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Indemnity vs. Guarantee

While the idea of indemnity (repayment) and guarantee (assurance) vary on a few issues, the two of them remain methods of pay with covering principles. This paper scrutinizes both the similitudes and the contrasts between the two.

Indemnity, under S. 124 of the Indian Contract Act, 1872 is an agreement to keep a gathering repaid against misfortune. Guarantee empowers an individual to get a credit on products, or work and requires a valid consideration. While an agreement of guarantee has 3 parties, with fluctuating liabilities, an agreement of indemnity has 2 parties with primary liability. There exist a few such contrasts, with an assurance having a sweeping rule, in contrast to a repayment, which develops every so often.

Indemnity (Reimbursement) and Guarantee (Assurance) are cut out of the same cloth- It implies that repayment and assurance contrast on plenty of issues while being comparative on the issue that they are the two methods of remuneration and that they are comparative on specific principles like Unjust Enrichment (treacherous enhancement) and matters of good faith.

Disregarding their essential similitudes, agreements of indemnity (reimbursement) are intrinsically unique about agreements of guarantee (assurance). First, we will approach clarifying what repayment and assurance imply. At that point we will go into the distinctions and the likenesses among indemnity & guarantee (assurance and repayment).

Objective of Study:
The objective of this research paper is to understand the concept of indemnity and guarantee and to determine the differences between both of them and similarities, if any.

Research Questions:
  • What is the concept of Indemnity and Guarantee?
  • What is the difference and similarities between contracts of Indemnity and Guarantee?
Research Methodology:
The researcher has used doctrinal method i.e., reference from available primary sources like Acts, Rules, and Regulations to study the present questions in hand. The researcher has also taken reference from secondary sources like books, articles, and newspaper reports understanding the concept of indemnity and guarantee.

The literal meaning of Indemnity is protection against loss or enacting to compensate or protect somebody from the loss or make good to the loss. Basically, a contract of indemnity is when a person promises to another person that in case another person suffers from loss, the first person will compensate the loss. It is defined under section 124 of the Indian Contract Act 1872 under chapter VIII of Indemnity and Guarantee.

It states, A contract by which one party promises to save the another from loss caused to him by him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.[1]

For e.g., A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs. 400. This is a contra t of indemnity.

According to Halsbury, as 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, independently of the question whether a third person makes a default.[2] In its most stretched out sense, it means a reward for any misfortune or obligation which one individual has acquired, regardless of whether the obligation to repay originates from an agreement or not.

The person who promises to indemnify is known as Indemnifier. The person in whose favor such promise is made is known as Indemnified or indemnified holder.

The indemnity under Indian law doesn't cover a promise to compensate for loss not arising due to Human Agency. So, the involvement of the Human Agency is the utmost requirement of the concept of indemnity. This means that the law does not cover the concept of insurance, for that matter, the law of insurance is covered under the contingent contract. Thus, the concept of indemnity, under Indian law does not cover insurance. Aside from on account of Contract of Life Insurance, individual mishap, and affliction, all agreements of protection entitle the guarantee for the reimbursement of real misfortune that is demonstrated to have been endured by him. It is just on the evidence of genuine misfortune that the assured can claim repayment of the misfortune to the degree it is set up not surpassing the sum stipulated in the agreement of protection which stipulates the external furthest reaches of the insurance agency's risk.

The features include:
  1. 2 parties
  2. Promise by one person to another to save from loss.
  3. Loss may be caused by the promisor or any other person.
  4. Contingent in nature.
  5. Satisfy all essentials of the contract.
Agreement of Indemnity is not uberrimae fidei, this implies all parties to a protection agreement must arrange in compliance with common decency, and until and except if promisee has not experienced any damage, he cannot claim repayment. For instance, Life insurance is not considered a contract of indemnity as one's life's value cannot be determined and where the loss is not a certain contract of indemnity does not arise. In the case of Adamson v Jarvis[3], Adamson was entitled to recover the money he had to pay to the true owner of the cattle.

Rights of Indemnified or Indemnity Holder: Sec 125 of ICA
He is entitled to recover from the indemnifier.
  1. All damages paid by him in any suit.
  2. All costs he might have to pay.
  3. All sums which he might have paid on a compromise.

