What is the difference between a guarantee and an indemnity under English law?

Under English law, a guarantee and an indemnity are distinct legal obligations, although they are often combined in the same document. A guarantee is a secondary obligation: the guarantor promises to be responsible for the obligations of another person (the principal debtor) if that person fails to perform. The guarantor’s liability is therefore dependent on (or ‘co-extensive with’) the liability of the principal debtor. If the principal debtor’s obligation is void or unenforceable for any reason, the guarantor’s obligation as guarantor may also be discharged. By contrast, an indemnity is a primary obligation: the indemnifier promises to hold the creditor harmless against loss, regardless of whether the principal debtor’s obligation is valid or enforceable. An indemnity survives even if the underlying obligation is void, unenforceable, or discharged. For this reason, creditors typically insist on both a guarantee and an indemnity, to ensure that the guarantor remains liable even in circumstances where the guarantee would otherwise be discharged. The indemnity does not need to be in writing to be enforceable (it is not caught by the Statute of Frauds 1677), though it is always good practice to document both obligations in a single deed.

What is the Statute of Frauds 1677 and how does it affect personal guarantees?

Section 4 of the Statute of Frauds 1677 provides that ‘no action shall be brought’ to enforce a guarantee unless there is ‘some memorandum or note thereof’ in writing and ‘signed by the party to be charged therewith or some other person thereunto by him lawfully authorised’. In practice, this means that a guarantee must be evidenced in writing and signed by the guarantor (or their authorised agent) to be enforceable in the courts of England and Wales. An oral guarantee is unenforceable. The writing requirement does not require the entire agreement to be in writing — it requires only a note or memorandum evidencing the guarantee and signed by the guarantor. However, the safest approach is to execute a formal written deed of guarantee, which provides clear evidence of the terms agreed and the guarantor’s intention to be bound. Where the guarantee is contained in a deed (which must be executed in accordance with section 1 of the Law of Property (Miscellaneous Provisions) Act 1989), the Statute of Frauds formalities are automatically satisfied, and the deed benefits from additional legal force (including a 12-year limitation period rather than the 6-year period applicable to simple contracts under the Limitation Act 1980).

What is the rule in Holme v Brunskill and how does it protect guarantors?

The rule in Holme v Brunskill (1877–78) LR 3 QBD 495 is a fundamental principle of English guarantee law. The Court of Appeal held that if the creditor and the principal debtor agree to a material variation of the principal contract without the guarantor’s consent, the guarantor is discharged from liability to the extent that the variation is material. The rationale is that the guarantor agreed to guarantee only the original obligations; if those obligations are materially changed, the guarantor should not be held to a different bargain. In practice, variations that increase the guarantor’s exposure (e.g., increasing the loan amount, extending the repayment period, or changing the interest rate adversely) are most likely to trigger the rule. Creditors typically seek to exclude the Holme v Brunskill principle in the guarantee document, by including provisions allowing them to vary the principal obligations without discharging the guarantor. Courts will, however, uphold the guarantor’s discharge if a variation was so fundamental that it exceeded the scope of any such exclusion clause. The guarantee should therefore clearly identify the principal obligations being guaranteed and the extent of any variation that the Guarantor is willing to accept without further consent.

What is the significance of Royal Bank of Scotland v Etridge [2001] and independent legal advice?

The House of Lords decision in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 is the leading English case on undue influence in the context of personal guarantees. The case established guidelines for banks and other creditors when taking a guarantee from a co-habitee, spouse, or other person who is in a relationship of trust and confidence with the principal debtor, and who may therefore be at risk of being subjected to undue influence. The Etridge guidelines require the creditor to: (1) take steps to bring home to the potential guarantor the seriousness of the commitment they are undertaking; (2) insist that the guarantor attend a private meeting with a solicitor (who may be the bank’s own solicitor in some circumstances, but should ideally be independent) before the guarantee is signed; (3) receive written confirmation from the solicitor that the nature and effect of the guarantee has been fully explained to the guarantor; and (4) not proceed if it is put on notice that the guarantor may have been unduly influenced. A guarantee given by someone who was subjected to undue influence, and where the Etridge guidelines were not followed, may be set aside by the court even though the guarantee was in writing and signed. All individual guarantors should be strongly encouraged to obtain independent legal advice before signing a guarantee.

Can a guarantee be discharged without the guarantor’s consent?

Yes, under English law there are several circumstances in which a guarantor’s liability may be discharged without their consent: (1) Payment or performance of the principal obligation in full by the principal debtor discharges the guarantee, because the guarantor’s obligation is secondary and dependent on the principal debtor’s default; (2) A material variation of the principal contract without the guarantor’s consent may discharge the guarantor under the rule in Holme v Brunskill (1877–78) LR 3 QBD 495; (3) Release of the principal debtor by the creditor (e.g., by a deed of release or a compromise agreement) discharges the guarantor, unless the creditor expressly reserves its rights against the guarantor; (4) The creditor’s failure to take other available security (e.g., by allowing a mortgage to lapse) in a way that prejudices the guarantor may discharge the guarantee pro tanto; (5) Misrepresentation or non-disclosure by the creditor of a material fact known to it that the guarantor would have wished to know before giving the guarantee. Creditors seeking to preserve their rights against a guarantor should always expressly reserve those rights when dealing with the principal debtor and should seek written consent from the guarantor before agreeing to material variations of the principal obligation.

Guarantee and Indemnity (UK) — Canada

Create a legally binding Deed of Guarantee and Indemnity for England and Wales. This template complies with the Statute of Frauds 1677 and the Law of Property (Miscellaneous Provisions) Act 1989 and incorporates guidance from Royal Bank of Scotland v Etridge [2001] UKHL 44 on independent legal advice. Suitable for personal guarantees by directors, shareholders, or third parties in support of business loans, leases, or commercial obligations.

