In this article, Diksha Chaturvedi of New Law College, Bharati Vidyapeeth Pune discusses the difference between Indemnity, Guarantee and Warranty.
Introduction
- People will often wonder that why there is a need of so much law in their lives. Why is it necessary all the time? It is because nowadays unethical practices are growing rapidly. There has been a pressure to protect the consumers. People are striving to maximise profit only.
- For that they exploit consumers by providing low quality products and services. Thus, it has become necessary to safeguard the interest of a consumer.
- To safeguard this, concept of Caveat Emptor is there. This means that a consumer must have necessary contractual and negotiation skills, proper knowledge about the product, rights available to him etc.
- This protection to a consumer comes in the form of Contract of Indemnity, Guarantee and Warranty. Though these words are similar as they all provide protection to the consumer but still they differ from each other.
Indemnity
Contract of Indemnity is a special contract which is mentioned under Indian Contract Act, 1872 in section 124 and 125. It is a contingent contract.
It is defined as ‘A contract of indemnity is a contract whereby one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any person.’
Under an indemnity contract one agrees to assume all responsibility and liability for any injuries or damages to someone else.
The person who undertakes to indemnify or make the good loss is called the ‘indemnifier’ and whose loss is made good is called the ‘indemnified’ or ‘indemnity holder’
Example: A contracts to indemnify B for any consequences of any proceedings which C may against B with respect to certain sum of Rs.200. This is a contract of indemnity. If B is ordered to pay to C Rs.200, A shall be required to pay this amount to B.
Features of Indemnity
- It must be a valid contract.
- It must possess all the elements of a valid contract as mentioned under the act.
- It is a contingent contract.
- It is a contract to make good the loss if any such loss in incurred by the indemnified.
- Loss must be caused by human conduct.
- The loss which has been caused to the indemnified must be because of the act of a human or his conducts.
- Loss must have actually occurred.
- The indemnified should have actually occurred the loss to be an indemnity holder.
Rights under Indemnity
Rights of Indemnity Holder
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Damages: In the contract of indemnity, the indemnity holder has the right to recover from all those damages which he has been promised.
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Costs: All costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit.
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Sums: All sums which he may have paid under the terms of any compromise of any suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity.
Rights of indemnifier
The act is silent on this. But after compensating the indemnity holder, the indemnifier is entitled to be protected by all ways and means.
Guarantee
Contract of Guarantee is a special contract which is mentioned under Indian Contract Act, 1872 from section 126 from 146.
Guarantee is a kind of an agreement or promise to pay the debts when the principal debtor fails to do so. Basically, in it the liability of third person is discharged by way of performing contract.
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’.
Kinds of guarantee
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Specific guarantee
It means guarantee which is given for a particular single transaction only. Under it the liability of the surety extends to a single transaction only.
Example: A guarantee payment to B for the price of 50 kgs of sugar to
be delivered by B to C and to be paid in a month. B delivers to C. C pays for them. Afterwards B delivers 10 kg of sugar to C, which C does not pay. The guarantee given by A was only a specific guarantee and accordingly he is not liable for the price of the 10 kg sugar.
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Continuing guarantee:
It means guarantee which extends to series of transaction. It is not circumscribed to a single transaction. Under this surety can fix the limit on the amount to be paid and when to be paid.
Example: overdraft.
Rights of surety
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Against the Principal Debtor:
– Right of subrogation
– Right of indemnity
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Against the creditor:
– Right of Securities.
– Right to claim set off.
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Against the co-sureties:
When the co-sureties have given guarantee for the same debt then they are liable to pay equally but according to the limit set by them.
Warranty
Warranty is an assurance given by the seller to the buyer that the product or service is of fine quality or what is promised to them. The warranty is drafted by the buyer.
The purpose of warranty is
- Allocation of risk between buyer and seller.
- It encourages the seller to make all the necessary disclosure about the warranty.
- Allows the buyer to set purchase price.
- Enable the buyer to have protection through indemnities for known liabilities and in extreme circumstances can withdraw acquisition.
Breach of Warranty
If there is a breach of warranty then the buyer can seek for damages. The buyer is being compensated for the loss. They are put in the position in which they would have if the breach would not be done.
To claim for damages the buyer has to prove that:
- The warranty is untrue and breach has been done.
- Loss or damage is been suffered by the buyer.
- The loss caused is because of breach of warranty.
- The loss is not too remote i.e. it could have easily been foreseeable.
- They have taken reasonable steps to mitigate loss.
Comparative Analysis
| BASIS | INDEMNITY | WARRANTY | GUARANTEE |
| No. of parties | It has two parties. | It has two parties. | It includes three parties i.e. Principal Debtor, surety, creditor. |
| No. of Contracts | It has only one contract. | It has only one contract. | It has two contracts. One is the Principal contract and the other is the guarantee contract. |
| Nature | Its nature is to compensate someone for loss and is independent of the obligations of the party whose covenants are being reinforced by the provision of indemnity. | Its nature is to compensate someone for loss and is independent of the obligations of the party whose covenants are being reinforced by the provision of warranty. | Its nature is to create secondary obligations. |
| Liability | It has only primary It has only primary liability. It provides that the liability of the indemnifier is to run with any loss by the person he indemnifies. | It has a primary liability only towards the person who he gives the warranty. | It has two liabilities. Primary and secondary. Primary is with Principal Debtor and secondary which lies with the surety. |
| Obligations | Obligation under indemnity arises out of occurrence of an event. | Obligation under warranty arises out of demand by the other person. | Under it, obligation of guaranty contract is triggered by a demand which says the principal debtor is at fault. |
| Discharge | In it liability remains under the transaction notwithstanding that the debtor is discharged under the main contract. | Same as the contract of indemnity. | When the guarantor pays the sum for which he is liable then he extinguishes his liability. |
| Remedy | Under the contract of indemnity the claimant can recover all the loss if there is a breach of a contract. | Under it, if there is a breach of warranty then the warrantor has to bear all the damages. | In guarantee, if surety makes payment to creditor, surety can recover that amount from principal debtor. |
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Proof of loss
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Under the contract of indemnity, a buyer can recover any losses without having to prove that loss. |
Under it, the buyer has to proof the loss suffered due to breach of warranty to be entitle for damages |
Under it, the buyer has to proof the loss suffered due to breach of guarantee to be entitle for damages. |
| Limitations | The limitation period starts from the date when loss is suffered. | The limitation period starts from the date of breach of warranty. | – |
Conclusion
It is necessary to know the difference between indemnity, warranty and guarantee for a better understanding. All these contracts play an important role in the commercial transactions. Thus, these concepts are similar in the sense that they all protect the consumers but still they differ from each other.
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