A Guarantee Cannot Fix a Bad Deal

A Guarantee Cannot Fix a Bad Deal

In some negotiations, when a risk appears in the deal, the first response is to add a guarantee:

A promissory note, surety, penalty clause, or additional financial obligation.

But a guarantee, however strong, does not always address the underlying defect in the deal.

If the due date is unclear, the condition triggering payment is not clear, or the parties’ obligations during the interim period have not been determined, increasing the guarantee may not reduce the dispute; it may simply move it elsewhere.

That is why, before I ask:

What guarantee should we request?

I prefer to ask first:

Is the obligation we want to secure clear in the first place? When does it arise? And when does it end?

A good guarantee follows clarity about the right; it does not compensate for ambiguity.

Sometimes the best protection for a contracting party is not adding a new instrument, but redrafting the obligation itself so that each party knows, from the outset, when payment is due, when it becomes entitled to payment, and when it may recover its property or funds.

A guarantee protects a clear obligation… but it cannot always save an unclear agreement.

— Omar Al-Baghdadi