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I.) Introduction

It is a well known rhetorical technique of post-modern jurisprudence to apologise for the impossibility and inadequacy of any translation and to translate in the awareness of an invincible difference between original and translation. The comparison between the English word "guarantee" and its assumed German equivalent "Bürgschaft" is an illustrative example of this difference. Like most legal instruments this term is taken from a  textual field consisting of all relevant sources of law like statues, contracts, precedents etc. The more one knows of this textual field the bigger becomes one`s ability to differentiate. Thus, I prefer not to translate the German terms "Bürgschaft" for “guarantee” and the term "Bürge" for “guarantor” at all. Nor would I do that with the French term “cautionnement” describing the French brother of the German Bürgschaft ¹⁾. The same goes for the word "Garantie", which obviously has the same etymological root as the English word "guarantee", but as a legal term of art does not refer to a guarantee in the sense understood by the common law, which can refer to a contract of indemnity, a bond, a letter of undertaking or a surety.

For the purposes of this article, the word "accessory" shall have the meaning of the German word "akzessorisch". When a right is refered to as being "accessory" hereinafter it is meant that any change in the prior right, to which the accessory right is connected, has a direct impact on the accessory right, e.g. when the prior right is void or transferred then the accessory right is also automatically void or transferred. This must be underlined, because according to most law dictionaries "accessory" does not seem to have exactly this connotation in Legal English.

II) Bürgschaft 

1.) The "Bürgschaft" according to § 765 BGB and the following provisions

Whenever a debtor owes money to a creditor, the question arises how this payment claim can be secured. One way is to offer real securities like mortgages, another is by movable securities such as those provided by a third person, the Bürge or guarantor, who promises to pay the debt of the main debtor to the creditor should the main debtor be unable to pay the main debt by himself. The Bürgschaft is a unilateral contract between the Bürge and the creditor, which has to be in writing. There might also be a contract between the Bürge and the main creditor, like an agency or service contract, which motivates the Bürge to stand surety for the main debtor, but this is not a prerequisite for the validity of the Bürgschaft. So far, the only difference from the guarantee under Common Law is that under Civil Law the problem of determining the consideration and the problem of past-consideration do not arise, because under Civil Law consideration is not required for a valid contract. 

aa) "Akzessorietät"

The main feature of the German Bürgschaft and a French “cautionnement” is that it is accessory in the above mentioned sense (§ 767 BGB; Art. 2012, 2013 Code Civil). This means that its origin, its worth and its discharge totally depend upon the main debt. This draws the distinction between the Bürgschaft and other movable securities like the Garantie, which resembles a contract of indemnity. The consequences of this principle are as follows. Any modification of the main debt, caused for example by delay or breach of contract, has a direct impact on the Bürgschaft. This also applies to the assignment of the main debt from the creditor to a fourth party. With the assignment of the main debt, the Bürgschaft like all other accessory securities, is automatically transferred  (§§ 412, 401 BGB). On the other hand this leads to the conclusion that the Bürge can use counterclaims, such as time limitation, the right of retention and non-performance of the main debtor, arising from the main contract, to defend himself against the creditor, even if the main debtor has waived these counterclaims (§ 768 II BGB). However, the Bürge can not exercise the main debtor's counterclaims involving a challenge to the main contract, such as rescission and set-off, because these would necessitate changes to the effects of the main contract, to which he is not a party. He can however use these counterclaims to refuse his obligation of payment (§ 770 BGB).

bb)  Requirement of Writing

Every Bürgschaft must be in writing (§ 766 BGB). This means that a deed (not necessarily under seal) must be subscribed with the personal signature of the Bürge or by notarised cross (§ 126 BGB). In accordance with EC-directive 1999/93, dated Dec. 12th 1999, the usage of digital media like e-mail is explicitly prohibited since 2001 (§ 766 S. 2 BGB). However, there is one important exception to this rule: “Businessmen” in the sense of the German Commercial Code, which includes artificial persons like trading companies (Handelsgesellschaften), can enter into a valid Bürgschaft contract orally or be the usage of digital media (§ 350 HGB= abbreviation for Handelsgesetzbuch, Germany's Commercial Code), because it is assumed that they are more experienced in business matters than ordinary persons and thereby need less protection from the law. 

