Indemnities and Guarantees – what’s the difference?
Indemnities and Guarantees are both a form of what the law terms as suretyship. A surety is a person who is liable for the payment of another person’s debt or the performance of another person’s obligation in the event of the failure by that person to comply with his obligations.
An indemnity is a contractual promise whereby one party promises to another party that he will compensate the loss or damages occurred to him by the conduct of another person. In a contract of indemnity there are two parties, one who promises to indemnify the other party, the indemnifier, while the other one whose loss is compensated is known as the indemnified. One of the most common examples of an indemnity is a contract of insurance where the insurance company promises to pay for the damages suffered by the policyholder in return for the payment of insurance premiums by the policyholder.
A guarantee is a contractual promise by a guarantor to ensure that a third party fulfils his obligation and/or that the guarantor will pay an amount owed by the third party if the third party fails to do so.
Guarantees and Indemnities are often confused and used interchangeably. Below are the key differences between indemnities and guarantees and its importance as the distinctions can be relevant such as when one has to consider their enforceability:
- In a contract of indemnity, one party makes a promise to the other that he will compensate for any loss incurred to the other party because of the act of the promisor or any other person.
- In a contract of guarantee, one party makes a promise to the other party that he will perform the obligation or pay the liability, in the case of default by a third party.
- In an indemnity there are two parties involved, the indemnifier and the indemnified but 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.
- Unlike an indemnity, a guarantee must be in writing or signed by the guarantor in order for it to be effective.
Guarantee documents can include both a guarantee and an indemnity so that the beneficiary can have the benefit of both and they are often executed as deeds to overcome any argument about whether good consideration has been given.