Indemnity and Guarantee: Two Different Promises Often Confused
Priya Sharma
· Corporate Legal & Compliance Counsel· 3 min read
Both clauses promise to make someone whole, and both are routinely described as the same thing in negotiation. Under the Indian Contract Act they are structurally different, and the difference decides whether your protection survives a variation in the underlying arrangement.
- ✓Section 124 defines indemnity; Section 126 defines guarantee.
- ✓An indemnifier's liability is primary and independent.
- ✓A surety's liability is co-extensive with the principal debtor's and discharged if the principal debt is.
- ✓Guarantees are discharged by variance without consent, which indemnities are not.
The statutory definitions
Section 124 defines a contract of indemnity as one by which a party promises to save the other from loss caused by the conduct of the promisor or of any other person. Two parties: indemnifier and indemnified.
Section 126 defines a contract of guarantee as one to perform the promise or discharge the liability of a third person in case of default. Three parties: creditor, principal debtor and surety.
Primary against secondary
An indemnifier's liability is primary and independent. It arises when the specified loss occurs, regardless of what anyone else does. A surety's liability under Section 128 is co-extensive with that of the principal debtor, which means it exists only so far as the principal liability does.
If the principal debt is void, discharged or unenforceable, the guarantee generally goes with it. An indemnity does not depend on another obligation in that way.
How a guarantee is discharged
These are generous to sureties, which is why creditors routinely take indemnities instead, or draft guarantees as continuing and irrevocable with express waivers.
- Variance in the terms of the contract between creditor and principal debtor without the surety's consent, under Section 133.
- Release or discharge of the principal debtor, under Section 134.
- A compromise or promise not to sue the principal debtor without the surety's assent, under Section 135.
- An act or omission of the creditor impairing the surety's eventual remedy against the principal debtor, under Section 139.
Drafting consequences
If you are the protected party, an indemnity is generally stronger. Specify the triggering events, whether it covers third-party claims only or direct losses too, whether defence costs are included, and whether the duty to indemnify arises on demand or only after loss is established.
If you are giving one, negotiate caps, carve-outs for the other party's own negligence, a duty to mitigate, and control of the defence where the claim is from a third party. Uncapped indemnities are the most expensive sentence in most commercial contracts.
Frequently asked questions
### What is the main difference between indemnity and guarantee?
An indemnity is a primary, independent obligation between two parties, triggered by a specified loss. A guarantee is a secondary obligation involving three parties, co-extensive with the principal debtor's liability and discharged when that liability is.
### Can a guarantee be discharged without the surety's default?
Yes. Variance in the principal contract without the surety's consent, release of the principal debtor, a compromise not to sue, or any act impairing the surety's remedy all discharge the surety under Sections 133 to 139 of the Contract Act.
### Should an indemnity be capped?
From the indemnifier's perspective, yes — an uncapped indemnity can exceed the entire value of the contract. Protected parties often resist caps for third-party IP and confidentiality claims, which is usually where the negotiation settles.
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Frequently Asked Questions
What is the main difference between indemnity and guarantee?
An indemnity is a primary, independent obligation between two parties, triggered by a specified loss. A guarantee is a secondary obligation involving three parties, co-extensive with the principal debtor's liability and discharged when that liability is.
Can a guarantee be discharged without the surety's default?
Yes. Variance in the principal contract without the surety's consent, release of the principal debtor, a compromise not to sue, or any act impairing the surety's remedy all discharge the surety under Sections 133 to 139 of the Contract Act.
Should an indemnity be capped?
From the indemnifier's perspective, yes — an uncapped indemnity can exceed the entire value of the contract. Protected parties often resist caps for third-party IP and confidentiality claims, which is usually where the negotiation settles.
Priya Sharma
Corporate Legal & Compliance CounselSpecializing in commercial contract litigation, Section 138 NI Act recovery, commercial property leases, and MSMED Act compliance.