Guarantee

"A guarantee will generally be upheld in Ontario based on the same principles as in the U.S. However, there is an argument that a guarantee will fall away in the event of a bankruptcy, while an indemnity will be upheld. Accordingly, it is common practice in Ontario to have indemnity language included. The rationale behind this is that a guarantee is regarded as a secondary obligation. Thus, the guarantor's obligation may fall away if the guaranteed obligations are void, illegal, ultra vires, or otherwise unenforceable. Consequently, lenders will attempt to preserve the guarantor's liability by including language in the guarantee that essentially converts it into an indemnity. An indemnity, on the other hand, is a primary obligation whereby the indemnifier remains liable notwithstanding an invalidity or defect in the guaranteed obligations. However, the dividing line between what language constitutes a guarantee vs. an indemnity is not clear-cut and will turn on the interpretation of the contract and intention of the parties. Mere use as ""principal debtor and not as surety only"" language will not automatically qualify the contract as an indemnity [Communities Economic Development Fund v. Canadian Pickles Corp. (1991), 85 D.L.R. (4th) 88 (S.C.C.)].

It is suggested that a clause as follows under the heading ""Indemnity"" be included:

""The Guarantor shall indemnify and save the Lender harmless from and against any losses which may arise by virtue of any of the Guaranteed Obligations, the Loan Agreement, any Security held by the Lender for all or any part of the Guaranteed Obligations, or any other agreement relating to any of the foregoing being or becoming for any reason whatsoever, in whole or in part (a) void, voidable, ultra vires, illegal, invalid, ineffective or otherwise unenforceable by the Lender in accordance with its terms, or (b) released or discharged by operation of law (collectively, ""Indemnifiable Circumstances""). For greater certainty, these losses shall include, without limitation, the amount of all Guaranteed Obligations which would have been payable by the Borrower but for the existence of an Indemnifiable Circumstance""."