When it comes to legal agreements, there are several types that one can enter into. Two of them are the contract of indemnity and the contract of guarantee. While these two contracts may seem similar, they have some key differences that set them apart. In this article, we will explore the differences between these two types of contracts.

Definition

A contract of indemnity is an agreement by which one party promises to compensate the other party for any loss or damage that may be suffered as a result of a specified event. On the other hand, a contract of guarantee is an agreement by which one party promises to be responsible for the debt or obligation of another party in case of default.

Parties Involved

In a contract of indemnity, there are two parties involved, namely the indemnifier and the indemnity holder. The indemnifier is the party that promises to compensate the indemnity holder for any loss or damage suffered. The indemnity holder is the party that is protected and compensated in case of a loss.

In a contract of guarantee, there are three parties involved, namely the original creditor, the principal debtor, and the guarantor. The original creditor is the party that initially lends the money or provides the goods or services. The principal debtor is the party that owes the debt or obligation to the original creditor. The guarantor is the party that promises to be responsible for the debt or obligation in case the principal debtor defaults.

Liability

In a contract of indemnity, the indemnifier is liable only for the loss or damage suffered by the indemnity holder. The liability is limited to the amount of loss or damage suffered by the indemnity holder. In other words, the indemnifier`s liability is co-extensive with the loss suffered by the indemnity holder.

In a contract of guarantee, the liability of the guarantor is secondary. This means that the guarantor is liable only if the principal debtor defaults. The liability of the guarantor is co-extensive with the liability of the principal debtor. This means that the guarantor is liable for the full amount of the debt or obligation in case the principal debtor defaults.

Nature of Obligation

In a contract of indemnity, the obligation is to compensate the indemnity holder for any loss or damage suffered as a result of a specified event. The indemnifier is not obligated to do anything unless the indemnity holder has suffered a loss or damage.

In a contract of guarantee, the obligation is to be responsible for the debt or obligation of the principal debtor in case of default. The guarantor is obligated to pay the debt or perform the obligation in case the principal debtor defaults.

Conclusion

In summary, a contract of indemnity and a contract of guarantee are two different types of legal agreements. A contract of indemnity is an agreement by which one party promises to compensate the other party for any loss or damage suffered as a result of a specified event. A contract of guarantee is an agreement by which one party promises to be responsible for the debt or obligation of another party in case of default. The parties involved, the liability, and the nature of the obligation are some of the key differences between these two types of contracts.