What is a guarantee?
A guarantee is a contractual agreement where the guarantor promises to the beneficiary to fulfil the obligations of the borrower if the borrower fails to perform such obligations. The primary purpose of a guarantee is to provide additional assurance to the beneficiary (in the form of a secondary obligation) that the debt or obligations owed to them will be honoured.
A guarantee of a borrower’s obligations under a loan agreement may impose different types of liability on guarantors, including:
- a “conditional payment obligation” (i.e., a promise by the guarantor to pay the instalments of principal and interest which fall due if the borrower fails to make those payments);
- a “see to it” obligation (i.e., an undertaking by the guarantor that the borrower will perform its obligations under the loan agreement – this will include payment obligations, and may include other covenants or undertakings of the borrower);
- an indemnity (i.e., a separate and independent obligation by the guarantor to compensate the lender for loss or damage suffered as a result of the borrower’s failure to perform its obligations under the loan agreement, or other specified events – this may arise regardless of whether the borrower’s obligations are enforceable or whether the lender has taken steps to enforce them); and
- a concurrent liability with the borrower for what is due under the loan agreement (i.e., a situation where the guarantor is jointly and severally liable with the borrower for the obligations under the loan agreement – this means the lender may pursue either the borrower, the guarantor, or both, for the full amount due, without first having to seek payment from the borrower).
Of course, different types of guarantees are appropriate in different scenarios. For example, a “see to it” obligation would be appropriate when guaranteeing the completion of a development within a particular timeframe, whilst a conditional payment obligation would be more appropriate for recovering the payment of debts owed by a borrower and which may be capable of summary proceedings.
Guarantees require the primary obligation of the borrower to be binding in order to be effective. In practice, indemnities are often inserted as a fallback in case the guarantees don’t work (e.g., if the primary obligation owed by the borrower is invalid, an indemnity would provide a way around this).
Importantly for Jones v City Electrical Factors Ltd [2025] EWHC 414 (Ch), a “conditional payment obligation” and a concurrent liability with the borrower can create a claim for a “liquidated sum” which can be used to make a bankruptcy petition under section 267 of the Insolvency Act 1986. In contrast, a “see to it” obligation and an indemnity give rise to claims for damages and cannot be used to make a bankruptcy petition.
What approach have English courts taken when interpreting guarantees?
English courts take a protective approach to guarantors on the basis that they are supporting the borrowing of a third party. English courts therefore read the terms of guarantees contra proferentem, meaning, in case of ambiguity, in favour of the guarantor. Guarantors also benefit from various defences and implied rights. It is therefore essential that guarantees and supporting documents (e.g. board minutes or, for individual guarantors, the requirement for independent legal advice) are clearly considered and drafted and properly navigate the various rights and protections given to guarantors under English law.
