CONTRACT OF INDEMNITY

SEC : 124 " CONTRACT OF INDEMNITY " DEFINED

A contract in which one person/party promises other person saving from the loss
caused to due to the promises himself by any third person that contract is known as "
Contract of Indemnity ( Express or implied). The person sustaining the loss is known as
Indemnity holder and the person saving from loss is known as indemnifier. In
Indemnity Contract the loss is not from Natural disasters.

Essentials of Contract of Indemnity

1. Special Contract: These contracts are special in nature as they are included in
contingent Contracts . The contract will be performed when loss will occur to the
promisee.
2. Loss Of Party: There should be any loss sustained by the indemnity holder to claim
such damages or saving from indemnifier.
3. Indemnity By Promisor: The Indemnifier should promise to compensate or to save
the Indemnity holder from the loss occurred to him.
4. Reason For Loss: There should be a Valid reason for the loss of the Indemnity
holder.

CONTRACT OF GURANTEE

SEC : 126 " CONTRACT OF GURANTEE, SURETY, PRINCIPAL DEBTOR

AND CREDITOR " DEFINED

A contract of guarantee is a contract between three parties. It is a contract of

performance of promise or the discharge of liabilities of a third person in case of any
default by him. The person giving the guarantee is called surety, the person on behalf of
whom the guarantee is given is principal debtor and the person to whom the
guarantee is given is called as the creditor. The contract between the principal debtor
and the creditor is primary and the contract between creditor and surety is secondary.
Liability of surety is secondary and arises when a principal debtor fails to perform
commitments under the Principal Contract. It can be said that surety only plays a third-
party role to confirm, support or supplement an obligation between the principal debtor
and creditor. Surety can also be described as an assurance to the creditor that if the
principal debtor fails to pay, the guarantor or surety would repay the debt.

A contract of guarantee essentially states that if the debtor doesn't fulfil his end of the
agreement, the guarantor will release him from liability. The guarantee's terms and
conditions must be followed when determining the guarantor's liability. The language of
the guarantee typically determines the guarantor's accountability, as was determined in
the following case: United Bank Limited v. Pakistan Industrial Credit and
Investment Corporation Ltd.

“The liability of the guarantor depends on the language of the guarantee. The terms of the
guarantee would demonstrate how far the guarantor has bound itself to indemnify the
creditor.”

ESSENTIALS OF CONTRACT OF GUARANTEE

1. Tripartite contract: There are 3 parties in contract of guarantee having contract

with each other. Primary liability is between principal debtor and creditor,
secondary liability is between surety and creditor and liability to indemnity is
between surety and principal debtor.
2. Consideration (sec:127): It is important and essential in every contract that
there must be lawful consideration between parties. In contract of guarantee the
promise of principal debtor is sufficient consideration for surety.
3. Primary liability: It is also essential for the contract of guarantee that there
should be the primary liability of the principal debtor to the creditor and in case
of default liability transfers towards surety.
4. Writing not necessary: The contract can be in expressed orin implied form, not
necessarily in writing.
 5. Capacity of contract: Parties should be capable to contract as according to the
Pakistan Contract Act 1872. The person giving the surety must be competent to
contract.

THE POINTS OF DISTINCTION BETWEEN A CONTRACT OF

INDEMNITY AND A GUARANTEE

1. NUMBER OF PARTIES: In a contract of indemnity there are two parties are under
obligation namely indemnifier and indemnity holder and vice versa to this at the other
hand in the contract of guarantee there are three parties, creditor and principal debtor
and surety.

2. NUMBER OF CONTRACTS: Contract of guarantee has three contracts between all the
parties, creditor and principal debtor, principal debtor, and surety, creditor, and surety,
while at the other hand in the contract of indemnity, there is only one contract between
indemnifier and indemnified.

3. NATURE OF LIABILITY: It is a contingent contract liability of the indemnifier that is

primarily because he has to reimburse the loss whatever is caused to the indemnified.
But in the contract of guarantee surety’s liability arise when the principal debtor fails to
discharge his liability or could not fulfill his promise. But if the principal debtor does not
make any default then there is no liability on the surety when the principal himself
discharges the obligation.

4. REQUEST: The indemnifier doesn't need to always act at the request of the indemnity
holder, in the contract of indemnity; the indemnifier has to make the loss good without
the request of the indemnity holder. But In the case of a contract of guarantee the
debtor has to request the surety to make the loss good or pay the debt to the creditor.
This liability arises only when the debtor fails to perform his part.

5. SUITS: The indemnifier cannot sue any third party in his name. But in the case of
surety when the principal debtor does not fulfill his part, the surety can directly sue the
principal debtor after discharging the part to the creditor.
6. PURPOSE OF CONTRACT: The indemnifier promises to save the indemnified from
any loss while the other hand the surety promises to pay the debt when the principal
debtor fails to discharge his part.