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Merchantile law

Jagadish mishra (Lecture) (38 Points)

02 March 2015

What is indemnity? Who are the persons involved in this contract?

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An indemnity is an obligation by a person (indemnitor) to provide compensation for a particular loss suffered by another person (indemnitee)

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Arpit Shah (Accountant) (21438 Points)
Replied 02 March 2015

Contracts of Indemnity and Guarantee

A contract of indemnity is one whereby a person promises to save the other from loss caused to him by the conduct of the promisor himself or of any third person.For example,a shareholder executes an indemnity bond favouring the company thereby agreeing to indemnify the company for any loss caused as a consequence of his own act.The person who gives the indemnity is called the 'indemnifier' and the person for whose protection it is given is called the 'indemnity-holder' or 'indemnified'. A contract of indemnity is restricted to cover the loss caused by the promisor himself or by a third person.The loss must be caused by some human agency.Loss arising from accidents like fire or perils of the sea are not covered by a contract of indemnity.

A contract of 'guarantee' is a contract,whether oral or written,to perform the promise,or discharge the liability,of a third person in case of his default. A contract of guarantee involves three persons,viz. a person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given called the 'principal debtor'; and the person to whom the guarantee is given is called the 'creditor'. A contract of guarantee is a conditional promise by the surety that if the principal debtor defaults he shall be liable to the creditor.

Difference between Indemnity and Guarantee:-

In a contract of indemnity there are two parties i.e. indemnifier and indemnified. A contract of guarantee involves three parties i.e. creditor, principal debtor and surety.

An indemnity is for reimbursement of a loss, while a guarantee is for security of the creditor.

In a contract of indemnity the liability of the indemnifier is primary and arises when the contingent event occurs. In case of contract of guarantee the liability of surety is secondary and arises when the principal debtor defaults.

The indemnifier after performing his part of the promise has no rights against the third party and he can sue the third party only if there is an assignment in his favour. Whereas in a contract of guarantee, the surety steps into the shoes of the creditor on discharge of his liability, and may sue the principal debtor.