A contract of indemnity involves two parties, where one party promises to compensate the other for any losses incurred. A contract of guarantee involves three parties - a principal debtor, a surety who guarantees the debt, and a creditor. The key differences are that indemnity provides reimbursement for losses, while guarantee provides security for the creditor. In guarantee, the surety is only secondarily liable if the principal debtor defaults, whereas the indemnifier is primarily liable. A valid guarantee also requires consideration and cannot involve misrepresentation.

1. Guarantee & Indemnity
INDEMNITY AND GUARANTEEINDEMNITY AND GUARANTEE
Contract of IndemnityContract of Indemnity
A contract by which one party promises to save the otherA contract by which one party promises to save the other
from loss caused to him by the conduct of the promisefrom loss caused to him by the conduct of the promise
himself or by the conduct of any other person, is called ahimself or by the conduct of any other person, is called a
contract of indemnity (Section 124) the person whocontract of indemnity (Section 124) the person who
undertakes or agrees to undertake to compensate the lossundertakes or agrees to undertake to compensate the loss
is called the indemnifier & the person whose loss is to beis called the indemnifier & the person whose loss is to be
made good is called the indemnitymade good is called the indemnity holder.holder.
Right of Indemnity holderRight of Indemnity holder
 All costs he may be compelled to pay in any such suit.All costs he may be compelled to pay in any such suit.
But the indemnity holder can recover such cost only if heBut the indemnity holder can recover such cost only if he
had acted prudently and did not contravene the orders ofhad acted prudently and did not contravene the orders of
the indemnifierthe indemnifier
 All damages which he may be compelled to pay underAll damages which he may be compelled to pay under
the contract in any suit.the contract in any suit.
 All sums which he may have paid under the terms of anyAll sums which he may have paid under the terms of any
compromise of any such suit, provided such compromisecompromise of any such suit, provided such compromise
Dr Subhash Gupta1

2. Guarantee & Indemnity
is not contrary to the order of the promissory and was asis not contrary to the order of the promissory and was as
which it would have been prudent for the indemnitywhich it would have been prudent for the indemnity
holder to makeholder to make..
Right of indemnifierRight of indemnifier
 The Indian Contract Act is silent regarding the rightsThe Indian Contract Act is silent regarding the rights
which the indemnifier has, on carrying out his promise towhich the indemnifier has, on carrying out his promise to
indemnify. It has been held however that his rights, in suchindemnify. It has been held however that his rights, in such
cases are similar to the rights of a surety under Section 141cases are similar to the rights of a surety under Section 141
of the Contract Act.of the Contract Act.
CONTRACT OF GUARANTEECONTRACT OF GUARANTEE
 According to Section 126, a contract of a guarantee is aAccording to Section 126, a contract of a guarantee is a
contract to perform the promise to discharge the liability of acontract to perform the promise to discharge the liability of a
third person in case of his default.third person in case of his default.
 A contract of guarantee involvesA contract of guarantee involves three parties, thethree parties, the
creditor the surety and the principal debtorcreditor the surety and the principal debtor. The person who. The person who
gives the guarantee is called the ‘surety’ the person ingives the guarantee is called the ‘surety’ the person in
respect of whose default the guarantee is given is called therespect of whose default the guarantee is given is called the
‘principle debtor’ and the person to whom the guarantee is‘principle debtor’ and the person to whom the guarantee is
given is called the creditorgiven is called the creditor
ESSENTIALS OF A VALID GUARANTEEESSENTIALS OF A VALID GUARANTEE
 Existence of a principal debtExistence of a principal debt
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3. Guarantee & Indemnity
 Consideration for a contract of guaranteeConsideration for a contract of guarantee
 There should be no misrepresentation or concealmentThere should be no misrepresentation or concealment
a. Misrepresentationa. Misrepresentation
b. Concealmentb. Concealment
 Uniting not necessaryUniting not necessary
Contract of indemnity & Contract of guarantee- DifferencesContract of indemnity & Contract of guarantee- Differences
 In contract of indemnity, the liability of the indemnifier isIn contract of indemnity, the liability of the indemnifier is
primary in nature, while in a contract of guarantee theprimary in nature, while in a contract of guarantee the
liability of the surety is secondary and arises only on theliability of the surety is secondary and arises only on the
default of principal debtordefault of principal debtor
 In a contract of indemnity there are two parties to theIn a contract of indemnity there are two parties to the
contract viz, the indemnifier and the indemnity holder, incontract viz, the indemnifier and the indemnity holder, in
a contract of guarantee there are parties debtor anda contract of guarantee there are parties debtor and
suretysurety
 In a contract of indemnity the liability of the indemnifierIn a contract of indemnity the liability of the indemnifier
arises only on the happening of a contingency whereas inarises only on the happening of a contingency whereas in
the case of contract of guarantee there is an existing debtthe case of contract of guarantee there is an existing debt
or duty the performance of which is guaranteed by theor duty the performance of which is guaranteed by the
suretysurety..
Dr Subhash Gupta3

