Guarantees and indemnities—general contract
Guarantees and indemnities—general contract

The following Commercial guidance note provides comprehensive and up to date legal information covering:

  • Guarantees and indemnities—general contract
  • Elements of a guarantee
  • Elements of an indemnity
  • Distinguishing guarantees from indemnities
  • Advantages of indemnities
  • Reasons for using guarantees
  • Issues to consider—form of guarantee/indemnity
  • Issues to consider—guarantees/indemnities from individuals
  • Issues to consider—guarantees/indemnities from companies

This Practice Note summarises the key elements of guarantees and indemnities, the circumstances in which they are used, issues that beneficiaries and lenders should consider in respect of the form of the guarantee or indemnity, and in the context of indemnities or guarantees granted by individuals or corporate entities.

For an example:

  1. indemnity clause, see Precedent: Indemnity clause—commercial contracts

  2. performance guarantee, see Precedent: Parent company guarantee

  3. payment guarantee, see the Precedents listed in: Guarantees—overview

Elements of a guarantee

A guarantee:

  1. is a promise by the guarantor to the beneficiary that a third party (the primary obligor) will perform an obligation, and/or if the third party does not perform, the guarantor will perform it or procure its performance

  2. creates a secondary obligation (ie an obligation dependent on the primary obligor’s obligation), and

  3. can never exceed the obligation of the primary obligor in the absence of wording to the contrary (ie if the primary obligor’s obligation falls away for any reason (eg illegality), the guarantor’s liability falls away too)

Guarantors enjoy a right of subrogation; once the guarantor has paid the beneficiary it may step into the beneficiary’s shoes to recover what it has paid, so if the beneficiary had any security or rights of set-off against the primary obligor the guarantor can enforce them.

For more information on guarantees in a finance transaction, see