While the idea of indemnity (repayment) and guarantee (assurance) vary on a few
issues, the two of them remain methods of pay with covering principles. This
paper scrutinizes both the similitudes and the contrasts between the two.
Indemnity, under S. 124 of the Indian Contract Act, 1872 is an agreement to keep
a gathering repaid against misfortune. Guarantee empowers an individual to get a
credit on products, or work and requires a valid consideration. While an
agreement of guarantee has 3 parties, with fluctuating liabilities, an agreement
of indemnity has 2 parties with primary liability. There exist a few such
contrasts, with an assurance having a sweeping rule, in contrast to a repayment,
which develops every so often.
Indemnity (Reimbursement) and Guarantee (Assurance) are cut out of the same
cloth- It implies that repayment and assurance contrast on plenty of issues
while being comparative on the issue that they are the two methods of
remuneration and that they are comparative on specific principles like Unjust
Enrichment (treacherous enhancement) and matters of good faith.
their essential similitudes, agreements of indemnity (reimbursement) are
intrinsically unique about agreements of guarantee (assurance). First, we will
approach clarifying what repayment and assurance imply. At that point we will go
into the distinctions and the likenesses among indemnity & guarantee (assurance
Objective of Study:
The objective of this research paper is to understand the concept of indemnity
and guarantee and to determine the differences between both of them and
similarities, if any.
- What is the concept of Indemnity and Guarantee?
- What is the difference and similarities between contracts of Indemnity
The researcher has used doctrinal method i.e., reference from available primary
sources like Acts, Rules, and Regulations to study the present questions in
hand. The researcher has also taken reference from secondary sources like books,
articles, and newspaper reports understanding the concept of indemnity and
The literal meaning of Indemnity is protection against loss or enacting to
compensate or protect somebody from the loss or make good to the loss.
Basically, a contract of indemnity is when a person promises to another person
that in case another person suffers from loss, the first person will compensate
the loss. It is defined under section 124 of the Indian Contract Act 1872 under
chapter VIII of Indemnity and Guarantee.
It states, A contract by which one party promises to save the another from loss
caused to him by him by the conduct of the promisor himself, or by the conduct
of any other person, is called a contract of indemnity.
For e.g., A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of Rs. 400. This is a
contra t of indemnity.
According to Halsbury, as indemnity is a contract, express or implied to keep
a person, who has entered into or who is about to enter into, a contract or
incur any other liability, indemnified against loss, independently of the
question whether a third person makes a default. In its most stretched out
sense, it means a reward for any misfortune or obligation which one individual
has acquired, regardless of whether the obligation to repay originates from an
agreement or not.
The person who promises to indemnify is known as Indemnifier. The person in
whose favor such promise is made is known as Indemnified or indemnified holder.
The indemnity under Indian law doesn't cover a promise to compensate for loss
not arising due to Human Agency. So, the involvement of the Human Agency is the
utmost requirement of the concept of indemnity. This means that the law does not
cover the concept of insurance, for that matter, the law of insurance is covered
under the contingent contract. Thus, the concept of indemnity, under Indian
law does not cover insurance. Aside from on account of Contract of Life
Insurance, individual mishap, and affliction, all agreements of protection
entitle the guarantee for the reimbursement of real misfortune that is
demonstrated to have been endured by him. It is just on the evidence of genuine
misfortune that the assured can claim repayment of the misfortune to the degree
it is set up not surpassing the sum stipulated in the agreement of protection
which stipulates the external furthest reaches of the insurance agency's risk.
The features include:
- 2 parties
- Promise by one person to another to save from loss.
- Loss may be caused by the promisor or any other person.
- Contingent in nature.
- Satisfy all essentials of the contract.
Agreement of Indemnity is not uberrimae fidei
, this implies all parties to a
protection agreement must arrange in compliance with common decency, and until
and except if promisee has not experienced any damage, he cannot claim
repayment. For instance, Life insurance is not considered a contract of
indemnity as one's life's value cannot be determined and where the loss is not a
certain contract of indemnity does not arise. In the case of Adamson v
Jarvis, Adamson was entitled to recover the money he had to pay to the true
owner of the cattle.
Rights of Indemnified or Indemnity Holder: Sec 125 of ICA
He is entitled to recover from the indemnifier.
