Guarantee

A contract in which one party (the guarantor) gives a second party an undertaking to answer for any debt or default of a third party in respect of a dealing between the second and third parties. Unlike a warranty, a guarantee always involves a third party.

Read our article on personal guarantees for more information:

“A personal guarantee is a unique form of contract and there is a complex body of law surrounding personal guarantees.

A personal guarantee is founded on the existence of a principal obligation being owed by one party to another. A personal guarantee is a secondary obligation (to the principal obligation) because it relies on the existence of that principal obligation.

A guarantor’s obligation under a personal guarantee only continues to the extent that the guaranteed debt (i.e. the principal obligation) is enforceable. Further to this, a guarantor’s liability is contingent upon the principal debtor’s default (i.e. non-payment of a debt that is due and payable).

Obtaining a personal guarantee from the directors of a debtor company is a common way for a creditor to limit their risk in commercial credit arrangements. In circumstances where a creditor has a personal guarantee against the directors of a company and where the company defaults on its obligations with the creditor (e.g. by non-payment), the creditor can seek payment of the unpaid debt from the guarantors (e.g. the directors).”