Guarantee Requirements

Nature of Guarantee

A true guarantee is a collateral undertaking.  The guarantor is liable only if the guaranteed principal defaults on the guaranteed obligations.  It is a separate obligation from the guaranteed obligation.  However, if the principal obligation terminates, a guarantee will terminate a common law unless a contrary provision is made.

The guarantee requires mutual assent, the capacity of the parties, express or implied considerations.  It is an alternative to consideration that the guarantee is given by way of a deed.

There may be a contract to which the guarantor, principal and creditor are parties.  There may be a contract between the principal debtor and surety to which the creditor is not a party.  There may be primary and secondary liability of each for the same debt with each party to a contract with the creditor.

A contract of guarantee is not a contract of utmost good faith, unlike an insurance contract. The insurer undertakes to indemnify the insured against the loss even if due to the default of the indemnified person.   In contrast, the guarantor’s obligation is a collateral obligation to enter for the default of the principal debtor.

A guarantee may be described as an indemnity in the broad sense of that word.  However, an indemnity involves an independent obligation on the part of the indemnifier.

Set-Aside

A guarantee may be set aside on much the same basis as a contract.  Mutual consent is a requirement.  Accordingly, a guarantee may be set aside on the basis that there is no agreement, there was a fundamental operative mistake, coercion, undue influence etc.

The parties to a guarantee must have legal capacity in the same way as a party to any other contract.  A guarantee by an infant is void, and not capable of being ratified under the Infants Relief Act.

Many guarantees have been set aside on the basis of undue influence.  A third party who has actual or constructive knowledge of the undue influence or the potential for it, may be affected by the set-aside.

Consideration

A guarantee which is not under seal or executed as a deed after 2009, must be supported by valuable consideration. The general principle of contract applies.  In many contexts consideration may be implied by forbearance even for a relatively short time, from enforcing against the principal debtor, at the request of the guarantor.

In the same way as with contracts, an illegal consideration is not sufficient to support a guarantee.  A guarantee may be invalid if it has a unlawful preference.  A guarantee of a loan to an infant is void.

As with contract, neither a moral consideration nor past consideration is sufficient.  The mere existence of an existing debt is not sufficient.  There may be consideration if there is an express or an implied agreement to forbear. at least for a period.

Statutory Requirement for Writing I

The Statute of Frauds 1828 provides that no action shall be brought on any special promise to answer for the debt default or miscarriage of another unless the agreement upon which such action shall be brought, or some memorandum thereof shall be in writing and signed by a party to be charged therewith or by some other person lawfully authorised by that party.

The same act provides that no representation or assurance as to the character, conduct, creditability, trade or dealings of any other persons in order to obtain credit money or goods can be sued on, unless in writing.

General principles of fraud and negligence apply to the issue of whether a person would be liable on a representation as to the credit of another.  This applies in addition to the requirement for writing.

Statutory Requirement for Writing II

The Mercantile Law Amendment Act 1856 provides with no special promise to answer for a debt, default, or miscarriage of another is to be in writing and signed by the party to be charged or some other person lawfully authorised is deemed invalid to support an action by reason only that the consideration for the promise does not appear in writing, or by necessary inference from a written document.

The Statute of Frauds only applies where there is an obligation on the part of the person to be charged to meet the primary liability of another for the latter’s death, default or miscarriage.  A primary obligation is not subject to the statute.  The existence of the third party’s liability is usually sufficient.  The Statute does not apply to a novation.

Scope of Statue

The statute has no application to an independent original promise, which is not collateral or linked to the obligation of a third party. An indemnity in the strict sense is a primary obligation and outside the statute.  A promise to pay another’s debt out of the money due to the promisor when received or a promise to give a guarantee or to give bills for a debt due is collateral and accessory, and accordingly subject to the Statute.

The Act applies where the liability arises as a result of the guarantor’s promise.  If it arises otherwise, the promise must be made to the creditor.  The main or immediate purpose of the agreement between the parties must be to secure the payment of debt or fulfilment of duty by a third party in order to be within the Statute.

It must not arise out of some larger contract where the liability for the debt arises incidentally. Where the person promising has an interest in the property including an encumbrancer or a creditor with the rights to distrain and obtains a discharge or release by the promising the creditor to be responsible for payment of debt in respect of which it exists, the promise is not subject to the statute.

Memorandum in Writing

The memorandum required need not be contemporaneous with the guaranteed transaction. However, it must exist before the action is commenced due to the wording of the statute.  If a memorandum exists, but is lost, secondary evidence may be given of its loss and contents.

The memorandum must show the names of the contracting parties.  Evidence of the consideration is not necessary.  It need only be signed by the person to be charged.  It does not matter what intentions it arose with or how it arose. The memorandum need not be in any form.  It need not expressly describe itself as a guarantee.

The memorandum may be signed by an agent who is authorised in writing or even verbally. He need not necessarily express that he is agent, and secondary evidence may be given as such.  Some agents may have implied authority to guarantee.