Difference between a contract of

indemnity and a contract of guarantee

When getting a bank loan, a person is often asked to provide a guarantee.
Guarantee an indemnity are often used to reinforce each other.
Contract of indemnity contract of guarantee
 A contract of indemnity is one in  A contract of guarantee is an
which the party sought to be undertaking by which a person
made liable him or herself accepts what is sometimes
undertakes a primary liability to called a secondary liability to
make good another’s loss, which answer for the debt or default of
loss may or may not result from another person who is primarily
the act of another (third) liable to a third. The contract of
person. guarantee is between the first
 It is original and independent. and the third persons.
Example:
 An indemnity is a personal X will loan money to Y, subject to Z
security undertaking given by a providing security by guaranteeing
the loan. The guarantor Z will only
third party, but under an
become liable under the guarantee if
indemnity the surety’s
the principal debtor, Y, defaults.
obligation is independent of
debtor/creditor relationship. It is  A contract of guaranty is a
therefore a primary liability, not collateral undertaking, and
dependent on the debtor’s presupposes an original
default. contract.
 Indemnity is not given by  In a guarantee the liability
repayment after payment. arises at the point of time when
Indemnity requires that the the principal borrower or debtor
party to be indemnified shall defaults on his obligation.
never be called upon to pay. Where there is liability even
though there is no default or
 In a contract of indemnity not
breach by the principal debtor, it
only is there no requirement for
is not a contract of guarantee.
a default by a third party as a
condition of liability but there
may not even be a third party
involved for either the creation
or exercise of the right.
Example:
By way of illustration, an insurance
contract is an indemnity contract. A
person who buys an insurance policy
insures his property against damage.
If and when the damage occurs, the
insured is entitled to call upon the
insurer to pay him.

The difference between indemnity and guarantee can be illustrated by

example:
If X says to Y: ‘Supply goods to Z and if he does not pay, I will’, X’s
undertaking is a contract of guarantee, as payment by X is conditional
on Y’s default. But if X says to Y: ‘Supply goods to Z and I will see you
paid’, this is a contract of indemnity because X’s liability to pay is not
contingent on Y’s default.
Conclusion:-
The essence of the matter is that there is a difference between a
promise to pay the creditor if the debtor defaults on payment as
compared to a promise to make payment irrespective of any default by
anybody so long as the recovery of the money is unsuccessful.
A guarantee involves a default by a third party and indemnity arises on
the occurrence of an event.