RESEARCH PAPER
LAW OF CONTRACT – 2
BA LLB (Hons.) Semester – 3
TOPIC:
Differences Between an Indemnity Contract and a Guarantee
Contract under the Indian Contract Act of 1872.
Submitted to:
Prof. ANU MISHRA
ASSISTANT PROFESSOR
KIRIT P MEHTA
SCHOOL OF LAW
Submitted by:
RAJNISH KUMAR
ROLL NO.- C076
SAP ID: 81012100660
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TABLE OF CONTENT
ABSTRACT...............................................................................................................................3
INTRODUCTION......................................................................................................................4
RESEARCH METHODOLOGY...............................................................................................5
SCOPE:..................................................................................................................................5
RESEARCH OBJECTIVE:...................................................................................................5
RESEARCH QUESTION:.....................................................................................................5
LIMITATION OF THE STUDY:..........................................................................................5
HYPOTHESIS:......................................................................................................................5
LITERATURE REVIEW...........................................................................................................6
LEGISLATION FRAMEWORK...............................................................................................8
DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND CONTRACT OF
GUARANTEE:......................................................................................................................8
Definition:..............................................................................................................................8
Number of Parties:.................................................................................................................9
Number of Contracts:.............................................................................................................9
Liability:.................................................................................................................................9
JUDICIAL FRAMEWORK.....................................................................................................11
SUGGESTIONS......................................................................................................................13
CONCLUSION........................................................................................................................14
BIBLIOGRAPHY....................................................................................................................15
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ABSTRACT
In Chapter VIII of the 1872 Indian Contract Act, indemnity and guarantee contracts are
defined. As a result, individuals mistakenly believe that both forms of contracts are
comparable or even identical, as both serve essentially the same goal. Even though they are
described in the same chapter, indemnities and guarantees differ in numerous ways. It is vital
to comprehend the fundamental distinctions between the two. The provisions regarding
contracts of indemnities and guarantees have not been changed since the Imperial Legislative
Council passed the Indian Contract Act in 1872. It has been a very long time since either sort
of contract was even considered, therefore the distinctions between them can be extremely
helpful in determining whether the applicable terms need to be amended or updated.
Keywords: Indemnity, Guarantee, Indian Contract Act, Differences, Common Law
System.
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INTRODUCTION
Contract of guarantee and contract of indemnification are both defined in Chapter VIII of the
Indian Contract Act, 1872. Section 124 of the Indian Contract Act through Section 147 are
covered in this chapter. The contrast between indemnification and guarantee is frequently
considered. Sometimes, people think of both types of contracts to be same or similar when in
reality, there exist certain differences. One significant yet often misunderstood distinction is
that between guarantees and indemnities.1 It can be said that both types of contracts come
under the definition of contingent contracts.2
Both types of contracts come under the definition of specific contracts.3 They are performed
out under specific circumstances, as their name would imply. The two forms of contracts
differ greatly due to these factors. The difference between the two types of contracts is
significant in terms of parties to a contract. The results may not be satisfying if a party to a
contract misunderstands the definitions and operations of the two types of contracts. In the
end, the party would need to understand the distinction; otherwise, both parties would lose.
Losing here would render the contract meaningless because it would not apply to the current
circumstance. Because these are the fundamentals, it is crucial to distinguish between the two
types of contracts. Contracting without understanding the fundamentals would be pointless or
even dangerous.
1
Sarah Sinclair, Difference Between a Guarantee and Indemnity, 6(3) Auckland U L Rev 414, 414 (1990),
http://www.nzlii.org/nz/journals/AukULawRw/1990/6.html.
2
Contingent Contracts: Indemnity and Guarantee, Lexpeeps (Jun. 3, 2020), https://lexpeeps.in/contingent-
contracts-indemnity-and-guarantee/.
3
Sankalp Jain, Types of Contracts: General and Specific Contracts, SSRN 1, 12 (2015),
https://dx.doi.org/10.2139/ssrn.2781255.
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RESEARCH METHODOLOGY
SCOPE:
As the chapter outlining indemnity and guarantee contracts has remained largely unchanged,
the set definitions and distinctions between both types of contracts have also persisted for a
very long period. This implies that there may be unresolved concerns pertaining to
unaddressed contract kinds. Concurrently, there may be a need for specific adjustments to the
pertinent provisions, as there is a high probability that the law will not be fully applicable at
the moment. The purpose of this study is to determine whether certain amendments to the
provisions are necessary, and examining the differences between the two types of contracts
may assist determine which amendments may be necessary.
