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The Difference Between Surety and Guarantees

  • Subject: Economics
  • Category: Finances
  • Essay Topic: Debt
  • Pages: 3
  • Words: 1194
  • Published: 19 November 2018
  • Downloads: 43
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The Difference Between Surety and Guarantees Essay

A surety is a binding agreement that the signee will accept responsibility for another individual’s contractual obligations, usually the payment of a loan if the principal borrower falls behind or defaults. The person who signs this type of contract is more commonly referred to as a cosigner. Someone may sign a surety contract to help their child obtain a car loan, to start a business, or some other transaction considered by the lender to be relatively high-risk. In many lending situations, it is a requirement for getting the loan or, alternatively, can help the borrower get a better rate.

Guarantees and indemnities are a common way in which creditors protect themselves from the risk of debt default. Lenders will often seek a guarantee and indemnity if they have doubts about a borrower’s ability to fulfil its obligations under a loan agreement. Guarantors and indemnifiers take on a serious financial risk in entering into such transactions, and it is important that they are aware of all the implications.

Although a surety and a guarantor are both parties who make an express agreement to bind themselves for the performance of an act or the fulfillment of an obligation or duty of another, the distinctions between the contract of the two persons, and the obligations assumed under their contract, can be sharply made. A surety, as a general rule, is a party to the original contract of the principal, he signs his name to the original agreement at the same time the principal signs, and the consideration for the principal’s contract is the consideration for the agreement of the surety’s. The surety is therefore bound on his contract from the very beginning, and he is bound also to inform himself of the defaults of the principal debtor, and he is not in any part relieved from his obligations under the contract by the creditor’s failure to inform him of the principal’s default in the contract, for which contract the surety has become the security for. A guarantor, on the other hand, usually does not make his agreement to answer for the principal’s debt or default, contemporaneously with the principal or by the same agreement, but his obligation is entered into subsequently to the making of the original agreement, and his agreement is not the contract that the principal makes, and hence a new consideration is required to support it.

Laws include:

The Guarantee(Loans) Act
The Guarantee(High Commission Railways and Harbours Loan) (No.2) Act
The International Monetary Fund (Amendment of Articles) Act

Provision of Surety

A surety is a contract or agreement where one person guarantees the debts of another. Often they are called surety bonds or surety agreements. Surety bonds commonly are used to protect the government from the misconduct or failure of a company to fulfill its obligations. For example, a contractor building something for the government might be required to purchase a surety bond to reimburse the government if the project isn’t completed on time or up to the required standards.

For a surety obligation to exist legally the guarantor must have received some form of payment or consideration. All people in the contract must be legally able to enter into binding contracts. The obligation of the guarantor cannot be greater than the original obligation of the principal, although it can be less than the original obligation. The obligation of the guarantor ends when the terms of the contract are fulfilled by the principal or some other terms of the contract are met.

If the principal fails to meet his obligations and the surety bond company has to reimburse the obligee, the surety company will seek reimbursement from the principal. Surety agreements are not insurance. The payment made to the surety company is payment for the bond, but the principal is still liable for the debt. The primary purpose of the surety company is to relieve the obligee of the time and inconvenience of collecting from the principal. The obligee instead collects immediately from the guarantor, and then the guarantor must collect the obligation from the principal either through collateral posted by the principal or through other means.

The surety does not lend the contractor money, but it does allow the surety’s financial resources to be used to back the commitment of the contractor, thus enabling the contractor to acquire a contract with a public or private owner.

The owner receives guarantees from a financially-responsible surety company licensed to transact suretyship. Bonds perform the following functions:
Guarantee that the bonded project will be completed.Guarantee that the laborers, suppliers, and subcontractors will be paid even if the contractor defaults. This often results in lower prices and expedited deliveries.Relieve the owner from the risk of financial loss arising from liens filed by unpaid laborers, suppliers, and subcontractors.Smooth the transition from construction to permanent financing by eliminating liens.

Guarantee

Business owners know it is very difficult to borrow money for the business from a creditor without a personal guarantee even if the creditor has security against all of the business. If you sign the typical standard guarantee form used by creditors, you may be giving up rights designed to level the field. Some terms of the creditor guarantee are not in your best interest.

A guarantee is a contract between the guarantor (the person that gives the guarantee) and the creditor (typically the creditor that makes the loan). As a contract, it must meet the essential conditions required to form a valid and enforceable contract. There must be certainty of the terms of the guarantee: what is the extent of the guarantee, when can the creditor call for performance under the guarantee, and how can it be revoked.

There must be some consideration for the guarantee as with all contracts. Usually this is the loan made to the business. It could also be an agreement to hold off taking some action that the creditor is otherwise entitled to take, or allowing more time for the business to meet its obligations to the creditor under the existing arrangements. The amount or nature of the consideration does not matter as long as there is some consideration.

The guarantee is normally in written and signed by the guarantor. But a guarantee can be enforceable even if it is not in writing; the guarantee could be implied from the conduct of the parties such as a partial payment after a promise relied upon by the creditor to provide credit to the debtor.

Guarantees tend to be more advantageous to the guarantor because they confer certain rights including:
Rightto indemnity. Once the guarantor pays the beneficiary under the terms of the guarantee, it has a right to claim indemnity from the principal provided that the guarantee was given at the principal’s request.
Right of set-off. Where the principal satisfies its obligations by way of set-off against the beneficiary’s liabilities to the principal, the guarantor is also entitled to that right of set-off and will be discharged from its obligations under the guarantee.
Subrogation. A guarantor who fulfils the principal’s obligations under the terms of the guarantee is entitled to all the rights of the beneficiary against the principal under the primary agreement, including any rights of set-off and any security that the beneficiary had taken from the principal.

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The Difference Between Surety and Guarantees. (2018, November 19). GradesFixer. Retrieved February 9, 2023, from https://gradesfixer.com/free-essay-examples/the-difference-between-surety-and-guarantees/
“The Difference Between Surety and Guarantees.” GradesFixer, 19 Nov. 2018, gradesfixer.com/free-essay-examples/the-difference-between-surety-and-guarantees/
The Difference Between Surety and Guarantees. [online]. Available at: <https://gradesfixer.com/free-essay-examples/the-difference-between-surety-and-guarantees/> [Accessed 9 Feb. 2023].
The Difference Between Surety and Guarantees [Internet]. GradesFixer. 2018 Nov 19 [cited 2023 Feb 9]. Available from: https://gradesfixer.com/free-essay-examples/the-difference-between-surety-and-guarantees/
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