Scroll Top

INDEMNITY AND GUARANTEE UNDER THE INDIAN CONTRACT ACT, 1872

Introduction

An agreement of Indemnity is a commitment between two parties where one vows to make good to the misfortune endured by the other. It is the obligation of the indemnifier (promisor) to reimburse the promisee against harms, cost, and all aggregates in any suit of a matter where the promisor guaranteed the promisee to repay him. A contract of guarantee empowers an individual to get an advance, to get products using a credit card or on loan. Guarantee means to give surety or take on obligation in case one is unable to repay the loans by paying on his behalf. Contract of indemnity and Contract of guarantee carry out comparable business roles in giving remuneration to the creditor for the disappointment of an outsider to play out their commitment. Notwithstanding, there are a few significant contrasts between the two.

Contract of Indemnity

An understanding of indemnity suggests an arrangement by which the party vows to save the other from a mishap caused to him by the lead of the promisor himself or by the direction of another person. Agreement of reimbursement covers misfortune brought about by the human organization only according to Section 124 of the Indian Contract Act, 1872[1]. A contract of insurance is not covered under the definition of Section 124 of the Indian Contract Act and it is considered a contingent contract.

In United India Insurance Co. v. M/s. Aman Singh Munshilal[2], the cover note specified movement to the consigner. The merchandise was to be passed on to the godown from the objective. While the merchandise was in the godown, the items were obliterated by fire. It was held that the products were harmed during movement, and the insurer was obligated by the insurance strategy and not under the policy of indemnity.

Rights of the Indemnity holder[3]

  1. A reimbursement holder has the choice to recuperate from the indemnifier which he may be obliged to propose in any suit regarding the agreement of Indemnity applies.
  2. An Indemnity holder has the choice to recuperate the cost achieved by him in bringing or guarding a claim in the courtroom.
  3. An Indemnity holder has the choice to recuperate the aggregate paid by him in any compromise under the suit from the Indemnifier.

In Anwar khan v Gulam Kasam[4], the court held that the extent of damage would depend on how much the individual has been reimbursed, if more than the total, the indemnifier may also deny.

Duties of the Indemnity holder

Besides as in any case expressed in the agreement, the indemnifier will not be responsible for harm under the accompanying conditions. He is additionally called the obligation of reimbursement holder.

  1. Obligation to the holder to act prudently– Except as in any case expressed in the agreement, the indemnifier will not be repaid for the misfortune brought about by the carelessness of the reimbursement. All in all, the repayment holder should wisely act.
  2. Obligation not to cause damage or misfortune – If the repayment holder acts determined to cause any misfortune or harm, the indemnifier will not be responsible for such misfortune. As such, it is the obligation of the reimbursement or holder not to inflict any kind of damage or mischief.
  3. Obligation to conform to the aims of the Indemnifier – If the repayment -holder acts against the guidance of the other party or the promisor, the indemnifier won’t be at risk for such harms as the Indemnity holder goes past the directions given by the Indemnifier. All in all, the indemnity-holder should follow the expectation of the advertiser.

Rights of Indemnifier

It is a notable standard of regulation that where one individual has consented to repay another, he will consent to do well for his misfortunes, so Indemnifier has the right to safeguard or repay himself in any capacity or means from the misfortunes.

Duties of Indemnifier

The duties of an indemnifier emerge in the accompanying conditions: –

  1. There should be a misfortune as per the agreement to make the indemnifier liable to repay.
  2. There should be an event for the expected occasion. If the event is not of the expected occasion then there will be no repayment by the indemnifier.
  3. Where the right of repayment is utilized by the indemnity-holder judiciously and the guidance of the indemnifier isn’t contradicted or when there is no break of agreement
  4. On the off chance that the expenses requested by the indemnifier are not brought about by carelessness, heedless way of behaving.

In Nallappa Reddi v. Vridhachala Reddi and Anr[5], the court said that it’s the obligation of the indemnifier to give the harms to the promisee. The obligation emerges when the decree is passed against the promisee.

Contract of guarantee

As per Section 126 of the Indian Contract Act, 1872[6], an agreement of assurance is an agreement to play out the commitment or release the responsibility, of a third individual in the event of his default. For instance, Ram takes credit from a bank and vows to pay the credit. Bunty makes a guarantee to the bank saying that in the event that A doesn’t reimburse the credit, B will pay for his sake. Ram is the key debt holder and Bunty is the guarantee who has auxiliary responsibility.

Characteristics of Contract of Guarantee

  1. The arrangement may be either oral or recorded as a printed copy: This is given under Section 124 of the Indian Contract Act, 1872[7]. This point has been the mark of discussion since this part doesn’t agree with the English guideline. English guideline says that the arrangement of affirmation ought to be recorded as a hard copy and should be properly endorsed by the gatherings. In Mathur Das v Secretary of State[8], it was held that the simple exclusion with respect to the litigant to sign the arrangement can’t clear him from his obligation as a guarantor.
  2. There ought to be a principal debt: Principal obligation is a sum acquired by the principal debt holder by the creditor, on behalf of which the guarantee has given the assurance, on the off chance that any default occurs from the principal debtor. Thus, if any principal debt won’t exist then, at that point, naturally agreement of guarantee won’t exist.
  3. Benefits to the principal debtors are adequate consideration: As we have seen before too that consideration is essential for the agreement. In this too, consideration acts as a fundamental component of the agreement. For this situation, any benefit or advantage that the principal debt holder will get from the lender (the creditor) will go about as consideration for surety and the agreement of assurance. In Ram Narain v Lt. Col. Hari Singh[9], the court held that an agreement of assurance executed without consideration between the vital indebted person and the lender is void.
  4. Assent of the surety shouldn’t have been gotten by distortion: The assent of the guarantee ought not to be acquired by any unreasonable means i.e, by deception or disguise of any material or reality of the agreement. If anything is found further, this will expose to the ceasing of the agreement can be additionally named as an invalid agreement. Section 142 of the Indian Contract Act[10], states that any assurance which has been gotten through distortion is invalid. The assurance that the creditor has got through keeping quiet as to material conditions is invalid.

Conclusion

It is concluded that a contract of indemnity is a contract by which one party assures another to save him from mishap caused to him and a contract of guarantee is an agreement to play out the commitment, to deliver the obligation of a third individual for good measure of his default. In agreement of guarantee the party acts as a security for the third party against any default. Both the contracts are comparable as in they give security against misfortune but at the same time different in many aspects. Notwithstanding, as referenced above, there is a significant qualification between the two.

Author(s) Name: Vanshika Srivastav (The ICFAI University, Dehradun)

References:

[1] The Indian Contract Act, 1872, §124, No. 9, Act of Parliament, 1872 (India).

[2] United India Insurance Co. v. M/s. Aman Singh Munshilal, AIR 1994 P H 206

[3] The Indian Contract Act, 1872, §125, No. 9, Act of Parliament, 1872 (India).

[4] Anwar khan v. Gulam Kasam, AIR 1919 Nag 126

[5] Nallappa Reddi v. Vridhachala Reddi and Anr, (1914) 37 Mad 270

[6] The Indian Contract Act, 1872, §126, No. 9, Act of Parliament, 1872 (India).

[7] The Indian Contract Act, 1872, §124, No. 9, Act of Parliament, 1872 (India).

[8] Mathur Das v Secretary of State, AIR 1930 All 848

[9] Ram Narain v Lt. Col. Hari Singh, AIR 1964 Rajasthan 76

[10] The Indian Contract Act, 1872, §142, No. 9, Act of Parliament, 1872 (India).