The contracts of indemnity and guarantee are considered unique types of contracts under the Indian Contract Act. Three parties are engaged in a contract of guarantee: the major debtor, the surer, and the creditor.
In this instance, the third party, the surer, guarantees to pay the creditor’s outstanding balance in the event that the principal debtor defaults. Conversely, an indemnity contract focuses on a situation in which one party pays for or assumes responsibility for another’s loss or damages.
“The fundamental distinction between indemnity and guarantee pertains to the character of the commitment. An indemnity constitutes a fundamental duty that exists in isolation from any additional obligations. A pledge to make amends for a loss. A guarantee, conversely, constitutes a secondary obligation that becomes effective in the event that the principal obligation (the debt) is not satisfied.”
Law of indemnity
As previously stated, a contract of indemnification compensates one party for another’s loss. The indemnity donor is referred to as the indemnifier, and the loss carrier is referred to as the indemnified or indemnity holder. The indemnified party has the right to pay for all of the alleged damages in any form, including legal defense costs.
- Beginning of Liability: The indemnity is not only intended for post-payment reimbursement. It requires that the party seeking indemnification never be asked to pay. According to major courts, the indemnity holder has the right to put the indemnifier in a position to fulfill the claims for reimbursement as soon as the duty to pay is clear and obvious.
- Indemnity Bond: The indemnification bond allows an employee to leave their position before the end of the agreed period. This withdrawal is only allowed at the bond money’s forfeiture cost and when the bond money and restriction term are fair. Only the amount of bond money required to cover employer losses is maintained.
Law of guarantee
Under such a specific contract, three parties are involved: one who provides a guarantee to return the amount (the surety or surer), one who receives the guarantee (the major debtor), and one who owes the money to the debtor (known as the creditor). The assurance could be in written or conversational form.
Furthermore, the promise that endures across a succession of transactions is known as a continuing guarantee. Some surety rights are also described, including those against the debtor, creditor, and co-sureties. In addition, the situations under which the surer may withdraw the contract are illustrated, as are some of the key features of the guarantee contract.