A contract of Indemnity is a contract, express or implied to keep a person, who has entered into or who is about to enter into, a contract or incur any other liability, indemnified against loss, independent of the question of whether a third person makes a default.
Indemnity is protection against possible damages. Deriving from a Latin word, indemnis, which stands for ‘unhurt’ or ‘free from loss’. In its broadest sense, it means to compensate for any loss that a person has incurred. The liability or the duty to pay arises out of different reasons such as an agreement or from obligations arising out of the relations between the concerned parties or by statute.
Contract of Guarantee
A contract where a third person discharges the liability of the debtor to the creditor. The person who gives a guarantee is the surety. A person who receives the guarantee to repay his debt is the principal debtor. The person to whom the principal debtor has to pay the guarantee is the creditor. A guarantee is either in the format of writing or of oral. This contract lets the principal debtor to avail employment, loan or goods on credit and the surety would ensure repayment in case of any default in the part of the debtor.
Salient Features of Guarantee
Principal Debtor
The guarantee or the surety is only for securing the debt. It is necessary for the existence of the recoverable debt. The contract of guarantee should contain the essentials of the valid contract. The guarantee is valid even when the principal debtor is incompetent. But if the surety is incompetent, then the contract stands void.
Consideration
For a contract to be valid, there should be a valid consideration. The consideration of the principal debtor should be a sufficient consideration for the surety to give a guarantee.
Misrepresentation
A contract availed through misrepresentation will become an invalid contract. The misrepresentation may be by the creditor or considering with his knowledge the transaction of the material part stays invalid. Moreover, the creditor’s silence on the material circumstances makes the guarantee invalid.
Surety’s Liability
The surety’s liability remains co-extensive with that of the principal debtor unless the contract provides it. This is the maximum liability of the surety. However, the surety can have a limit on his liability. The contract can provide that the surety will be liable to only a certain extent of the liability of the principal debtor.
Coextensive with Liability of Principal Debtor
The general rule states that the surety is responsible for paying all the debts of the principal creditor from the creditor. The principal debtor can recover the costs, damages and interests from the surety. There might be an exception in these rules only when the contract pertains to it.
Commencement
Immediately after the default of the principal debtor rises the responsibility of the surety. The creditor need not first either sue or give notice to the principal debtor. The surety limits his liability, and his guarantee will be effective only until such a limit.
Continuing Guarantee
The guarantee that extends for a series of transactions is the continuing guarantee.
Contract of Indemnity
A contract where one party tries to help and compensate the other party of the loss is indemnity. The person giving the indemnity is the indemnifier. Whereas the person receiving the indemnity to pay the loss is the indemnity-holder or indemnified.
Rights of Indemnity-holder
The Indemnity-holder has the rights to enforce the following from the Indemnifier’s a contract:
- Pay for the damages of any suit irrespective of any manner
- Pay for all the cost that requires for defending the suit against him legally
- Amount to the sums for the compromise of any suit
Commencement of Liability
The Indemnity is not given just for the repayment after the payment. It requires that the indemnified party shall never come up to pay. Major courts state that as soon as the liability to pay is precise and clear by the indemnity-holder, then he has the right to put the indemnifier in a position to meet the claims of repayment.
Indemnity Bond
The indemnity bond permits an employee to withdraw from the employment prior to the agreed period. This withdrawal is applicable only at the forfeiture cost of the bond money, which is valid only when the bond money and the period of restriction are reasonable. It retains only that part of the bond money to indemnify for the loss of the employer.
Difference between Indemnity and Guarantee
| Parameter | Indemnity | Guarantee |
| Definition | Indemnity is a contractual obligation where one party promises to compensate for the potential loss or damage incurred by another party. | A guarantee is a legal promise made by a third party to cover a debt or obligation of another party if they fail to fulfill their obligation. |
| Nature of Obligation | Indemnity is a primary obligation that is independent of any other obligations. | Guarantee is a secondary obligation that comes into play if the primary obligation (the debt) is not fulfilled. |
| Number of Parties Involved | Indemnity typically involves two parties – the indemnifier and the indemnified party. | Guarantee usually involves three parties – the creditor, the principal debtor, and the guarantor. |
| Risk | The indemnifier is liable for the loss suffered by the indemnified party. | The guarantor is liable for the principal debtor’s default, which is generally considered riskier. |
| Purpose | The purpose of indemnity is to compensate for a loss. | The purpose of a guarantee is to ensure the performance of an obligation. |
| Example | An example of indemnity is an insurance contract. | An example of a guarantee is a bank guarantee. |
FAQs
Discharge of Surety from Liability?
The surety is free from his liability only after the end of his limit of liability. The discharge of surety from the liabilities takes place through the following: Revocation: The surety can revoke the continuing guarantee at any time by sending a notice to the creditor. This is for future transactions. Death of Surety’s: The death of the surety revokes the continuing guarantee in future transactions. Variance in the Contract: The variance made in the contract between the creditor and the principal debtor releases the surety from his liability. Discharge or Release of Principal Debtor: If the contract discharges the principal debtor, then the surety is also free from his liabilities. The discharge of the principal debtor takes place by an act or omission of the creditor. This will result in the discharge of the principal debtor. Composition, Promise not to Sue or Extension of Time: If the creditor makes changes in the contract without consulting the surety, then the surety is free from such liability. Moreover, these changes will portray variations in the original contract. Creditor’s Forbearance to Sue: The mere forbearance of the creditor to sue the principal debtor does not discharge the surety. A promise made with the Third Person: An agreement with the third party does not discharge the surety. The initiation of the agreement takes place to give time to the principal debtor. Moreover, the agreement is between the creditor and the third party. Impairing Surety’s Remedy: If the creditor does an act that is inconsistent or omits to do an act, then such a circumstance will discharge the surety as the remedy of the surety against the principal debtor stands impaired. Moreover, the creditor must remain consistent with the surety’s rights.
Similarities Between Indemnity and Guarantee?
- Contractual Agreements: Both indemnity and guarantee are forms of contractual agreements. They are legally binding and enforceable in a court of law.
- Risk Management: Both indemnity and guarantee are used as tools for managing financial risk. They provide a safety net against potential losses or defaults.
- Obligation to Pay: Both involve an obligation to pay or compensate under certain conditions. In an indemnity, the indemnifier promises to compensate for losses suffered by the indemnified party. In a guarantee, the guarantor promises to fulfill the obligations of the principal debtor if they fail to do so.
- Protection: Both indemnity and guarantee offer protection. Indemnity protects against losses, while a guarantee protects against a failure to fulfill an obligation.
- Triggering Event: Both indemnity and guarantee come into effect upon the occurrence of a specific event – a loss in the case of indemnity, and a default in the case of a guarantee.
- Involvement of Parties: Both indemnity and guarantee involve at least two parties who agree to the terms and conditions set forth in the contract.
