Guarantees

Question 1

What is a Guarantee?

Answer 1

An agreement whereby the Guarantor promises the Creditor to account for the Debtor’s obligations if it fails to perform them.

P. 1072; Vossloh v Alpha Trains [2012] EWHC 2443, at [23].

Question 2

What are the Commercial Purposes of a Guarantee?

Answer 2

• To minimize capital adequacy requirements.
• To decrease the cost of finance, usually through cross-guarantees in a Group.
• To personally bind the Debtor’s management to its obligations to the Creditor.
• To decrease the Creditor’s exposure to the Debtor’s credit risk through risk-sharing.

Lecture Notes.

A consequent effect of lower credit risk may be lower cost of financing, the guarantee’s price notwithstanding.

Question 3

Is a Guarantee a form of Security?

Answer 3

Only if it concerns the granting of a proprietary interest in an asset; otherwise, it concerns mere personal liability.

P. 1072-1073.

Question 4

How is a Guarantee distinct from an Indemnity or other types of Hedging Arrangements?

Answer 4

• The Guarantor’s liability is secondary and ancillary to the Debtor’s; whereas
• Under other arrangements, the equivalent party’s liability is primary.

P. 1073; Mountstephen v Lakeman (1871) LR 7 QB 196, at [202].

Question 5

What are the differences between a ‘Conditional Payment’ and ‘See To It’ Guarantee?

Answer 5

Obligation:
* A See To It Guarantee compels the Guarantor to ensure the Debtor performs its obligations; whereas
* A Conditional Payment Guarantee compels the Guarantor to pay whatever the Debtor owes if it fails to perform.

Liability:
* A Conditional Payment Guarantee imposes an obligation that arises only if the Debtor defaults and only causes liability regarding the debt itself; whereas
* A See To It Guarantee imposes an obligation that arises immediately and causes liability regarding breach of contract.

P. 1077-1078; Moschi v Lep Air [1973] AC 331, at [334].

Regardig Liability, in effect, the former leaves the Guarantor liable for the Debtor’s default, whereas the latter leaves the Guarantor liable to the Creditor for breach of contract, i.e. allowing the Debtor to default. Usually, the sum payable is the same, but the nature of the cause of action is distinct.

Question 6

Can Liability against the Guarantor be proven indirectly through Liability against the Debtor?

Answer 6

No. The Guarantor is entitled to have its liability proved in direct proceedings against it.

P. 1079; Re Kitchen (1881) 17 ChD 668.

Question 7

What is a Conclusive Evidence Clause?

Answer 7

A clause allowing the Creditor to independently prove the sum, but not the fact, of the Guarantor’s liability.

P. 1078; Bache v Banque Vernes [1973] 2 Lloyd’s Rep 437.

These clauses are construed strictly and contra preferentum. See North Shore v Anstead Holdings [2011] EWCA Civ 230, at [48]-[50].

Question 8

What is the Scope of a Guarantee?

Answer 8

Unless specified, it pertains to all the Debtor’s liabilities regarding the relevant transaction(s).

P. 1078.

Question 9

What is a First Demand Instrument?

Answer 9

A contract wherein the Insurer agrees pay a liquidated sum upon the Creditor’s mere demand, pursuant to the delivery of certain documentaton.

The Standby Letter of Credit and Performance Bond are two examples.

P. 1081.

I say ‘Insurer’ for clarity’s sake, but it could also be a Guarantor.

Question 10

What are the Tell-Tale Characteristics of a First Demand Instrument?

Answer 10

• The inclusion of a Conclusive Evidence clause.
• The covering of both current and prospective liabilties.
• The Insurer’s obligation is primary, not secondary, and payable on demand.

P. 1083; Van Der Merwe v IIG Capital [2008] EWCA Civ 542.

Question 11

What is an Indemnity?

Answer 11

An agreement wherein the Indemnifier agrees to compensate the Indemnified for any losses or liabilities in case of a specific event.

Lecture Notes.

Question 12

What is the Difference between an Indemnity and a Guarantee?

Answer 12

• Indemnifiers have a central interest in the underlying transaction; whereas
• Guarantors have only a peripheral interest, if one at all.

P. 1085; Harburg India v Martin [1902] 1 KB 778, at [783]-[786].

Question 13

Relative to Guarantees, what is the Commercial Purpose of Indemnities?

Answer 13

They perform the same functions as Guarantees, but offer greater customizability and may cover a broader scope of loss events beyond the Debtor’s default.

Lecture Notes.

Question 14

What are the Guarantor’s Rights as a Surety?

Answer 14

The right to:
* Revocation.
* Subrogation.
* Contribution.
* Indemnification (by the Debtor).

P. 1108-1113.

It is advisable that all of these be expressly stipulated in the contract.

Question 15

What is the Guarantor’s Right of Revocation?

Answer 15

The right to terminate the contract upon giving notice.

P. 1111.

Question 16

Regarding the Right of Revocation, do the Guarantor’s Obligations obtain during the Period of Notice?

Answer 16

Yes. Until the period expires, it remains liable.

P. 1112; National Westminster v Hardman [1988] FLR 302.

Question 17

What is the Guarantor’s Right of Subrogation?

Answer 17

The right to be subrogated to:
* The Creditor’s rights against the Debtor; and
* The benefit of any security collateralizing its obligations.

P. 1109.

Subrogation is the equivalent of a Step-In clause, except it does not extend to the obligations of the given counterparty.

Question 18

What is the Guarantor’s Right of Contribution?

Answer 18

The right to claim contribution from Co-Sureties of the same debt where the Guarantor pays, or must pay, more than its mandatory share.

P. 1110-1111.

Question 19

What is the Guarantor’s Right of Indemnification?

Answer 19

The right to be indemnified by the Debtor for liabilities the Guarantor incurs against the Creditor.

P. 1108-1109.

Question 20

When may the Guarantor be Discharged from its Obligations?

Answer 20

When:
* The Debtor discharges its debt (C);
* The Creditor releases the Debtor (E);
* The Creditor varies the payment schedule (E);
* The Guarantor losses its right of subrogation (E);
* The Guarantor pays whatever the Debtor owes and cannot afford (C);
* The Creditor enters into other deals with the Debtor, e.g. refinancing (E).
* A Co-Surety is released without the Guarantor’s consent, although this highly contextual (E).

(C) and (E) refer to contractual and equitable grounds, respectively.

P. 1114-1123.

More exceptional means include invalidating the underlying obligations or changing the Debtor’s identity, although the latter has a limited effect.

Question 21

What is a Saving Provision?

Answer 21

A provision that limits the Guarantor’s ability to claim it is released from its obligations on equitable grounds.

P. 1125.