What is the difference between a guarantee and an indemnity?

Suretyship

Both guarantees and indemnities are common forms of what the law terms suretyship. There are important legal distinctions between the two.

What is meant by suretyship?

  • Suretyship refers to a person who is liable for the payment of another’s debt or the performance of another person’s obligations in the event of a failure to perform or a failure in relation to some other condition.

Guarantee

What is meant by a guarantee?

  • A guarantee is a promise to someone that a third party will meet its obligations to them. The best example of this is a promise that if a third party will not pay them then they will meet this obligation and pay them.

  • If for example a tour operator enters into a contract with a hotel to provide accommodation as part of a tour there may well be a guarantee clause contained in the contract. If for example the customer refuses to pay when they check out of the accommodation there may well be a clause in the contract stating that if they don’t pay the tour operator will provide the payment to the hotel.

Indemnity

What is meant by indemnity?

  • An indemnity is a promise to be responsible for another person’s loss and to then provide them with compensation for that loss. If for example, you enter a contract with a travel agent to book a holiday which includes accommodation there may well be a clause relating to indemnity which states that you will be responsible for the loss caused to that hotel by any damage you may have caused and that you will adequately compensate them.

Do both guarantees and indemnities have to be in writing?

  • According to the Statute of Frauds 1677 a guarantee must be in writing or evidenced in writing. If it is not then it is unenforceable. An indemnity can be purely oral.

  • For a guarantee to be fully enforceable there must be an agreement or a note or memorandum of the guarantee signed by the guarantor before they can be liable.

  • It is however, good practice when dealing with both of these forms of suretyship to ensure that they are fully provided for in a written agreement signed by both parties.

Demand

    For a guarantee it is often the case that there is some form of demand as a condition for the guarantee to come into play.

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For more information on:

  • Are there any other issues to be examined when establishing the difference between a guarantee and an indemnity?
  • Difficulties in distinguishing between the two