Failure to obey this requirement for writing renders the contract void from its very beginning (§ 126 BGB), but this nullity can itself be cured if the Bürge pays the main debt (§ 766 BGB). This means that the Bürge, who pays in spite of the void Bürgschaft, is not entitled to be reimbursed by the creditor, but he still might take up actions against the main debtor, because insofar as he pays the main debt, he always(!) becomes the creditor of the main debtor; the main debt is assigned to him by operation of law (§ 774 BGB so- called:"cessio legis", which resembles the common law principle of subrogation) and he might sue the main debtor, if a contract exists between them. 

After payment of the main debt by either the Bürge or by the main debtor, the Bürge is entitled to have the contract deed surrendered to him. This claim finds its legal justification either in a collateral duty of the Bürgschaft itself or in § 371 BGB.

According to sect. 4 Statute of Frauds 1647, the British guarantee also has to be in writing. But there exist many differences from the German law: the requirement of writing  itself, as well as the consequences of non-compliance with this requirement. These result from the difference that sect. 4 Statue of Frauds 1647 is only a procedural rule, whereas §§ 766,126 nullifies the contract itself. 

As mentioned above, the requirement for writing of § 126 BGB is only satisfied if the deed is subscribed with the personal signature of the Bürge, whereas sect. 4 Statue of Frauds 1647 only requires that the guarantor can be identified with the help of the deed. For example, it is sufficient for the deed to bear the stamp of the grantor's company, since the English rule requires a signature not a subscription, whereas the German rule requires exactly this. A signature by the usage of mechanical devices is not sufficient (RGZ 74, 341, BGH NJW 1970,1078). The following differences are caused by the different legal consequences of non-compliance with the requirement for writing: (1)  Unlike in the case of an English guarantee it is not possible to enter into a German Bürgschaft orally and to sign the deed later. (2) It is also not possible to use a void Bürgschaft as a counterclaim, whereas the creditor of an oral guarantee can set off the guarantee claim against claims of the guarantor. 

cc) Distinction between the "Bürgschaft" and other personal securities

A clear-cut distinction must be drawn between the Bürgschaft and other personal securities like the Garantie, which is even more binding for the person standing security but ironically does not require to be in any special form. Thus, in cases of doubt there is a tendency in German courts to assume that one has  a void Bürgschaft rather than a Garantie, in order to protect the person standing security. The difference between these legal instruments is that unlike the Bürgschaft the Garantie is completely independent from the main debt. The Garantie is not accessory in the above mentioned sense. Furthermore, "Garantie" has a broader sense than Bürgschaft: the main debt under a Bürgschaft will mostly be a payment claim, whereas a person standing Garantie can theoretically guarantee  anything. However, Bürgschaft and Garantie have in common the condition that the main debtor fails to perform, which is the difference between these instruments and the third type of personal security, the kumultativer Schuldbeitritt. Whereas the liability of a person standing security either by Bürgschaft or Garantie is subsidiary to the liability of the main debtor, the person standing security by a kumultativer Schuldbeitritt is liable jointly and severally with the main debtor. 

The most suitable equivalent translation of this term is probably "surety". "A surety and a guaranty have in common that they are both bound for another person; yet there are points of difference. A surety is usually bound with his principal by the same instrument, executed at the same time and on the same consideration. He is an original promisor and debtor from the beginning and is held oridinary to every known default of his principal. .... The surety joins in the same promise as his principal and is primarily liable, the guarantor makes a second and individual promise and is only secondarily liable" (Black´s Law Dictionary 6 th. edition, page 1441). The same could be said for the distinction between the Bürgschaft and the Garantie on the one hand and the “kumultativer Schuldbeitritt” on the other.

The distinction between these three instruments is problematic, if the person standing security enters into a contract with the creditor and not with the main debtor. As mentioned above, strong preference is given by the courts to the assumption of a void Bürgschaft rather  than to one of a Garantie or a kumultativer Schuldbeitritt, both of which do not require any special form. To enter into these forms of security which are disadvantageous for him if compared with a Bürgschaft,  the decisive criterion shall be a personal economic interest ("wirtschaftliches Eigenintesse") of the person standing security. 

