Contract of Guarantee and Contract of Indemnity

The Indian Contract Act, 1872 defines the contract of indemnity and guarantee in India under Section 124 and Section 126 respectively. The term “guarantee” could be simply understood as a formal agreement to take responsibility for something, such as the payment of someone else’s debt[1] whereas the term “indemnity” refers to protection against possible damage or loss[2].

The Indian Contract Act, 1872 defines the “contract of guarantee” as a ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. 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’ under Section 126. The Act allows the contract to be made in written as well as oral form. The three parties under a contract of guarantee are surety, principal debtor and creditor and the primary liability lies with the principal debtor whereas the secondary liability with the creditor.

The Act defines the “contract of indemnity” as a contract by which 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 other person, is called a “contract of indemnity under Section 124. The Act also defines certain rights of the indemnity holder such as right to cover damages, right to cover costs, right to sue for specific performance etc. There are only two parties under a contract of indemnity i.e. indemnity holder and indemnifier. Such contract has to be express and specific. The primary liability in this type of contract lies with the promisor.

[1] https://dictionary.cambridge.org/dictionary/english/guarantee

[2] https://dictionary.cambridge.org/dictionary/english/indemnity