What is the function of a guarantee?

A guarantee is an agreement through which an individual or legal entity undertakes to meet certain obligations, such as paying a third party’s debt if the latter defaults.

The guarantee is a contract by which a natural or legal person guarantees or assures the fulfillment of obligations, assuming the payment a debt of another person if this does not.

Guarantees of this kind, known as an “aval”, “fianza” or “garantía personal” in Spanish, are personal guarantees where all the guarantor’s assets may be sold to meet the obligation, unless certain limits have been set.

Who can request a guarantee and in what situations?

  • A bank may ask por a guarantee (of wich it is the beneficiary) when granting a loan
  • A government agency may require a guarantee when contracting services with an individual
  • Guarantees may be given when individuals provide services to another under an agreement such as a lease.

What should an endorsement contain?

A guarantee is a private contract and its characteristics are defined in the agreement. This must include:

  • Identification of the guarantor, the guaranteed party (obligor) and the  beneficiary of the guarantee.
    • Specification of the underlying guaranteed obligation.
    • Duration and enforceability of the guarantee, if applicable.    
    • Requirements for the beneficiary to enforce the guarantee or demand that it to be honoured.
    • Termination conditions, when there is no specific expiry date.    
    • Any fees or expenses the guaranteed party is liable for in the case of guarantees provided by banks.
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