Important Distinction between a Contract of Indemnity and a Contract of Guarantee are listed below:
1. Number of parties:
In a contract of indemnity, there are two parties the indemnifier and the indemnity-holder. In a contract of guarantee, there are three parties the creditor, the principal debtor and the surety.
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2. Object or purpose:
A contract of indemnity is for the reimbursement of loss, whereas a contract of guarantee is for the security of a debt or good conduct of an employee.
3. Number of contracts:
In indemnity there is only one contract between the indemnifier and the indemnified, while in guarantee, there are three contracts – one between the principal debtor and the creditor, the second between the creditor and the surety, and the third between the surety and the principal debtor.
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4. Nature of liability:
In a contract of indemnity, the liability of the indemnifier is primary in nature. In a contract of guarantee, the liability of the surety is secondary, i.e., the surety is liable only on default of the principal debtor. (If the principal debtor fulfils his obligation, the question of surety’s liability does not arise.)
5. Request by the debtor:
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In a contract of indemnity, the indemnifier acts independently without any request of the debtor or the third party, whereas in a contract of guarantee it is necessary that the surety should give the guarantee at the request of the debtor.
6. Existing debt or duty:
In a contract of indemnity, in most cases there is no existing debt or duty, whereas in a contract of guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety.
7. Right to sue:
In a contract of guarantee, the surety, after he discharges the debt owing to the creditor, can proceed against the principal debtor in his own right. But in the case of a contract of indemnity, the indemnifier cannot sue the third party for loss in his own name, because there is no privity of contract. He can do so only, if there is an assignment in his favour, otherwise he must bring the suit (against the third party) in the name of the indemnified.