Indemnity and Guarantee



Difference between Indemnity and Guarantee:



Section 124 of Indian Contract Act: a contract by which one party promises to save others from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person Section 126 of Indian Contract Act: a contract to perform the promise, or discharge the liability of a third person in case of his default.
Two parties (Indemnifier and Indemnified) Three parties (Principal Debtor, Creditor, Surety)
To provide compensation for loss To give assurance to the creditor in lieu for his money
Indemnifier is the sole person liable Liability shared between Principal Debtor (primary liability) and Surety (secondary liability)
Liability arises only on occurrence of a loss Fixed legal liability

Claiming Indemnity:

Implied Indemnity:


Subrogation under Indian Contract Act means stepping into the shoes of the creditor(s). When a surety has already paid the guaranteed debt on its becoming due or has performed the guaranteed duty on the default of the principal debtor, he is invested with all the rights, which the creditor has against the debtor.

Primary & Secondary Liability:


The expression “security” in s. 141 of the Indian Contract Act is not used in any technical sense : it includes all rights which the creditor had against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for, to the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability.

Bank Guarantee:

Bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity present, the beneficiary cannot be restrained from encasing the bank guarantee even if dispute arises in performance of the contract.

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