Answer and Analysis Charlie is probably liable, but this case could go either way in court.
A classic example of the problem with disputed personal guarantees occurred in a Nevada case. The debtor company's president admitted signing the guarantee that included terms allowing the creditor/plaintiff to release or surrender the security without the consent of the guarantor. But he contended that since the application was for an open account, no underlying contractual relationship existed. He further insisted that he was not even aware that he signed as a guarantor. The plaintiff countered that the president was told that his signature on the guarantee would expedite the approval of credit and in all likelihood the guarantee probably did expedite the approval of credit because the plaintiff in fact did extend credit to the corporation. This case is a classic example of the situation that often arises when an individual signs as the guarantor and the guarantee itself is not clearly identified. The guarantor has, of course, received no consideration and is looking for any possible way to avoid liability. A Merchant Should Know
In this case the court held that the parties were liable for the contracts, which they did not read. One important issue here was the fact that the defendant was a merchant, and the one-page guarantee was conspicuously labeled. His failure to read the guarantee was not relevant. If the defendant had been a consumer who was guaranteeing the debt of another individual, the court might have come to a different conclusion. Courts are much more lenient with consumers who misunderstand agreements than with businesspeople who fail to understand a written contracts. The court held that certain essential elements make a guarantee binding and enforceable.
- the name of the guarantor
- the name of the party whose debts are being guaranteed
- the terms and conditions of the guarantee
- the interest of the property affected
- the consideration to be paid
In this case, the name of the party whose debts were being guaranteed was omitted, so the court found that the guarantee was certainly indefinite and nonbinding without any other evidence.Several writings together may supply an essential term that is missing, and they may be construed to supply the missing essential terms, providing there is a reference in one document to another document. Where more than one writing is used, there may be a nexus between the writings and "internal reference" to describe the requisite nexus between the writings. Oral evidence may be admissible to fill in the blank spaces. In the Nevada case, the court found that the credit application and guarantee construed together clearly refer to the same transaction, and that the customer's name on the credit application was the same as on the guarantee. Blank spaces in the guarantee did not render it indefinite, since the intent of the parties was ascertainable. The court then held that oral evidence could be allowed to explain the information that should have been entered in the blank space. Just as courts generally allow extraneous documents to prove security agreements and other indebtedness, they lean toward allowing other documentation, circumstances and, of course, oral evidence to fill in blank spaces and provide the necessary information to show exactly what the intent of the party is. The obvious lesson here is that a guarantee should be carefully completed and reviewed so that the lender has the proper documentation in the event of a problem at a later date. As to the defense that the guarantor did not read or understand the guarantee or thought it was a different type of agreement, a risk is always present where the guarantor is representing himself and no attorney is present. Witnesses
In these instances, it might be advisable to have the salesperson or some other party witness the execution of the guarantee and to provide a line next to the guarantee name identifying the "witness." In business transactions where a credit application is used, it might be better to have the guarantee on the front of the credit application than on the reverse side, and certainly the guarantee should be conspicuously labeled as a guarantee of the debt of the corporation. The wording of the guarantee should be carefully reviewed by counsel and should be phrased as an unconditional, absolute, and continuing guarantee until such time the guarantor terminates the guarantee in writing. The terms and conditions of the guarantee can run from two or three lines to a whole page as is evidenced by some of the guarantees used by financial institutions. Nevertheless, it is probably in the best interest of the credit grantor to limit the guarantee to serve the purpose for which it is intended (i.e., to guarantee the indebtedness of the corporate customer who is purchasing goods or services on credit). Sometimes logistics may allow the credit grantor to have the customer acknowledge receipt of the copy of the guarantee and have the receipt identify that the document the customer received is "a credit application and guarantee." Whether all this is necessary is a question of company policy. If the execution of the guarantee is conducted in a forthright manner; and if the guarantee itself is clear, conspicuous, and readable; and if every effort is made to inform the particular individual that it is a guarantee of the debt of the corporation, the credit grantor should have no problem in enforcing it. Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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