Written and recorded during the breakdown of his marriage to fellow musician Beverley Martyn, the record captures a period of profound heartache, uncertainty and reflection in Martyn's life. Its intensely autobiographical nature was so striking that Island Records founder Chris Blackwell delayed its release for more than a year, reportedly finding the material too painful and disturbing. Martyn later described it as "the most specific piece of autobiography" he had ever written.

Musically, Grace and Danger builds on the atmospheric fusion of folk, jazz, rock and reggae influences that characterised Martyn's late-1970s work, while placing a stronger emphasis on concise songwriting and emotional directness. The album features notable contributions from drummer and backing vocalist Phil Collins, whose sympathetic playing complements Martyn's expressive guitar work and distinctive vocals.

Tracks such as "Sweet Little Mystery", "Hurt in Your Heart", "Baby Please Come Home" and the title song explore themes of love, loss, regret and longing with remarkable honesty.