INDEMNITY
The word “indemnity” comes from the Latin term “indemnity” which means “free from loss” or “unharmed”. Indemnity is governed by Section 124 of the Indian Contract Act,1872 and acts as a fundamental principle in contract law which acts as a protective tool for managing risk and ensuring that on experience of loss by a party they can recover compensation from the other party responsible.
Section 124 of ICA defines 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, is called a contract of indemnity.”
The contract of indemnity is an agreement between two parties, wherein one party (indemnifier) takes responsibility to compensate the other party (indemnified) for any loss caused due to the conduct of himself i.e., indemnifier or the conduct of a third party. Herein, the indemnified is compensated by the indemnifier only if the losses have arisen from a specified cause and obligation arises only when a loss occurs not when no actual loss is suffered.
RIGHTS OF INDEMNIFIED PARTY
In a contract of indemnity, the person receiving the indemnity or the indemnified party is entitled to certain rights that protect from any losses they might incur and maintain their full compensation. These rights are crucial as are designed to provide financial protection against risks and damages.
Many of these rights are not explicitly mentioned in the list of rights but have been developed through judicial precedents.
- Right to Recover Losses
The party indemnified has the right to claim reimbursement for any loss suffered that is covered under the indemnity agreement. This included monetary losses, damages or damages.
2. Right To Recover Costs Incurred in Legal Proceedings
Under a circumstance where the indemnified party faces a lawsuit/ legal proceeding and has to spend money on legal expenses, they then have a right to recover such cost from the indemnifier.
However, these costs must be related to the indemnity contracts and provisions under it and at the same time should be incurred with the indemnifier’s consent.
3. Rights to Recover Sums Paid Under Compulsion
If the indemnified is compelled to pay money because of legal liability, they have the right to recover this amount from the indemnifier.
This is applied only when the payment is essential and is related to the provisions of the indemnity agreement..
4. Right to Seek Indemnity Before Actual Payment
This particular right is ruled by the courts , traditionally, the indemnity claims could be made only after a actual loss occurs ,but courts have ruled that the right of the indemnified party is clear and absolute and hence they can seek indemnity even before making the actual payment.
Some agreements also cover indirect or consequential losses and the indemnified party has the right to recover indirect losses if the contract explicitly mentions it.
5. Right To Enforce Indemnity Contract Against Indemnifier
If the indemnifier refuses to uphold the provisions of the indemnity agreement then the indemnity holder has the right to sue for enforcement of the contract.
In this situation, courts may order the indemnifier to fulfil their obligations as per the terms of the contract.
LIABILITIES OF INDEMNIFIER
In a contract of indemnity, the indemnifier takes the responsibility of compensating the indemnified party for losses related to the provisions under the contract. At the same time, the indemnified is subjected to certain liabilities according to the terms of the contract.
- Liability to compensate for losses incurred
The indemnifier is liable to compensate the indemnified party for the losses if they have resulted from any event or risk that was already mutually agreed upon or falls within the scope of the indemnity agreement.
The liability arises only upon the loss suffered by the indemnified party.
2. Liability for Legal Costs and Expenses
Under a circumstance wherein the indemnified party is involved in legal proceedings, the indemnifier is liable to pay the legal cost incurred.
However, the legal cost must be reasonable and should be in good faith.
3. Liability for Payments Made Under Legal Compulsion
If in any case, the indemnified party is forced to make a payment due to any legal obligation, the indemnifier should reimburse for the same. This applies even if the indemnified party has not suffered actual damages.
4. Liability to compensate even without indemnified prior payment.
Earlier an indemnified was liable only after the indemnified has paid for the damages but with current judicial views the court now recognizes that the indemnifier’s liability can arise before the indemnified party actually pays if the liability is clear and absolute.
5. Liability for Indirect or Consequential Losses
Usually the indemnifier is responsible for the direct losses only . however, if the contract explicitly mentions includes indirect compensation then the indemnifier must compensate for the same.
This can include loss of profit, reputational damage etc.
