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
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
Whether the words "guarantee" or "fully
guaranteed" were used in any informal or formal
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).