A Guarantee is a promise by one party to assume responsibility for the debt or obligation of a borrower in the event of the borrower’s default. In other words, a guarantee is a third-party assurance to a lender that if the borrower fails to repay a loan, the guarantor will assume responsibility for the debt.
A guarantee binds the guarantor to pay the lender an agreed amount when the principal obligor fails to fully discharge its obligation. A guarantee is a separate and independent agreement distinct from the underlying lender - borrower agreement. It has no bearing on the relationship between the main parties to the transaction.
A guarantee usually covers the repayment of debt, obligations to perform a particular act or to perform an obligation in accordance with certain terms and conditions. The guarantee may be limited to a specific period of time, specific amounts of money, or other stipulations.
A guarantee typically identifies the parties to the agreement, states the terms and conditions of the guarantee, explains the obligations of the guarantor, and outlines any restrictions on the extent of the guarantee. A guarantee generally requires the guarantor to pay the lender a pre-determined sum upon default of the borrower.
The essential element of a guarantee is that it is unconditional and irrevocable. A guarantee is obligation of the guarantor to the lender, which is binding and enforceable against the guarantor in the event of a default by the borrower.
A guarantee does not require the guarantor to assume any of the obligations of the borrower under the contract; it merely promises to pay a debt or perform an act or obligation in the event of default by the borrower. The guarantee thus serves to provide additional security to the lender beyond that offered by the borrower alone.
Generally, a guarantee should be in writing and signed by both the lender and the guarantor. It is also important to clearly set out the scope and limits of the guarantee so that the guarantor can well understand its obligations.
A guarantee should also include a clause that clearly and explicitly sets out the terms and conditions upon which the guarantee can be canceled and the guarantor released from its obligation. Such a clause should be enforceable by law and provide both clarity and security.
Guarantees may be requested as part of business transactions as well as loan arrangements. In some cases, a guarantee may be required to secure a loan or a line of credit and assure repayment of the loan or credit line in case of the borrowers default.
Guarantees may also be issued to guarantee the performance or delivery of goods or services by one party to another. For example, a manufacturer may guarantee a supplier that the goods or services it orders will be delivered in good order and on time.
Finally, banks may also issue guarantees to third-party customers as part of their services. Such bank guarantees are generally intended to ensure payment of specified obligations in the event of non-delivery of goods or services, negligence, or breach of any other contractual obligation.
