Difference between Contract of Indemnity and Contract of Guarantee: Ten Case Analysis
By: Sudhanshu Shekhar
An indemnity is a contract by one party to
keep the other harmless against loss, but a
contract of guarantee is a contract to answer
for the debt, default or miscarriage of
another who is to be primarily liable to the
promisee.Contracts of guarantee and
contracts of indemnity perform similar
commercial functions, in providing
compensation to the creditor for failure of a
third party to perform his obligation.1 A
contract of guarantee always and necessarily
involves participation of three parties i.e.
creditor, principal-debtor and surety.
Without them a contract of guarantee is not
possible. It is tripartite agreement, the one
between principal-debtor and surety being
implied or express. A contract of guarantee
includes a contract of indemnity in itself.
The contract between principal-debtor and
surety is one being that of indemnity where
the principal-debtor indemnifies the surety
for any loss occurred to him due to fault of
any party. Without this contract, the contract
is one of indemnity and not guarantee and it
is not possible to work out the liabilities of
surety. And hence a contract of guarantee
must involve privies of all the three parties.
It is not enough to have separate agreements
1
Halsbury’s Law of England , ‘Guarantee and
Indemnity ‘ fourth edn,Reissue , vol 20, Para 109
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between creditor and principal-debtor and
surety and creditor.
It is perfectly possible to have a contract of
indemnity in which there is no suretyship at
all, because, the party liable under the
indemnity has not contracted at the request
of another debtor. If a person undertakes to
reimburse another for some loss which may
be caused to him, say by a third person who
having undertaken the liability and having
been called upon to make good the loss, will
not be able to recover the loss so caused to
him from the principal-debtor, the latter
being not privy but virtually a stranger to the
undertaking given to the promise.2
In case of indemnity, the promisor makes
himself primarily liable and undertakes to
discharge the liability in any event. A
Queen’s Bench decision in the case of
Guild& Co vs. Conrad3, it was stated that
there is a plain distinction between a
promise to pay the creditor if the principal-
debtor makes default in payment and a
promise to keep a person who has entered or
about to enter, into a contract of liability
indemnified against that liability
independently of the question whether a
2
Punjab national bank Ltd vs. Sri Bikram Cotton
Mills Ltd , (1970) 2 Nag 350
3
[1894] 2 QB 885
third person makes default or not. Under a
contract of indemnity, the indemnifier
undertakes an independent obligation which
does not depend upon the existence of any
other obligation of any other obligator; it
does not refer to the obligation of any third
person. A promise to be primarily and
independently liable is not a guarantee,
though it may be an indemnity. There can be
no contract of guarantee unless there is a
principal-debtor.4 In a contract of guarantee,
the obligation of the surety depends
substantially on the principal-debtors
default, while under a contract of indemnity,
liability arises from loss caused to the
promisee by the conduct of the promisor
himself or by the conduct of any other
person. Therefore, the fact that the person,
for whose conduct it is given, is not liable,
does not affect the obligation undertaken by
the indemnifier, which is primary liability;
but in a contract of guarantee, the liability of
the surety rests on a valid obligation of the
principal debtor. Thus, if the principal
debtor is not liable, the promisor is still
liable under the contract of indemnity.5
Whether the contract is one of guarantee or
of indemnity, is a question of construction in
each case.6 The description of the agreement
as one of indemnity or guarantee may
provide some guide , especially if the
expression ‘indemnity’ or ‘guarantee’ is
used in the heading or if it is repeated a
number of times in the body of the
agreement.7 Another guide is – whether the
creditor’s rights against the principal-debtor
and against the indemnifier or guarantor are
the same. If the person liable under the
agreement is stated to be liable even though
the principle debtor is not in default, or for a
greater amount than the principal debtor, the
agreement may be constructed as an
indemnity.8 On the other hand the inclusion
of a clause preserving the creditor’s rights
against the person liable under the
agreement in the event of the creditor’s
giving time to the principal debtor or
varying the principal obligation, suggests
that the contract is a guarantee, because such
provisions would be unnecessary in a
contract of indemnity.9 The common form
provision stating that the guarantor is liable
as principal debtor does not convert every
guarantee into indemnity. The fact that the
agreement makes no provision for demand
to be made on the principal debtor does not
convert what would otherwise be a
guarantee into an indemnity.
