Guarantees or Indemnities?
Often in transactions, solicitors get asked about appropriate ways in which clients can be protected from various commercial scenarios such as failure to make payment by one party to another, or if any losses occur from actions of the other party in the contract which are foreseeable to happen. Two common ways of helping eliminate risks, or allaying the client’s concerns, are choosing to request indemnities or a guarantee. Below is a brief summary of what they are:
A guarantee is a contractual promise to ensure that, in the event someone cannot pay or fulfil its obligations under any contract you are in, a third party agrees to step in and promise to take on that responsibility. It is usually in written form.. An example of where they will be used is that a lender will ask the borrower to provide a guarantee. This can be useful if you want the assurance that there is someone else to pursue in the even a party cannot pay.
An indemnity is similar to a guarantee in that it is a promise to be responsible for another’s loss. However the difference is that you personally are liable to the person you give an indemnity to. It is completely independent to, and not dependant on any particular set of events happening, for example, upon the failure of someone to pay.
Instead, you usually agree to pay all costs in the event something occurs and is a primary obligation. For example, a seller of a company could agree to give an indemnity to the buyer that if there are any tax claims or issues by HMRC from during the time the seller owned the company, then the seller is effectively agreeing to pay all costs incurred, and put the buyer back in a financial position, as if any HMRC claim would not have occurred.
Whether you need an indemnity or a guarantee, or even both, needs to be carefully considered by a solicitor, so always seek advice from your solicitor if you are unsure.