What Is a Guarantee and Indemnity (UK)?

A Deed of Guarantee and Indemnity is a formal legal document used in England and Wales under which one party (the Guarantor) undertakes to be responsible for the obligations of another party (the Principal Debtor) to a third party (the Creditor), in the event that the Principal Debtor fails to perform those obligations. It combines two distinct legal mechanisms: a guarantee (a secondary obligation, under which the Guarantor promises to perform or pay if the Principal Debtor defaults) and an indemnity (a primary obligation, under which the Guarantor agrees to hold the Creditor harmless against all losses arising from the Principal Debtor’s failure to perform).

Guarantees are governed by the Statute of Frauds 1677, which requires a guarantee to be evidenced in writing and signed by the guarantor to be enforceable in the courts of England and Wales. An oral guarantee is unenforceable. Where the guarantee is contained in a deed executed in accordance with section 1 of the Law of Property (Miscellaneous Provisions) Act 1989, the statutory writing requirement is satisfied and the creditor benefits from a 12-year limitation period (rather than the 6-year period applicable to simple contracts under the Limitation Act 1980).

Personal guarantees — given by a director, shareholder, or other individual in support of a company’s obligations — are extremely common in UK commercial lending, commercial property, and trade credit contexts. A guarantee allows a creditor to look beyond the assets of the principal debtor (typically a limited company with limited liability) to the personal assets of an individual who has a sufficient interest in the company’s success.

Our UK Deed of Guarantee and Indemnity template is drafted for use in England and Wales and reflects the requirements of the Statute of Frauds 1677, the guidance in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 on independent legal advice for individual guarantors, and the principle established in Holme v Brunskill (1877–78) LR 3 QBD 495 on variation of the principal obligation.

When Do You Need a Guarantee and Indemnity (UK)?

A Deed of Guarantee and Indemnity is appropriate in a wide range of commercial and personal financial contexts in England and Wales.

The most common use case is the personal guarantee given by a director or controlling shareholder of a limited company in support of the company’s borrowing from a bank or other commercial lender. Because a limited company is a separate legal entity with limited liability, its shareholders and directors are not personally liable for its debts. A personal guarantee effectively removes this protection and creates a direct liability on the individual if the company defaults. Banks, asset financiers, and invoice financiers routinely require personal guarantees from directors or shareholders as a condition of lending to small or medium-sized enterprises (SMEs).

Guarantees are also commonly required in the following situations: a landlord requiring a director’s personal guarantee in addition to a corporate lease (particularly where the tenant is a newly incorporated company with no trading history); a trade supplier extending credit to a business customer and requiring a director guarantee as security for the credit line; a parent company guaranteeing the obligations of a subsidiary under a contract with a third party; and a third party guaranteeing the obligations of a family member under a mortgage or other financial arrangement.

The indemnity element of the document is particularly important where there is a risk that the principal debtor’s underlying obligation may be challenged as void or unenforceable (for example, on the grounds of misrepresentation or incapacity). The indemnity survives as a primary obligation even if the guarantee would otherwise be discharged.

Before giving a personal guarantee, all individuals should seek independent legal advice from a solicitor qualified in England and Wales. Following the House of Lords decision in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, creditors should ensure that individual guarantors receive proper legal advice and confirm this in writing.

What to Include in Your Guarantee and Indemnity (UK)

A legally effective Deed of Guarantee and Indemnity for use in England and Wales must contain several key provisions.

The guarantee clause sets out the Guarantor’s secondary obligation: to perform or pay the Principal Obligations if the Principal Debtor fails to do so. The clause should clearly identify the Principal Debtor, the Creditor, and the nature of the obligations being guaranteed. The guarantee must be in writing and signed by the Guarantor to satisfy the requirements of section 4 of the Statute of Frauds 1677.

The indemnity clause sets out the Guarantor’s separate and independent primary obligation to hold the Creditor harmless against all losses arising from the Principal Debtor’s failure to perform. Unlike the guarantee, the indemnity survives even if the underlying obligation is void or unenforceable.

The limitation of liability clause, if included, caps the Guarantor’s maximum aggregate liability under the Deed. An unlimited guarantee may expose the Guarantor to liability for the full amount of the Principal Debtor’s obligations, including interest and costs, without any ceiling. A capped guarantee limits the Guarantor’s exposure to a specified maximum sum.

The continuing guarantee clause, if included, extends the guarantee to cover all present and future obligations of the Principal Debtor to the Creditor, including any variations or increases in the facility. A guarantee that is not expressed to be continuing may be limited to the specific obligations described at the date of the Deed.

The Holme v Brunskill provisions address the rule that a material variation of the principal contract without the Guarantor’s consent may discharge the guarantee. Creditors typically include provisions allowing them to grant time, vary terms, or take or release other security without discharging the Guarantor. The Guarantor should ensure it understands the extent of any such waiver.

The independent legal advice confirmation clause, reflecting the guidance in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, records that the Guarantor has received independent legal advice from a named solicitor and understands the nature and effect of the Deed.

The execution requirements must be met for the Deed to be valid: an individual Guarantor must sign in the presence of a witness who also signs the Deed; a corporate Guarantor must execute by two directors or a director and the company secretary in accordance with section 44 of the Companies Act 2006.

The governing law and jurisdiction clause should specify England and Wales.

What Is a Guarantee and Indemnity (UK)?

When Do You Need a Guarantee and Indemnity (UK)?

What to Include in Your Guarantee and Indemnity (UK)

Frequently Asked Questions

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