Similar problems exist in England if the distinction between a guarantee and a contract of indemnity is to be drawn, to which sect. 4 Statue of Frauds 1647 is not applicable. However, this provison requires a collateral promise of the person standing security whose liability is subsidiary to the main debtor. If there is an original promise of the person standing security, then this statute is not applicable. In assuming a contract of indemnity, the English courts are as reluctant as the German courts in assuming a Garantie or a kumultativer Schuldbeitritt. Surprisingly, there is also a similarity in the decisive criterion. A contract of indemnity requires a proprietory interest of the person standing security, whereas a personal interest is not sufficient. 

dd) The liability of the main debtor to the Bürge 

As mentioned above, there can be a contract between the main debtor and the Bürge which motivated the Bürge to stand security. In this case the Bürge has a contractual claim to be reimbursed by the main debtor (§ 670 BGB). As also mentioned above, the Bürge, who pays the main debt, becomes the new creditor of the main debtor, because the main debt is assigned to him by operation of law (§ 774 BGB cessio legis). So if there is a contract between him and the main debtor, he has the choice which of these claims he realises, otherwise he can only sue the former main debtor. 

Under Common Law the outcome is pretty much the same, though the justification in law differs widely from the solution of the Civil Law. The contractual claim of the Bürgen who pays the main debt, according to § 670 BGB finds its equivalent in the assumption of an implied promise of the main debtor, who made the guarantor stand guarantee. In this case a quasi-contract is assumed according to which the main debtor promised the guarantor to pay an indemnity, insofar as the guarantor has paid the main debt. Therefore, unlike under Civil Law, a problem arises if the main debtor has not asked the guarantor to stand guarantee. Traditionally, it was held that in this case the main debtor is not liable to the guarantor at all, because through the payment of the main debt the guarantor was supposed to have interfered with a third party legal relationship without any right or duty to do so. He was treated as an undutiful intervener. However, Owen vs. Tate [1975 2 All ER 129, Court of Appeal] set the precedent which put an end to this tradition. In this case it was held that the guarantor, who stands guarantee without  being asked to do so by the main debtor, has a claim to be paid an indemnity by the main debtor. This claim finds its source of law in the law of unjustified enrichment, provided that the standing of guarantee was motivated by an economic predicament. 

The automatic transfer of the main debt to the guarantor (§ 774) produces a similar result to sect. 5 of the Mercantile Law Amendment Act. 1856 , though this provision is much more complicated than the Civil Law solution. According to this provision, the former creditor is obliged to hand over all documents and titles relating to the main debt to the guarantor. He is also obliged to assign all other securities such as mortgages etc. to the guarantor, which under §§ 774, 412, 401 BGB are automatically transferred to the Bürge, if they are accessory in the aforementioned sense. Moreover, the guarantor has the right to sue the main debtor using the name of the former creditor. In this case, the Civil Law solution seems to be much more elegant and easier to handle than the over-complicated regulation in sect. 5 of the Mercantile Law Amendment Act. 1856 which itself is based upon the principle of subrogation.
 

ee) The right of the Bürgen to be reimbursed by other persons standing security

According to § 769 BGB, Mitbürgen, meaning co-guarantors, are liable to the creditor jointly and severally. Thus, the creditor has the choice whom of two Mitbürgen he sues. Provided that no other quota has been agreed upon by two Mitbürgen  the one who paid the full amount of the main debt is entitled to be reimbursed by the other one on a 50:50 basis (§§ 774, 426 BGB). English law comes to the same conclusion, as the co-guarantor who pays the main debt is entitled to be reimbursed by the other co guarantors according to the doctrine of contribution, a claim in equity. The main difference is that unlike a co-guarantor a Mitbürge has no duty to seek reimbursement by the main debtor before taking up actions against his Mitbürgen but can sue them directly.

ff) The waiver of securities by the creditor

The case of the creditor giving up other securities than a Bürgschaft or a Mitbürgschaft is regulated in § 776 BGB. According to this provision, the creditor loses the security of one Bürgschaft if he waives either another Bürgschaft or another accessory real security such as a mortgage, insofar as the waived security would have also secured the claim of the Bürge to be reimbursed by the main creditor according to §§ 776, 774 BGB. The underlying concept of this provision is that the Bürge shall not lose securities through the intervention of the creditor. This concept is realised by the Common Law in an easier way, provided that the waiving of a security by the creditor requires the consent of co-sureties. 

