Economic functions of guarantee
A guarantee contract allows an individual to obtain a loan, goods on credit, or employment opportunities. In some of the cases the lender, orthe supplier, or the employer that he (the person in need) may be trusted. This type of collateral undertaking is called a“contract of guarantee”. Under English law, a guarantee is described as “a commitment to be accountable for the debt, failure, or negligence of another party. Guarantee is usually known as the second pocket to pay if the first should be empty.PartySurety: – The person who gives the guarantee.Principal debtor: – The person in respect of whose default the guarantee is given.Creditor: – The person to whom the guarantee isgiven.Independent liability different from guarantee In the case of Taylor v. Lee in the United States, akey legal principle emerged regarding the nature of guarantees. It was established that for liability to arise on the default of the principal debtor, there must be a conditional promise. An incurred liability does not fall within the definition of aguarantee. This precedent was applied to asituation where a landlord and tenant visited astore, and the landlord made an assertion to the store owner about the tenant’s purchases, with a commitment to ensure payment. The court deemed this an original promise, not a collateral promise for liability in case of default, and therefore, not aguarantee.This principle extends to the context of bank guarantees, where the bank’s undertaking represents an independent obligation payable ondemand. Such guarantees are unrelated to the state of relations between the parties involved in the contract. They serve as a secure method for facilitating payment in commercial transactions,allowing the beneficiary to claim the entire guaranteed amount regardless of ongoing disputes between the parties.In another case involving a letter serving as assurance for the repayment of a loan, the court held that it couldn’t be construed as a deed of guarantee. Consequently, the writer of the letter was not found liable. Similarly, when a holding company issued a letter of comfort to its associate company, affirming its capability to meet financial and contractual obligations, the court ruled that it couldn’t be interpreted as a guarantee, as it did not impose any liability on the holding company in the event of the associate company’s default.
