What is the Difference Between Indemnity and Guarantee?

What is the Difference Between Indemnity and Guarantee?

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Mar 8, 2024 16:39 IST

The primary difference between indemnity and guarantee lies in the nature of the obligation. An indemnity is a primary obligation that is independent of any other obligations. It is a promise to compensate for a loss. On the other hand, a guarantee is a secondary obligation, which comes into play if the primary obligation (i.e., the debt) is not fulfilled.

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This article will help you learn about the difference between indemnity and guarantee in detail. While the two terms seem similar, they have distinct differences that are important to understand.

Table of Contents

Difference between Indemnity and Guarantee

Indemnity is a contractual obligation where one party promises to compensate for the potential loss or damage incurred by another party. On the other hand, guarantee is a legal promise made by a third party to cover a debt or obligation of another party if they fail to fulfill their obligation. Here are other differences between indemnity and guarantee in a tabular format:

Parameter Indemnity Guarantee
Definition Indemnity is a contractual obligation where one party promises to compensate for the potential loss or damage incurred by another party. A guarantee is a legal promise made by a third party to cover a debt or obligation of another party if they fail to fulfill their obligation.
Nature of Obligation Indemnity is a primary obligation that is independent of any other obligations. Guarantee is a secondary obligation that comes into play if the primary obligation (the debt) is not fulfilled.
Number of Parties Involved Indemnity typically involves two parties – the indemnifier and the indemnified party. Guarantee usually involves three parties – the creditor, the principal debtor, and the guarantor.
Risk The indemnifier is liable for the loss suffered by the indemnified party. The guarantor is liable for the principal debtor’s default, which is generally considered riskier.
Purpose The purpose of indemnity is to compensate for a loss. The purpose of a guarantee is to ensure the performance of an obligation.
Example An example of indemnity is an insurance contract. An example of a guarantee is a bank guarantee.

What is Indemnity?

Indemnity is a contractual obligation where one party (the indemnifier) promises to secure against potential loss or damage incurred by another party (the indemnified party). This essentially means that the indemnifier is promising to compensate the indemnified party for any loss or damage that they may suffer.

Indemnity is a form of insurance compensation for losses and damages. In legal terms, it refers to exemption from liability for damages. Concept of indemnity is on the basis of a contractual agreement formed between two parties, where one party agrees to pay for the potential damages caused by the other party.

A common example of indemnity is an insurance contract in which insurer agrees to compensate the insured person for any damages or losses incurred, in return for premiums paid by the insured party.

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Features of Indemnity

The features of an indemnity include:

  • Two Parties Involved: An indemnity contract typically involves two parties – the indemnifier (the person who promises to pay) and the indemnified (the person who is protected against the loss).
  • Compensation for Loss: The primary purpose of an indemnity contract is to compensate for losses. The indemnifier promises to make good the loss suffered by the indemnified.
  • Primary Obligation: The obligation under an indemnity is a primary obligation. It is not dependent on the failure of another party to perform.
  • Amount of Compensation: The indemnifier is liable to pay the actual amount of loss suffered by the indemnified. The compensation should not exceed the amount of loss.
  • Legal and Voluntary: An indemnity contract is a legal and voluntary agreement between the indemnifier and the indemnified. It is enforceable by law.
  • Triggering Event: The obligation to indemnify arises when the specified loss occurs. The indemnifier is not obligated to compensate until the loss has been suffered by the indemnified.
  • Protection Against Liability: An indemnity can also protect against potential future liabilities. For example, in an insurance contract, the insurer (indemnifier) compensates the insured (indemnified) for a loss that may occur in the future.
  • Written or Oral: An indemnity contract can be either written or oral. However, it is generally recommended to have a written contract for clarity and legal purposes.

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What is Guarantee?

A guarantee, on the other hand, is a legal promise made by a third party (the guarantor) to cover a debt or obligation of another party (the principal debtor) in the event that the debtor fails to fulfill their obligation. This means that if the debtor cannot pay their debt, the guarantor will step in and cover the debt on their behalf.

As explained, a guarantee is basically the promise made by a third party that they will cover a person or a company’s debt should that person or company be unable to continue to do so themselves. There are several types of guarantees in business law, including bank guarantees, bid bonds, warranty bonds, and more.

Features of Guarantee

The features of a guarantee include:

  • Three Parties Involved: A guarantee contract typically involves three parties – the creditor (the party to whom the obligation is owed), the principal debtor (the party who owes the obligation), and the guarantor (the party who promises to fulfill the obligation if the principal debtor fails to do so).
  • Secondary Obligation: The obligation under a guarantee is a secondary obligation. It comes into effect only if the principal debtor fails to fulfill their obligation.
  • Written Agreement: A guarantee must be in writing and signed by the guarantor or a representative of the guarantor.
  • Specific Promise: A guarantee is a specific promise to answer for debts, default, or miscarriage of another person. It is not a general promise of liability.
  • Co-Existence with Principal Debt: A guarantee co-exists with a principal debt or duty. It is not possible that it exist independently of the principal obligation.
  • Limited Liability: The liability of the guarantor is usually limited to the extent of the guarantee. The guarantor cannot be held liable beyond the amount specified in the guarantee.
  • Revocable: A continuing guarantee can be revoked at any time by the guarantor unless it is a guarantee for a specific transaction or period.
  • Protection for the Creditor: A guarantee provides protection for the creditor. It ensures that the creditor will receive the owed amount, even if the principal debtor fails to pay.

Similarities Between Indemnity and Guarantee

While indemnity and guarantee are different concepts, they do share some similarities:

  • Contractual Agreements: Both indemnity and guarantee are forms of contractual agreements. They are legally binding and enforceable in a court of law.
  • Risk Management: Both indemnity and guarantee are used as tools for managing financial risk. They provide a safety net against potential losses or defaults.
  • Obligation to Pay: Both involve an obligation to pay or compensate under certain conditions. In an indemnity, the indemnifier promises to compensate for losses suffered by the indemnified party. In a guarantee, the guarantor promises to fulfill the obligations of the principal debtor if they fail to do so.
  • Protection: Both indemnity and guarantee offer protection. Indemnity protects against losses, while a guarantee protects against a failure to fulfill an obligation.
  • Triggering Event: Both indemnity and guarantee come into effect upon the occurrence of a specific event – a loss in the case of indemnity, and a default in the case of a guarantee.
  • Involvement of Parties: Both indemnity and guarantee involve at least two parties who agree to the terms and conditions set forth in the contract.

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FAQs

Who bears more risk an indemnifier or a guarantor?

A guarantor bears more risk than an indemnifier. This is because the guarantor of a guarantee is liable for the principal debtor default, whereas the indemnifier of an indemnity is only liable for the loss suffered by the indemnified party.

Can an indemnity and a guarantee coexist in the same contract?

Yes, it is possible for a contract to contain both an indemnity clause and a guarantee clause, depending on the nature of the agreement and the parties involved.

What is the purpose of an indemnity and a guarantee?

The purpose of an indemnity is to compensate for a loss, while the purpose of a guarantee is to ensure the performance of an obligation.

Are indemnities and guarantees enforceable by law?

Yes, both indemnities and guarantees are legally binding and enforceable by law, provided they meet the necessary legal requirements.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio