The following Commercial practice note provides comprehensive and up to date legal information covering:
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:
indemnity clause, see Precedent: Indemnity clause—commercial contracts
performance guarantee, see Precedent: Parent company guarantee
payment guarantee, see the Precedents listed in: Guarantees—overview
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
creates a secondary obligation (ie an obligation dependent on the primary obligor’s obligation), and
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 Practice Note: Guarantees.
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