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.
• 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
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