Overview

Two recent UK decisions have highlighted the risk of giving an inadvertent guarantee in a contract. The cases turned on the use of the words “procure” and “ensure”, and the court held that a promise by one party to “procure” or “ensure” that a third party does something (e.g., where one party to a software development contract agrees to procure that its subcontractors will comply with certain programming procedures or where one group company agrees to ensure that its affiliate properly performs certain services under an outsourcing contract) may in fact amount to a guarantee. This can lead to serious consequences. In particular, it might increase the scope of the “guarantor’s” anticipated liability or even put it in default of its financing arrangements.

To avoid this risk, parties should try to avoid using words that may be misconstrued, such as “procure” and “ensure”. Where the intention is that one party will simply perform an administrative function to help arrange for a third party to satisfy a specified liability on its own behalf, then it is best to state this expressly, rather than rely on looser language.

Please see full update for more information.