Indemnity and Guarantee
→ Distinction between Indemnity and Guarantee
CONTRACT OF INDEMNITY :
• Definition:
According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity is
a contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct of any other person. Literally,
the term means "security against loss".
• Essentials:
• Two Parties: There must be two parties: the indemnifier (promisor) and the
indemnity-holder or indemnified (promisee).
• Promise to Save from Loss: One party must make an express or implied promise to
safeguard the other from a specific loss.
• Cause of Loss (Human Agency): Under Indian law, the loss must be caused by the
conduct of the promisor or any other person. o Note: Unlike English law, Section 124
does not explicitly cover losses caused by accidents or natural calamities like fire,
though insurance contracts (except life insurance) are generally treated as contracts
of indemnity in practice.
• Existence of Loss: The contract is contingent in nature; the liability of the
indemnifier arises only when the loss actually occurs.
• Enforceable Agreement: It must satisfy all the essential elements of a valid
contract, such as free consent and lawful object. rights of the indemnity holder sec
125 Under Section 125 of the Indian Contract Act, 1872, the indemnity holder
(promisee), when acting within the scope of his authority, is entitled to recover
several types of compensation from the promisor. These rights apply specifically
when the indemnity holder is sued regarding a matter to which the promise of
indemnity applies. The specific rights provided under this section include:
• Recovery of Damages: The indemnity holder is entitled to recover all damages
which he may be compelled to pay in any suit in respect of any matter covered by the
contract.
• Recovery of Costs: He can recover all costs which he may be forced to pay in any
such suit. However, this is subject to the condition that in bringing or defending the
suit, he did not contravene the orders of the promisor and acted as it would have
been prudent for him to act in the absence of any contract of indemnity, or if the
promisor authorized him to bring or defend the suit.
• Recovery of Sums Paid under Compromise: The holder is entitled to recover all
sums paid under the terms of any compromise of any such suit. For this right to be
valid, the compromise must not be contrary to the orders of the promisor and must
, be one that would have been prudent for the promisee to make in the absence of an
indemnity contract, or one that the promisor authorized. Additionally, judicial
interpretations have expanded these rights:
• Right to Sue for Specific Performance: The right of the indemnity holder is not
strictly confined to the points mentioned in Section 125. Based on landmark cases
like Gajanan Moreshwar v. Moreshwar Madan, an indemnity holder can sue for
specific performance of the contract even before damages are actually incurred,
provided that an absolute liability has been incurred by him and the contract covers
that liability. This means the indemnifier can be compelled to save the holder by
paying off the liability directly.
Contract of guarantee:
• Definition:
According to Section 126 of the Indian Contract Act, 1872, a "contract of guarantee"
is a contract to perform the promise, or discharge the liability, of a third person in
case of his default. It is essentially a collateral engagement to answer for the debt or
miscarriage of another person.
The Three Parties Involved:
• Surety: The person who gives the guarantee.
• Principal Debtor: The person in respect of whose default the guarantee is given.
• Creditor: The person to whom the guarantee is given
• Essential Elements:
• Tripartite Agreement: A guarantee is a tripartite agreement requiring the
concurrence of the principal debtor, the creditor, and the surety. While there must be
concurrence, the principal debtor's request for the guarantee can be implied rather
than express.
• Existence of a Principal Debt: There must be an existing primary liability or debt
owed by the principal debtor to the creditor. A contract of guarantee cannot exist
without a principal debt.
• Secondary Liability: The surety’s liability is secondary and conditional; it arises only
upon the default of the principal debtor. If a liability is incurred independently of a
default, it does not fall within the definition of a guarantee.
• Consideration (Section 127): Consideration is essential for the contract to be
enforceable. Anything done or any promise made for the benefit of the principal
debtor is sufficient consideration for the surety. The surety themselves does not
need to receive a direct benefit.
• Form of the Contract: Under Indian law, a guarantee may be either oral or written.
• Consent and Validity: The contract must contain all the essentials of a valid
contract.
However, the principal debtor need not be competent to contract (e.g., a minor). In
such cases, the surety is regarded as the principal debtor and is personally liable.
