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Difference between Contract of Indemnity and Guarantee
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Difference between Contract of Indemnity and Guarantee
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Difference between Contract of Indemnity andGuarantee
When two parties formally come together for business and enter into a contract, the main
intention for both parties is to get protection from any sort of loss or damage. Careful
drafting of a contract and managing proper financial arrangements can help in achieving
the goal of protection for both parties. The Contract of Indemnity and Contract of
Guarantee are contracts that are related to such special circumstances, where they
establish the duties and rights for the parties in a contract in the event of any uncertainty.
A Contract of Guarantee is an agreement to fulfill an agreed promise. Here three parties
are involved, and the Contract of Indemnity establishes that one party will pay the other in
case of any losses or case of an unprecedent event. Indian Contract Act, 1872 contains
the provision related to the Contract of Indemnity and Guarantee under Sections 124 to
147.
What is Indemnity?
According to the provisions of Section 124 of the Indian Contract Act, 1872, a Contract
of Indemnity is a type of contract where one party contracts with another party to save
the other party from loss caused due to the conduct of the promisor or due to any other
person. This arrangement between parties is called a Contract of Indemnity.
In a typical Contract of Indemnity, two parties are party to the contract. The party who
makes a promise to indemnify against the loss is called an Indemnifier and the party in
whose favor such a promise to indemnify is made is called an Indemnity Holder.
Insurance is a well-known example of a Contract of Indemnity, where the insurance
, company promises the insurer that they will bear all expenses and pay for the damages in
case of any event specified in the policy document, here the insurer pays the premium to
subscribe to the policy.
For Example, A and B are partners in a business firm. C who is a relative of A, wants to
join A and B as a business partner; however, B is hesitant to admit C as a partner in the
firm. A promises to B, that in case of any wrongdoing by C, A will bear the loss and will
indemnify B for any loss that happens due to the act of C. In continuance of their
business, C made a wrong business decision and the firm realized a loss of ₹1,00,000
from the deal due to C. So, as per the contract between A and B, A will indemnify with the
amount of ₹1,00,000 to cover up for the loss that happened due to C. A is the promisor, as
he has promised B to indemnify the losses which arise due to the fault of C. B is the
Indemnity holder, to whom the promise to save from losses has been made.
What is Guarantee?
According to the provisions of Section 126 of the Indian Contract Act, 1872, a Contract
of Guarantee is a type of contract where one party promises the other party to perform
the promise or to discharge the liability which is incurred by the third party due to his
default. Contract of Guarantee can be either an Oral Contract or a Written Contract.
Under the Contract of Guarantee, there are three parties involved:
● The person who promises the guarantee is known as Surety.
● The one in whose respect, the guarantee by surety is given is known as
Principal Debtor.
● The person to whom the guarantee by surety is given is called a Creditor.
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