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MARCH 2012

The Huge Risks of Being a Guarantor

There are significant risks when you become a guarantor. A recent decision from the High Court highlights the huge gap between the understanding of the “guarantor” as to liability and the obligations the guarantee document actually imposed.

The Background

In this particular case, a contractor applied for credit from a supplier to purchase goods. The form of application for credit contained a guarantee. MK, who was related to the contractor, signed the guarantee. The guarantee document contained, amongst other provisions, the following:
“the guarantor…acknowledges and agrees that the guarantee will continue if the application is renewed or any of its terms are changed.”

The credit application contained a section that was headed “credit information” and posed the question “how much credit do you require?”. Within the relevant space, the figure $2,000 had been entered. Subsequently, the supplier agreed to increase the credit limit without MK being advised.

The contractor purchased items totaling more than $22,000 using this credit but the debt was not repaid. The supplier sued MK. MK argued that the guarantee was a limited guarantee for debts not exceeding $2,000.

The Decision

The Court acknowledged that although “a substantial variation of the basis of the contract between the creditor and the debtor without the consent of the guarantor will discharge the guarantor from liability…where a guarantee contains a clause which gives the creditor power to make variations to the contract with the debtor, this principle will not apply”. In this case the Court found that the supplier was permitted to vary the credit limit and had done so. Further, although this term was “changed” the guarantee permitted this arrangement and accordingly the guarantee continued to be effective.

Additionally, the agreement that MK guaranteed provided for the debtor to pay interest on overdue payments and all costs, including legal costs, incurred by the supplier in collecting or attempting to collect overdue payments. The total amount of the judgment against MK was $30,057.48.

The Conclusion 

  • Don’t sign guarantees;
  • If you do, check carefully as to the terms (don’t assume anything);
  • A Guarantor may have no control over the amount of funds advanced from time to time BUT be liable for all such funds advanced.
In the above case, MK thought that his exposure was only $2,000 but on a careful review of the guarantee document he signed he was liable for all credit advanced by the supplier to the fencing contractor and all interest and costs incurred, in all totaling over $30,000. MK may be able to recover this amount from the contractor relative but in all likelihood the relative is insolvent.