Guarantees FAQs

Q. My bank tells me that I must give a guarantee for the loan to my business – do I have to do so?

A. No, but you need to obtain independent legal advice if you choose to do so.

Q. My mother gave a guarantee for my brother’s debts and the bank requires repayment – what can I do?

A. You will need a lawyer to review the guarantee to see if it complies with the appropriate legislation and is enforceable.

Q. What is a guarantee?

A. It is a contractual obligation to pay a debt, to perform a service for an obligation that another (the primary debtor) is commited to with a third-party (a lender), if the primary debtor defaults or does not pay or perform.

Q. What other meaning does a guarantee have?

A. A guarantee can be a promise to make a product good if it has some defect.

Q. Is the guarantee part of the contract?

A. A guarantee is a separate ("collateral") contract from that as between the primary debtor and the third-party. It is as an "add-on" to the primary debtor's contract but is a separate contract.

Q. What is the feature of a guarantee?

A. A substantial feature of a contract of guarantee is that there is no obligation by the guarantor to do anything until and unless the primary contract fails.

Q. How does the law view a guarantee?

A.  The law deals with guarantees strictly given the onerous consequences of being responsible for another. Any significant change in the contract between the creditor and the primary debtor may well void and vacate the guarantee if the guarantor was neither aware nor agreeable to the change. An example of such a change might be to advance further funds to the debtor or, an increase in the interest rate of a guaranteed loan.

Q. Can a guarantee make me liable even if there is a change in the terms of contract between the creditor and the primary debtor?

A. Creditors can draft flexible guarantees which specifically allow them to change the terms of the contract with the primary debtor without thereby affecting the guarantee.

Q. Must the guarantee be in writing?

A. A guarantee must be in writing otherwise it would be difficult prove and in certain cases unenforceable.

Q. What is the difference between a guarantee and an indemnity?

A. A guarantee is often distinguished from an indemnity in that an indeminity puts the indemnitor on a par with the primary debtor, the creditor can demand payment or performance from the indemnitor at any time, whether the primary debtor has defaulted or not.

Q. Must the obligation to pay a debt exist before I am liable?

A. There must be a debt or obligation owed from the primary debtor to the creditor before the guarantor will be called upon to pay or perform.

Q. What is the effect of death on the guarantee?

A. If there is an obligation to pay a debt or perform a service to another, upon the death of the guarantor obligation will cease but the guarantee is often drafted such that the obligation has to be satisfied by the guarantor's estate.