Some agreements described as guarantee
may contain clauses which preserve the

4 7
Mountstephen vs. Lakeman , [1871] 2 QB 885 Heald vs. O’Connor , [1971] 2 All ER 1105
5 8
Ibid at 2 Yeoman Credit Ltd vs. Latter , [1961] 2 All ER 294
6 9
Moschi vs. Lep Air Services Ltd , [1973] KB AC Western Credit Ltd vs. Alberry , [1964] 2 All ER
331 938

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liability of the guarantor, even where the
principal debtor has either never been liable
or has ceased to be liable to the creditor.
Agreements may also contain clauses
entitling the creditor to treat the guarantor as
a principal debtor, either generally or in
specific circumstances. Such contracts may
not necessarily convert a contract of
guarantee to a contract of indemnity since
10
they are hybrid in nature.
TEN CASE ANALYSIS:
1. Moschi vs. Lep Air Services , [1973]
KB AC 331
The respondents acted as forwarding agents
for goods imported by a company Rolloswin
which was controlled by the appellant. The
company was in debt to the respondents who
were exercising a lien. In order that the
goods should be released and that the debt
should be paid by instalments
respondents, the company and the appellant
made a tripartite agreement on November
29, 1967. Its objects were that the amount of
the debt should be ascertained,
meanwhile the respondents should release
the goods, and that the company should pay
weekly instalments of £6,000 each. The
appellant gave a personal guarantee and the
10
Ibid at 7
company failed to carry out the terms of this
agreement. The court stated that “Whether
any particular contractual promise is to be
classified as a guarantee so as to attract all
or any of the legal consequences depends
upon the words in which the parties have
expressed the promise. Even the use of the
word 'guarantee' is not in itself conclusive. It
is often used loosely in commercial dealings
to mean an ordinary warranty. It is
sometimes used to mis-describe what is in
law a contract of indemnity and not of
guarantee. Where the contractual promise
can be correctly classified as a guarantee it
is open to the parties expressly to exclude or
vary any of their mutual rights or obligations
which would otherwise result from its being
classifiable as a guarantee. Every case must
depend upon the true construction of the
actual words in which the promise is
expressed.
In the instant appeal, however, the actual
words used are simple, unambiguous, and
the
contain no qualification except to impose a
limit upon the guarantor's maximum liability
under the guarantee.”
that
2. Goulston Discount Co. Ltd vs. Clark
, [1967] 2 QB 493
In this case in November, 1964, a customer
called Webb went to a dealer, the defendant,
Mr. Clark, at Southwick in Wiltshire. He
wanted to get a Jaguar car. The cash price
was £400. He had not the money to pay, but
he had an old car worth £100. So he got the
Jaguar on hire-purchase terms in the usual
way. He handed the old car to the dealer in
part exchange. That represented £100. Then
the defendant sold the Jaguar to the finance
company, the plaintiffs, Goulston Discount
Co. Ltd., for £400, giving credit for £100.
Then the plaintiffs paid £300 in cash to the
defendant, and thus became owners of the
Jaguar car. The plaintiffs then let out the
Jaguar car on hire-purchase terms to the
customer on installments payable over two
years. These installments were calculated so
as to cover the £300 and there was to be
added, of course, the finance charge of £57.
There was the usual option to purchase of
£1. So the total hire-purchase price was
£458 and the customer had the car. The
customer paid the first two or three
installments, and then he defaulted. The car
was retaken and eventually sold by the
plaintiffs for £155. The plaintiffs could only
sue the hirer for the arrears of the
installments. They could not get anything
more from him. So they came down upon
the dealer, the defendant. He had signed a
specific recourse agreement, i.e. a recourse
agreement in respect of this very car. The
question in the case is whether that is an
agreement of guarantee or of indemnity. If it
is a guarantee, the dealer, the defendant, is
under no more liability than the hirer, i.e. to
pay the arrears. But if it is an indemnity, he
will be liable to pay the whole of the hire-
purchase price. The agreement read as “In
consideration of your entering into a hire-
purchase agreement with Raymond Harry
Webb. ... I agree to indemnify you against
any loss you may suffer by reason of the fact
that the hirer under the said agreement for
any cause whatsoever does not pay the
amounts which he would if he completed his
agreement by exercising the option to
purchase. The date of loss shall be any date
you notify me after termination of any of the
said agreement or the hiring thereunder.
