Strategies for Safeguarding Personal Liability on Guarantees: Hits and Misses
In the complex world of finance, a personal guarantee can provide a safety net for lenders when borrowers fail to repay their loans. However, for the guarantor, the stakes are equally high. Here, we explore common defenses available to guarantors when sued by a creditor under a personal guarantee.
## Common Defenses Against a Creditor
When a creditor seeks to enforce a personal guarantee, the guarantor may argue that certain conditions have not been met. For instance, the guarantor may claim that the creditor has not met the conditions precedent for enforcement under the guarantee, or that the guaranteed debt has not actually become due.
If the creditor materially alters the original contract without the guarantor’s consent, the guarantor may be discharged from liability. Statutory defenses, which vary by jurisdiction, may include fraud, duress, or incapacity at the time the guarantee was given. Misrepresentation or non-disclosure by the creditor or principal could also form a defense for the guarantor.
## Limitations and Important Considerations
It's important to note that a guarantor generally cannot assert defenses that are personal to the principal obligor, such as usury or offset. In some jurisdictions, if the guarantor is in a non-commercial relationship with the principal, the lender may be put on inquiry about the possibility of undue influence.
If a guarantor pays more than their share of the guaranteed debt, they may seek contribution from other co-guarantors, but this is not a defense against the creditor. Certain actions by the creditor, such as agreeing not to sue one guarantor, generally do not affect the creditor’s right to pursue others, nor does it affect rights among co-guarantors seeking contribution.
## Summary Table
| Defense/Condition | Description | |-----------------------------|-----------------------------------------------------------------------------| | No liability arisen | Conditions for enforcement not met, debt not due | | Discharge or release | Principal released or obligation settled | | Material alteration | Creditor changes contract without consent | | Statutory defenses | Fraud, duress, incapacity (varies by jurisdiction) | | Misrepresentation | Creditor/principal misleads guarantor | | Estoppel | Creditor leads guarantor to believe released | | Cannot use principal’s defenses | Usury, offset not available to guarantor | | Undue influence inquiry | Lender must consider risk in non-commercial relationships |
These defenses and limitations are critical for guarantors to understand when entering into or enforcing a guarantee agreement. In some cases, impairment of collateral, usury, or lack of consideration may potentially release a guarantee. However, these defenses are not universally applicable and may depend on the specific jurisdiction.
In conclusion, while personal guarantees can offer a layer of security for lenders, they also expose guarantors to significant financial risk. Understanding the available defenses and the limitations is crucial for anyone considering a personal guarantee.
When sued by a creditor under a personal guarantee, a guarantor may argue that the guaranteed debt has not become due or that the creditor has materially altered the original contract without the guarantor's consent, thereby potentially discharging them from liability. Statutory defenses, such as fraud, duress, or incapacity at the time the guarantee was given, may also provide protection for a guarantor.
