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To guarantee or not to guarantee. Part 1 of 2

3 min read
11 November 2019

Key Takeaways

  • An indemnity is an agreement to cover loss and damage suffered by another. An indemnity typically exposes the Indemnifier to an assumption of additional risk beyond what they would have been exposed to without which is a win for the Indemnified, but can be a big loss for the Indemnifier
  • A guarantee provides significant advantages for the party with the benefit of the guarantee beyond what are typically provided in a commercial agreement if no guarantee is in place.

Why would we tell you to get a guarantee or indemnity if we will also tell you not to give one? Hopefully I can answer your burning questions and help clarify just what guarantees and indemnities are.

Before we can get into the nitty gritty of the why, it is important to understand just what a guarantee and an indemnity are.

What is a guarantee?

Most people will have been asked to give a guarantee at some stage, whether you are a director guaranteeing an obligation of your company, or personally guaranteeing a loan. In brief (without going into the intricate complexities of what particular formalities and requirements must be met before a guarantee can be lawfully given) a guarantee is where a party secures the performance of an obligation of a party to an agreement for the benefit of the other party.

Some common examples of guarantees are when:

  • Parents guarantee repayment of a child’s loan for a house
  • Directors guarantee repayment of a company’s line of credit
  • A parent company guarantees performance of a subsidiary’s obligations under a lease or a credit arrangement

 In Queensland, s 56 of the Property Law Act 1974 (Qld) provides that guarantees are not enforceable unless they are in writing and signed by the person providing the guarantee. 

What is an indemnity?

It is not possible to give an exhaustive list of all types of indemnities in an article without boring you so, most simply defined, an indemnity is an agreement between two parties whereby a party agrees to cover another party for loss and damage suffered by the other party. Effectively, one party assumes some of the risk and/or liability of certain events happening in respect of a transaction/agreement.

What’s the difference?

I am sure you are probably thinking “those two explanations sound very similar Ben” – and you would be correct. With commercial agreements often requiring both a guarantee and an indemnity, it can be difficult to differentiate the different obligations required.  Ultimately it will be a matter of interpreting the terms of an Agreement in order to differentiate exactly what those different requirements imposed are and the actual intention of the parties.

As a basic principle, the difference between a guarantee and indemnity is as follows:

  1. An indemnity is typically between two parties – the person providing the indemnity (Indemnifier) and the person obtaining the benefit of the indemnity (Indemnified) – and is an agreement for the Indemnifier to cover certain loss and damage suffered by the Indemnified;
  2. A guarantee ordinarily involves at least three parties – the person providing the guarantee (Guarantor), the party with the benefit of the guarantee (Beneficiary) and the third party whose performance is being guaranteed (Primary Obligor) – and is a promise by the Guarantor to the Beneficiary to perform the obligations of the Primary Obligator.

As a result of the above, when it comes to enforcing a guarantee or indemnity:

  1. Indemnity: recovery steps can only be taken against the Indemnifier
  2. Guarantee: recovery steps can be taken against both the Guarantor and the Primary Obligator

Given the close interaction between the two, and the benefits posed by each, it is typical for parties to obtain both a guarantee and an indemnity to maximise their protection. Of course, if you are the party giving the guarantee or indemnity, your liability and subsequently risk in the transaction/agreement will increase accordingly.

While the above is by no means an exhaustive definition or method for determining what a guarantee or indemnity is, it is a useful guide to determining what obligations may be imposed. Ultimately it will come down to an individual interpretation of the agreement to determine what your obligations/liabilities are. We recommend that all clients obtain advice before signing any guarantee or indemnity.

To find out the three reasons why you should always ask for a guarantee and/or indemnity, but avoid giving one at all costs, wait for Part 2. If you don’t want to wait, contact me to find out more.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.

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