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A Brief Introductory Guide to the English Law of Guarantees
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A Brief Introductory Guide to the English Law of Guarantees
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A Brief Introductory Guide to theEnglish Law of Guarantees
UK – 5 July 2023
This is an introductory guide to aspects of the English law of guarantees. It is useful to note at
the outset that the commercial usage of the term “guarantee” is not always aligned with the
technical legal meaning of that term.
There are many different types of documentary instruments Confusingly, both a true guarantee and an indemnity are
that are commonly referred to as guarantees. Almost often referred to as “contracts of suretyship”.3 On this
invariably, any such instrument sets out a contractual subject, it is useful to note the following explanation
assurance that a certain type of event (such as contractual provided by Sir William Blackburne (sitting as a judge of
performance or payment of money) will happen under a the High Court) in Vossloh Aktiengesellschaft v. Alpha
certain separate contract (“the underlying contract”) or in Trains (UK) Limited [2010] EWHC 2443 (Ch) at paragraph
relation to the obligations (“the underlying obligations”) of 25 in relation to the liability of an indemnifier:
one of the parties to the underlying contract (“the underlying
‘… Unless (as is quite possible) he has undertaken his
obligor”).
liability jointly with the principal, his liability is wholly
In fact, however, some such instruments are not true independent of any liability which may arise as between
guarantees at all under English law. The legal significance of the principal and the creditor. It will usually be implicit in
this is explained below. The explanations are largely based such an arrangement that as between the principal and
on general English law principles. It is important to note that the giver of the indemnity, the principal is to be primarily
general principles are not necessarily applicable to every case. liable, so that if the indemnifier has to pay first he has
a right of recourse against the principal. (It will not be
A “True Guarantee” Compared With so if, for example, the indemnifier has not undertaken
an “Indemnity” (Such as “a Demand his indemnity obligation at the request of the principal.)
It is this feature which leads to the person giving the
Guarantee”)
indemnity to be described as a “surety” although, strictly,
As indicated above, sometimes, in the eyes of the law, it may the contract of indemnity cannot itself be a contract of
be that a particular instrument, albeit named as a guarantee, suretyship.’
is not a true contract of guarantee but a contract of indemnity,
(2) As regards the legal concept of a see-to-it guarantee, Lord
of which a demand guarantee is an example. As explained
Justice Popplewell explained it as follows in Shanghai
below, this has significant legal implications.
Shipyard Co., Ltd v. Reignwood International Investment
(1) From an English law point of view, of instruments that are (Group) Co:4
guarantees and/or named as guarantees, it is important
‘A traditional guarantee by way of suretyship is an
to distinguish between the following two types of
undertaking by the guarantor to be answerable for
instruments: (i) a true guarantee – a guarantee that is,
the debt or obligation of another if that other defaults.
in substance, a contractual promise to be responsible,
Traditional guarantees by way of suretyship are
in addition to and (typically) co-extensively with the
sometimes called “see to it” guarantees, following the
underlying obligor, for the due performance by the latter
dictum of Lord Diplock in Moschi v Lep Air Services Ltd
of its obligations and is not an indemnity (as defined at
[1973] AC 331, 348 that the nature of the guarantor’s
(ii) below) (the technical name of which is “a see-to-it
obligation was “to see to it that the debtor performed
guarantee” or, less often, “a surety guarantee”); and (ii)
its own obligation to the creditor”. Where the debt or
an indemnity, especially one in the form of an undertaking
performance obligation arises under a contract between
that is, in substance, a contractual promise to be liable
the obligor/debtor and obligee/creditor, the essential
to pay a sum of money in relation to an underlying
feature of such a guarantee, for present purposes, is that
contract upon satisfaction of certain conditions but wholly
the liability of the guarantor depends upon there being
independent1 of any liability that may arise between the
a liability of the obligor/debtor. The guarantor’s liability
parties to the underlying contract (“an indemnity”).2 In
is secondary, in the sense that it is contingent upon the
English law, such an indemnity is not a true guarantee.
obligor’s continuing liability and default. …’
1 This means that the underlying obligor being actually liable under the underlying contract is not a pre-condition to the liability of the indemnifier, although there may be a situation in
which the underlying obligor has assumed a joint liability with the indemnifier. The fact that the instrument refers to the underlying obligor’s contractual breach or liability does not in itself
necessarily mean that the instrument was intended to be a true guarantee rather than an indemnity.
2 There are other forms of indemnities under English law, such as, for example, a contract of insurance.
3 See Law of Guarantees, 7th ed., by The Hon. Mrs. Justice Geraldine Andrews DBE and Richard Millett, QC, para. 1-003.
4 Shanghai Shipyard Co., Ltd v. Reignwood International Investment (Group) Company Limited [2021] EWCA Civ 1147 at paragraph 22. Although the judgment of the Court of Appeal in the
Shanghai Shipyard case has been appealed to the Supreme Court, which remains pending as at the date of this article, this explanation by Lord Justice Popplewell is unlikely to be affected
by the outcome of that appeal.
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