Guarantee Scope

Interpretation

The general principles of interpretation of contracts apply to guarantees. The courts seek to give effect to the intention and the understanding of the parties as expressed by them in the guarantee.  Difficult questions of interpretations may arise, particularly in relation to the scope of the guarantee and the debts intended to be covered.

Where a surety gives a continuing guarantee, limited in amount to secure a floating balance from time to time, it is presumptively applicable for part of the debt coincidental with the amount of the guarantee. Where a guarantee is limited in amount or where an amount is already fixed, where it exceeds that limit, it is presumed to be interpreted as security for part of the debt only and it is for a court to determine whether the intention was to guarantee the whole debt with the limitation of liability or to guarantee a part of the debt only.

Recital may be used for the assistance of interpretation.  Ambiguities will be interpreted against the interests of the guaranteed party. Where the consideration is not ascertainable from the document itself, verbal evidence may be admitted proving the same.

Where a written guarantee is ambiguous, verbal evidence may be given to interpret the meaning, but not to alter or vary it in any manner.

Favoured at Common Law

A surety is said to be a favoured debtor.  He is entitled to the strict adherence to the terms of his obligation.  He cannot be made liable for more than what he has undertaken.  The agreement is to be interpreted strictly.

The surety’s liability will not be unduly extended. He will not be liable for the costs of a pointless action against the creditor, if he has not been given notice of the intention to sue.  He will not be liable beyond the limit on the guaranteed demand.  However, the guarantee does contemplate transaction naturally and reasonably entered on faith of the guarantee.

In an estimating loss that is caused by the debtor’s defaults, the creditor must give credit from sums received from the principal debtor or paid by the surety to keep up the security for a guaranteed debt.  He is not entitled to the benefit of a counter security received by the surety for the principal debtor.

Liability Arising

Where the principal debtor has defaulted, the surety’s liability arises.  It may not arise until then.  After that the surety can relative to the creditor, set up an adverse claim. Demand is usually required under the guarantee document.

The default must not be due to the guarantor’s misconduct or connivance, or from outside forces such as force majeure. Precedents in this area are controversial.

Notice of default need not be given to the surety in order to trigger liability.  However, provision will commonly be made for demand and notice on foot thereof.  It is not necessary for the creditor to demand of the principal debtor, or to sue him unless this is provided for. If expressed or by implication, any condition precedent to liability is provided, this must be complied with.

It may be a condition precedent that the guarantee is executed by certain persons as co-sureties.  They must so execute unless the surety provides to the contrary. Where it doesn’t provide that the principal debtor is to execute a particular instrument, this may be a condition precedent.  However, this is a matter of interpretation of the document and standard form documents commonly provided to the contrary.

Where the guarantee is premised by way of consideration on a stipulation as to forbearance or other conditions, this must be allowed granted before the guarantee may be enforced.

Duration

The duration of the surety’s liability is a matter of intention and interpretation.  A guarantee may be given for a single credit transaction.  More commonly, guarantees are continuing, guarantees applying to a series of credits and transactions. Where there are doubts, the surrounding circumstances may be examined to see what the parties contemplated.

Where there is a monetary limit, the continuing guarantee is not exhausted by the first advance or credit equal to that amount.  A guarantee may provide that the surety is only liable for debts within a period of time and no longer.

Firms

In the absence of provision to the contrary, a continuing guarantee is revoked by any change to the constitution of a firm to or for whom the guarantee was given.  Questions may arise as to whether the surety remains liable where there is an increase in the number of persons who the subject of the guarantee.

An action may be taken by several partners of a firm upon a guarantee given to one of them if it was for the benefit of them all.  A guarantee given to trustees of a non-incorporated company or to a fluctuating body of persons or committee may be sued upon by the persons for the benefit of whom, it is given.

Action v Guarantee

The remedy against a guarantor who is not bankrupt is an action on the guarantee.  It is an action for a liquidated sum. It may be taken by a summary procedure. It may be barred by the operation of the statute of limitations.

Where a guarantee is given to more than one person; it is a question of interpretation as to whether it is given jointly or separately.  If it is given separately, anyone of the personal representative of one of them may sue by himself, although others may join as plaintiffs.

A plaintiff may join as defendant, all of the persons severally or jointly and severally liable on it. Where liability is joint only all should be joined as judgement against one in such circumstances would bar judgement against the others. A joint defendant may require that they be joined if they are within the jurisdiction.

Where parties who are liable under a several guarantee, when each is expressed to be for a limited sum, it is a matter of interpretation whether each has made themselves liable for that sum, or whether that represents the total liability of all; In one case it may be recovered against each and in other cases, payment of that sum relieves the other from further liability.

A set off a counter claim that would be maintained by the surety against the creditor.