Guarantees
Guarantees

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Guarantees
  • Characteristics of guarantees
  • How guarantees are used in finance transactions
  • Why lenders prefer to have a guarantee with an indemnity
  • What is guaranteed?
  • Whose obligations are guaranteed?
  • Limited guarantees
  • Guarantor rights and protections

Guarantees are typically used in banking transactions as a form of collateral for a debt. In such circumstances, they are a contractual arrangement where one party (the guarantor) agrees to answer for the liability of another party (the principal) to another party. They do not create rights over property. In this context, guarantees are characterised as quasi-security.

This Practice Note examines:

  1. the key characteristics of guarantees

  2. how guarantees are used in financing transactions

  3. why lenders prefer guarantee documentation to include both a guarantee and an indemnity

  4. which obligations are commonly guaranteed in finance transactions—obligations under a specific transaction or 'all moneys'?

  5. whose obligations are commonly guaranteed in finance transactions

  6. the use of limited guarantees, and

  7. the importance for lenders of understanding the rights of guarantors and guarantor protections

This Practice Note does not deal with on demand guarantees (see Practice Note: On demand guarantees and bonds).

Characteristics of guarantees

A guarantee is a secondary obligation in a tripartite structure.

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Meaning of 'tripartite structure'

A guarantee is a promise by one party (the guarantor) to another party (the guaranteed party) to be responsible for the due performance of the obligations of another party (the principal) to the guaranteed party if the principal fails to perform such obligations.

Guarantees usually relate to an obligation to pay a debt but it is possible to guarantee other types