DIFFERENCE BETWEEN INDEMNITY AND GUARANTEE
Contract of Indemnity and Contract of the guarantee are special contracts. They are contingent and used to protect the creditor from a debt default. Creditors usually get into a contract of indemnity and guarantee when they doubt whether the debtor will be able to return their money or not.
As per law, indemnity means when the person agrees to pay the losses in the form of money. When one party consents to bear all the losses or damages caused by the promisor himself or by any other third-party then that agreement is called a contract of indemnity. Guarantee, however, means when one party assures the other party that he/she will be responsible if the third-party defaults and he/she will fulfil the obligations on behalf of the third-party.
Section 124 of the Indian Contract Act, 1872 defines a 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.” And Section of 126 of the Indian Contract Act defines a contract of guarantee as “a contract to perform the promise, or discharge the liability, of a third person in case of his default.”
A contract of guarantee can either be oral or written. In a contract of guarantee, there are three parties, surety, principal debtor and creditor. As duly mentioned in section 126 of the Indian Contract Act, “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’.” Whereas a contract of indemnity can only be written and there are two parties in it, Indemnifier and Indemnity holder. The one who promises to indemnify is known as Indemnifier and the one who gets indemnified is known as Indemnity holder.
In the contract of guarantee, there are three different contracts, the general contract which is in between the principal debtor and the creditor, the contract of guarantee between the creditor and the surety and the contract of indemnity between the surety and the creditor. Whereas in the contract of indemnity there is only one contract i.e. in between the indemnifier and the indemnity holder.
In the case of a contract of guarantee, surety holds secondary liability and the primary liability is of the debtor whereas, in a contract of indemnity, indemnifier is primarily liable.
In the contract of guarantee, the party promises to fulfil the obligations of the contract if the debtor fails. For example: if A lends $10000 to B and B promised to pay back the money in fifteen days, C guarantees A that if B fails to pay back the amount, then he will pay. While in the contract of indemnity, indemnifier pay off any damage or loss caused by the promisor or any other party. For example, A lends his house to B on the condition that B will pay him $100 every month, C comes in and promises to indemnify A, if B fails to pay him the said amount.