Contracts of indemnity and guarantee are a part of special contracts designed to
offer security or compensation against potential losses. However, some distinct
differences exist between the two which we will understand as we continue our
Chapter VIII of The Indian Contract Act, 1872 lays down the provisions related
to contracts of indemnity and guarantee.
Contract of Indemnity
According to the dictionary meaning, indemnity is protection against loss,
especially in the form of a promise to pay.
According to Section 124 of the Indian Contract Act, 1872, 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, is called a
"contract of indemnity".
For instance, A contracts to indemnify B against the consequences of any
proceedings that C may take against B in respect of a certain sum of Rs.200.
This is a contract of indemnity.
Based on this provision, a fundamental aspect of the contract of indemnity is
that one party promises to save the other from losses solely under the following
- when the loss is caused by the conduct of the promisor himself; or
- when the loss is caused by the conduct of any other person.
Therefore, the definition covers those cases where the losses are caused by
human agency only and not the ones which do not or may not depend upon the
conduct of the indemnifier or any other person.
Thus, a contract of insurance does not come within the purview of section 124.
In United India Insurance Company v. M/s. Aman Singh Munshilal
, the cover
note stipulated delivery to the consigner. Moreover, on its way to the
destination, the goods were to be stored in a godown and thereafter to be
carried to the destination. While the goods were in the godown, the goods were
destroyed by fire. It was held that the goods were destroyed during transit, and
the insurer was liable as per the insurance contract.
Contract of Guarantee
According to Section 126 of the Indian Contract Act, 1872, a "contract of
guarantee" 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".
The section further provides that a guarantee may be either oral or written.
For instance, A takes a loan from a bank with a commitment to repay the borrowed
amount. Additionally, B makes a promise to the bank ensuring that if A defaults
on the payment of the loan then B will assume the responsibility for repayment.
In this case, A is a principal debtor, who undertakes to repay the loan, B is
the surety who undertakes to perform the same duty in case there is a default on
the part of A and the bank is the creditor in whose favor the promise has been
Hence it is clear that in every contract of guarantee, there are the following
three contracts between the three parties:
- the principal debtor himself makes a promise in favor of the creditor to perform
- the surety undertakes to be liable to the creditor if the principal debtor makes
- an implied promise by the principal debtor to indemnify the surety if the surety
has to discharge the liability in case of default on the part of the principal
The main object of a contract of guarantee is to provide additional security to
the creditor and the surety's liability is secondary.
'In the event of a decree in favor of the creditor against the principal
borrower, the wings of the decree can also be extended against the sureties as
their liability is coextensive with the principal debtor'.
Main features of Contract of Guarantee:
The contract may be either oral or in writing: Section 126 of the act
specifically provides that a contract of guarantee may be either oral or in
writing. Thus, such a contract is valid even if it is not written. However, it
should be expressed (not implied) and must be entered into in the presence of
all three parties.
There should be a principal debt: A contract of guarantee pre-supposes a
principal debt or an obligation to be discharged by the principal debtor. The
surety undertakes to be liable only if the principal debtor fails to discharge
Benefit to the principal debtor is sufficient consideration: Section 127 of the
act provides that anything done, or any promise made for the benefit of the
principal debtor may be a sufficient consideration to the surety for giving the
For instance, B requests A to sell and deliver to him the goods on credit. A
agrees to do so, provided C will guarantee the payment of the price of the
goods. C promises to guarantee the payment in consideration of A's promise to
deliver the goods. Here, the basis of promise by the surety is a sale of goods
on credit to the principal debtor. This is a sufficient consideration for C's
Consent of the surety should not have been obtained by misrepresentation or
concealment: Sections 142 & 143 provide that any guarantee which has been
obtained by means of misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the transaction; or by means
of keeping silence as to material circumstance is invalid.
- A engages B as a clerk to collect money from him. B fails to account for
some of his receipts and A in consequence calls upon him to furnish security
for his duly accounting. C gives his guarantee for B's duly accounting. A
does not acquaint C with B's previous conduct. B afterward makes default.
The guarantee is invalid.
- A guarantees to C payment for iron to be supplied by him to B to the
amount of 2,000 tons. B & C have privately agreed that B should pay five
rupees per ton beyond the market price, such excess to be applied in
liquidation of an old debt. This agreement is concealed from A. A is not
liable as a surety.
Therefore, it is clear from the above provisions that if a cashier has been
found guilty of embezzlement, but this fact is not disclosed when a surety has
been made to guarantee the future conduct of the cashier, the surety will not be
liable as such, under these circumstances. Similarly, if a surety is made to
guarantee an employee's existing and future liabilities, without being informed
that the said employee is already indebted to an extent more than that of the
guarantee, the guarantee is invalid.
Having established a foundational understanding of the concept of contracts of
indemnity and guarantee, let us now analyse the differences between the two:
There are two parties in a contract of indemnity, the indemnifier and the
indemnified; whereas there are three parties in a contract of guarantee, the
creditor, the principal debtor, and the surety.
A contract of indemnity consists of only one contract under which the
indemnifier promises to indemnify the indemnified in the event of a certain
loss; whereas there are three contracts under the contract of guarantee. One is
between the principal debtor and the creditor, the second is between the
creditor and the surety, and the third contract is an implied one which is
between the principal debtor and the surety.
The object of the contract of guarantee is the security of the creditor; whereas
the contract of indemnity is made to protect the promisee against some
- A.I.R. 1994 P. & H. 206.
- State Bank of India v. Messrs Indexport Registered, A.I.R. 1992 S.C.