Meaning
Indemnity and guarantee are two different types of contract meant for protection against contingent losses and liabilities. These contracts are governed by Indian contract act, 1872. Contract of indemnity means protection against losses whereas contract of guarantee means surety to creditor for granting credit. Under indemnity, one person called indemnifier agrees to protect other person known as indemnified for losses caused to him either by promisor himself or somebody else. In contract of guarantee, one person provides guarantee to another person for granting credit to third party and promises him to pay full liability in a case if a third comes out to be default. Indemnity contract takes place between 2 persons i.e. indemnifier and indemnified. On the other hand, there are 3 persons involved in contact of guarantee that are surety, principal debtor and creditor. Also liability of promisor under indemnity contract is primary and independent. Under contract of guarantee, liability of surety is secondary as he is required to pay only if principal debtor fails to perform his obligations.
Difference between indemnity and guarantee
| Basis of Distinction | Contract of Indemnity | Contract of Guarantee |
|---|---|---|
| Meaning | It is a contract under which one party agrees to protect other party against losses caused to him either by promisor himself or any other third person. | Contract under which one party assures another party to discharge the obligation of third party if he fails to do so. |
| Purpose | Protection against contingent losses. | Provides assurance to creditors for granting credit. |
| Number of persons | 2 persons i.e. Indemnifier and Indemnity holder. | 3 persons i.e. Surety, creditor and principal debtor. |
| Governed by | Section 124, Indian contract Act 1872. | Section 126, Indian contract Act 1872. |
| Nature of promisor liability. | Here, liability of promisor is primary and unconditional. | Promisor liability is secondary and arises if principal debtor fails to perform his obligation. |
| Existing liability | No existing liability | Liability already exists which is guaranteed by surety. |
| Right to sue | Indemnifier cannot sue third party in his name but can only sue in name of indemnity holder. | Surety can sue principal debtor after performing his obligations. |