consideration

Post image for Revisiting Personal Guarantees

There are a surprising number of cases dealing with whether people who purportedly signed a personal guarantee actually agreed to personally guarantee a contract.

Many of the issues I’ve seen arise when someone signs at the bottom of a contract as “guarantor” rather than signing a separate guarantee document. There’s nothing wrong with doing that, but it can cause issues. For example, I discussed a case in 2012 involving a corporate officer who signed a credit application that contained guarantee language. The officer signed the document only once, the signature did not indicate whether he was signing in his individual capacity or on behalf of the company, there was only one signature line, and the guarantee language did not clearly evidence that a personal guarantee was intended. The court held that the officer had not agreed to personally guarantee the company’s obligations and stated:

When considering whether a signatory to a contract intended to sign the agreement in his corporate or individual capacity, the determinative question is whether, in view of the form of the signature to the agreement, the language of the so called guaranty clause is sufficient to manifest a clear and explicit intent by [the signatory] to assume a personal guaranty contract. … Accordingly, our courts have adopted the policy that in order to hold a corporate officer individually liable in signing a contract of guaranty … the officer should sign the contract twice[,] once in his corporate capacity and once in his individual capacity…. By signing the contract twice, the officer executing the contract for his corporation clearly manifests his intent to assume personal liability. [citations and internal quotation marks omitted]

Drafters should clearly indicate that persons signing guarantees in contracts are signing in their individual capacities and they should include a separate signature block for them the sign in that capacity. [click to continue…]

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When people enter into a contract, everything changes. Before the contract is formed, people can change their minds. They can walk away from negotiations, ask for a higher price, or decide to do business with someone else. After the contract is formed, they have to do what they promised.

Contracts are promises that courts will enforce, but courts won’t get involved for just any promise. Courts require that the parties intend to be bound by their promises at the time of their contracting. And they require contracts to be a two-way street. That’s where consideration comes in. Each party has to bring something to the table.

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