Rights of Indemnifier:
- All damages paid by him in any suit.
- All costs he might have to pay.
- All sums which he might have paid on a compromise.
- Rights under Doctrine of subrogation.
- To sue against 3rd party after indemnifying the indemnity holder
- Not to compensate for losses not covered under Contract of Indemnity.
The basic meaning of guarantee is an undertaking to answer for the payment or
performance, so, contract of guarantee is a contract to perform the promise or
discharge the liability of a third person in case of his default. It is
comprised of the simultaneousness of the principal debtor, the creditor, and the
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. The
person to whom the guarantee is given is called the creditor. A guarantee may be
either in written or oral form. The capacity of an agreement of assurance is to
empower an individual to get an advance on products using a loan, or a work. An
agreement of assurance is rendered void without valid consideration.
According to S. 126, a contract to perform the promise or to discharge the
liability of a 3rd person in case of default.
For e.g., A takes a loan from the bank. A promise to the bank to repay the loan.
B also makes a promise to the bank saying that if A does not repay the loan
�then I will pau'. In this case, a is the Principal Debtor, B is the surety, and
the bank is the creditor.
The Essentials of a Contract of Guarantee are:
Difference between Indemnity and Guarantee
- Tripartite Agreement: A contract of guarantee entails three parties,
principal creditor, creditor, and surety. In a successful contract of
guarantee, there must be three separate contracts between the three parties
and each contract must be consenting
- Existence of Liability: Here the main liability lies with the principal
debtor. Secondary liability lies with the surety which can only be invoked
once the principal debtor defaults on its payment.
- Essentials of a Valid Contract: Like any other general contract, it
maintains free consent, consideration, lawful object, and competency of
contracting parties as to the essentials of a valid contract.
- Medium of Contract: The Indian Contract Act, 1872, does not strictly
mention the need for any written form of a contract or guarantee. Both oral
and written form will suffice
- Number of Parties: A contract of guarantee always has three parties;
they are, the creditor, the principal debtor, and the surety; for e.g., Bank
Loan, whereas a contract of indemnity has two parties, the indemnifier, and
the indemnity holder
- Number of Contracts: In a contract of indemnity, there is a single
promise or contract; a promise to pay if there is a loss. For e.g., Insurer
and Insured, in a contract of guarantee, by contrast, there are multiple
promises (3), i.e., between principal debtor and creditor, between creditor
and surety, and an implied contract between the principal debtor and the
- Nature: A contract of indemnity is for reimbursement of loss, whereas
the contract of guarantee is for the security of the creditor or assurance
to the creditor
- Liability: In a contract of indemnity, the liability of the indemnifier
is primary (Fire Insurance), whereas in a contract of guarantee, the debtor
is primarily liable, and the surety assumes secondary liability because the
customer is primary liable in default of his payment then after the surety
- Object: The purpose is of safety from an uncertain future event in a
contract of indemnity, for e.g., Fire Insurance, whereas the purpose in a
contract of guarantee is to assure the other party of the performance of an
- Scope: The Scope is limited in a contract of indemnity as it doesn't
include contracts of guarantee, whereas the scope is wider in a contract of
guarantee as it includes a contract of indemnity.
- Consideration: Indemnifiers receive consideration from the indemnity
holder at the beginning of the contract, e.g., premium in case of fire
insurance. But Surety doesn't receive any consideration. The only
consideration for the surety is the expected gain of the principal debtor.
- Existence of liability: In indemnity, the contingency present is that of
the possibility or risk of suffering a loss to which the indemnifier agrees
to indemnify for e.g., in fire insurance, the compensation would be given
only when a fire occurs viz uncertain; while in guarantee, there is an existing debt or
duty whose performance is guaranteed by the surety.
- Subrogation: In a contract of indemnity, the indemnifier cannot sue a
third party in his own name for the loss compensated unless they have the
right. The surety is entitled to file a suit against the principal debtor in
his own name if only he has discharged the obligation of the creditor, then
he steps in the shoes of the principal debtor.
- Discharge: The indemnifier is not necessarily discharged with the
discharge of the persons for whom the indemnity was given. After paying
compensation, it's not necessary the fire insurance company is free from all
the liabilities. The surety is discharged from his liability with the
discharge of the principal debtor for e.g., the guarantee is over when
surety pays off the amount to the bank.
