If you run a business or borrow money in England and Wales, you will sooner or later meet the word "guarantee". It is a powerful legal commitment that can put your personal assets on the line, so it pays to understand what you are signing. Here is a plain-English guide to personal guarantees and bank guarantees.
What is a guarantee?
A guarantee is a promise by one person (the guarantor) to be responsible for another person's (the principal debtor's) debt or obligation if that other person fails to pay or perform. The guarantor's liability is usually secondary, it arises only if the main debtor defaults.
This is different from an indemnity, where the giver takes on a primary obligation to make good a loss regardless of what the main debtor does. The distinction matters for enforcement, so contracts often say "as primary obligor" to cover both.
Personal guarantees
A personal guarantee is given by an individual, very commonly a company director or owner guaranteeing the company's borrowing, lease or supplier credit. Lenders and landlords often require one because a limited company's limited liability would otherwise leave them with no recourse to the people behind it.
The serious point: a personal guarantee can expose your personal assets (savings, and sometimes your home) if the business cannot pay. Before signing, check:
- the amount and scope, is it capped, or "all monies" (unlimited)?
- how long it lasts and how it can be released;
- whether it is supported by security (e.g. a charge over your home);
- what triggers liability and whether the lender must pursue the company first.
Bank guarantees
A bank guarantee is a guarantee given by a bank. The bank promises to pay a beneficiary a sum if its customer fails to meet an obligation, used, for example, to back a commercial contract, a lease (instead of a cash deposit), or international trade.
Many bank guarantees are "on demand" (demand) guarantees: the bank must pay on the beneficiary's demand, often without the beneficiary having to prove the underlying default. These are effectively as good as cash for the beneficiary, and correspondingly risky for the customer, whose bank will reimburse itself from the customer.
Formality: guarantees must be in writing
Under the Statute of Frauds 1677, a guarantee is unenforceable unless it is evidenced in writing and signed by (or on behalf of) the guarantor. (An indemnity, by contrast, does not need this formality, another reason the guarantee/indemnity distinction matters.)
Undue influence and the Etridge protocol
Where a guarantee (often secured on the family home) is given by someone in a close personal relationship with the debtor (classically a spouse or partner guaranteeing the other's business debts) there is a risk the guarantee was procured by undue influence. Following the House of Lords decision in Royal Bank of Scotland v Etridge (No 2), lenders follow the "Etridge protocol": they ensure the guarantor receives independent legal advice and understands the risks, so the guarantee cannot later be set aside. If you are asked to guarantee a partner's debts, take your own independent advice.
Practical tips
- Never sign a guarantee casually, understand the amount, duration and what assets are at risk.
- Negotiate a cap and clear release terms where you can.
- Get independent legal advice, especially if your home is involved.
- Keep copies and diarise any review or release dates.
Key takeaways
- A guarantee is a (usually secondary) promise to answer for another's debt; an indemnity is a primary promise to cover a loss.
- A personal guarantee (often from a director) can put personal assets, including your home, at risk, check the cap, duration and security.
- A bank guarantee is given by a bank, frequently "on demand" (payable without proof of default), effectively as good as cash.
- Guarantees must be in writing and signed (Statute of Frauds 1677), and where a partner/spouse guarantees a debt secured on the home, the Etridge protocol requires independent legal advice.
Sources
- Statute of Frauds 1677, s 4 (guarantees must be evidenced in writing and signed)
- Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 (undue influence; lender's protocol and independent legal advice)
- General law on guarantees, indemnities and demand (bank) guarantees in England & Wales
--- This article is general information about the law of England & Wales as at 2026, not legal advice. Before signing any guarantee, consult a qualified solicitor.