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A. General rules and principles

I.  The nature of a guarantee (Die Natur der Garantie)

A guarantee is a special form of a contract. So it requires an agreement and consideration, whether it is actual or implied. As an additional requirement, the contract has to be in writing. By definition, a guarantee is an accessory contract by which the promisor undertakes to be liable to the promisee for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist or be contemplated (City of London v New Hampshire Insurance Co (1991) 3 JIBFL 144).
Generally, a guarantee is confined to a single credit or transaction only. As a special form, a continuing guarantee is one which extends to a series of transactions.

A guarantee always requires an other, principal, obligation of some other obligor (General Surety and Guarantee Co Ltd v Francis Parker Ltd (1977) 6 BLR 16 at 21 per Donaldson J.); it is always both ancillary and subsidiary to the other contract or liability on which it is founded (Mountstephen v Lakeman (1871) LR 7 QB 196 at 202, Ex Ch, per Willes.). Usually, this liability will be a contractual, but the guarantee is also valid, if it is based on non-contractual liabilities, such as those resulting from bailment or tort (Moschi v Lep Air Services Ltd (1973) AC 331 at 347-348, (1972) 2 All ER 393 at 400-401, HL, per Lord Diplock.).

II. The form of a guarantee (Die Form der Garantie)

The principles of construction governing contracts in general apply equally to contracts of guarantee (Hargreave v Smee (1829) 6 Bing 244; Eshelby v Federated European Bank Ltd (1932) 1 KB 254 at 266, DC, per Swift J.), but there is a necessity of writing to prevent the danger of a guarantee being established by false evidence, or by evidence of loose talk, when it never really meant to make such a contract (Steele v M´Kinlay (1880) 5 App Cas 754 at 768, HL, per Lord Blackburn.). Nevertheless, an oral guarantee is not void, but it cannot be enforced by action. Even if a guarantee is made abroad and binding there, it cannot be enforced in England by an action, since the mode of proof is governed by the lex fori (Leroux v Brown (1852) 12 CB 801; see „Conflict of Laws“ vol. 8 paras 600, 769.).

The guarantee-agreement is in the form of a facility letter which may be drawn up by the issuer or his solicitor. It includes a definitions clause and general conditions precedent; the amount available and its duration is limited. There are regulations about the full indemnity against the issuer’s liability to beneficiaries and an unconditional authority to pay beneficiaries without questioning the validity of a demand. There are representations and warranties as well as a default clause and provisions for increased costs, taxation changes and changes in law (see as an example enclosure: Guarantee and bond insurance facility, taken from: Practical Commercial Precedents, Vol. 4: published by Longman)

III.  The parties (Die Parteien)

Generally, three parties are involved in a guarantee, although the guarantee-contract is only between two of them.

1.  principal debtor
The principal debtor is the person who is primarily liable to the creditor for the obligation guaranteed; but he is not a party to the guarantor’s contract.

2.  creditor
The creditor is the person to whom the obligations of the principal debtor and the guarantor are owed. Of course, the same person can never be both: creditor and surety.

3.  guarantor
The guarantor is the person who engages with the creditor of a third party to be liable for some debt, default or miscarriage.

a. Liability of the guarantor
There are two different types of guarantee: The first is a promise given by the guarantor which becomes effective if the principal debtor fails to perform his obligations. The second is a promise that the principal debtor will perform his obligations. The guarantor is under no liability if the principal debtor’s obligation is, usually by performance, discharged, because his liability is only secondary. With the performance, in the one case the conditional promise never becomes effective; in the other, there is no breach of contract by the guarantor (General Produce Co v United Bank Ltd (1979) 2 Lloyd’s Rep 255 at 258 per Lloyd J.).

