Difference between Indemnity and Guarantee

What is Indemnity?

According to the provisions of Section 124 of the Indian Contract Act, 1872, a Contract of Indemnity is a type of contract where one party contracts with another party to save the other party from loss caused due to the conduct of the promisor or due to any other person. This arrangement between parties is called a Contract of Indemnity....

What is Guarantee?

According to the provisions of Section 126 of the Indian Contract Act, 1872, a Contract of Guarantee is a type of contract where one party promises the other party to perform the promise or to discharge the liability which is incurred by the third party due to his default. Contract of Guarantee can be either an Oral Contract or a Written Contract....

Difference between Indemnity and Guarantee

Basis of Difference Contract of Indemnity Contract of Guarantee Definition It is a contractual obligation where one party promises to pay for the loss or damages incurred by another party. It is a legal promise made by a third party to pay off a debt or obligation of another party if the debtor fails to fulfill his obligation. Purpose The purpose of a Contract of Indemnity is to get compensated for loss by any event. The purpose of the Contract of Guarantee is to get assurance that the performance of the contract will be done. Nature of Obligation Indemnity is a primary and independent obligation. Obligation here is contingent, the event may or may not happen. Guarantee is a secondary obligation that comes into light only if the Debtor who holds primary responsibility makes a default. Number of Parties Involved An indemnity contract typically involves two parties which are the Indemnifier and the Indemnity Holder. Guarantee contract typically involves three parties which are the Creditor, the Principal Debtor, and the Surety. Number of Contracts It consists of a single contract, which happens between the Indemnifier and the Indemnity Holder in case of loss. Here, three contracts exist; between the Principal Debtor and Creditor, between the Surety and the Creditor in case of any default by the Debtor, and between the Surety and Principal Debtor. Subsequent Recovery Once the Indemnifier pays off the Indemnity holder, he can’t recover the amount from any third party. Once the Surety has paid the Creditor, he has the right to recover from the Principal Debtor all the rightful amount he has paid to the creditor. Requirement of Principal Debt In a Contract of Indemnity, principal debt is not required. In a Contract of Guarantee, the presence of principal debt is essential....

Conclusion

The Contract of Indemnity and Contract of Guarantee somehow fulfill the same purpose, but are distinct from each other. The main purpose of both contracts is to get assurance and protection for the parties to the contract. These types of contracts are widely used in businesses that are prone to risk and uncertainty. Here the idea is to get protected from losses. These contracts help parties to avoid default on payments, services, losses, or other actions of the contract. A person or party becomes responsible when the terms are not fulfilled as per the original agreement and becomes liable for their default. One of the basic differences between the two is that under a Contract of Indemnity, the principal debt is not required; whereas, under a Contract of Guarantee, principal debt is required....