INDEMNITY AND GUARANTEE
Indemnity and Guarantee are a type of contingent contracts, which are governed by Contract Law. Contingent contract is defined under section 31 of the Indian contract act as “ If two or more parties enter into a contract to do or not to do something, if an event collateral to the contract does or does not happen, then it is a
contingent contract.” However, if the event on which performance or non-performance of the contract is depended is bound to happen, such a contract is not a contingent contract.
Indemnity is a contract when one person promises to compensate the loss occurred to the other party, due to the acts of the promisor or any other party. Whereas, when a person assures the other party that he/she will perform the promise or fulfil the obligation of the third party, in case he/she default is a contract of guarantee.
Forming and entering a contract of indemnity or guarantee to secure ones interest is advisable. In an indemnity contract the promisor is the indemnifier and the party is called indemnified.
Parties namely, Principal debtor (on whose default the guarantee is given), the creditor (to whom the guarantee is given) and the surety
(the person who gives the guarantee) are to be in a contract of guarantee. When a contract of guarantee is made it has three contracts, first between the principal debtor and creditor, second between principal debtor and surety, third between the surety and the creditor. The contract can be oral or written. An indemnity contract has a straight forward contract between two parties. When two parties sign the contract of indemnity the liability of the indemnifier does not come into state till the loss has occurred to the other party but whereas, in case of a contract of guarantee the liability of the surety begins the moment the contract is signed. The
difference between indemnity and guarantee is visible in the judgement given by the courts in two cases being, Punjab National Bank Limited Vs Bikram Cotton Mills and Gajan Moreshwar Vs Moreshwar Madan. There were only two parties in Gajan Moreshwar case, where 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, who was the first respondent company, was the primary liability holder and the secondary liability belonged to the surety who was the respondent. The Privy Council in Gajan Moreshwar case held that the indemnity holder had rights other than those mentioned in the sections mentioned.
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. In Punjab National Bank case, there was no risk involved, but there was 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 had to do well of the debts of the creditor. In Gajan Moreshwar case, Gajan Moreshwar couldn’t sue K.D. Mohan, as it is was a contract of indemnity. He could only sue Moreshwar Madan. But in Punjab National Bank case, along with the principal debtor, the surety could also be sued.
There are certain similarities between indemnity and guarantee, mainly that in both the contracts one party consents to pay in the interest of another, that they are utilized to safeguard misfortunes and that no contract can be used to make unjust adjustments. Though there are similarities, the commitment given in both the
contracts is an auxiliary one, reflexive in character, indemnity emerges on event of an occasion, whereas a guarantee emerges on default by a third party. Therefore, though guarantee and indemnity have a few similarities, they are inherently different in nature.