Rights of Indemnifier:
  1. Rights under Doctrine of subrogation.
  2. To sue against 3rd party after indemnifying the indemnity holder
  3. Not to compensate for losses not covered under Contract of Indemnity.

The basic meaning of guarantee is an undertaking to answer for the payment or performance, so, 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 comprised of the simultaneousness of the principal debtor, the creditor, and the surety.

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. The person to whom the guarantee is given is called the creditor. A guarantee may be either in written or oral form. The capacity of an agreement of assurance is to empower an individual to get an advance on products using a loan, or a work. An agreement of assurance is rendered void without valid consideration.[4]

According to S. 126, a contract to perform the promise or to discharge the liability of a 3rd person in case of default.[5]

For e.g., A takes a loan from the bank. A promise to the bank to repay the loan. B also makes a promise to the bank saying that if A does not repay the loan �then I will pau'. In this case, a is the Principal Debtor, B is the surety, and the bank is the creditor.

The Essentials of a Contract of Guarantee are:
  1. Tripartite Agreement: A contract of guarantee entails three parties, principal creditor, creditor, and surety. In a successful contract of guarantee, there must be three separate contracts between the three parties and each contract must be consenting
  2. Existence of Liability: Here the main liability lies with the principal debtor. Secondary liability lies with the surety which can only be invoked once the principal debtor defaults on its payment.
  3. Essentials of a Valid Contract: Like any other general contract, it maintains free consent, consideration, lawful object, and competency of contracting parties as to the essentials of a valid contract.
  4. Medium of Contract: The Indian Contract Act, 1872, does not strictly mention the need for any written form of a contract or guarantee. Both oral and written form will suffice

Difference between Indemnity and Guarantee
  1. Number of Parties: A contract of guarantee always has three parties; they are, the creditor, the principal debtor, and the surety; for e.g., Bank Loan, whereas a contract of indemnity has two parties, the indemnifier, and the indemnity holder
  2. Number of Contracts: In a contract of indemnity, there is a single promise or contract; a promise to pay if there is a loss. For e.g., Insurer and Insured, in a contract of guarantee, by contrast, there are multiple promises (3), i.e., between principal debtor and creditor, between creditor and surety, and an implied contract between the principal debtor and the surety.
  3. Nature: A contract of indemnity is for reimbursement of loss, whereas the contract of guarantee is for the security of the creditor or assurance to the creditor
  4. Liability: In a contract of indemnity, the liability of the indemnifier is primary (Fire Insurance), whereas in a contract of guarantee, the debtor is primarily liable, and the surety assumes secondary liability because the customer is primary liable in default of his payment then after the surety has liability.
  5. Object: The purpose is of safety from an uncertain future event in a contract of indemnity, for e.g., Fire Insurance, whereas the purpose in a contract of guarantee is to assure the other party of the performance of an obligation.
  6. Scope: The Scope is limited in a contract of indemnity as it doesn't include contracts of guarantee, whereas the scope is wider in a contract of guarantee as it includes a contract of indemnity.
  7. Consideration: Indemnifiers receive consideration from the indemnity holder at the beginning of the contract, e.g., premium in case of fire insurance. But Surety doesn't receive any consideration. The only consideration for the surety is the expected gain of the principal debtor.
  8. Existence of liability: In indemnity, the contingency present is that of the possibility or risk of suffering a loss to which the indemnifier agrees to indemnify for e.g., in fire insurance, the compensation would be given only when a fire occurs viz uncertain; while in guarantee, there is an existing debt or duty whose performance is guaranteed by the surety.
  9. Subrogation: In a contract of indemnity, the indemnifier cannot sue a third party in his own name for the loss compensated unless they have the right. The surety is entitled to file a suit against the principal debtor in his own name if only he has discharged the obligation of the creditor, then he steps in the shoes of the principal debtor.
  10. Discharge: The indemnifier is not necessarily discharged with the discharge of the persons for whom the indemnity was given. After paying compensation, it's not necessary the fire insurance company is free from all the liabilities. The surety is discharged from his liability with the discharge of the principal debtor for e.g., the guarantee is over when surety pays off the amount to the bank.
  11. Interests of the parties: The indemnifier has some interest in the transaction other than indemnity like commission, but the surety has no such interest except that of guarantee.
  12. Types: The contract of indemnity has no types, whereas the contract of guarantee has 2 types: specific and continuing guarantee.

