The Reality of Signing a Guarantee

My first contact with a client is often prefaced by the words, ‘I’ve been told that I just need you to witness my signature.’ Unfortunately, life is not so simple.

A guarantee may be found in many documents, some stand alone and others embedded in a clause in a contract or lease. The essence of a guarantee is that you are agreeing to undertake the obligations of a third party, if they do not. Most guarantees, in fact, also have the effect of making you a joint debtor with the third party and thereby impose a primary obligation upon you too. The person with the benefit of the guarantee (very often a financial institution lending money) does not have to try to obtain payment from the third party – they can make a demand straight to you to obtain redress.

The Importance of Seeking Independent Advice

So why have you been told to seek independent advice? The short answer is that the beneficiary of the guarantee does not want you later to allege that you didn’t understand what you were doing at the time you entered into it and the severe impact a demand under the guarantee could have on your financial wellbeing.

More importantly, as a potential guarantor, it is vital that you understand what your potential liability could be – is your liability limited in some way? Do you have a right to cancel the guarantee (therefore crystallising your potential liability)? At what point will you be released? At the end of the day, you have to decide what risk you are prepared to accept and consider how you would satisfy a demand if one was made.

How Pinney Talfourd can help

You can see from the above that ‘giving a guarantee’ is not just a formality but can have wide-ranging consequences and advice should always be taken.

Pinney Talfourd’s Commercial team can advise you so that you understand if you should be giving a guarantee in the first place, and, if you wish to give one, then, precisely what you are getting yourself into.