<p>In loan transactions, lenders normally require the borrower to provide  collateral or other forms of security to secure the debt obligation of the  borrower. One such form of security, which is widely recognized and used across  various jurisdictions, is third party guarantees. A guarantee is a promise by  one party (the &ldquo;Guarantor&rdquo;) to assume the financial responsibility for the debt  obligation of a borrower in the event the borrower defaults on its debt  obligation under the loan transaction by the borrower. Where the borrower is a  corporate entity, the parent company or the shareholder of the borrower, often  assumes the role of a Guarantor for the debt obligations of such  borrower.<br /><br />In Kuwait, the relevant provisions governing guarantees are set  out in Law No. 67 of 1980 (the &ldquo;Civil Code&rdquo;). Under the Civil Code, a guarantee  is a contract or agreement where the Guarantor joins his liability with the  borrower to fulfill the latter&rsquo;s obligation by undertaking to the lender to  discharge the same, should the borrower fail to do so. The obligation of the  Guarantor is to guarantee the underlying obligation of the borrower. Once the  Guarantor agrees to guarantee certain obligations, the Guarantor&rsquo;s obligations  will continue until the fulfillment of the original debt.<br /><br />One point of  confusion under the Civil Code is whether the concept of a time limited  guarantee exists. Such confusion arises in view of the provisions of Article 749  of the Civil Code whereby such article allows a Guarantor to give notice to  terminate a guarantee that does not otherwise specify a termination date. This  article is often interpreted as implying that a guarantee that does have a  termination date must be also allowed.<br /><br />The provisions of Article 749 also  raises the issue of whether under the guarantee, if the debt obligation of the  borrower is not discharged by the maturity date, the lenders can automatically  extend a guarantee without obtaining the prior consent from the Guarantor. This  relates to Article 746 of the Civil Code where it states that guarantee is not  presumed but must be expressly obtained from the Guarantor to guarantee the debt  obligation of the borrower. In other words, the said Article 746 refers to the  evidentiary requirement of a guarantee, where the consent of the Guarantor must  be expressly stated (i.e. it must be in writing or clear verbal statement) and  not implied (e.g. by omission or inaction).<br /><br />Article 749 of the Civil Code  states the following:</p>
<ol>
<li>An obligation in the future may be guaranteed provided that the extent of  the Guarantor&rsquo;s obligation has been determined in advance.</li>
<li>A guarantee without a fixed time limit may be rescinded by the Guarantor any  time so long as the secured obligation has not arisen and provided that the  Guarantor serves a notice of his rescission on the lender at a reasonable  time.&rdquo;</li>
</ol>
<p>Based on the above Article:</p>
<p>(a)&nbsp;It is clear that the above Article regulates guarantee on future  obligations and not obligations which already arisen.<br />&nbsp;<br />(b)&nbsp;The above  Article allows a Guarantor to grant a guarantee on a future obligation which  does not exist at the time of the guarantee, as well potentially guarantee, such  as guaranteeing the obligations under current accounts (Al Sanhoury, Al Waseet  Vol 10 para 22, page 42, Arabic and Beaudry et Vale para 950 page 510,  French).</p>
<p>(c)&nbsp;The guarantee of existing debt obligations of an unspecified amount will  not be considered as a guarantee of future obligation (Beaudry et Vale para 950  page 511, French) and therefore does not fall within the purview of the above  Article. Consequently, if the amount being guaranteed is known and clearly  specified in the guarantee agreement, then Article 749 will not apply.&nbsp;&nbsp;&nbsp;</p>
<p>(d)&nbsp;The reference to Article 749(2) on the rescission of a guarantee without  a fixed time limit meant that the Guarantor may rescind at any time as long as  the debt obligation has not arisen. However, in cases where there is a time  limit for the future obligation to arise and when such guaranteed obligation  arises, the Guarantor cannot rescind his guarantee in such event (Al Sanhoury,  Al Waseet Vol 10 para 22, page 46, Arabic and Egyptian Cessation Court Judgement  No. 31 of the Judicial Year 1942, Session 14 June 1976). The Explanatory  Memorandum of the Civil Code also supports this view.</p>
<p>(e)&nbsp;Furthermore, Article 753 of the Civil Code states that the liability of  the Guarantor is discharged by the discharge of the borrower&rsquo;s debt obligations.  Therefore, whenever the borrower fulfills its obligations under the loan  documents, the guarantee will be automatically terminated by law.</p>
<p>In view of the above, the lenders may automatically extend a guarantee  without the prior consent from the Guarantor so long as the debt obligations of  the borrower still exist. As stated above, once the Guarantor agrees to  guarantee certain obligations, the Guarantor&rsquo;s obligations will continue until  the fulfillment of the original debt and the Guarantor may not rescind or  terminate his guarantee prior to the full settlement of the debt by the  borrower. If the borrower has paid off its debts to the lender, the guarantee is  automatically terminated by law. Therefore, under Kuwaiti law, the concept of  time limited guarantee is only applicable to future obligations which do not  exist at the time of the guarantee.</p>
<p>In addition, from a commercial point of view, a guarantee will not be useful  and clearly defeats the purpose of a lender obtaining a guarantee if the  Guarantor is allowed to cancel the guarantee prior to the date when all the  obligations of the borrower are fully discharged, as the lender initially grants  the facility on reliance of the guarantee and its continuity until the full  payment the whole debt.</p>