Indemnity and guarantee contracts are a type of contingent contract governed by Contract Law. Simply put, indemnity means protection against loss in the form of monetary compensation. Indemnity occurs when one party promises to compensate the other party for a loss caused by the promisor’s or any other party’s actions. The guarantee, on the other hand, is when a person assures the other party that he/she will perform the promise or fulfil the obligation of the third party if he/she fails to do so.
When it comes to protecting one’s interests while entering into a contract, most people opt for an indemnity or guarantee contract. These two may appear identical at first glance, but there are some differences between them. So, if you’re interested in learning more about the differences between guarantee and indemnity, keep reading.
- Contract of Indemnity
The contract of indemnity is a type of contingent contract in which one party promises the other party that he will compensate him for any loss or damages caused by the first party’s or any other person’s conduct. The contract has two parties: the one who promises to indemnify the other party is known as the indemnifier, and the other whose loss is compensated is known as the indemnified. The indemnity holder has the right to seek reimbursement from the indemnifier for the following amounts:
- He was forced to pay for the damages he caused.
- The sum paid to defend the suit.
- The sum paid for jeopardising the suit.
- Contract of Guarantee
A guarantee contract exists when one person promises to perform the contract or discharge the liability incurred by the third party on behalf of the second party if he fails. There are three parties in this type of contract: the person to whom the guarantee is given is known as the Creditor, the person on whose default the guarantee is given is known as the Principal Debtor, and the person who gives the guarantee is known as the Surety.
There will be three contracts: one between the principal debtor and the creditor, one between the principal debtor and the surety, and one between the surety and the creditor. The agreement can be oral or written.
- Points of Comparison:
|Basis of comparison||Contract of Indemnity||Contract of Guarantee|
|Parties||A contract of indemnity has two parties: the indemnifier and the indemnity holder.||A guarantee contract has three parties: the principal debtor, the creditor, and the surety.|
|No. of contracts||It is made up of a single contract between the indemnifier and the indemnity holder. In the event of a certain loss, the indemnifier promises to indemnify the indemnified/indemnity holder||It is made up of three contracts. – A contract between the principal debtor and the creditor in which the debtor promises to fulfil his obligations and make payment. The agreement between a surety and a creditor in which the surety promises to perform the aforementioned obligation/make the payment if the principal debtor defaults. An unspoken agreement between the surety and principal debtor|
|Principal debt||Principal debt is not required||Principal debt id required.|
|Subsequent recovery||Once the indemnifier has paid the indemnity holder, he is not permitted to seek reimbursement from anyone else for that sum.||The surety assumes the role of the creditor after making the payment and is then able to reclaim the funds from the principal debtor.|
|Can a contract be oral or written||It can be oral as well as written.||It can be oral as well as written|
- The key distinctions between indemnity and guarantee are as follows:
In an indemnity contract, one party promises the other that he will compensate for any loss suffered by the other party as a result of the promisor’s or any other person’s actions. In a guarantee contract, one party promises the other party that if a third party defaults, he will perform the obligation or pay the liability.
Section 124 of the Indian Contract Act of 1872 defines indemnity, while Section 126 defines guarantee. In an indemnity contract, there are two parties: the indemnifier and the indemnified, whereas in a guarantee contract, there are three parties: the debtor, the creditor, and the surety.
In an indemnity contract, the indemnifier’s liability is primary, whereas in a guarantee, the surety’s liability is secondary because the debtor’s liability is primary.
The purpose of an indemnity contract is to protect the other party from financial loss. In the case of a guarantee contract, however, the goal is to assure the creditor that either the contract will be performed or liability will be discharged.
The liability arises in the contract of indemnity when the contingency occurs, whereas the liability already exists in the contract of guarantee.
Mr. Joe lost his share certificate and is a stakeholder in Alpha Ltd. Joe submits a request for a second one. The business agrees, but only provided Joe pays the cost of the company’s loss or harm if a third party presents the original certificate.
Mr. Joseph has guaranteed that if Mr. Harry defaults on making the agreed-upon payment, he will release him from the obligation. Mr. Harry obtains a loan from the bank under this arrangement. Harry is the major debtor, Bank is the creditor, and Joseph serves as the surety in this situation.
Following a thorough examination of the two, we can conclude that these two types of contracts differ in numerous ways. The promisor cannot sue the third party in the case of indemnity, but he can in the case of guarantee because after discharging the creditor’s debts, he gains the position of the creditor.
* Harshita Malviya, Final Year Law Student, Banasthali University
- Contract-II, Dr. R.K. Bangia
- Avtar Singh, Contract & SRA
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