RESEARCH OBJECTIVE:
To study the differences between contract of indemnity and contract of guarantee.
To understand whether the two types of contracts need amending.
RESEARCH QUESTION:
What are the differences between a contract of indemnity and a contract of guarantee?
LIMITATION OF THE STUDY:
There are just secondary sources cited. No primary research has been conducted for this
paper's purposes.
HYPOTHESIS:
1. There are numerous distinctions between contracts of indemnification and guarantee.
2. There is no immediate need to change any laws because they are not out of date.
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LITERATURE REVIEW
Avtar Singh, Contract & Specific Relief (Eastern Book Company 2020).
Singh (2020) has provided a very thorough explanation of every facet of the Indian
Contract Act. To have a thorough grasp of contract of indemnity and contract of
guarantee, the author consulted this book.
Sarah Sinclair, Difference Between a Guarantee and Indemnity, 6(3) Auckland U L Rev
414, 414 – 434 (1990).
Sinclair (1990) provides a thorough discussion of the distinction between guarantee
and indemnity under New Zealand law. The author consulted this journal article in
order to comprehend why it is necessary to research the discrepancies in the first
place.
Saima Khan & Ruchita Yadav, Contract of Indemnity: Relevance in the Covid-19
Pandemic, 4(4) IJLMH 2108, 2108 – 2114 (2021).
Khan & Yadav (2021) have provided a summary of the significance of
indemnification contracts during the covid-19 pandemic. The author consulted this
journal article in order to comprehend what an indemnity contract is.
Ananthanarayanan B & V S Ajaykrishna, Contract of Guarantee, SSRN 1, 1 – 9 (2021),
https://dx.doi.org/10.2139/ssrn.3838030.
Ananthanarayanan B & Ajaykrishna (2021) have provided a definition of a guarantee
contract. The author consulted this journal article to gain a basic understanding of a
contract of guarantee.
Sudhanshu Shekhar, Difference Between Contract of Indemnity and Contract of
Guarantee: Ten Case Analysis, SSRN 1, 1 – 11 (2015).
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Shekhar (2015) has provided a legal explanation of the distinction between an indemnity
contract and a guarantee contract. The author has referenced to this journal article to examine
specific cases and how courts have distinguished between indemnity contracts and guarantee
contracts.
R Pushpavalli, A Study of Contract of Indemnity and Contract of Insurance, 9(5)
IJARESM 2095, 2095 – 2099 (2021).
Pushpavalli (2021) has provided a concise explanation of what an indemnification contract is.
The author consulted this journal article to gain an understanding of indemnity contracts and
to compare them to guarantee contracts.
Wayne Courtney, Indemnities and the Indian Contract Act 1872, 27(1) NLSIR 66, 69
(2015).
Courtney (2015) has provided a comprehensive analysis of indemnification contracts in the
Indian Contract Act. This journal article was consulted by the author to determine how a
contract of indemnification in India varies from a contract of indemnity under the common
law system.
Kshitij Chandra Pandey & Komal Sabhnani, Contract of Indemnity and Guarantee:
Provision in U.K. and India, 1(2) Burnished Law J. 1, 1 – 14 (2020).
Pandey and Sabhnani (2020) provide a concise explanation of how indemnification and
guarantee contracts in India differ from those in the United Kingdom. The author consulted
this journal article in order to comprehend the distinction between a contract of guarantee in
India and a contract of guarantee in the United Kingdom.
Sankalp Jain, Types of Contracts: General and Specific Contracts, SSRN 1, 1 – 28 (2015).
Jain (2015) has provided a comprehensive explanation of general and particular contracts.
The author consulted this journal article to comprehend how indemnities and guarantees are
included in particular contracts.
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LEGISLATION FRAMEWORK
DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND
CONTRACT OF GUARANTEE:
There are some distinctions between the two forms of contracts. From the definitions to the
rights of the parties to the manner in which the contracts are discharged, there are a number
of differences that demonstrate how the two types of contracts are distinct.
