Guarantees and Indemnities- What’s the Difference?

A guarantee is essentially a promise from a party that it will fulfil the obligations of another party if that other party fails to fulfil its own obligations. Guarantees are widely used in corporate transactions, such as where security is required for the fulfilment of certain obligations. A guarantor will be required to fulfil the obligations under the agreement if the contracting party fails to carry them out. In sale transactions where staged payments are required, a seller with doubts about the buyer being able to pay the instalments may wish to use a guarantor who will be required to make the payments in the absence of the buyer being able to do so. Under such circumstances the seller would make the buyer and the guarantor jointly and severally liable for payment.

An indemnity is very similar to a guarantee in that it is a promise to be responsible for another party’s loss. The difference, however, is that an indemnity is a primary obligation given by the indemnifier to the party seeking the indemnity. This means that it is independent on its own right. It is quite usual to have guarantees backed up with indemnities. it is worth noting, however, that a guarantee or indemnity is only as good as the financial standing of the party giving it!

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