To guarantee or not to guarantee – what liabilities are you really assuming?
When asked to guarantee the obligations of another party a guarantor should give consideration to what liabilities it is assuming and for how long.
A guarantee is an agreement in which a guarantor (also known as a surety) agrees to discharge an obligation if the person whose obligation it is fails to perform it. A guarantee is a secondary obligation which supports a primary obligation of one party to another; examples include parent company, payment and environmental liability guarantees.
A guarantor should review the extent of its liability: is there a financial cap to the guarantee? when does the guarantee expire? can the guarantor meet this liability for the term of the guarantee?
Guarantors should also determine whether the guarantee contains an indemnity; which creates a primary obligation between the guarantor and the beneficiary of the guarantee. This would make the indemnity independent to, and not contingent on, the obligations of the person whose obligation it is. This would mean that if the underlying transaction is set aside for any reason, the indemnity would remain valid and the guarantor would remain on the hook.
While requests for guarantees are commonplace, they should always be carefully considered by the guarantor before being entered into.