On the other hand, a guarantee contract is a legally binding contract whereby one party takes up the liability of another in case of default of that particular party. The party issuing the guarantee is called the guarantor, and the person whom the guarantee is issued to is the creditor. A guarantee contract is mainly used to protect the creditor in case of a possible debt defaulting by the debtor.

For example, in the case of borrowing of money, a guarantor undertakes responsibility for repaying the loan if the borrower fails to do so. Thus, the lender has recourse to principals against the guarantor for recovering the amount due from him in case the borrower fails to pay.

CONTRACT OF INDEMNITY

Indemnity Contract: A contract in which one party accepts responsibility to compensate the other upon loss or damage coming under certain circumstances, unless there is a proviso to the contrary. It is a kind of contingent contract and encompasses all elements of validity.

Section 124 of the Act defines a contract of indemnity as an agreement whereby one party promises to protect the other from loss, caused either by his own act or by the act of another person.

There are precisely two parties in an indemnity contract, and these are:

- The Indemnifier: It means the promisor who agrees to indemnify the other party against any losses incurred.
- The Indemnified: The party assured compensation in case of incurred losses; he/she is called an indemnity holder or indemnitee.

RIGHTS OF INDEMNITY-HOLDER

The following are the rights of the indemnity-holder which he can enforce against the indemnifier under the contract:

a) Right to recover damages- He can recover from any legal action, expense, or liability, taken in whichever form the said suit is taken.

b) Right to recover all expenses of defending any such suit which the indemnity-holder could be compelled to pay in a suit brought against him, in respect of the damage.

- The right of the indemnity-holder, on the happening of such Shirley, to recover all damages which the indemnity-holder is compelled to pay in any such legal proceeding.

- The right of the indemnity-holder to recover all outlays or expenses incurred in any such legal proceeding, on the condition that the indemnity-holder did nothing against the instructions of the indemnifier and, under the circumstances of the case, acted reasonably provided as if no contract of indemnity had been executed, and the indemnifier had authorized the indemnity-holder to act under the terms of the said promise to the best of the circumstances.

- The right to recover all sums paid under the terms of any compromise of such legal action, if the compromise was not against the indemnifier's instructions and was a prudent decision for the indemnity-holder to make in the absence of any contract of indemnity, or if authorised by the indemnifier to compromise the legal action.

RIGHTS OF THE INDEMNIFIER

As a result the indemnifier gains all the rights upon making payment to the indemnity holder against damages suffered to use such methods and services which may prevent damage or reduce the extent of damage.

An indemnity agreement is solely based on the idea of loss to one of the parties. In the case where loss has taken place to the other party or where the loss is definitely going to occur can indemnification be claimed.

COMMENCEMENT OF LIABILITY

Indemnity does not only kick in when a refund is demanded on the part of the payer. It needs the indemnified party to be excused from making any payment. The established cases clearly illustrate that when the indemnity holder's duty to make the payment is ascertained and not in dispute, he can compel the indemnifier to settle the claims for refund.

INDEMNITY BOND

An indemnity bond gives an employee freedom to leave the service before the period contracted for, subject to some conditions. Such withdrawal is permissible upon payment of a forfeit, which will be valid provided both the bond amount and the duration of the restriction are reasonable. The bond retains a portion of the bond money solely for compensating the employer against loss.

Concept of Indemnity Bonds

An indemnity bond is a contract where one party—the indemnifier—agrees to pay or compensate the other party—the indemnity holder—for any loss or damage incurred by the latter as a result of certain specified causes. The key objective of concern for the party issuing this bond is the protection of the indemnitee from financial loss or legal liability. It therefore essentially equates to security and guarantee in monetary affairs.

Key Features of Indemnity Bond:

1. Parties Involved:

- Indemnifier: That party which gives the indemnity and who agrees to make good the losses.
- Indemnity Holder: That party who benefits from the indemnity and is protected against losses.

2. Object:

- The risk or liability insurance
- To entail that payment, in terms of compensation be made to the indemnity holder for any financial loss due to specified circumstances.