4. Guarantee & Indemnity
 In a contract of guarantee where a surety discharges aIn a contract of guarantee where a surety discharges a
debt payable by the principal debtor to the creditor, he ondebt payable by the principal debtor to the creditor, he on
such payment can proceed against the principal debtor insuch payment can proceed against the principal debtor in
his own right. But in the case of a contract of indemnity,his own right. But in the case of a contract of indemnity,
the indemnifier cannot sue third parties in his ownthe indemnifier cannot sue third parties in his own
names, but must bring the suit in the name of thenames, but must bring the suit in the name of the
indemnifier.indemnifier.
 A contract of indemnity is for the reimbursement of a lossA contract of indemnity is for the reimbursement of a loss
while a contract of guarantee is for the security of thewhile a contract of guarantee is for the security of the
creditor.creditor.
 In the case of the contract of indemnity it is not necessaryIn the case of the contract of indemnity it is not necessary
for the indemnifier to act at the request of thefor the indemnifier to act at the request of the
indemnified, whereas in the case of a contract ofindemnified, whereas in the case of a contract of
guarantee it is necessary that the surety should give theguarantee it is necessary that the surety should give the
guarantee at the request of the debtor.guarantee at the request of the debtor.
 In a contract of indemnity there is only are original andIn a contract of indemnity there is only are original and
independent contract between the indemnifier andindependent contract between the indemnifier and
indemnified whereas in a contract of guarantee there areindemnified whereas in a contract of guarantee there are
three contracts. One between the creditor and thethree contracts. One between the creditor and the
principle debtor, second between the creditor and theprinciple debtor, second between the creditor and the
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5. Guarantee & Indemnity
surety and the third between the surety and the principalsurety and the third between the surety and the principal
debtor.debtor.
Kinds of GuaranteeKinds of Guarantee
 Absolute and conditional guaranteeAbsolute and conditional guarantee
 General and special guaranteeGeneral and special guarantee
 Limited and unlimited guaranteeLimited and unlimited guarantee
 Continuing guaranteeContinuing guarantee
Nature of surety’s LiabilityNature of surety’s Liability
 Sec 128 of the Contract Act defines that nature andSec 128 of the Contract Act defines that nature and
extent of surety’s liability it provides that the liability of theextent of surety’s liability it provides that the liability of the
surety is co-extensive with that of the principal debtor. Thesurety is co-extensive with that of the principal debtor. The
term co-extensive with that of the principle debtor’s showsterm co-extensive with that of the principle debtor’s shows
the quantum of the surety’s liability . The surety is liable forthe quantum of the surety’s liability . The surety is liable for
what the principal debtor is liable the liability of the surety willwhat the principal debtor is liable the liability of the surety will
neither be more nor less that that of the principal debtor,neither be more nor less that that of the principal debtor,
though by a special contract it may be made less than that ofthough by a special contract it may be made less than that of
the principal debtor, but never greater.the principal debtor, but never greater.
Right of suretyRight of surety
 Right of the surety against the creditorRight of the surety against the creditor
 Rights of the surety against the principal debtorRights of the surety against the principal debtor
 Rights of surety against co-suretiesRights of surety against co-sureties
Dr Subhash Gupta5

6. Guarantee & Indemnity
Discharge of suretyDischarge of surety
 Revocation of continuing guarantee [sec 130]Revocation of continuing guarantee [sec 130]
 Revocation by Death [Sec 131]Revocation by Death [Sec 131]
 Discharge by variation in terms of contract [sec 133]Discharge by variation in terms of contract [sec 133]
 Release or discharge of principal debtor [sec 134]Release or discharge of principal debtor [sec 134]
 By creditors act or omission impairing surety’s eventualBy creditors act or omission impairing surety’s eventual
remedy [sec 139]remedy [sec 139]
 By the creditor losing his security [sec 141]By the creditor losing his security [sec 141]
 By concealment or misrepresentation [sec 142&143]By concealment or misrepresentation [sec 142&143]
 By the failure on the part of some person or person toBy the failure on the part of some person or person to
join the surety [sec144]join the surety [sec144]
Dr Subhash Gupta6

7. Guarantee & Indemnity
Discharge of suretyDischarge of surety
 Revocation of continuing guarantee [sec 130]Revocation of continuing guarantee [sec 130]
 Revocation by Death [Sec 131]Revocation by Death [Sec 131]
 Discharge by variation in terms of contract [sec 133]Discharge by variation in terms of contract [sec 133]
 Release or discharge of principal debtor [sec 134]Release or discharge of principal debtor [sec 134]
 By creditors act or omission impairing surety’s eventualBy creditors act or omission impairing surety’s eventual
remedy [sec 139]remedy [sec 139]
 By the creditor losing his security [sec 141]By the creditor losing his security [sec 141]
 By concealment or misrepresentation [sec 142&143]By concealment or misrepresentation [sec 142&143]
 By the failure on the part of some person or person toBy the failure on the part of some person or person to
join the surety [sec144]join the surety [sec144]
Dr Subhash Gupta6