Contract of Guarantee vis-à-vis Contract of Indemnity

A contract of guarantee is defined in Section 126 of the Indian Contract Act, 1872 which says that a “contract of guarantee” is a contract to perform the promise or discharge liability of a third person in case of his default. The person who gives the guarantee is called “surety”, person in respect of whose default the guarantee is given is called the “creditor”. A guarantee, therefore, is an accessory. It is essentially a contract of accessory nature being always ancillary and subsidiary to some other contract or liability on which it is founded without support of which it must fail. The distinction between the “contract of guarantee” and “contract of indemnity” comes out from the definitions of the two. The phrase “contract of indemnity” is defined in Section 124 of the Indian Contract Act, 1872 which says that a contract by which one party promises to save the other from loss caused to him by the conduct of the petitioner himself or by the conduct of any other person is called “contract of indemnity”. One of the apparent distinction between the two is that a “contract of guarantee” requires concurrence of three persons, namely, the principal debtor, surety and the creditor, while the “contract of indemnity” is a contract between two parties and promisor enters into such contract with other party. In other words, a person who is party to a contract, if executes a promise to other party to save him from loss on account of promisor’s conduct or by the conduct of any other person, it is a “contract of indemnity”, while for the purpose of “contract of guarantee”, it requires presence of three parties at least. Punjab National Bank v. Ram Dutt Sharma, 2013 (120) RD 507.

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Filed under Civil Law, Contract Law

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