Even without a signature!
Guarantees are routinely included in commercial transactions as a "promise" by the guarantor to answer a debt, a default or miscarriage of another party.
It is common practice when entering into an agreement with a corporation, for supply of goods or otherwise, to request provision of a personal guarantee. An enforceable guarantee can be the difference between recovery and non-recovery of a debt.
The Courts have recently looked at enforceability issues, and in particular, whether it is necessary for a person to sign the guarantee and whether the guarantor intends to be bound in their personal capacity. The findings in regard to these issues could surprise you!
So, how might a guarantee create a personal liability without a signature on the dotted line?
- Even if the guarantor's signatory space is not signed, if the wording of the commercial document identifies a guarantor and the terms of the commercial document are clear, a personal liability may come into effect. Similarly, if a person (who is also to be the guarantor) signs the document in some other capacity (such as in their capacity as a Director), a personal liability may fall on that person if their intent to be bound is identified.
- Informal email correspondence between commercial parties in the negotiation phase of a commercial agreement using words like "fully guaranteed," prior to formal documents being prepared, may create a personal liability on the guarantor even if formal documents never come into existence and even if the final email does not refer to the guarantee.
- If alterations to provisions of a commercial document are made and the guarantee provisions are left unaffected, this may create a personal liability on the named guarantor even if the guarantor signatory space is not signed.
- In circumstances where there are two nominated guarantors to a commercial transaction, references throughout the commercial document using words such as "they" and "guarantors," may create a personal liability on one or both of the persons even if the guarantor signatory space is not signed.
Practical guidance for parties
In determining the enforceability of a guarantee, the Court considers the construction of the document as a whole and the basis of any surrounding circumstances known to the parties.
When making or imposing a personal guarantee, you need to consider the following issues:
- Whether there is a clear intention to enter into a guarantee;
- Whether the words "guarantee" or "fully guaranteed" were used in any informal or formal negotiations;
- Whether a party has made it clear that no legally binding relations arise unless and until formal documents are signed;
- If there are guarantee clause/s and guarantor signatory spaces contained within formal documents, and whether they remain, are signed or are struck out.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.