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Difference between indemnity and guarantee


05-Apr-2024 (In Civil Law)
What is the difference between indemnity and guarantee? Are they same, or different according to law?
Answers (3)

Answer #1
275 votes

Difference between Indemnity and Guarantee

When dealing with a contract we very often come across terms like indemnity and guarantee. While they might sound similar, in legal terms they are not quite the same. These two terms are a type of contingent contracts which are governed by the Indian Contract Act in India. 
 

Indemnity

Indemnity is a form of compensation that one party agrees to give for damages and loss caused. In legal terms, Indemnity can also mean an exemption from liability for damages. An example of Indemnity is an insurance agreement where the insurer agrees to compensate the party who has faced any loss in exchange of premiums that are given to the insurer. With the help of an indemnity clause the insurer promises to cover the costs of the loss suffered. The amount of how much an indemnity clause covers and to what extent varies from case to case. In an Indemnity there is a specific length of time for which the payment is valid. This is called a period of indemnity. There also exists the concept of letter of indemnity which makes sure that both the parties will be meeting the terms and conditions of the contract otherwise an indemnity will be paid.

An indemnity may be paid in the form of cash, replacement or any other forms which are mentioned in the indemnity clause that both parties agree to. There is also a way on how companies obtain protection from indemnity claims. This is called indemnity insurance which protects the insurer from paying the full amount of the indemnity even if he is responsible for it.
 

Guarantee

The term guarantee is when a party assures the other party to perform the promise or undertake the obligations which needed to be fulfilled by the second party in case, he/she defaults to do the same. So, in these types of contracts there are a total of three parties involved. The person who gives such a guarantee is called the Surety. The person to whom the guarantee is given to is called the Creditor. Finally, the person on whose default such a guarantee is given is called the Principal Debtor.

For example: If X takes a loan from the bank and Y guarantees that if X fails to give back the amount owed to the bank, then he will take on the liability. In such a scenario the bank is the creditor and X plays the role of Principal debtor while Y is the Surety.
 

Differences between Indemnity and Guarantee

  1. An indemnity is form of compensation that one party agrees to give for damages and loss caused. Whereas, the term guarantee is when a party assures the other party to perform the promise or undertake the obligations which needed to be fulfilled by the second party in case, he/she defaults to do the same.

  2. The term indemnity is defined under Section 124 of the Indian Contract Act, 1872. The term Guarantee is defined under Section 126 of the Indian Contract Act.

  3. In indemnity there are only two parties involved who are the indemnifier and the indemnified. In a guarantee there are three parties involved who are the creditor, surety and the principal debtor.

  4. Since there are only two parties to indemnity, there is only need for one contract between them. Since there are three parties to the contract there are three contracts entered within the parties to one another.

  5. The liability of the promisor of an indemnity is primary in nature since the contract exists between two of those parties. The liability of the promisor is secondary in the case of a guarantee as a third party agrees to fulfil the promise in case the principal debtor fails to do so.

  6. The purpose of an indemnity is to compensate for the loss whereas the purpose of a guarantee is to fulfil the promise and assure the promisor to do the same in case of a default.

  7. The liability in an indemnity is when the contingency occurs and if it even occurs in the future. The liability in a guarantee already exists.

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Answer #2
955 votes
this question pertains to study of law and is not related to the legal query here. it is advisable for you to get hold of any professor in law to explain you the concepts which you might be not able to understand because here the legal queries will be answered and not the academic queries
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Answer #3
103 votes
Differences between indemnities and guarantees An indemnity is the primary liability. A guarantee, on the other hand, places a second-tier liability.
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