Guarantees + Indemnities

Question 1

What is a guarantee?

Answer 1

A promise by a party to ensure that another party carries out its obligations, or a promise to fulfil those obligations itself if that other party does not do so.​

Question 2

What is an indemnity?

Answer 2

An indemnity is a promise to reimburse someone in the event that they suffer a stated loss. ​

Question 3

How to differentiate between the two?

Answer 3

the substance of the provision, not whether it is headed ‘guarantee’ or ‘indemnity’.​

Question 4

Is it possible for both a guarantee and an indemnity to be given at the same time?

Answer 4

Yes

Question 5

Admin requirements for a guarantee

Answer 5

must be in writing + signed by guarantor.​

Question 6

What ceases if a contract is set aside between two parties?

Answer 6

Guarantee will cease as its dependent on a party’s obligation.

An indemnity will remain in place.

Question 7

What happens if there is a change to the contract after the guarantee/ indemnity is given?

Answer 7

Guarantee - ceases
Indemnity - continues

Question 8

Is there any formalities for an indemnity?

Answer 8

No - not like a guarantee

Question 9

Can a party give both?

Answer 9

yes

Question 10

Provide a basic example of a guarantee

Answer 10

A has an obligation to repay a loan to B.​

If C provided a guarantee, this would mean C promising that A will repay the loan, and that if A does not do so, C will perform this obligation on A’s behalf ie will make the payment to B.​

Note that C’s obligation is effectively defined by A’s obligation: so C cannot face any obligation that is greater than A’s obligation. ​

Question 11

Provide a basic example of an indemnity

Answer 11

A has an obligation to repay a loan to B​

If C provided an indemnity in relation to this, C would be saying that in the event that B suffers the non-payment of the loan, C will reimburse B in relation to this loss.​

Note that C’s obligation is a primary obligation. C’s obligation is legally independent of A’s obligation, although what C has to pay will be affected by what A pays. C’s obligation stands by itself, so to speak, which is what we mean by it being a primary obligation, and this could mean C’s liability might ultimately be even more than A’s was.​

Again, this provides greater protection for B – ultimately, it can look to either A or C for payment.​