The Contract of Indemnity is given in Section 124 of Contract Act,1872 and Contract of Guarantee is given in Section 125 of Contract Act,1872. Firstly we need to understand a few terms. Indemnity means a ‘Security against Loss’. While both Contract of Indemnity and Guarantee are contingent or conditional contracts which are governed and regulated by the Law of Contracts.
As Indemnity implies for protection against any loss, guarantee is when an individual assures the opposite or other party that he/she will be fulfilling an obligation if there is any default.
Indemnity means that the money is needed to pay for any loss. If any party wants to secure the position or any interest in a contract, you can opt for any of the two. However, before moving ahead, an individual needs to understand the difference between the guarantee and indemnity. Below mentioned are the basic differences between them:-
Definition of Indemnity
Its a form of Contingent Contract where only one party promises that it will provide compensation for any loss or damage done cause of the other person. Its called a Contract of Indemnity and involves two parties.
One of the party is that who has promised to indemnify the other party known as the indemnifier and the second one who gets compensation for damages known as Indemnified.
The Indemnity Holder has Right to reimburse the refunds from the Indemnifier. The first are the damages which occur for which it was compelled.
Also the amount which is paid for defending the suit. He/she can claim reimbursement for the amount paid for compromising the suit.
Definition of Guarantee
Contract of Guarantee is that in which a person marks to perform the contract which is incurred by a third party, on behalf of a second party incase that person fails to do so.
There are mainly three parties which are involved the person for whom the guarantee is given also known as the creditor, the principal debtor on whose default the guarantee is given and the person who gives the guarantee is called a Surety.
There are three contracts in a case of Guarantee
While One Contract is present between the principal debtor and creditor, the second contract is between Principal Debtor and Surety. The third is between the Creditor and Surety. These contract could be in written or verbal. Also there is this implied promise present in the contract.
These are the basics of both the contract. In Case of Indemnity one party makes the promise to other party that this person will compensate for the loss which has occurred to other party because of his/her activity.
Whereas in Guarantee, the party which makes a promise to any other that the person will perform the liability in that case by default of a third party. The definition of Indemnity is given in Section 124 of Contract Act, 1872 whereas Guarantee is defined in Section 126.
There are two parties involved in Contract of Indemnity whereas there are three parties in Contract of Guarantee. The Liability in Contract of Indemnity is Primary where in Contract of Guarantee liability of Surety is secondary cause the primary liability remains with the debtor.
The contract of indemnity is made for saving the other party from suffering losses. Although in contract of guarantee the intention is making sure that the creditor understands that either the contract is performed or the liability is discharged.
Major Differences between Contract and Indemnity
:- Meaning
Indemnity:- Indemnity is a contract where one party promises to another that he or she will compensate the other for any kind of loss suffered by the act of the third party
Guarantee:- Guarantee is a contract where a party promises the other that he or she will compensate for the loss or perform the contract if there is a default.
:- Defined
Indemnity:- Section 124 of Indian Contract Act,1872
Guarantee:- Section 126 of Indian Contract Act, 1872
:- Parties
Indemnity:- Generally two an indemnifier and indemnified
Guarantee:- Mainly three namely creditor, principal debtor and surety
:- Liability of Promisor
Indemnity:- The promisor has a Primary Liability
Guarantee:- The Promisor has a Secondary Liability
:- Maturity
Indemnity :- Upon fulfillment of Contingency
Guarantee:- The Liability is already in existence
:- Purpose
Indemnity:- For compensating for the loss suffered
Guarantee:- For providing an assurance for the promise
Key Features of Contract of Indemnity
- Key features include the fact that the contract is made for the protection of promise against the contingent loss.
- The event which is mentioned in the contract shall take place.
- Whenever the indemnifier faces a loss, the liability of the indemnifier takes place.
- It is done for actual damages or the actual loss
- It could be implied or expressed
- If there is a loss which is caused due to indemnifier’s mistake, then he/she is responsible for the same.
Key features of contract of guarantee
- The agreement shall be between three parties
- There shall be no misrepresentation of facts which are related to the contract
- There should be no consideration between the Creditor and Surety
- Other than having features of a valid contract the involvement between competent parties is mandatory.
- As, it’s a conditional contract the liability of a surety takes place when the principal debtor is at default.
Conclusion:
To wrap it up, both these contracts are of contingency, and having one is a must for your protection. In indemnity, the promisor has no right to sue the third party. However, in the case of guarantee, the promisor can sue after he or she gets the position of the creditor once he or she has discharged the creditor’s debts.