Loss shall mean the difference between the
total amount the hirer would have had to pay
to acquire title to the goods under the hire-
purchase agreement, plus your expenses,
less payments received by you. If an
indemnity is also given to you by any other
person my indemnity shall not be a joint
indemnity but an indemnity against default
of that indemnifier. On payment by me to
you of the loss I shall be entitled to your
rights in respect of the hirer, the goods and
any other indemnifier or guarantor. No time
or indulgence shown by you to the hirer or
any indemnifier or guarantor shall in any
way affect this indemnity.” That was signed
on November 4, 1964.
On the face of it, the defendant, who has had
£400 for the car, is saying to the plaintiff:
"If you let the hirer have this car, I will
make sure that it is purchased at the hire-
purchase price. If he defaults, I will
indemnify you against any deficiency on
that price on the understanding, of course,
that I shall in return get the car and all your
rights."
Lord Denning held that the document which
is relevant in the present case is described as
a "specific indemnity and repurchase
undertaking." By the operative words the
defendant agrees to indemnify the plaintiffs
against loss. "Loss" is defined, and the only
references to a guarantor are in two places
where it is referring to some document
which may be entered into by some other
party. It seems in its terms it is quite plainly
an indemnity and not a guarantee.
3. Unity Finance Ltd vs. Woodcock
, [1963] 1 WLR 455
The facts of this case arise out of an
agreement between a finance company and a
dealer. As long ago as November 5, 1957,
the finance company, Unity Finance Ltd.,
made an agreement with a dealer,
Woodcock, in anticipation of his afterwards
putting forward to them hire-purchase
transactions. Again in this case it was a re-
course agreement. The court held that it that
the principal question of the case is whether
the recourse agreement was an agreement of
guarantee; for if it is, then clearly the dealer
is discharged. In form it is an agreement of
repurchase — to repurchase the car on
request should the hire-purchase agreement
be determined. But in substance it is an
agreement under which the dealer
guarantees the finance company that they
will receive the total hire-purchase price.
The hirer is the principal debtor. He is the
person who is primarily bound to pay the
hire-purchase price (less the nominal option
fee). So long as the hirer keeps up the
installments and the hiring remains in force,
the dealer comes under no liability. But if
the hirer should make default and the hiring
is determined, the dealer becomes bound to
make up the total hire-purchase price. The
dealer's obligation is only a secondary
obligation, dependent on the hirer's default.
There are circumstances where the hirer may
himself determine the agreement without
being in default. He may return the car and
pay up all that is required of him for the
purpose, without being in default at all. In
those circumstances the recourse agreement
is only a contract of repurchase and not a
contract of guarantee. But in cases where the
finance company determines the hiring on
account of the hirer's default, the recourse
agreement is nothing more nor less than an
agreement of guarantee, and the dealer is
entitled to the benefit of all the laws in favor
of those who undertake suretyship for
another — except in so far as they are
excluded by the contract. Hence it was held
to be a contract of guarantee.
4. Yeoman Credit Ltd. vs. Latter ,
[1961] 1 WLR 828
A finance company let a car on hire-
purchase to an infant. An adult signed a
form headed “Hire-purchase indemnity and
undertaking” in which the adult by clause 1
undertook to indemnify the finance
company against any loss resulting or
arising out of the hire-purchase agreement.
