Liability of Guarantors:

A guarantee is a promise by the guarantor to assume liability for an obligation owed by another person, namely the principal debtor, in the event that the principal debtor defaults in meeting his or her obligation. The principal creditor has no action against the guarantor if there has been no default by the principal debtor. A guarantee must be distinguished from an indemnity, which is a promise independent of the scope and enforceability of the obligation owed by the principal debtor. A guarantee is a legal chose in action which is assignable. The majority of guarantees are entered into to guarantee some secured or unsecured debt or liability, such as under a mortgage or lease of real or personal property. For instance you may enter a contract of sale to purchase a property and finance this transaction with a mortgage. If you are unable to obtain financing using solely your name, you may have your parents guarantee your mortgage and loan which means they agree to meet your mortgage repayments and debt obligations should you be unable to fulfil them yourself. Sound legal advice from an Asset Protection & Trusts Lawyer may be immensely useful in understanding how guarantees operate and your rights and obligations should you enter such a contract.

A number of considerations are present in any guarantee agreement. First you need to be aware of and understand the obligation or debt that the guarantee relates to. Second is the identity of the guarantor and whether the guarantee is provided on a personal capacity, and if there is more than one guarantor whether the guarantee is joint or several. Another consideration is the time frame in which the guarantee operates, including whether the guarantee continues to the successors and assignees of the party receiving the guarantee. It is important to understand the implications of acting as a guarantor, because it usually means that the lender considers that the risks of lending to the borrower are significant.  Solid legal and financial advice from an experienced team of professions can be greatly beneficial in any matter that involves a guarantee.

Another important consideration is assignment of a debt which is secured by a guarantee. The simple point is that if the debt is assigned, the guarantee (whether secured or unsecured) should also be assigned in order to remain enforceable. If a debt by A to B is assigned by B to C, without assigning the benefit of the guarantee, by B to C, it is not possible for C to claim the debt and simultaneously (or subsequently) for B (who no longer owns the debt) to claim payment under the guarantee.

Other considerations that should be considered in a guarantee are disclosure and discharge. There may be a duty on the lender or borrower to disclose relevant information to a guarantor where the situation between the lender and borrower has changed. Also, the guarantee may not be enforceable unless a copy of the contract of guarantee and other relevant disclosure documents are provided. A discharge may occur when performance has occurred and/or the obligations of a guarantee contract are released.   A commercial law firm which has a host of resources available to it from across a wide spectrum of other practice areas will be in the best position to investigate, prepare and deal with your guarantee related matters.

If you require assistance with a building and construction dispute you may wish to contact our firm on (02) 9233 4048 and make an appointment to see one of our solicitors. 

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