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contract_laws:part-2:indemnity-guarantee

Indemnity and guarantee distinguished

Indemnity and guarantee have this common feature that both are a device for providing protection against a probable loss. In either case the loss may arise due to human conduct. However, the technique of providing protection, the need and occasion for protection and the number of parties involved mark some differences between them.

  1. The liability under a contract of indemnity is contingent in the sense that it may or may not arise. Under a guarantee, on the other hand, the liability is subsisting in the sense that once a guarantee has been acted upon, the liability of the surety automatically arises, though it remains in a suspended animation till the principal debtor commits default.
  2. The undertaking in a guarantee is collateral, in an indemnity, it is original. The purpose of a guarantee is to support the primary liability of a third person. In an indemnity, there being no third person, the indemnifier's liability is in itself “primary”.
  3. In a contract of indemnity there are only two parties, namely, the indemnifier and the indemnity-holder. But there are three parties to a guarantee, the creditor, the principal debtor and the surety. It is a tripartite arrangement.
  4. In an indemnity there is only one contract, that is, the contract of indemnity against loss between the indemnity-holder and the indemnifier. But in a guarantee there are three contracts, namely, a contract of loan between the principal debtor and the creditor; a contract of guarantee between the creditor and the surety and finally an implied contract of indemnity between the principal debtor and the surety

Comparison Table

Contract of Indemnity (Section 124)Contract of Guarantee (Section 126)
It is a bipartite agreement between the indemnifier and indemnity-holder.It is a tripartite agreement between the Creditor, Principal Debtor, and Surety.
Liability of the indemnifier is contingent upon the loss.Liability of the surety is not contingent upon any loss.
Liability of the indemnifier is primary to the contract.Liability of the surety is co-extensive with that of the principal debtor although it remains in suspended animation until the principal debtor defaults. Thus, it is secondary to the contract and consequenty if the principal debtor is not liable, the surety will also not be liable.
The undertaking in indemnity is original.The undertaking in a guarantee is collateral to the original contract between the creditor and the principal debtor.
There is only one contract in a contract of indemnity - between the indemnifier and the indemnity holder.There are three contracts in a contract of guaratee - an original contract between Creditor and Principal Debtor, a contract of guarantee between creditor and surety, and an implied contract of indemnity between the surety and the principal debtor.
The reason for a contract of indemnity is to make good on a loss if there is any.The reason for a contract of guarantee is to enable a third person get credit.
Once the indemnifier fulfills his liability, he does not get any right over any third party. He can only sue the indemnity-holder in his own name.Once the guarantor fulfills his liabilty by paying any debt to the creditor, he steps into the shoes of the creditor and gets all the rights that the creditor had over the principal debtor.


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Created on 2020/12/31 07:30 by Admin • Last modified on 2020/12/31 07:30 by LawPage