DIFFERENCE BETWEEN CONTRACT OF INDEMNTY & GURANTEE UNDER THE INDIAN CONTRACT ACT

DIFFERENCE BETWEEN CONTRACT OF INDEMNTY &

GURANTEE UNDER THE INDIAN CONTRACT ACT

Some of the basic differences between the contract of indemnity and guarantee under the Indian Contract Act, 1872 are as follows:

a) The contract of indemnity requires two parties, the indemnified /indemnity holder and the indemnifier; In contrast to the contract of guarantee which necessarily requires three parties viz. principal debtor, creditor and surety.

b)The liability of the indemnifier in case of the contract of indemnity is primary; Incontrast to the contract of guarantee where the liability of the surety is both co-extensive with the liability of the principal debtor and is secondary.

c) The contract of indemnity is the contract to cover up the loss of one party [indemnified/indemnity-holder] by the other [indemnifier]; In contrast to the contract of guarantee, where the surety promises to perform or discharge the liability of the principal debtor only in case of default and/or demand as the case may be.

d) There is only one contract in case of contract of indemnity between the indemnifier and the indemnified/indemnity-holder.

But in case of contract of guarantee there are three contracts namely, contract between the principal debtor and the creditor; contract between the creditor and surety and contract between the surety and principal debtor. The former two are expressed and the latter is an implied contract.

e) The doctrine of subrogation is expressly provided in the contract of guarantee under section 140 of the Act, but no such mention of subrogation is provided for the contract of indemnity. Recently in one the decision 172 of the Hon‟ble Supreme Court (Constitutional Bench), in the year 2010, it has provided that the doctrine of subrogation also applies to the contract of indemnity and is very much innate and inherent in the contract of indemnity.

f) The provision for “consideration for guarantee” is expressly provided under section -127 of the Indian Contract Act, 1872 (Though, it is submitted that it is not free form inherent follies). In contrast to the contract of indemnity where there is no provision for the consideration for indemnity.