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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 , 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:
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 2010 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 2002 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 2010 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") 1992 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 2006 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.
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 sales 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.
As regards the kind of note or memorandum of the guarantee that will satisfy the statute of frauds, "no special promise to be made, by any person after the passing of this act, to answer for the debt, default or miscarriage of another person, being in writing and signed by the party to be charged, or some other person by him thereunto lawfully authorized, shall be deemed invalid to support an action, suit or other proceeding, to charge the person by whom such promise shall have been made, by reason only that the consideration for such promise does not appear in writing or by necessary inference from a written document."Mercantile Law Amendment Act 1856 §3 Any writing embodying the terms of the agreement between the parties and signed by the party to be charged is sufficient; and the idea of agreement need not be present to the mind of the person signing. In re Hoyle - Hoyle v. Hoyle, I Ch., 98 (1893) It is, however, necessary that the names of the contracting parties should appear somewhere in writing; that the party to be charged, or his agent, should sign the agreement or another paper referring to it; and that, when the note or memorandum is made, a complete agreement shall exist. The memorandum need not be contemporaneous with the agreement itself.As regards the stamping of the memorandum or note of agreement, a guarantee cannot, in England, be given in evidence unless properly stamped. Stamp Act 1891. A guarantee for the payment of goods, however, requires no stamp. Nor is it necessary to stamp a written representation or assurance as to character within 9 Geo. 4. c. 14. If under seal, a guarantee may require an ad valorem Revenue stamp; and, on certain prescribed terms, the stamps can be affixed any time after execution. Stamp Act 1891, 15, amended by 15 of the Finance Act 1895
The Irish Statute of Frauds7 Will. 3. c. 12 (Ir.) has provisions identical to those found in the English Statute of Frauds.
According to several codes civil sureties are divided into conventional, legal and judicial,Codes Civil, France and Belgium, 2015, 2040 et seq.; Spain, 1823; Lower Canada, 1930 while the Spanish code further divides them into gratuitous and for valuable consideration.art. 1, 823
The German code civil requires the surety's promise to be verified by writing where he has not executed the principal obligation.art. 766 The Portuguese code renders a guarantee provable by all the modes established by law for the proof of the principal contractart. 826 According to most civil codes civil a guarantee like any other contract can usually be made verbally in the presence of witnesses and in certain cases (where for instance considerable sums of money are involved) sous signature privee or by a judicial or notarial legal instrument. See Codes Civil, France and Belgium 1341; Spain, 1244; Portugal 2506, 2513; Italy, 1341 et seq.; Pothier's Law of Obligations, Evans's ed. i. 257; Burge on Suretyship, p. 19; van der Linden's Institutes of Holland, p. 120 The French and Belgian Codes, moreover, provide that suretyship is not to be presumed but must always be expressed.art. 2015
If a surety's assent to a guarantee has been procured by fraud by the person to whom it is given, there is no binding contract. Fraud may consist of suppression, concealment or misrepresentation. However, only facts that are really material to the risk undertaken need be spontaneously disclosed. Seaton v. Burn and Burn v. Seaton, 1900 A.C. 135 The competency of the parties to enter into a contract of guarantee may be affected by insanity or intoxication of the surety, if known to the creditor, or by any disability. The ordinary disabilities are those of minors.
In some guarantees the consideration is "entire". For example, in consideration for a lease being granted, the surety becomes answerable for the performance of the covenants of the lease. In other cases it is "fragmentary" or supplied from time to time, as where a guarantee is given to secure the balance of a running account at a bank, for goods supplied. Lloyd's v. Harper, 16 Ch. Div. 319 When the consideration is "entire", the guarantee runs on through the duration of the lease and is irrevocable. When the consideration is "fragmentary", unless the guarantee stipulates to the contrary, the surety may at any time terminate his liability under the guarantee.
Total failure of consideration or illegal consideration by the party giving a guarantee will prevent its being enforced. Though in all countries the mutual assent of two or more parties is essential to the formation of any contract, See e.g. Codes Civil, Fr. and Bel. 1108; Port. 643, 647 et seq.; Spain, 1258, 1261; Italy, 1104; Holt. 1356; Lower Canada, 984 a consideration is not everywhere regarded as a necessary element. See Pothier's Law of Obligations, Evans's edition vol. ii. p. 19 Thus in Scotland a contract may be binding without a consideration to support it.Stair i. 10. 7
Where the liability of the surety is less extensive in amount than that of the principal debtor, questions have arisen in England and America as to whether the surety is liable only for part of the debt equal to the limit of his liability, or, up to such limit, for the whole debt. Ellis v. Emmanuel, 4 Ex. Div. 157; Hobson v. Bass, 6 Ch. App. 792; Brandt, Suretyship, sec. 219 The surety cannot be made liable except for a loss sustained by reason of the default guaranteed against. Moreover, in the case of a joint and several guarantee by several sureties, unless all sign it none are liable thereunder.National Pro. Bank of England v. Brackenbury 1906, 22 Times L.R. 797 The limit of the surety's liability must be construed so as to give effect to what may fairly be inferred to have been the intention of the parties as expressed in writing. In cases of doubtful import, recourse to parol evidence is permissible, to explain, but not to contradict, the written evidence of the guarantee.
