A contract of guarantee arises where one person, a Guarantor, contracts with another to pay someone else’s debt or to perform some act, owed to a third by the Borrower.

Even when a guarantee is signed the borrower remains primarily liable for payment or performance.

Agreeing to be a Guarantor means taking on a legal liability.

The Guarantor agrees to repay the amount lent to the Borrower if the Borrower fails to repay the loan. The Guarantor may have to pay interest and costs as well, especially if the guarantee is not limited to a specified amount.

The Guarantor only becomes liable on the default of the Borrower.

Going Guarantor does not mean:

  • That the Guarantor believes the Borrower is good for the money;
  • That the Guarantor is just witnessing the Borrower’s signature;
  • That the Guarantor is declaring that the Borrower is who they say they are; and it is not “just a formality”.

Unless the guarantee is created by deed, the Guarantor’s promise must be supported by valuable consideration such as a payment or a promise. The making of the loan to the borrower, or an agreement not to sue are examples of valuable consideration.

If there is no consideration, the guarantee will be unenforceable and will fail. A guarantee for past consideration will also fail because past consideration is not valuable consideration.

If a Lender requires a guarantee it usually means that they believe that there is a risk that the Borrower may not be able to repay the loan. That risk is, in effect, transferred to the Guarantor, who assumes such responsibility, usually with little or no benefit to themselves.

Although a Guarantor has a right to recover any money they have paid out under the guarantee from the Borrower, the chances are that, if the Borrower could not pay the Lender, they will not be able to pay the Guarantor. Agreeing to be a Guarantor should therefore not be done lightly. A Guarantor should be fully informed about the terms of both the Guarantee and the Borrower’s contract. Some conditions can be very difficult to meet, for example, if the Borrower fails to meet their repayments, the Lender may be able to demand that the Guarantor pay the whole amount owing in a single lump sum, rather than in repayments as the Borrower did.

A potential Guarantor should ask the Lender to provide all the information they have as to the risks they see in the transaction. If the Lender is not willing to give convincing reasons why they require a Guarantor, or the Borrower is not willing to disclose information about their financial situation or the loan, the risk of the Guarantee be called upon is higher.

If the Guarantor is not informed of all of the terms of the loan, they may be able to avoid liability for the debt.

Uniform credit laws exist throughout Australia. These laws regulate the circumstances in which a contract of guarantee is formed, varied and enforced. A full analysis of the credit laws is beyond the scope of this article and you should seek professional advice for any specific circumstances.

At the end of the day if a guarantee is called on, then you may lose valuable assets. If you can’t satisfy a call on the guarantee, you will be sued and a judgment may follow causing you to be liable for costs and interest. If you can not satisfy the judgment you may end up bankrupt.

As you can see, even if you think the borrower is good for the money there is still a risk and we as your lawyers need to make sure the risks are understood by you.

We can not advise you about the financial risks you face nor, whether the borrower will be able to pay the debt. If you have any concerns about the borrower’s capacity then don’t sign the guarantee. No matter how much pressure is put on you a lot of people just sign to avoid the pressure of a confrontation and this leads to a lot of further marital problems and in some cases financial ruin.

Be careful.

Guarantor — Our Team

Director - Accredited Specialist in Business Law
Solicitor - Property & Commercial Team
Solicitor - Business & Commercial Team