Difference Between Contract of Indemnity and Guarantee
Difference Between Contract of Indemnity and Contract of Guarantee
1. Definition
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| As per Section 124 of the Indian Contract Act, 1872, a contract of indemnity is 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. | As per Section 126 of the Indian Contract Act, 1872, a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. |
2. Number of Parties Involved
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| Involves two parties – the indemnifier (promisor) and the indemnity-holder (promisee). | Involves three parties – the creditor, the principal debtor, and the surety (guarantor). |
3. Nature of Liability
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| The indemnifier’s liability arises when the indemnity-holder suffers a loss. The indemnifier compensates for actual loss. | The surety’s liability is secondary and arises only when the principal debtor defaults. The surety discharges the principal debtor’s liability. |
4. Purpose
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| To protect the promisee against loss caused by the promisor or third party. | To secure the performance or discharge of the principal debtor’s liability. |
5. Consideration
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| Consideration may be past, present, or future; the contract can be made even without a prior contract with a third party. | Consideration generally flows from the principal debtor’s contract with the creditor. The surety’s consideration is the contract between creditor and principal debtor. |
6. Right to Sue
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| The indemnity-holder can sue the indemnifier immediately upon incurring loss. | The creditor can sue the surety only after the principal debtor defaults and fails to fulfill the obligation. |
7. Liability Scope
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| Liability is primary and absolute for any loss caused by the promisor or others. | Liability is collateral and contingent on default by the principal debtor. |
8. Termination of Liability
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| Liability ends once loss is compensated. | Liability ends once the principal debtor’s obligation is discharged or creditor releases surety. |
9. Right of Subrogation
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| Generally, no subrogation rights because indemnifier pays loss directly. | The surety, after paying, gets the right to recover from the principal debtor (right of subrogation). |
Key Sections in Indian Contract Act
Section 124: Contract of indemnity
Section 126: Contract of guarantee
Section 128: Liability of surety
Section 140: Rights of surety on payment
Important Case Laws
1. M.C. Chockalingam v. Union of India (AIR 1965 SC 1115)
Differentiated between contract of indemnity and contract of guarantee.
Held that indemnity protects against loss, while guarantee ensures performance by a third party.
2. Sanjay Paper Ltd. v. Sinclaire Insurance Co. Ltd. (AIR 1980 SC 1573)
Confirmed that indemnity contract is between two parties and guarantee involves three.
3. State of Orissa v. Gopabandhu Builders (AIR 1971 SC 1875)
Held that surety’s liability is secondary, and the principal debtor must default before surety’s liability arises.
4. National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. (AIR 2009 SC 1514)
Emphasized that indemnity is for loss caused; guarantee is for discharge of liability of third party.
Summary Table
| Feature | Contract of Indemnity | Contract of Guarantee |
|---|---|---|
| Definition | Promise to compensate loss | Promise to perform/ discharge third party’s liability |
| Number of Parties | Two | Three (Creditor, Principal Debtor, Surety) |
| Liability | Primary and absolute | Collateral and conditional |
| Purpose | To protect from loss | To secure performance/discharge |
| When Liability Arises | On loss incurred | On default by principal debtor |
| Right to Sue | Immediately after loss | Only after default |
| Consideration | May be independent | Depends on principal contract |
| Right of Subrogation | Not generally available | Surety can recover from principal debtor |
Conclusion
While both contracts involve assurance against risk or loss, the contract of indemnity is essentially a promise to compensate loss to the promisee, whereas the contract of guarantee is a tripartite contract involving a surety who promises to fulfill the obligation of the principal debtor in case of default.
Understanding these differences is crucial for correctly interpreting and applying these contracts in commercial and legal contexts.
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