GUARANTEE
The contract of indemnity is an agreement wherein one party ( the surety or guarantor) takes responsibility for the obligation of another party (the principal debtor) if they fail to fulfil it. The guarantee gives security and assurance to the creditor.
Section 126 of the ICA 1872 defines guarantee as “A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default.”
The contract of guarantee includes three parties: principal debtor, the person who takes a loan or incurs obligation; creditor, the person to whom the obligation or debt owed; surety (guarantor), the person who promises to pay if the debtor defaults.
In this single agreement, three separate contracts exists , between principal debtor and creditor, between surety and creditor, between surety and principal debtor.
The guarantee is supported by consideration and the guarantee can be oral or written.
RIGHTS OF THE PARTIES
The contract of guarantee involves three and hence each party has specific rights and obligations.
1. RIGHTS OF THE CREDITOR
The creditor provides a loan or credit to the principal debtor and holds the guarantee from the surety.
- The creditor has the right to sue the principal debtor and surety if the debtor fails to fulfil their obligations. Herein, the surety’s liability is cco-existing with that of the debtor.
- The creditor has the right to demand immediate payment from surety upon default.
- The creditor has the right to benefit from securities held against the debtor if the creditor holds collateral or security from the debtor and the same time has the right to enforce guarantee even without principal debtor’s consent.
2. RIGHTS OF THE SURETY (GUARANTOR)
A surety is a person who promises to fulfil the obligations of the debtor if they fail to do so.
- The surety has the right to be indemnified by the principal debtor if they have to pay on behalf of the debtor and hence have the right to recover the amount from the debtor.
- The surety has the right to benefit from the creditor’s securities if the creditor holds the security given by the debtor and is entitled to take it back after paying the debt.
- The surety has the right to be released or discharged from liability if the contract is materially altered without the surety’s consent if the creditor gives additional time to the or if the creditor releases the debtor from liability or if the creditor loses or releases security.
- T.he surety has the right to demand a hare in payments or profits recovered from the debtor.
3. RIGHTS OF THE PRINCIPAL DEBTOR
The principal debtor is a primary party in the contract
- The principal debtor has the right to receive money, goods, loans or benefits as per the contract
- They have the right to be sued if the contract specifies
LIABILITIES
the contract of guarantee involves three and hence each party has specific liabilities under the Indian Contract Act, of 1872
1. LIABILITIES OF THE PRINCIPAL DEBTOR
- The primary liability is to pay the debt as they are the first responsible responsible for fulfilling the obligation under the contract
- The principal debtor has the liability to indemnify the surety if the surety has already paid the debt on his behalf. At the same time,e they can be sued by the surety to recover the amount paid.
- They have the liability to provide security or collateral to secure the loan if the debtor defaults and creditor uses the security.
2. LIABILITIES OF SURETY
- The liability of the surety is secondary but immediate as the surety’s liability is co-existence with the principal debtor.
- The liability exists if the debtor goes bankrupt and insolvent , the surety must stil pay the creditor. The liabilty continue If the surety dies, their legal heirs may still be responsible unless the contract states otherwise.
- The liability may be limited by contract and can be discharged under certain conditions as per the provisions.
3. LIABILITIES OF THE CREDITOR
- The creditor has the liability of the duty to demand payment from the principal debtor first in some cases if the contract specifies.
- The creditor has the liability to not unfairly release the debtor and not to alter the contract without the surety’s consent.
- The creditor also has the liability of the duty to preserve the security given by the debtor and to an in good faith.
COMPARISON BETWEEN INDEMNITY AND GUARANTEE
Indemnity and guarantee are both important tools that help in risk management but serve different purposes.
A contract of indemnity aims to protect a party from future loss which may occur sue to an uncertain event and hence make the indemnifier liable for compensation . This is most commonly used in insurance contracts.
On the other hand, a contract of guarantee ensures that a third party fulfils their obligations with the surety having the second liability in case of any default by the principal debtor. This is a commonly used bank guarantees
Difference lies in the liability and the number of parties involved: Indemnity involves two parties and direct compensation while the guarantee involves three parties and a conditional liability.
Also Read:
Rights of undertrial prisoners in India
How To Send A Legal Notice In India
