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CONTRACT OF INDEMNITY AND GUARANTEE
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CONTRACT OF INDEMNITY AND GUARANTEE
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CONTRACT OF INDEMNITY AND GUARANTEEINTRODUCTION
The term indemnity means to make good the loss to compensate the party who has suffered some
loss.
DEFINITION
Sec.124 of the Indian contract act defines a contract of indemnity thus, a contract by which one
party promises to save the other from loss caused to him by the conduct of the promisor himself
or by the conduct of any other person is called a "contract of indemnity”. The person who
promises to make good the loss is called the indemnifier. The person whose loss is to be made
good is called the 'indemnity holder'
ESSENTIALS OF A VALID CONTRACT OF INDEMNITY
1. The contract of indemnity must contain all the essentials of valid contract.
2. It is contract between two parties one person promises to save the other from any loss,
which he may suffer.
3. The loss may be caused by the conduct of the promisor himself or any other person.
4. The contract of indemnity may be express or implied.
RIGHTS OF INDEMNITY HOLDER
l. All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies.
2. All costs which he may be compelled to pay, in bringing or defending such suit, if, he
did not contravene the orders of the promisor, and acted as it would have been prudent for him to
act in the absence of any contract of indemnity or if the promisor authorized him to bring or
defend the suit.
3. All sums which he may have paid under the terms of any compromise of any such suit, if
the compromise was not contrary to the orders of the promisor, and was one which it would have
been prudent for the promisee to make the absence of any contract of' indemnity or if the
promisor authorized him to compromise the suit.
, RIGHTS OF INDEMNIFIER
The act makes no mention of' the rights of indemnifier. It has been held, however that his
rights of a surety, under Sec. 141 of the Indian contract Act. That is the rights of the promisor
are virtually the same as those of the surety in a contract of guarantee.
TIME OF COMMENCEMENT OF THE INDEMNIFIER LIABILITY:
The Indian contract act 1872 is silent on the time of commencement of liability of
indemnifier. On the basis judicial pronouncement of courts, it can be said that the liability Of an
indemnifier commences as soon as the liability of the indemnity holder becomes absolute and
certain.
CONTRACT OF GUARANTEE
According to sec 126, "A contract of guarantee is a contract to perform the promise or discharge
the liability of third person in case of his default". A guarantee may be either oral or written
Parties to a contract of guarantee
Creditor: The person to whom the guarantee is given is called the creditor.
Surety: The person who gives the guarantee is called the surety.
Principal debtor: The person for whom the guarantee is given is called the principal debtor
In a contract of guarantee there are three separate agreements.
• One between the principal debtor and creditor
• The second between the creditor and the surety
• The third between the surety and the principal debtor
ESSENTIALS OF A CONTRACT OF GUARANTEE
following are the essential features of a valid contract of guarantee.
1. Tripartite agreement:
contract of guarantee is a tripartite agreement between the principal debtor, creditor and
surety
2. Consent of three parties:
There must be consent of all three parties
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