What is a contract of guarantee? How is it different from a contract of indemnity? D guaranteed the repayment of a loan of Rs. 20,000 given by P to A......
Find the answer to the mains question of the Law of Contract only on Legal Bites.
Question: What is a contract of guarantee? How is it different from a contract of indemnity? D guaranteed the repayment of a loan of Rs. 20,000 given by P to A. ‘The guaranteed paper showed a loan of Rs. 25,000. P refused to accept this paper. Therefore A, without any reference to D, altered the amount to Rs. 20,000 and gave it to P, who accepted it. A failed to pay, and therefore P sues D. Will P succeed? [BJS 1986]Find the answer to the mains question of the Law of Contract only on...
Question: What is a contract of guarantee? How is it different from a contract of indemnity? D guaranteed the repayment of a loan of Rs. 20,000 given by P to A.
‘The guaranteed paper showed a loan of Rs. 25,000. P refused to accept this paper. Therefore A, without any reference to D, altered the amount to Rs. 20,000 and gave it to P, who accepted it. A failed to pay, and therefore P sues D. Will P succeed? [BJS 1986]
Find the answer to the mains question of the Law of Contract only on Legal Bites. [What is a contract of guarantee? How is it different from a contract of indemnity? D guaranteed the repayment of a loan of Rs. 20,000 given by P to A.
‘The guaranteed paper showed a loan of Rs. 25,000. P refused to accept this paper. Therefore A, without any reference to D, altered the amount to Rs. 20,000 and gave it to P, who accepted it. A failed to pay, and therefore P sues D. Will P succeed?]
Answer
Section 126 of the Indian Contract Act, 1872 defines the Contract of Guarantee. According to Section 126 of the Indian Contract Act, a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of their default. Here, the person who gives the guarantee is called the surety, and the person on whose behalf the guarantee is given is called the principal debtor. The person to whom such performance or discharge of liability has to be made is called the creditor.
Difference between a Contract of Indemnity and a Contract of Guarantee
Contract of Indemnity | Contract of Guarantee |
| Defined in Section 124 of the Indian Contract Act, 1872. | Defined in Section 126 of the Indian Contract Act, 1872. |
| This involves two parties- one who makes the promise for indemnification in case of any loss incurred, the other for whom such promise is made. | This involves three parties- surety, the principal debtor and the creditor. |
| The contract of indemnity is made to protect the promisee against some likely loss. | The object of contract of guarantee is the security of the creditor. |
The liability of the indemnifier in a contract of indemnity is a primary one. | In guarantee, the liability of the surety is only secondary, when the principal debtor defaults. |
Section 128 of the Indian Contract Act says the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.
So, Here initially Surety promised to Pay 20,000 and even the last modification of A was Rs 20,000 and up to that D was liable to Pay. Section 133 is not applicable which says any variance, made without the surety consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.