Contract of Indemnity and Guarantee:- Contracts of indemnity and guarantee serve the same economic purposes by compensating the creditor when a third party fails to uphold their end of the bargain. There are, however, some significant differences between the two. The author of this article will discuss the Indian Contract Act, 1872's pertinent legal requirements as well as the differences between a contract of indemnification and a contract of guarantee.
Indemnity:-
Indemnity, as defined by the dictionary, is defence against potential loss. A guarantee to make up for lost property includes an indemnity clause that protects against loss of money, assets, etc. It serves as protection from loss or payment for it.
Guarantee:-
With a guarantee, one is able to obtain a loan, purchase items on credit, etc. Assume responsibility or provide a guarantee. It is a commitment to stand up for another person’s debt in the event of a default.
Definition of Contract of Indemnity and Guarantee:-
A contract of indemnity is defined as one where one party promises to protect the other against loss caused to him by the promisor’s own or another party’s action in Section 124 of the Indian Contract Act, 1872.
There are only two parties to an indemnity contract, as stated in:
The Indemnifier:
The Indemnifier is the promisor who promises to make up the harm done to the opposing organisation.
The Indemnified: Also known as the indemnity holder or the indemnified, this individual is guaranteed recompense for any damages sustained.
The compensation contract’s mode may be expressed explicitly or may be inferred from the case’s conditions. For example, if one party expressly undertakes to protect the other from harm, the compensation contract’s method will be mentioned.
Illustrations;-
In a contract of indemnification, Mr. A (the promisor) guarantees that he will repay Mr. B (the promisee) for any losses incurred as a result of the behaviour of Mr. A or any third person.
Essential Ingredients for Indemnity:-
- There must be a loss; otherwise, there is no basis for the indemnification claim.
- Either the promisor or another party must be at fault for the loss.
- Only the loss is indemnified by the indemnifier.
Here, it is evident that this contract is of a contingent nature, meaning that the promisor will fulfil his obligation only if a number of requirements are met and that it will only be enforceable if a loss has happened.
Rights of an Indemnified
Rights of the indemnity-holder when sued, according to Section 125 of the Indian Contracts Act.
- Acting within the scope of his authority, the promisee in an indemnification contract is entitled to recover from the promisor: All damages that he may be required to pay in any lawsuit about any matter to which the promise to indemnify relates.
- all costs that he might be required to pay in any such suit if, in bringing or defending it, he did not disobey the promisor’s instructions and acted prudently under the circumstances in the absence of any indemnity contract, or if the promisor gave him permission to bring or defend the suit;
- if the compromise was not against the promises of the promisor and was one that the promisee would have been wise to make in the absence of any contract of indemnity, or if the promisor gave him permission to compromise the suit, all sums that he may have paid under the terms of any compromise of any such suit.
Rights of the Indemnifier:-
The compensator will have full access to all techniques and services that can protect them from damage once the indemnity holder has been compensated for the harm done.
Indemnification can only be performed if the loss to the other party has already occurred or if it is certain that it will occur. This is because the loss to the party is the essential component of the indemnity contract.
The Indian Contract Act of 1872 does not specify when the indemnifier’s obligations under the contract will start to take effect.
In the landmark decision of Gajanan Moreshwar vs. Moreshwar Madan (1942), the judge noted that if the indemnified had acquired a duty and the liability was absolute, he had the right to request that the indemnifier absolve him of the obligation and settle it.
Contract of guarantee
Contract of Guarantee, Surety, Principal Debtor, and Creditor are defined under Section 126 of the Indian Contract Act. A contract of guarantee is intended to provide further assurance to the creditor that, in the event of a default by the debtor, his money will be repaid by the surety.
Contracts of guarantee are agreements to carry out promises or release other parties from obligations in the event of their breach.
The major debtor, the creditor, and the surety are the three parties to the guarantee contract.
Illustration:-
Ankit (Debtor) took a loan from a Bank (Creditor) for which Sohel (Surety) has given the guarantee that if Ankit could not pay the loan then he(Surety) will discharge the liability.
The components of a guarantee contract are:
There are primarily 8 key components to a contract of guarantee:
- the agreement of all parties.
- Liability.
- Existence of a Debt.
- Consideration.
- Writing is not necessary.
- The Components of a Valid Contract.
- No Falsification of the Truth.
- No Misrepresentation.
Rights of Surety:
With regard to the Creditor:
The Indian Contract Act of 1872 states
Section 133 states that the creditor must obtain the surety’s permission before changing the terms of the agreement between the creditor and the principal debtor. Any such change absolves the party from responsibility for any transactions resulting from the discrepancy. However, the adjustment might not have the effect of releasing the guarantor if it is made for the surety’s benefit, does not favour him, or is unimportant in nature.
Sec. 134 – The creditor should not release the major debtor from his obligation to uphold the terms of the contract. The surety is also released as a result of the release of the lead debtor. The obligation of the surety is terminated by any law, regulation, or creditor exclusion that releases the principal debtor.
Section 135, if an agreement is made between the creditor and the principal debtor to increase the latter’s liability, guarantee him a longer period of time to fulfil his commitments, or make him swear categorically not to, the surety is released unless he agrees to the agreement.
Section 139– the surety is discharged if the creditor impairs the surety’s potential legal recourse against the principal debtor.
Regarding the principal debtor:
Subrogation right The surety on payment of the obligation is granted a right of subrogation, which is another word for substitution.
Sec. 140 prohibits the surety from claiming the right of subrogation to the creditor’s securities if the surety has committed to serve as security for only a portion of the contract and the creditor has obtained security to cover the entire obligation.
Liabilities of Surety:-
The obligation of the surety is co-extensive with that of the principal debtor, according to Section 128 of the Indian Contracts Act, unless the contract specifies otherwise.
The obligation of the surety is equivalent to that of the principal debtor. A surety may be immediately attacked by a creditor. A creditor may file a lawsuit against the surety without first suing the principal debtor. Following any payment by the principal debtor’s default, the surety is required to make payment.
However, the principal debtor is solely responsible for paying payments, with the surety’s obligations taking a back seat. In truth, the surety is not responsible for such a payment either if the principal debtor cannot be held liable for it owing to a paperwork error.
Conclusion
In that they both offer protection against loss, contracts of indemnification and guarantees are similar to one another. However, as was already indicated, there is a significant difference between the two.
A contract’s construction will determine whether it is a guarantee or an indemnity agreement. The description of the agreement and whether it is referred to as a contract of guarantee or indemnification, as well as whether such phrases are referenced one or more times in the contract, may be used to identify such a contract.