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Personal Property Securities Register And Terms Of Trade
November 28, 2012
Council Liability For Leaky Buildings
March 5, 2013

Guarantees

March 5, 2013
Categories
  • Corporate & Commercial Law
  • First Home Buyers
  • Property Law
Tags
  • Commercial
  • First Home Buyers
  • Property
  • Small Business
Acting as a guarantor for someone, often in respect of payment of money, means that you agree to meet their obligations, if they do not. Guarantee clauses are common in leases, hire purchase agreements, and in general dealings with a bank. There are potential pit-falls for you to consider when agreeing to be a guarantor.

Types Of Guarantees

There are many different types of guarantees, varying from a limited guarantee to cover a particular transaction for a limited value through to a continuing all obligations guarantee where the guarantor agrees to meet all obligations of the other party, both past, present and future. Many guarantee documents include both a guarantee and an indemnity, which means that not only is the guarantor guaranteeing the obligations will be met, they agree to protect the receiver of the guarantee from any harm or loss.

In most contracts, where there is more than one guarantor, they are treated as being ’jointly and severally liable‘. This means that the creditor can choose to pursue whomever they like to recover the debt. Even if you are only one guarantor amongst many, you may find yourself held liable for all of the debt. In this case, you may have a right to compensation from co-guarantors, but enforcing this right can be a lengthy and costly process.

Rights And Obligations Of The Guarantor

As a guarantor who has been called upon by a creditor to pay a debt, you have a right to require repayment by the original debtor. Of course in practice, this right may not amount to much protection as often the creditor is enforcing the guarantee due to the inability of the debtor to make a payment. A guarantor can however use the securities available to the original creditor. In other words, if a debt secured by a mortgage is paid in full by a guarantor, the guarantor is entitled to take over that mortgage security.

Independent Legal Advice

Creditors rely on a guarantor making an informed decision. To ensure their guarantee is enforceable creditors should disclose to the guarantor information about the obligations they are guaranteeing and be satisfied that the guarantor appreciates the risk they are assuming. The Code of Banking Practice goes further, by requiring that prospective guarantors be advised to seek independent legal advice. The party providing legal advice is then required to confirm the guarantor understood the obligation they were assuming at the time they entered the guarantee.

Diligence Required

If you decide to act as a guarantor for someone, including close friends and family, you should familiarise yourself with their financial position, read the contract very carefully and obtain legal advice to determine what your liability might be. Everyone is naturally optimistic when it comes to their family and friends, but it is vital to be aware of the risk you are assuming and make an informed decision.

Signing A Guarantee

A guarantee agreement must be in writing and must be signed by the guarantor. It is advisable that, if a party is signing in another capacity as well, that they sign the contract clearly in both capacities.   Usually this is simply achieved by the party signing twice – once in their capacity as borrower (e.g. as a director of a borrowing company), and once as a guarantor.

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