This blog post explores the different ways of drafting guarantees and how this interacts with the obligations of parties within the shipping industry.
What is a guarantee?
A contract of guarantee is an undertaking given by one party (the guarantor) to another party (the beneficiary) to pay the principal obligor’s debts or to perform their obligations set out in the underlying contract. A guarantor has a secondary obligation to the beneficiary and therefore the guarantor will typically only be obliged to act where there has been a breach of the underlying contract. Whilst the commercial reasons behind a guarantee are often straightforward, the use of the word “guarantee” including the fact that the term “guarantee” is also frequently used to refer to other arrangements, such as contracts of indemnity (the difference between these terms is explored further below), and the differing ways in which guarantees are drafted, often leaves scope for ambiguity. Such ambiguity can be problematic for a beneficiary trying to enforce the provisions of their agreement. Continue Reading