guaranties

Guaranties, also spelled guaranties, are contractual promises by a third party to answer for the obligations of another party if that party fails to perform. The guarantor’s liability is typically secondary and triggered by the principal debtor’s default. The terms of a guaranty may specify the scope, amount, time period, and conditions under which the guarantor must pay or perform.

Key parties and concepts:

- Guarantor: the party providing the guarantee.

- Obligee (beneficiary): the party to be protected by the guarantee.

- Principal debtor (obligor): the party whose performance is guaranteed.

- The guarantee can be unconditional or conditional, and in many contracts the obligee must first pursue the principal debtor before calling on the guarantor, depending on the governing law and contract terms.

Common forms and uses:

- Bank guarantee: a bank agrees to pay the obligee if the applicant defaults, widely used in international trade and project finance.

- Performance guarantee: ensures completion of contractual obligations, such as in construction or service agreements.

- Payment guarantee: ensures payment of owed sums.

- Personal guarantee: a person commits to guaranteeing a business’s debt.

- Corporate or parent company guarantee: a company guarantees the obligations of its subsidiary.

- Surety bonds and standby letters of credit: related mechanisms used in public procurement and construction.

Enforcement and considerations:

Upon default, the guarantor may be required to satisfy the guaranteed obligation up to the specified limit, after which the guarantor may seek reimbursement from the principal debtor. Guaranties are governed by contract law and applicable statutes, including limitations periods and defenses such as fraud or misrepresentation. The exact effect and enforceability depend on the terms of the guarantee and the jurisdiction.