Contract of Indemnity vs Contract of Guarantee: An analysis
Contracts of Indemnity and Guarantee are special contracts governed under the Indian Contract Act of 1872 which are specifically provided for in Chapter 8 of the same. Both these contracts have similar purposes, that of saving of particular companies, partnerships, associations of people, and individuals from losses caused to them. The basic difference between the two is that an Indemnity is a bipartite agreement, that is, an agreement between two Parties, and Guarantee is a tripartite agreement, that is, an agreement between three parties.
This article will focus on Indemnity and Guarantee individually and analyze the same in detail and some differences will also be drawn between the two for a better understanding of the concepts that revolve around these two Contracts.
A contract of indemnity is defined under Section 124, Chapter 8 of the Contract Act. This Contract is bipartite in nature as it has two parties, the ‘Promisor’ or the ‘indemnifier’ and the ‘Promisee’ or ‘indemnity-holder’. In general terms, if there is any loss caused to a party by the actions of another party in due course of pursuit of a business relation or transaction by way of an agreement, then that party by whose actions, loss or losses were caused to the other party, will indemnify the affected party. This means that the party which caused the loss will pay back or recompense the affected party for the same. It is not always the case that the Promisor himself has to cause the loss to the affected party as any third person who might cause loss in the future is also taken care of. But this third person does not have to be a part of the agreement for the indemnity to realize. For instance, a car insurance agency insures against losses caused to the person whose car has been damaged in an accident where some third party might have caused the damage.
Indemnity contracts are generally contingent in nature i.e., with the happening of the event of causing loss to the Promisee by the acts of the Promisor or any other person. What this means is that the contract will not get realized until and unless some calculable damage has been caused to the Promisee. Once the damage or loss has been incurred, the Contract comes into force whereby the liability to pay or recompense for the losses materializes.
Rights of the Promisee in an Indemnity Contract
The rights of the Promisee or the indemnity-holder are provided for under Section 125 of the Contract Act. This section provides for the rights of the Promisee if and when they are sued. These rights of the Promisee are being discussed in brief hereunder: –
- The Promisee has a right to recover any amount that he/she may have had to pay with regards to a suit filed in a court of law to which such indemnity has been made applicable at the mutual consent of the parties by way of the indemnity contract.
- The Promisee has a right to recover any and all amounts in such a suit, if he/she has instituted or defended such a suit without going against the orders or requests of the Promisor as per the indemnity contract or if the Promisor had themselves authorized to file or institute the suit.
- Similar rights are provided for the Promisee in case of any compromise or settlement made under such suit, provided such compromise was not in direct violation of the orders or requests of the Promisor.
These are the specific rights granted to a Promisee or an indemnity-holder in case of an institution of suit is done with regards to the indemnity agreement whereby the Promisor has agreed to indemnify the Promisee of such costs that would be incurred for the purposes of the suit.
The contract of guarantee is defined under Section 126, Chapter 8 of the Contract Act of 1872. This contract has three parties agreeing, signing and ratifying it, in effect, making it a tripartite agreement. These parties are the principal debtor, creditor and surety. This contract also has a similar purpose to that of the indemnity contract in that this contract also recompenses for the losses caused by a party to another party. But in this case, three parties are involved. The ‘Principal Debtor’ is the person who causes the loss or damage to the aggrieved party who is called the ‘Creditor’ who is due the recovery of such amount by way of the ‘Surety’, who is the third party in this contract who comes in to compensate for the losses caused to the Creditor.
This contract is executed in three parts, firstly between the Principal Debtor and the Creditor whereby the promise of performance or amount to be paid is made to the Creditor; in the second instance, if there is to be a future prospect of default being committed by the Principal Debtor with regards to obligations or consideration to the Creditor, the Surety comes in to take up the default of the Principal Debtor and reimburse the Creditor of the loss so caused by the default of the Principal Debtor and lastly, between the Surety and the Principal Debtor which is implied in nature, whereby the Principal Debtor has to make up for the default by compensating the Surety for taking up the default on his behalf.
Continuing Guarantee and other important provisions
A Contract of guarantee is a little more complex than the Contract of Indemnity in the sense that it is a tripartite contract with three parties involved in it and also with the introduction of the concept of continuing guarantee. Section 129 of the Contract Act defines and introduces the concept of Continuing Guarantee. This section states that a contract of guarantee shall be valid across multiple transactions. This means that the surety will not just be liable to reimburse the creditor on one instance but on multiple occasions. For example, a rent payment is to be made by A to B. C comes along as surety to pay the rent on behalf of A to B. This rent amount will be continuing in nature for a couple of months, hence the continuation of guarantee over such period of time. Such a continuing guarantee may be revoked at any time by the surety, in regards to future amounts to be paid by giving a prior notice to the creditor which is provided for in Section 130. In the alternative, the death of the surety also implies the termination of the continuing guarantee as per Section 131.
Difference between Indemnity and Guarantee
There are a few major differences between the contract of indemnity and guarantee. These differences are laid out hereunder: –
|1.||This is a bipartite contract having just two parties.||This is a tripartite agreement having three parties.|
|2.||Reimbursement is made by the Promisor or the Indemnity-Holder in case of loss or damage so caused by the acts of the Promisor himself or any other person.||Reimbursement is made by a party, Surety on behalf of the Principal Debtor when he defaults in committing to his obligations or fails to pay for consideration to the Creditor.|
|3.||Once the Promisor has repaid the amounts due to the Promisee, he is not empowered to recover the same from any other party or person.||Once the Surety has recompensed the Creditor on behalf of the Principal Debtor, the Surety gets empowered to get reimbursed by the Principal Debtor in terms of the amount so given by him to the Creditor.|
|4.||This consists of only one contract.||This is one contract that has under it three sub-contracts which get executed one after the other. The first is a contract between the Principal Debtor and the Creditor, the second being between the Surety and the Creditor and the third being between the Surety and the Principal Debtor.|
The Indian Contract Act of 1872 governs the special contracts of Indemnity and Guarantee, which, in essence, have very similar purposes, that of reimbursing one party of the losses caused by the act of another, whether it be the Promisor or any other person, in the case of Indemnity or the Principal Debtor, in the case of Guarantee. Basically, Section 124 of the Contract Act defines Indemnity and Section 126 of the same defines the Contract of Guarantee.
There is also the concept of Continuing Guarantee which extends over a series of transactions as the payment to be made to the Creditor is not a one-time payment but part-payments like in the case of monthly rent amounts where the Surety takes up the responsibility of the Creditor to pay the rent amount which has to be paid in parts over the course of a certain number of months. Contracts of Indemnity and Guarantee are very alike in nature at first glance, but there are a few major differences between the two. These differences have been highlighted in the aforementioned table.
To sum up the conclusion for the contracts of Indemnity and Guarantee, they have one basic purpose, that of repaying one party of the losses so caused to them by the acts of another. There are few subtle but major differences in the details of the same which reason out for these two contracts being named and laid down in different provisions of the Indian Contract Act.
- The Indian Contract Act, 1872|Legislative Department | Ministry of Law and Justice | GoI
- Difference between contract of indemnity and contract of guarantee – iPleaders
- Contract of Indemnity and Guarantee – IndiaFilings
- Difference Between Indemnity and Guarantee (with Example and Comparison Chart) – Key Differences