Guarantees and indemnities: what have you got?

Guarantees and indemnities are distinctly different in their use and purpose but also when it comes to enforceability. Understanding the difference is paramount for businesses so that they are clear on the protection these products offer and to ensure the risk to their business is managed appropriately. 

In this Perspectives mini-series, we first explore the difference between third-party guarantees and indemnities as they relate to underlying loans and the approach Courts and Tribunals take when determining which is which, important when a dispute arises.

This perennial issue arises frequently in the courts of England and other jurisdictions such as Singapore and Australia. It was notably addressed in a High Court decision earlier this year (Natwest Market v CMIS Nederland [2025] EWHC 37 (Comm)).

In Part 2, we will look more closely at the common issues involved in enforcing guarantees and indemnities.

What is the difference between guarantees and indemnities?

A guarantee by a third party, defined as a guarantor, is a contractual written promise to perform an obligation if a party defaults. In the case of a loan, for example, the third party will either pay the debt if the primary debtor fails to do so (a payment guarantee), or procure the primary debtor’s compliance with its obligations (a performance guarantee). 

The liability of the third-party guarantor is secondary to the liability of the primary debtor because it depends on (or is ‘co-extensive’ with) the primary debtor’s liability. Because the third-party guarantor guarantees the primary obligation, any changes to that obligation may discharge the secondary obligation - the guarantee.  And if there are doubts about the primary debtor’s liability - for example, if it is unenforceable or has been discharged - then generally the guarantee cannot be called upon. This is subject to the exception, for example, of on- demand bonds (but that subject deserves a separate Perspective). 

A further important characteristic is that, once the guarantor pays the debt, it has a right of subrogation or contribution against the primary debtor.

An indemnity is a contractual obligation, which does not need to be in writing, that the third party will pay a sum of money in relation to an underlying contract upon satisfaction of certain conditions.

It is independent of any liability that may arise between the parties to the underlying contract, i.e. the principal debtor and the creditor, and there is therefore no ‘co-extensiveness’. If there are doubts about the primary debtor’s liability to the creditor, then generally the indemnity can still be called upon. In other words, the surety can be liable even if the creditor is not. 

Further, it is more or less settled law that changes to the underlying contract do not affect the indemnifier’s liability, nor does the indemnifier have any right of subrogation.

Enforceability

While indemnities are more onerous on the surety than guarantees, loan agreements will often contain both, because the creditor feels more protected that way and the debtor and debtor’s group may have no alternative if they want the loan.  Given the uncertainty and the high stakes, drafters often adopt belt-and-braces wording, causing confusion, as some parts of a provision may be more consistent with a guarantee and others more consistent with an indemnity.  This opens the door for the creditor to argue that an agreement is an indemnity, and for the surety, that it is a guarantee.

The purpose of frequently used language

For example, a guarantee might introduce the concept of the surety as ‘primary’ or ‘principal’ debtor’.  The purpose of putting that language in is to preserve a surety’s liability if the principal debtor’s obligation is discharged or unenforceable, but it does not in itself transform a guarantee into an indemnity if other aspects point towards a guarantee.

Conversely, an indemnity may have language suggesting that it is payable ‘to the extent monies are not recovered’ from the primary debtor, which would be suggestive of a secondary obligation, pointing to a guarantee. But that language can equally be found to be a statement of fact, i.e. the indemnity sum amounting to what has not already been paid, rather than an indication of a guarantee.   

The courts

When it comes to interpretation, contracts of surety such as indemnities and guarantees have been clearly stated to be subject to the same principles as other contracts. 

However, courts still require clear evidence of the surety’s intended liability.  Regardless of whether it is said to be a guarantee or an indemnity, courts and tribunals will look very closely at the respective wordings to properly categorise the obligations and the context, before deciding on the correct categorisation.

In Part 2 of this mini-series we will assess the top issues that arising when enforcing both guarantees and indemnities.

This article is for information only and should not be relied upon. The opinions expressed are made in good faith and while every care has been taken in preparing this document, Hausfeld & Co LLP makes no representations and gives no warranties of whatever nature in respect of this document, including but not limited to the accuracy or completeness of any information, facts and/or opinions contained therein.