Contracts of guarantee are ubiquitous in the commercial and personal legal landscape.
In our experience, they are sometimes agreed to as an afterthought when the primary agreement terms have already been negotiated in detail and are just as quickly forgotten when the dust has settled.
A contract of guarantee (Guarantee) is a contract under which a person (Guarantor) agrees to answer to another person (Obligee) for the debt default or liability of a third person (Obligor). A Guarantor does not directly undertake the obligations of the Obligor. The Guarantor assumes liability only when the Obligor defaults on its obligations.
Guarantees are regularly used in the following situations:
- financing arrangements
- leases; and
- commercial contracts
In New Zealand, contracts of guarantee are required to be in writing and signed by the Guarantor. But, what if a person signs a principal contract as Guarantor which refers to a separate contract of guarantee? The Courts in New Zealand have upheld liability of a Guarantor in such a situation provided the necessary terms are contained in the primary contract. The necessary terms will most likely be contained in any well drafted primary contract, and therefore, provided such contract is signed by the Guarantor, there will likely be an enforceable contract of guarantee.
Guarantees often involve more than one Guarantor which may be liable:
- severally; and
- jointly and severally.
Complications may arise where Guarantors are to be jointly and severally liable, and only one Guarantor has signed. In such situations, the starting point will be if not all Guarantors have signed then the guarantee is not enforceable against any of the Guarantors. This position may be displaced where the contract or the circumstances around the signing of the contract support such a departure. If relying on a guarantee from more than one Guarantor, it is important to draft the contract terms carefully, and to ensure they have each signed as Guarantors.
A Guarantor’s liability may be limited. And, a limit to your liability when providing a guarantee is good practice. It is sometimes suggested a limited guarantee will render an arrangement inflexible; for example, increasing a credit facility may require a subsequent guarantee or security to be provided. Generally, any such changes to the obligations which are being guaranteed should be considered closely when the need for change arises. Because, often, the objectives and responsibilities of the Guarantor and the Obligor may diverge.
In the event you are signing an unlimited guarantee, the extent of the security, which you will effectively be providing, should be considered. Where there are existing security interests registered in favour of the Obligee, these will be enforceable through the Guarantee.
If you are regularly signing contacts as a Guarantor, it is useful to maintain a record of the Guarantees you have been signing. Open communication with the Obligee is also invaluable. If it is intended that your obligations as Guarantor end, it is important you obtain a written release of guarantee to support this.
If you are considering providing or obtaining a guarantee, we suggest you;
- get independent legal advice
- understand what is being guaranteed
- establish exactly who is providing the guarantee
- consider limiting the guarantee where appropriate
- ensure the guarantee is in writing and signed by all guarantors
- once signed, keep a record of the guarantee; and
- obtain a release of guarantee when appropriate
Should you wish to discuss contracts of guarantee and how they may affect you, please contact Michael Molloy (DDI: (09) 969 1211; m.............@glaister.co.nz) and Stephanie Harris (DDI: 09 356 8232; s...............@glaister.co.nz)