b. extent, arise and duration of guarantor’s liability
The guarantor cannot be made liable for more, referring to the extent stated in the terms of contract (Swan v Bank of Scotland (1836) 10 Bli NS 627, HL.), than he has undertaken (Wright v Russel (1774) 2 Wm Bl 934 at 935; Coghlan v S H Lock (Australia) Ltd (1987) 3 BCC 183 at 187, PC.). The extent of the guarantor’s liability has not to be co-extensive with that of the principal debtor, but as far as it exceeds it, it is not a guarantee liability (Re Moss, ex p Hallet (1905) 2 KB 307 at 314 per Darling J; Re British Salicylates Ltd (1919) 2 Ch 155 at 159 per Astbury J.). 
The guarantor’s liability arises when the principal debtor has made default (Moschi v Lep Air Services Ltd (1973) AC 331, (1972) 2 All ER 393, HL.), but not until then (Halliwell v Counsell (1878) 38 LT 176; Blest v Brown (1862) 4 De G F&J 367.). Generally, the guarantor is immediately liable to the full extent of his obligation on default of the principal debtor. Modern guarantee forms usually require the guarantor to pay on demand (M S Fashion Ltd. V Bank of Credit and Commerce International SA (in liquidation) (No 2) (1993) 3 All ER 769 at 785.), thus for the creditors cause of action against the guarantor a valid demand is necessary (Re Brown´s Estate, Brown v Brown (1893) 2 Ch 300.). It can be made orally (Re Colonial Finance, Mortgage, Investment and Guarantee Corp. Ltd (1905) 6 SR NSW 6 at 9.) and it is sufficient that the demand makes clear to the guarantor that the creditor requires to be paid a sum which is due (N R G Vision Ltd v Churchfield Leasing Ltd (1988) 4 BCC 56, (1988) BCLC 624.). But where there is no express or implied requirement for demands in the guarantee-contract, the guarantor is liable without being requested to pay (Hitchcock v Humfrey (1843) 5 Man & G 559; Rede v Farr (1817) 6 M & S 121; Thomas v Nottingham Incorporated Football Club Ltd (1972) Ch 596, (1972) 1 All ER 1176.).

The duration of the guarantor’s liability depends on the terms of the guarantee. In the case of a single guarantee (which covers a single credit or transaction only; see above) the guarantor’s liability extends to the one credit or transaction agreed upon. In the case of a continuing guarantee the liability endures until the credits or transactions covered by the guarantee have been exhausted or until the guarantee itself has been revoked. In some cases, it is hard to say if the guarantee is a continuing one or not; it always depends on the construction of the guarantee in its context.

c.  enforcement
A guarantee can be enforced by everybody to whom or for whose benefit it was given (Williams v Byrnes (1863) 1 Moo PCCNS 154 at 198.), usually the creditor. The remedy against a guarantor on his guarantee is by action in the High Court and even in a county court, which has now unlimited jurisdiction to hear and determine any action founded on contract (County Courts Act 1984 S 15 (amended by the High Court and County Court Jurisdiction Order 1991, SI 1991/724, art 2 (8), Schedule Pt I).). If the person who wants to sue the guarantor is not a party to the guarantee, he is only entitled to do so if he can possess an actual beneficial right which places him in the position of beneficiary under the contract (Gandy v Gandy (1885) 30 ChD 57 at 66-67.).
In the case that the guaranteed debt and the securities for the debt were assigned, the assignee acquires all the rights of the assignor, thus he can sue in his own name on the guarantee (See Re Hallett & Co, ex p Cocks, Biddulph & Co (1894) 2 QB 256, CA.). It is possible for the guarantor to rely upon a creditors claim by way of set-off, if he has a money claim against him.

d.  The guarantor’s rights
The most important right is that the guarantor is entitled to be reimbursed by the principal debtor if he has made a payment for which the debtor is ultimately liable. The right to indemnification includes the reimbursement of the sum he has actually paid for the principal debtor, and interest (Re Fox, Walker & Co, ex p Bishop (1880) 15 ChD 400,CA; As to the courts´ power to award interest on debt and damages see the Supreme Court Act 1981 S. 35 A (added by the Administration of Justice Act 1982 S 15 (I), Sch I Pt I).). A guarantor who has paid the creditor on behalf of the principal debtor becomes to that extent a creditor of the principal debtor - the guarantor stands in the place of the original creditor (Mercantile Law Amendment Act 1856 S 5; Re Lord Churchill, Manisty v Churchill (1888) 39 ChD 174 at 176 per North J; Morris v Ford Motor Co Ltd. (1973) QB 792 at 809, (1973) 2 All ER 1084 at 1097, CA, per James LJ.). If the guarantor wishes to enforce his right to indemnity from the principal debtor may bring an action for indemnification either to the High Court or to a county court.

