Commercial: Guarantees

WARNING

Giving a guarantee and indemnity to another person is a serious thing to do. It could result in you suffering significant financial harm and may even result in you becoming bankrupt or otherwise insolvent

What is a guarantee?

A guarantee is a binding promise or obligation by a person called the guarantor or surety to be answerable for the debt and/or obligations of another (called the principal debtor/obligor). The person who benefits from the guarantee is perhaps somewhat confusingly called the guarantee although they can also be referred to as the obligee (for example, it is not uncommon for this person to be a bank from whom the principal debtor has borrowed money).

The essential feature of a guarantee is that the guarantor assumes personal liability for the debts and obligations of the principal debtor/obligor.

In most cases the obligations imposed on the guarantor require payment/performance to occur on demand, although the provisions of the guarantee may expressly provide for a longer period of time in which to satisfy the obligations. Often the terms of a guarantee will state that they do not require the obligee to have recourse to the assets of the principal debtor first, or to have recourse to any other security that is given.

The guarantee may be uncapped

The liability of a guarantor can be capped or uncapped depending on the provisions of the guarantee document. If there is no monetary limit placed on a guarantor’s liability, and there is no temporal limitation placed on the operation of the guarantee, then the guarantor’s liability to the obligee is uncapped or unlimited. This means that the guarantor may be exposed to financial burdens it cannot afford to meet at a time that it can least afford to deal with them. These factors may cause or contribute to the guarantor’s insolvency (i.e. bankruptcy in the case of a natural person and liquidation in the case of a company).

What assets of each guarantor are exposed to risk?

Under the guarantee each guarantor’s property, whatever form it may take, is completely and fully exposed to the risk created by the guarantee. This includes all the property the guarantor presently owns and any property it may acquire in future (eg under a will; by way of gift etc).

Discharge of the guarantee

A guarantor can be discharged by release by agreement, or possibly pursuant to a rule of law that operates to discharge the obligations. The latter is obviously uncertain, and its availability is subject to detailed legal advice and should not to be readily relied upon because this remedy requires a court order.

If the guarantor’s liability is unlimited then its obligations will not be capable of being discharged by payment of a sum of money to the obligee or by the effluxion of time.

What happens if there are two or more guarantor and the guarantee describes your liability as joint and several?

If there are two or more guarantors and your liability is described in the guarantee document to be joint and several then the obligations entered into by you and your co-guarantors will operate as follows:

  • each guarantor is liable severally (ie individually); and
  • all are liable jointly.

The obligee may sue one or more severally, or all jointly, at its option. This means that the obligee can immediately enforce the guarantee against each guarantor or against just one or more guarantors to the full extent of the liability that the obligee has suffered or incurred. This concept is relevant to the indemnities being given too.

Equitable contribution and co-guarantors

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