Legal Updates for September 2021

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.