A personal guarantee is often asked for and we often give them without too much thought or concern. However, they are a serious legal document which has the potential of making a third party liable for the liabilities, loss or breach of obligations of another person.
Guarantees should never be signed without due thought and consideration. Issues to consider:
- do you really need to give a guarantee? Will the party asking for it accept some other form of security e.g. deposit, bond, mortgage etc?
- if you are guaranteeing the obligations of another person, can that person repay the debt or perform their obligations? How much do you know about them? What is their financial position?
- are there any unusual terms such as the right to lodge a caveat over your real property?
- seek legal advice before signing a guarantee. Guarantees are very difficult to get out of and often continue indefinitely and apply to current and future liabilities.
On the other hand if you are in the business of supplying goods or services on credit, you should consider implementing personal guarantee arrangements as an additional form of securing payment. If you are providing goods and services to a company, you should always request a personal guarantee from the directors of that company because the company is a separate legal entity, and in the absence of the guarantee, you will likely have no recourse against the directors, if the company goes into liquidation.
If you should require a personal guarantee from a customer or other person you are dealing with, here are some practical tips:
- ensure the guarantee is in writing as the Property Law Act (1974) Qld requires the guarantee to be in writing;
- include an all monies clause. An all monies clause means the guarantor is guaranteeing the payment of all debts and monies which may become owing to the supplier at any time;
- include an indemnity clause. This clause provides that the guarantor also indemnifies the supplier against any loss or damages that the supplier may suffer as a result of the customer’s default;
- ensure that the guarantee includes a clause whereby the guarantor contracts out of/waives any equitable right to be released or rights inconsistent with the guarantee or to the detriment of the supplier. Without this clause it is possible that the supplier may have discharged/revoked the guarantee without meaning to do so;
- disclose any unusual features or circumstances of the credit arrangement to the guarantor;
- encourage the guarantor to get independent legal advice. You may wish to even make it a requirement that the guarantor provide a certificate from a solicitor certifying that the solicitor has explained the guarantee to the guarantor and the guarantor executed the guarantee in the solicitor’s presence of his or her own free will.
If you require any further advice about personal guarantees, or about supply terms to your customers, please contact Donnie Harris Law on [email protected] or 07 4724 1016. Our Townsville Lawyers would be happy to assist you.