Indemnity and Guarantee Contrac

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.