B.  Guarantees in leases or tenancy agreements

An original tenant remains liable for the payment of the rent notwithstanding any transfer of his interest (Bayton v Morgan (1888) 22 QBD 74, CA; Warnford Investments Ltd v Duckworth (1979) Ch 127 at 137, (1978) 2 all ER 517 at 525.); his covenant is direct and primary (Warnford Investment Co Ltd v Duckworth (1979) Ch 127 at 137, (1978) 2 All ER 517 at 525.). So if the assignee fails to pay the rent, the (original) tenant is still liable for the payment. So it can happen that tenants who thought that they had disposed of their interests in premises many years previously were being asked by landlords to comply with the covenants. The landlord is not under an obligation to notify the previous tenant when the current tenant began to default under the terms of the lease. The landlord may sue both the original tenant and the assignee for the same arrears and may obtain judgement against both (Norwich Union Life Insurance). But, of course, in relation between the tenant and the assignee, it is the assignee’s liability which is regarded as primary or ultimate (Becton Dickinson UK Ltd v Zwebner (1989) QB 208, (1988) 3 WLR 1376.).

The guarantor of a tenant’s obligation will be liable for those arising under the original contract which he guaranteed only. In order that an action may be brought on a guarantee for rent, the guarantee must be in writing, and must be given to the landlord (Nash v Spencer (1896) 13 TLR 78.).

With the Landlord and Tenant (Covenants) Act 1995 the situation has changed essentially. Now, there is a „clean break“ on the assignment. The Act provides an automatic release of tenants from their obligations under the lease on assignment; see Sec. 5. But, in certain circumstances, a landlord may require a tenant to give a limited guarantee on assignment for the performance of his assignee; see Sec. 16. Certain protection is given to former tenants and guarantors, whose liability survives an assignment: the landlord must give tenants and guarantors notice that the current tenant has defaulted within six month of the relevant sum becoming due. If the notice is not given, the landlord loses his right to recover against that party; see Sec. 17. By that, former tenants and guarantors gain some control of the situation and of their potential liability. They can take steps to enforce the assignee’s covenants or ultimately forfeit the lease.

C.  Guarantees by spouses (Garantien von Ehegatten)

It is always necessary that the commitment to take up a guarantee is the result of a free and uninfluenced decision. A guarantee procured by undue influence on the part of the creditor or by a third party is liable to be set aside (Lloyds Bank Ltd v Bundy (1975) QB 326, (1974) 3 All ER 757, CA; National Westminster Bank plc v Morgan (1985) AC 686, (1985) 1 All ER 821, HL; Woodstead Finance Ltd v Petrou (1986) BTLC 267.). Such undue influence can either be actual or presumed. If there was an actual undue influence that made the guarantor enter into the guarantee, it is necessary to prove the concrete undue influence (Barclays Bank plc v O´Brien (1993) 4 All ER 417, HL.). In cases of presumed undue influence, the guarantor only has to show that there was a relationship of trust and confidence between him and the wrongdoer of such nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the transaction.

Such confidential relationship can be established in different ways and can exist between different parties. A special type of a confidential relationship is that between husband and wife. It is not possible to presume automatically that in these relationships undue influence has been exercised (Barclays Bank plc v O´Brien (1993) 4 All ER 417.). But in particular cases, a wife may be able to demonstrate that she left all decisions on financial affairs to her husband, so that the wife reposed confidence and trust in her husband in relation to their financial affairs, and therefore an undue influence can be presumed. So for the presumption of undue influence it is in such cases enough to proof such trust and confidence without proofing an actual undue influence (Barclays Bank plc v O´Brien (1993) 4 All ER 417 at 429, HL, per Lord Browne-Wilkinson.).

Generally, there is no special obligation of a creditor, if it is a bank or other large institution or not, to explain the meaning or effect of the guarantee (Small v Currie (1853) 2 Drew 102 at 114-115 per Kindersley V-C; Barclays Bank plc v Khaira (1992) 1 WLR 623; O´Hara v Allied Irish Banks Ltd (1985) BCLC 52.). But the „Code of Practice to be Observed by Banks Building Societies and Card Issuers when Dealing with Personal Customers (December 1991)“, issued jointly by the British Bankers´ Association, the Building Societies Association and the Association for Payment Clearing Services, states in para 12.1:

The banks and building societies will advise private individuals proposing to give them a guarantee or other security for another person’s liabilities
(a)  that by giving the guarantee or other security he or she might become liable instead of or as well as that other person, and
(b)  that he or she should seek independent legal advice before entering into that guarantee or security.

And, if the creditor is aware that the principal debtor and the guarantor are cohabitees, he has to take reasonable steps to satisfy himself that the guarantor entered into the transaction freely and in knowledge of the true facts. So he has to warn the guarantor at a meeting not attended by the principal debtor of the amount of the potential liability and of the risks involved. The creditor has to advise the guarantor to take independent legal advice (Barclays Bank plc v O´Brien (1993) 4 All ER 417 at 429-430, HL, per Lord Browne-Wilkinson.). If the creditor does not so, he is always exposed to the risk of loosing security for the credit given to the principal debtor, because then the guarantor has a right to set aside the transaction if there was an undue influence.

