Guarantees and indemnities

Businesses and individuals need indemnities and guarantees every day for a wide range of uses from securing a loan to indemnifying the buyer of a business.

Although these types of agreements are often perceived to be difficult to add to existing contracts, the Net Lawman documents are as simple to understand and use as they are effective in law.


Guarantee of contract debt OR Deed of guarantee of loan

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This is a professionally drawn, short agreement that brings in a guarantor to an existing contract.

It is most likely to be used when a client or customer misses a payment deadline for work that is performed in stages, and the contractor accordingly refuses to continue his own contractual obligations. The guarantor "rescues" the first party and the deal by guaranteeing payment.

The document includes an option to change the terms of payment should you so require. For example, the debtor may agree to an increased rate of default interest, or the creditor to extended payments or a different schedule of work against which payments are made. (If you make a change that affects the obligations of the creditor or debtor, the other parties must sign too. If that happens, no-one needs to sign the document as a deed.)

Examples of when you might use this document:

An entrepreneur borrows from a friend to start a new business. The loan requires monthly payments and the borrower fails to meet them. The borrower’s brother agrees to provide an “after the event” guarantee without change to the terms of the original agreement.

A website developer agrees to write a website for a new business. Before completion, the client decides to add a great deal more work. The developer become worried that the new business might not ever launch, so insists that the directors of the client company undertake payment for the enlarged contract. This agreement would include adding a new schedule to the original agreement, by reference, and a new schedule of payments.

A builder agrees to build a house against stage payments, but the client fails to make a payment after part of the work has been done. The builder threatens to walk out. The client persuades a family member to give an assurance of the debt as instalments become due. The builder agrees to complete the contract.

Guarantee of contract performance

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This is a short agreement that can be used in any situation where there has been some disagreement about a contractor's ability to complete his original performance obligations.

It records the amendments to the deal, whereby the contractor finds another party to provide support and to guarantee the performance of the contract.

Although named simply as a guarantee document, we provide a structure for you to add changes to the terms of the original agreement. These could be changes to price, payment terms, completion date, penalties, quality of work, testing, or any other term.

Example circumstances:

A builder agrees to build a garage. Problems arise in the quality of the work and the client holds back payment. The client accepts another building firm as a guarantor and the garage is completed.

An engineering firm subsidiary fails to meet its client’s project milestones. The client threatens a penalty according to the agreement. The parent company agrees to give undertaking for the performance of the contract in return for the client waiving the penalty.

Personal guarantee of company debt

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This personal guarantee is the equivalent of the "PG" your bank might ask you to sign when storm clouds gather around your company.

It is for use in any situation requiring an individual to guarantee the debt of a company, but most usually the guarantor is a director.

The key benefit of using this document over adding a guarantee paragraph to the original contract is the simplicity of use. There is no need to edit and agree the original contract. That means less room for making a mistake and invalidating some provision of it.

It provides a wide range of options to produce a final agreement with a high level or a very high level of lender security.

It is applicable to any situation where money is owed. For example:

Bringing in a personal guarantee might be a condition of either increased lending or forbearance in the enforcement of the conditions of an existing loan.

A supplier might sell perishable stock on credit to a new company with a short trading history in return for the directors signing such agreement.

Deed of indemnity for guarantee

This is a short, professionally drawn agreement to enable a guarantor to impose a legal obligation on the person he has guaranteed to repay him if the guarantee is called.

It does not protect the guarantor from his fulfilling his obligation. It simply gives him a hard, legal basis for suing the person or company he has guaranteed in the event that his assurance is called by the party protected.

Either party to the agreement may be a company or a private individual.

Example uses:

A director has guaranteed a debt or an obligation of his company. If the company were to collapse and the guarantee called, the director could use this agreement to claim against the company as an unsecured creditor.

Director A enters his company into hire purchase agreement to buy a company car for his own use. Director B signs the personal undertaking but does not realise that A has not also signed it. B discovers the position and insists that A signs an indemnity agreement so that he makes good to B if the finance company should call on the guarantee.

A company wishes to sell a subsidiary, but the buyer is concerned about the level of debt in the subsidiary. The company agrees to indemnify the buyer if the subsidiary fails to be able to meet its obligations due in next 12 months.

