CONTRACT OF INDEMNITY AND GUARANTEE- MEANING, DEFINTION, RIGHTS OF INDEMNITY HOLDER, RIGHTS OF INDEMNIFIER, ESSENTIAL FOR CONTRACT OF GUARANTEE AND TYPES OF GUARANTEE

 CONTRACT OF INDEMNITY

•       According to Section 124 of the Indian Contract act, “a Contract, by which 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”.

Example: A promises to deliver certain goods to B for Rs. 2,000 every month. C comes in and promises to indemnify B’s losses if A fails to so deliver the goods. This is how B and C will enter into contractual obligations of indemnity.

PARTIES UNDER INDEMNITY CONTRACTS

•       There are generally two parties in indemnity contracts. The person who promises to indemnify for a loss is the Indemnifier.

•       On the other hand, the person whose losses the indemnifier promises to make good is the Indemnified.

•       We can also refer to the Indemnified party as the Indemnity Holder.

      For example, in the earlier example, C is the Indemnifier and B is the   Indemnity Holder.

RIGHTS OF INDEMNITY HOLDERS

•        However, sometimes they may not do so. In such a case, the indemnity holder can enforce the following rights against the indemnifier:

1) The indemnifier will have to pay damages which the indemnity holder will claim in a suit.

2) The indemnity holder can even compel the indemnifier to pay the costs he incurs in litigating the suit. 3) If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise amount.

RIGHTS OF INDEMNIFIER

•       An indemnifier, after he has paid the damages under an indemnity, regains the rights he had delegated to the indemnified. But he gets rights only after he has paid the damages, and not before.

•       If the indemnifier has indemnified the indemnity holder, he gets the right to sue third parties on behalf of the indemnified.

•       If the indemnified suffers any damages which are not recovered by the contract of indemnity, the indemnifier is not bound by law to pay such damages.

CONTRACT OF GUARANTEE

•       According to section 126 of the Indian Contract Act, “A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person of his default.

•        In a contract of guarantee, the person who gives the guarantee is called the ‘Surety’.

•       The person in reject of whose default the guarantee is given the ‘Principal debtor’

•        And the person to whom the guarantee is given is called ‘creditor’.

ESSENTIALS OF CONTRACT OF GUARANTEE

•       A contract of Guarantee can only be between at least three parties- surety, Principal debtor, and creditor.

•       Free consent of all parties is essential for a contract to be valid.

•       The surety obligation arises only when the principal debtor makes a default in the performance of his obligation i.e. does not repay a debt.

TYPES OF GUARANTEE

1) Retrospective Guarantee: A guarantee which is with respect to an existing or an old debt of a party is called retrospective guarantee.

2) Prospective Guarantee: A guarantee for a future debt or obligation is a prospective guarantee.

This guarantee is of two types:

 a) Specific Guarantee: A specific guarantee is for a single debt or any specified transaction. It comes to an end when such debt has been paid.

b) Continuing Guarantee: A continuing guarantee is a type of guarantee which applies to a series of transactions.

SURETY’S LIABILITY

•       According to section 128 of Indian Contract Act, 1872, the liability of a surety is co-extensive with that of principal debtor’s unless the contract provides.

•       Liability of surety is same as that of the principal debtor. A creditor can directly proceed against the surety. A creditor can sue the surety directly without sueing principal debtor.

•       Surety becomes liable to make payment immediately when the principal debtor makes default in such payment.

•       However, primary liability to make payment is of the principal debtor, surety’s liability is secondary. Also, where the principal debtor cannot be held liable for any payment due to any defect in documents, then surety is also not responsible for such payment.

DISCHARGE OF A SURETY

•       By giving notice of revocation for future transactions (section 130).

•       In case of death of surety, the guarantee is revoked for all the future transactions (section 131).

•       When the principal debtor makes payment of debt.

•       The surety will be discharged when the creditor does any act which is inconsistent with the rights of surety.

DIFFERENT BETWEEN INDEMNITY AND GUARANTEE