What Are Guarantees and Indemnities?

What Is a Default Judgement and How Does It Affect You?
April 30, 2018

Written by Nikolina Milošević

Are you thinking about accepting a contract? Have you checked that there are no hidden guarantee and/or indemnity clauses in the contract?

Guarantees and indemnities form a key part of contractual transactions. They are often used in a number of different contracts such as lease agreements, loan agreements, and property sale agreements, just to name a few. Agreeing to sign a contract that contains a guarantee and/or indemnity is a very serious one and should only be done after obtaining legal advice.

But what does a guarantee and an indemnity mean?

Introducing the Parties

To have a guarantee and indemnity, you need three parties: Party One, Party Two, and a third party which can be a Guarantor and/or Indemnifier.

  • Party One: The person who enters the contract with Party Two. Party One has the power, assets, or money needed by Party Two. They can be, for example, a landlord, bank, or seller of a business.
  • Party Two: The person seeking something from Party One. This can be, for example, a lease, loan, or money to buy a business.
  • Guarantor: A Third Party who guarantees the fulfilment of any contractual obligations owed by Party Two to Party One. A Guarantor can be an individual, company, or an unrelated third party.
  • Indemnifier: A Third Party (who is usually the same party as the Guarantor) who agrees to compensate Party One for any losses, damage, and claims suffered because of the actions of Party Two. Like Guarantors, an Indemnifier can be an individual, unrelated third party, or company.

What Is a Guarantee?

In a guarantee, the Guarantor guarantees that the obligations of Party Two made in the contract with Party One will be fulfilled. If Party Two fails to fulfil their obligations under the contract, then the Party One has the option of pursuing the Guarantor to enforce the contract or for the loss suffered as a result of Party Two’s failure to comply with their obligations.

An example of this is when someone has agreed to be the Guarantor for Party Two’s home loan. If Party Two fails to make the required repayments, then Party One (the lender) has to option of seeking payment from the Guarantor.

What Is an Indemnity?

An Indemnity is a promise made by a Third Party to accept any risk of loss or damage Party One might suffer due to the actions of Party Two, such as incurring legal fees. If any loss is suffered by Party One because of Party Two’s actions, the Indemnifier compensates for the loss.

How Do Guarantees and Indemnities Feature in Contracts?

Guarantees and indemnities usually have their own separate clause (section) in contracts and are usually titled by their given name.

However, when Party One (the company or person with the power, assets, or money) is a company or trust, the guarantee and indemnity clause can be hidden. They can be inserted into contracts without being obvious and can also be inserted as a part of another clause.

What Happens When the Guarantees and Indemnities Are Hidden in a Contract?

In the circumstance where guarantees and indemnities are hidden in a contract, it is very likely that the clause in question will create a guarantee and/or Indemnity obligation for a Director or trustee of Party Two to ensure that the obligations of the contract are guaranteed, and that any losses suffered by Party One are compensated.

This creates a no-win situation for you (Party Two), because you will be held personally accountable if something goes wrong.

There’s also the additional risk of “all monies guarantee”. This means the debt owed is not limited to a specific amount. This amount can grow over time and can escalate to a situation where you are trapped over time in a debt you cannot settle or pay. This can also lead to bankruptcy.

 

If you have a contract that you are looking to accept, make an appointment with one of our lawyers today to make sure that there are no hidden guarantee or indemnity clauses in the contract, and that you understand the extent of your obligations if you proceed.

 

Comments are closed.