D. Bank Guarantees (Bankgarantien)

A company, for example a trading, services or manufacturing company, may be required to support its covenants with a bank guarantee or bond. It is possible to obtain the required guarantee or bond at a certain rate from a bank or financial institution. (As an example see enclosure: Guarantee and bond Insurance facility, taken from: Practical Commercial Precedents, Vol. 4.) In this case, the bank does not act as a creditor but as a guarantor on the principal debtor’s behalf. The bank is liable for some debt, default or miscarriage of the principal debtor up to the extent she has undertaken. If payment is demanded from the bank under a bond or guarantee, the debtor has to indemnify the bank immediately. If he fails to do so, the bank is entitled to cancel the Facility and declare to be under no obligations under the Facility letter. The bank has all the rights of a guarantor as stated above (A.III.3.d.).

E.  Special problem: Co-Guarantors

In certain cases, there is more than just guarantor to secure the same debt. The co-guarantors can be bound either jointly and severally (Underhill v Horwood (1804) 10 Ves 209 at 226 per Lord Eldon LC) or severally (Ward v National Bank of New Zealand (1883) 8 App Cas 755 at 765, PC.) and by the same or different instruments (Ellesmere Brewery Co v Cooper (1896) 1 QB 75; Mayhew v Crickett (1818) 2 Swan 185 at 192; Pendlebury v Walker (1841) 4 Y & C Ex 424; Swain v Wall (1641) 1 Rep Ch 149; Craythorne v Swinburne (1807) 14 Ves 160 at 167, 170 per Lord Eldon LC; Dallas v Walls (1873) 29 LT 599; Ware v Horwood (1807) 14 Ves 28.), but they all share one common liability.

Generally, the release of one of two joint or joint and several guarantors without the consent of the other will bar the creditor’s right of action against the other on the guarantee (Mercantile Bank of Sydney v Taylor (1893) AC317, PC.). Moreover, where one co-guarantor is released the security given by the other will also, apparently, be discharged (Hodgson v Hodgson (1837) 2 Keen 704; Bolton v Salmon (1891) 2 Ch 48 at 53 per Chitty J.; Smith v Wood (1929) 1 Ch 14, CA.).

To avoid the release of all co-guarantors if only the release of one is intended, the creditor has to reserve remedies against the other co-guarantor(s) (Commercial Bank of Australia v Wilson & Co´s Estate (Official Assignee) (1893) AC 181, PC.). Today, most forms of guarantee contain provisions permitting the creditor to release one or more co-guarantors without affecting the liability of the others. So the creditor is entitled to vary the principal contract by discharging one guarantor while nevertheless preserving the other guarantor’s liability under the guarantee.

Such provisions, if on their true construction they cover the events which have happened (Dowling v Ditanda Ltd (1975) 236 Estates Gazette 485.), are effective to preserve the guarantor’s liability to the creditor (Perry v National Provincial Bank of England (1910) 1 Ch 464, CA; Cowper v Smith (1838) 4 M & W 519; China and South Bank Ltd v Tan (1990) 1 AC 536 at 542-543, (1989) 3 All ER 839 at 840, PC.).
Usually, provisions of this kind in a contract of guarantee are probably outside the ambit of the Unfair Contract Terms Act 1977. But they will of course be subject to the Unfair Contract Terms Act 1977, if the terms of the guarantee go further to seek to exclude the creditor’s liability for a breach of contract (Byblos Bank SAL v Al-Khudhairy (1987) BCLC 232, CA; TBC Ltd v Gray (1987) Ch 458n, (1988) 1 All ER 108, CA.) or of a common law duty (Standard Chartered Bank Ltd v Walker (1982) 3 All ER 938, (1982) 1 WLR 1410 at 1416, CA, per Lord Denning MR.). For example, it is in fact a breach of contract, if the creditor releases all other guarantors or all other security, although it is a condition of the guarantee that there are to be other guarantors or other security (Byblos Bank SAL v Al-Khudhairy (1987) BCLC 232, CA; TBC Ltd v Gray (1987) Ch 458n, (1988) 1 All ER 108, CA.).

(Anmerkung: Dr. Hök, Berlin)