The terms indemnity and guarantee are widely used in contract law to describe the nature of a contractual agreement between parties. Indemnities and guarantee agreements are used in areas such insurance, mortgage agreements, corporate governance between a company and shareholders and in loan agreements. The use and meaning of these two terms is often confused and can be mistranslated by parties to an agreement. It is important to understand their differences and their legal implications.
Number of Parties
The contractual agreement arising from an indemnity is made between two parties, that is the indemnifier and the person who receives the indemnity. For example, a life insurance policy is an indemnity between the insurance company and the person buying the policy. A guarantee agreement involves three parties these are: the guarantor, the principal debtor and the principal creditor. For example in taking a student loan, a cosigner promises to pay the debt to the lender if the student defaults on the loan.
Nature of Obligations
The nature of obligations in a guarantee agreement is different from that of an indemnity. In an indemnity the indemnifier has an obligation to protect the receiver of the indemnity from loss. In the event of a loss, then the indemnifier will compensate the receiver or principle creditor accordingly. A guarantee agreement obligates a guarantor to pay a certain debt or perform a service on behalf of a principal debtor if the debtor fails to meet his obligations to the creditor.
Sequence of Liability
A guarantee agreement comes secondary to previous obligations agreed upon between the principle creditor and the principle debtor. The guarantee agreement becomes a subsidiary agreement rather than the principle agreement between the parties involved. In an indemnity the contractual liability is primary and does not require the existence of a previous agreement between the two parties. The agreement is independent of any other contracts and obligations.
Relationship between Parties
Unlike a guarantee agreement, an indemnity brings the indemnifier and the principal creditor on the same level. There is a one-on-one interaction between these parties and the liability is concurrent, meaning it is equally shared. A guarantee agreement places more emphasis on the guarantor-principal creditor relationship and the primary debtor does not necessarily carry equal liability.