Contract of Guarantee vs Contract of Indemnity
| Point | Contract of Guarantee | Contract of Indemnity |
|---|---|---|
| Parties involved | 3 parties: Surety, Principal Debtor, Creditor | 2 parties: Indemnifier, Indemnified |
| Main purpose | To ensure payment or performance | To compensate for loss |
| When liability arises | Only if the principal debtor fails | As soon as loss happens |
| Nature of liability | Secondary (backup responsibility) | Primary (direct responsibility) |
| Number of contracts | 3 contracts (between all parties) | 1 contract |
- Contract of Guarantee
One person promises to pay if another person fails to pay. - Contract of Indemnity
One person promises to cover loss caused to another person.
Example
Contract of Guarantee
A takes a loan from a bank. B says, “If A does not pay, I will pay.”
- A = Principal Debtor
- Bank = Creditor
- B = Surety
B pays only if A fails.
Contract of Indemnity
An insurance company promises to compensate A if his car gets damaged. If damage happens, the company directly pays A.
One-Line Difference
- Guarantee = “If he doesn’t pay, I will pay.”
- Indemnity = “If you suffer loss, I will cover it.”