Project security: bonds and guarantees by Nicholas Gould

Project security: bonds and guarantees by Nicholas Gould, Partner

Contractual indemnities
A simple contractual indemnity is a primary obligation arising between two people. A 
simple indemnity clause might state that one party “agrees to indemnify you if you suffer 
damage as a result of my negligence”. Contractual indemnities might also arise in the 
form of collateral contracts. These might simply be as a result of an assurance given 
which then induces a contract. 
In terms of more frequently encountered security, we are concerned with formal 
contracts that are ancillary to the primary contract. Common forms of ancillary or 
collateral contract include collateral warranties (duty of care deeds) or direct step-in 
agreements given to funders. They could also include letters of intent or letters of 
comfort.
Insurance
It is worth mentioning insurance before moving on to consider suretyship and in 
particular bonds. This is because insurance is a type of indemnity contract. It arises from 
a primary obligation whereby the insurer indemnifies the insured against loss caused by 
a speci! ed insurance risk. A breach of contract is not required in order for the insured 
to recover under the insurance policy. However, there are special characteristics of 
contracts of insurance, such as a duty of utmost good faith, and the requirement for the 
beneficiary to have an insurable interest.
Suretyship
A surety is a guarantor. A surety or guarantor is someone who contracts with an actual 
or potential creditor of another so as to be responsible to that creditor by way of security 
for all or part of the debt. The key characteristic of suretyship is that it is collateral to the 
main agreement, and is therefore a secondary obligation. A surety cannot be someone 
who has become liable in substitution for the liability of another. Neither can a surety be 
someone who has joint liability with another. 
According to Halsbury’s Laws:
 “A guarantee is an accessory contract by which the promisor undertakes to 
be answerable to the promisee for the debt, default or miscarriage of another 
person, whose primary liability to the promisee must exist or be contemplated.”2
In other words, it’s a secondary obligation or separate contract placing an obligation 
on a guarantor to ensure that the principal completes a certain task for a third party 
bene! ciary. If the principal fails to carry out that task then it is the guarantor’s obligation 
to perform the principal’s task. If the guarantor fails, then the guarantor is liable in 
damages.
The liability of a surety or guarantor arises because a material fault has occurred under a 
primary underlying contract. This liability under the primary contract must arise before 
liability can arise under the second surety contract.

The characteristics of suretyship are:
1. That there are two contracts. A contract of guarantee, and the underlying 
primary contract which is to be guaranteed.
2. That there are three parties. The guarantor, beneficiary and contractor. The 
guarantor and beneficiary are parties to the contract and the guarantee. The 
bene! ciary and the contractor are parties to the underlying primary contract.

Project security: bonds and guarantees by Nicholas Gould