BRF 2010 (Solved)

Contract of indemnity:
Section 124 of the Indian Contract Act defines it 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”. The person who promises is called the Indemnifier and the person to whom the promise is made is called the Indemnified or Indemnity Holder.
Illustration: A promises not to construct buildings on a particular site so as to prevent light and air to B’s house and in case of breach of such promise, to indemnify for the consequent loss. This is a contract of indemnity. A contract of insurance is also a contract of indemnity.
He is entitled to recover—
a)      All damages
b)      All costs which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnity applies, and
c)       All sums which he may have paid under the terms of any compromise of any such suit provided, such compromise was not contrary to the orders of the promisor and was prudent or the promisor authorizes him to compromise the suit.
 Contract of Guarantee:
Section 126 of Indian Contract Act defines it as “a contract to perform the promise, or discharge the liability, of a third person in case of his default”. The person who gives the guarantee is called the “surety”, the person in respect of whose default, the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”.
Illustration: A purchases goods from B on credit. C agrees to stand as a surety which means that if A does not pay the price of the goods, he will pay. Here, A is the principal debtor, B is the creditor and C is the surety or guarantee.
Distinction between a contract of Indemnity and a contract of guarantee
a)      In a contract of indemnity the promisor undertakes an independent liability; where as a contract of guarantee is a contract to discharge the liability of a third person in case of default made by him.
b)      A contract of guarantee requires the concurrence of three person viz. the principal debtor, the creditor and the surety; whereas a contract of indemnity requires the concurrence of only two persons, viz., the indemnifier and the indemnity-holder.
c)       The promise of the indemnifier is to save the person indemnifier from a contingent risk; where as  the surety undertakes to discharge the liability of the principal debtor, which is not contingent, but is subsisting .
d)      In a contract of guarantee, the surety, after he has discharge the debt owing to the creditor, can proceed against the other case, the guarantor is totally unconnected with contract guaranteed except through the medium of his guarantee. In the case of indemnity, there is one contract, but in the case of guarantee there are at least three contract. The contract of indemnity is for the reimbursement of the loss, where as the contract of guarantee is for the security of the creditor.