Useful Resources

Guarantees

What is a guarantee?

A guarantee is a binding promise by a third party, that they will be liable for the obligations of the someone, if that person defaults on their obligations.

A contract of guarantee cannot exist unless there is first a contract or other obligation between two or more persons.

Further, if the primary obligation between the creditor and debtor is discharged, then so is the agreement between the creditor and guarantor.

If the first person defaults, technically the other party can then call on the guarantor to honour the guarantee instead of insisting the first person perform the principal obligation.

What is the nature of a guarantee?

The nature of a guarantee will generally be the assumption of personal liability for another’s debt.

It’s a collateral promise (a promise that sits side by side the first promise).

Typically, the guarantor will then be personally responsible for discharging that obligation. However, a guarantee can be made through the giving of a security, such as a bank guarantee or charge over the guarantor’s property, which will then give the creditor recourse to specific property.

Who can be a guarantor?

A debtor and guarantor cannot be the same person.

Can two people cross guarantee each other?

It is possible for joint debtors to agree between themselves, to be guarantors for each other’s debts, with those debts being treated separately and without prejudice by the creditor.

Must the guarantee be evidenced in writing?

Where the guarantee is given by way of security over the guarantor’s property, it doesn’t need to be in writing.

Where a guarantee is made to a creditor, has that collateral nature and imposes personal liability, it must be evidenced in writing.

When can a guarantee be enforced?

The law of guarantees is very technical.

Issues in the enforcement of guarantees can include:

Whether the guarantee is supported by value (consideration);
Whether the guarantee is in the form of a Deed;
Whether the guarantee stipulates that the guarantor will be liable only if the debtor defaults, or contains an indemnity clause making the third party (guarantor) liable whether or not default has occurred;
Whether the guarantee is over obligations that a debtor has already incurred (this gives rise to the issue of whether new consideration is not being provided);
Whether the guarantee is security for the performance of an obligation that the debtor is presently incurring, a future obligation (e.g. further advances of credit);
Whether there is to be any limit on the liability of the guarantor;
Whether a guarantee covers any interest or the costs of its enforcement;
Whether the guarantee stipulates that the guarantor remains liable if the primary contract that gives rise to the debtor’s obligations is varied in any way;
Whether the guarantee remains enforceable where a debtor is given "time or other indulgence or consideration";
What about when rights of co-guarantors are contested?
What happens if a co-guarantor is released;
What happens if a debtor goes bankrupt;
What matters ought to be disclosed to a guarantor about the debtor?
What about rights of subrogation – what rights does the guarantor have to stand in the shoes of the lender to seek be compensated by the debtor once the creditor has enforced the guarantee (rights of subrogation).

Many other issues can arise!

No matter how much you want to trust someone, entering into a guarantee should never be taken lightly or regarded as a simple formality. It is a serious undertaking that could leave you exposed to significant debts – and being held accountable for the debt of someone else can damage or destroy your most important personal relationships.

If you are contemplating becoming a guarantor, it is important to understand the risk that you face.