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DIFFERENCE BETWEEN INDEMNITY & GUARANTEE ALL THAT YOU NEED TO KNOW

DIFFERENCE BETWEEN INDEMNITY & GUARANTEE ALL THAT VALUERS NEED TO KNOW: BEAUTIFULLY COMPILED PRESENTATION

CONTRACT OF INDEMNITY

Contract of Indemnity (Section124)

A contract by which one party promises to another to save him 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.

Parties to the Contract of Indemnity

The person who promises to protect another: INDEMNIFIER

The   person   who is     so    protected       is:  INDEMNITYHOLDER / INDEMNIFIED

Meaning of Indemnity

Indemnity means enacting to compensate or protect somebody from the loss or make good to the loss. When one person promises to another person that in case another person suffers from some loss the first person will compensate for the loss.

Example

A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of Indemnity.

Example S agrees to sell toasters on behalf of N, and N agrees to indemnify S against any loss caused to him because of a manufacturing defect in any toaster. A customer B buys a toaster from S, which burst out on plugging in the socket and he sustains personal injuries therefrom. B sues S to get his loss compensated. S has to pay Rs. 10,000 to B as damage caused to him, and incurs Rs. 1000 in defending the suit. Here S is entitled to get indemnity worth Rs. 11,000 from N.

Essentials of Contracts of Indemnity Essentials of a valid Contract.

There must be a loss either by the promisor’s conduct or by any other person’s conduct

The contract may be expressed or implied.

It is a Contingent Contract by Nature

Liability of indemnifier commences when the indemnified suffers some loss according to the terms and conditions of the contract.

Contracts of Insurance are also covered in this.

All Contracts of Insurance are Contracts of Indemnity except life insurance.

Rights of Indemnity Holder

The rights of the indemnity holder are dependent on the terms of the contract of indemnity as a general rule. Section 125 of the Indian Contract Act, 1872 comes into play when the indemnity holder is sued i.e. under a specific situation.

Rights of Indemnity Holder Section 125 states rights claim for Damages-Sec. 125(1)

Claim for Cost of Suit-Sec. 125(2)

Recovery of Sums paid under conditions of compromise.-Sec.125(3)

The indemnity holder is entitled to recover:

(a)all the damages that he may have been compelled to pay in any suit in respect of any matter to which the promise of the indemnifier applies.

For example, if A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a particular transaction. If C does institute legal proceeding against B in that matter and B pays damages to C, A will be liable to make good all the damages B had to pay

(b) all the costs of suits that he may have had to pay to the third party provided he acted as a man of ordinary prudence and he did not act in contravention of the directions of the indemnifier or if he had acted under the authority of the indemnifier to contest such a suit.

(c) All the sums that he may have paid under the terms of any compromise of any such suit provided such compromise is not contrary to the indemnifier’s orders and was a prudent one or if he acted under the authority of the indemnifier to compromise the suit.

Rights of Indemnifier

Rights under Doctrine of Subrogation.

To sue against a third party after indemnifying the indemnity holder.

Not to compensate for losses not covered under the Contract of Indemnity.

CONTRACT OF GUARANTEE

Contract of Guarantee (Sec.126)

A Contract of Guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is known as the ‘Surety’, the person in respect of whom the guarantee is given is known as the ‘Principal Debtor’, and the person to whom the guarantee is given is called the ‘Creditor’.

Guarantee is e in which the promisor promises to perform the promise of a third person, or to discharge the liability or obligation of a third person, in the case of the latter’s default. It is of utmost importance to note that the defining section in itself provides that the Guarantee may be either Oral or Written.

Essential Features of Guarantee

1.Tripartite Agreement:

Concurrence of three Contracts: The Contracts connecting each other as contract between: the Principal Debtor and Creditor, the Creditor and Surety, and the Surety and Principal Debtor

2. Liability:

Under such a contract, the primary liability is of the principal debtor and only secondary liability is of the surety.

3. Essentials of Valid Contract:

Requirements for Valid Contract i.e. Free consent, consideration, lawful object, competency of the parties, etc. are necessary to form this kind of contract. But, in respect of consideration, no direct consideration in the contract between the surety and creditor. Consideration of principal debtor is considered to be adequate for the surety.

Example B takes a loan of Rs. 10,000 from L, where S assures L that in case B fails to pay, S will repay the loan to L. Here S is surety, B is the principal debtor, and L is the creditor.

There exist three separate and independent contracts (a) between the Principal Debtor and Surety (b) between the Principal Debtor and the Creditor (c) between the Creditor and Surety.

The liability of the Surety under the Contract Act is absolute and coextensive with that of the Principal Debtor, unless limited and restricted under the terms of Contract. Thus a party who guarantees the payment of a bill is liable for all that the principal debtor would be liable for, including costs, interest due under the contract.

Both indemnity and guarantee are contingent contracts…but indemnity is BIPARTITE. For both, the liability will reckon only upon accrual of the cause of action. Legally these ingredients are essential. 

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