A guarantee is a form of transaction in which one person, to obtain some trust, confidence or credit for another, agrees to be answerable for them. It may also designate a treaty through which claims, rights or possessions are secured. It is to be differentiated from the colloquial "personal guarantee" in that a guarantee is a legal concept which produces an economic effect. A personal guarantee, by contrast, is often used to refer to a promise made by an individual which is supported by, or assured through, the word of the individual. In the same way, a guarantee produces a legal effect wherein one party affirms the promise of another (usually to pay) by promising to themselves pay if default occurs.
In legal terminology, the giver of a guarantee is called the surety or the "guarantor". The person to whom the guarantee is given is the creditor or the "obligee"; while the person whose payment or performance is secured thereby is termed "the obligor", "the principal debtor", or simply "the principal".
Sureties have been classified as follows:
Those in which there is an agreement to constitute, for a particular purpose, the relation of principal and surety, to which agreement the secured creditor is a party; those in which there is a similar agreement between the principal and surety only, to which the creditor is a stranger; those in which, without any such contract of suretyship, there is a primary and a secondary liability of two persons for one and the same debt, the debt being, as between the two, that of one of those persons only, and not equally of both, so that the other, if they should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid.Duncan Fox and Co. v. North and South Wales Bank, 6 App. Cas. 11
Etymology Guarantee is sometimes spelt "guarantie" or "guaranty".The guarantee (person) is sometimes distinguished from the guaranty (obligation). It is from an Old French form of "warrant", from the Germanic word which appears in German as wahren: to defend or make safe and binding.
Common law
England In English law, a guarantee is a contract whereby the person (the guarantor) enters into an agreement to pay a debt, or effect the performance of some duty by a third person who is primarily liable for that payment or performance. The extent of the debt that the guarantor is liable to this debt is co-extensive to the obligation of the third-party.Joanna Benjamin, Financial Law, OUP, 2007, Chapter 4.2 It is a collateral contract, which does not extinguish the original obligation for payment or performance and is secondary to the primary obligation.Chitty on Contracts 32nd edition, Sweet & Maxwell, Volume II Chapter 45-001, Lakeman v Mountstephen LR 7 HL 17, also cf Halsbury Laws of England & Wales, Para 1013 It is rendered null and void if the original obligation fails. Two forms of guarantee exists in England: guarantees creating a conditional payment, wherein if the principal fails, the guarantor will pay. Under this form, the guarantee is not enforceable until failure occurs.Joanna Benjamin, Financial Law, OUP, 2007, Chapter 4.2 a "see-to-it" obligation, where the guarantor's obligation is to ensure that the principal will carry out the obligation. Failure of the principal to do so will automatically make the guarantor in breach of his contractual obligation, on which the creditor can sue.Norwich and Peterborough Building Society v McGuinness EWCA Civ 1286
The liabilities of a guarantor in law depend upon those of the principal debtor, and when the principal's obligations cease the guarantor's do too,Norwich and Peterborough Building Society v McGuinness EWCA Civ 1286. See Stacey v. Hill, 1 KB 666 (1901). See Bateson v. Gosling, 1871 L.R. 7, 14 except in certain cases where the discharge of the principal debtor is by the operation of the law.With regard to release of the debtor See Finley v Connell Associates Lloyds Rep PN 62 or also In re Fitzgeorge ex parte Robson, 1 KB 462 (1905) The co-extensive, secondary nature of the liability of the guarantor along with the fact that the guarantee is a contract to answer default, debt, or miscarriage; crucially differentiates the guarantee from an indemnity.Norwich and Peterborough Building Society v McGuinness EWCA Civ 1286 Also See Joanna Benjamin, Financial Law, OUP, 2007, Chapter 4.2 If, for example, a person wrongly supposes that someone is liable to them, and a guarantee is given on that erroneous basis, the guarantee is invalid by virtue of the law of contracts, because its foundation (that another was liable) failed.Mountstephen v. Lakeman, L.R. 7 Q.B. 202
No special phraseology is necessary to form a guarantee. What distinguishes a guarantee from insurance is not any difference between the words "insurance" and "guarantee", but the substance of the contract entered into by the parties.Seaton v. Heath—Seaton v. Burnand, 1 QB 782, 792, C.A. (1899); In re Denton's Estate Licenses Insurance Corporation and Guarantee Fund Ltd. v. Denton, 2 Ch. 188 (1899); see Dane v. Mortgage Insurance Corporation, 1 Q.B. 54 C.A. (1894)
