A guarantee is a promise by the guarantor to assume liability for an obligation owed by another person, namely the principal debtor, in the event that the principal debtor defaults in meeting his or her obligation.
What follows is an overview of Guarantor Liability.
How A Guarantee Works?
The principal creditor has no action against the guarantor if there has been no default by the principal debtor. A guarantee may be distinguished from an indemnity, which is a promise independent of the scope and enforceability of the obligation owed by the principal debtor. A guarantee maybe assignable. The majority of guarantees are entered into to guarantee some secured or unsecured debt or liability, such as under a mortgage or lease of real or personal property. For instance you may enter a contract of sale to purchase a property and finance this transaction with a mortgage. If you are unable to obtain finance, another person may guarantee your mortgage and loan. This person is known as the guarantor. The guarantor agrees to meet your mortgage repayments and debt obligations should you be unable to fulfil them yourself.
Before entering into a guarantee it is important that you understand how a guarantee operates and understand your rights and obligations should you enter such a contract.
Understanding Guarantee Obligations
A number of considerations are present in any guarantee agreement.
In the first instance you need to understand the obligation or debt that the guarantee relates to.
Secondly you need to know the identity of the guarantor and whether the guarantee is provided on a personal capacity or otherwise. Furthermore if there is more than one guarantor you need to understand whether the guarantee is joint or several. If a guarantee is jointly held you may find that you may be liable for not only your interest in the debt but that of your joint guarantors.
Furthermore carefully consider what has been disclosed to you and understand how to discharge the guarantee. There may be a duty on the lender or borrower to disclose relevant information to a guarantor where the situation between the lender and borrower has changed. Also, the guarantee may not be enforceable unless a copy of the contract of guarantee and other relevant disclosure documents are provided. A discharge may occur when performance has occurred and/or the obligations of a guarantee contract are released.