A guarantee is a form of transaction in which one person, to obtain some trust, confidence or credit for another, agrees to be answerable for them.
[1][12] The statutory requisites of a guarantee are, in England, prescribed firstly by the statute of frauds, which provides in section 4 that "no action shall be brought whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person, unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorized".
[clarification needed] The requirement for a signature in writing was clarified in Elpis Maritime Co v. Marti Chartering Co Inc (the "Maria D") [1992] 1 AC 21[14] and J Pereia Fernandes SA v. Mehta [2006] EWHC 813 (Ch).
This is congruent with Article 9 of the EU Directive on Electronic Commerce 2000, this specifically allowed exceptions to the 'in writing' requirement of a guarantee.
It has even been held that clicking a button to confirm personal details sufficiently discharges the Statute of Frauds requirement.
[17] Lord Tenterden's Act, which applies to incorporated companies and to individual persons,[18] was rendered necessary by an evasion of the statute of frauds, treating the guarantee for a debt, default or miscarriage, when not in writing as a fraudulent representation, giving rise to damages for a tort.
[13] According to various existing civil codes, a suretyship, when the underlying obligation is "non-valuable", is null and void unless the invalidity is the result of personal incapacity of the principal debtor[31] In some countries, however, the mere personal incapacity of a minor to borrow suffices to eliminate the guarantee of a loan made to him[32] The Egyptian codes sanction guarantees expressly entered into "in view of debtor's want of legal capacity" to contract a valid principal obligation [33] The Portuguese code retains the surety's liability, in respect of an invalid principal obligation, until the latter has been legally rescinded.
[1][36] The German code civil requires the surety's promise to be verified by writing where he has not executed the principal obligation.
[37] The Portuguese code renders a guarantee provable by all the modes established by law for the proof of the principal contract[38] According to most civil codes civil a guarantee like any other contract can usually be made verbally in the presence of witnesses and in certain cases (where for instance considerable sums of money are involved) sous signature privee[jargon] or by a judicial or notarial instrument.
[43] The competency of the parties to enter into a contract of guarantee may be affected by insanity or intoxication of the surety, if known to the creditor, or by any disability.
Though in all countries the mutual assent of two or more parties is essential to the formation of any contract,[45] a consideration is not everywhere regarded as a necessary element.
Cross guarantees enable businesses within a corporate group to support each other with raising finance, reducing risk to lenders, or to win contracts based on a stronger financial position.
[48] The liability incurred by a surety under his guarantee depends upon its terms, and is not necessarily coextensive with that of the principal debtor.
[54] The limit of the surety's liability must be construed so as to give effect to what may fairly be inferred to have been the intention of the parties as expressed in writing.
It has never been actually decided in England whether this rule holds good in cases where the principal debtor is a minor and on that account is not liable to the creditor.
[51] No fixed rules of interpretation determine whether a guarantee is a continuing one or not, but each case must be judged on its individual merits.
Frequently, in order to achieve a correct construction, it becomes necessary to examine the surrounding circumstances, which often reveal what was the subject matter which the parties contemplated when the guarantee was given, and what was the scope and object of the transaction between them.
When, however, this has occurred, the creditor, in the absence of express agreement to the contrary, may sue the surety, without informing him of such default having taken place before proceeding against the principal debtor or resorting to securities for the debt received from the latter.
(if any) of the principal debtor being first "discussed", i.e., appraised and sold, and appropriated to the liquidation of the debt guaranteed before having recourse to the sureties.
It is also permissible for the creditor to obtain redress by means of a set-off or counterclaim, in an action brought against him by the surety.
On the other hand, the surety may now, in any court in which the action on the guarantee is pending, avail himself of any set-off which may exist between the principal debtor and the creditor.
Moreover, if one of several sureties for the same debt is sued by the creditor or his guarantee, he can, by means of a third-party complaint, claim contribution from his co-sureties towards the common liability.
If the creditor has lost these securities by default or laches or rendered them otherwise unavailable, the surety is discharged pro tanto.
[74] "[E]very person who being surety for the debt or duty of another, or being liable with another for any debt or duty, shall pay such debt or perform such duty, shall be entitled to have assigned to him, or to a trustee for him, every judgment, specialty, or other security, which shall be held by the creditor in respect of such debt or duty, whether such judgment, specialty, or other security shall or shall not be deemed at law to have been satisfied by the payment of the debt or performance of the duty, and such person shall be entitled to stand in the place of the creditor, and to use all the remedies, and, if need be, and upon a proper indemnity, to use the name of the creditor, in any action or other proceeding at law or in equity, in order to obtain from the principal debtor, or any co-surety, co-contractor, or co-debtor, as the case may be, indemnification for the advances made and loss sustained by the person who shall have so paid such debt or performed such duty; and such payment or performance so made by such surety shall not be pleadable in bar of any such action or other proceeding by him, provided always that no co-surety, co-contractor, or co-debtor shall be entitled to recover from any other co-surety, co-contractor, or co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties themselves, such last-mentioned person shall be justly liable".
In the event of the bankruptcy of a surety, proof can be made against his estate by a co-surety for any excess over the latter's contributive share.
The governing principle is that if the creditor violates any rights which the surety possessed when he entered into the suretyship, even though the damage is only nominal, the guarantee cannot be enforced.
If one of a number of joint and several sureties dies, the future liability of the survivors continues, at least until it has been terminated by express notice.
[87] This ruling can be contrasted with the ruling based on different facts in Young v Schuler (1883) 11 QBD 651, where "the issue was whether Schuler had signed an agreement simply under a power of attorney on behalf of one of the named parties or, additionally, on his own behalf as a guarantor".