2. To indemnify means ‘to compensate or to make
good the loss’ A contract of indemnity means ‘a
promise or statement of liability to pay
compensation for a loss or for a wrong in a
transaction’.
In the law of contract, indemnity is the obligation,
undertaken by one party to cover the loss or debt
incurred by another. A contract of indemnity differs
from indemnity for the breach of contract. The first
is related to the contract or bear the anticipated
loss by
one party and the latter one is related to the
2
3. Damage for the breach of contract by the breacher
party.
A contract of indemnity is a part of a general
contract and is of special nature. Sec. 22 of
Contract Act, 2056, contains “where any person
has concluded a contract relating to indemnity,
with the provision to pay to any party to a contract
or a third person for any loss or damage that may
result from his actions, while working under the
direction of that party to that contract , he may
realize as compensation.”
3
4. Similarly, Indian Contract Act defines it as “a
contract by which one party promises to save the
other from loss, caused to him by the conduct of
the promisor himself or by conduct of any other
person, is called, contract of indemnity.”
In English law, it is defined in a wider sense than
the above two laws “a promise to save another
party from a loss caused as a result of a
transaction entered into at the instance of the
promisor”. It covers all types of losses caused by
events or accidents (Personal or natural).
4
5. Black’s Law Dictionary “Indemnity is an undertaking
whereby one agrees to indemnify another, upon the
occurrence of the anticipated loss”
Thus indemnity is a kind of security for the loss made
by the concerned or a third party. The person making
an indemnity is primarily liable and can be sued by
the person with whom he makes the transaction.
The indemnifier is liable for the prescribed loss. The
terms and conditions must cover all the aspects of
the contract. In the absence of clarity of the condition,
legal remedy will not be available.
5
6. A Contract of indemnity is a security for an
anticipated loss
It covers the loss suffered by the concerned party or
a third party and is of special nature
It must fulfill all the essential of valid contract-(lawful
object, free consent, capable parties, consideration
etc.)
It may be made expressly or impliedly.
It covers only the loss caused by an event
mentioned in the contract.
It covers the promised loss.
6
7. It is dependent on the good faith or prudence of
the concerned party.
There are two parties- the indemnifier and
indemnity holders.
Contract of Indemnity and Indemnity for
Breach
A contract of indemnity differs from the indemnity
after the breach of contract.
1. A contract of indemnity is agreed at the time of
making contract on any transaction whereas,
indemnity for breach of contract is obligatory after
a loss.
7
8. 2. A contract of Indemnity is provided for in the
Chapter 4, under the topic of the ‘contract relating
to a guarantee, indemnity and subrogation’. But
indemnity for the breach of the contract is
provided in chapter 12 of Contract Act, 2056
under the ‘topic of ‘Breach of Contract and its
remedy’.
3. A contract of indemnity is meant for the
compensation for an anticipated loss but
indemnity for the breach of contract and law os
the damage after the loss to the injured party
occurs.
8
9. 4. A contract of indemnity is meant for the remedy
based on the good relationship (good faith and
prudence) between the parties but indemnity for
the breach of a contract is based on the dispute,
created by the misunderstanding between the
parties.
5. The contract of indemnity is preventive in nature
and indemnity of breach is curative in nature.
9
10. Indemnity holder (i.e. indemnified) is the party who
has been assured of recovery of a loss by the
indemnifier. Contract Act, 2056 has made the
provision regarding the rights of an indemnity
holder. The indemnity holder is entitled to recover
any or all of the following amounts of indemnity
under the contract
All the indemnity amount (damage) mentioned in
the contract
All the damage he may is compelled to pay to a
third party for the loss or damage.
10
11. All the costs spend on the case filed or defended
by him in connection with the contract relating to
indemnity
All the costs of a legal action, if it becomes
necessary to initiate such an action for a failure to
pay the amount mentioned in all the above
clauses.
But except otherwise is mentioned in the contract,
in the contract, the indemnifier will not be liable for
the loss in the following circumstances. They are
called duties of indemnity holder too. (sec. 22 (2)
of CA, 2056)
11
12. If he is acting against the instruction of the
indemnifier
If he works negligently
If he is acting with the intention of causing any
loss or damage
If concerned or third party suffers a loss thereof.
