Difference Between Contract of Indemnity and Contract of Guarantee
Introduction
Contracts of indemnity and guarantee are special contracts under the Indian Contract Act, 1872. Both deal with protection against loss, but they operate differently. This distinction is important for understanding liability and rights of parties.
Meaning / Definition
Contract of Indemnity (Section 124)
A contract where one party promises to compensate the other for loss caused by the conduct of the promisor or any other person.
Contract of Guarantee (Section 126)
A contract where one person promises to perform the obligation or discharge the liability of a third person in case of default.
Modes or Types
Contract of Indemnity
- Express indemnity (clearly stated agreement)
- Implied indemnity (inferred from conduct or situation)
Contract of Guarantee
- Specific guarantee (single transaction)
- Continuing guarantee (series of transactions)
Distinction / Comparison
| Basis | Contract of Indemnity | Contract of Guarantee |
|---|---|---|
| Parties | Two parties: indemnifier and indemnity holder | Three parties: surety, principal debtor, creditor |
| Number of contracts | One contract | Three contracts |
| Object | To protect against loss | To secure payment or performance |
| Nature of liability | Primary (main responsibility) | Secondary (arises on default) |
| When liability arises | On occurrence of loss | On default of principal debtor |
| Request | No need for request | Surety acts at request of principal debtor |
| Right against third party | Cannot sue in own name (without assignment) | Can sue principal debtor after payment |
Practical Example
Indemnity:
A promises to compensate B if B suffers loss due to a case filed by C. If loss occurs, A must pay B.
Guarantee:
A tells B to supply goods to C and promises to pay if C fails. If C does not pay, A is liable.
Summary
- Indemnity has two parties; guarantee has three parties
- Indemnity liability is primary; guarantee liability is secondary
- Indemnity protects against loss; guarantee secures payment
- Liability in indemnity arises on loss; in guarantee on default
- Surety can recover from principal debtor after payment
- Both are special contracts under the Indian Contract Act, 1872