Written by: Shannia Yesenia
A contract of indemnity is a form of agreement between two parties used as an act of protection in which one party promises to save the other from loss caused to them because of a promising party or by the conduct of a third party. Industries usually rely on this type of contract because of its nature that helps businesses compensate their losses and will help them to minimize their risks. An example of an industry that relies on this type of contract is the insurance industry.
In a contract of indemnity, there are two parties involved: the indemnifier and the indemnified. The indemnifier is the person who promises to compensate for a loss, on the other hand, the indemnified is a person who will be compensated by the indemnifier
A contract of Guarantee is a type of agreement to perform the promise or dismiss the liability of a third person in case they neglect their responsibilities.
In a contract of guarantee, there are usually three parties involved:
Principal debtor: a person who made an agreement with a creditor and is obligated to fulfill the terms of said agreement
Surety: a surety is a third party that is responsible for paying the debts of the principal debtor if they are unable to fulfill their obligations.
Creditor: a person or institution that gives out credits, permitting another entity to borrow money with the promise of being repaid in the future
‘Indemnity and Guarantee are two sides of the same coin’ meaning even though they both tackle different issues, they are still alike on the aspect that they are both manners of compensation and share some similarities regarding certain principles, such as unjust enrichment and manners of good faith. Despite having a few basic similarities, these two contracts still are naturally different from the other.
Contract of guarantee gives a secondary responsibility regarding the liability of the surety because the primary liability is appointed to the debtor whereas, an indemnity agreement imposes its main accountability to the indemnifier
In most places, a contract of guarantee should be in writing, whereas indemnities do not have to be in writing and can be implied in court
The liability in an indemnity agreement will come up when a turning point happens, whereas, in contracts of guarantee, the liability already exists.
Contract of indemnity's main purpose is to save the other party from suffering loss, while the guarantee agreement exists to assure the creditors that; all terms in the arrangement will be fulfilled, or liability will be discharged.
It is concluded that these two contracts are different in many aspects. In indemnity, third parties cannot be sued by the promisor in opposition to guarantee third parties can be sued by the promisor because after clearing the debts of the creditor, they will become the creditor.
So, which of these contracts is more beneficial?
It depends on what role a person is playing in the agreement. In guarantee, the guarantor confers certain rights such as rights to indemnity, rights of set-off, subrogation, and marshaling while indemnities tend to be more advantageous to the beneficiary by offering no specific formal requirements and giving more robustness.
Lawbite Team, October 17, 2019, Guarantee or Indemnity – Which is best for your Business? https://www.lawbite.co.uk/resources/blog/guarantee-or-indemnity-which-is-best-for-your-business
Surbhi S, July 26, 2018, Difference Between Indemnity and Guarantee, https://keydifferences.com/difference-between-indemnity-and-guarantee.html
Crystal Ignatowski, May 16, 2018, What Is An Indemnity Agreement?, https://blog.suretysolutions.com/suretynews/what-is-an-indemnity-agreement-with-examples#:~:text=Parties%20of%20an%20Indemnity%20Agreement&text=The%20Indemnitee%20is%20the%20one,the%20Indemnitee%20for%20any%20claims.
March 17,2018, Difference between contract of Indemnity and Contract of guarantee, https://www.vakilno1.com/legal-news/contract-of-indemnity-and-contract-of-guarantee.html