Surety
Encyclopedia
A surety or guarantee, in finance, is a promise by one party (the guarantor) to assume responsibility for the debt
obligation of a borrower if that borrower defaults. The person or company that provides this promise, is also known as a surety or guarantor.
The situation in which a surety is most typically required is when the ability of the primary obligor or principal to perform its obligations to the obligee (counterparty) under a contract
is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. In most common law
jurisdictions, a contract of suretyship
is subject to the statute of frauds
(or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal.
If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of subrogation
, allowing the surety to "step into the shoes of" the principal and use his (the surety's) contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal.
Traditionally a guarantee was distinguished from a surety in that the surety's liability was joint and primary with the principal, whereas the guarantee's liability was ancillary and derivative. Many jurisdictions have abolished this distinction.
In the United States, under Article 3 of the Uniform Commercial Code
, a person who signs a negotiable instrument
as a surety is termed an accommodation party; such a party may be able to assert defenses to the enforcement of an instrument not available to the maker of the instrument.
In the United Kingdom the idea of a loan with a guarantor has been popularised over the last 3 years. Guarantor loans open a unique type of unsecured loan, which is not based on the credit history of the borrower. In fact it is quite the opposite, this loan is based on the credit standing of the person who will guarantee the payment of the loan in case the borrower defaults. Certain circumstances lead to a reduction of credit rating. Whenever a credit rating reduces and becomes poor it will not be very easy to obtain even a high rate bad credit loan. Having a guarantor will address the lender’s concern, and is a great way to regain the lost credibility in terms of obtaining credit.
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
obligation of a borrower if that borrower defaults. The person or company that provides this promise, is also known as a surety or guarantor.
The situation in which a surety is most typically required is when the ability of the primary obligor or principal to perform its obligations to the obligee (counterparty) under a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. In most common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
jurisdictions, a contract of suretyship
Surety bond
A surety bond is a promise to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract...
is subject to the statute of frauds
Statute of frauds
The statute of frauds refers to the requirement that certain kinds of contracts be memorialized in a signed writing with sufficient content to evidence the contract....
(or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal.
If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of subrogation
Subrogation
Subrogation in its most common usage refers to circumstances in which an insurance company tries to recoup expenses for a claim it paid out when another party should have been responsible for paying at least a portion of that claim....
, allowing the surety to "step into the shoes of" the principal and use his (the surety's) contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal.
Traditionally a guarantee was distinguished from a surety in that the surety's liability was joint and primary with the principal, whereas the guarantee's liability was ancillary and derivative. Many jurisdictions have abolished this distinction.
In the United States, under Article 3 of the Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
, a person who signs a negotiable instrument
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
as a surety is termed an accommodation party; such a party may be able to assert defenses to the enforcement of an instrument not available to the maker of the instrument.
In the United Kingdom the idea of a loan with a guarantor has been popularised over the last 3 years. Guarantor loans open a unique type of unsecured loan, which is not based on the credit history of the borrower. In fact it is quite the opposite, this loan is based on the credit standing of the person who will guarantee the payment of the loan in case the borrower defaults. Certain circumstances lead to a reduction of credit rating. Whenever a credit rating reduces and becomes poor it will not be very easy to obtain even a high rate bad credit loan. Having a guarantor will address the lender’s concern, and is a great way to regain the lost credibility in terms of obtaining credit.
See also
- ArrestArrestAn arrest is the act of depriving a person of his or her liberty usually in relation to the purported investigation and prevention of crime and presenting into the criminal justice system or harm to oneself or others...
- AvalAvalAval , in Spain, is a joint commitment to payment of an obligation in favor of the creditor or beneficiary. It is granted by a third party, in case the principal debtor does not fulfil the obligation of payment of a credit title....
- Co-signingCo-signingThe act of co-signing involves a promise to pay another person's debt arising out of contract if that person fails to do so. Many realtors and landlords require a cosigner for college students, people with bad credit or people whose income is less than a certain, low multiple of the amount of rent...
- IndemnityIndemnityAn indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor may or may not be responsible for the loss suffered by the indemnitee...
- Loan guarantee
- Surety bondSurety bondA surety bond is a promise to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract...
- Surety (Canadian criminal law)
- Student Loan GuarantorStudent Loan GuarantorA guarantor is a person or agency that agrees to pay someone else’s debt should he or she default on a loan. In the case of student loans in the United States, the government guarantees the federal loans that students borrow...