Besides these, an indemnity holder can compel the
indemnifier to make a payment even before the
indemnity holder has met his liability.
12
13. 1. Happening of loss: There must be a loss in
accordance with the contract to make the
indemnifier liable.
2. Occurrence of event: There must be an
occurrence of the anticipated event. Without any
occurrence of the prescribed contingent event,
there is no indemnity by the indemnifier.
3. Prudent act of indemnity holder: Where
the right of indemnity is used by the indemnity
holder prudently and the instruction of the
indemnifier is not contravened or when there is no
breach of contract.
13
14. 4. No negligence and bad intention
involved: If the costs demanded by the
indemnifier area not caused by negligence, bad
intention and reckless behaviour.
14
15. Guarantee means ‘assurance’. A contract of
guarantee is a promise to be responsible for
something, to perform the promise or to discharge
the liability of a third person, in case of his default.
Such a contract involves three parties: The
creditor, the surety and the Principal debtor.
Sec. 15 (1) of Contract Act, 2056 has provided the
definition of a Guarantee Contract: “A contract
relating to a guarantee shall be deemed to have
been concluded in case it provide that if any
person defaults in the repayment of the loan
obtained by him or
15
16. fulfillment of the obligation accepted by him, it will
be repaid or fulfilled by a third person.”
Indian Contract Act define it “a contract of
guarantee is a contract to perform the promise, or
discharge the liability of a third person in case of
his default.”
Creditor: The person to whom the guarantee is
given.
Surety: The person who gives the guarantee
Principal deptor: The person, in respect of
whose default, the guarantee is given.
16
17. The Contract of Guarantee must be in written form
(Sec. 15 (3) of CA, 2056)
A tripartite concurrent agreement between Creditor,
Surety and Principal debtor
There must not be any misrepresentation or
concealment of the facts regarding the contract
A security for repayment of dept or performance of
promise
No direct consideration contract between the surety
and the creditor. Consideration of the Principal debtor
is considered to be sufficient for the surety.
17
18. Primary liability is of the principal debtor and
secondary liability is of the surety.
The involvement of competent parties is a must,
along with other essentials of a valid contract.
18
19. Differs in Contract of
Indemnity
Contract of
Guarantee
1. Purpose of the
Contract
To save the indemnified
from loss caused to him
by any event collateral to
such a contract
To provide necessary
security to the creditor
against his debt and
credit to the principal
debtor
2. Number of Parties TWO parties- Indemnity
holder (Indemnified) and
indemnifier
THREE parties- Principal
debtor, Surety and the
Creditor
3. Number of Contracts There is only one
contract between the
indemnified and the
indemnifier
Three different collateral
contracts between-
Principal debtor and
Surety, Principal debtor
and Creditor, Creditor
and Surety
19
20. 4. Nature of Liability Primary liability is of t
he indemnifier and it
arises immediately
after loss from the
collateral event.
Secondary liability is
of the surety and it
arises only on the
default of the principal
debtor
5. Consideration The consideration for the
indemnifier is from the
creation of the contract.
Consideration for the
surety is not direct. The
creditor’s consideration is
considered adequate to the
surety.
6. Commencement of
liability
Liability of the indemnifier
arises after the happening
of the collateral event
Liability of the surety arises
after the default by the
principal debtor.
7. Discharge from liability The indemnifier discharges
after paying indemnity to
the indemnified party.
20
21. 8.Nature of Contract Indemnity is a
contract of
contingent nature
Guarantee is a
contract of general
nature
9. Right to
reimbursement
The indemnifier has no
right of reimbursement of
the amount paid to the
indemnity holder.
The Surety has the right
of the reimbursement of
the amount from the
Principal debtor, which is
paid to the Creditor.
10. Number of promisors Indemnifier is the only
promisor for the loss of
the indemnified party.
The surety and the
Principal debtor are the
two promisors for the
debt of the creditor.
11. Scope Scope of indemnity is
limited in itself
Scope of Guarantee
includes indemnity too.
21
