Guarantees - What is a Guarantee, Legally?
We have all, at some point in our lives, agreed to "guarantee" something for someone. So what exactly is a guarantee legally and what are its implications?
Essentially, a guarantee is an assurance in writing, signed by the guarantor, that certain obligations will be met. A typical scenario is where someone agrees to act as a guarantor for someone who has borrowed money from a lender. In this case the guarantor agrees to meet the obligations of the borrower (i.e. repayment of money) if the borrower fails to do so. It is important to note that the lender is entitled to pursue the guarantor before pursuing the borrower.
Types of Guarantees
Guarantee clauses are common in leases, hire purchase agreements, and in general dealings with a bank. There are many different types of guarantees, varying from a specific guarantee to cover a particular transaction, a continuing guarantee limited to a fixed amount, through to a continuing guarantee where the guarantor agrees to meet all obligations of the other party. Many guarantee documents include both a guarantee and an indemnity, which means that not only is the guarantor guaranteeing the obligations will be met, but they also 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 the creditor is entitled to choose which guarantor to pursue, 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 fully 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.
Whenever you decide to act as a guarantor for someone, including close friends and family, you should always familiarise yourself with their financial position, carefully read the contract and obtain legal advice to determine what your liability might be. As a guarantor you have no direct control over the debtor’s repayments and therefore it is advised that, where possible, you always seek to limit the amount that you guarantee.
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.
“I can't speak highly enough of Jenny. She got everything done in a timely manner and when my ex-husband threw a spanner in the works at the eleventh hour she got the required documentation to his lawyers and settlement back on track.”
“I have struggled with different legal firms over the years, but over the past few years I have engaged with Turner Hopkins with various requirements from personal relating to wills, family trust, property settlements and contracts through to commercial engagements including employment advice, commercial lease agreements and general legal advice. I have engaged with a number of the people in the firm and always found them professional, punctual in their responses and very sound in the advice provided.”
“Joy, we cannot thank you enough for your help with our purchase! You have been wonderful to deal with and so proactive (and patient with my numerous emails). We will be visiting NZ in April so will make sure we drop in to thank you in person.”
“I have used Turner Hopkins for my legal services for over eight years. I have always found their level of service excellent and their work to a very high standard. I have used various lawyers at their firm for various businesses I have been involved with and have always had very positive experiences. I would highly recommend them.”
“To Michael Robinson – I wanted to thank you and your colleagues for many years of excellent service to the Bank. You have an outstanding business that has proved to be one of the most reliable and ethical businesses that Collections have dealt with in the almost 9 years I was with the Bank.”