Guarantee

By:

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock… read more.

Updated: Aug 20, 2021

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An agreement to be answerable for the debt, default or miscarriage of another. This is different from an indemnity, which is a contract where one party agrees to suffer the loss of the other (e.g. fire insurance). The indemnifier takes a primary liability; there may be only two persons concerned. A guarantor assumes secondary liability. He agrees to pay if the debtor defaults. He must have no interest in the contract between the debtor and creditor. He is sometimes called a surety. The contract of guarantee itself must be accompanied by a memorandum in writing. Normally, on default of the debtor, the creditor may take action against the guarantor without first having taken action against the debtor. If the guarantor pays he may then himself attempt to recover from the debtor. The liability of a guarantor may disappear if the contract between debtor and creditor is altered without his notice. The law on guarantees is fairly extensive. Points to note are: (1) the guarantor in recovering from the debtor can take over a security previously held by the creditor; (2) he may also claim contribution from co-sureties.

Reference: The Penguin Business Dictionary, 3rd edt.