3. Terms and Conditions:

- The bond usually spells out the nature of indemnity—including extent of coverage, duration, and conditions under which indemnity will be granted.

- Details as to how claims are to be made and processed are contained therein.

Common Uses of Indemnity Bonds in India

1. Employment:

- Employment Contracts: The employer can have the employees sign indemnity bonds against potential losses incurred from the disclosure of trade secrets, intellectual property, or breach of contracts.
- Professional Negligence: Within particular fields, indemnity bonds may be procured to safeguard probable claims against negligence or errors while discharging professional duties.

2. Contracts:

- General Contracts: Indemnity bonds may be availed in various contractual agreements to ensure that the parties are protected from any breach of contract or non-performance.
- Service Contracts: For instance, in construction or service contracts, an indemnity bond can be availed, covering costs incurred due to delays, damages, or any other contract breaches.

3. Tenders:

- Bid Security: Firms are heard to issue indemnity bonds at the time of tendering, which automatically upon acceptance of a proposal would constitute an agreement. This serves as surety against defaulting on the tender terms.
- Performance Bonds: When a tender is won, there may be a performance bond involved and it is simply an indemnity bond to ensure the contract would indeed get performed according to stipulations. Financial compensation can be allowed on indemnity bonds in case non-compliance of the terms is done to the client by the contractor.

Indemnity Bonds under Indian Contract Act, 1872

The Indemnity bonds are governed under the Indian Contract Act, 1872, under various provisions relating to the contracts. Here's how it aligns with indemnity bonds:

1. Section 124: This section of this Act defines the concept of "Contract of Contract of Indemnity." It states that a contract of indemnity is one where one party promises to save the other from any loss incurred due to the conduct of the promisor or any other person.

2. Section 125: This section further elucidates that loss, once occurring, is to be made good to the indemnity holder by the indemnifier. The right of the indemnity holder here extents to not only the recovery of the loss but all costs and damages arising from such loss.

3. Contractual Freedom: Subject to the general provisions of the Indian Contract Act, the parties to an indemnity bond may agree upon and negotiate the terms and conditions of the instrument, so long as it does not violate any existing laws.

4. Legal Enforceability: Every indemnity bond, as with any other contract, has to meet the essential requirements of the law of contracts under the Indian Contract Act for free consent, lawful consideration, and a lawful object to be enforced in a court of law.

Extent of Coverage under an Indemnity Contract

1. Scope of Indemnity:

- Definition and Coverage: According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity is a promise to make good any loss or damage incurred by one party because of the act of the indemnifier or of any third party. Its coverage area usually varies with the terms of the indemnity agreement.

- Nature of Losses Covered: Indemnity contracts may cover monetary, damages, legal costs, and liabilities incurred as a consequence of breach of contract, negligence, or the occurrence of other specified risks. Such clauses within an indemnity agreement define and delimit its reach.

2. Specific Terms:

- Detailed Clauses: The indemnity agreement contains detailed clauses regarding the type of losses covered, when indemnity will be granted, and how indemnity will be claimed. The contract can therefore be adapted to address specific risks involved in a given transaction or arrangement.

3. Duration of Coverage:

- Time Factor: Indemnity coverage usually extends for a certain agreed time factor. The coverage may apply to losses occurring during the contract term or some years from the date of termination of the contract.

Possible Limitations

1. Limitations of Liability:

- Monetary Limits: Caps or limits to the indemnity payable under an indemnity agreement can be provided. It may, for instance, be agreed that the indemnifier would bear losses up to a certain amount, whereupon further liability would not be covered.
- Scope of Claims: The indemnity may be limited to specific types of claims or damages. For instance, it may cover direct losses and not indirect, consequential, or punitive damages.

2. Exclusions:

- Exclusions from Coverage: One of the most common aspects of the indemnity agreement is the exclusion of certain kinds of loss or damage from its coverage. Typical exclusions under this category include:
- Willful Misconduct: Losses that result from the indemnified party's acts or fraud are not covered.
- Pre-existing Conditions: Coverage can specifically exclude pre-existing conditions prior to the date of the indemnity agreement.
- Acts of God: Some events beyond human control could be specifically ruled out; examples would be natural disasters.

