INDEMNITY AND GUARANTEE
The Indian Contract Act, 1872, lays down the legal framework for contracts in India. Two important concepts discussed under this act are indemnity and guarantee.
INDEMNITY : Indemnity is a contractual agreement where one party agrees to compensate the other party for any loss or damage suffered due to the occurrence of specified events. The provisions related to indemnity are mentioned under sections 124-125 of the Indian Contract Act.
KEY PROVISIONS :
- Section 124 defines indemnity as a contract where one party promises to save the other party from any loss caused by the conduct of the promisor or a third party.
- The promisee is entitled to recover from the promisor all damages incurred due to such loss.
- The indemnity holder should take reasonable steps to minimise the loss suffered.
SIGNIFICANCE : Indemnity provides a sense of security to the party being indemnified. It ensures that they are protected from potential financial losses arising from the agreed-upon events. It is commonly used in contracts for lease agreements, insurance policies, and construction contracts.
EXAMPLE – A promises to protect B from any legal actions brought by C regarding a specific amount of 200 rupees. It’s basically a Contract to provide Indemnity.
GUARANTEE : A guarantee is a contract where one person assures the performance of an obligation by another person, in case of a default. The provisions related to guarantee are mentioned under sections 126-147 of the Indian Contract Act.
KEY PROVISIONS :
- Section 126 defines a contract of guarantee as a contract to perform the promise or discharge the liability of a third person, in case of their default.
- A guarantee can be either oral or written, and the consent of all parties involved is crucial.
- The liability of the guarantor is co-extensive with that of the principal debtor, unless specified otherwise.
- A guarantee can be revoked with the consent of the parties involved, or in case of any change in the terms of the contract without the guarantor’s consent.
SIGNIFICANCE : Guarantees provide assurance to the party receiving the guarantee that their contractual obligations will be fulfilled, even in the case of a default by the principal debtor. It helps build trust and confidence in business transactions, especially in cases where one party may have doubts about the other party’s ability to fulfil their obligations.
EXAMPLE – A had asked B to lend some money to a third person, C. A promises and guarantees that if C is unable to repay the borrowed amount within the agreed time, A will step in and repay B on behalf of C. This is called Contract of Guarantee.
Understanding the concepts of indemnity and guarantee under the Indian Contract Act is crucial for anyone involved in contractual agreements. By knowing the provisions and significance of these concepts, one can make informed decisions and protect their interests in various business dealings.
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