The adult did not obtain full rights of
subrogation under the undertaking but only
those which the finance company chose to
allow. By clause 2 the adult agreed to pay
the finance company such amount as would
make up the sums paid by the hirer to the
total amount of hire payable under the
agreement and the price of the option
together with any expenses incurred by the
finance company in enforcing the
agreement. Clause 3 provided that if the car
had come into the company's possession,
they should either give the adult credit for
any amount which they realized on sale or
transfer the car to the adult after payment in
full by him.The infant defaulted. The
finance company repossessed the car and
sold it. They then claimed against the adult
the amount due under the undertaking.
The effect of the document in question as
this: It protects the plaintiffs against any loss
they may suffer since it assures to them the
full sum of the hire-purchase price, plus any
costs incurred by them in enforcing the hire-
purchase agreement. Thus the rights of the
second defendant (if called upon to pay) are
different from the rights of subrogation
under a guarantee. Further, the agreement
does not provide that the second defendant
shall make good the particular defaults of
the hirer. If the hirer fails to pay the
installments, no recourse can be had to the
second defendant for those installments.
None of the actual obligations of the hirer
can, if he defaults, be enforced against the
second defendant. All these considerations
point strongly towards the agreement being
what it claims to be, namely, an indemnity.
The surrounding circumstances (so far as
one can gather them in the absence of the
evidence) also support that claim. The
parties were, it would seem, all aware of the
legal difficulty created by the hirer's infancy.
Hence the necessity for this special form of
indemnity. That circumstance, as well as the
wording of the document, makes it
improbable that the transaction was intended
as a guarantee of particular obligations if, as
appears, they were known not to be binding
against the infant.

5. Lakeman vs. Mountstephen , [1874]
LR 7 HL 17
The plaintiff, a contractor, was failing to do
certain sewage work because he was not
sure that the Board of Health would pay for
it; and the defendant, who wanted the work
to be done, said: “Mountstephen, go and do
the work, and I will see you paid.” The
House held that these words did not
constitute a promise to pay the debt of
another, and that they were rightly left to the
jury as evidence of a primary obligation on
the defendant. Lord Selborne said “There
can be no suretyship unless there be a
principal debtor, who of course may be
constituted in the course of the transaction
by matters ex post facto, and need not be so
at the time, but until there is a principal
debtor there can be no suretyship. Nor can a
man guarantee anybody else's debt unless
there is a debt of some other person to be
guaranteed The tendency, therefore, of any
view of this contract which would place it in
the position of a guarantee for a future
liability to be undertaken by the local board,
would be absolutely to defeat the whole
purpose of the communication, which was to
remove a difficulty then pressing upon the
mind of the contractor, as to whether or not
he had sufficient authority from anyone to
go on with the work; and the answer was
given in terms de praesenti for the express
purpose of inducing him at once to go on.”
6. Western Credit Ltd. vs. Alberry
, [1964] 1 WLR 945
By a hire-purchase agreement a finance
company let a secondhand car to the hirer
for four years at a hire-purchase price of
£849. By clause 9 of the agreement the hirer
was given an option to determine the
agreement provided he returned the car in
good condition to the finance company and
paid the amount by which any payments
already made fell short of three quarters of
the hire-purchase price (£636 15s). At the
foot of the agreement there was the
following collateral undertaking which the
surety had signed:
“Guarantee to Western Credit Ltd. In
consideration of your having agreed at my
request to enter into the annexed agreement
with the … hirer, I, the undersigned,
guarantee the payment by the said hirer to
you of the installment … agreed to be paid
and the performance and observance by the
said hirer of the terms of the said agreement:
and I will indemnify you against any loss or
damage which you may sustain as a result of
the act, default, or negligence of the said
hirer. … This guarantee shall not be
terminated or affected by my death or by
you giving time or other indulgence to the
said hirer.”
