Distinction between Indemnity and Guarantee
| Basis of Distinction | Indemnity | Guarantee |
|---|---|---|
| Definition | A contract where one party agrees to compensate another for losses incurred due to specific events or actions. (Section 124, Indian Contract Act, 1872) | A contract where one party (the guarantor) promises to take responsibility for the debt or obligation of another party (the principal debtor) if they default. (Section 126, Indian Contract Act, 1872) |
| Number of Parties | Two parties: Indemnifier (promisor) and Indemnified (promisee). | Three parties: Principal Debtor, Creditor, and Guarantor. |
| Purpose | To compensate the indemnified party for loss or damage. | To ensure the creditor is repaid or obligations are fulfilled in case of the principal debtor's default. |
| Liability | The indemnifier's liability is primary and arises upon the occurrence of a loss. | The guarantor's liability is secondary and arises only when the principal debtor defaults. |
| Scope of Responsibility | Covers losses due to specific events or actions stated in the contract. | Involves ensuring the repayment of debt or fulfillment of obligations. |
| Examples | - An insurance company compensates a policyholder for damages caused by a fire. | - A bank provides a loan to a business with the owner guaranteeing repayment if the business defaults. |
| Legal Framework | Governed by Sections 124–125 of the Indian Contract Act, 1872. | Governed by Sections 126–147 of the Indian Contract Act, 1872. |
| Involvement of the Principal Debtor | No involvement of a third party, as the contract is between the indemnifier and the indemnified. | Involves a third party (Principal Debtor) whose default triggers the guarantor’s liability. |
| Loss Requirement | Loss must occur for the indemnifier to be held liable. | Default by the principal debtor triggers the guarantor’s liability; no direct loss to the guarantor is required. |
| Common Use Cases | - Insurance contracts. - Business contracts with indemnity clauses. |
- Loan agreements. - Surety bonds. - Performance guarantees. |
Key Differences at a Glance:
- Liability: In indemnity, the liability is primary, while in guarantee, it is secondary.
- Parties Involved: Indemnity involves two parties, whereas guarantee involves three.
- Trigger for Obligation: Indemnity arises upon loss, while guarantee arises upon default.
By understanding these differences, businesses and individuals can determine which type of contract best suits their needs in specific situations.