- Interests of the parties: The indemnifier has some interest in the
transaction other than indemnity like commission, but the surety has no such
interest except that of guarantee.
- Types: The contract of indemnity has no types, whereas the contract of
guarantee has 2 types: specific and continuing guarantee.
In a case study between, Punjab National Bank Ltd. v. Bikram Cotton Mills and Anr
vs. Moreshwar Madan
, the difference between guarantee and indemnity was
clearly visible. There were three parties here, in the Punjab National Bank case
whereas only two parties in Gajan Moreshwar. Here Moreshwar Madan was the
indemnifier and hence he was the only one liable to make good of the money,
whereas in the Punjab National Bank case, the debtor, which is the first
respondent company, is the primary liability holder and the secondary liability
belongs to the surety which is the respondent.
The Privy Council in Gajan Moreshwar case held that the indemnity holder has
rights other than those mentioned in the sections. If the indemnity holder has
incurred any liability, he can ask the indemnifier to do well of the liability
and Moreshwar Madan was directed by the Privy Council to do well of the
indemnity holder, Gajan Moreshwar's, liability. In Punjab National Bank case,
there was no risk involved, but there is an existing duty to pay off debts as
mentioned in the sections governing guarantee.
Hence irrespective of the presence of risk, the principal debtor and surety
must do well of the debts of the creditor. In the Gajan Moreshwar case, Gajan
can't sue K.D. Mohan, as it is a contract of indemnity. He can only
sue Moreshwar Madan. But in the Punjab National Bank case, along with the
principal debtor, the surety can also be sued. Here, the obligation was
absolute. The ratio was that There exist contracts of indemnity, which do not
fall within the ambit of S 124,125. Contracts of indemnity can be enforced
without the actual loss of the indemnified so long as there is an absolute
liability of the type covered by the contract of indemnity.
In Lala Shanti Swarup vs Munshi Singh & Others
, it was held that the sold
property is nothing but an implied contract of indemnity, whose cause of action
arises when Actually Damnified (Mortgage decree being passed does not amount to
Assurances and reimbursements have various comparable qualities. All things
considered moreover, comparative commitments and rights develop between the
gatherings. This will have sway especially for the duration of the hour of
hoping to approve the understanding. Agreements of repayment and agreements of
assurance give certain focal shared characteristics.
In each agreement, one gathering agrees to pay in light of a legitimate concern
for another. Likewise, every one of these classes of agreements is used as a
defense against hardships by individuals and associations.
One more point of similarity worth mentioning is that they cannot be used to
make unjust enrichments. In a comparative study between Punjab National Bank
Ltd. v. Bikram Cotton Mills
and Anr and Gajan Moreshwar vs. Moreshwar Madan
can be seen, that both guarantee, and indemnity is used to compensate the
creditor and indemnity holder respectively and the principal debtor and surety
in the Punjab National Bank case as well as the indemnifier had consented to pay
to make good of the debt.
By the day's end, the guarantor can't be in danger for substantially more than
the customer. The document will be understood as a guarantee if, on its actual
development, the commitments of the surety are to remained behind
principal and just go to the fore once a commitment has been broken between the
principal and the lender. The commitment is an auxiliary one, reflexive in
character. A repayment rises on occasion of an event, while an assurance
develops on default by an outsider.
An indemnity, by contrast, accommodates simultaneous obligation with the
principal although and there is no compelling reason to look first at the
principal. Generally, it is an agreement that the surety will hold the lender
innocuous against all misfortunes emerging from the agreement between the
principal and the lender. Generally, a guarantee accommodates an obligation
far-reaching from that of the principal.
- The Indian Contract Act, 1872, ( 9 of 1872
- Halsbury's Laws of India, Vol 9- contract, Lexis Nexis, 2nd ed., 2015.
-  4 BING 66.
- Janaki Paul v. Dhokar Mall Kidarbux, (1935) 156 IC 200.
- The Indian Contract Act, 1872, (9 of 1872).
- 1970 AIR 1973.
- AIR 1942 BOM 302.
- 1967 AIR 1315.