A guarantee is a deed or written agreement in which a person
enters into an obligation to answer for a default or omission of
another person. Creditors commonly require guarantees from
third parties before loaning money to debtors.
In all guarantees, the debtor owes a payment or obligation, the
creditor is owed the payment or obligation, and the guarantor
guarantees the payment or obligation. If these three parties
do not exist, a guarantee will not be created. The difference
between a guarantee and other legal relationships can sometimes be
difficult to distinguish and legal counsel should be consulted
whenever it is unclear whether or not a guarantee exists.
The Guarantee Acknowledgement Act (Alberta)
The Guarantee Acknowledgement Act (the "GAA")
applies to all guarantees in Alberta granted after 1969 and sets
out specific requirements that must be followed in order for a
guarantee to be enforceable in Alberta. The GAA was enacted
to protect individuals guaranteeing the debt or obligation of
another, and imposes requirements that differ from obligations
found in other Canadian jurisdictions.
The GAA requires a guarantor to appear before a notary public
and acknowledge that he or she is the person who executed the
guarantee. The notary public must then satisfy himself or
herself that the guarantor is aware of the contents of the
guarantee and understands its effect. Upon being satisfied,
the notary public must issue a certificate under his or her
seal. This certificate must be executed by the guarantor in
the presence of the notary public and be attached to the
guarantee. It is important to note that the requirements
under the GAA only apply to guarantees granted by individuals and
do not apply to guarantees granted by corporations.
Guarantors: Proceed with Caution
Guaranteeing the debts or obligations of another is a serious
legal obligation, and it is very important that a guarantor fully
understands the nature and effect of the obligation.
Although a guarantee only needs to be executed before a notary
public, legal advice from a solicitor is highly
recommended, as many guarantors do not fully understand
Understand the Agreement
In our experience, many clients misunderstand the following
common provisions in guarantees:
The creditor does not have to go after the principal debtor
before pursuing the guarantor. A creditor typically does not
have to exhaust its recourse against the debtor before pursuing
payment from one or more guarantors.
The creditor does not have to realize other security before
seeking satisfaction of the debt from the guarantor.
What amount is guaranteed? Some guarantees are unlimited,
or fluctuate based on a revolving line of credit, for
example. A guarantor must understand his or her exposure and
determine if he or she will have any control over or visibility of
the guaranteed amount.
Are there other guarantors? The creditor typically does
not have to pursue payment from all of the guarantors. The
creditor can choose to pursue just one of the guarantors if the
creditor so wishes.
Post – Signing Tips
Once a guarantor has signed a guarantee there are some important
final steps that he or she should take. A guarantor should
try not to provide the creditor with the guarantee until all of the
other guarantors have done the same. Also, it is important
for the guarantor to keep a copy of the guarantee for his or her
records to avoid having to ask the creditor for a copy when the
guarantor is worried about the primary debtor's solvency.
Finally, once the debt is paid the guarantor should ask the
creditor to return the creditor's copy of the guarantee to the
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.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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