Lahore Business School

Business Law

SUBMITTED TO: Mr. Zahid Sikandar

SUBMITTED BY:

IMRAN ALI MBA-01091075 COURSE: MBA
SEMESTER: Final
DATE: Oct. 13, 2010.
Indemnity
“A contract of indemnity is one in which the party sought to be made liable him or herself undertakes a primary liability to make good another’s loss, which loss may or may not result from the act of another (third) person”.

“An expressed or implied contract to compensate an individual for loss or damage; for example, an insurance policy”.
“A contract by which one party promises to save other from loss caused to him by the conduct of the promisor or by the conduct of any other person is called a contract of indemnity”.
Essentials of contract of indemnity
An indemnity is a personal security undertaking given by a third party, but under an indemnity the surety’s obligation is independent of debtor/creditor relationship. It is therefore a primary liability, not dependent on the debtor’s default.

Indemnity is not given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay.

In a contract of indemnity not only is there no requirement for a default by a third party as a condition of liability but there may not even be a third party involved for either the creation or exercise of the right.

Indemnity holder

Indemnifier

Guarantee
When getting a bank loan, a person is often asked to provide a guarantee. Guarantee an indemnity are often used to reinforce each other.

“A contract of guarantee is an undertaking by which a person accepts what is sometimes called a secondary liability to answer for the debt or default of another person who is primarily liable to a third. The contract of guarantee is between the first and the third persons”.

Example:
X will loan money to Y, subject to Z providing security by guaranteeing the loan. The guarantor Z will only become liable under the guarantee if the principal debtor, Y, defaults.

A contract of guaranty is a collateral undertaking, and presupposes an original contract.

In a guarantee the liability arises at the point of time when the principal borrower or debtor defaults on his obligation. Where there is liability even though there is no default or breach by the principal debtor, it is not a contract of guarantee.

Example:
By way of illustration, an insurance contract is an indemnity contract. A person who buys an insurance policy insures his property against damage. If and when the damage occurs, the insured is entitled to call upon the insurer to pay him.

The difference between indemnity and guarantee can be illustrated by example:

If X says to Y: ‘Supply goods to Z and if he does not pay, I will’, X’s undertaking is a contract of guarantee, as payment by X is conditional on Y’s default. But if X says to Y: ‘Supply goods to Z and I will see you paid’, this is a contract of indemnity because X’s liability to pay is not contingent on Y’s default.

Example:
By way of illustration, an insurance contract is an indemnity contract. A person who buys an insurance policy insures his property against damage. If and when the damage occurs, the insured is entitled to call upon the insurer to pay him.