The Legal Characteristics of a Guarantee. | Suite101.com

A guarantee is different from an indemnity. - Wikimedia Commons

A simplified definition of a guarantee is that it is a promise to answer for the debt, default or miscarriage of another person.

A guarantee is a collateral contract to answer for the debt, default or miscarriage of another who is or is contemplated to be or to become liable to the person to whom the guarantee is given: Sunbird Plaza Pty. Ltd. V Maloney (1988) 166 CLR 245 at 254 per Mason CJ. (This suggests a theory of how a statutory guarantee is implied into a consumer contract).

Kirkham v Marter (1819) 2 B & Ald 613 is authority for the proposition that, in the above descriptive definition, miscarriage means tort.

Parties to the Guarantee

The following are the three parties to a guarantee.

• The guarantor or surety is the person who promises to be answerable for the default of another.
• The creditor is the person to whom the promise is made.
• The debtor or principal debtor is the person on whose behalf the promise was made.

A contract of guarantee gives rise to three different legal relationships.

1. The Creditor ? Debtor relationship;
2. The Creditor ? Surety relationship;
3. The Surety ? Debtor relationship.

The guarantor is held liable only for exactly what has been agreed: Ankar Pty Ltd v National Westminster Finance (Australia) Pty Ltd (1987) 162 CLR 549. Ambiguous contractual provisions are construed in favour of the guarantor: Ankar Pty Ltd v National Westminster Finance (Australia) Pty Ltd (1987) 162 CLR 549, at 561. The guarantor is liable only if and while the debtor is liable: McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 471, 480.

The Differences Between a Guarantee and an Indemnity

An indemnity is a promise by the promisor to keep the promisee harmless against loss as a result of entering into a transaction with a third party: Sunbird Plaza Pty. Ltd. V Maloney (1988) 166 CLR 245 at 254 per Mason CJ. An indemnifier has primary liability, and bears ultimate liability with no automatic recourse against the cause of the loss. Many insurance contracts are indemnity agreements.

For a guarantee:

• Liability depends on liability of the debtor.
• The Guarantor discharged if principal contract is void or unenforceable.
• The Guarantor is discharged by certain conduct of the creditor.
• A Guarantee must be either in writing or evidenced by a sufficient memorandum or note.
• A Guarantee requires express agreement.

For an indemnity:

• Liability can arise from a breach of any contract or event relating to that contract.
• Generally, the indemnifier remains liable, unless the amount is a penalty.
• The indemnity stands despite any conduct of the parties.
• There is no requirement for a writing.
• An indemnity can be implied from the circumstances.

Statute of Frauds Requirements for a Guarantee

The following are the essential items required by statute to be in writing:

• Identification of all the parties;
• A statement of all the material terms;
• A recognition that the parties have made a contract.

These requirements are evidentiary only. If not met, the contract is still valid, but will not be enforceable should the Statute of Frauds is pleaded.

Applicable Principles of Construction

At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety: Ankar Pty Ltd v National Westminster Finance (Australia) Pty Ltd (1987) 162 CLR 549. The guiding principle is that a guarantor is only liable for exactly what has been guaranteed.

Sources:

R. Macdonald, & D. McGill, Drafting, Butterworths, Sydney, 1997.

Phillips and O?Donovan, The Modern Contract of Guarantee, Law Book Company, 1992.

Statute of Frauds 1667 (Imp.).

Sunbird Plaza Pty. Ltd. V Maloney (1988) 166 CLR 245.

Kirkham v Marter (1819) 2 B & Ald 613.

Ankar Pty Ltd v National Westminster Finance (Australia) Pty Ltd (1987) 162 CLR 549.

McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457.

Copyright Gary Lilienthal. Contact the author to obtain permission for republication.

Gary Lilienthal -

Gary Lilienthal, journalist, author, lecturer, and legal academic.

Source: http://gary-lilienthal.suite101.com/the-legal-characteristics-of-a-guarantee-a388064

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