2.) Special types of "Bürgschaft" developed by Business Practice

Until now the Bürgschaft has been explained according to the way it is regulated in §§ 765 and the following provisions. However, this overview would be incomplete without mentioning some special types of Bürgschaft which can be contractually agreed, because of their high practical relevance.

The provision the application of which is usually excluded is § 771 BGB, according to which the Bürge has a counterclaim against the creditor, if the creditor does not sue the main debtor before he takes up actions against the Bürgen. This is a counterclaim which is unknown in England. This type of Bürgschaft is called "selbstschuldnerisch".

Differing from the principle of the strict accessory of the Bürgschaft it can be limited to certain amount of the main debt, then the Bürgschaft is called a Höchstbetragsbürgschaft. 

More than one Bürge does not have to be liable jointly and/or severally. There can be a first Bürge and a second Bürge, the latter of which  will only be liable to the creditor if the first Bürge fails to perform. This is called a “Nachbürgschaft”.

Particularly in the field of manufacture contracts, namely in construction contracts, a special type of Bürgschaft is widely used, which is called the Gewährleistungs/-or Erfüllungsbürgschaft. This means that a party,  preferably a bank, stands Bürgschaft for damage claims of the buyer against the manufacturer for failure to perform, which is the same function as a performance bond has under English law. This is possible, because at the time the Bürgschafts-contract is entered into, the main debt does not have to exist (§ 765 II BGB). It is sufficient if the main debt can be determined in the future.

In such a case it is also very common for the bank to waive the right to use the counterclaims of the main debtor arising from the main contract, in advance (Bürgschaft auf erstes Anfordern). The Bürge has to pay on demand. This means that, for example, the question whether the manufacturer has performed in an unsatisfactory manner, becomes totally irrelevant in the lawsuit between the bank and the creditor, but will be relevant if the bank as Bürge sues the main debtor. This resembles a gurantee on demand. 

3.) Guarantees by Spouses

The most controversial legal debate during the recent decade in the connection with the Bürgschaft has been caused by cases in which spouses or children without any assets or income of their own stood Bürgschaft for main debts of their husband's or parents business. Even though the details are still unclear, the premise that such a Bürgschaft can be void because it violates moral and ethical standards ("gute Sitten" in the sense of § 138 BGB) is widely unchallenged. As in England, the main argument for this is the "inequality of bargaining power" between relatives and bank. Parents who make their adult incomeless children stand Bürgschaft violate their special duty to take care of the family. It is assumed that the bank has knowledge of the parental violation of that duty. The prerequisites under which the Bürgschaft of husband or a wife is void are still a subject of controversy before the courts. At least it can be said that there is a resemblance to the English doctrine of undue influence. If the spouse can prove an actual undue influence she can void the Bürgschaft according to § 123 BGB. But is also held that sometimes an undue influence can be presumed, so that the burden to prove that there has been no such influence lies with the bank. 

4.) Guarantees according to § 648 a BGB

Pursuant to § 648 a I construction companies can ask for security for their work which they contract to do. In such cases the promotor can grant security by a bank guarantee or a “Bürgschaft” of a bank (§ 648 a II BGB). This right of the construction company is mandatory. If the promotor doesn´t grant the security within the delay set by the construction company the construction contract will be dissolved (§§ 648 a I, V, 643, 645 BGB).

III.) Literature

Berensmann, Wolfgang, Bürgschaft und Garantievertrag im englischen und deutschen Recht, erschienen in: Untersuchungen über das Spar-,Giro- und Kreditwesen, Hrsg. von Walter Hadding und Uwe Schneider, Berlin 1988

Bernstorff Christoph, Einführung in das englische Recht, 2.Aufl., München 2000

Black´s Law Dictionary, 6 th. Edition, St. Paul, Minnessota, 1990

Stefan Buske, Kreditsicherung und Nähebeziehung, Diss., Frankfurt am Main 1999

Palandt, Kommentar zum Bürgerlichen Gesetzbuch, 62. Aufl., München 2003

1)As to this French Law and German Law are very similar