In a case study between, Punjab National Bank Ltd. v. Bikram Cotton Mills and Anr [6]and Gajan Moreshwar vs. Moreshwar Madan[7], the difference between guarantee and indemnity was clearly visible. There were three parties here, in the Punjab National Bank case whereas only two parties in Gajan Moreshwar. Here Moreshwar Madan was the indemnifier and hence he was the only one liable to make good of the money, whereas in the Punjab National Bank case, the debtor, which is the first respondent company, is the primary liability holder and the secondary liability belongs to the surety which is the respondent.

The Privy Council in Gajan Moreshwar case held that the indemnity holder has rights other than those mentioned in the sections. If the indemnity holder has incurred any liability, he can ask the indemnifier to do well of the liability and Moreshwar Madan was directed by the Privy Council to do well of the indemnity holder, Gajan Moreshwar's, liability. In Punjab National Bank case, there was no risk involved, but there is an existing duty to pay off debts as mentioned in the sections governing guarantee.

Hence irrespective of the presence of risk, the principal debtor and surety must do well of the debts of the creditor. In the Gajan Moreshwar case, Gajan Moreshwar can't sue K.D. Mohan, as it is a contract of indemnity. He can only sue Moreshwar Madan. But in the Punjab National Bank case, along with the principal debtor, the surety can also be sued. Here, the obligation was absolute. The ratio was that There exist contracts of indemnity, which do not fall within the ambit of S 124,125. Contracts of indemnity can be enforced without the actual loss of the indemnified so long as there is an absolute liability of the type covered by the contract of indemnity.

In Lala Shanti Swarup vs Munshi Singh & Others,[8] it was held that the sold property is nothing but an implied contract of indemnity, whose cause of action arises when Actually Damnified (Mortgage decree being passed does not amount to actual damnification).

Assurances and reimbursements have various comparable qualities. All things considered moreover, comparative commitments and rights develop between the gatherings. This will have sway especially for the duration of the hour of hoping to approve the understanding. Agreements of repayment and agreements of assurance give certain focal shared characteristics.

In each agreement, one gathering agrees to pay in light of a legitimate concern for another. Likewise, every one of these classes of agreements is used as a defense against hardships by individuals and associations.

One more point of similarity worth mentioning is that they cannot be used to make unjust enrichments. In a comparative study between Punjab National Bank Ltd. v. Bikram Cotton Mills and Anr and Gajan Moreshwar vs. Moreshwar Madan, it can be seen, that both guarantee, and indemnity is used to compensate the creditor and indemnity holder respectively and the principal debtor and surety in the Punjab National Bank case as well as the indemnifier had consented to pay to make good of the debt.

By the day's end, the guarantor can't be in danger for substantially more than the customer. The document will be understood as a guarantee if, on its actual development, the commitments of the surety are to remained behind the principal and just go to the fore once a commitment has been broken between the principal and the lender. The commitment is an auxiliary one, reflexive in character. A repayment rises on occasion of an event, while an assurance develops on default by an outsider.

An indemnity, by contrast, accommodates simultaneous obligation with the principal although and there is no compelling reason to look first at the principal. Generally, it is an agreement that the surety will hold the lender innocuous against all misfortunes emerging from the agreement between the principal and the lender. Generally, a guarantee accommodates an obligation far-reaching from that of the principal.

  1. The Indian Contract Act, 1872, ( 9 of 1872
  2. Halsbury's Laws of India, Vol 9- contract, Lexis Nexis, 2nd ed., 2015.
  3. [1827] 4 BING 66.
  4. Janaki Paul v. Dhokar Mall Kidarbux, (1935) 156 IC 200.
  5. The Indian Contract Act, 1872, (9 of 1872).
  6. 1970 AIR 1973.
  7. AIR 1942 BOM 302.
  8. 1967 AIR 1315.

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