Definition:
Under section 124 of the Indian Contract Act, a contract of indemnity is defined as “A
contract by which one party promises to save the other from loss caused to him by the
contract of the promisor himself, or by the conduct of any other person, is called a contract
of indemnity”.4
It basically means that one of the parties to the contract will promise to make good the loss
that has occurred to the other party. The party that has made the promise is called the
indemnifier and the party that has been promised that any loss occurred will be compensated
by the indemnifier is called the indemnity-holder.5
Under section 126 of the same Act, a contract of guarantee is defined as “A contract to
perform the promise, or discharge the liability, of a third person in case of his default. The
person who gives the guarantee is called the surety; the person in respect of whose default
the guarantee is given is called the principal debtor, and the person to whom the guarantee
is given is called the creditor. A guarantee may be either oral or written”.6
In a contract of guarantee, one party assures another that, in the event of the other party's
default, he will perform the contract on behalf of the defaulting party. The individual who
provides this assurance is known as the surety. Principal debtor is the party in breach of this
agreement. The recipient of the guarantee is known as the creditor. In other words, the surety
gives assurance to the creditor that he would perform the contract on behalf of the principal
debtor in case of a default by the principal debtor. 7 A contract of guarantee essentially
4
The Indian Contract Act, 1872, § 124, Acts of Imperial Legislative Council, 1872 (India).
5
Saima Khan & Ruchita Yadav, Contract of Indemnity: Relevance in the Covid-19 Pandemic, 4(4) IJLMH
2108, 2108 (2021), https://doij.org/10.10000/IJLMH.111563.
6
The Indian Contract Act, 1872, § 126, Acts of Imperial Legislative Council, 1872 (India).
7
Ananthanarayanan B & V S Ajaykrishna, Contract of Guarantee, SSRN 1, 4 (2021),
https://dx.doi.org/10.2139/ssrn.3838030
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includes a contract of indemnity in itself. This is the contract between principal debtor and
surety as the principal debtor will make good of any loss occurred to the surety as result of
the default.8
Number of Parties:
From the definitions, it is clear that the number of parties varies between the two types of
contracts. A contract of indemnity is between the indemnifier and the indemnity-holder,
whereas a contract of guarantee is between the surety, principal debtor, and creditor.
Therefore, there are two parties in an indemnity contract but there are three parties in a
guarantee contract.
Number of Contracts:
In a contract of indemnity, there exists only one contract between the indemnifier and the
indemnity-holder.9 In a contract of guarantee, there exist 3 separate contracts. The first one is
between creditor and principal debtor. The second one is between surety and creditor. The
third one is between the principal debtor and surety.10
Liability:
In a contract of indemnity, the indemnifier assumes solely primary liability. In a contract of
guarantee, the major debtor bears primary responsibility, while the surety bears secondary
responsibility. The responsibility under an indemnity contract is contingent on the occurrence
of the contingency. The indemnity-holder cannot ask the indemnifier to cover any losses if
the contingency has not occurred. In a contract of guarantee, the liability exists from the
start.11
8
Sudhanshu Shekhar, Difference Between Contract of Indemnity and Contract of Guarantee: Ten Case
Analysis, SSRN 1, 1 (2015), https://dx.doi.org/10.2139/ssrn.2587228.
9
R. Pushpavalli, A Study of Contract of Indemnity and Contract of Insurance, 9(5) IJARESM 2095, 2096
(2021), http://www.ijaresm.com/a-study-of-contract-of-indemnity-and-contract-of-insurance.
10
Karan Singh, Everything you need to know about Contract of Guarantee, IPleaders (Jul. 26, 2017),
https://blog.ipleaders.in/everything-need-know-contract-guarantee/.
11
Surbhi S, Difference Between Indemnity and Guarantee, Key Differences (Jul. 26, 2018),
https://keydifferences.com/difference-between-indemnity-and-guarantee.html.
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Similarity to the English Common Law System:
Comparing an indemnification contract in India to an indemnity contract under the Common
Law, the extent of the clauses varies significantly. The scope of indemnities in India is very
much narrower than indemnities in the common law system.12 In India, the loss has to be
cause by some human agency.13 Consequently, loss induced by specific disasters or
catastrophes does not fall within the scope of indemnities in India, and the indemnity-holder
will not be compensated if such a loss occurs. The scope of the common law system
encompasses the likelihood of an occurrence or catastrophe generating a loss to the
indemnity-holder.
In the event of guarantee contracts, the contract must adhere to the common law system. In
India, contracts can also be oral. In India, there is no requirement that contracts be in writing.
In the common law system, there is no culpability if a minor is involved, even if the other
parties were aware of this fact. The contract becomes void ab-initio. In Indian law, if the
minor is knowingly guaranteed, the surety will be held liable as principal debtor.14 Therefore,
the contract of guarantee in India resembles the relevant laws of the common law system
more than the contract of indemnification.
12
Avtar Singh, Contract & Specific Relief 591 (Eastern Book Company 2020).
13
Wayne Courtney, Indemnities and the Indian Contract Act 1872, 27(1) NLSIR 66, 69 (2015),
https://www.jstor.org/stable/44283647.
