Contract of Indemnity and Guarantee (Section 124 – 147)
Contract of Indemnity define (Section 124)
A contract by which one party promise to save the other party from loss caused to him by the conduct of the promisor himself or by the conduct of the any other person, is called a “Contract of Indemnity”.
Parties
There are two parties in Indemnity contract
Indemnifier:- who promise to save the other party from loss.
Indemnified:- who is promised to be saved.
Point to Remember
A contract of fire insurance or marine insurance is always a
contract of indemnity. But there is no contract of indemnity in case of
contract of life insurance.
Essentials of contract of indemnity
Two parties:- there must be two parties in contract of indemnity first one is indemnifier and the other one is indemnified.Protection of loss:- The object of contract must be protecting the one party from the loss by the other party.Express or implied:- A contract of indemnity may be express i.e., verbal or written or implied.Essentials of a valid contact:- A contract of indemnity must contains all the essentials of a valid contract.
Rights of indemnity-holder when sued (Section 125)
Promisee is entitled to recover from the promisor1. All damages
arrise due to any suit.
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Contract of Guarantee
“Contract of Guarantee”, “Surety”, “Principal debtor” and “Creditor” (Section 126)
A contract of guarantee is a contract to perform the promise made or discharge the liability of a third person in case of his default.
Parties
There are three parties involved in a contract of guarantee
Surety:- Person who gives the guarantee.
Principal debtor:- Person in respect of whose default the guarantee is given.
Creditor:- Person to whom the guarantee is given.
Essential of a valid contract
1. Existence
of a principal debt.
Distinction between a contract of indemnity and a
contract of guarantee
Basis |
Indemnity |
Guarantee |
Number of parties |
Two (indemnifier and indemnified) |
Three (surety, creditor, principal debtor) |
Purpose |
Reimbursement of loss |
For the security of the creditor |
Number of contract |
One (between indemnifier and indemnified) |
Three (between the principal debtor and creditor, surety and the creditor, principal debtor and surety |
Nature of liability |
Person who compensates the loss is primary (solely) liable |
The liability of the surety to the creditor is collateral or is secondary |
Time of liability |
On the happening of the contingency |
When principal debtor fails |
Time of act |
It is not necessary for the indemnifier to act at the request of the indemnified |
It is necessary that surety should give the guarantee at the request of the debtor |
Right to sue third party |
Indemnifier can’t file a suit against a third party in his own name because there is no privity of contract. He is allowed to do so if the claim is assigned in his favour |
When the surety discharge the liability of debtor he steps into the shoe of creditor. He can processed against the debtor in his own right |
Compentency to contract |
All parties must be competent to contract |
In the case of a contract of guarantee, where a minor is a principal debtor, the contract is still valid |
Kinds of guarantee
1. Retrospective
or Prospective guarantee
Retrospective is for the past debt.
Prospective is for future debt or
obligation.
2. Specific or
Continuing guarantee
Specific is for a single and
specified transaction.
Continuing is for a series of
transaction over a period of time.
3. Guarantee
for the entire debt or partial debt
Point to Remember
Guarantee
which is given for the good conduct or honesty of a person employed in particular institute
such guarantee is known as Fidelity guarantee.
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