The Nature of the Contract of Guarantee
A guarantee is a contract under which a person promises to be answerable to a creditor for a debt if the principal debtor fails to repay it. The contract of guarantee is incidental to the primary contract between the creditor and the debtor; a guarantee cannot stand by itself. Consequently, a guarantee may become invalid if there is no such primary liability establishing its basis.
If a bank, say, provides a credit facility to a company, the directors may provide personal guarantees to place the bank in comfort concerning the financial ability of the company to repay. If the company repays the debt, the bank cannot call up the guarantee because the guarantee ends when the underlying debt is paid. Nevertheless, the guarantor may limit their liability in the contract of guarantee by, for example, refusing to bear liability for the whole indebtedness of the principal debtor.
For the purposes of a series of credit transactions, a continuing guarantee may cover all the transactions and is not confined to or affected by the extinction or changes relating to any one of them. The continuing guarantee ends when the covered credit transactions have all been satisfied or terminated.
Rights before Payment of the Debt
The principal debtor and the guarantor are not jointly liable to the creditor. The contract of guarantee is strictly between the creditor and the guarantor, the principal debtor is not a party to that guarantee. To avoid bearing liability unnecessarily, the guarantor is entitled to insist upon strict adherence to the terms of the contract between the principal debtor and the creditor. In any event, the guarantor cannot be bound to bear more liability than that which the principal debtor undertook.
Even before the debt is paid, the guarantor may obtain a declaration from the Court that he is relieved from all further liability under the guarantee where the acts and conduct of the creditor and principal debtor have effectively removed all liability in respect of the guarantor. The guarantor may seek indemnity from the principal debtor and may demand that a sufficient sum be set aside by the latter for purposes of the indemnity. The guarantor may before payment of the debt be entitled to compensation (e.g., by damages) from the principal debtor where, for example, the principal debtor promised to pay the debt to the creditor on a specific date and then defaults.
Rights after Payment of the Debt
If the principal debtor defaults on the debt and the guarantor pays it, the latter has an immediate right to sue (a right of action) the former – but the guarantor cannot accelerate his right to sue the debtor merely by deciding to pay the debt before it becomes legally due. For example, if the debt is legally due in September 2027, and the guarantor decides to pay it on his own volition in October 2025, the guarantor is not entitled to sue just because he decides to pay the debt earlier.
The right of action arises the moment the debt becomes due, the debtor has failed to pay, and this has necessitated the guarantor’s payment. In our provided example, however, the guarantor will inherit the rights of the creditor concerning the debt. It is good practice for the guarantor to compel the debtor to reimburse the amount paid, and only after the debtor has failed to comply does the guarantor exercise the right to sue. In the case of a legal charge or a mortgage, a guarantor who pays the amount secured on the principal debtor’s property is entitled to a lien against the property.
If, instead of making payment, the guarantor’s property is taken in execution, or if the guarantor pays money to the creditor to prevent such execution, the guarantor has a right of action against the debtor for such execution or for any payment made in that regard. The guarantor is entitled to recover from the debtor the amount actually paid under the contract of guarantee but if he sustains further damage, he is entitled to recover the equivalent of such damage also.
The above analysis only covers certain principles from a general angle; the rights of the guarantor, principal debtor, and the creditor are also governed by the precise terms of the contracts between them.
This article is for general information; it is not legal advice. For any assistance, kindly contact us for guidance if you wish to rely on it.