Guarantee or Guaranty Legal Definition:
A back-up debtor who steps in if the primary debtor defaults.
Guarantee (UK English) and guaranty (USA English).
A contractual obligation to pay a debt, to perform a service, or to otherwise compensate for an obligation that another (the primary debtor) is committed to with a third-party (i.e. a lender), in the event that the primary debtor defaults.
"The guarantor irrevocably and unconditionally guarantees the due and punctual payment and performance of all debts, liabilities and obligations of the debtor to the creditor whenever, however or wherever incurred and any ultimate unpaid balance thereof."
In McGee, Dean & Co. v F. W. Poe Manufacturing Company:
"Technically, the guarantor does not undertake payment by himself, but that the principal will pay, though when the act to be performed is the payment of money, a default by the principal results practically in payment by the guarantor, but if the act to be performed is other than the payment of money, the guarantor's contract is more clearly seen-that the principal will perform.
"A guaranty is said to be a promise to answer for the payment of some debt or the performance of some duty in case of the failure of another person, who is himself, in the first instance, liable to such payment or performance."
A guarantee is a separate ("collateral") contract from that as between the primary debtor and the third-party. It is as an "add-on" to the primary debtor's contract but a separate contract nonetheless.
The substantial feature of a contract of guarantee is that there is no obligation by the guarantor to do anything until and unless the primary contract fails.
The law deals with guarantees strictly given the onerous consequences of being responsible for another. Any significant change in the contract between the creditor and the primary debtor may well void and vacate the guarantee if the guarantor was neither aware nor agreeable to the change. An example of such a change might be #1 to advance further funds to the debtor or, #2, an increase in the interest rate of a guaranteed loan.
In TD Bank v Rooke and others, a lender withheld important information from the guarantor about the primary debtor's business plans; the omission being enough for the Court to subsequently rule that the guarantee was unenforceable.
Justice Esson for the British Columbia Court of Appeal:
"A creditor must reveal to the surety every fact which under the circumstances the surety would expect not to exist; for the omission to mention that such a fact does exist is an implied misrepresentation that it does not. But a banker taking a guarantee for an overdraft to a customer is not ordinarily bound to disclose to the intending surety the unsatisfactory character of a previous account of the customer or other matters generally affecting his financial credit, because dissatisfaction with the customer's credit is the probable reason for requiring the guarantee. In fact it has been held that the hank need not even disclose an existing overdraft unless specifically asked. However, where the intending guarantor makes enquiries of the bank, he must be given a "true, honest and accurate answer" about any matters material to the giving of the guarantee. If he is under a misapprehension which he communicates to the bank, the bank has a duty to correct it."
Lenders are wise to the law's careful eye upon their transactions so they have begun to draft flexible guarantees which specifically allow them to tweak the contract with the primary debtor without thereby vacating the guarantee. Caveat emptor: read the fine print!
Many jurisdictions require that guarantees be in writing, failing which they are not enforceable. Some jurisdictions require more: that the guarantee by notarized.
The guarantee is often distinguished from an indemnity as the latter puts the indemnitor on a par with the primary debtor: the creditor can demand payment or performance from the indemnitor at any time, whether the primary debtor has defaulted or not.
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