Contract Act: Contract of Indemnity and Contract of Guarantee
We enter into various contracts so that we can carry on with our day to day activities. It is almost impossible to run a company or get a credit card without entering into some kind of a contract. In India, the formation and validation of a contract is governed by the Indian Contract Act, 1872.
Contract Act: What is Indemnity?
As per Section 124 of the Indian Contract Act, the contract of indemnity is defined as, “a contract by which one party promises to save other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.” Does this sound like a lot of mumbo jumbo?
Well, this section is not so difficult to understand when you relate it to practical house. Suppose you are hired by a newspaper to write articles for them as a freelancer. Typically, your contract would have an indemnity clause so that if you write something against a very important person and that person files a suit against the newspaper for defamatory material, the newspaper can show the indemnity clause that you signed, protecting them from any form of loss caused due to your conduct.
Then, the onus of fighting the defamation suit becomes your responsibility. That’s not all about the contract of indemnity as it is incorporated in most contracts, particularly in real estate purchase and bank loans. A person who promises to bear the loss is known as indemnifier and the person whose loss is covered is known as indemnified. These types of contracts are mainly formed between insurance companies and their customers.
Under Section 126, of the Act, a contract of guarantee is defined as, “a contract to perform the promise, or discharge the liability of a third person in case of his default.” This type of contract is formed mainly to facilitate borrowing and lending money.
The three parties involved in this type of contract are:
- Surety: is the person by whom the guarantee is given
- Principal Debtor: is the person from whom the assurance is given.
- Creditor: is the person to whom the guarantee is given.
Contract Act: Differences between Contract of Indemnity and Guarantee
A few important distinctions between a contract of indemnity and contract of guarantee are as follows:
- Number of Parties: In a contract of indemnity only two parties are involved, whereas in a contract of guarantee, three parties are involved.
- Purpose: A contract of indemnity is formed to provide compensation of loss. A contract of guarantee is formed to give assurance to the creditor in lieu for his money.
- Nature of Liability: In a contract of indemnity, the indemnifier is the sole person who is held liable. In a contract of guarantee, the liability is shared by the surety and principal debtor. The principal debtor owes the primary liability and the surety owes the secondary liability.