This briefing offers a summary of the main features of guarantees under English law.  It is not a substitute for detailed or specialist advice on specific transactions or disputes.  In particular, EuroJuris users of this note should be aware that English law on guarantees develops almost entirely through decided cases, and so can change as new cases are decided in the Courts.  Please consult an English-qualified member firm for all specific or client-related enquiries.

Questions

1.                  Does a guarantee in your jurisdiction have to be in a particular form? For example does it have to be in writing, or notarised? Does it have to be registered? Are there special laws which state specific requirements for validity? 

Under English law a guarantee must normally be in writing and must be signed by or on behalf of the party acting as the guarantor (s.4 Statute of Frauds 1677). The guarantee does not need to be notarised or registered. There are no laws which state specific requirements for validity, however English case law now means that often the guarantor is required to sign a document indicating that he fully understands the legal significance of making a guarantee. 

2.                  Is there a choice of different types of guarantee? For what is each type suitable?

 Rather than there being different ‘types’ of guarantee, guarantees may be classed by the situations in which they are used. Foe example:

 (1) A guarantee may be classed as either ‘discrete’ or ‘continuing’. Discrete guarantees cover a specific transaction. The amount of debt the guarantor is willing to cover as well as the duration of the guarantee is fixed from the outset. A ‘continuing’ guarantee lasts for an indeterminate period (or until the guarantor withdraws from the agreement) and covers a flow of transactions. The debtor must keep within the limits of debt that the guarantor has agreed to.

 (2) Banks may also issue ‘demand guarantees’. In this situation, the bank will make payment upon receipt of a written request from the creditor – there need be no evidence produced of the of the debtors original default. These are also known as ‘pseudo-guarantees’

 3.                  Is there a recommended type of guarantee?

As explained above, there are not different ‘types’ of guarantee, as such. The form that the guarantee takes and its wording will depend on the original agreement from which it stems. 

4.                  Can the guarantor protect himself by using certain clauses in the guarantee agreement?

English common law would normally protect guarantors in several ways, but in most cases (e.g. of guarantees given to a bank) the written guarantee will contain valid clauses removing this protection. Examples of situations in which the guarantor is protected include:

-	where the amount covered by the guarantee is increased without the guarantor’s acceptance
-	where the underlying contract made by the principal debtor is void or unenforceable

-	where the guarantor has been specifically asked for a guarantee, he has an implied contractual  right to be indemnified by the debtor against all liabilities he incurs.
-	Subrogation – if a guarantor discharges the debt, he may take over the creditor’s rights against the debtor

5.                  Can the creditor pursue the guarantor independently, or must he try to take action against the principal debtor first?

 When approaching the guarantor, the creditor does not have to show him that any steps have been taken to pursue the principal debtor first. The creditor may pursue the guarantor without having approached the principal debtor at all.

 6.                  If two or more people are joint guarantors, can one of them claim a contribution from the other, if he is required to pay the whole debt?

 Where two or more guarantors are liable for the same amount, then unless there has been a separate agreement between them the debt must be shared equally between them. This is the case even if each of the guarantors has given a separate guarantee. A guarantor can not claim contribution if the second guarantor has guaranteed the debtors indebtedness to a different creditor.

Where the different guarantors have made guarantees to different limits, the debt must be shared proportionally between them.

 7.                  Can the guarantor claim an indemnity from the main debtor, if the guarantor is made to pay or perform obligations under the guarantee? Do any mortgaged assets pass to the guarantor if he pays the debt due to the mortgage lender?

 Where a guarantee was given at the specific request of the debtor, the guarantor has an implied contractual right of indemnity from the debtor. In principal, if a guarantor pays a debt due to a secured lender, the secured assets pass to him. Many standard guarantees normally contain a clause which prevents the passing of secured assets to the guarantor.

 8.                  How is a guarantor released? If there are joint guarantors, does a release of one of them release the others automatically?

 The guarantor will normally be released:

-	if the principal obligation is discharged (i.e. the contract to which the guarantee is secondary)
-	once the principal debtor pays the full amount of debt or is released from the debt
-	once the guarantor has paid the full amount of debt he guaranteed
-	if an act or omission by the creditor adversely affects the guarantor’s rights (there is no need to show that the guarantor has suffered any loss)
-	if the guarantor under a continuing guarantee withdraws the guarantee with respect to any future transactions
-	if a guarantee is procured by undue influence

If by releasing a co-guarantor, the creditor adversely affects the rights of the first guarantor without his consent, then under normal principals, the first guarantor will be released.

 9.                  Are there any problem areas in your jurisdiction, in relation to guarantees? How can these be avoided or the dangers reduced?

 In the past, English cases have shown there to be problems in certain situations where the guarantor has signed a guarantee without fully understanding the consequences. The courts have previously decided that in such situations, the guarantor is not liable for any debt and the creditor is unable to recover their loss. As a result, English case law now often requires that the guarantor signs an additional document confirming that they fully understand the legal significance and consequences of giving a guarantee.

 10.              Are there any special rules about consumer protection, for example where directors guarantee their companies’ borrowing from a bank?

 N.B. In the UK consumer warranties for product defects are sometimes known as ‘guarantees’, but should not be confused with guarantees in the legal sense of a third party agreeing to be held liable for the debt of another.

 The Consumer Credit Act 1974 regulates guarantees given in relation to consumer credit or consumer hire agreements. These must be made in writing.

 A company may not make a guarantee in connection to a loan made by any person  to a director of that company.

 11.              Does your country make a distinction between a caution and a guarantee? If so, what is the difference?

 Not applicable 

12.              If you are from a French speaking jurisdiction, does this recognise the terms nantissement and  fonds de commerce? Please explain the meaning of these terms.

 Not applicable 

13.              What is the meaning of a letter of intent in your jurisdiction? Is this a type of guarantee? Does the meaning depend simply on the wording of the letter?

 A letter of intent in English law is literally any letter, not necessarily relating to the law of guarantees, in which the sender expresses their ‘intent’ to do something. These letters are not usually legally binding.

‘Letters of comfort’ are types of letters of intent relevant to the law of guarantees. Comfort letters are usually written by a parent company to the creditor to give assurances about a loan made to a subsidiary company. It may be difficult to ascertain whether or not the letter was intended as a guarantee, and both the wording of the letter and the intentions of the parties must be considered in the light of the surrounding circumstances. Usually, comfort letters are not intended as guarantees and are therefore not legally binding.

 14.              If the laws of more than one state are involved in a transaction, which country’s law governs the law of the guarantor or the law of the main debtor. Note: this question is largely governed by private international law. It might be necessary to verify in your jurisdiction the case law which is concerned, because it seems that there are different interpretations of the Rome Convention. In Germany the law applicable to a guarantee according to the Rome Convention will be the law of the guarantor. In France it seems that the law applicable to the ‘cautionnement’ is the law of the main debt.

 The Rome convention was signed by the United Kingdom on 7^th December 1981, but normally applies only to contract made after the 1^st April 1991.

 The parties may insert a clause into the contract stating which law they wish to be applicable and this may be changed at any time with the agreement of all parties, provided it does not affect the overall validity of the document.

If there is no specific clause in the contract, then it will be conducted in accordance with the laws of the country with which it is most closely connected. In terms of a guarantee, this connection will be with the country in which the guarantor – as the person who will carry out the payment of the debt indicated in the document – habitually resides.

 15.              Are there any legal guarantees or claims for guarantees, such as those in Germany and other countries where for example a construction enterprise may ask the promoter for a guarantee for unpaid and uncompleted work?