CHAPTER 13.01. General

• Jurisdiction: United States

13.01. General

A guaranty is a contract by which the guarantor agrees to pay some debt or perform some obligation in the event the primary obligor defaults on the underlying obliga-tion.¹ Similarly to how collateral secures a debt, a guaranty provides another method by which an obligee can recover payment if a primary obligor defaults.²

As a guaranty is contractual in nature, it is subject to general contract principles of formation³ and interpretation.⁴ For example, whether the contract uses the terms "guarantor" or "guaranty" is not itself determinative.⁵ And conditions precedent to performance or liability may be imposed by contract⁶ and can be implied by law.⁷ A guaranty can also take different forms. It may be an absolute guaranty or a conditional guaranty, and it may be a guaranty of payment or a guaranty of completion.

[1] Absolute Versus Conditional

Many guaranties express that they are absolute and unconditional. An absolute and unconditional guaranty is one in which the guarantor's liability to the obligee for the underlying obligation arises upon the default of the primary obligor, with no additional requirements for the obligee to satisfy for the guarantor to be liable for payment.⁸ For example, there is no requirement in an absolute and unconditional guaranty that the obligee give the guarantor notice of default, but such a notice is generally a requirement implied by law in the case of conditional guaranties.⁹

[2] Collection Versus Payment

A guaranty is typically stated to be a guaranty of payment and not of collection. The latter requires the obligee to attempt to collect the debt from the primary obligor by some level of diligence.¹⁰ No Delaware case has established what constitutes the necessary diligence in this context, but American Jurisprudence, which has been cited with approval by Delaware courts with respect to the law of guaranties generally,¹¹ states that the guarantor's liability is conditioned on the obligee exhausting its remedies against the primary obligor.¹² Because this exhaustion of remedies is a condition to the guarantor's liability, a guaranty of collection is a type of conditional guaranty.¹³

By contrast, a guaranty of payment is an absolute and unconditional guaranty.¹⁴ The guarantor's liability arises merely by reason of the default of the primary obligor.¹⁵

[3] Continuing Versus Limited

A continuing guaranty is one that is not limited to a single transaction but contemplates a series of transactions, often for an indefinite period.¹⁶ In the case of a continuing guaranty, general contract principles govern whether the guarantor's offer to guaranty future transactions is accepted or revoked.¹⁷ The guarantor's promise with respect to future transactions operates as an offer.¹⁸ Thus, by effectively revoking its promise to guaranty future transactions prior to the obligee's acceptance, a guarantor may limit its liability to that amount already accepted by the obligee.¹⁹ Parties may also qualify by contract their respective rights or duties with respect to revocation or notice of acceptance.²⁰

[4] Guaranty of Completion

A guaranty of completion is often used in construction loans; however, the term is a misnomer. It is not an instrument by which a lender can force a guarantor to complete the construction the borrower has failed to complete; rather, it is a guaranty of payment of the damages the lender has suffered as a result of the failure of the borrower to complete construction. Stated differently, because the lender has an adequate remedy to recover its damages, it is unlikely that a court in equity would mandate specific performance of construction activities.²¹ Usually, the guarantor under a completion guaranty will be liable to the...