Guarantee and Indemnity

What is a Deed of Guarantee?

Lenders often require guaranty and indemnity from a third party in respect of a commercial loan made to a business.  Therefore a deed of guarantee and indemnity is signed whereby one party guarantees the performance of the borrower's obligations to the lender.

In the deed, the guarantor agrees to unconditionally and irrevocably guarantee and indemnify the Lender from time to time of all obligations, liabilities and undertakings and will waive their right to protest or demand payment. The guarantee is also continuing and successive.

Some of the key provisions included in the template are:

(a) terms for guarantee and indemnity

(b) representation and warranty

How to use this Document?

This document should be carefully read by the Guarantor and the Lender.

The details of the loan facilities agreement should be clearly specified in the template.

Both the Guarantor and the Lender should sign and return a copy, and once signed, both parties should get a copy. To avoid any future disputes, both parties may wish to have their signatures witnessed.

If either party wishes to amend the agreement in the future, both parties should agree to do so, and the original agreement and amendments should be recorded in writing and signed by both parties. 

Relevant Hong Kong laws

Section 2 of the Misrepresentation Ordinance (Cap. 284) states that where a person has entered into a contract after a misrepresentation has been made to him, and—
(a) the misrepresentation has become a term of the contract; or
(b) the contract has been performed,
or both, then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled, subject to the provisions of this Ordinance, notwithstanding the matters mentioned in paragraphs (a) and (b).

Frequently Asked Questions

What is a guarantee?

A guarantee is a legal commitment to pay or fulfil the debt or obligation of another person in the event of a default by the person responsible for the debt or obligation.  Legally, it is a secondary obligation for the giver of a guarantee (also known as the "guarantor"). 

What is Indemnity?

An indemnity is similar to a guarantee, it is a contractual commitment to take responsibility for the losses of another person. This is a primary obligation, as it is independent of the obligation of the third party (the principal) to compensate (the beneficiary) the beneficiary for the loss. This is preferred by most lenders since it does not depend on the validity of the underlying transaction. Even if the underlying transaction is set aside (e.g. due to illegality), or if the guaranteed obligations have been amended, the giver of indemnity will still need to compensate as the primary obligor.

I'm the Guarantor, should I consult a lawyer before signing the Deed of Guarantee and Indemnity?

A Deed of guarantee and indemnity is a technical document and can cause personal liability to the guarantor depending on the terms of the document. It is advisable to understand your responsibilities and obligations before signing a deed of guaranty and indemnity.

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