Contract of Guarantee vs Indemnity: Key Differences
Contract of Guarantee
A contract of guarantee is a special type of contract recognized under the Indian Contract Act, 1872. Defined under Section 126, it is an agreement to perform the promise or discharge the liability of a third person in case of their default. The parties involved are:
- 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.
The object is to provide security to the creditor. The surety’s liability arises only upon the default of the principal debtor. Such contracts may be oral or written.
Essential Elements of a Contract of Guarantee
- Existence of Three Parties: Must involve a principal debtor, creditor, and surety.
- Primary Liability: There must be an enforceable debt or legal obligation.
- Conditional Promise: The surety’s liability is secondary and arises only upon default.
- Consideration: Anything done or promised for the benefit of the principal debtor is sufficient consideration for the surety.
- Competency: Parties must be legally competent to contract.
- Free Consent: The guarantee must not be obtained via coercion, fraud, or misrepresentation.
- Lawful Object: The contract must not be for an illegal purpose.
- Possibility of Performance: The obligation must be capable of being performed.
Guarantee vs Indemnity: Key Differences
| Basis | Contract of Guarantee | Contract of Indemnity |
|---|---|---|
| Parties | Three (Creditor, Debtor, Surety) | Two (Indemnifier, Indemnified) |
| Liability | Secondary (arises on default) | Primary and independent |
| Object | Security for the creditor | Compensation for loss |
| Existing Debt | Required | Not required |
Contract of Indemnity
Defined under Section 124 of the Indian Contract Act, 1872, a contract of indemnity is an agreement where one party promises to save the other from loss caused by the conduct of the promisor or any other person. The person promising is the indemnifier, and the person protected is the indemnity holder.
Essential Elements of Indemnity
- Two Parties: Indemnifier and indemnity holder.
- Promise to Compensate: An assurance to make good any loss.
- Actual Loss: Compensation is limited to actual loss suffered.
- Contingent Nature: Liability arises only upon the occurrence of a specified event.
Rights of the Indemnity Holder
Under Section 125, the indemnity holder is entitled to recover:
- All damages they may be compelled to pay in a suit.
- All costs incurred in defending or bringing a suit, provided they acted prudently.
- All sums paid under the terms of any compromise, provided the compromise was not contrary to the indemnifier’s orders.