A guarantee is when one person makes an agreement with the creditor of another person to answer for the debt or default of that other person. For this reason, a contract of guarantee cannot exist unless there is first a contract or other obligation between a debtor and a creditor. Further, if the primary obligation between the creditor and debtor is discharged, then so is the agreement between the creditor and guarantor. The obligations for which a guarantee may be made can be in relation to a debt but may also relate to legal or contractual obligations. The essence of a guarantee is that it gives rise to an additional liability to a creditor. If the original debtor defaults, technically the creditor can then call on the guarantor to honour the guarantee before calling on the original debtor to perform the principal obligation.
The nature of a guarantee will generally be the assumption of personal liability for another’s debt (a collateral promise). That means that if the debtor defaults, the guarantor will then be personally responsible for discharging that debt or default. Alternatively, a guarantee can be made through the giving of a security, such as a charge over the guarantor’s property, which will then give the creditor recourse to specific property to secure performance of the debtor’s obligations.
It is not possible for a debtor to also be a guarantor for the same obligation, the debtor and guarantor must be different persons. Further, the existence of joint debtors is not the same as a debtor and guarantor situation. However, it is possible for joint debtors to agree between themselves, separately from the creditor, to be guarantors for each other’s debts, with those debts being treated separately and without prejudice by the creditor. It has also been suggested that where a person unconscionably induces a creditor to believe that a contract of guarantee exists, they will be estopped from denying this obligation if the creditor then acts on this assumption (such as by releasing a security to the debtor).
Where the guarantee is given by way of security over the guarantor’s property, it need not be in writing. Where the guarantee is made to a creditor, is collateral in nature and imposes a personal liability, it must be evidenced in writing. In these circumstances it must be in writing even where the guarantor is promising to give a guarantee upon the happening of a certain event such as delivery of goods or services. Clearly, the guarantee will only exist and need to be made in writing if the principal debtor still remains liable to the creditor.