Indemnities and guarantees are both a form of what the law calls suretyship. A surety is a party who is liable for the payment of another party’s debt or the performance of another party’s obligation in the event of default by that other party.
An indemnity is a contractual promise in which one party says it will compensate the other for the loss it suffers in certain circumstances. In a contract of indemnity there are two parties, one, the indemnifier, which promises to indemnify the other; the one whose loss is compensated is known as the indemnified.
One of the most common examples of an indemnity is a contract of insurance: the insurance company promises to pay for certain losses suffered by the policyholder in return for the payment of insurance premiums by it.
A guarantee is also a contractual promise. In it the party giving the guarantee, the guarantor, says that it will make sure that a third party fulfils its obligation to the party receiving the benefit of the guarantee and/or that the guarantor will pay the amount owed by the third party if it fails to do so.
Guarantees and indemnities are often confused and used interchangeably. The difference between them, however, is important particularly when considering whether or not they are actually enforceable. Below are the key differences between the two:
- In a contract of indemnity, one party makes a promise to the other that he will compensate it for loss incurred by it resulting from the indemnifier’s own actions or other specified events, such as actions by others.
- In a contract of guarantee, where one party “A” and another party “B” have entered into a contract and “B” owes a “A” certain contractual obligations, another party “C” promises to perform the obligations or pay the liability due to “A” in the case of default by “B”.
- In an indemnity there are two parties involved, the indemnifier and the indemnified. In a contract of guarantee, there are three parties – debtor, creditor and surety.
- The liability of the indemnifier in the contract of indemnity is primary whereas in a guarantee the liability of the surety is secondary because the primary liability is that of the debtor (i.e. the surety only becomes liable if the debtor cannot pay).
- Unlike an indemnity, a guarantee must be in writing and signed by the guarantor in order for it to be effective.
Guarantee documents can actually include both a guarantee and an indemnity so it is possible for a party to have the benefit of both. They are often executed as deeds to overcome any technical legal arguments about whether a contract has actually been formed.
If you require advice on enforcing or complying with an indemnity or a guarantee or if you require the preparation of an indemnity or guarantee then Blacks Solicitors can assist. Please contact Luke Patel on 0113 227 9316 or email him at “LPatel@LawBlacks.com”.