→ Distinction between Indemnity and Guarantee
CONTRACT OF INDEMNITY :
• Definition:
According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity is
a contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct of any other person. Literally,
the term means "security against loss".
• Essentials:
• Two Parties: There must be two parties: the indemnifier (promisor) and the
indemnity-holder or indemnified (promisee).
• Promise to Save from Loss: One party must make an express or implied promise to
safeguard the other from a specific loss.
• Cause of Loss (Human Agency): Under Indian law, the loss must be caused by the
conduct of the promisor or any other person. o Note: Unlike English law, Section 124
does not explicitly cover losses caused by accidents or natural calamities like fire,
though insurance contracts (except life insurance) are generally treated as contracts
of indemnity in practice.
• Existence of Loss: The contract is contingent in nature; the liability of the
indemnifier arises only when the loss actually occurs.
• Enforceable Agreement: It must satisfy all the essential elements of a valid
contract, such as free consent and lawful object. rights of the indemnity holder sec
125 Under Section 125 of the Indian Contract Act, 1872, the indemnity holder
(promisee), when acting within the scope of his authority, is entitled to recover
several types of compensation from the promisor. These rights apply specifically
when the indemnity holder is sued regarding a matter to which the promise of
indemnity applies. The specific rights provided under this section include:
• Recovery of Damages: The indemnity holder is entitled to recover all damages
which he may be compelled to pay in any suit in respect of any matter covered by the
contract.
• Recovery of Costs: He can recover all costs which he may be forced to pay in any
such suit. However, this is subject to the condition that in bringing or defending the
suit, he did not contravene the orders of the promisor and acted as it would have
been prudent for him to act in the absence of any contract of indemnity, or if the
promisor authorized him to bring or defend the suit.
• Recovery of Sums Paid under Compromise: The holder is entitled to recover all
sums paid under the terms of any compromise of any such suit. For this right to be
valid, the compromise must not be contrary to the orders of the promisor and must
, be one that would have been prudent for the promisee to make in the absence of an
indemnity contract, or one that the promisor authorized. Additionally, judicial
interpretations have expanded these rights:
• Right to Sue for Specific Performance: The right of the indemnity holder is not
strictly confined to the points mentioned in Section 125. Based on landmark cases
like Gajanan Moreshwar v. Moreshwar Madan, an indemnity holder can sue for
specific performance of the contract even before damages are actually incurred,
provided that an absolute liability has been incurred by him and the contract covers
that liability. This means the indemnifier can be compelled to save the holder by
paying off the liability directly.
Contract of guarantee:
• Definition:
According to Section 126 of the Indian Contract Act, 1872, a "contract of guarantee"
is a contract to perform the promise, or discharge the liability, of a third person in
case of his default. It is essentially a collateral engagement to answer for the debt or
miscarriage of another person.
The Three Parties Involved:
• Surety: The person who gives the guarantee.
• Principal Debtor: The person in respect of whose default the guarantee is given.
• Creditor: The person to whom the guarantee is given
• Essential Elements:
• Tripartite Agreement: A guarantee is a tripartite agreement requiring the
concurrence of the principal debtor, the creditor, and the surety. While there must be
concurrence, the principal debtor's request for the guarantee can be implied rather
than express.
• Existence of a Principal Debt: There must be an existing primary liability or debt
owed by the principal debtor to the creditor. A contract of guarantee cannot exist
without a principal debt.
• Secondary Liability: The surety’s liability is secondary and conditional; it arises only
upon the default of the principal debtor. If a liability is incurred independently of a
default, it does not fall within the definition of a guarantee.
• Consideration (Section 127): Consideration is essential for the contract to be
enforceable. Anything done or any promise made for the benefit of the principal
debtor is sufficient consideration for the surety. The surety themselves does not
need to receive a direct benefit.
• Form of the Contract: Under Indian law, a guarantee may be either oral or written.
• Consent and Validity: The contract must contain all the essentials of a valid
contract.
However, the principal debtor need not be competent to contract (e.g., a minor). In
such cases, the surety is regarded as the principal debtor and is personally liable.
