Types of Guarantee | Guarantee Meaning | What is a guarantee in law? | What is guarantee and its types? | What are the different types of guarantees? | Business Law

Guarantee Meaning

Contract of guarantee is that contract by which one party promises to discharge the liability or to repay the loan on behalf of the third party if the third party is unable to repay the loan or to discharge the liability promised by him. A contract of guarantee is also one of the branches of contract. As the contract of indemnity, the contract of guarantee is of special nature. The guarantee is a contract between the guarantor (the person who provides the guarantee) and the creditor (usually the creditor who makes the loan). In order to be a valid and enforceable contract, it must meet certain essential requirements. It is important to know what the terms of the guarantee are: what is the extent of the guarantee, when can the creditor call for performance, and how can it be revoked. All contracts have certain considerations, including guarantees. The most common guarantee is a loan. The creditor may also agree not to take action that he would otherwise be entitled to take, or to give the business more time to meet its obligations to the creditor under the existing arrangements. As long as there is some consideration, it doesn’t matter how much or what it is.

Guarantor’s signature is normally required for the guarantee. It is possible for guarantees to be enforceable even if they are not in writing; a guarantee may be implied from the manner in which one party pays the other, or the creditor may rely on the debtor’s performance in providing credit. The guarantor guarantees to fulfill the obligations of the third party (the debtor) if the debtor fails to do so. By guaranteeing the loan you agree that you will make payment if the black sheep of the family fails to pay. Usually the guarantee is a loan. However, any form of debt can be guaranteed.

This typically involves the creditor asking the guarantor to waive various common law rights or defences in order to secure the guarantee. For example, at common law the creditor would normally be required to protect the security of the debtor; not allow the security to be lost or sold for less than fair value; not change or alter the terms of the loan with the debtor; not do anything that would materially alter the risk assumed by the guarantor; and not give up claims of the creditor against the debtor.

This could result in the guarantor being released from the guarantee if the creditor permits it. Creditors usually give up these defences or rights when they provide guarantees. In most cases, you can retain many of these rights with the right legal advice and some negotiation, or limit the circumstances in which you give up these rights.

Even if you have signed a guarantee, you may still have certain defences available to you. There are no defences available to you against creditor claims if you have signed a guarantee. The creditor and the guarantor must have mutual consent for a guarantee to be valid. Essentially, when you signed a document, you should have made clear that the guarantee was intended. We sometimes sign documents without realizing that they contain a guarantee. The signing of the document raises the presumption that you intended to enter into the very same agreement or contract as set out therein.

It is possible at times to feel that a guarantee is needed; for example, to support a family member making the leap into business or to help your company expand. You cannot stand by the guarantee in court if you provided it in spite of duress, undue influence, or other circumstances that the law considers to be illegal. In every case, the creditor cannot act only for its own interests. Fiduciary duties may apply to the creditor if the guarantee is requested by someone. A creditor can’t rely on the guarantee if this duty exists and the creditor breaches it.

“Non est factum” is another defence. In this case, the guarantor is actually saying that the guarantee alleged is so fundamentally different from the agreement he thought he was making that he could never have intended to guarantee. Nevertheless, if the guarantee is contained in the document which you have signed, you will have a difficult time proving your case. A guarantor may be entitled to such a defense if he or she cannot read the language. A guarantor can be found fraudulent if, in signing a new or replacement guarantee, the terms of the guarantee are altered without his/her knowledge.

It is important that any commitments the creditor made to you about the guarantee are incorporated into the guarantee. The creditor has been accused of misleading customers by promising that it would not use the guarantee; or that it would only be used if someone else committed default. Creditors cannot be bound by a commitment unless it is written down and is normally stated in a guarantee document.

Paying the creditor gives you the right to recover that money from the debtor. A creditor can also assign its rights against the principal debtor. The debtor has to have the ability to pay you for these rights to have any value to you. Before signing the guarantee, most creditors insist that the guarantor gets independent legal advice from a solicitor. In this way, the creditor can enforce the guarantee if necessary. If you want to protect your rights, you should seek out an independent legal opinion from a solicitor with experience in business law.

What are the main features of contract of guarantee?

The contract of guarantee is clarified as a tripartite nature. They are as follows:

i) Creditor- The person to whom the guarantee is given in the contract of guarantee.
ii) Principal debtor– The person in respect of whose default the guarantee is given.
iii) Surety– The person, who gives the guarantee, is a surety.

What are the different types of guarantees?

The contract of guarantee can be classified in different senses. From the viewpoint of nature, objective and the act the guarantee may be classified as follows:

a) On the ground of time frame

Under this, the guarantee can be classified as follows:

(i) Retrospective guarantee

Where the contract of guarantee is concluded for an existing debt called retrospective guarantee. This type of contract can be concluded for the past task too.

(ii) Prospective guarantee

The guarantee concerned with future transactions is called a prospective guarantee. It may also be for particular or unlimited transactions of the parties as mentioned by the contract that is to say it may be given either for a single transaction or for a series of transactions.

(iii) Continuing guarantee

Continuing guarantee is such a guarantee which is given for a series of transactions. It is related to the present to future transactions. Therefore this sort of guarantee doesn’t confine to a single transaction rather it covers a series of present to future transactions.

b) On the ground of liability

Under this the guarantee can be classified as follows:

i) Limited guarantee

Where the guarantee is given for the particular amount and transaction that is called a limited guarantee.

ii) Unlimited guarantee / What is an unlimited guarantee?

Where the guarantee is given for the unlimited amount and transaction or time is known as an unlimited guarantee.

iii) Absolute guarantee

Where the surety without any condition imposes the burden upon him it is called absolute guarantee.

iv) Conditional guarantee

Where the liability is committed to being accepted after fulfilling a certain condition that is called a conditional guarantee.

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Smirti

(Founder of Management Notes)
MBA,BBA.

I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.

I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,

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