What is the difference between indemnity and guarantee in commercial contracts?

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Same, same … but different

 

In a basic sense, providing indemnity and providing a guarantee may be seen as the same. Both provide protection in the event that things don’t go as planned. Both are used as legal vehicles to decide where risk lies, and reduce, or even eliminate, exposure to a risk.

 

However, these instruments within contracts, or perhaps contracts in themselves, are used in different ways.

 

Drilling down into the nether-reaches of legal-speak a little further, it can be seen that a guarantee is used to insure against default.

 

Guarantee

 

Perhaps the most common and widely known example of a guarantee is that of a financial loan, where a person or company will guarantee, that is go guarantor, for an individual or business who is entering into a loan agreement. The guarantor is effectively saying, if they don’t fulfil their obligation to pay the loan, then I will. Of course, any guarantor will have had to provide evidence—financial and otherwise—to satisfactorily display that they have the wherewithal to make the offer.

 

In this case, the primary obligation is between the lender (bank, financial institution, or company) and the party taking out the loan. The guarantor has no obligation at all unless and until the borrower defaults on the loan. Only then, does the guarantee come into play and the guarantor has a secondary obligation. That is, this guarantee, by the guarantor, sits dormant in the background until triggered by a default. Having put themselves into the position of guarantor, that party then stands in the shoes of the borrower, has full responsibility for the loan, and may even be sued by the lender if they do not fulfil the repayment.

 

This example is one of a monetary loan, but a guarantee can also be against failing to provide a service.

 

A guarantee then, is a legal way of protecting a provider against default. It gives the provider a second shot at being reimbursed in the event the initial borrower defaults on their obligation.

 

Indemnity

 

An indemnity is a primary obligation between the provider and the recipient. That obligation is ongoing, with the timeframe defined by legislation. It is important to note that indemnity clauses may well vary considerably in their scope, depending upon the wording, and perhaps go further than required by law. Insurance coverage for indemnity may, however, draw the line at the normal limit required by law, and provide no cover beyond that, so companies providing indemnity but assuming that insurance will cover it all, should have a close look at their insurance policy wording.

 

Companies providing goods or services are essentially agreeing to reimburse the recipient against such things as injury, death, damage, loss—and may even include circumstances where the fault was actually with the recipient. The extent of indemnity offered can vary widely, and it is vital that the words reflect the individual circumstances. Other words may also be used instead of indemnify: hold harmless, make good, reimburse, and so on.

 

Companies providing indemnity should make absolutely sure that they are clear on what they are offering. Recipients of indemnity should likewise be totally aware, particularly of phrases that may serve to dilute the offering.

 

Contractual obligations are binding, so It is crucial that all parties involved seek sound legal advice before signing, not after.

 

Commercial Law – it’s what we do. Whatever you choose to do – it will be easier with sound legal advice from the experts. Owen Hodge Lawyers. We are here to help. Contact us today on 1800 770 780 or via email at ohl@owenhodge.com.au.

 

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