Introduction to guarantees and indemnities essentials

Guarantees and indemnities are very similar in nature and are very common in financing transactions. In both cases, the person providing the guarantee or indemnity will become liable for the debt if the borrower does not satisfy it.

Most documents are called guarantees, but in fact also contain indemnity provisions. This means it is common practice for the provisions in a guarantee document to include indemnity language. It is also common for a guarantee document (most likely in deed form, that is, a deed of guarantee) to refer to a party as being the "guarantor" whether the party is a guarantor or whether the party is indemnifying the lender for the borrower’s liability.

Features of guarantees and indemnities

This guidance note explains what a guarantee is, and separately, what is an indemnity. It also explains, among other things:

• • each of their uses;
• • parties involved; and
• • the nature of their respective obligations and liabilities.

See Features of guarantees and indemnities.

Characteristics of guarantees

A guarantee is a secondary obligation in a tripartite structure. This guidance note explains the meaning of secondary obligation and tripartite structure, with examples to aid legal practitioners’ understanding of these characteristics of guarantees.

A guarantee is a quasi-security. This guidance note also explains:

• • the meaning of quasi-security;
• • the difference between security and quasi-security; and
• • what do quasi-securities do.

See Characteristics of guarantees.

Formalities for creating a guarantee

This guidance note focuses on the formalities for creating a guarantee document. It explains the legal principles behind forming a binding guarantee that is often in the form of a deed.

This guidance note outlines the reason why a guarantee document generally should be in deed form, and includes drafting tips to help construe a guarantee document as a deed. Importantly, it explains the requirements relating execution of a deed of guarantee, including state and territory based requirements, Corporations Act 2001 (Cth) requirements, and those under the National Credit Code (as included in Sch 1 of the National Consumer Credit Protection Act 2009 (Cth)).

See Formalities for creating a guarantee.

What is guaranteed, and whose obligations are guaranteed

Guarantees often guarantee all the obligations of the principal to the guaranteed party in relation to a specific transaction only. It can be:

• • an “all moneys” guarantee; or
• • a limited guarantee.

This guidance note explains a guarantee that is for a specific transaction, an “all moneys” guarantee, and a limited guarantee. It also provides drafting tips for an “all moneys” guarantee and a limited guarantee, in particular, a guarantee that is limited in amount.

A guarantee can cover the obligations of the borrower, but it can also cover the obligations of third parties. This guidance note explains both these scenarios.

Example wording for provisions in a guarantee is provided throughout this guidance note to aid legal practitioners’ understanding.

See What is guaranteed, and whose obligations are guaranteed.

The difference between guarantee and indemnity

While guarantees and indemnities are very similar in nature, there are some key differences between them. This guidance note sets out these key differences (such as form, liability, scope, enforceability, release and subrogation) in an easy-to-read table form, and explains the relevant legal concepts, supported by case law references.

See The difference between guarantee and indemnity.

The use of guarantees and indemnities in financing transactions

Guarantees and indemnities are very common in financing transactions. This guidance note explains how they are used, including their respective use as a quasi-security and as a risk management tool.

See The use of guarantees and indemnities in financing transactions.

The right of set-off and other selected legal concepts in guarantees explained

Set-off rights may arise between two parties who owe each other monetary debts. This guidance note explains set-off in general, as well as set-off in the specific context of a guarantee. Examples from recent case law is provided to aid legal practitioners’ understanding of this important legal concept in guarantees.

This guidance note also explains the right of subrogation, and the autonomy principle.

See The right of set-off and other selected legal concepts in guarantees explained.

Selected key definitions in a guarantee and general drafting tips

This guidance note explains selected key definitions in a guarantee, including “Guarantor”, “Guaranteed Money” and “Security Interest”. For each definition, example wording is provided, as well as drafting tips that legal practitioners would find useful.

See Selected key definitions in a guarantee and general drafting tips.

The guarantee and indemnity clause and other selected key provisions in a guarantee and general drafting tips

This guidance note explains selected key provisions in a guarantee. This includes, importantly, the guarantee and indemnity clause. The limited in amount clause is also explained, as well as representations and warranties made by the guarantor to the lender. For each provision, example wording is provided, as well as drafting tips that legal practitioners would find useful.

See The guarantee and indemnity clause and other selected key provisions in a guarantee and general drafting tips.