14
Kshitij Chandra Pandey & Komal Sabhnani, Contract of Indemnity and Guarantee: Provision in U.K. and
India, 1(2) Burnished Law J. 1, 12 (2020), http://burnishedlawjournal.in/wp-content/uploads/2020/06/Contract-
of-indemnity-and-guarantee-provision-in-U.K.-and-India-by-Kshitij-Chandra-Pandey-Komal-Sabhnani.pdf.
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JUDICIAL FRAMEWORK
In Moschi v. Lep Air Services,15 the respondents served as forwarding agents for items
imported by Rolloswin, a corporation under the appellant's control. Rolloswin owed the
respondents money, and they were merely executing a lien. The respondents, Rolloswin, and
the appellants reached a tripartite agreement about the instalment payment of the debt. The
responses were to release the products, and the corporation would pay 6,000 pounds in
weekly instalments. The appellant provided a personal guarantee to the respondents in the
event that the corporation defaults on its obligations. Here, the court examined whether the
deal was an indemnity contract or a guarantee contract. The Court ruled that the mere use of
the word "guarantee" is not conclusive on its own. It could as well be a standard warranty. It
is occasionally used to misrepresent an indemnity contract and not a guarantee contract. As
the words in this contract were simple and unambiguous, it was visible that the contract did
impose a limit upon the guarantor’s maximum liability under the contract of guarantee.16
In Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri,17 the Municipal
Corporation of Mumbai leased a parcel of property to the plaintiff. On the defendant's
request, the plaintiff permitted the defendant to construct a structure on the land. A debt of
Rs. 5,000 had accrued to Keshavdas Mohandas, the land's supplier, during the construction of
a structure on the property. On the request of the defendant, the plaintiff mortgaged a portion
of the property to Keshavdas Mohandas. Upon additional request, the plaintiff handed the
parcel of land to the defendant in order to release him from his obligations. Upon observing
that the defendant was not abiding by the agreement, the plaintiff launched a lawsuit against
him, saying that he was the indemnifier. The court was unable to apply section 124 in this
instance, and the plaintiff's request was also considered. The plaintiff argued that he is
entitled to indemnification, but the court disagreed. This is due to the fact that the defendant
never denied or contested the plaintiff's entitlement to indemnification. Ultimately, it was
determined that the plaintiff would be exonerated of all liability under the common law
system's principles of equity.18
15
Moschi v LEP Air Services; HL 1973; [1972] 2 ALL ER 393, [1973] AC 331.
16
Id.
17
Gajanan Moreshwar vs Moreshwar Madan, (1942) 44 BOMLR 703.
18
Id.
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In Pitts v. Jones,19 the appellants were minority owners in a firm where the defendant was
the main shareholder and managing director. Jones had brokered an agreement with a buyer
who agreed to purchase the appellants' shares. However, these shares would not be acquired
until six months following the sale's conclusion. The appellants verbally agreed with the
defendants that if the buyer was unable to pay after a six-month delay, Jones would be
responsible for the payment. When the purchaser was unable to pay, Jones was sued for
indemnification by the appellants. The Court of Appeals determined that it was in fact a
guarantee contract and not an indemnity contract.20
SUGGESTIONS
19
Pitts & Ors v Jones [2007] EWCA Civ 1301.
20
Id.
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The difficulty that emerges is that contracts of guarantee are defined under 22 sections of the
Indian Contract Act, whereas contracts of indemnification are defined in only sections 124
and 125 of the Indian Contract Act. The definition of several components of indemnification
contracts is extremely limited. The scope is too limited, and modifications are required. The
primary suggestion is to align the provisions with those of the common law system. Due to
the restricted nature of Indian law, the application of English common law to indemnification
matters appears more equitable. Even in Gajanan Moreshwar Parelkar v. Moreshwar Madan
Mantri,21 the common law principles of equity were invoked to absolve the plaintiff of any
liability. Section 124 was deemed inapplicable, which is not good news for the Indian legal
system. This creates a conflict of interest regarding whether the Courts should refer to the
English courts to provide relief to certain plaintiffs or defendants, or whether the Courts
should be strict in their application of Indian law, and the court should never have ordered
indemnification for the plaintiff in Gajanan Moreshwar Parelkar vs. Moreshwar Madan
Mantri.22
The pertinent sections should also be revised to broaden the scope of indemnification to cover
situations in which the indemnity holder could be indemnified in the event of specific
occurrences or catastrophes. The restriction that indemnity is only available for losses caused
by human action is problematic. It should also be made clear that an indemnification contract
can be inferred as well as express. As it relates to guarantee, there are a few modifications
that might be performed, but their implementation is not urgent at this time. Changes to the
indemnity clauses should have been implemented years ago, but there is still time to do so.