3. Procedural Limitations:

- Claim Process: The contract may impose some procedural requirements for making a claim, such as notification periods, documentation requirements, and deadlines. Any non-compliance with the procedures in this regard may result in denial of indemnity.

4. Legal and Regulatory Constraints:

- Oppugnancy to Law: An indemnity clause opposing Indian laws or against public policy may be considered void. For example, indemnifying a party from the consequences of illegal acts or breach of statutory duty may be rendered ineffective.

From Indian Contract Act Angle

1. Freedom of Contract:

- The Indian Contract Act allows wide latitude to parties for setting the scope of indemnity, so long as it remains within the limits of legality. What may be covered under indemnity, the limitations thereto, and exclusions may be negotiated by the parties based on needs and the nature of transaction.

2. Enforcement:

- Any agreement of indemnity shall always be subject to the contracts; it means, in this respect, there must be free consent, lawful consideration, and a lawful object. If the conditions of indemnity are clear, they shall, generally speaking, be good in a court of law.

3. Judicial Interpretation:

- The Indian courts have interpreted indemnity contracts keeping in view the express terms of the contract and the intention of the parties. It may also look into the question as to whether the indemnity provisions, in the given case, are reasonable and based on principles of fairness and equity.

CONCEPTS OF CONTRIBUTION AND SUBROGATION

1. Indemnity and Multiple Indemnifiers: Indemnity is a contract by which one person promises to save the other from the loss caused to him on account of the conduct of the promisor himself or of any other person. Of course, the presence of more than one indemnifier provides a scenario where the aforesaid two. Would seem indispensable for the determination of the sharing of the financial burden amongst them.

2. Contribution: Contribution refers to the right of the indemnifier who pays more than their due share of indemnity to seek reimbursement from other indemnifiers. This ensures that the loss is equitably shared by all indemnifiers according to their respective shares or responsibilities.

In Indian Law:

- Contribution is implied in the doctrine of indemnity under the Indian Contract Act, 1872, but it is not specifically elaborated.
- The principle of contribution can be applied by analogy from the law of contracts and equity principles.

Thus, for instance, if three indemnifiers together are liable for a particular loss, and one of the indemnifiers should pay off the whole sum, the repayment of contributions amongst the other two indemnifiers should be adjusted in proportion to the amount for which the indemnifier is liable.

Suppose three companies-A, B, and C, combine to indemnify a loss up to ₹300,000, and if A pays ₹300,000, then A is entitled to claim ₹100,000 each from B and C. Thus, each indemnifier is responsible for his equal proportion of loss.

3. Subrogation: It is the principle which enables an insurer, who has indemnified a loss, to stand in the shoes of the insured and enforce against third parties all rights or claims which the insured may have against the third party.

In Indian Law:

- Subrogation is generally recognized in Indian law as an equitable principle and is often implied in insurance and indemnity agreements.
- The amount paid will be recoverable from the party responsible for the loss, in which case the indemnifier is not out of pocket.

4. Application with Multiple Indemnifiers: The two principles of contribution and subrogation work hand in hand to ensure that both the responsibilitiescgf and the cost recovery are done efficiently. This happens by the contribution ensuring that each indemnifier pays only the proportionate amount of indemnity allocated to him so as not to bear an unjust share of the indemnity.

Subrogation allows the indemnifier recovery from third parties that are responsible for the loss, thus ensuring the indemnifier can recoup the amounts it paid on behalf of the indemnified party.

CONTRACT OF GUARANTEE

Section 126 of the Indian Contracts Act defines a contract of guarantee as follows: A contract of guarantee is, a promise to perform or discharge the liability of a third person in case of their default. By its very nature, there are three parties involved in this type of contract: the principal creditor, the surety, and the principal debtor.

A contract of guarantee involves three distinct obligations:

- First, there is an express contractual undertaking by the principal debtor to the creditor.

- Second, in the event of default by the principal debtor, an undertaking is made by the surety to fulfill such obligation to the creditor.

