In order to understand the difference between Contract of Indemnity and Contract of Guarantee, we need to understand few important terms. Indemnity means “Security against loss”. Both indemnity and guarantee are contingent contracts that are governed by the Contract Law.
While indemnity implies protection against loss, the guarantee is when an individual assures the opposite party that he or she will fulfil the obligation in case of a default.
Indemnity means money that needs to be paid for the loss. If you want to secure your position or interest in a given contract, you should opt for either of the two. However, before you go ahead, you need to understand the differences between guarantee and indemnity. There are some borderline differences between them.
Key features of the contract of indemnity
- Some key features include the fact that the contract is made for the protection of the promise against contingent loss
- The event mentioned in the contract must take place
- As soon as the indemnified faces the loss, the liability of the indemnifier takes place
- Indemnification is made for actual damage or loss
- The contract may be implied and expressed.
- If the loss is caused due to the indemnifier’s mistake, then he or she is responsible for the same.
Key features of contract of guarantee
- An agreement between three parties
- No misrepresentation of the facts related to the contract
- No direct consideration between the creditor and the surety
- Apart from other features of a valid contract, the involvement of competent parties is mandatory
- Since it is a conditional contract, the liability of the surety takes place when the principal debtor defaults
For your understanding, we are going to segregate the entire blog into few parts, namely:
- Indemnity Vs Guarantee
- Key differences in the form of chart
- Key Differences explained in details
|Basis of Comparison||Indemnity||Guarantee|
|Meaning||Indemnity is a contract where one party promises to another that he or she will compensate the other for any kind of loss suffered by the act of the third party||Guarantee is a contract where a party promises the other that he or she will compensate for the loss or perform the contract if there is a default.|
|Defined in||Section 124 of Indian Contract Act, 1872||Section 126 of Indian Contract Act, 1872|
|Parties||2, namely indemnifier and indemnified||3, namely creditor, principal debtor and surety|
|Number of contracts and details||1||3|
|Degree of liability of promisor in each case||Primary||Secondary|
|Maturity of liability||When the contingency occurs.||Liability is already in existence|
|Purpose||To compensate for the loss||To provide some kind of assurance to the promise|
Definition of Indemnity
This is a form of contingent contract, where one party promises that he will she will compensate for the loss or damages due to the other person present. It is known as a contract of indemnity. As mentioned earlier, in this case, the number of involved parties is two.
One party is the one who promises to indemnify the other party all, also known as indemnifier, and the other one whose damage gets compensated, namely indemnified.
The indemnity holder has the right to reimburse the following refunds from the indemnifier. The first one is damages that occurred for which he or she was compelled.
Secondly, the amount paid for defending the suit. He or she can also ask for reimbursement for the amount paid for compromising the suit.
Definition of guarantee
A contract of guarantee is when a person signifies to perform the contract incurred by the third party, on behalf of the second party, in case he or she fails.
Here, there are three parties involved, the person to whom the guarantee is given, also known as creditor; the principal debtor is the individual on whose default the guarantee is given, and the other one who gives a guarantee is Surety.
As mentioned earlier, three contacts will be there in case of a guarantee.
While one of the contracts will be present between the principal debtor and the creditor, the second one will be present between the principal debtor and surety. And the last one will be present between the creditor and the surety.
The contracts can be either written or verbal. There is an implied promise present in the contract.
So these are the basics of both the contracts. We will be talking about the dissimilarities in detail.
In the case of indemnity, one party makes the promise to the other that he or she will compensate for the loss that occurred to the other party because of his or her activity.
While in guarantee, a party makes a promise to another that he or she will perform the liability in case of default by a third party. Indemnity is defined in section 124 of the Indian Contract Act, 1872 while Guarantee is defined in section 126.
There are two parties involved in the contract of indemnity while there are three parties in the contract of guarantee. In the contract of indemnity, the liability of indemnified is primary.
However, in the contract in the liability in the contract of guarantee, the liability of the surety is secondary as the primary liabilities remain with the debtor.
The contract of indemnity is made to save the other party from suffering loss. However, in the case of a contract of guarantee, the intention is to make sure that the creditor understands that either the contract will be performed or else, liability will be discharged.
We hope that you got a clear idea about both indemnity and guarantee.
To wrap it up, both these contracts are of contingency, and having one is a must for your protection. In indemnity, the promisor has no right to sue the third party. However, in the case of guarantee, the promisor can sue after he or she gets the position of the creditor once he or she has discharged the creditor’s debts.