There are distinguishing differences between Indemnity and Guarantee in the Indian Contract Act.
- Section 124 of the Indian Contract Act, 1872 defines the "Contract of Indemnity". It is a contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person. 'A' contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 20000 rupees. This is a contract of indemnity.
- A contract of guarantee is defined in Section 126 of the Act. It is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor.
- In contract of indemnity there are only two parties viz the indemnifier or promisor and the indemnity holder or promisee. In contract of guarantee there are three parties viz the creditor, principal debtor and surety.
- In indemnity, there is primary and independent liability. In guarantee the surety has collateral liability.
- There is no existing debt generally in the case of contract of indemnity where there is existing debt in the case of guarantee.
- There are two contracts in a contract of indemnity where there are three contracts in the case of guarantee.
- In Indemnity the promisor is discharged by payment. In guarantee the surety is discharged by payment made by principal debtor.
- Indemnifier may have some interest in the transaction where the surety will not have any connection with the transaction.