Indemnity and Guarantee Are Two Sides of The Same Coin'
Indemnity and Guarantee Are Two Sides of The Same Coin'
Indemnity and Guarantee Are Two Sides of The Same Coin'
Indemnity: Section 124 of the Indian Contract Act 1872, defines 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 1. Chitti says the term, indemnity, is used in the law in several
different times and cases. In its widest sense, it means recompense for any loss or liability which one
person has incurred, whether the duty to indemnify comes from an agreement or not. Section 126 of the
Indian Contract Act 1872, talks about the rights conferred on the indemnity holder and the essential
conditions for him to claim these rights. It was held in Adamson vs. Jarvis, that Adamson has to
indemnify Jarvis as Jarvis was asked to follow the orders of Adamson, and if anything went amiss
Jarvis would be indemnified. The indemnity holder can call upon the indemnifier to save him from loss
even before the actual loss is incurred.
Rights of Indemnified or Indemnity Holder:
• All damages for which he may be forced to pay in any suit subjected to any matter to which the
promise to indemnify is applicable;
• All costs which he may be forced to pay in any such suit if, in carrying or protecting it, he
didn’t negate the commands of the promisor, and went about as it might have been judicious for
him to act without any agreement of reimbursement, or if the promisor commissioned him to
carry or defend a suit;
• Every sum which he may have paid under the terms of any bargain of any such suit, if the
bargain was not in spite of the requests of the promisor, and was one which it might have been
reasonable for the promisee to make without any agreement of indemnity, or if the promisor
sanctioned him to bargain the suit.
Rights of Indemnifier: After compensation of the indemnity holder, indemnifier reserves the right to
all the ways and means by which the indemnifier could have safeguarded himself from the loss.
Guarantee: Guarantee is constituted with the concurrence of the principle debtor, the creditor and the
surety, but that does not mean that there must be evidence showing that the principle-debtor undertook
his obligation at the express request of the principle-debtor as implied request will be quiet sufficient to
satisfy this requirement. The function of a contract of guarantee is to enable a person to get a loan on
goods on credit, or an employment. A contract of guarantee is rendered void without valid
consideration2.
The Essentials of a Contract of Guarantee are:
• 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 and every contract must be consenting.
• 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.
• Essentials of a Valid Contract: Like any other general contract, it maintains free consent,
consideration, lawful object and competency of contracting parties as the essentials of a valid
contract.
• Medium of Contract: The Indian Contract Act, 1872, does not strictly mention the need for any
written form of contract of guarantee. Both oral and written form will suffice.