- Third, implied in the guarantee is a promise by the principal debtor that, in the event that the surety is called upon to discharge the debtor's default liability, he will indemnify the surety for such discharge.

SALIENT FEATURES OF GUARANTEE

1. Principal Debtor: The guarantee or surety arises only to secure a debt, and there must be a recoverable debt. The contract of guarantee must constitute all the essentials of a valid contract. The guarantee is valid even if the principal debtor is incompetent but not if the surety is incompetent where it becomes void.

2. Consideration: The presence of sufficient consideration is one of the essential ingredients of a valid contract. The consideration given by the principal debtor should be adequate enough to enable the surety to give a guarantee.

3. Misrepresentation: A contract induced by misrepresentation is voidable. Misrepresentation may be, directly made by the creditor or by his silent acquiescence of facts. Besides, mere silence of the creditor regarding material circumstances also avoids the guarantee.

4. Oral or Written Form: Under Section 126, a contract of guarantee is valid if it is in either oral or written form. However, to be binding under English law, a guarantee contract should be in writing and attested by the signature.

5. Consent and Misrepresentation: A guarantee obtained by misrepresentation of the creditor, or with his knowledge or consent as regards a material fact of the transaction, under Section 142, I.C.A., 1872, is void.

6. Promise to Pay in Case of Default: As in a contract of guarantee, the liability of the surety arises only upon the default of the debtor. A surety is liable to pay only when the debtor makes a default in making a payment.

SURETY'S LIABILITY

Unless expressly limited, the liability of the surety is co-extensive with the liability of the person whose debts he has guaranteed. This is the fullest extent of the surety's obligation. However, an upper limit can be provided by the contract on the amount for which the surety may be liable, thus restricting his obligation to a certain fraction of the debts owed by the principal debtor.

Under the general rule, the surety is liable for the payment of all debts due by the principal debtor to the creditor. On its part, the principal debtor reserved the right to recover from the surety costs, damages, and interests incurred. Application of these principles yields to exceptions only in instances provided by the contracts themselves.

COMMENCEMENT

The liability of the surety immediately springs into existence on the default by the principal debtor. The creditor is not bound to file a suit first against the principal debtor nor is he bound to give him any notice. The liability of the surety is a limited one and his guarantee Stands discharged, once the limit specified therein is reached.

DISCHARGE OF SURETY FROM LIABILITY

The surety is discharged from his liability when the limit of the surety comes to an end. The following are the modes by which the surety is discharged from his liability:

1. Cancellation: A continuing guarantee may be revoked by the surety upon giving notice to the creditor. Such revocation, however, only affects future transactions.

2. Death of Surety: The death of the surety discharges the continuing guarantee in regard to future transactions.

3. Variation in Contract: Any variation in contract entered between the creditor and the principal debtor has discharged the surety from his liability.

4. Discharge or Release of Principal Debtor: If the principal debtor is discharged from a contract, the liability of the surety will cease. The discharge of the former may be caused by an act or omission of the creditor.

5. Composition, Promise not to Sue, or Extension of Time: Any variations in the contract, to which the surety is not a party, discharge them from their liability. Such variations must be material alterations in the original contract.

6. Creditor's Forbearance to Sue: Mere forbearance to sue the principal debtor does not discharge the surety from his liability.

7. Agreement with Third Person: An agreement between the creditor and a third party, to give time to the principal debtor, does not discharge the surety unless expressly provided.

8. Impairment of Surety's Remedy: Any act or omission on the part of the creditor which impairs the remedy available to the surety against the principal debtor, discharges the surety from his liability. The creditor cannot do anything which will impair the surety's rights consistently.

RIGHTS OF SURETY

The rights of the surety are three-fold and are as follows:

Rights against Principal Debtor

- Rights of Subrogation: Only upon satisfaction of discharging the obligation, on account of debtor's default, does the surety acquire the rights of the creditor against the principal debtor.

- Right to Indemnity: Every contract of guarantee impliedly contains a promise by the principal debtor to indemnify the surety. The principal debtor is bound to refund all sums rightfully paid by the surety, except those which he has paid by mistake.

