When the Guarantor Gets the Call: Understanding Guarantee Law in Canada

Guarantees are among the most common forms of commercial security in Canada. They are signed every day, often quickly and sometimes without full understanding of what they commit the signer to. Banks require them as a condition of lending to corporations. Landlords require them before granting commercial leases. Franchisors require them before awarding franchise agreements. The amounts at stake can be enormous.

Yet the law governing guarantees is complex, and the defences available to a guarantor who is called upon to pay are often more substantial than either the guarantor or the creditor realizes. This article explains how guarantees work, what is required to make one enforceable, the types of guarantee a person may be asked to sign, the defences available when a creditor calls on a guarantee, the rights a guarantor acquires upon payment, and what the law says about the related concept of an indemnity.

What Is a Guarantee?

A guarantee is a secondary promise by one person to be answerable for the performance of a legal obligation owed by another person. It is a contractual undertaking by a guarantor (also called a surety or obligor) to a creditor, promising that a third party (the principal or debtor) will perform their obligations, and that if the principal does not, the guarantor will do so in their place.

The three-party structure is fundamental. A guarantee necessarily involves three separate legal persons: a creditor to whom an obligation is owed, a principal who is primarily liable for that obligation, and a surety whose liability is secondary. No one can guarantee their own debt, and no one can give a guarantee to themselves. Where an officer of a corporation signs a document on the corporation’s behalf, the question of whether they intended to add their own guarantee or merely to bind the corporation is one of interpretation that turns on all the circumstances.

The liability of a surety is collateral to, not independent of, the liability of the principal. It arises when a specific contingency occurs: the default of the principal. Until the principal defaults, the surety has no obligation to pay. The surety’s liability is never greater in equity than the liability of the principal, and will be reduced to the extent the principal is not liable. This secondary and collateral nature of guarantee liability was reaffirmed by the Ontario Court of Appeal in ClearFlow Commercial Finance Corp. v. Trigger Wholesale Inc.

Guarantee vs. Indemnity: Why the Distinction Matters

A guarantee is frequently confused with an indemnity, and the two concepts are closely related. But the distinction has significant legal consequences, particularly in connection with the writing requirements of the Statute of Frauds.

The key distinction is this: if the liability of the promisor turns upon the default of some third party, and constitutes a secondary undertaking with respect to that liability, the agreement is a guarantee. If the obligation is an independent undertaking to make good a loss, regardless of whether any third party is in default, the agreement is an indemnity rather than a guarantee.

A practical way to think about it: if the promisor would only pay if a third party does not, it is a guarantee. If the promisor is liable to pay in any event, regardless of what the third party does, it is an indemnity. Courts look to the substance of the transaction, not the label attached to it. A document titled “indemnity” may in substance be a guarantee, and vice versa. As the Federal Court confirmed in Canada v. Wimmer Brook Enterprises Inc., where an individual agreed to be personally liable at the same time as the corporate defendant, regardless of whether the corporate defendant defaulted, the document was held to be more in the nature of an indemnity even though it was labelled a “guarantee.”

The distinction matters because guarantees must comply with the writing requirements of the Statute of Frauds, while simple indemnities do not. In practice the line between the two is not always easy to draw, and the caselaw is difficult to reconcile at the margins.

Types of Guarantee

Understanding which type of guarantee you have signed or are being asked to sign is critical. There are three basic types, and they differ significantly in scope.

Specific (Discrete) Guarantees

The most basic type is the specific or discrete guarantee. Under this arrangement, the surety guarantees the repayment of a particular obligation of the principal, such as a single term loan. Once that loan is repaid, the surety’s liability is discharged and cannot be revived by the creditor re-advancing funds. Guarantees of term loans are usually specific guarantees.

Continuing Guarantees

A continuing guarantee covers a series of transactions, and the surety remains liable in respect of any of those transactions (subject to any overall dollar limit), provided there is a balance owing at any given time. A guarantee of the balance of an overdraft or line of credit is a continuing guarantee. The surety is not discharged merely because at some point the balance is reduced to zero; each new advance revives the surety’s liability. Continuing guarantees are most often encountered in revolving credit arrangements.

