DIFFERENCE BETWEEN INDEMNITY AND GUARANTEE

CONTRACT OF INDEMNITY

The term Indemnity literally means “Security against loss”. In a contract of indemnity one party – i.e. the indemnifier promise to compensate the other party i.e. the indemnified against the loss suffered by the other.

ACCORDING TO ENGLISH LAW

“It is a promise to save a person harmless from the consequences of an act”.

Thus it includes within its scope losses caused not merely by human agency but also those caused by accident or fire or other natural calamities.

CONTRACT OF GUARANTEE

Contract of Guarantee means a contract to perform the promises made or discharge the liabilities of the third person in case of his failure to discharge such liabilities.

ACCORDING TO SECTION 126 OF INDIAN CONTRACT ACT, 1872

“A contract of guarantee is a contract to perform the promise or discharge the liability of the defaulting party in case he fails to fulfill his promise.”

The difference between Indemnity and Guarantee is as follows:

BASIS FOR COMPARISON INDEMNITY GUARANTEE
MEANING A contract in which one party promises to another that he will compensate him for any loss suffered by him by the act of the promisor or the third party. A contract in which a party promises to another party that he will perform the contract or compensate the loss, in case of the default of a their person, it is the contract of guarantee.
DEFINED IN The contract of indemnity is defined under Section 124 of Indian Contract Act, 1872 The contract of Guarantee is defined under Section 126 of Indian Contract Act, 1872
PARTIES The number of parties is: Two, i.e. indemnifier and indemnified The number of parties is: Three, i.e. creditor, principal debtor and surety
NUMBER OF CONTRACTS There is only one contract. There are three contracts.
DEGREE OF LIABILITY OF THE PROMISOR The degree of liability of the promisor is Primary. The degree of liability of promisor is Secondary.
PURPOSE The purpose of contract of indemnity is to compensate for the loss. The purpose of contract of guarantee is to give assurance to the promise.
MATURITY OF LIABILITY The liability matures when the contingency occurs. In this, liability already exists.
  INTEREST In case of indemnity, the promisor has some interest in the transaction. But in a guarantee, the surety has no other interest.
  RIGHT TO SUE In indemnity, the indemnifier can not sue the third party for loss in his own name. He can sue in the name of the indemnity-holder. But in case of guarantee, the surety can sue the principal debtor in his own name after discharging debtor’s liabilities.
  REQUEST It is not necessary for indemnifier to act on request by indemnity-holder.  But the surety should give guarantee at the request of the debtor.

CONCLUSION

These both contracts are contracts of contingency. In indemnity, the promisor cannot sue the third party, but in the case of guarantee, the promisor can do so because after discharging the creditor’s debts he gets the position of the creditor.

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