Rights against Creditor:

- Right to Creditor's Securities: If there are securities held by a creditor against the principal debtor at the time of making the contract, the surety retains the right to get benefit from it. His ignorance of the securities at the time of contract does not affect his entitlement. If the creditor loses or disposes of the securities, the liability of the surety is reduced to the extent of the value lost.

- Right to Set-off: Where action is brought against the surety by the creditor, the surety is entitled to set off any claims.

Rights against Co-sureties

- Release of Co-surety: Release of one co-surety does not discharge the other sureties from their liability to the creditor, or to each other.

Right to Contribution: Co-sureties are undertakers of the same debt, and they are to share alike in any discharge or payment made to the creditor. The incidence of this burden is not affected by whether the liabilities arise out of the same or separate contracts, and also whether or not the co-sureties knew of one another's liabilities.

Right to Set-Off:

- Definition: The right of set-off enables the surety to adjust or set off against the amount payable by him under the guarantee amounts due from the creditor to the surety.

- Set-Off: In case of any surety having claims against, or counter-claims to such claims by, the creditor, the surety may set off their claims against the liability under the guarantee. This simply means that if a surety is a debtor to the creditor, this amount can be set off against the debt guaranteed.

Right to Counter-Guarantee:

- It grants the surety the right to claim indemnity or a counter-guarantee from the principal debtor or another party in case the former is compelled to perform such an obligation.

- Application: In the event that the debt is paid or the obligation discharged by the surety, they can claim indemnity or a counter-guarantee from the principal debtor or any other person who has agreed to indemnify the surety.

Right to Exoneration:

- Definition: The right of exoneration is exercised when the surety is released from the obligation upon performance of the contract by the principal debtor, or because of material changes to the contract that alter the surety's risk.

- Where the liability of the principal debtor is discharged, the surety is entitled to claim discharge or exoneration of further liability. On the same principle, if there is any alteration in the contract which would enhance the risk of the surety, without his consent then also the surety is entitled to exoneration.

A continuing guarantee is that type of guarantee which applies to a series of transactions. It extends to all transactions entered into by the principal debtor till it is revoked by the surety. A continuing guarantee for future transactions can be revoked at any time by the surety upon giving notice to the creditors. However, he still remains liable for the transactions completed before such revocation and his liability for the same is not diminished.

JOINT-DEBTOR AND SURETYSHIP

When two persons contract with a third person to incur certain liabilities, they may subsequently enter into a separate contract between themselves by which one party agrees to be liable in case of default by the other, without the third party being involved. The existence of this secondary contract does not affect the original liability of the two individuals to the third party even if the third party is aware of its existence.

DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND CONTRACT OF GUARANTEE

1. In a contract of indemnity, there are two parties involved, whereas a contract of guarantee involves three parties.

2. A contract of guarantee involves three distinct contracts, while that of indemnity usually has one single contract.

3. In the case of a contract of indemnity, the indemnifier is primarily liable, whereas in a contract of guarantee, the liability of the surety is secondary, the debtor being primarily liable.

4. A contract of indemnity is entered into with an object to indemnify or compensate the other party from loss. The contract of guarantee ensures the creditor that either the contract will be performed by the debtor or the liability will be discharged.

5. Liability under a contract of indemnity arises only on the happening of a specified contingency. While in a contract of guarantee, the liability exists ab initio.

6. In a contract of indemnity, the indemnifier cannot sue a third party until the indemnity holder relinquishes their right in favour of the indemnifier. However, in a contract of guarantee, the surety can sue without requiring any such relinquishment on the part of the creditor.

Types of Guarantees

Guarantees are provided as a security measure for the performance of obligations in the form of actions or payments under the Indian Contract Act, 1872. It defines the types of guarantees and prescribes the rules governing the rights of sureties and their discharge from liability.

1. Specific Guarantee:

- Definition: A specific guarantee is an assurance issued to cover one particular transaction or obligation only. It is limited to one contract or debt.
- Example: Guaranteeing a specific bank loan or related to a particular supplier's contract; should the principal debtor default on such loan or contract, the surety will be responsible only for such obligation.

