Contract of Indemnity & Guarantee — KSLU Contract 2 Notes
Contract of Indemnity & Guarantee
A contract of indemnity (S.124) is a contract by which one party (the indemnifier) promises to save the other (the indemnity-holder) from loss caused by the conduct of the promisor himself or of any other person (an insurance policy is the classic example). A contract of guarantee (S.126) is a contract to perform the promise, or discharge the liability, of a third person in case of his default — it involves three parties (the principal debtor, the creditor, and the surety) and three contracts.
| Indemnity (S.124) | Guarantee (S.126) | |
|---|---|---|
| Parties | Two (indemnifier, indemnity-holder) | Three (debtor, creditor, surety) |
| Number of contracts | One | Three |
| Liability | Primary & independent | Secondary — arises on the debtor’s default |
| Purpose | To compensate for a loss | To give the creditor security for a debt |
| Existing debt | Need not exist | A debt/duty owed by the principal debtor exists |
In Simple Terms: indemnity = “I’ll cover your loss”; guarantee = “if he doesn’t pay, I will.” The surety’s liability is co-extensive with the principal debtor’s (S.128) unless the contract provides otherwise.