Contract of Indemnity – Section 124 of Indian Contract Act defines Contract of Indemnity as a contract whereby one party promises to other party to save the other party from the loss caused to him by the conduct of promisor or by any other person.
Illustration – A contracts with B to indemnify B against the any repercussions or consequences of any proceedings which the C may take against B in respect of certain sum of 500 rupees. This is a contract of indemnity.
The two parties involved in Contract of Indemnity are Indemnifier and Indemnity holder.
Indemnifier – The person who makes the promise to indemnify against the loss or to make good the loss is called indemnifier.
Indemnity holder – The person in whose favor such a promise to indemnify is made is called indemnity holder.
Characteristics of the contract of Indemnity are as follows
1) Contingent Contract – Contract of indemnity is a real kind of contingent contract. It is an original and direct engagement between two parties where one party promises to save other from the loss suffered by him due to the conduct of the promisor or any other person.
2) Loss to promise – It will be seen from section 124, that the promise under the contract of indemnity must have suffered loss before he can hold the promisor liable on the contract of indemnity.
3) Consideration and Object must be lawful – It must be noted that the consideration and object of the contract of indemnity must be lawful. Thus, an agreement by an accused or any other person to indemnify the person who has given bail is illegal, and cannot be enforced.
4) Express or Implied – Although this section applies only to an express promise, a duty to indemnify may arise by operation of law in several circumstances.
5) Scope of section 124 – The scope of this section is narrower. According to section 124, the loss must be caused by the conduct of human being, it does not not include loss caused by natural factors, not involving human agency such as accidental fire which is included in English law.
6) Insurance Contracts – Contract of Indemnity which are the most common example of insurance contract under English law are not contract of indemnity under Indian Contract Law. According to Indian law, indemnity contract is restricted to only those cases where the loss caused can be reimbursed.
Cases of Contract of Indemnity
1) Adamson v/s Jarvis – Adamson, who followed the instructions of Jarvis and sold the cattle.
Jarvis was however not the real owner and the real owner sued Adamson was conversion. The court held that since Adamson acted out Jarvis instructions and was entitled to presume that if anything went wrong as per instructions, he would be indemnified. Jarvis was ordered by the court to pay damages to Adamson.
2) Betts v/v Gibbins – The court in this case held that an undertaking to indemnify may be implied.
3) Sheffield Corp. v/s Barclay – A corporation having registered a transfer of stock on the request of the banker was held entitled to recover indemnity from the banker when the transfers were discovered to be forged.
4) Starkey v/v Bank of England – A stockbroker innocently acted upon a power of attorney on which one out of three signatures were forged. The court permitted the bank to recover the indemnity from an agent who had presented the document.
Contract of Guarantee – Section 126 of Indian Contract Act defines Contract of guarantee is a contract to perform the promise or to discharge the liability, of the third person in case of his default. It may be oral or written.
Illustration – If A says to B ‘Lend Rs. 5000 to C for one year at 12% interest per annum. If he does not repay this amount with interest at the end of one year, I shall pay it to you’. This is a contract of Guarantee.
Parties involved are
1) Surety – The person who gives guarantee is surety.
2) Principal Debtor – The person in respect of whose default guarantee is given is principal debtor.
3) Creditor – The person to whom guarantee is given is creditor.
Characteristics of Contract of Guarantee
1) Consideration – Any promise made for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
2) Concurrence of three parties - There must be concurrence of three parties to constitute the contract of guarantee.
3) Surety” distinct promise to be answered – To constitute contract of guarantee, there must be a distinct promise on the part of the surety to be answerable for the debt.
4) Liability must be legally enforced – The word ‘liability’ used in section 126 must be enforceable at law. If the liability does not exist, there cannot be contract of guarantee.
Cases of Contract of Guarantee
1) In case of Birkmyrvs Darnell, the court held that when one person in shop buys and to give him credit other person promises that’ if he does not pay I will pay’ this is a collateral undertaking to be held liable in case of default of another. It is contract of guarantee.
2) Swan v/s Bank of Scotland – It was held that guarantee contract is a tripartite agreement between creditor, surety and principal debtor.
Allahabad Bank v/s S M engineering industries – Here the bank was disallowed from suing the surety in the absence of any advance payment made after the date of Guarantee.
Difference between the two contracts
Points of Distinction
Contract of Indemnity
Contract of Guarantee
Contract of indemnity is a contract where one party promises to save the other party from the loss caused to him by conduct of promisor or any other person.
A contract to perform the promise or discharge the liability of a third person in case of the third person’s default is known as contract of guarantee.
In case of contract of indemnity there are only two parties i.e. the person who promises to indemnify and the person who is to be indemnified.
Creditor, Principal Debtor and surety are the three parties in case of contract of guarantee.
Number of Contracts
In contract of indemnity, there is only one promise between the promisor and promisee.
In contract of guarantee, there are three contracts, two express and one implied. An express contract exists between the creditor and the principal debtor, and another between the surety and the creditor. The third, an implied contract exists between the surety and principal debtor, by virtue of which the surety is entitled to recover from principal debtor whatever he has rightfully paid under the contract of guarantee.
Nature of Liability
In contract of Indemnity, the person giving the indemnity is primarily liable; there is no secondary liability.
In contract of guarantee, the principal debtor has primary liability and liability of surety is secondary.
The main aim is reimbursement of loss
The main aim is security of the creditor.
No requirement of principal debt
Principal debt is necessary
This article is written by Neha Bodas of ADV.BALASAHEB APTE COLLEGE OF LAW.