The courts are reluctant to infer a continuing guarantee from ambiguous language. Where there is uncertainty in the document, it will be construed against the creditor. The Ontario Court of Appeal’s decision in Intercap Equity Inc. v. Bellman addressed the interpretation of “in connection with” language in an all accounts continuing guarantee, illustrating how carefully guarantee scope provisions will be examined. A surety who intends to guarantee only one specific transaction should make that clear in writing.

All Accounts Guarantees

The third type, most commonly encountered in bank financing, is the all accounts guarantee. Such a guarantee covers any amount owed by the principal to the creditor, regardless of how that indebtedness arose. It extends to contingent liabilities, running account balances, and potentially to non-debt liabilities depending on the wording. When a bank insists that a guarantee cover “all accounts” rather than a specific loan, it is seeking protection against the total credit exposure of the principal.

A surety who assumes they are guaranteeing only a specific transaction but signs an all accounts guarantee form is in a very difficult position. The parol evidence rule will generally prevent them from introducing evidence to limit the scope of the written document.

Formation: What Makes a Guarantee Enforceable

Because a guarantee is a contract, it must satisfy all the requirements of a valid contract. But it must also comply with additional statutory formalities that apply specifically to guarantees.

The Three-Party Requirement and Capacity

There must be at least three separate legal persons: a creditor, a principal, and a surety. The parties must have legal capacity. A guarantee given by a minor is void. Mental incapacity renders a guarantee voidable, not void, but only where the other party knew or ought to have known of the incapacity. A contract entered into when a party is intoxicated is treated similarly.

Consideration

A guarantee must be supported by consideration. Where the guarantee is given as part of the same overall transaction as the underlying credit, the advance of credit to the principal serves as sufficient consideration. Where a guarantee is given after the credit has already been advanced, there must be fresh consideration, typically forbearance by the creditor from enforcing the debt, an agreement to extend the repayment terms, or a comparable indulgence. Without consideration, a guarantee is unenforceable unless executed as a deed under seal.

The Writing Requirement: The Statute of Frauds

The most important formality for guarantees is the requirement under the Statute of Frauds that a guarantee, or some note or memorandum of it, must be in writing and signed by the guarantor or their authorized agent.

The Statute of Frauds does not render an oral guarantee void. It renders it unenforceable. An oral guarantee may not be sued upon, but money paid under it cannot be recovered, and it may be raised as a defence (though not as a counterclaim) to a related claim. A defendant who wishes to challenge the enforceability of a guarantee on the ground that it is not in writing must specifically plead the Statute as a defence; if they do not, the court will assume compliance.

The written evidence need not be a single formal document. The agreement may be oral if there is a signed written note or memorandum evidencing it, and that memorandum may be assembled from more than one document. All essential terms must appear in writing. The note or memorandum need be signed only by the guarantor.

The Statute of Frauds applies where the substance of the transaction is a secondary undertaking to answer for the debt, default or miscarriage of another. It does not apply where the obligation is a direct and independent promise to pay, in which case the obligation is an indemnity and the writing requirement does not arise.

In Manitoba, the Statute of Frauds has been repealed in relation to guarantees. In Alberta, there is an additional formality beyond the writing requirement: a guarantee given by an individual must be acknowledged before a notary (usually a lawyer) under the Guarantees Acknowledgment Act. Saskatchewan imposes similar requirements for guarantees relating to farmland under its farm security legislation.

Joint and Several Liability

It is common for a creditor to obtain guarantees from more than one person in respect of the same principal. Where two or more persons guarantee the same obligation, they may do so jointly, severally, or jointly and severally. In practice, bank guarantee forms almost always provide for joint and several liability among co-guarantors, which gives the creditor the right to pursue any one of the co-sureties for the full amount of the guaranteed debt.

