Written By Marina Akram
Personal guarantees can be a valuable tool for creditors and lenders, but if not handled properly, they may lead to disputes and even become unenforceable. Understanding how personal guarantees work and how to avoid common pitfalls is essential to protect your financial interests.
What Is a Personal Guarantee?
A personal guarantee is a promise made by an individual (the guarantor) to take responsibility for a debt or obligation if the primary borrower, often a business, fails to meet their commitments.
This type of agreement is commonly used in situations such as:
- Bank loans.
- Applications for overdrafts.
- Supplier agreements (trade credit).
- Lease agreements with landlords.
Key Requirements for a Valid Personal Guarantee
For a personal guarantee to hold up, it must meet certain conditions:
- Linked to the Primary Borrower: The guarantor’s promise depends on the borrower’s (or company’s) obligations to the lender. If those obligations don’t exist or are invalid, the guarantee may also be invalid.
- Basic Contract Rules Apply: A personal guarantee must meet standard requirements of a contract, such as offer, acceptance, intention to create legal obligations, and consideration.
- Must Be in Writing: For the guarantee to be enforceable, it must be documented in writing and signed by the guarantor or someone authorised to sign on their behalf.
- Electronic Signatures Count: In many cases, an email with the guarantor’s name can serve as a valid signature if it shows intent to contract.
- Specific vs. All-Encompassing: Guarantees can cover a specific amount or all obligations of the borrower.
Common Pitfalls and How to Avoid Them
To ensure your personal guarantee is enforceable, here are some tips:
- Use Professional Guidance: Have the guarantee and related agreements reviewed by a legal expert. Poorly worded guarantees can lead to disputes or become unenforceable.
- Be Clear About the Terms: Clearly state whether the guarantee includes additional protection like an indemnity clause, which provides broader coverage. Ambiguous terms may lead courts to rule in favour of the guarantor.
- Avoid Undue Pressure: Give guarantors enough time to review the terms, and encourage them to seek independent legal advice if needed. This can help prevent claims of undue influence or misrepresentation.
- Verify Capacity: Make sure the guarantor has the authority to make such commitments, especially in a business setting. For example, ensure they are a company director or partner.
- Keep Records: Always obtain the signed original document and validate the guarantor’s identity by checking their ID.
Why It Matters
A well-drafted personal guarantee can be a powerful way to recover debts or enforce obligations. However, vague or incomplete documents may be challenged in court, potentially leaving you without the protection you expected.
Our Advice
If you’re considering using personal guarantees or have concerns about an existing one, it’s crucial to seek expert advice. At Silverback Law, we can help you:
- Draft watertight guarantees tailored to your needs.
- Review and update existing agreements.
- Resolve disputes over personal guarantees.
Contact us today to protect your interests and ensure your personal guarantees are enforceable.
Marina Akram
Assistant Head of Commercial Litigation