Guarantee Essay

3385 words - 14 pages

IntroductionA guarantee is a contract between a guarantor and the creditor to ensure the debtor's obligation to the creditor should the debtor fail to meet that obligation. Under guarantee, there is a contract between the creditor (such as a bank) and the guarantor. There is no contract between the debtor and the guarantor.The guarantor, also called the 'surety', may either guarantee the payment of money or the performance of some other contractual obligation. More than one person may guarantee the obligations of the debtor. In this situation, they are called co-sureties. Rights of contribution may exist between them if one is called upon to pay the whole debt and the other is not.Guarantees are by their nature a problematic and risky transaction for the surety. Generally, guarantors tend to be the debtor's family or close associates. A guarantor is never a stranger to the debtor, so the transaction has emotional and personal overtones that other contractual arrangements lack. A guarantee is a creature of faith. The guarantor believes or feels obliged to believe the debtor and what the debtor tells them about the debt. Generally a borrower tends to focus on success. The money borrowed is usually for business. Such borrowers do not generally plan for failure or even contemplate too closely the consequences of failure, with the result that they tend in their own minds to minimise the risks. Therefore the account that the debtor gives to the guarantor is generally positive and optimistic, and the guarantor tends to accept or at least pretend to accept that optimism. The reality, however, is that a lender usually requires a guarantee only if there is a high level of risk associated with the loan. In other words, the lender, who is more objective and realistic, has identified high risk in the debt. So there is a real schism between the perspective of the lender and the perspective of the borrower. The guarantor is usually deeply influenced by emotional considerations inherent in their relationship with the debtor.This is not to say that the guarantee is always disastrous or wrong. Banks and other lenders are institutionally cautious. Finance and commercial profit are not the only important motivators or factors in decision making. However, it does mean that guarantee is a highly unusual commercial transaction. It is no coincidence that so many equity cases are about guarantee.Guarantee v IndemnityA guarantee must be distinguished from an indemnity. A guarantee is a secondary obligation which only arises if and when the debtor defaults. By contrast, an indemnity is a primary obligation that arises even in the absence of any default. The obligation in an indemnity (which we considered briefly in insurance) is that the promisor keeps the promisee harmless against loss. This means the promisor is liable to the promisee whether or not the debtor is at fault. An example which highlights the distinction between a guarantee and an indemnity is if the contract...

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