Difference between Indemnity and Guarantee
Overview
Indemnity and guarantee are two terms that are often used in the legal and financial fields. Although the two terms are related to providing security, they are fundamentally different. Understanding the difference between indemnity and guarantee is crucial when entering into contracts or agreements.
Definition of Indemnity
Indemnity refers to a contractual agreement whereby one party agrees to compensate the other party for losses or damages that may occur due to their actions or inactions. An indemnity clause in a contract shifts the potential risk of loss from one party to another. In simple terms, indemnity is a form of insurance against loss or damage.
Definition of Guarantee
Guarantee, on the other hand, is a legally binding promise to pay a debt or fulfill an obligation if the person initially responsible does not meet their obligation. A guarantee effectively acts as a backup plan to ensure that the other party receives what they are owed. If a guarantee is called upon, the guarantor is legally obligated to pay the debt or fulfill the obligation.
Difference between Indemnity and Guarantee
The primary difference between these two concepts is the extent of liability that each imposes. In the case of indemnity, the indemnifier is only liable to compensate the other party if a loss or damage actually occurs. In contrast, a guarantee imposes a much broader liability on the guarantor, who is responsible for ensuring that an obligation is met, regardless of whether a loss or damage occurs.
Another difference between the two is that indemnity is often used to cover losses or damages that might arise in the future. A guarantee, on the other hand, is typically used to guarantee against non-performance or non-payment of an existing obligation.
Conclusion
Indemnity and guarantee are two distinct concepts that are important to understand when entering into legal or financial agreements. Indemnity refers to a contractual obligation to compensate for losses, while guarantee is a legally binding promise to pay a debt or fulfill an obligation if the person initially responsible is unable to do so. Clarifying the difference between the two can help reduce the risk of confusion and ensure that both parties have clear expectations of their obligations.
Table difference between indemnity and guarantee
| Indemnity | Guarantee | |
|---|---|---|
| Meaning | It is an agreement where one party compensates the other party for losses suffered, damage caused or expenses or liabilities incurred by the other party. | It is an agreement where one party promises to pay or fulfil the promise of another party if they cannot do it themselves. |
| Scope of protection | Covers actual losses, damages or expenses incurred by the beneficiary party. | Covers liability for non-performance of contractual obligations by the principal party. |
| Liabilities | The indemnifier may have to pay more or less than the actual loss or damage. | The guarantor is liable to pay only if the principal party fails to perform their obligations. |
| Termination | The indemnity agreement ends when the loss, damage or expenses have been paid or compensated by the indemnifier party. | The guarantee agreement ends when the principal party has fulfilled its contractual obligations or when the guarantee is revoked with mutual consent. |
| Enforceability | Indemnity agreements are generally enforceable unless they are against public policy or prohibited by law. | Guarantee agreements are also generally enforceable unless they are fraudulent, illegal or unconscionable. |