Explain and distinguish between a contract of Indemnity and a contract of Guarantee. Explain that “The liability of the surety is co-extensive with principal-debtor”?
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Question: Explain and distinguish between a contract of Indemnity and a contract of Guarantee. Explain that “The liability of the surety is co-extensive with principal-debtor”? [MPJS 2019]Find the answer to the mains question of the Law of Contract only on Legal Bites.[Explain and distinguish between a contract of Indemnity and a contract of Guarantee. Explain that “The liability of the surety is co-extensive with principal-debtor”?]AnswerThe contract of indemnity as described...
Question: Explain and distinguish between a contract of Indemnity and a contract of Guarantee. Explain that “The liability of the surety is co-extensive with principal-debtor”? [MPJS 2019]
Find the answer to the mains question of the Law of Contract only on Legal Bites.[Explain and distinguish between a contract of Indemnity and a contract of Guarantee. Explain that “The liability of the surety is co-extensive with principal-debtor”?]
Answer
The contract of indemnity as described in Section 124 of the Indian Contract Act, is a contract between two parties where one party promises to indemnify the other party in case the later one suffers from any loss or to incur any kind of expenses or to protect him from any legal consequences which have been caused by the conduct of the promisor himself or caused by the third party. For example, if A borrows money from B, and C agrees to indemnify B in case A defaults on the loan, then C is the indemnifier, B is the indemnified party, and A is the principal debtor.
Section 126 of the Indian Contracts Act, 1872 provides a comprehensive definition of “Contract of Guarantee” as well as the parties involved in it. As per the provision, a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. In Bank of Bihar Ltd v. Damodar Prasad, 1969 AIR 297: The Supreme Court held that the liability of the surety is immediate and cannot be defended until the creditor has exhausted all his remedies against the principal debtor.
Indemnity | Guarantee |
| 1. In indemnity there are two, one who is indemnified and the other indemnifier. | 1. There are three parties, the Principal debtor, the Surety and the Creditor. |
| 2. It consists of only one contract under which the indemnifier promises to pay in the event of a certain loss. | 2. There are three contracts between the surety, principal debtor and creditor. |
3. The contract of indemnity is made to protect the promise against some likely loss. | 3. The object of the contract of guarantee is the security of the creditor. |
4. The liability of the indemnifier in a contract of indemnity is a primary one. | 4. In guarantee the liability of the surety is only secondary when the principal debtor defaults. |
5. The liability arises only on the happening of a contingency. | 5. The liability arises only on the non-performance of an existing promise or non-payment of an existing debt. |
6. The indemnifier need not act at the request of indemnity holder. | 6. The surety acts at the request of the principal debtor. |
7. The indemnifier cannot sue a third party in his own name because of the absence of privity of contract between him and a third party. He can sue the third party in his own name if there in an assignment in his favour | 7. A surety, on discharging the debt of the principal debtor, can sue the principal debtor in his own name. |
The Liability of the Surety is Co-Extensive with Principal-Debtor
This statement means that in a contract of guarantee, the liability of the surety is equivalent or equal to that of the principal debtor. The surety's responsibility to fulfil the obligations of the principal debtor arises when the principal debtor fails to perform those obligations. If the principal debtor defaults, the surety becomes liable to the creditor for the entire amount owed by the principal debtor.
The co-extensive liability principle implies that the surety's liability mirrors that of the principal debtor. If the principal debtor fails to fulfil the obligation partially or entirely, the surety will step in to honour the commitment on behalf of the principal debtor. The surety is obligated to pay the creditor the full amount owed by the principal debtor, including any interest, costs, or damages that may arise due to the default.
It's important to note that the surety's liability is secondary in nature, as it arises only when the principal debtor fails to fulfil their obligations. The creditor must first seek to recover the amount owed from the principal debtor before approaching the surety. The surety's liability is contingent upon the default of the principal debtor, and their obligation ceases if the principal debtor fulfils their obligations satisfactorily.