Guarantee agreement – simple guarantee or joint and several guarantee?

Short answer: A guarantee (borgen) means that a guarantor takes responsibility for someone else's debt. With a simple guarantee (enkel borgen), the creditor must normally first seek payment from the debtor in the manner required by the rules, whereas a proprietary guarantee (proprieborgen)—"as for one's own debt"—allows the creditor to turn directly to the guarantor when the debt becomes due.

Three roles in a guarantee relationship

• the debtor – the person who has the principal debt
• the creditor – the person who is to receive payment
• the guarantor – the person who guarantees the payment

Simple guarantee

With a simple guarantee, the guarantor's liability is subsidiary. The creditor must normally first demonstrate that the principal debtor cannot pay before the guarantor is claimed. This model exists but is less common in commercial credit relationships.

Proprietary guarantee

With a proprietary guarantee, the guarantor provides a guarantee "as for one's own debt." This implies significantly stronger liability. If the debt is not paid on the due date, the creditor can normally direct the claim straight to the guarantor.

What should the guarantee agreement contain?

• which debt or which promissory note is being guaranteed
• maximum amount
• whether interest, fees, and costs are included
• whether the guarantee is a simple or a proprietary guarantee
• validity period and termination
• how changes to the principal debt affect the guarantee
• information and notification in the event of payment problems
• signatures

Right of recourse

If the guarantor is forced to pay the principal debtor's debt, the guarantor normally acquires a right of recourse against the debtor. In practice, however, the right of recourse may have little value if the debtor lacks the ability to pay.

Limit the risk

A guarantee commitment should not be broader than necessary. A clear maximum amount, a defined principal debt, and a set validity period reduce the risk of ambiguity. The guarantor should understand that the commitment can have a major personal financial impact.

See Mallbutiken's template for a guarantee agreement.

FAQ

Is a guarantee the same thing as a co-borrower?

No. A co-borrower is a debtor themselves, whereas a guarantor guarantees someone else's debt.

Can guarantee liability be limited?

Yes, the parties can, among other things, clearly specify the amount, debt, and validity period.

Is a promissory note also needed?

It is often good if the principal debt is documented separately, for example in a promissory note, and that the guarantee agreement clearly refers to it.

The article provides general information and does not replace legal or financial advice.