Contract of
indemnity and guarantee, one of the most confusing, but inherently different
concepts of Indian Contract Act. In this post, we’ll present the differences
between both the concepts, in simplified manner.
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Differences
1.
Contract
of indemnity refers to a Contract by which one party promises to save the other
from loss caused by conduct of the promisor or another person. Whereas, in
contract of guarantee, surety, on the behalf of principal debtor, assures the creditor, that he will perform
the contract or compensate him for the loss.
2.
Indemnity
is defined in Section 124 of Indian Contract Act, 1872, Whereas, guarantee is
in Section 126.
3.
The
purpose of the contract of indemnity is to save the other party from suffering
loss. However, in the case of a contract of guarantee, the aim is to
assure the creditor that either the contract will be performed, or
liability will be discharged.
4.
A
contract of guarantee always has three parties; they are, the creditor, the
principal debtor and the surety; whereas a contract of indemnity has two
parties, the indemnifier and the indemnity holder.
5.
In
a contract of indemnity, there is a single promise or contract. Whereas, in a
contract of guarantee, by contrast, there are multiple promises: one between
the principal debtor and the creditor, second between the surety and the
creditor and the third between the surety and the principal debtor.
6.
Unlike
the contract of guarantee, wherein the existing debt is the necessary
condition, there is no as such requirement in contract of indemnity.
7.
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.
8.
In
the contract of indemnity, the liability arises when the contingency occurs
while in the contract of guarantee, the liability already exists.
9.
in
the case of a contract of indemnity, the rights of the indemnifier are
comparatively limited, and the indemnifier can only sue the third party only if
there is an assignment in his favor. In the case of contract of guarantee, the
surety has comparatively more rights and he is empowered to step into the shoes
of the creditor and he may sue the principal debtor after the discharge of
surety’s liabilities.
Also read:
- Difference Between Sale And Agreement To Sell
- Differences Between Law Of Tort and Other Branches of Law
- Difference Between Judicial Separation and Divorce (Hindu Law)
Comparison Table
Let’s
understand it with the help of a chart:
|
Basis of Comparison |
Indemnity |
Guarantee |
|
Definition |
Section 124 of
Indian Contract Act, 1872, defines indemnity as: 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.” |
Section 126 contains
the definition of guarantee. This section reads as: A ‘contract of
guarantee’ is a contract to perform the promise, or discharge the liability,
of a third person in case of his default. |
|
Objective |
Protection from any
harm/loss |
for the surety of
the creditor |
|
Number of parties |
Two, i.e.
indemnifier and indemnified |
Three, i.e.
creditor, principal debtor and surety |
|
Number of
promises/contracts |
1: i.e. the contract
between indemnifier and indemnity holder |
3: i.e. contract between
the creditor and principal debtor, the creditor and surety and surety and
principal debtor |
|
Pre-existing debt |
no |
Debt exists |
|
Liability |
Primary |
Secondary |
|
Maturity of
liability |
When the contingency
occurs |
Liability already
exists |
|
Rights |
Limited |
Comparatively more
rights available |
Important cases
1.
State
Bank of India v. Mula Sahakari Sakhar Karkhana,
2.
Punjab
National Bank Ltd. v. Bikram Cotton Mills and Anr
3.
New India Assurance Company Ltd. V. Kusumanchi Kameshwra Rao,
4.
Gajanan Moreshwar Parelkar V. Moreshwar Madan
Mantri,
5.
Adamson V. Jarvis,
6.
Bank of Bihar Ltd. V. Damodar Prasad,
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