Is my Guarantee enforceable?
What is a guarantee?
If you’ve ever tried to enter into a commercial contract, chances are you’ve been asked to sign a guarantee.
Guarantees are all about giving assurance to the other side of the contract. It does this by making a person (the guarantor) liable for the default (breach) of a third party.
For instance, a Director (the guarantor) may guarantee the repayment of a loan to her company (the debtor), meaning that in the event that the company defaults on the loan, the director will be liable for the debt.
Is my guarantee valid – “Can I get out of my guarantee”?
Most guarantees end when:
- the debtor is released by the creditor; or
- The obligation is performed under the contract (e.g. the debt is paid)
However, there are a few situations that the courts will consider that a guarantee cannot be enforced.
1) Failure to issue a notice of demand for payment
At law, a guarantor may be sued immediately if the debtor defaults, without first demanding payment from the guarantor.
However, in practice many guarantees require that a written demand be made to the guarantor.
Where a notice of demand is required, the guarantee will not be enforceable unless the notice has been issued.
NB: It is important that you check both the wording of the notice and that the notice was issued in accordance with the contract (see our article on notice provisions).
2) Requirement to be in writing
In some states, there is an additional requirement that the guarantee be contained in writing (Qld, Tas, Vic, WA), although this is common practice in almost all jurisdictions.
While a guarantee doesn’t need to be contained in a formal deed or agreement, it must be reasonably apparent that it is intended to operate as a guarantee.
Generally, there will need to be clear evidence in writing of whose debt is being guaranteed and which contracts fall within the scope of the guarantee. Although the courts will consider surrounding circumstances when determining if this has been met
3) Requirement for consideration
Whether a guarantee requires consideration or not depends on if it is a contract or a deed.
If it is entered into as a contract, then there will need to be valid consideration between the parties, that is, there must be something valuable (the consideration) offered to the guarantor in return for them entering into the guarantee.
Generally, the consideration will be an agreement by the secured party to enter into a contract with a third party in return for the guarantee.
However, things can get complicated where a guarantee is given after the parties have already entered into the contract and you should seek legal advice if you think this might apply.
4) Other things to consider
The above are just a few examples of the things which may impact the enforceability of a guarantee. Examples of some other things to consider include:
- Is it a guarantee, indemnity or letter of comfort?
- Did the guarantor know what they were signing? Is there a question of the guarantor having been taken advantage of?
- Was the original obligation enforceable against the debtor or are there questions as to performance or illegality?
- Is there a clause in the contract which attempts to maintain the enforceability of the guarantee notwithstanding any acts or omissions of the creditor?
- Was the original contract a credit contract under the National Credit Code?
These questions should be looked into with the help of your lawyer.
Frequently asked questions
I provided a joint guarantee but now the creditor is only going after me, is this right?
Where there is a joint guarantee, the creditor can sue any one of the guarantors as the creditor wishes.
A creditor will normally choose to take action against the guarantor that they believe has the greatest capacity and fastest means to satisfy the debt.
Where there is a dispute as to uneven contributions to the debt by the co-guarantors, this is an issue for the guarantors, and will not be any concern to the creditor.
My company might be going into liquidation, is the guarantee still enforceable against me?
Generally, bankruptcy or the winding up of a company will not relieve a guarantor of their obligations under a guarantee.
However, there are very strict rules about when a creditor can pursue a guarantee and these will depend upon the terms of the guarantee and whether the company is in receivership, voluntary administration or liquidation.
Can I limit my obligations to pay under the guarantee?
The extent to which a guarantee will operate depends upon the terms of the guarantee. This means that you are able to limit both the amount you are liable for and the amount of time that you can be chased.
I need more time to get the money, is this ok?
Where a demand for payment needs to be made, the guarantor should be provided a reasonable time to arrange for payment.
However, where there is no requirement for a notice of demand, you will be immediately liable for the guarantee.
How can we help
Whether a guarantee is enforceable will depend largely on the construction of the guarantee and surrounding circumstances.
Whether you are drafting a guarantee, trying to understand the extent of your liability as guarantor, or just want a second opinion, our lawyers are available for a no-obligation free consultation. We have access to any barrister from the QLD Bar, including Queens Counsel and Senior Counsel, and are available after-hours if needed.
Author: Sam Billingsley-Dadd