What is a Personal Guarantee?

Under English law, a personal guarantee is a contractual promise by a guarantor to answer for the “debt, default, or miscarriage of another” (section 4 of the Statute of Frauds 1677 (yes, 1677!))  — typically the principal debtor (i.e. the guarantor steps into the shoes of the principal for the purposes of liability).

It is a secondary obligation, meaning the guarantor’s liability arises only when the primary debtor fails to perform (absent any express provision extending liability), and must be in writing and signed by the guarantor.

Nature and Construction of Guarantees

The courts approach guarantees as contracts strictissimi juris (i.e. according to the strictest interpretation of the law).

This principle was confirmed in Moschi v Lep Air Services Ltd [1973] AC 331, where Lord Diplock emphasised that a guarantor’s liability must be “found within the four corners of the instrument.” Similarly, in Triodos Bank NV v Dobbs [2005] EWCA Civ 630, the Court of Appeal reaffirmed that a guarantor’s obligations cannot be enlarged or extended beyond what has been expressly agreed, and that any ambiguity will be resolved in favour of the guarantor.

Consequently, a guarantor is liable only for those obligations that are clearly and unambiguously set out in the guarantee document.

What About Implied Terms?

The courts are notably reluctant to imply terms into guarantees. In Aviva Life & Pensions UK Ltd v Hackney Empire Ltd [2012] EWHC 2703 (Ch), the court declined to imply obligations extending the guarantor’s liability beyond the express words of the guarantee, reiterating that guarantees must be read literally and narrowly.

Because guarantees are secondary and accessory in nature, they do not carry with them the flexible interpretative principles that may attach to primary obligations, such as indemnities. Where a creditor wishes to ensure recovery for a wider class of losses (for example, remedial costs, professional fees, or interest), this must be expressly included in the guarantee’s wording.

Is A Guarantee The Same/Different To An Indemnity?

A critical distinction exists between a guarantee and an indemnity.

A Guarantee

A guarantee is a secondary obligation: it is a promise to answer for the debt, default, or miscarriage of another (the principal debtor). A guarantor’s liability is contingent on the default of the principal debtor. Such a guarantee is typically limited to sums due under a contract.

An Indemnity

An indemnity is a primary obligation: it is a direct promise to compensate another for a loss, regardless of whether any third-party defaults. The indemnifier undertakes independent liability and is broader in scope, including other losses, costs and expenses.

The obligation exists even if the principal debtor’s obligation is void, unenforceable, or discharged.

Can You Have both?

Yes.

If the contract for which a guarantee has been given is varied, the guarantee will be discharged (i.e. cannot be relied upon by the creditor) if consent was not sought first.

In Triodos Bank NV v Dobbs [2005] EWCA Civ 630,it was said:

“A guarantor is discharged from liability if the contract guaranteed is materially varied without their consent, unless the variation is clearly insubstantial or wholly beneficial to the guarantor.”

Therefore, a guarantee might be broadened to include an indemnity. For example:

“The Guarantor guarantees to the Landlord the performance of all tenant covenants, and indemnifies and keeps the Landlord indemnified against all losses, liabilities, costs and expenses arising from any failure by the Tenant to perform its obligations, whether or not the same are enforceable against the Tenant.”

Under this example, if the lease had been varied without the guarantor’s consent, the landlord can still recover rent arrears and losses under the indemnity, because it is a direct contractual promise to reimburse loss, not merely to guarantee another’s performance.

Conclusion

English courts adopt a textual and conservative approach to personal guarantees. Liability is confined to what the guarantor has clearly and voluntarily agreed to undertake.

Implied obligations, whether based on fairness, commercial purpose, or presumed intention, are rarely, if ever, recognised in this context. As a result, creditors and landlords should ensure that personal guarantees are comprehensive and carefully drafted, expressly covering all intended liabilities, including interest, costs, and consequential losses.

In short, reliance on implied terms in a guarantee is unlikely to succeed. The law favours certainty over implication: if the protection or recovery sought is not clearly written into the instrument, it will almost certainly not be enforced.

Griffin Law is a dispute resolution firm comprising innovative, proactive, tenacious and commercially-minded lawyers. We pride ourselves on our close client relationships, which are uniquely enhanced by our transparent fee guarantee and a commitment to share the risks of litigation. For more details of our services please email justice@griffin.law or call 01732 52 59 23.

GRIFFIN LAW – TRANSPARENT FEES. TENACIOUS LAWYERS. TRUSTED PARTNERS.

Nothing in this document constitutes any form of legal advice upon which any person can place any form of reliance of any kind whatsoever. We expressly disclaim, and you hereby irrevocably agree to waive, all or any liability of any kind whatsoever, whether in contract, tort or otherwise, to you or any other person who may read or otherwise come to learn of anything covered or referred to in this document. In the event that you wish to take any action in connection with the subject matter of this document, you should obtain legal advice before doing so.