Indemnity, guaranty, warranty: Learn how they differ

Contract Language. By Steven M. Harris, AMNews contributor. May 7, 2007.

CONTRACT LANGUAGE

A column examining the ins and outs of contract issues

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Have you ever wondered what the difference is between an indemnity, guaranty and warranty agreement? You have probably encountered such agreements or contract provisions in the context of executing an employment agreement, sales contract, lease or real estate contract, or loan-of-credit contract.

This column will focus on defining the three types of agreements as well as identifying key phrases which you should consider including in your indemnity, guaranty or warranty agreements.

Generally, under an indemnity agreement, you would be agreeing to assume all responsibility and liability for any injuries or damages to someone else.

It is common for the parties to an indemnity agreement to provide that in the event that one is held liable, the other shall indemnify it for the consequences. The underlying principle is that the party that is in the better position to avoid liability is given an incentive to do so by being made responsible for the consequences.

Some common phrases contained in indemnity agreements include that the person or entity agrees "to indemnify and hold harmless" or "to defend, indemnify and hold harmless."

If the indemnity agreement includes the obligation to defend, you should also include language requiring the person who is being indemnified to "tender the defense" to you. Or you should include language reserving your "right to control" the defense, including requiring your approval of any settlement.