Indemnity and Guarantee are a type of contingent contracts, which are governed by Contract Law. Simply put, indemnity implies protection against loss, in terms of money to be paid for loss. Indemnity is when one party promises to compensate the loss occurred to the other party, due to the act of the promisor or any other party. On the other hand, the guarantee is when a person assures the other party that he/she will perform the promise or fulfill the obligation of the third party, in case he/she default.
When it’s about securing one’s interest while entering into the contract, people mostly go for a contract of indemnity or guarantee. At first instance, these two will appear same, but there are some differences between them. So if you are also interested to know about the differences between guarantee and indemnity then let’s take a further read.
Content: Indemnity Vs Guarantee
|Basis for Comparison||Indemnity||Guarantee|
|Meaning||A contract in which one party promises to another that he will compensate him for any loss suffered by him by the act of the promisor or the third party.||A contract in which a party promises to another party that he will perform the contract or compensate the loss, in case of the default of a their person, it is the contract of guarantee.|
|Defined in||Section 124 of Indian Contract Act, 1872||Section 126 of Indian Contract Act, 1872|
|Parties||Two, i.e. indemnifier and indemnified||Three, i.e. creditor, principal debtor and surety|
|Number of Contracts||One||Three|
|Degree of liability of the promisor||Primary||Secondary|
|Purpose||To compensate for the loss||To give assurance to the promisee|
|Maturity of Liability||When the contingency occurs.||Liability already exists.|
Definition of Indemnity
A form of contingent contract, whereby one party promises to the other party that he will compensate the loss or damages occurred to him by the conduct of the first party or any other person, it is known as the contract of indemnity. The number of parties in the contract is two, one who promises to indemnify the other party is indemnifier while the other one whose loss is compensated is known as indemnified.
The indemnity holder has the right to reimburse the following sums from the indemnifier:
- Damages caused, for which he was compelled.
- The amount paid for defending the suit.
- The amount paid for compromising the suit.
One more common example of indemnity is the insurance contract where the insurance company promises to pay for the damages suffered by the policyholder, against the premiums.
Definition of Guarantee
When one person signifies to perform the contract or discharge the liability incurred by the third party, on behalf of the second party, in case he fails, then there is a contract of guarantee. In this type of contract, there are three parties, i.e. The person to whom the guarantee is given is Creditor, Principal Debtor is the person on whose default the guarantee is given, and the person who gives a guarantee is Surety.
Three contracts will be there, first between the principal debtor and creditor, second between principal debtor and surety, third between the surety and the creditor. The contract can be oral or written. There is an implied promise in the contract that the principal debtor will indemnify the surety for the sums paid by him as an obligation of the contract provided they are rightfully paid. The surety is not entitled to recover the amount paid by him wrongfully.
Key Differences Between Indemnity and Guarantee
The following are the major differences between indemnity and guarantee:
- In the contract of indemnity, one party makes a promise to the other that he will compensate for any loss occurred to the other party because of the act of the promisor or any other person. In the contract of guarantee, one party makes a promise to the other party that he will perform the obligation or pay for the liability, in the case of default by a third party.
- Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in Section 126, Guarantee is defined.
- In indemnity, there are two parties, indemnifier and indemnified but in the contract of guarantee, there are three parties i.e. debtor, creditor, and surety.
- The liability of the indemnifier in the contract of indemnity is primary whereas if we talk about guarantee the liability of the surety is secondary because the primary liability is of the debtor.
- The purpose of the contract of indemnity is to save the other party from suffering loss. However, in the case of a contract of guarantee, the aim is to assure the creditor that either the contract will be performed, or liability will be discharged.
- In the contract of indemnity, the liability arises when the contingency occurs while in the contract of guarantee, the liability already exists.
Mr. Joe is a shareholder of Alpha Ltd. lost his share certificate. Joe applies for a duplicate one. The company agrees, but on the condition that Joe compensates for the loss or damage to the company if a third person brings the original certificate.
Mr. Harry takes a loan from the bank for which Mr. Joesph has given the guarantee that if Harry default in the payment of the said amount he will discharge the liability. Here Joseph plays the role of surety, Harry is the principal debtor and Bank is the creditor.
After having a deep discussion on the two, now we can say that these two types of contract are different in many respects. In indemnity, the promisor cannot sue the third party, but in the case of guarantee, the promisor can do so because after discharging the creditor’s debts he gets the position of the creditor.