Indemnity and Guarantee Contract

Indemnity Contract: A contract where one party promises to save the other from any loss caused to him by the
conduct of promissor himself or any other person is called contract of indemnity, (Section 124) Indian Contract
Act, 1872.

Indemnity contract includes two parties namely; Indemnifier and Indemnity holder. The person who is
promising to pay compensation is called Indemnifier and the person who`s loss is compensated is called
Indemnity holder.
Example: There is a contract between X and Y according to which X has to Sell a tape recorder (which
is selected) to Y after three months. On the next day of their contract Z has come to X and has insisted on selling
the same tape recorder to him (Z). Here Z is promising to compensate X for any loss faced by X, due to selling
the tape recorder to Z. X has agreed. Now the contract which has got formed between X and Z is called
indemnity contract, where Z is indemnifier and X is indemnity holder.
Guarantee Contract: A contract to perform the obligation or to discharge the liability of a third party in case of
its default is called contract of guarantee, (Section 126) Indian Contract Act, 1872.
Guarantee contract includes three parties namely; Creditor, Principal Debtor and Surety. The person who is
granting the loan, the person who is utilizing the amount of loan is principal debtor and the person who is giving
guarantee is called surety or guarantor or favored debtor. In case of guarantee contract there will be two types of
liabilities namely; Primary liability and secondary liability. Primary liability will be with principal debtor and
Secondary liability goes to surety.
Example: Y is in need of Rs. 10000/-. Upon guarantee by Z, Y has got the amount from X. Here X, Y
and Z are creditor, principal debtor and surety respectively.
Difference between Indemnity Contract and Guarantee Contract
Number of Parties: Indemnity contract includes two parties namely, indemnifier and indemnity holder. But
guarantee contract includes three parties namely creditor, Principal debtor and surety.
Number of Contracts: In case of indemnity contract, as there are only two parties, there is possibility for
existence of one contract only. But a contract of guarantee includes three sub-contracts.
Nature: As indemnity contract includes two parties and one contract, it can be said that indemnity contract is
simple in nature. But guarantee contract includes three parties and three sub-contracts and hence be said that
guarantee contract is complex in nature.
Liability: In contract of guarantee there will be two types of liabilities namely; primary and secondary liabilities
which will be with principal debtor and surety respectively. But in contract of indemnity there is no
classification and sharing of liability where the absolute liability rests with indemnifier.
Recovery: In case of indemnity contract the indemnifier, after compensating indemnity holder`s loss, cannot
recover that amount from any person. But in contract of guarantee, if surety makes payment to creditor, he
(surety) can recover that amount from principal debtor.
Interest of parties: Indemnity contract gets formed upon indemnifier`s interest and guarantee contract gets
formed upon principal debtor`s interest.
Difference between Indemnity and Guarantee

Indemnity

Section 124 of Indian Contract Act: a contract

by which one party promises to save others
from loss caused to him by the conduct of the
promisor himself, or by the conduct of any

Guarantee

Section 126 of Indian Contract Act: a

contract to perform the promise, or
discharge the liability of a third person in

other person

case of his default.

Two parties (Indemnifier and Indemnified)

Three parties (Principal Debtor, Creditor,

Surety)

To provide compensation for loss

To give assurance to the creditor in lieu for

his money

Indemnifier is the sole person liable

Liability shared between Principal Debtor

(primary liability) and Surety (secondary
liability)

Liability arises only on occurrence of a loss

GUARANTY
> Contract between the guarantor and creditor
> In a broad sense, it includes pledge and mortgage because the purpose of guaranty may be accomplished not
only by securing the fulfillment of an obligation contracted by the principal debtor through the personal
guaranty of a third person but also by furnishing to the creditor for his
security, property with authority to collect the debt from the proceeds of the same in case of default.
CHARACTERISTICS OF A GUARANTY
1. Accessorybecause it is dependent for its existence upon the principal obligation guaranteed by it
2. Subsidiary and conditionalit takes effect only when the principal debtor fails in his obligation subject
to limitation
3. Unilateral
a. Gives rise only to the duty on the part of the guarantor in relation to the creditor and not vice
versa
b. It may be entered into even without the intervention of the principal debtor
4. Contract, which requires that the guarantor be a distinct person from the principal debtor because a
person cannot be the personal guarantor of himself

SURETYSHIP
In finance, a surety, surety bond or guaranty involves a promise by one party to assume responsibility for
the debt obligation of a borrower if that borrower defaults. The person or company providing this promise is also
known as a "surety" or as a "guarantor".
A surety most typically requires a guarantor when the ability of the primary obligor or principal to perform its
obligations to the obligee (counterparty) under a contract is in question, or when there is some public or private
interest which requires protection from the consequences of the principal's default or delinquency. In
most common-lawjurisdictions, a contract of suretyship is subject to the Statute of Frauds (or its equivalent local
laws) and is only enforceable if recorded in writing and signed by the surety and by the principal.

