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MBA-PM0051 : Distinguish between indemnity and guarantee.

Posted on: March 14, 2012

MBA-PM0051 :  Distinguish between indemnity and guarantee.

Answers: – Indemnity vs. Guarantee

Indemnity and guarantee are two important ways to safeguard ones interests when entering into a contract. There are many similarities between the two concepts though they differ a lot also. This article will highlight the differences between Indemnity and guarantee to enable readers to choose one of the two depending upon circumstances and requirements.

Indemnity

When you agree to an indemnity agreement, you agree to assume all responsibility and liability for any injuries or damages to someone else. Whenever there is an indemnity contract and one party suffers any losses, the other has the liability to indemnify for the consequences. The common phrases that are included in indemnity contracts say that the person agrees to indemnify and hold harmless or to defend, indemnify and hold harmless. If there is a clause or obligation to defend, you should also get a clause included requiring the person who is being indemnified to tender the defense to you. At least you should get the clause of right to control defense. In the absence of these provisions, the party that you are indemnifying can cost you dearly by raking up huge attorney fees and other sundry expenses. But if you are controlling the defense, you can have a say in the selection of attorney thereby minimizing litigation costs.

In general indemnity agreement covers damages, loss, costs, expenses and fees of attorneys. If there is no mention of attorney fees, the court may not require the person promising to indemnify to pay attorney fees.

Guarantee

In sharp contrast to an indemnity, a guarantee is a promise to answer for debt, default or other financial liability of another. You promise to pay for any damages or default in the event of the principal person refusing to do so or when he cannot do so. If you are a guarantor, once you have paid the principal obligation, your obligation is terminated. Guarantee clause is not the main agreement and is generally collateral to some other obligation or debt. You are held accountable or liable for this debt or obligation after you have fulfilled your obligation as a guarantor. It is therefore prudent to study all clauses or underlying contract before signing any guarantee contract.

Difference between Indemnity and Guarantee
• A guarantee is a promise to someone that a third party will meet its obligation to them. “If they do not pay you, I will pay you”.
• An indemnity is a promise to be responsible for another person’s loss and to agree to compensate them for any loss or damage on mutually agreed terms. For example, one agrees to pay the difference of repairs if they exceed a certain limit.

 

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