Contract of Guarantee and Contract of Indemnity

Contract of Indemnity Sec. 124

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, is called a contract of indemnity.
Illustration 1 : Mr. Yasir purchased demand draft of Rs 50,000 from a bank. The draft was lost in transit. Mr. Yasir requested the concerned branch to issue a duplicate demand draft. He had to furnish an indemnity bond that in case of any claim on the bank, Mr. Yasir (indemnifier) shall be liable to make good the loss suffered by the bank (Indemnity holder/ Indemnified)

Rights of Indemnity Holder When Sued: 1) Can recover all damages incurred /Paid by him. 2) Can recover costs incurred. 3) Can recover sums paid under compromise, if any.

Rights of Indemnifier Settled principle of law : After compensating the loss to indemnity holder, indemnifier is entitled to all the ways and means by which person indemnified might have protected himself for the loss. Time of Commencement of Indemnifiers Liability: When indemnity holder incurs an absolute liability though not actual loss.

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 called the surety; the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor. A guarantee may be either oral or written.

Guarantee may be: o ORAL OR o WRITTEN

PARTIES in a contract of guarantee Surety /Guarantor -- the person who gives guarantee Creditor. -- the person in whose favour guarantee is given Principal Debtor. -- the person who primarily incurs liability/debt Contract of Indemnity and Guarantee

 By Revocation By Death By Novation By the Conduct of the Creditor

Discharge of liability

Any variance made without the suretys consent Where the creditor enters into an agreement with the principal debtor releasing him from his liability, the surety stands discharged. When the creditor compounds with principal debtor giving him time to pay his debt the surety stands discharged Continued..

When the creditor compounds with the principal debtor When the creditor agrees not to sue the principal debtor Where the creditor, by his act or failure to perform his duty to the surety impairs the remedy available to the surety against the principal debtor, the surety is discharged.

When the creditor which by implication releases the principal

debtor from liability, will discharge the surety from his liability

Where the creditor loses or disposes off, without the consent of

the surety any security pledged with him
(to the extent of value of the security so lost or disposed)

DistinctionBetween Indemnity & Guarantee Indemnity. 1) N umber Of Parties,Twoa) Indemnifier. b) Indemnity holder. 2) N umber Of Contracts.One Contract. Guarantee. Three Parties.a) Creditor b) Principal Debtor.c) Surety.Three Contracts:a) P.D & Creditor b) P.D & Suretyc) surety & creditor .

3)Liability of indemnifier:is primary andindependent from Principal debtor.4) R equestIndemnifier givesindemnity at his own noton the request of thirdparty.5) Purpose. R eimbursement of loss.3)Liability of surety:is secondary, it accrueswhen principal debtorfails to perform hisobligations4)Guarantor.Surety furnishes/ givesguarantee on the requestof principal debtor5) Purpose. To Secure performance of a contract (debt etc) byprincipal debtor.