In our previous blog “Loan Agreement – overview and tips” we have mentioned the guarantee and guarantors as an instrument to secure the repayment of a loan. In this article, we are going to shed a bit more light on this instrument.
A guarantee is a promise by C (“Guarantor” or “Surety”) that B (“Principal” or “Borrower”) will perform his/her obligations to A (“Creditor” or “Lender”). Most often such relationships exist in the banking or private loan contexts. A guarantee is a contract and except for a couple of formal statutory requirements is mostly regulated by the general law of contracts. Therefore, the details and nuances of the creditor-guarantor relationship, such as limitations and protections to either party, will be usually subject to different factors like bargaining power, the sophistication of the parties, and, most importantly, appropriate legal advice. To illustrate the risks and solutions to both parties with respect to the creditor-guarantor relationship, below we provide a few examples of terms and conditions which can affect each party’s position.
- Exhaustion of remedies. A guarantor may bargain for entering a clause requiring a creditor to exhaust all remedies available for him against a principal before he/she can turn to demand payment from the guarantor.
- Demand for payment. A contract may set out a requirement that a creditor makes a demand for payment to the principal or give written notice of default to the guarantor prior to enforcing a claim.
- Joint and/or several liability. In case of more than one guarantor to the same obligation, the contract may outline whether the guarantors are liable jointly and severally or only severally. In the former way, the creditor may seek full repayment from all, one or part of the guarantors, while in the latter case each guarantor is liable only for his/her portion.
- Variation of the principal obligation. Although this is a rule arising from a body of case law, to prevent any doubts it is highly recommended to set it out in a written clause that any variation of the principal obligation of the borrower to the creditor is subject to the guarantor’s consent.
A guarantee is an important instrument that stimulates economics by allowing principals to receive financing more easily and thus allowing projects to be carried out and deals to be closed. Very often the readiness of the guarantor to take on liability is not a gratuitous act, and some kind of interest or consideration for the guarantor is most probably at stake. Despite the obvious advantages of this instrument of guarantee, precautions should be taken by both parties to eliminate or at least minimize risks.
Should you need assistance with the guarantee agreement whether you are a creditor or a guarantor, please contact Buzaker Law Firm via email at firstname.lastname@example.org or call 905-370-0484.
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