What is Indemnity & Guarantee in Contract Law?
By Joy Puri
Table of Contents
Introduction
The history of law of contracts roots back to ancient civilizations of the human society such as Mesopotamia and Rome. In these country, early forms of agreements were recognized and enforced by the law established by the state.
Sticking only to the Roman Law, Justinian’s Code, laid foundational principles, emphasizing the importance of mutual consent and obligations between the individuals of the society.
Digging in to the facts of the medieval period, contract law evolved significantly in England through the common law system of the country. The Statute of Frauds (1677) marked a critical development, requiring certain contracts to be in writing to be enforceable by the law established by the state.
The 19th century witnessed the codification of contract principles which was therefore influenced by the Industrial Revolution’s and the very demand for clearer commercial regulations. Landmark cases, such as Carlill v. Carbolic Smoke Ball Co. (1893), gave the shape to the modern contract law doctrines, establishing rules on offer, acceptance, and consideration in the contract thereof.
If talking about the recent times, 20th century marked the rise of international trade which thereby led to the development of uniform laws, such as the United Nations Convention on Contracts for the International Sale of Goods (CISG) on a global level.
What is Indemnity?
The aforementioned topic has been entailed in the Section 124 of the Indian Contract Act, 1872, which thereby opines it as: an indemnity contract is an agreement where one party promises to compensate the other for losses caused by the indemnifier’s actions or the actions of any third party thereof.
This legal concept hereby ensures that the indemnified party is protected against specific losses or damages that arise due to defined events or actions on part of any third party.
The indemnity contract highlights the scope of coverage, including the types of losses and the extent of financial compensation on the part of the parties. The indemnifier is obligated to cover all damages, costs, and expenses incurred by the indemnified party as per the terms of the contract by the third party thereof.
However in furtherance to the aforesaid, indirect or consequential losses are generally not covered unless explicitly included in the agreement of the indemnity.
For instance, in insurance contracts, an insurance company, which is the indemnifier promises to indemnify the policyholder, which is the indemnified, against specified risks, such as fire or health issues. In case of a loss, such as property damage due to fire, the insurer compensates the policyholder for the incurred loss which has been incurred by the party.
Likewise, in agency contracts, a principal might indemnify an agent for losses incurred while performing duties on behalf of the principal. If the agent incurs expenses or suffers losses while executing the principal’s instructions, the principal must reimburse those costs as per the agreement.
The legal consequences of the indemnity contracts are significant. The indemnified party can claim reimbursement without needing to prove fault, as long as the loss falls within the agreed terms of the contract.
The indemnifier’s liability is generally triggered when the indemnified party suffers the specified loss, ensuring prompt and adequate compensation on the part of the party.
Indian courts have reinforced these principles through various judgments, emphasizing the indemnifier’s obligation to fulfill the promise of indemnity in the indemnity contracts.
What is Guarantee?
With reference to the Indian contract law, a guarantee is a legal commitment wherein the guarantor assures the performance of a duty or repayment of a debt owed by the principle debtor to the creditor.
This concept is has been entailed in the legislation of the Indian Contract Act, 1872, to be precise under Sections 126 to 147 of the aforementioned legislation.
In these types of contracts, the parties in these extend to three parties in quantum, namely; the creditor, the principal debtor, and the guarantor.
The crux and the fundamentals of this contract lies in the guarantor’s promise to be answerable for the debt or default of the principal debtor if the latter fails to fulfill their obligation as per the agreements.
The guarantee in the contract can take form by two ways which ordains that they can either be in writing or verbally said, although for practical and evidentiary purposes, a written guarantee is more common form than the latter.
Section 126 of the Indian Contract Act stipulates the contract of guarantee as “a contract to perform the promise or discharge the liability of a third person in case of his default.”
The law mandates and makes it compulsory that there must be a clear or unimpeachable evidence of principal debt or obligation, and the guarantor’s liability is secondary and conditional upon the default of the principal debtor.
For a guarantee to be valid, several conditions must be met: (i) Existence of a Debt or Duty (ii) Consideration (iii) Consent of All Parties (iv) Capacity
The liability of the guarantor is co-extensive with that of the principal debtor unless otherwise provided by the contractual terms.
What this implies is that, the guarantor’s liability is equivalent to the principal debtor’s liability and arises only upon the latter’s default. The guarantor can be sued by the creditor directly in case of default by principal debtor of his duties.
The discharge of the guarantor can occur under various circumstances, such as revocation by notice, the creditor’s act impairing the guarantor’s eventual remedy against the principal debtor, or the change or variation in the terms of the contract without the guarantor’s consent thereof.
Distinction Between the Two
Furthermore, after being well versed with the context and the topics of the antecedents, it is thereby utmost important to understand the distinction which arises in these concepts.
In the case of the Indemnity, its nature arises as of the primary obligation which is there on the part of the party as the indemnifier has to compensate for the loss. Whereas in the case of the contract of guarantee the obligation is secondary and the guarantor has to compensate for the loss.
For the case of contract of Indemnity there are only two parties involved which are indemnity holder and the indemnifier, whereas in the case of the contact of guarantee the involvement is of parties which are guarantor, principal debtor, and creditor.
The scope of the two contracts are very different from each other. In the case of Indemnity, the scope of the damages is certainly specific in regards to the case. Whereas in the case of guarantee contract the scope is generally wide and broad.
In the case of claims by the parties the two aforementioned contacts differ too. In case of Indemnity contracts, the indemnifier has to pay the compensation directly to the indemnity holder in case of loss. Looking upon the other side, in the case of the Contract of Guarantee the guarantor has to only pay if the principal debtor makes a default on his part.
Conclusion
These sorts of contracts are involved in our day to day lives and help in the regulation of trade not only inside the country but also helps in enhancing the trade between the countries.
The contracts are widely used by the individuals and the companies thereof and hold the lagal validity by the law which deciphers that they are enforceable by the law of the country thereof.
Disclaimer:
The information provided in the article is for general informational purposes only, and is not intended to constitute legal advice or to be relied upon as a substitute for legal advice. Furthermore, any information contained in the article is not guaranteed to be current, complete or accurate. If you require legal advice or representation, you should contact an attorney or law firm directly. We are not responsible for any damages resulting from any reliance on the content of this website.
