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?

  1. 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.
  2. 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.
  3. 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.
  4. 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:

  1. Whether there is a clear intention to enter into a guarantee;
  2. Whether the words "guarantee" or "fully guaranteed" were used in any informal or formal negotiations;
  3. Whether a party has made it clear that no legally binding relations arise unless and until formal documents are signed;
  4. 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.