Monday, 11 June 2012

Q.3 Distinguish between indemnity and guarantee

Indemnity and guarantee are two important ways to safeguard ones interests when entering into a contract. There are many similarities between the two concepts though they differ a lot also.
Distinction between a contract of guarantee and a contract of indemnity:
L.C. Mather in his book ‘Securities Acceptable to the Lending Banker’ has brought out the distinction between indemnity and guarantee by the following illustration. A contract in which A says to B, “If you lend Rs. 1 Lac to C, I will see that your money comes back” is an indemnity. On the other hand undertaking in these words, “If you lend 1 Lac to C and he does not pay you, I will pay” is a guarantee. Thus, in a contract of indemnity, there are only two parties, indemnifier and indemnified. In case of a guarantee, on the other hand, there are three parties, the ‘principal debtor’, the ‘creditor’ and the ‘surety’.

A guarantee is a promise to someone that a third party will meet its obligation to them. “If they do not pay you, I will pay you”. An indemnity is a promise to be responsible for another person’s loss and to agree to compensate them for any loss or damage on mutually agreed terms. For example, one agrees to pay the difference of repairs if they exceed a certain limit.
Other points of difference are:
Comprise only two parties- the indemnifier and the indemnity holder.
There are three parties namely the surety, principal debtor and the creditor.
Liability of the indemnifier is primary.
The liability of the surety is secondary. The surety is liable only if the principal debtor makes a default. The primary liability being that of the principal debtor.
The indemnifier need not necessarily act at the request of the indemnified.
The surety give guarantee only at the request of the principal debtor
The possibility of any loss happening is the only contingency against which the indemnifier undertakes to indemnify.
There is an existing debt or duty’ the performance of which is guarantee by the surety.
The indemnifier cannot proceed against third parties in his own name, unless there is an assignment in his favour.
After discharging the debt, the surety is entitled to proceed against the principal debtor in his own name.

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