- Shipowners often face demands for guarantees, an additional layer of security sought by charterers, especially in cases where the shipowner is a special purpose vehicle with limited known assets.
- The following article clarifies legal distinctions between guarantees and indemnities, emphasizing why such differences matter and offering insights to safeguard the shipowner’s position.
The Significance of Guarantees
Ships, as a shipowner’s primary assets, are commonly considered security for potential charterer claims. However, charterers may insist on guarantees, particularly when dealing with shipowners lacking diverse assets. Typically, the parent company of a shipowning entity may be asked to guarantee the subsidiary’s obligations under a charterparty, providing an additional layer of security.
Terminology
- Guarantee: A contract where the guarantor pledges to the beneficiary regarding the due performance of the principal’s obligations under the underlying contract.
- Guarantor: The party providing the guarantee.
- Beneficiary: The party receiving the guarantee, potentially making a claim against the guarantor if the principal fails to perform.
- Principal: The party with whom the beneficiary initially contracts, and whose obligations the guarantor is guaranteeing.
- Indemnity: A contractual promise to compensate the beneficiary if a specified event occurs, without the need to prove a breach.
Guarantee or Indemnity
Under English law, distinctions between a guarantee and an indemnity hold crucial legal implications. A guarantee involves secondary liability, with the guarantor’s obligation contingent upon the principal’s default. In contrast, an indemnity establishes primary liability, independent of the principal’s obligations.
Avoiding Indemnities if Possible
Indemnities impose more onerous obligations on the guarantor, requiring no proof of a breach under the underlying contract. Unlike guarantees, indemnities may not benefit from the defences or limitations available to the shipowners. Careful consideration is necessary to avoid unwittingly agreeing to an indemnity when providing a guarantee.
Limiting the Scope of Guarantees/Indemnities
In situations where agreeing to an indemnity is unavoidable, steps should be taken to understand and narrow down the scope of the indemnity. Key considerations include time limits, beneficiaries, financial caps, and the applicability of defences or limitations.
Seeking Legal Advice
Determining whether an agreement constitutes a guarantee or an indemnity is a nuanced legal matter. The mere use of the term “guarantee” in a document is not conclusive. Shipowners are strongly advised to seek legal counsel to ensure a clear understanding of the nature of the agreement and to protect their position adequately. Legal experts, such as defense lawyers, can provide valuable insights and review draft guarantees for optimal protection.
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Source: Gard