The hirer exercised his option under clause 9
and terminated the agreement, returning the
car in good condition to the finance
company and paying in all three-quarters of
the hire-purchase price, thus fulfilling all his
obligations under the agreement. The car,
however, was resold for only £69, so that the
finance company suffered a shortfall in its
anticipated profit on the transaction. On a
claim by the finance company against the
surety to recover the difference between
what it had received and what it would have
received had the agreement not been
terminated, the judge held that the collateral
undertaking was a contract of indemnity and
he accordingly gave judgment for the
finance company for £93 6s, being the sum
claimed less a discount for accelerated
payment. On appeal by the surety:—It was
held that, on its true construction, the
collateral undertaking was no more than a
contract of guarantee and that since the hirer
had duly performed all his obligations under
the hire-purchase agreement the surety was
discharged from liability under the collateral
undertaking .The word “indemnity” is used,
but the sentence is descriptive in its context
of the kind of non-performance or
nonobservance which might arise under the
guarantee, following as it does the guarantee
of the performance and observance by the
hirer under the agreement. It cannot be read
as an indemnity against any loss or damage
as a result of the termination of the contract
by the hirer when the contract of hire has
been fully performed by him according to its
tenor. It would release the hirer completely
and leave the “surety” liable for the best
possible performance of it in favor of the
finance company without any redress
against the hirer.
7. Pitts and Others v Jones , [2007]
EWCA Civ 1301
The appellants (who brought the claim)
were minority shareholders in a company
of which Jones was managing director and
majority shareholder. Jones had negotiated
the sale of the company to a purchaser who
had agreed to buy the shares of the minority
at the same price. But when the day came
for completion of the sale, Pits and the
others were horrified to hear that their
shares would be purchased only after a
delay of six months.
Of course they were aware that the buyer
might go bust. After all, if he did not have
the money now, how could they be sure he
would have it in six months’ time. So they
obtained a verbal agreement from Jones
that if the buyer failed to come good, he,
Jones, would give them the money out of
his share. So they had a verbal contract,
witnessed by all of them.The buyer did indemnity to Morris, along with W. Cook
subsequently become insolvent and could and the defendant, the defendant verbally
not pay for the minority shareholders’ promised the plaintiff, and in consideration
shares, so they sued Jones under his verbal therefor, that if the plaintiff would sign the
agreement to indemnify them. bond of indemnity to Morris "with the
defendant and W. Cook," the defendant
The Court of Appeal found that, while all
would save the plaintiff harmless from all
the other necessary elements of a legally
damages and costs which the plaintiff might
binding contract were present (offer,
have to pay by reason of becoming liable on
acceptance, consideration and the intention
the indemnity bond to Morris, as obligee.
to create legal relations), and held that it
The bond of indemnity was signed by the
was a contract of guarantee and not that of
plaintiff and the defendant, as sureties for
indemnity because the base contract to sell
W. Cook, principal. The plaintiff was
the shares was a contract with the buyer
compelled to pay £400 to Morris on the
and not with Jones. So he must have been a
bond of indemnity. Plaintiff then recovered
guarantor and not an indemnifier.
£100 from the estate of W. Cook, he being
since deceased. This left a deficiency of
8. Thomas vs. Cook, [1839] 10 Ad. &
£300, and the plaintiff brought this action of
Ell. 453.
assumpsit against the defendant to recover
on his verbal promise to save the plaintiff
In Thomas v. Cook, W. Cook and Morris
harmless from all payments he might incur
were in a partnership, which was dissolved
by reason of the plaintiff signing the bond of
by agreement, Morris retiring. Morris
indemnity to Morris. The Court held the
would, of course, be liable for the prior
verbal promise to be a contract of indemnity
partnership debts' incurred while he was a
and hence the defendants were liable.
member of it. To protect him, it was agreed
between W. Cook and Morris that W. Cook
and two other persons should execute to
9. Argo Caribbean Group v Lewis ,
Morris a bond of indemnity to save Morris
[1976] 2 Lloyd's Rep 289
from liability of these partnership debts.
