Deed of guarantee

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What's a deed of guarantee and when do you need it?

This type of simple guarantee is useful where a business is entering into a new trading relationship with a company that's new or that currently has a weak balance sheet.

If you want for a bit of extra security in the relationship you’re considering with this new or financially constrained business, you can ask for its obligations to be guaranteed by another company that does have a good credit rating. This may be another company in the same group or a separate one (perhaps under common ownership).

If you're satisfied with the creditworthiness of the guarantor, you then have the option to offer normal credit terms to the company you are contracting with (rather than, for example, having to ask for payment upfront with orders).

Contracts that contain such a guarantee - where a third party is agreeing to pay the debts of another party if they default on their payments – should be executed as a deed.

A deed is a contract, but one that has more exacting signature provisions. That means they incorporate witnesses of signatures, so they tend to suit certain circumstances where a straightforward contract would be considered insufficient.

By including witnesses, it is clear that the signing parties fully understood what it is they are signing up to and intend to agree to the terms that have been set out in the deed.

NB – Witnesses should not have a personal interest in the contents of the document they are witnessing. As such, they should not be a spouse, partner or family member of a signing party.

They must be able to provide an unbiased confirmation of what has been signed and by whom and in the event of a dispute, may be called upon by a court to make a statement to that effect.