What is the difference between indemnity and guarantee

Unlike a guarantee, an indemnity need not be in writing or signed by the indemnifier in order to be effective. More robust. Being a primary obligation, an indemnity will be valid even if the underlying transaction is set aside; unlike a guarantee, which is dependent on the underlying transaction. Furthermore, any variation to the underlying transaction will discharge a guarantor's but not an indemnifier's liability, unless the guarantor consents to the variation, or the variation is insubstantial or incapable of adversely affecting the guarantor.

For more information on the variation of guaranteed obligations, see Practice note, Variation of guaranteed obligations. Drafting issues Guarantee documents often include both a guarantee and a supporting indemnity so that the beneficiary can have the benefit of both. The exact wording of the terms of the obligation must make this clear. If there is any uncertainty, the court will choose the interpretation that is less onerous for the guarantor and will characterise the obligation as a guarantee, not an indemnity.

A guarantee must be in writing or evidenced in writing and signed by the guarantor or a person authorised by the guarantor section 4 , Statute of Frauds Guarantees and indemnities are often executed as deeds to overcome any argument about whether good consideration has been given.

For more information on the formal requirements for deeds, see Practice note, Execution of deeds and documents: Formalities for a deed.

Even though guarantees need to be in writing and signed by the guarantor, a series of documents is capable of forming a guarantee see Legal update, E-mail chain can create an enforceable guarantee Court of Appeal. The name of the guarantor in an e-mail, where there is both an intention that it is a signature and an intention to contract, will constitute a signature for this purpose see Legal update, Guidance on execution of documents at a virtual signing or closing: Guarantees.

For a list of standard form deeds of guarantee and indemnity, see Accessing Practical Law Finance's guarantees resources: Key standard documents and clauses. Other legal issues Contractual issues. Guarantees and indemnities are subject to general contract law principles on offer and acceptance, intention to create legal relations, consideration etc. For more information, see Practice note, Contracts: formation. Undue influence and misrepresentation. To avoid potential undue influence and misrepresentation issues when obtaining a guarantee from an individual, the beneficiary should obtain confirmation from the guarantor's solicitor that the transaction and its implications have been explained to the guarantor.

For more information, see Practice notes, Guarantees and indemnities: Duress, misrepresentation and undue influence and Undue influence and the Etridge principles. Capacity to give guarantee or indemnity. Ideally, the constitutional documents of the company giving the guarantee or indemnity should provide an express power to do so.

See for example, Articles of association for a public company limited by shares incorporated under the Companies Act Basis for Comparison Indemnity Guarantee Meaning A contract in which one party promises to another that he will compensate him for any loss suffered by him by the act of the promisor or the third party.

A contract in which a party promises to another party that he will perform the contract or compensate the loss, in case of the default of a their person, it is the contract of guarantee.

Liability already exists. A form of contingent contract, whereby one party promises to the other party that he will compensate the loss or damages occurred to him by the conduct of the first party or any other person, it is known as the contract of indemnity.

The number of parties in the contract is two, one who promises to indemnify the other party is indemnifier while the other one whose loss is compensated is known as indemnified. One more common example of indemnity is the insurance contract where the insurance company promises to pay for the damages suffered by the policyholder, against the premiums. When one person signifies to perform the contract or discharge the liability incurred by the third party, on behalf of the second party, in case he fails, then there is a contract of guarantee.

In this type of contract, there are three parties, i. The person to whom the guarantee is given is Creditor, Principal Debtor is the person on whose default the guarantee is given, and the person who gives a guarantee is Surety. A contract in which a party promises to another party that he will perform the contract or compensate the loss, in case of the default of a their person, it is the contract of guarantee.

In indemnity, the indemnifier can not sue the third party for loss in his own name. He can sue in the name of the indemnity-holder. It is necessary for a buyer to prove that losses arise as a result of a breach of warranty — such as a fall in the value of the shares being acquired — and other contractual issues relating to matters such as remoteness of damages apply.

An action for breach of the warranty will leave it to the court to assess the extent of the loss which can be recovered, especially when there is a dispute as to the impact of the breach of warranty on the actual market value of the shares.

With an indemnity worded appropriately, however, a buyer can recover any losses of the underlying assets of the business sustained without having to prove that there is any corresponding loss in value of the shares being acquired, and is generally not subject to contractual issues relating to remoteness and foreseeability.

An appropriately worded indemnity also assists a buyer to recover the expense of bringing a claim. Buyer protection also often includes a tax indemnity, which will allocate to the seller risk of liability for tax in the company outside the ordinary course of business up to the completion of the acquisition.

Depending on the terms of a contract, a buyer that is aware of a breach of warranty might be precluded from bringing a claim on the basis that they were aware of a breach and decided to enter into a contract regardless.

However, knowledge of a breach of contract will not prevent a buyer from making a claim under an indemnity. Indeed, buyers often negotiate an indemnity as contractual protection from a specific problem that they have discovered. Warranties are commonly subject to a series of negotiated limitations on liability that would not usually apply to indemnities although many sellers resist indemnities. Common limitations that may be sought include limiting the period during which a claim can be brought and defining the amount that may be claimed under a warranty.

The limitation period in respect of indemnities starts to run from the date on which the loss is suffered, whereas in the case of warranties the limitation period starts to run from the date of the breach of the warranty. Theoretically, therefore, the limitation period is longer under an indemnity. However, in practice, the time period for claims under a share purchase agreement is usually contractually agreed and not of much significance.

Warranties are only true at the moment they are given, so the buyer will have an interest in having them repeated to ensure effectiveness where there is a delay between exchange and completion.

However, the buyer may have to accept that there may be late or even last-minute disclosures as circumstances change. The buyer is, however, entitled to object if the seller attempts to swamp him with last-minute disclosure of matters which ought to reasonably be disclosed earlier.

The seller may be attempting to sneak through disclosure of material issues at such a late stage such that the buyer is unlikely to be able to properly consider all the implications of the disclosure. The buyer should take care to ensure the seller will be able and around to pay out indemnities or for breach of warranty.

This can be done by requiring the seller's bank, shareholders or parent company to provide guarantees; retention of part of the purchase price for an agreed period in order to satisfy any warranty or indemnity claims which may arise during that period; or set-off any warranty or indemnity claims against deferred consideration. Where the warranties or indemnities are given by more than one person, there should be clarity over who is liable.

The buyer will normally request that they will be liable on a joint and several bases as this gives the buyer the maximum possible flexibility to make claims. It is also common for sellers to enter into a contribution agreement under which they agree, as between themselves, to share any liability in specified proportions.

Warranties and indemnities offer different forms of contractual protection and it is crucial for buyers to negotiate a good balance of warranties and indemnities in a share purchase agreement depending on the circumstances and particular concerns that the buyer has. Warranties are used to "flush out" information by encouraging sellers to make disclosures whereas specific indemnities are used to protect the buyer against specific concerns that arise after disclosure and a general indemnity may be drafted to make it easier to claim for losses impacting the underlying assets or business and expenses of bring claims.

In general, an indemnity may have a number of advantages over a warranty and a claim under an indemnity is likely to be easier to establish than a claim for breach of warranty. However, sellers are also more resistant to providing indemnities. This update is provided to you for general information and should not be relied upon as legal advice.

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