Article
Does your guarantee do what you think it does? Plan ahead with our checklists
Readers of our insight Top Five Considerations for Every Guarantee will have seen that planning guarantee provisions before drafting can bring both cost and time benefits. However, in the heat of a transaction, parties may turn their focus to the main deal documents (e.g. sale, development or loan agreements) which carries the risk that equal emphasis isn't given to the content of guarantees.
Ultimately, if a transaction goes sour and as many court cases have shown, that lack of emphasis can lead to litigation and potentially, parties either being unable to recover under a guarantee, or discovering that their liability under one was far greater than expected.
If you want to be certain that you can rely on a guarantee, it's crucial to understand what that guarantee says and allows you to do before it is signed. And if you are the guarantor, understanding what liability could come your way and when, is crucial to avoid any nasty shocks in the future.
So how can you go about ensuring that a guarantee covers what you expect? One way is to consider some key commercial questions at an early stage, so that the correct terms can be drafted into the document. Heads of terms are usually considered for key documents and given the importance of guarantees, it makes commercial sense to consider a similar approach for them too.
To assist, we have produced two checklists. One for guarantee beneficiaries and one for guarantors. These provide many of the key considerations in a parent guarantee type situation and are also useful in other scenarios, as many of these considerations are common across different types of guarantee.
Whilst no checklist can be completely exhaustive, we hope that you find these useful. However, if you are unsure how to approach a guarantee, please contact one of our experts who would be happy to assist.
Part A: Guarantee checklist - Beneficiary
This checklist considers some of the key areas to consider when approaching a parent company guarantee from the guarantee beneficiary's perspective. References to 'Principal Debtor' mean the person/entity whose obligations are to be guaranteed.
Question
Considerations
Which obligations do you need guaranteed?
Payment obligations only?
Performance obligations only?
Payment and performance obligations?
Under single contract or multiple contracts?
Will it include any amendments to those obligations/contracts?
Do you want an indemnity in the event that the underlying Principal Debtor obligations become invalid, illegal or unenforceable and you sustain loss as a result?
Yes/No?
In what circumstances do you want to be able to call on the guarantee?
Payment default by the Principal Debtor?
Any default by the Principal Debtor?
Other?
Do you want to be able to claim under the guarantee if the Principal Debtor hasn't defaulted first?
Yes/No?
Will the guarantee have a liability cap?
Yes/No?
If yes, what amount?
When are you willing to release liability under the guarantee?
Upon the occurrence of a specific contractual trigger(s)?
Only when you are satisfied that all Principal Debtor obligations have been performed/liabilities have been paid?
Will the guarantee have a longstop date?
Yes/No?
When do you want to be able to make demand under the guarantee?
- At any time; or
- Following actual default by the Principal Debtor?
What evidence will you produce to make a demand?
Copy of the demand made on the Principal Debtor?
Other confirmation?
Set-off
Are there any other liabilities that you currently/may in the future owe to the Guarantor?
If yes, do you want to restrict the ability of the Guarantor to be able to set-off those amounts against amounts owed to you under the guarantee?
Tax
Is there any risk of any amounts due under the guarantee being reduced/withheld due to withholding tax or other tax reasons?[1]
If yes, do you require appropriate tax language to ensure that amounts are grossed-up/paid in full?
Currency
Are there any cross-jurisdictional considerations?
If yes, do you need a currency indemnity[2]?
Assignment
Do you need the benefit of the guarantee to be assignable?
Governing law
What law will govern the guarantee?
Where is the guarantor based?
In which jurisdictions do you need to be able to bring proceedings?[4]
If the guarantor is based outside of England & Wales, do you require a legal opinion?[5]
If the guarantee is governed by laws other than English law, do you require a legal opinion?
Part B: Guarantee checklist - Guarantor
This checklist considers some of the key areas to consider when approaching a parent company guarantee from the Guarantor's perspective. References to 'Principal Debtor' mean the person/entity whose obligations are to be guaranteed.
Question
Considerations
What obligations are you willing to guarantee?
Payment obligations only?
Performance obligations only?
Payment and performance obligations?
Under single contract or multiple contracts?
Will it include any amendments to those obligations/contracts?
Are you willing to indemnify the guarantee beneficiary for loss it sustains if the underlying Principal Debtor obligations become invalid, illegal or unenforceable?
Yes/No?
In what circumstances do you want the guarantee beneficiary to be able to call on the guarantee?
Payment default by the Principal Debtor?
Any default by the Principal Debtor?
Other?
Do you want the guarantee beneficiary to be able to claim under the guarantee if the Principal Debtor hasn't defaulted first?
Yes/No?
Will the guarantee have a liability cap?
Yes/No?
If yes, what amount?
When do you want your liability under the guarantee to be released?
Automatically on the occurrence of specific contractual trigger(s)?
Other?
Will the guarantee have a longstop date?
Yes/No?
When do you want the guarantee beneficiary to be able to make demand under the guarantee?
- At any time; or
- Following actual default by the Principal Debtor?
What evidence do you need the guarantee beneficiary to produce to make a valid demand?
Copy of the demand made on the Principal Debtor?
Other confirmation?
Can an amount be claimed if it is disputed under the Principal Debtor contract?
Set-off
Are there any other liabilities that you currently/may in the future may be owed by the guarantee beneficiary?
If yes, do you want to be able to be able to set-off amounts owed by you under the guarantee against those amounts?
Tax
If any amounts due under the guarantee have to be reduced/withheld by you due to withholding tax or other tax reasons, do you want to be liable for gross-up of those?[6]
Currency
Are there any cross-jurisdictional considerations?
If yes, are you willing to provide a currency indemnity[7]?
Notices
How do you require notice/demands to be served under the guarantee (post, courier, e-mail, fax?)[8]
Assignment
Can the benefit of the guarantee be assigned by the guarantee beneficiary?
Footnotes:
[1] If you are unsure, you should consider taking appropriate professional advice.
[2] Currency indemnities are often included where amounts, claims and awards in relation to agreements may need to be made in different currencies.
[3] Where parties are based in different jurisdictions, notice provisions will need to work in each jurisdiction.
[4] Consider whether you need the flexibility to bring proceedings in different jurisdictions.
[5] Obtaining a legal opinion may provide you with day one comfort that the guarantor has the capacity to enter into the guarantee and/or that a judgment obtained in relation to the guarantee will be enforceable in the guarantor's jurisdiction.
[6] If you are unsure of your tax position, you should consider taking appropriate professional tax advice.
[7] Currency indemnities are often included where amounts, claims and awards in relation to agreements may need to be made in different currencies.
[8] Where parties are based in different jurisdictions, appropriate notice provisions should be considered.
[9] Bear in mind that the cost/complexity of defending proceedings in different jurisdictions may vary.
NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.