Guarantees & Indemnities in Construction Contracts

Guarantees & Indemnities in Construction Contracts

A guarantee requires the guarantor to satisfy the obligations of one of the primary parties to a contract.  The beneficiary of a guarantee will have establish their actual loss resulting from the default of the primary party, net of any set off, in order to call on the guarantee.

By contrast an indemnity requires the beneficiary of the same to be held harmless in relation to the contract or relevant event, i.e. ensure they are placed in the position they would have been in but for the same.

This distinction is important in any contract but is especially relevant in construction contracts, where it can take a very long time for liabilities to crystalize.

In Multiplex Construction (Europe) Ltd v Dunne, the Court determined that Mr Dunne had in fact agreed to provide an indemnity and not a guarantee, principally because the clause in question required Mr Dunne to “immediately” pay back the advance payment (of 4 million pounds) in the event the sub-contractor became insolvent. 

This was despite the fact that he was described as a “guarantor”; the requirement to repay the advance immediately, meant that on its true construction, the provision was an indemnity and not a guarantee.  This meant that Multiplex did not have to establish the actual loss that it suffered from the sub-contractor’s insolvency, it was simply entitled to repayment of the 4 million forthwith.

The case demonstrates the importance of the distinction between guarantees and indemnities, and the need to seek legal advice before entering into any such agreement  (apparently Mr Dunne did not).