DWF logo


DWF logo

            Giving a Guarantee – What you need to think about

            Date: 1 March 2017

            Date: 01/03/2017

            A guarantee is a contractual promise by one person (the "Guarantor") to another person (the "Beneficiary") to meet the liabilities of a third party (the "Principal") in the event that the Principal fails to perform its obligations pursuant to the underlying contract made between the Beneficiary and the Principal.  A guarantee is often sought when the Beneficiary has doubts about the Principal's ability to meet its obligations and they are looking for a third party with deeper pockets from which they can seek recovery if the Principal defaults in the performance of its obligations.

            If you are asked to be a Guarantor what do you need to think about?

            You are taking a serious financial risk; if the Principal does not pay or perform its obligations under the underlying contract then the Beneficiary can demand that you meet those obligations.

            What do you know about the nature of the underlying contract and the extent and nature of the Principal's obligations under it?

            Get a copy of the final form underlying contract and understand the Principal's obligations and liabilities under it.

            Get a draft of the guarantee as soon as possible and take independent legal advice to ensure that you have complete clarity on the nature and timing of your obligations.

            What control (if any) do you have over the Principal so that you can ensure that they meettheir obligations?

            The level of control will vary depending on the nature of your relationship with the Principal.  If you are its parent company then this is not an issue.  If the relationship is more remote then you may need to work out what regular information you require from the Principal and what leverage, if any, you can exert to ensure that they comply with their obligations.

            What financial information do you have, and need in the future, from the Principal?

            You need to get yourself comfortable with the Principal's financial standing and its ability to meet its obligations, not just on the date of signing the guarantee but over the term of the contract.

            Can the guarantee be limited so you know the maximum amount that can be claimed from you or the precise obligations that you will be responsible for?

            It is good practice to ask for the obligations to be limited in scope.  If it is a guarantee of payment obligations, consider whether or not the maximum amount guaranteed includes costs and interest, or are costs and interest an additional figure on top of the maximum amount guaranteed.

            Can the guarantee remain in place for a fixed period of time?

            Seek confirmation that the guarantee will have an end date after which you will have no further liabilities arising under the guarantee.  This gives you certainty on the term of your liabilities

            Are there any other guarantors that can share the potential burden with you?

            It may be the case that there is more than one Guarantor of the liabilities of the Principal under the contract.  However this does not automatically mean that your liability under the guarantee will reduce proportionately – you need to check the wording very carefully if this is the commercial agreement between you to ensure that the wording is consistent with your understanding.  There are often provisions in the guarantee that mean that the Principal can proceed against you first and claim against you for the full amount of the debt.  It would then be up to you to proceed against the other guarantors for them to pay their proportionate share.

            What will be the impact on your relationship with the Principal?

            If the Principal fails to perform its obligations under the contract and demand is made on you, there is the clear risk of a damaged relationship between you in the future; particularly if the guarantee is a personal one.  Is this a risk you wish to incur?

            Legally, can you give a guarantee?

            If you are a company/LLP you need to check your constitutional documents to ensure there are no restrictions on you giving a guarantee or formalities that need to be observed in authorising the guarantee.  A company/LLP will also need to check any finance documents to see if there are any restrictions in there on it entering into a guarantee, in particular to see if it needs lender consent to granting a guarantee.

            Clearly providing a guarantee is not something to be undertaken lightly. All of the above points need to be given due consideration.  A potential guarantor needs to assume that the worst case scenario will unfold, namely that the Principal will fail to perform its obligations and that the Guarantor will have to undertake them instead.

            We use cookies to give you the best user experience on our website. Please let us know if you accept our use of cookies.

            Manage cookies

            Your Privacy

            When you visit any web site, it may store or retrieve information on your browser, mostly in the form of cookies. We mainly use this information to ensure the site works as you expect it to, and to learn how we can improve the experience in the future. The information does not usually directly identify you, but it can give you a more personalised web experience.
            Because we respect your right to privacy, you can choose not to allow some types of cookies. Click on the different category headings to find out more and change permissions. However, blocking some types of cookies may prevent certain site functionality from working as expected

            Functional cookies


            These cookies let you use the website and are required for the website to function as expected.

            These cookies are required

            Tracking cookies

            Anonymous cookies that help us understand the performance of our website and how we can improve the website experience for our users. Some of these may be set by third parties we trust, such as Google Analytics.

            They may also be used to personalise your experience on our website by remembering your preferences and settings.

            Marketing cookies

            These cookies are used to improve and personalise your experience with our brands. We may use these cookies to show adverts for our products, or measure the performance of our adverts.