Indemnity vs Guarantee Under Indian Law: Two Different Promises, Two Different Risks
Indemnity and guarantee are confused in Indian commercial contracts and the confusion is expensive. What sections 124 and 126 of the Contract Act say, how the two differ in parties, trigger and defences, how to draft each, and the execution and stamping points for guarantees.
"Indemnify and guarantee" appears in many Indian contracts as if the words were a pair. They describe different promises with different parties, triggers and defences, and treating one as the other produces either an unenforceable clause or an unexpected liability. This guide separates them using the Contract Act's own definitions and gives drafting and execution points for each. Position as of October 2026.
The definitions
Indemnity, section 124. "A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a 'contract of indemnity'." Two parties: the indemnifier and the indemnified. The promise is to make good a loss.
Guarantee, section 126. "A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default." Three parties: the surety, the principal debtor and the creditor. The promise is to answer for someone else's default. The section adds that "a guarantee may be either oral or written".
How they differ in practice
| Indemnity | Guarantee | |
|---|---|---|
| Parties | Two | Three |
| Trigger | Loss suffered by the indemnified | Default by the principal debtor |
| Primary or secondary | Primary promise | Secondary; depends on the principal debtor's liability |
| Surety's rights | - | Surety stepping in acquires the creditor's rights against the debtor (section 140) and is discharged by variations without consent (section 133) or release of the debtor (section 134) |
| Typical use | Third-party claims, regulatory penalties, breach of warranty | Loan repayment, lease rent, performance of a subsidiary |
The practical consequences: a guarantor can escape if the underlying contract is varied without its consent or the creditor releases the debtor; an indemnifier cannot, because its promise does not depend on a third person's liability. Lenders therefore draft guarantees with consents to variation built in; commercial parties drafting indemnities should define the losses covered and the claims process.
Drafting an indemnity
- State what is indemnified: losses, costs, claims arising from specified events (third-party IP claims, breach of data obligations, regulatory penalties caused by the indemnifier).
- State the process: prompt notice of the claim, conduct of the defence, no settlement without consent, mitigation.
- Decide the interaction with the liability cap: indemnities are commonly carved out of the cap for defined events, which is where the money sits.
- Avoid "indemnify against all losses whatsoever": courts read indemnities according to their words, and an unlimited one is either resisted in negotiation or litigated later.
Drafting a guarantee
- Identify the guaranteed obligations precisely and the maximum amount.
- Make it a continuing guarantee if it covers a running account (section 129).
- Include the surety's consent to variations, extensions and releases, to avoid discharge under sections 133 to 135.
- State whether the creditor must first proceed against the debtor (a guarantee is co-extensive with the principal's liability under section 128 unless the contract says otherwise).
- Personal guarantees by directors for company borrowing are common; the director should understand that the promise is personal and survives leaving the company unless released.
Execution and stamping
Guarantees and indemnity bonds are chargeable instruments under state stamp schedules; stamp before or at execution (section 17, Indian Stamp Act, 1899) or the instrument is inadmissible until duty and penalty are paid (section 35). Neither is excluded by the IT Act's First Schedule, so both can be e-signed under sections 5 and 10A; for a personal guarantee, use Aadhaar eSign or DSC so that the signer's identity is firmly evidenced, and keep the audit trail. A guarantee may be oral in law, but no lender or landlord should rely on one.
Tracking
Guarantees have lives: the guaranteed obligation's term, the amount outstanding, the expiry of the guarantee, and the release on repayment. Indemnities have notice periods and claim windows. Both belong in the obligation register with an owner.
Where Legatio fits. Legatio holds guarantee and indemnity templates, executes them with strong identity evidence and stamping, and tracks expiry, release and claim windows. Which promise your deal needs is a question for the deal.
Position stated as of October 2026. General information, not legal advice.