> A relation which exists where one person has undertaken an obligation and another person is also under a
direct and primary obligation or other duty to a third person, who is entitled to but one performance, and as
between the two who are bound, the one rather than the other should perform
> Contractual relation resulting from an agreement whereby one person, the surety, engages to be
answerable for a debt, default, miscarriage of another known as the principal
LAW APPLICABLE TO SURETYSHIP
> Second paragraph
> It covers OBLIGATIONS, DIFFERENT KINDS OF OBLIGATIONS, JOINT AND
SOLIDARY OBLIGATIONS, OBLIGATIONS AND CONTRACTS
> If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the
guarantor is called the SURETY

All Contracts are Agreements but All Agreements are not

Contracts
INTRODUCTION:
No doubt it is a valid and true statement. Before critically discussing the statement, we must
know the exact and basic meanings of the two terms contract and agreement in the context of business law. For
understanding the meaning, we have to go to the contract act 1872 that is applicable in subcontinent.
A contract is a legally binding agreement or relationship that exists between two or more parties to do or
abstain from performing certain acts. There must be offer and acceptance for a contract to be formed. An offer
must backed by acceptance of which there must be consideration. Both parties involved must intend to create
legal relation on a lawful matter which must be entered into freely and should be possible to perform.
Definition of contract
According to section 2(h) of the Contract Act 1872:
An agreement enforceable by law is a contract.
A contract therefore, is an agreement the which creates a legal obligation i.e., a duty enforceable by law.
From the above definition, we find that a contract essentially consists of two elements:
(1) An agreement and (2) Legal obligation i.e., a duty enforceable by law.
Example;
A promises to sell a horse to B for Rs.100,000, and B promises to buy horse at that price.
All contracts are agreements:
For a Contract to be there an agreement is essential; without an agreement, there can be no contract. As the
saying goes, where there is smoke, there is fire; for without fire, there can be no smoke. It could will be said,
where there is contract, there is agreement without an agreement there can be no contract. Just as a fire gives
birth to smoke, in the same way, an agreement gives birth to a contract.
What is agreement?
An agreement is a form of cross reference between different parties, which may be written, oral and lies
upon the honor of the parties for its fulfillment rather than being in any way enforceable.

As per section 2 (e) of Contract At 1872:

Every promise and every set of promises, forming the consideration for each other, is an agreement. Thus it is
clear from this definition that a promise is an agreement.
What is a promise?
the answer to this question is contained in section 2 (b) which defines the term. When the person to whom the
proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted,
becomes a promise.
An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party
and that other party signifies his assent thereto.
All agreements are not contracts
As stated above, an agreement to become a contract must give rise to a legal obligation. If an agreement is
incapable of creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a
contract.
Agreements of moral, religious or social nature e.g., a promise to lunch together at a friends house or to take
a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple
reason that the parties never intended that they should be attended by legal consequences
On the other hand, legal agreements are contracts because they create legal relations between the parties.
EXAMPLE: a- A invites B to dinner. B accepts this invitation but does not attend the dinner. A can not sue B for
damages. It is social agreement because it does not create legal obligation. So it is not a contract.
b- A promises to sell his car to B for one million. It is legal agreement because it creates legal obligations
between the parties. So it is a contrac
According to section 10 of the contract act 1872,
All agreements are contracts if they are made by the free consent
of the parties, competent to contract, for a lawful consideration and with a lawful object and not hereby declared
to be void.
Thus an agreement becomes a contract when at least the following conditions are satisfied.
1-free consent
2-competency of the parties
3-lawful consideration
4- lawful object.
Conclusion:
In a nut shell, an agreement is the basis of a contract and contract is the structure constructed on
these basis. An agreement starts from an offer and ends on consideration while a contract has to achieve an
other milestone that is enforceability. Due to this, breach of an agreement does not give rise to any legal remedy
to the aggrieved party while breach of contract provides legal remedy to the aggrieved party against the guilty
party. Thus we can say that all contracts are agreements but all agreements are not contracts.