Difference Between Contract of Indemnity & Contract of Guarantee: Of all the contracts used in the world of business and finance, formal agreements between parties can never be ignored without two: the contract of indemnity and the contract of guarantee. Even though they both help prevent losses and ensure security for certain parties, differences abound regarding their purpose, the parties involved, and legal implications, among others. The best reason for knowing these two contracts is to see to it that one or a business will not make uninformed decisions while entering into some such agreements.

Meaning of Contract of Indemnity

A contract of indemnity is the process where an indemnifier has promised to reimburse the other party, called the indemnified, against any damages or losses incurred by him as a result of a particular event or action. 

Such indemnities are generally offered as protective measures against potential risks or liabilities that an indemnified person may face. A contract of indemnity primarily is concerned with ascertaining the financial status and position of the indemnified at the time when the loss has taken place.

For example, in insurance, the indemnifier, that is, the insurance firm, commits itself to indemnify the party insured upon occurring loss because of a specific risk like theft, fire, or accident. It is concerned with the protection of the indemnified from financial damage caused by undetermined events.

What is a Contract of Guarantee?

A contract of guarantee consists of the following parties: the creditor, the principal debtor, and the guarantor. This contract states that the promisor—the guarantor—promises that he will fulfill the obligation or pay the debt when the principal debtor defaults on it. 

This means, essentially, that the contract of guarantee makes the creditor assured of getting the money or the performance even in a situation where the principal debtor is unable to deliver.

For example, if a person borrows some amount of money from the bank, he promises the bank that he will pay the amount in case the borrower fails to repay it. This kind of contract gives confidence to the creditor to lend or to indulge with the principal debtor.

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Key Differences Between Contract of Indemnity and Contract of Guarantee

The above differences are fundamental when choosing the appropriate contract for your needs, whether to take a loan, get cover over your risk, or get protection against future liabilities in a business deal.

1. The Parties:

• Contract of indemnity: A contract of indemnity considers two parties, which involve the indemnifier or promisor and the indemnified or promisee.

• Contract of guarantee: The parties in a contract of guarantee consider three parties involved, namely, the creditor, the principal debtor, and the guarantor.

2. Objective:

• Contract of indemnity: The basic purpose of an indemnity contract is to provide protection to the indemnified from losses or damages because of certain events.

• Contract of guarantee: A guarantee is provided to ensure the performance of a promise or repayment of debt by the principal debtor. The guarantor takes over if the debtor fails to do so.

3. Character of Liability:

• Contract of indemnity: The liability in the indemnity contract is primary, which means that the person directly undertakes the burden to pay losses.

• Contract of guarantee: Here, the liability is of a guarantor, which is secondary and dependent upon the default of the principal debtor.

4. Scope of Risk:

• Contract of indemnity: The indemnity contracts tend to be more wide-ranging regarding losses or damages; they include loss of finances, legal costs, and other unforeseen risks.

• Contract of guarantee: Guarantee contracts are narrower and more specific in that they mainly refer to debt repayment or fulfilment of a certain obligation.

5. Claim:

• Contract of indemnity: In a contract of indemnity, the indemnified can claim compensation directly from the indemnifier as soon as the loss occurs.

• Contract of guarantee: In a contract of guarantee, the creditor can recover payment only from the guarantor if the principal debtor fails to fulfill his obligation.

6. Consideration:

• Contract of indemnity: Consideration by the indemnifier in indemnity contracts is usually a promise to pay the loss. Direct financial liability on the indemnifier usually does not exist unless it is the event that causes the loss.

• Contract of guarantee: In the case of guarantee contracts, consideration is accepted by the principal debtor through the agreement made by the guarantor to be liable for the debt or performance in case the primary debtor fails to perform.

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Conclusion

Contracts of indemnity and guarantee are important since they provide security and protection based on monetary securities in most transactions. Though the contracts differ only in form and purpose and typically like liability, both are, however, different. While a contract of indemnity runs on the principles of indemnifying the indemnified for specific types of losses, a contract of guarantee is based on a guarantor guaranteeing the performance of the principal debtor. An understanding of the differences between them is essential so that one may see which agreement suits his purpose. Both contracts help instill trust in business relationships, but the choice depends on the risk factors and the level of security needed financially.

Difference Between Contract of Indemnity and Contract Of Guarantee FAQs

1. What's the main difference between a contract of indemnity and a contract of guarantee?

The major difference exists between the parties involved and liability. Indemnity has two parties and primary liability, whereas a guarantee comprises three parties and secondary liability.

2. Who are the parties to a contract of guarantee? 

There are three of them, namely the creditor, the principal debtor, and the guarantor.

3. Under a contract of guarantee, for what events shall the liability of the guarantor arise? 

The liability of the guarantor will arise only if the principal debtor fails to fulfill his obligation.

4. Can a contract of indemnity provide indemnity against the costs of legal proceedings?

Yes, contracts of indemnity can provide for indemnity against the cost of a legal proceeding, loss, or damage arising as a result of certain specified events.

5. Is the liability of a surety capper under an agreement of guarantee?

A liability under an agreement of guarantee may be fixed or unlimited as agreed under the contract.