GUARANTEE: A contract of guarantee is covered by Indian Contract Act 1872. Section 126 of the act defines contract of guarantee as “contract to perform the promise or discharge the liability of a third person in case of his default”. The person who undertakes to discharge of third party is called guarantor or surety. The person on whose behalf guarantee is given is called Creditor. Guarantee is generally obtained by banks when there is deficit in security or value of security falls below the advance granted. The contract of guarantee is secondary contract, primary contract being between the borrower and the guarantor. The contract of guarantee can be entered into only if there is primary contract between two parties.
Contract of Indemnity: is defined as “contract by which one party promises to save other party from loss caused to him by the conduct of the promisor himself or by the conduct of any other person.” The person who gives this assurance is called indemnifier and the person for whom the indemnity is given is called beneficiary. Contract of general insurance is contract of indemnity.
Contract of Guarantee has existence of two contract. Indemnity is only one contract.
Contract of Guarantee has three parties. Indemnity contract has only two parties.
Liability of Guarantor is secondary whereas liability of indemnifier is primary.
Guarantor has the right of subrogation and right of re imbursement. Not so with indemnifier.
Contract of Guarantee can be implied like in case of Endorsement.
Contract of Guarantee has always consideration
Misrepresentation of material part of the transaction by the creditor or debtor makes Guarantee invalid.
Keeping silence i.e. concealment of fact, over certain facts with the purpose to defraud the guarantor renders the guarantee invalid