Contributor: Lee Grossman
Guarantee Versus Guaranty
Yes, there is a difference. A Guarantee is an assurance that a contract will be carried out according to its terms. A Guaranty is a promise made by a person or entity to answer for the debt, default, or nonpayment of another person or entity. A Personal Guaranty is a promise made by a person to answer for the debt, default, or nonpayment of another person or entity.
Basics Of A Personal Guaranty
A personal guaranty is often located within a contract between two business entities. The contract could be for the payment of goods and services, or construction of a building, or financing for real estate. A personal guaranty may require an individual (the Guarantor) to be responsible for the financial obligations of one of the entities. A personal guaranty is also often located in a contract between a business entity and another person, like a mortgage or promissory note, where the Guarantor agrees to be responsible for the financial obligations of the other person.
Under North Dakota law, a personal guaranty is a contract separate and distinct from the contract between two business entities. For instance, BigCorp and SmallSub enter into a subcontract for SmallSub to provide concrete work on a building where BigCorp is the general contractor. BigCorp requires a personal guaranty from Steve Small (the Guarantor), the owner of SmallSub, to be responsible for SmallSub’s financial obligations if SmallSub breaches its contract with BigCorp. BigCorp will not agree to a contract with SmallSub unless Steve Small agrees to the personal guaranty. There are two contracts here: (1) Subcontract between BigCorp and SmallSub for the concrete work, and (2) Personal Guaranty between BigCorp and Steve Small. Steve Small is only liable on his personal guaranty with BigCorp if SmallSub is unable to perform its separate contractual obligations with BigCorp.
The language of a personal guaranty will determine its duration. A personal guaranty may be limited in time and scope or limited by the entity for which the Guarantor is providing the personal guaranty. A personal guaranty may also be unconditional or continuing, which may make the Guarantor responsible for the personal guaranty as long as the contract is in place. This could span many years if the personal guaranty is made on a contract for services.
Exoneration, Novation, And Release
There are several situations where the Guarantor, after signing the personal guaranty, may no longer be responsible for the debt of another.
A Guarantor may be exonerated from a personal guaranty if the terms of the original contract change between the two contracting parties, thus changing the terms for which the Guarantor agreed to be responsible. Using the example above, the subcontract between BigCorp and SmallSub initially called for SmallSub to install a parking slab of 10,000 square feet, which Steve Small personally guaranteed. BigCorp decided it wanted to extend the parking lot and amended its subcontract with SmallSub to include a parking slab of 12,000 square feet. This changes the terms of the original agreement. If Steve Small did not sign a personal guaranty related to this change, Steve Small may be exonerated from his personal guaranty on the original contract for 10,000 square feet of concrete.
A Guarantor may be released from obligation by novation. A novation occurs when one of the original parties to the contract or one of the parties’ obligations is substituted for another. Using the example above, SmallSub is sold to LittleLLC, which assumes SmallSub’s obligations as the subcontractor with BigCorp for concrete work. BigCorp and LittleLLC do not enter into a new subcontract agreement, rather they continue performing under the original agreement. LittleLLC defaults on its performance and BigCorp seeks to hold LittleLLC and Steve Small liable for the related costs. Because Steve Small only personally guaranteed the work of SmallSub, not LittleLLC, he may not be responsible for the financial obligations of LittleLLC.
A Guarantor may sign a release to be free from the personal guaranty. A release must be in writing and the Guarantor must notify the contracting parties to the original agreement. The Guarantor may be released completely from any financial obligation, or the Guarantor may be released only from any financial obligation that occurs after the release is signed. It all depends on the language of the personal guaranty and the release.
If you have questions about personal guarantees, visit our website or call SW&L at 701-297-2890. Or you can email us via the contact form below and one of our attorneys will try and help.
The information contained in this article and on this website is for informational purposes only and not for the purposes of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.