Difference between

Indemnity and
Guarantee
In Contract Law

Ayesha Majid 3/5/18 Corporate Law

 Contract of Indemnity and contract of Guarantee are the contingent contracts
under the contract law. Guarantees and indemnities are a common way in which
creditors protect themselves from the risk of debt default. Lenders will often seek a
guarantee and indemnity if they have doubts about a borrower's ability to fulfil its
obligations under a loan agreement.

Indemnity under the law means protection of the losses or financial burden in
the form of money. It is when one party promises to compensate for the losses that
will occur due to the act of the promisor or other party. Whereas guarantee is when a
person gives the assurity to the other party that if the third party defaults he/she will
be held responsible for that and will fulfil the obligations.

The English law definition of a contract of guarantee is “A Contract to perform

the promise, or discharge the liability, of a third person in case of his default is called
Contract of Guarantee” as per Section 126 of Contract Act 1872. The definition of a
contract of indemnity as laid down in Section 124 – “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, is called a contract of indemnity."

A guarantee may be either oral or written. A Contract of Guarantee is also called

surety. There can be no contract of guarantee without a liability enforceable a law. The
primary idea of surety ship is an undertaking to indemnify if some other person does
not fulfill his promise. Guarantee is a legal term more comprehensive and of higher
import than either warranty or "security". A common example of guarantee is bank
guarantee.

In guarantee there are three parties involved, creditor, surety and principal
debtor. Creditor is the one to whom the guarantee is given, surety is the party who
gives the guarantee and principal debtor is the party on whose default the guarantee
is given. The person who gives the guarantee is called the Guarantor/Surety. The
person on whose default the guarantee is given is called the Principal Debtor. The
guarantor promises to pay for someone else's debt if he or she should default on a
loan obligation. In a contract of guarantee there are three contracts, between Principal
Debtor and Creditor; between creditor and the surety and between surety and principal
debtor. A guarantor acts as a co-signer of sorts, in that they pledge their own assets
or services if a situation arises in which the original debtor cannot perform their
obligations. For example Mr. A borrows $10m loan from Mr. B. Mr. C has given
guarantee to Mr. B that “if Mr. A doesn’t pay him, he will pay”.

While an indemnity can only be written. In a contract of indemnity there is only

one contract between the indemnified (promisee) and indemnifier (promisor), that the
indemnifier will pay indemnity to the indemnified when the predetermined condition is
met. Indemnity is compensation for damages or loss, and in the legal sense, it may
also refer to an exemption from liability for damages. Indemnifier is the one who
promises to indemnify whereas indemnified is the party whose loss will be
compensated. One of the example of indemnity is the insurance contract in which
insurance company promises to pay for the damages.

In a contract of indemnity, the indemnifier assumes primary liability, whereas in

a contract of guarantee, the debtor is primarily liable and the surety assumes
secondary liability. Under a contract of indemnity, liability of the promisor arises from
loss caused to the promisee by the conduct of the promisor himself or by the conduct
of a third person. In case of contract of guarantee the promisee only needs to
compensate when the debtor (primary promise) fails to fulfill his obligation. The
guarantor (promisee) does not need to pay for the loss occurred because of a third
person.