Difference between Contract of Indemnity and Contract of Guarantee


March 17, 2018

In the case of State Bank of India v. Mula Sahakari Sakhar Karkhana (2006), the Supreme Court was of the view that whether a contract is one of guarantee or of indemnity is a question of construction in each case. The difference between the two types of contract are enumerated below:

Contract of Indemnity Contract of Guarantee
It refers to a Contract by which one party promises to save the other from loss caused by conduct of the promisor or another person. It refers to a Contract to perform the promise or discharge the liability of a third person in case of his default.
In contract of indemnity, the liability of the promisor is primary. In contract of guarantee, the primary liability is of principal debtor and the liability of surety is secondary.
Contract 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.
In contract of indemnity there are two parties indemnifier and the indemnity holder. In contract of guarantee there are three parties i.e. creditor, the principal debtor and surety.
In Contract of indemnity there is only one agreement i.e. the agreement between indemnifier and indemnity holder. In contract of guarantee there are three agreements i.e. agreement between the creditor and principal debtor, the creditor and surety and surety and principal debtor.
Contract of indemnity protects the promise from loss. Contract of guarantee is for the surety of the creditor.
In Contract if indemnity, the promisor cannot file the suit against third person until and unless the promisee relinquishes his right in favour of the promisor. In contract of guarantee, the surety does not require any relinquishment for filing of suit. The surety gets the right to file suit against the principal debtor as and when the surety pays the debt.