DEFINITION , EXPLANATION AND DISTINTINCTION BETWEEN CONTRATCT OF INDEMNITY AND GURANTEE

Definition of Contract of Indemnity

According to Sec 124- A contract of indemnity is a

contract whereby one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. For example A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees.

Contract of Indemnity
All contacts of Insurance are contracts of indemnity except life insurance.
There are only two parties involved i.e. the person

who promises to make good the loss generally known as the indemnifier (promisor) and the person whose loss is to be made good called as the indemnified (promisee).

Contract of Indemnity
Right of Indemnity Holder When Sued :

cont---

Can recover all damages incurred or paid by him.

Can recover costs incurred.

Can recover sums paid under compromise, if any.

Definition of Contract of Guarantee

As per Section 126- It is a contract to perform the promise or discharge the liability of a third person in case of his default. It may be either oral or written.

For example A says to B, Lend money at interest to C, if C be unable to pay I shall pay This is a contract of guarantee

CONTRACT OF GUARANTEE cont-- There are three parties involved i.e. the person who gives the guarantee known as the surety, the person in respect of whose default the guarantee is given known as the principal debtor and the

person to whom the guarantee is given known as the creditor.

CONTRACT OF GUARANTEE cont-- There are three contracts first between creditor & principal debtor, second between surety and creditor, third between surety and principal debtor.
The primary liability is of principal debtor and the surety has a secondary liability. Which means that

the payment is to be made by the surety only if the debtor does not pay. This contract is for the security of the creditor.

CONTRACT OF GUARANTEE cont--RIGHTS AND LIABILITIES OF SURETY.

1.

RIGHTS Right of subrogation (interchange): when the surety has paid the guaranteed debt on default of the principal debtor he is then entitled to all the rights which the creditor had against the principal debtor. The surety is entitled to all the remedies which are available to the creditor against the principal debtor

CONTRACT OF GUARANTEE cont--RIGHTS AND LIABILITIES OF SURETY. cont--2. Right to securities: Surety is entitled to the benefit of all the securities given by the principal debtor to the creditor. The surety at the time of payment can demand the securities, which the creditor has received from the principal debtor. Surety can recover the securities only after making full payment. He cannot claim the benefit of a part of the securities if he has paid a part of the debt.

CONTRACT OF GUARANTEE cont--RIGHTS AND LIABILITIES OF SURETY. cont---

3.

Right of surety when the creditor loses or parts with the securities of the principal debtor: if the creditor by negligence loses any security held by him, or if the creditor parts with the security, the liability of the surety is reduced to the extent of the value of those securities.

Essentials of a contract of gurantee

Concurrence of three parties is necessary :The contract of surety ship requires the concurrence of three persons, the principal debtor, the creditor, and surety. 2. Suretys distinct promise to be answerable is necessary- Secondly, in order to constitute a guarantee there must be a distinct promise on the part of the surety to be answerable for the debt.
1.

Essentials of a contract of guarantee

cont..

3.

Liability must be legally enforceable- If the liability does not exist, there cannot be a contract of guarantee. A surety, therefore, is not liable on a guarantee for the payment of a debt which is barred by the law of limitation.

CONTRACT OF GUARANTEE cont--RIGHTS AND LIABILITIES OF SURETY. cont LIABILITIES

The liabilities of the surety are co-existent which those of the principal debtor unless it is otherwise

provided. Example: if A guarantees to B the payment of a Bill of Exchange by C, the acceptor. The bill is dishonored by C. A is liable not only for the amount of the bill but also for any interest or charges which may have become due on it.

CONTRACT OF GUARANTEE cont--DISCHARGE OF SURETY

Change in the terms of the contract: If the principal debtor and the creditor make any changes, without the consent of the surety, the surety is discharged from the contract.

CONTRACT OF GUARANTEE cont--DISCHARGE OF SURETY cont-- Discharge by death of the surety: In specific guarantee the surety is not discharged from his liability on his death if the liability has already occurred. But the death of surety operates as revocation of a continuing guarantee as to future transactions. The deceased suretys estate will not be liable for any transaction after the death, even if the creditor has no knowledge of suretys death.

CONTRACT OF GUARANTEE cont--DISCHARGE OF SURETY cont-- Release or discharge of principal debtor: a surety is discharged by any contract between the creditor and the principal debtor, or any act or omission of the creditor by which the principal debtor is released or discharged.

CONTRACT OF GUARANTEE cont--DISCHARGE OF SURETY cont-- Compounding of creditor with principal debtor: a contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharge the surety.

Distinction Between Indemnity & Gua

rantee Indemnity
Two a) Indemnifier. b) Indemnity holder.

Guarantee Three parties a)Creditor b) Principal Debtor. c) Surety.

1. Number of parties

2. Number of contract

One contract

Three contracts

3. Liability

In case of contract of indemnity liability of indemnifier is primary and there is no secondary liability.

In case of contract of guarantee the primary liabithere is a preliminary liability is of principal debtorof surety is primary and there is no secondary liability.

Distinction Between Indemnity and Guarantee

4. Purpose of contract A contract of indemnity exists for the reimbursement of loss. A contract of guarantee stands for the security of the creditor.

5. Origin of liability

The liability of the indemnifier arises only in case of the actual loss suffered by the indemnity holder.

The liability of the surety arises only when the principal debtor commits the default in making the payment to the creditor.

6. Remedy

The indemnity holder is not entitled to sue third party for whose sake the loss is caused.

The creditor is entitled to sue the surety in case the principal debtor commits the default.