Guarantee

Components of a guarantee

There's a saying in legal circles: anus matronae parvae malas leges faciunt: little old ladies make bad law. In the history of the common law, more little old ladies than you’d expect seem to have given guarantees.The common law is therefore littered with well-meaning judgments applying (and, frankly, making up) idiosyncratic, counter-intuitive and at times plainly stupid rules just to let little old lady-guarantors off the hook.

This means it is a minefield for lawyers. You know what you find in mines: GOLD. So a guarantee is a place, like no other, where you need magic words. Some of those are explained below.

Continuing guarantee

A continuing guarantee is one where the guarantor assumes liability for all the debtor’s past, present and future obligations to a creditor. Even where the amount owing has been paid in full, the guarantor can still be liable under the same facility if there is a subsequent indebtedness. This is useful for revolving credit facilities and other forms of indebtedness with a “now you see it, now you don’t” sort of a flavour to them.

This is to overcome a principle articulated in Devaynes v Noble that payments are presumed reduce debts in the order in which the debts are incurred.

Demand guarantee

A demand guarantee is a guarantee that the guarantor must honour upon the beneficiary’s demand. The beneficiary is not required to first make a claim or take any action against the obligor of the obligation that the guarantee supports. A demand guarantee is enforceable notwithstanding any deficiencies in the enforceability of the underlying obligation.

Indemnity

Not, strictly speaking, a guarantee at all, but a contractual obligation having a similar economic effect is the indemnity. Note the statute of frauds doesn’t apply to an indemnity - which is why it’s traditionally seen as a useful thing to attach to a guarantee.

Assignment of a Guarantor's rights

A Guarantor has certain rights it acquires at law, even where it executes as a deed (such as the right of subrogation), and there is a risk that a Guarantor who assigns these rights might somehow mysteriously compromise a beneficiary's rights under the Guarantee. So, to be sure, limit that right of assignment.

See Also

• Credit Support Document
• Guarantees of the ISDA
• full title guarantee
• Limited title guarantee
• Indemnity