A guarantee is a binding promise by a third party (‘guarantor’) to pay some debt or perform some act or duty owed by the debtor.

What is a guarantee and are you sure you want to sign it?

A guarantee is a binding promise by a third party (‘guarantor’) to pay some debt or perform some act or duty owed by the debtor. In other words, the guarantor is liable to a creditor for the obligations of a debtor. If the debtor defaults and cannot repay the debt they owe, the guarantor is called upon by the creditor to make up any shortfall. This may result in the creditor taking possession to sell any of the assets of the guarantor that have been listed as security to repay the debt.

The parties to a guarantee contract are:

  • The creditor – the person receiving the benefit of the guarantee is called the creditor. This is usually the bank, finance company, supplier or lender
  • The debtor – the person who is borrowing the money or obtaining the benefit of the contract
  • The guarantor – the person who provides the guarantee

Who can give a guarantee?

A guarantee can be given by anyone with capacity to enter into a contract. It is more unusual for parties to undertake the risk of being called on to fulfil another’s obligations if they have no connection to the debtor. The most common guarantee arrangements are related companies guaranteeing each other’s obligations, a director guaranteeing the obligations of their company or family members acting as guarantors for each other.

Formalities of contract

A guarantee is a contract. Accordingly, it will not generally be enforceable unless all the formalities of a contract have been fulfilled. The guarantee must be in writing and signed by the guarantor. In any event, it is recommended that both independent and legal advice be sought before signing a guarantee so that the guarantor’s rights, risks and liabilities can be fully explained.

How to check how much the guarantee is for

The guarantee should clearly describe how the amount of money owed will be calculated if the worst happens and the borrower defaults on payment. The guarantor should retain a copy of the contract of guarantee by the creditor. If the guarantor has not received a copy, a copy should be requested from the creditor.

What are the liabilities associated with a guarantee?

The extent and nature of the liabilities of a guarantor will depend on the words of the contract of guarantee. Some guarantees are for a fixed amount, others may be unlimited. If there are two or more people who have entered into the contract of guarantee, in most instances, the liabilities of the guarantors are joint and several.

Can a guarantee be withdrawn?

There are some circumstances where a guarantor can withdraw their guarantee before the loan has been provided. However, it is advisable to seek independent legal advice if a withdrawal or cancellation of a contract of guarantee is sought.

Conclusion

Entering into a guarantee should never be taken lightly or regarded as a mere formality. It is a serious undertaking that could leave the guarantor answerable for debts that were not of the guarantor’s own making.

If you are contemplating becoming a guarantor, it is important to understand the risks you potentially face. Contact Senior Litigation Lawyer, Lynda Lim, for a full and frank discussion.

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