Legal Developments in Oman - March 7, 2011

Guarantees and Indemnities
Guarantees and indemnities are both forms of what is known in legal terminology as ‘suretyship’. Suretyship refers to a promise by one person to be liable for the payment of another person’s debts or the performance of another person’s obligations in the event of that person’s failure to pay or perform (or a failure in relation to some other condition).

Guarantees and indemnities are often confused, but there are important distinctions between them.

Guarantees

A guarantee is a promise by the guarantor to a third party that a principal will meet its obligations to the third party – whether by the payment of a debt or by the performance of a duty. In essence, the guarantor says to the third party, “if the principal fails to pay you or perform for you, I will do so.”

Indemnities

An indemnity is a promise to be responsible for another party’s loss and to compensate them for that loss on an agreed basis. For example, the indemnifying party might say, “if it costs more than $100 to repair your car, I will reimburse you for any amounts over $100.”

Guarantees vs. Indemnities

The key distinction between a guarantee and an indemnity is that a guarantee presupposes an original contract, while a contract of indemnity is original and independent.

A guarantor cannot be liable for anything more than what was promised by the principal. The concept is that the obligations of the guarantor stand behind those of the principal and only come to the fore once the principal is in breach of its obligations. The guarantee can therefore be seen to be an accessory contract to the principal’s main contract.

An indemnity, in contrast, provides for concurrent primary liability with the principal to answer for a third party’s loss.

Whether the contracting parties choose to use a guarantee or an indemnity, it is important to record all important contractual promises in writing.