Saturday 29 June 2024

What are the basic concept of indemnity and guarantee with reference to Indian Contract Act?


Definition: Section 124 of the Indian Contract Act, 1872, defines a contract of indemnity as 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.

Key Points:

  1. Parties Involved: There are two parties in a contract of indemnity:

    • The indemnifier: The person who promises to indemnify or make good the loss.
    • The indemnified or indemnity holder: The person who is protected against the loss.
  2. Nature of Contract: It is a contingent contract, meaning it is enforceable only when the specified loss occurs.

  3. Essence: The core idea is to provide financial security to the indemnity holder against potential losses.

  4. Examples:

    • Insurance contracts where the insurer promises to compensate the insured for any losses due to specified events.
    • A contract where a company agrees to compensate a supplier for any damages arising out of defective products.


Definition: Section 126 of the Indian Contract Act, 1872, defines a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default.

Key Points:

  1. Parties Involved: There are three parties in a contract of guarantee:

    • The surety: The person who gives the guarantee.
    • The principal debtor: The person in respect of whose default the guarantee is given.
    • The creditor: The person to whom the guarantee is given.
  2. Nature of Contract: It involves a promise to answer for the debt or default of another person. It is a secondary contract that depends on the principal contract between the debtor and the creditor.

  3. Essence: The main purpose is to provide assurance to the creditor that the debt will be paid or the obligation will be fulfilled if the principal debtor fails to do so.

  4. Examples:

    • A person (surety) guarantees to a bank (creditor) that he will repay a loan taken by another person (principal debtor) if the latter defaults.
    • A parent guarantees to a landlord that they will pay the rent if their child (tenant) fails to do so.

Differences between Indemnity and Guarantee:

  1. Number of Parties:

    • Indemnity: Two parties (indemnifier and indemnified).
    • Guarantee: Three parties (surety, principal debtor, and creditor).
  2. Nature of Liability:

    • Indemnity: Primary liability of the indemnifier.
    • Guarantee: Secondary liability of the surety, primary liability remains with the principal debtor.
  3. Purpose:

    • Indemnity: To compensate for loss.
    • Guarantee: To assure the performance of a third party's obligation.
  4. Time of Responsibility:

    • Indemnity: Liability arises when the specified loss occurs.
    • Guarantee: Liability arises when the principal debtor defaults.

These concepts are fundamental to understanding risk management and assurance in various financial and commercial transactions under Indian law.

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