11.
Explanation
Indemnity and guarantee are two distinct legal concepts in contract law, often involving a third party’s obligation to fulfill certain responsibilities or provide compensation in case of default by another party. Here are the key differences between indemnity and guarantee:
Indemnity:
1. Primary Liability: In an indemnity contract, the indemnifier (the party providing indemnity) is directly responsible for fulfilling an obligation or compensating for a loss. They have primary liability for the underlying obligation.
2. Compensation for Loss: Indemnity agreements are often used to compensate a party for actual losses or expenses incurred due to a specific event. For example, an indemnity clause in a contract may require one party to indemnify the other for any legal costs arising from a lawsuit related to the contract.
3. No Requirement of Default: In an indemnity arrangement, the party seeking indemnity doesn’t need to prove a breach of contract or default by the other party. They can seek indemnity as long as they incur losses within the scope of the indemnity agreement.
4. Broader Scope: Indemnity agreements can cover a wide range of situations, including liability arising from third-party claims, contractual breaches, or other specified events.
Guarantee:
1. Secondary Liability: In a guarantee contract, the guarantor (the party providing the guarantee) is a secondary party who agrees to fulfill the obligations of another party (the principal debtor) if the principal debtor defaults on their obligations.
2. Protection Against Default: Guarantees are typically used to protect a creditor in case the principal debtor fails to perform or meet their obligations. The guarantor’s liability arises only when the debtor defaults.
3. Requirement of Default : To trigger the guarantor’s liability, there must be a clear default or failure by the principal debtor to fulfill their obligations. The creditor must demonstrate the default before seeking payment from the guarantor.
4. Specific to Financial Obligations: Guarantees are often associated with financial obligations, such as loans, credit, or payment of debts. The guarantor provides assurance to the creditor that they will step in if the debtor fails to pay.
The circumstances under which a surety (guarantor) can be discharged, here are some common scenarios:
1. Performance by Principal Debtor: If the principal debtor fulfills their obligations as per the contract, the guarantor is discharged from further liability. The purpose of the guarantee is to step in when the debtor defaults.
2. Change in Terms : If the terms of the underlying contract are altered without the consent of the guarantor in a way that increases the guarantor’s risk or changes the nature of the guarantee, the guarantor may be discharged.
3. Release of Guarantor: If the creditor releases or discharges the guarantor from their obligations without the guarantor’s consent, the guarantor is no longer liable.
4. Lack of Notice: In some jurisdictions, if the creditor fails to provide notice of the debtor’s default to the guarantor within a reasonable time, the guarantor’s liability may be discharged.
5. Fraud or Misrepresentation: If the guarantee was obtained through fraud or misrepresentation, the guarantor may be able to void the guarantee and be discharged from liability.
6. Impossibility or Illegality: If it becomes impossible to enforce the guarantee due to circumstances beyond the control of the parties or if the underlying contract becomes illegal, the guarantor may be discharged.
Conclusion: The specific circumstances and legal rules surrounding guarantees and indemnities can vary by jurisdiction and may also depend on the terms of the individual contracts involved. Parties entering into such agreements should seek legal advice to understand their rights and responsibilities fully.