This bond of indemnity was given in accord
In April 1971 five parties, namely P (the
with this understanding. But, in order to
plaintiffs), F Co., L Co., R and D (the
induce the plaintiff to sign this bond of
defendants), entered into an agreement
whereby L Co. were to lend F Co. GBP
7,000 on the agreement and a further GBP
63,000 on the execution of a debenture by F
Co. in favour of L Co. The agreement
included further, inter alia, by cl. 1 that A
and R agreed to guarantee to L Co. the
repayment of the loan and in consideration
of which F Co. would pay A two per cent
interest on the loan outstanding and that D
agreed to indemnify A and R against any
losses, expenses or charges which they
might incur; and by cl. 9, that D agreed to
indemnify A and R against any failure by F
Co. to execute the terms of the agreement:
and by cl. 10 that, all costs and expenses
arising out of the agreements should be
borne by F Co. A, who were part of the
same group as L Co. paid F Co. GBP 7,000
on April 30, 1971, and further paid GBP
61,890 (GBP 63,000 less GBP 1,110 legal
charges) to F Co. on June 1, 1971. F Co. did
not pay the interest on the debenture and in
January 1972 L Co. demanded payment of
the whole sum of principal and interest
under the debenture. No payment was made
and in February 1972 L Co. demanded
payments from A. In March 1972 A
demanded payment from D and D paid GBP
500. In July 1972 A issued a writ against D
for GBP 78,166 less GBP 500 already paid.
D contended that L Co. were moneylenders
within the Moneylenders Act 1927 and that
by ss.1(3), 6 and 12 the contract for the
repayment of the loan was unenforceable. It
was held at first instance that (1) the loan
was a moneylending transaction within the
meaning of the 1927 Act and was
unenforceable; (2) there was no
contravention of s.1(3) of the Act (under
which it is an offence for a licensed
moneylender to carry on business at any
other place than his authorised address); (3)
the provisions contained in cl. 10 did not
contain an illegality vitiating the whole
contract; (4) although the contract as
between L Co. and F Co. was unenforceable
the promise made by D was not a "security
given by the borrower" within the meaning
of s.6 of the 1927 Act and accordingly A
could recover all except for the GBP 1,110
in respect of legal fees (cf. s.12(3)). On
appeal and cross appeal, held, by C.A.
dismissing both the appeal and the cross-
appeal, that (1) the loan by L Co. was a loan
made in the course of the business of
moneylending; (2) on the true construction
of s.6 of the Act "security given by the
borrower" which was unenforceable was
limited to security given to the lender; (3)
D's promise was one of indemnity and not
one of guarantee: therefore it was
unnecessary to ascertain whether A were
entitled to recover under cl. 9; (5) the sum of
GBP 1,110 was correctly deducted from the
sum owed to A by reason of s.12
 10. Ramchandra B. Loyalka vs. Shapurji The court held it to be a contract of
N. Bhownagree , (1940) 42 BOMLR indemnity rather than a contract of
550 guarantee. This contract seems to clearly to
fall within the terms of definition under sec
The plaintiff is a sub-broker and was 124. The promisor is agreeing to save the
employed as such by the defendant, who is a promisee from loss occasioned by the
broker, on the terms of a contract. The conduct of the constituents introduced.
contract is in the form of a letter dated
March 12, 1935; it is addressed by the CONCLUSION
plaintiff to the defendant and says:
There are no hard and fast rules for
With reference to the business in shares,
determining whether a contract is an
securities and other commodities which I
indemnity or a guarantee. In each case the
have agreed to canvass from my constituents
courts will look at the specific terms of the
approved by you, and to introduce and place
agreement and in some cases the
with or procure tot you I hereby agree with
surrounding circumstances. Thus the central
you as follows :-
concern is construction, and the courts will
That I shall be answerable and responsible
base their decision on the substance of the
to you for all business secured by me from
agreement as opposed to its form or
my constituents and to be answerable and
description. The fact that a document is
responsible for the due payments by the said
described as either a "guarantee" or an
constituents for all moneys due in respect of
"indemnity" is taken as a guide by the
such business as you may from time to time
courts, but is by no means conclusive. Each
transact at my request and I agree on
case is a question of fact. A document will
demand to make good any default on part of
be construed by the courts in accordance
my said constituents and also to pay all
with what is seen to be the "ultimate object"
damages, costs, charges and expenses that
of the agreement. The intention of the
may be incurred by you or due to you by
parties will be central to interpretation.
reason of such default. It is agreed that I
shall be entitled to get 50% return of
brokerage for business secured by me.