2. Continuing Guarantee:

- Definition: A guarantee continuing applies to a series of transactions or obligations arising from time to time. It remains in force until revoked or discharged.
- Illustration: A guarantee granted only upon the bank providing some form of additional security—above and beyond collateral—which is payable once the outstanding loan exceeds a certain amount. The surety shall remain liable for all the guaranteed obligations of the principal debtor, only if and when the said amount has been crossed.

3. Conditional Guarantee

- Definition: A conditional guarantee is that where the surety's liability is conditioned on the happening of a certain event, that is to say, the obligations of the surety shall come in play only when these conditions are fulfilled.
- Example: An assurance in which the surety has agreed to pay the debt only if principal debtor fails to pay after an expiration of a certain grace period. If the happening on which the guarantee is based does not occur then surety is not liable.

Discharge of the Surety

1. Variation of the Contract:

- -Definition: Any material variation in the contract between the principal debtor and the creditor, if made without their consent, discharges the surety.
- Illustration: If the terms of a loan agreement are altered, either by extension of the period or increase in the rate of interest etc. and the surety did not consent to it. The surety may be discharged from his liability.

2. Release of the Principal Debtor:

- Definition: If the obligor discharges the liability of the principal debtor, then the surety is ipso facto discharged from his liability.
- Example: In cases where the creditor agrees to excuse a debt or discharge the principal debtor under a contract, the amount of that debt is no longer required to be covered by the surety.

3. Loss of Security:

- Definition: The surety is discharged to the extent of the value of the lost security in case the creditor loses any security provided by the principal debtor to secure the obligation.
- Illustration: In the case of a loan secured by property, if the security be lost or destroyed, and without fault of the debtor, the surety is discharged to the extent of the value of the security.

4. Forbearance or Delay by Creditor:

- Explanation: When the creditor shows undue forbearance, or delays, on his part, without the consent of the surety, in proceeding against the principal debtor, the latter shall be released from his surety.

- Illustration: If the creditor agrees not to file any action against or enforce a debt against the debtor, and this act of deferment alters the surety's position in any respect, he may be discharged from his liability.

5. Non notification of Surety about Default of Principal Debtor:

- Definition: If there is a default on the part of the principal debtor and the same is not brought to the notice of the surety in a reasonable time, it may result in the discharge of the surety.

- Illustration: If from omission to inform the surety of the principal debtor's default, the latter is prejudiced, and by reason thereof, the surety is discharged from the obligation.

IMPORTAT CASE LAWS

Osman Jamal and Sons Ltd. v. Gopal Purshottam

In the instant case, the plaintiff company, acting through the official liquidator in winding up proceedings, was a commission agent for buying and selling certain goods of the defendant firm.

The defendant firm had agreed to indemnify the plaintiff company against all losses and damages arising from these transactions. The vendor resold the goods at a lesser price than that agreed upon by contract, as a result of the failure of the defendant firm to take delivery. The plaintiff sued for recovery of the loss thereby incurred. The court held in favour of the plaintiff.

Lala Shanti Swarup v. Munshi Singh & Others

In this case, the plaintiff sold mortgaged property to the defendant upon an agreement by which the defendant had promised to make certain payments sufficient to discharge a mortgage held by the mortgagee.

The defendant failed to do so, and by the default the plaintiff lost because part of his property was sold. The plaintiff sued on an implied contract of guarantee. The legal issues considered were whether there was a contract of guarantee and whether the action was barred by limitation. It was held that a conveyance containing a covenant, whereby the purchaser covenants to clear encumbrances on the property sold, implies a contract of indemnity. The cause of action in such cases is based on actual indemnification, and issuing a mortgage decree, on its own, cannot be said to involve actual indemnification.

CONCLUSION

To sum up, a contract of indemnity is about making up for losses or damages, while a contract of guarantee is about taking responsibility for someone else's debts or obligations. Both types of contracts are used to manage risks, but they involve different parties and serve different purposes in legal situations.