The Dividing Line between Indemnities and Guarantees

When drafting indemnities and guarantees, parties should take heed of the differences between the two.

In particular, parties should consider the following:

(a) Whether parties intend:

i.  for the promisor's obligation to hinge upon a default of the principal contract (thus rendering the contract between the parties a guarantee, rather than an indemnity); or

ii.  for the promisor's obligation to be separately and independently enforced (this being a characteristic of an indemnity, rather than a guarantee); and,

(b) Whether parties intend for a variation of the principal contract to have the effect of discharging the promisor's obligations (this again being a characteristic of a guarantee, as distinct from an indemnity).

The latest judgment of the Admiralty Court at Kuala Lumpur in GJ Consultancy Sdn Bhd v Gan Teck Lim [2021] MLJU 933 examines the scope of indemnities and guarantees, and the differences between the two.

In doing so, the Admiralty Court undertook a detailed examination of the documents in question and relied on leading Common Law authorities, which were read with provisions of the Malaysian Contracts Act.