Contract of Indemnity
A contract of indemnity is a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor or any other person.
Contract of Indemnity is defined in Sec. 124 of Indian Contract Act, 1872 as “A contract, by which 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, is called a “contract of indemnity.”
A promise to be primarily and independently liable for another person’s conduct may amount to a contract of indemnity. In a contract of indemnity, the promisor makes himself primarily liable and undertakes to discharge the liability in any event; the liability may arise out of tort or contract; it may also be prospective or retrospective when the promise is made provided some new consideration is given.
Contract of Guarantee
A Guarantee, in simple terms, is a promise to pay if someone else fails in his obligations. A contract of guarantee is a contract between the surety and the creditor to perform the promise or discharge the liability of the principal debtor, in case of default by the principal debtor.
Contract of Guarantee is defined in Sec. 126 of the Indian Contract Act, 1872 as “a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.”
In a contract of guarantee, there must always be three parties in contemplation: a principal-debtor (whose liability may be actual or prospective), a creditor, and a third party who in consideration of some act or promise on the part of the creditor, promises to discharge the debtor’s liability, if the debtor failed to do so.
It is not necessary that there must be a simultaneous tripartite contract between all the three parties, that is, the principal debtor, the creditor and the guarantor; once a contract between the principal debtor and the creditor is formed, a contract between the surety and the creditor whereby the surety guarantees the debt, can also take place; and the consideration, therefore, may move either from the creditor or the principal-debtor or both.
A contract of guarantee may be wholly written, may be wholly oral, or may be partly written and partly oral.
Distinction between Contract of Guarantee and Contract of Indemnity
A contract of indemnity is bilateral, that is it involves two parties, the promisor and promisee. A contract of guarantee involves three parties, the creditor, the surety and the principal debtor; and it involves a contract to which those parties are privy. The contract need not be embodied in a single document, but there must be a contract or contracts to which the three parties are privy. There must be a contract first of all, between the principal debtor and the creditor. Then there must be a contract between the surety and creditor, by which the surety guarantees the debt; and the consideration for that contract may move either from the creditor or from the principal-debtor or both. But if those are the only contracts, then it is a contract of indemnity. In order to constitute a contract of guarantee, there must be a third contract, by which the principal-debtor expressly or impliedly requests the surety to act as surety. Unless that element is present, it is impossible to work out the rights and liabilities of the surety under the Contract Act. In order to imply a promise by the principal-debtor to indemnity the surety, it is necessary that the principal-debtor is privy to the contract of suretyship.
In the case of guarantee, there is an existing debt or duty the performance of which is guaranteed by surety – In indemnity, the possibility of risk of any loss happening is only contingent against the indemnifier.
Unlike the case of a contract of guarantee, there is no direct right of action on the original contract to the person who indemnifies against the person whose conduct has caused loss – He can sue only in the name of the promisee.
Under a contract of indemnity, liability arises from loss caused to the promisee by the conduct of the promisor himself or by the conduct of another person. A contract of guarantee requires the concurrence of three persons-the principal debtor, the surety and the creditor–the surety undertaking an obligation at the request express or implied of the principal debtor. The obligation of the surety depends substantially on the principal debtor’s default.
|1.||There are two parties to the contract viz. Indemnifier (Promisor) and the Indemnified (Promisee).||There are three parties to the viz. the creditor, Principal Debtor and the Surety.|
|2.||Liability of the Indemnifier to the Indemnified is primary and independent.||Liability of the Surety to the Creditor is collateral or secondary, the primary liability being that of the Principal Debtor.|
|3.||There is only one contract in case of a Contract of Indemnity, i.e., between the Indemnifier and the Indemnified.||In a contract of guarantee there are three contracts, between principal Debtor and Creditor; between Creditor and the Surety and between Surety and Principal Debtor.|
|4.||The Indemnifier promises to compensate for the losses suffered by the Indemnified||The surety gives assurance to the Creditor to discharge the liability of the Principal Debtor|
|5.||The liability of the Indemnifier arises only on the happening of a contingency.||There is usually an existing debt or duty, the performance of which is guaranteed by the Surety.|
|6.||An Indemnifier cannot sue a third party for loss in his own name because there is no privity of contract. He can do so only if there is an assignment in his favour.||A Surety, on discharging the debt due by the Principal Debtor, steps into the shoes of the Creditor. He can proceed against the Principal Debtor in his own right|