Note: this is a more efficient way to deal with the circumstances than for the seller to agree to guarantee the debts because, first, the dubious solvency of XYZ will remain unknown to a creditor and second, because if the indemnity is called, the cash will go to the buyer and not to XYZ.

Deed of inter-company cross guarantee

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This cross guarantee agreement is for use by a company that seeks extra security for the performance of a contract by another company. It brings in a third party – another company or one or more individuals – to act as guarantor.

This agreement could be put in place at the same time as the related contract is signed, or at some point after the contract has started. We include optional provisions to vary the terms of the original contract if needed if the circumstances require.

The most common use of such agreement is to provide additional security for a loan.

The agreement can be used where one or more of the parties is outside of the UK.

Deed of inter-group guarantee of loan

This deed is drawn to benefit a lender or other party dealing with one or more members of a group of companies (or associated individuals). Each member of the group guarantees one or more loans or contracts made by one or more of the others.

It can be used if some of the group members are registered outside of the UK.

Use this deed at the start of a new original contract or use it to supplement an existing one. It provides strong protection for the lender or counter party.

The document additionally provides the option to vary the terms of the original agreement.

Note: where the guarantor is not a member of the same group of companies, or where you want to acquire formal assurance for performance rather than repayment, use our deed of inter-company cross guarantee instead.

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Our documents comply with the latest relevant law. Our lawyers regularly review how new law affects each document in our library.

Documents to provide additional security to an existing contract

The subject matter of these documents is of a legal-technical nature. For that reason, none of them contain the wide range of options you will find in most Net Lawman documents. They are best used by insertion of the facts only, as we guide in the extensive drafting notes provided with each document.

They can be used where one or more of the parties are outside of the UK.

Sign your agreement as a deed, or as an agreement under hand. Our guidance notes explain how to do both.

The difference between a guarantee and an indemnity

A guarantee is a promise by a third party to carry out the obligations of one of the parties to the contract should that party fail to do so.

Guarantors often are brought into a contract to give additional security on rent or loan payments, but a guarantor could be used for the performance of any terms.

For example, because the shareholders in a limited company have limited liability by definition, anyone contracting with a new company may well ask for the personal assurance in formal writing of a director.

An indemnity is similar to insurance. The indemnifier has an obligation only if a specified event actually happens.

An indemnifier compensates the party for lack of performance. For example, an inventor might say: “I will grant you a licence to make my product but if you allow anyone else to copy the design, you must indemnify me against both the revenue I could have earned by granting a licence and also the cost of going to court to claim.”

Agreeing to be a guarantor

If you agree to be a guarantor, you should always make absolutely sure that you will be able to perform the action you have guaranteed. If the guarantee is simply that rent payments are made, then of course it is simply a matter of calculating whether you would be able to pay.

However, be careful of guaranteeing something that might be challenging for anyone, such as to bring a new technology to market; or wide obligations, such as on all terms of a lease. If you are called upon to stand in for the original party, you may find yourself unable to fulfil your obligations, or you may find that you are asked to fulfil obligations you did not originally intend to cover.

We advise against being a guarantor unless you are sure you could perform the contract, and the contract is very specific.

The law relating to these documents

These documents are based on the common law of contract.

Section 4 of the Statute of Frauds Act 1677 requires that only a guarantee in writing can be enforced.

There is no such requirement in the case of an indemnity, although of course written agreement is always best as a matter of practice and for proof.

Enforcing the guarantee or indemnity

At its most simple, the damaged party will normally have to make a formal demand of the original performer before he can ask the guarantor to step in. Depending on the subject matter of the guarantee, he may even have to issue a claim to prove that the original performer cannot perform.

An indemnity however, allows the person indemnified to approach the indemnifier as soon as there is a loss.

However, despite possibly being less easy to enforce, a guarantee is usually a more powerful psychological incentive for the original performance of the contract. People dislike having to lose face to their guarantor.

Similarly, whether you have an indemnity or a guarantee, it will always be more effective against an individual than a company. By and large, people would rather avoid personal bankruptcy than avoid letting their company go down.

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