The statutory requisites of a guarantee are, in England, prescribed firstly by the statute of frauds, which provides in section 4 that "no action shall be brought whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person, unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorized". This in effect means that a guarantee is not invalid but are merely unenforceable through a chose in personam. The requirement for a signature in writing was clarified in Elpis Maritime Co v. Marti Chartering Co Inc (the "Maria D") 1 AC 21Swarbrick, D., Elpis Maritime Company Limited v Marti Chartering Company Limited (The Maria D): HL 1991, accessed 8 November 2022 and J Pereia Fernandes SA v. Mehta EWHC 813 (Ch). In the former, an agreement had been signed by a party purporting to have signed only as an agent, but this fact was considered insignificant. In the latter, it was held that a contract was enforceable either by written agreement signed by the guarantor or his agent OR; if the guarantee was oral, a separate note or memorandum of the agreement could make the guarantee similarly enforceable. In the former, the court held it was sufficient that it was written or printed by the guarantor, an initial within an email was sufficient but a standard header name in an email was not. The court believed that the minor action was sufficient to engage the Statute as it had long been held that a single fingerprint, or "X" was sufficient. The Electronic Communications Act 2000 created a power to issue statutory instruments to modify legislation so as to be congruent with modern use of electronic communications. This is congruent with Article 9 of the EU Directive on Electronic Commerce 2000, this specifically allowed exceptions to the 'in writing' requirement of a guarantee. It has even been held that clicking a button to confirm personal details sufficiently discharges the Statute of Frauds requirement.Beale and Griffiths (2000) LMCLQ 467, 473
The second requisite is Lord Tenterden's Act (9 Geo. 4. c. 14),9 Geo. 4. c. 14 §6 which enacts that "no action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade or dealings of any other person, to the intent or purpose that such other person may obtain credit, money or goods upon unless such representation or assurance be made in writing signed by the party to be charged therewith".i.e. "upon credit", Lyde v. Barnard, 1 M. & W. 104 Lord Tenterden's Act, which applies to incorporated companies and to individual persons,Hirst v. West Riding Union Banking Co., 2 K.B. 560 C.A. (1901) was rendered necessary by an evasion of the statute of frauds, treating the guarantee for a debt, default or miscarriage, when not in writing as a fraudulent representation, giving rise to damages for a tort.Pasley v. Freeman, 3 T.R. 51In Scotland, where a guarantee is called a "cautionary obligation", similar enactments to those just specified are contained in the Mercantile Law Amendment Act (Scotland) 1856 §6.
Statute of frauds
The statute of frauds does not invalidate a verbal guarantee, but renders it unenforceable. It may therefore be available to support a defense to an action, and money paid under it cannot be recovered. An indemnity is not a guarantee within the statute, unless it contemplates the primary liability of a third person. It need not, therefore, be in writing when it is only a promise to become liable for a debt if the person to whom the promise is made should become liable.Wildes v. Dudlow, L.R. 19 Eq. 198; Harburg India-Rubber Co. v. Martin, 1902, 1 K.B. 786; Guild v. Conrad, 1894, 2 Q.B. 885 C.A.
Neither does the statute apply to the promise of a del credere agent to make no sales on behalf of his principal except to persons who are absolutely solvent, and renders the agent liable for any loss that may result from the non-fulfilment of his promise. A promise to give a guarantee is within the statute, though not one to procure a guarantee. The general principles which determine what are guarantees within the statute of frauds are: (1) the primary liability of a third person must exist or be contemplated;Birkmyr v. Darnell, 1 Sm. L.C. 11th ed. 299; Mounistephen v. Lakeman, L.R. 7 Q.B. 196; L.R. 7 H.L. 17 (2) the promise must be made to the creditor; (3) there must be no liability by the surety independent of an express promise of guarantee; (4) the main object of the parties to the guarantee must be the fulfilment of a third party's obligation;See Harburg India-Rubber Comb Co. v. Martin, 1 K.B. 778, 786 (1902) and (5) the contract entered into must not amount to a sale by the creditor to the promiser of the security for a debt or of the debt itself.See de Colyar's Law of Guarantees and of Principal and Surety, 3rd ed. pp. 65–161, where these principles are discussed in detail.