Define and distinguish between

indemnity and guarantee.

Sayan Biswas-LLM/18/35

Indemnity- Indemnity is compensation for damages or loss, and in the legal sense, it may also refer to an
exemption from liability for damages. The concept of indemnity is based on a contractual agreement
made between two parties, in which one party agrees to pay for potential losses or damages caused by the
other party. A typical example is an insurance contract, whereby one party (the insurer or the indemnitor)
agrees to compensate the other (the insured or the indemnitee) for any damages or losses, in return
for premiums paid by the insured to the insurer.

There must be two parties and, there should be an agreement between them wherein the promisor
promises to save the promisee from any kind of loss. This is the most vital element in the contract of
indemnity. The loss occurring may be due to the conduct of the promisor or any other third party. The
provisions of the Act restrict the loss to an extent because it is restricted to a human agency only and an
act of God is not covered under the contract of indemnity. Marine Insurance, fire insurance, etc. also fall
into the category of the contract of indemnity.

Guarantee- Sec. 126 of the Indian Contract Act 1872, which deals with the contract of guarantee, has
defined it as “A contract to perform the promise, or discharge the liability of a third person in case of his
defaults”.

Example: A advances a loan of Rs.10,000 to B, and C promises A that if B does not repay the loan, I will
repay it. This is a contract of guarantee. It involves three parties namely,

1. Surety, who gives the guarantee.

2. Principal Debtor, in respect of whose default the guarantee is given.
3. Creditor, to whom the guarantee is given.
Example: A supplies goods to B on C’s guaranteeing payment by B to A. This means that if B does not
pay, C would be liable to pay. This is a “Contract of Guarantee”.

Here B is the principal debtor, C is the surety and A is the creditor.

Difference between indemnity and guarantee
indemnity
There are 2 parties to indemnity, indemnifier, and
indemnity holder.
Contract of indemnity consists of only one contact
under which the indemnifier promises to indemnify
the indemnified in the event of a certain loss.
The object of a contract is to made to protect the
promise against some likely loss.
The liability of the indenifier is a contract of
indemnity is a primery one. He undertakes to be
liable when the contemplated situation arises.
guarantee
There are 3 parties. Creditor, principal holder and
surety.
There are 3 contracts in this. One contract is
between principal debtor and the creditor in respect
of a certain promise or obligation undertaken to be
performed by the principal debtor. The second
contract is between the surety undertakes to
perform the same obligation which the principal
debtor has undertaken in case principal debtor
makes a default. The third contract is as implied
one, between principal debtor and surety. By this
contarct the principal debtor is bound to indemnify
the surety for whatever sum the surety has
rightfully paid under the guarantee. It means that
after the surety discharges his obligation, he is
invested with all rights which the creditor has
against the principal debtor.
The object is the security of the creditor. It
presupposes a principal debtor and a certain debt or
an obligation for which the principal debtor is
primarily liable.
The liability of the surety is only secondary one.
 The loss falls on the indemnifier and therefore after After the surety has discharged his liability and
the indemnifier had indemnified the indemnity paid to the creditor he steps into the shoes of the
holder he cannot recover the amount from anybody. creditor and he realize the payments made by him
form the principal debtor.

In india it can be oral or written. In England it can In England it is written. In India it can be oral or
be oral or written. written.

Bibliography.
Dr. R. K. Bangia, Law of Contract-II, Allahabad Law Agency, Faridabad, 2007.
Avtar Singh, Law of contract, Eastern Book Company, Lucknow, 2005.