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Understanding Indemnities and Guarantees
What is an indemnity?
An indemnity is a legally binding promise to compensate someone for a loss. According to Barron’s Canadian Law Dictionary, the definition of an indemnity is “the obligation resting on one to make good any loss another person has incurred or may incur by acting at the former’s request or for his benefit”.[1]
An indemnity may be included as an express term in a contract as a way for parties to manage risk. For instance, in many contracts, both parties will agree to compensate the other party (or agree to be “held harmless”) for any costs related to the other party acting contrary to (or “breaching”) the contract. In some circumstances, where the risks of breach are unascertainable at the time of completion of the transaction, a portion of the amount paid under the contract may be delivered “in escrow” and held by an independent party for a certain period after the closing of the transaction.
Example where escrow funds may to be used towards indemnity payments:
This may occur in business sales where the acquiring party (the “Buyer”) is relying on the promises (the “representations and warranties”) of the selling party (the “Seller”) relating to facts of the Seller’s business (or certain material facts of the business) stated in the purchase agreement. If the Buyer places part of the purchase price in escrow, those funds may be retained and later returned to the Buyer if, upon completion of the transaction, it is determined that the Seller provided false or misleading representations or warranties.
However, not all indemnities are exclusively rooted in contract. Some indemnities may be derived from statute. For example, Alberta’s Environmental Protection and Enhancement Act (the “Act”) assigns responsibility for environmental matters to various parties who have an interest in property, including the handling of hazardous substances, even if the contract does not explicitly assign those duties to a party.
This type of statutory indemnity may come into play in contracts related to property, such as commercial leases. Unless exceptions apply or the lease says otherwise, the tenant will be responsible for ensuring compliance with the Act during their use of the property and the landlord will be responsible for ensuring compliance before and after the property is handed over to the tenant.
Example of indemnities that may be derived from the Act:
In this example, if the landlord is fined or incurs other costs payable to a governmental authority due to non-compliance with the Act during the tenant’s occupancy, the tenant will be responsible for indemnifying the landlord for those expenses. The reverse is also true: if the tenant is required to make payments to a governmental authority due to non-compliance with the Act that occurred before the tenant’s occupancy, the landlord will be responsible for indemnifying the tenant for those payments.
What is a guarantee?
A guarantee, often seen in financing arrangements, is a particular type of indemnity. The indemnifying party in a guarantee (often referred to as the Guarantor) agrees to indemnify the lender/creditor for the breach of the debtor (the primary contracting party) under the loan or credit agreement. The key (but not always conclusive) distinction between a guarantee and an indemnity is that a guarantee is a secondary obligation, meaning it flows from the breach of some other person (the primary debtor/contracting party) under a separate contract.
Under the Alberta Guarantees Acknowledgement Act[2](the “GAA”), a guarantee:
“Means a deed or written agreement whereby a person, not being a corporation, enters into an obligation to answer for an act or default or omission of another…”
All guarantees that fall under the GAA’s definition must comply with the strict formal requirements of the GAA.
Recent confirmation of the law in Alberta
In a recent case, WBI Home Warranty Ltd v Patel, 2025 ABKB 307 (“WBI v Patel”), the Alberta Court of King’s Bench considered the difference between an indemnity and a guarantee.
Here, the Court cited the Supreme Court of Canada to confirm that determining whether a contract is an indemnity or a guarantee is a question of contractual interpretation and will not depend solely on the name or label of the contract as an “Indemnity Agreement” or a “Guarantee”.[3] In interpreting a contract, it must be read “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”.[4] Therefore, even if a contract is labelled as an indemnity agreement, it may still be considered a guarantee and thus fall under the requirements of the GAA.
As described in WBI v Patel, if an indemnity arises because of a breach by a third-party, it may be distinguished from a guarantee if the indemnifying party has some larger connection to the third-party transaction and stands to benefit from the larger transaction in some way. On the other hand, if the Guarantor in a guarantee is only related to the transaction by their obligations under the guarantee and will not benefit from the larger transaction, then it will likely be deemed a guarantee.
Takeaways
For Clients
For clients, it is helpful to understand what an indemnity and a guarantee are because both terms frequently come up in transactions and related agreements. As described, sometimes indemnity obligations may arise without being explicitly stated in a contract. As indemnities and guarantees generally create financial obligations, it is important for clients to recognize when and how these obligations are created, what they are agreeing to be financially liable for and when they may be held responsible under their guarantee or indemnity. Clients should consult a lawyer to help understand their indemnity or guarantee obligations.
For Lawyers
It is important for practitioners to distinguish between indemnities and guarantees to ensure that these agreements are accurately drafted and legally enforceable. As the lines between indemnities and guarantees can sometimes be blurred, lawyers may consider erring on the side of caution by ensuring that all agreements that create (or may create) an indemnity obligation as a secondary obligation comply strictly with the requirements of the GAA.
[1] John A Yogis et al, Barron’s Canadian Law Dictionary, (Hauppauge, N.Y.: Barron’s Educational Series, 2009). sub verbo “indemnity”.
[2] RSA 2000, c G-11, s 1(a).
[3] WBI v Patel at paras 35-37, citing Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 [Sattva] and Communities Economic Development Fund v Canadian Pickles Corp, 1991 CanLII 48 (SCC).
[4] WBI v Patel at paras 35, citing Sattva at para 47.
This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.
