Essentials of Contract of Guarantee: What You Need to Know
The essentials of contract of guarantee include the promise to perform within the scope of a contractual agreement.3 min read
The essentials of contract of guarantee include the promise to perform within the scope of a contractual agreement. The three types of parties involved (making it a tripartite agreement) are:
- Surety, who is the person who made the promise
- Principal debtor, who is the individual or party taking on the default position for the surety
- Creditor, who is the party or person to whom the guarantee is being given
An example of this could be if you are taking out a student loan, but you need your parents to cosign it. You are the principal debtor, and your parents are the sureties, which means that if you fail to make your payments, they are liable. Meanwhile, the financial institution or lender who provided the loan is the creditor.
Should you default on your student loan payments, your parents cannot demand that the creditor take legal action you, as it is their responsibility to ensure you are honoring your obligations. With that said, the creditor can also not attempt to collect the debt from your parents before approaching you first. Only after you have failed to provide the agreed upon payment can the creditor “go after” your parents as the surety.
An additional element of a contract guarantee is that there be legally enforceable liability, either presently or in the future. If there is no liability involved, then a contract guarantee does not exist.
A contract guarantee is really no different from any other type of legal contract. As such, the same elements are required, such as all involved parties be consenting to the terms and conditions, and all the involved parties having the capacity to enter into a legally binding document. Additionally, the terms and conditions of the contract must be legal.
Types of Guarantees
Within contract guarantees, there are then two types: specific guarantee and continuing guarantee, the key differences being:
- A specific guarantee, as the name essentially implies, pertains to a single debt or obligation. It ends when the debt has been paid or otherwise discharged. Additionally, a specific guarantee cannot be revoked. In the example of the student loan, should something happen to you as the principal debtor, it does not erase the obligation, and the surety (your parents) are still responsible for paying off the debt.
- A continuing guarantee is one that involves a series of debts.
In a tripartite agreement, there will be three separate contracts drafted, one for each of the involved parties, with all three parties in agreement. The contracts exists as:
- Between the principal debtor and the creditor
- Between the creditor and the surety
- Between the surety and the principal debtor
The primary, or principal contract, is the one that exists between the creditor and the principal debtor, while the contract that exists between the creditor and surety is known as the secondary contract.
While a contract guarantee can be either or written oral, this is certainly a case of, “words matter.” Should you take a friend to a jewelry store and you say to the jeweler, “give my friend that bracelet and I will see that you get paid,” that is not a contract guarantee, as there is no clear promise of your intent to be the surety. However, should you say, “give my friend that bracelet and if she does not pay you, then I will,” then that is a contract guarantee, as you have clearly stated you will be responsible for providing payment should your friend not do so. As with any type of contract, however, having it all in writing is always considered best practice.
As with any contract, there cannot be any concealment of facts. For example, any potential increase in interest rates or any other factors that may affect the liability of the surety, must be disclosed to all parties, by the creditor. Failure to do so may invalidate the contract.
This also pertains to misrepresenting any of the terms or conditions of the contract to the surety by the creditor. However, even though the contract that exists between the creditor and the surety is not necessarily a good faith contract, it does not require full disclosure of material facts. For example, if you, as the principal debtor on your student loan agree to pay $100 per month to the creditor, that dollar amount may not necessarily be required to be disclosed to the surety.
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