As a general rule, the surety is not liable if the principal debt cannot be enforced. It has never been actually decided in England whether this rule holds good in cases where the principal debtor is a minor and on that account is not liable to the creditor.See Kimball v. Newell 7 Hill (N.Y.) 116 When directors guarantee the performance by their company of a contract which is ultra vires, and therefore not binding on the company, the directors' liability is enforceable against them personally. Yorkshire Railway Waggon Co. v. Maclure, 21 Ch. D. 309 C.A.
No fixed rules of interpretation determine whether a guarantee is a continuing one or not, but each case must be judged on its individual merits. Frequently, in order to achieve a correct construction, it becomes necessary to examine the surrounding circumstances, which often reveal what was the subject matter which the parties contemplated when the guarantee was given, and what was the scope and object of the transaction between them. Most continuing guarantees are either ordinary business securities for advances made or goods supplied to the principal debtor or else bonds for the good behavior of persons in public or private offices or employment. With regard to the latter class of continuing guarantees, the surety's liability is, generally speaking, revoked by any change in the constitution of the persons to or for whom the guarantee is given.The Partnership Act 1890 §18, which applies to Scotland as well as England, provides that "a continuing guarantee or cautionary obligation given either to a firm or to a third person in respect of the transactions of a firm, is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm to which, or of the firm in respect of the transactions of which the guaranty or obligation was given." This section is mainly declaratory of the English common law, which indicates that the changes in the persons to or for whom a guarantee is given may consist either of an increase in their number, of a diminution thereof caused by death or retirement from business, or of the incorporation or consolidation of the persons to whom the guarantee is given. In England the Commissioners of His Majesty's Treasury may vary the character of any security, given for good behavior by the heads of public departmentsGovernment Offices (Security) Act 1875, amended by the Statute Law Revision Act 1883 given by companies for the due performance of the duties of an office or employment in the public service.
In England, however, before any demand for payment has been made by the creditor on the surety, the latter can, as soon as the principal debtor has made default, compel the creditor, on giving him an indemnity against costs and expenses, to sue the principal debtor if the latter is solvent and able to pay. Rouse v. Bradford Banking Company 1894, 2 Ch. 75; Wright v. Simpson, 6 Yes. 733 and a similar remedy is also open to the surety in America. See Brandt on Suretyship, p. 290 ¶205 Extent of surety's liability In neither of these countries nor in Scotland can one of several sureties, when sued for the whole guaranteed debt by the creditor, compel the latter to divide his claim among the sureties, and reduce it to the share and proportion of each surety. However, this beneficium divisionis, as it is called in Roman law, is recognized by many existing codes.France and Belgium 2025–2027; Spain, 1837; Portugal, 835–836; Germany, 426; Netherlands, 1873–1874; Italy, 1911–1912; Lower Canada, 1946; Egypt mixed, 615,616
A person liable as a surety for another under a guarantee possesses rights against the person to whom the guarantee was given. As regards the surety's rights against the principal debtor, where the guarantee was made with the debtors consent but not otherwise,See Hodgson v. Shaw, 3 Myl. & K. 190 after he has made default, be compelled by the surety to exonerate him from liability by payment of the guaranteed debt. Antrobus v. Davidson, 3 Meriv. 569, 579; Johnston v. Salvage Association, 19 Q.B.D. 460, 461; and Wolmershausen v. Gullick, 2 Ch. 514 (1893) If the surety has paid any portion of the guaranteed debt, the surety is entitled to rank as a creditor for the amount paid and to compel repayment.
In the event of the principal debtor's bankruptcy, the surety can in England act against the bankrupt's estate, not only in respect of payments made before the bankruptcy of the principal debtor, but also, it seems, in respect of the contingent liability to pay under the guarantee. See Ex parte Delmar re Herepath, 38 W.R. 752 (1889) If the creditor has already acted, the surety who has paid the guaranteed debt has a right to all dividends received by the creditor from the bankrupt in respect to the guaranteed debt, and to stand in the creditor's place as to future .This right is, however, often waived by the guarantee stipulating that, until the creditor has received full payment of all sums over and above the guaranteed debt, due to him from the principal debtor, the surety shall not participate in any dividends distributed from the bankrupt's estate amongst his creditors. The rights of the surety against the creditor are in England exercisable even by one who in the first instance was a principal debtor, but has since become a surety, by arrangement with his creditor. Rouse v. The Bradford Banking Co., 1894 A.C. 586
The Roman law did not recognize the right of contribution among sureties. It is, however, sanctioned by many existing codes.Code Civil France and Belgium 2033; Germany, 426,474; Italy, 1920; Netherlands, 1881; Spain, 1844; Portugal 845; Lower Canada, 1955; Egypt mixed, 618, ibid. native, 506; Indian Contract Act 1872, §§146-147
The death of a surety does not per se determine the guarantee, but, save where from its nature the guarantee is irrevocable by the surety himself, it can be revoked by express notice after his death, or by the creditor becoming receiving constructive notice of the death; except where, under the testator's will, the executor has the option of continuing the guarantee, in which case the executor should specifically withdraw the guarantee in order to terminate it. If one of a number of joint and several sureties dies, the future liability of the survivors continues, at least until it has been terminated by express notice. In such a case, however, the estate of the deceased surety would be relieved from liability. The statute of limitations may bar the right of action on guarantees subject to variation by statute in any U.S. state where the guarantee is sought to be enforced.
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