Difference between Indemnity and Guarantee ?

Difference between Indemnity and Guarantee ?

Category : Contract – II

BASIS FOR COMPARISONINDEMNITY

Section 124

GUARANTEE

Section 126

1.MeaningA contract in which one party promises to another that he will compensate him for any loss suffered by him by the act of the promisor or the third party.A contract to perform the promise, or discharge the liability, of a third person in case of his default. it is the contract of guarantee.
2.Defined inSection 124 of Indian Contract Act, 1872Section 126 of Indian Contract Act, 1872
3.PartiesTwo, i.e. indemnifier and indemnified

It is a bipartite agreement between the indemnifier and indemnity-holder.

Three, i.e. creditor, principal debtor and surety

It is a tripartite agreement between the Creditor, Principal Debtor, and Surety.ety

4.Number of ContractsOne

There is only one contract in a contract of indemnity – between the indemnifier and the indemnity holder.

Three

There are three contracts in a contract of guaratee – an original contract between Creditor and Principal Debtor, a contract of guarantee between creditor and surety, and an implied contract of indemnity between the surety and the principal debtor.

5.Degree of liability of the promisorPrimary

Liability of the indemnifier is primary to the contract.

Secondary

Liability of the surety is co-extensive with that of the principal debtor although it remains in suspended animation until the principal debtor defaults. Thus, it is secondary to the contract and consequenty if the principal debtor is not liable, the surety will also not be liable.

6.PurposeTo compensate for the loss

The reason for a contract of indemnity is to make good on a loss if there is any.

To give assurance to the promise

the reason for a contract of guarantee is to enable a third person get credit.

7.Maturity of LiabilityThe liability of the indemnifier arises only on the happening of a contingency.Liability already exists.

There is usually an existing debt or duty, the performance of which is guaranteed by the surety.

8.RIGHT OVER THIRD PARTYOnce the indemnifier fulfills his liability, he does not get any right over any third party. He can only sue the indemnity-holder in his own name.Once the guarantor fulfills his liabilty by paying any debt to the creditor, he steps into the shoes of the creditor and gets all the rights that the creditor had over the principal debtor.
9. Liability of third partyAn indemnifier cannot sue a third party for loss in his own name, because there is no privity of contract. He can do so only if there is an assignment in his favour.A surety, on discharging the debt due by the principal debtor, steps into the shoes of the creditor. He can proceed against the principal debtor in his own right
10. Initiative of contractContract gets formed upon indemnifier`s interestContract gets formed upon principal debtor`s interest
11.Type of contractContract between the indemnifier and the indemnity holder is express and specific.Contract between surety and principal debtor is implied and between creditor and principal debtor is express.

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