CONCLUSION
21
Supra Note 17.
22
Supra Note 17.
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There are several distinctions between an indemnity contract and a guarantee contract. While
these contracts may initially appear to be fairly similar, the variances are glaring. Both forms
of specialised contracts are fundamentally distinct. Even the number of parties is not
identical. The description illustrates the differences between the two types of contracts and
why understanding the fundamentals might aid in distinguishing between them. In addition,
the liabilities of the parties illustrate the clear distinction between the two forms of contracts.
Contract of indemnification in India bears no resemblance to contract of indemnity under
common law, although contract of guarantee bears a striking resemblance to contract of
guarantee under common law. When comparing a contract of indemnification and a contract
of guarantee, one feature becomes evident. It is that the provisions linked to guarantee
contracts are much clearer and have fewer limits. In contrast, the indemnities clauses are
quite stringent and limited. The scope is too limited, compelling the courts to go to the
common law system to determine if relief can be granted to the proper party. The case of
Gajanan Moreshwar Parelkar vs. Moreshwar Madan Mantri exemplifies why the indemnity
rules are fundamentally faulty and why they require numerous clarifications, revisions, and
additions to be made solid. It is time for the relevant authorities to review the indemnities
section of the Indian Contract Act and examine the several easy adjustments that can be
made. In the near future, it is hoped that the authorities would implement the necessary
reforms to make indemnity provisions more equitable and advantageous.
BIBLIOGRAPHY
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CASES:
Moschi vs. Lep Air Services, [1973] KB AC 331.
Gajanan Moreshwar vs Moreshwar Madan, (1942) 44 BOMLR 703.
STATUTES:
The Indian Contract Act, 1872, § 124-147 Acts of Imperial Legislative Council, 1872
(India).
BOOK:
Avtar Singh, Contract & Specific Relief (Eastern Book Company 2020)
JOURNAL ARTICLES:
Sarah Sinclair, Difference Between a Guarantee and Indemnity, 6(3) Auckland U L
Rev 414, 414 – 434 (1990),
http://www.nzlii.org/nz/journals/AukULawRw/1990/6.html
Saima Khan & Ruchita Yadav, Contract of Indemnity: Relevance in the Covid-19
Pandemic, 4(4) IJLMH 2108, 2108 – 2114 (2021),
https://doij.org/10.10000/IJLMH.111563.
Ananthanarayanan B & V S Ajaykrishna, Contract of Guarantee, SSRN 1, 1 – 9
(2021), https://dx.doi.org/10.2139/ssrn.3838030.
Sudhanshu Shekhar, Difference Between Contract of Indemnity and Contract of
Guarantee: Ten Case Analysis, SSRN 1, 1 – 11 (2015),
https://dx.doi.org/10.2139/ssrn.2587228.
R. Pushpavalli, A Study of Contract of Indemnity and Contract of Insurance, 9(5)
IJARESM 2095, 2095 – 2099 (2021), http://www.ijaresm.com/a-study-of-contract-of-
indemnity-and-contract-of-insurance.
Wayne Courtney, Indemnities and the Indian Contract Act 1872, 27(1) NLSIR 66, 69
(2015), https://www.jstor.org/stable/44283647.
15 | P a g e
Kshitij Chandra Pandey & Komal Sabhnani, Contract of Indemnity and Guarantee:
Provision in U.K. and India, 1(2) Burnished Law J. 1, 1 – 14 (2020),
http://burnishedlawjournal.in/wp-content/uploads/2020/06/Contract-of-indemnity-
and-guarantee-provision-in-U.K.-and-India-by-Kshitij-Chandra-Pandey-Komal-
Sabhnani.pdf
Sankalp Jain, Types of Contracts: General and Specific Contracts, SSRN 1, 1 – 28
(2015), https://dx.doi.org/10.2139/ssrn.2781255
OTHER SOURCES:
Contingent Contracts: Indemnity and Guarantee, Lexpeeps (Jun. 3, 2020),
https://lexpeeps.in/contingent-contracts-indemnity-and-guarantee/
Karan Singh, Everything you need to know about Contract of Guarantee, IPleaders
(Jul. 26, 2017), https://blog.ipleaders.in/everything-need-know-contract-guarantee/
Surbhi S, Difference Between Indemnity and Guarantee, Key Differences (Jul. 26,
2018), https://keydifferences.com/difference-between-indemnity-and-guarantee.html
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