Section 124 of the Indian Contract Act 1872 provides that a contract of indemnity is a contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person. While as per section 126 a contract of guarantee is contract to perform the the promise or discharge the liability of third person in case of his default.
The points of difference between both the concepts can be given as follows-
1. In contact of guarantee there are three parties namely a principal debtor, a creditor and a surety.
While in contact of indemnity only two parties are necessary – indemnifier and indemnified.
2. A contract of guarantee is entered into for the security of the creditors.
While in contact of indemnity it is entered into for the reimbursement of the loss only.
3. In case of contract of guarantee there are three contacts between – (a) creditor and debtor, (b) creditor and surety and (c) debtor and surety.
While in contact of indemnity there is only one contract between indemnifier and indemnified.
4. A contract of guarantee is only a consequential contract. The original contract is between the creditor and the debtor.
While indemnity is an original and direct contract between indemnifier and indemnified.
5. In contract of guarantee guarantor’s liability is secondary. It means if principal debtor is not liable, the surety will also be not liable.
While a contact of indemnity creates a primary liability for indemnifier.
6. In contract of guarantee if surety discharges the debt payable by the principal debtor, he steps into the shoes of creditor and becomes entitled to realise the money paid in his own right.
While in contract of indemnity indemnifier must always bring the suit in the name of indemnified and can not sue third parties.