Section 126 of the Indian Contract Act defines the term “guarantee” as follows:

 “It indicates that a “contract of guarantee” is a contract to execute a third person’s promise or discharge his liability in the event of his default. The person who provides the guarantee is known as the “surety” the person whose default is covered by the guarantee is known as the “principal debtor” and the person to whom the guarantee is issued is known as the “creditor” A guarantee might be oral or written.”

Essentially, a guarantee is a collateral undertaking to be responsible for another party’s breach of an agreement. In all guarantees, there must be a conditional promise to hold the individual responsible for the principal debtor’s default. Liability which is assumed in the absence of a default is not covered by guarantee. Certain fundamental elements must be present in order for a legitimate guarantee to be created.

1) There must be a principal debt that must be discharged. Someone must be accountable as a principal debtor under a guarantee, and the surety assumes obligation if the principle debtor fails to pay. The purpose of a guarantee is to assure the payment of an existing debt, therefore if there is no principal debt, there cannot be a valid guarantee.

2) A guarantee contract must include some kind of consideration, and a guarantee without consideration is null and void. However, under Section 127 of the Indian Contract Act, the consideration for a guarantee does not have to be a direct consideration; rather, anything done or any promise made for the advantage of the principal debtor is adequate consideration.

3) Sections 142 and 143 of the Indian Contract Act make it illegal to acquire a guarantee by misrepresentation or concealment. Concealment in this context refers to the active concealment of substantial facts and circumstances pertinent to the case. 

4) Finally, the guarantee might be received orally or in writing.

Difference between Indemnity and Guarantee

In circumstances involving indemnity, one party promises to compensate the other party for the loss suffered by the other party as a result of the promiser’s or any other party’s acts. In circumstances involving Guarantee, on the other hand, one party guarantees to the other that they will pay the debt on their behalf if the other party defaults on the payment.

In indemnity contracts there are only two parties: the indemnifier and the indemnified whereas in guarantee contracts there are 3 parties: Creditor, principal debtor and surety. 

Unlike in Indemnity, in guarantee, three separate contracts are present, firstly between the principal debtor and the creditor, secondly between the principal debtor and surety and thirdly between the surety and the creditor. 

One key difference is that the liability of the indemnifier is primary in indemnity contracts whereas in surety the liability of the surety is secondary and the primary liability to pay the debt falls onto the principal debtor. 

Another key difference is that the very purpose of indemnity and guarantee contracts is different. The purpose of Indemnity Contracts is to save the other party from incurring loss however in guarantee contracts the purpose is to give assurance to the creditor that either the contract would be performed or liability would be discharged.

 Lastly in Contracts of Guarantee the liability already exists from the beginning while in Indemnity contracts the liability arises when the contingency occurs.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

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