guarantees

A guarantee is a promise made by a guarantor to a creditor to honour the performance of a primary debtor.  It is a form of security to the creditor, an agreement by which the guarantor accepts liability to answer for the debt of another as a third party to the contract.  The debtor remains primarily liable, liability of the guarantor secondary.  The guarantor undertakes the obligation at the request of the debtor and assumes liability when a debtor fails to perform.   

Contracts of guarantee:

• must be evidenced in writing, such as a written agreement, note or memorandum.
• must be signed by the party to be charged or by their authorised agent.  This may be the name written or printed, provided it is intended to operate as a signature.
• establish the guarantor as having secondary liability, the principal debtor primary liability.
• is formed, like any contract, by offer and acceptance, supported by contractual consideration and an intention to be legally bound.

Difference between a Guarantee and an Indemnity

Guarantees and indemnities are similar. However the distinction between the two is narrow, despite its importance. 

The requirements for giving an indemnity and a guarantee are different. A guarantee must be evidenced in writing and signed by the guarantor.  There are no formal requirements for an indemnity, and promises to indemnify may given orally. Both need to meet requirements for a valid contract, as they are only enforceable as contractual obligations.  

When a person gives a guarantee or promises to indemnify another person, that person will ultimately become liable if the original making the commitment (such as the payment of money or to perform a promise) does not perform.  A key difference is a question of compensating loss and seeing to the performance of the commitment. 

Liability of Guarantors and Sureties

There are two parties in a contract of indemnity; the indemnifier and the indemnified.  There are three parties in a contract of guarantee; the creditor, principal debtor and guarantor. 
A person who indemnifies assumes primary liability for performance of an obligation. An indemnity is an express obligation to compensate a creditor for any loss suffered, independent of the liability of the debtor.  In contracts of guarantee, the guarantor assumes secondary liability to answer for which the debtor who remains primarily liable.  This means the surety of a contract of indemnity is liable for the debt regardless of the position of the debtor, and whether a demand has been made upon the original borrower.  Whereas, a guarantor only becomes liable when the debtor has failed to perform its primary obligations; the liability arises when the rights against the original debtor have been exhausted. 

Variations to Guaranteed Obligations

In the absence of an express provision to the contrary in a guarantee, a bilateral variation between creditor and debtor (such as the time to pay) will usually discharge the liability of the guarantor.  This is not the case with indemnity, where the primary liability of the surety survives.  
Most documents are called guarantees even when at the law the provisions are properly considered indemnities.  Whether the provision is an indemnity or guarantee is decided not simply by reference to the title of a document, but also the proper interpretation of the document as a whole and particular words used will identify the purpose of the clause.  The difference is central for enforcement of the provision.  The proper interpretation of terms such as these frequently comes into dispute. The substance rather than form of the provision is decisive. 

In addition, the following general principles apply, subject to contract:

• Once a contract is made and an act is done on the part of the creditor, it cannot be revoked.
• If the consideration is divisible and partly performed, the guarantor will assume liability for the consideration given but the guarantee remains revocable for future liabilities.
• When a past debt or transaction is guaranteed, it may be valid where had it been promised in advance that the guarantee would be legally enforceable. 
• A guarantee of a past debt or transaction will be enforceable if the creditor promises to withhold from suing or to give time to the principal debtor, or if the creditor does so at the request of the surety.
• A guarantee of past and future transactions will be good consideration.    
• In general the contract may be voidable on the grounds of the creditor’s fraud or undue influence.
• A contract may become void on the grounds of a common mistake. 
• The main object of the promise between parties is that one party should guarantee the performance of another.  An incident to a wider transaction will not assume liability.
• A company director may guarantee the debts of a company, which is usually referred to as a personal guarantee.
• Extent of liability is detailed in the construction of contract.  The guarantee should use clear words. As with other commercial contracts, the obligations will be interpreted from the standpoint of a commercial perspective of a reasonable person the circumstances, knowing what the parties knew as at the date of the contract.
• A guarantor’s obligation is co-extensive with those of the principal debtor. If the debtor’s liability is released, so is the liability of the guarantor.
• If the guaranteed transaction varies from the terms entered into, the guarantor will not be liable.
• A guarantee may be conditional.
• A breach of contract on behalf of the debtor will not amount to effective variation and release the liability of the guarantor.
• Payment of a debt by the guarantor discharges the debt between the creditor and principal debtor.

Personal Guarantees

Personal guarantees usually take the form of a guarantee by a company director to a third party such as a bank for the debts of a company. In this way, if the company becomes insolvent, the bank has recourse to the director's personal assets to satisfy the outstanding debt.

Waranties usually differ from guarantees in commercial contracts as they are more of the nature of indemnties, hwoever personal laibility on the warranty (which is an indemnity) with the same end result. The result is likely to be that the same  person is personally liable for the debt or loss caused by the principal party's failure to perform its contractual obligations.

Guarantors have all the defences to payment and/or peformance available to them as the person primarily liable to perform the obligation. Accordingly, where a defendant is successfully able to argue that the sum for which it is liable is extinguished or diminished, the guarantor is entitled to stand in their shoes and claim the same dimunition of liability.