Interpreting a Guarantee

Guarantees are interpreted using the same rules that apply to contracts generally. There is no special rule requiring guarantees to be construed narrowly against the creditor or in favour of the surety, although ordinary interpretive principles may produce that result in some cases.

The starting point is the plain and ordinary meaning of the words the parties have used. A guarantee is read as a whole, and its provisions must be given a consistent and intelligible construction. A literal interpretation will be departed from only where it would lead to an absurd result or is plainly repugnant to the evident intent of the parties.

Two interpretive principles bear particular mention. The first is what may be called the fair protection rule: courts interpret a guarantee so that the protection or security it affords to a creditor is rendered real rather than illusory. A guarantee that is given to secure a commercial transaction will be construed in a commercially sensible way. The second is the contra proferentem rule: where an ambiguity in a guarantee document cannot be resolved by other means, it will be construed against the party who drafted it, usually the creditor.

The recitals of a guarantee play only a limited role. Reference may be made to them to resolve an ambiguity in the operative provisions, or to determine whether a guarantee is continuing or specific in nature. But a clear operative provision will override an inconsistent recital.

The Contingent Nature of the Surety’s Liability

The surety’s liability does not arise until the principal is in default. The starting point for any enforcement analysis is therefore to establish whether the principal is in default, and whether that default is of a kind that engages the guarantee.

Not every default triggers the surety’s liability. The default must not be attributable to the conduct of the creditor, and the creditor cannot refuse to accept the payment or performance of the principal and then call upon the surety. A surety is not liable where the default results from the frustration of the principal contract. In the case of a fidelity guarantee, the surety will not be liable if the default results from a cause that could not have been prevented by the exercise of reasonable prudence, such as robbery.

Unless the terms of the guarantee provide otherwise, the creditor does not need to pursue the principal before calling upon the surety. The creditor can demand payment from the surety immediately upon the principal’s default. The creditor is not required to exhaust its remedies against any other security before proceeding against the guarantor. This is a critical point that surprises many guarantors who assume they will have advance warning and an opportunity to arrange for the principal to pay first.

Demand Requirements

Where the guarantee contains a provision that payment is due “on demand” or “after demand,” the limitation period runs from the date the demand is made, not from the date of the principal’s default. A demand must be specific, clear, and unambiguous. Where no demand provision is included, the limitation period generally runs from the date of the principal’s default.

Defences Available to a Guarantor

A guarantor who is called upon to pay has access to a wide and sometimes surprising range of defences. These arise both from general contract law and from principles specific to the law of guarantee. Most of them can be, and usually are, expressly waived in the guarantee document by broadly drafted waiver clauses. Before relying on any defence, it is essential to review the guarantee carefully for such waivers.

Duress and Economic Duress

A guarantee obtained through duress may be rescinded. Common law duress encompasses physical violence or the threat of it, and unlawful imprisonment. The concept of economic duress extends this to situations where a party is forced into a guarantee by illegitimate economic pressure such that their consent was not truly voluntary. The authority for economic duress within the Commonwealth may be found in the Privy Council’s decision in Pao On v. Lau Yiu Long. Commercial pressure of the ordinary kind does not constitute duress, even where one party is in a significantly weaker bargaining position. The pressure must be illegitimate and must rise to the level of coercing the guarantor’s will. Relevant considerations include whether the guarantor protested, whether there was any practical alternative, whether they obtained independent advice, and whether they took steps promptly to avoid the obligation.

Undue Influence

Where a guarantee was obtained through the undue influence of the principal or another person, and the creditor knew or had notice of that influence, the guarantee may be set aside. Undue influence involves the overpowering of one person’s will by another that prevents them from exercising independent judgment. It arises in relationships of dependency and trust: parent and child, solicitor and client, doctor and patient, religious advisor and disciple, and similar relationships where one party is in a position of reliance on the other.

There is no general presumption of undue influence between spouses. However, the mere fact that a spouse is asked to guarantee the other’s business obligations raises a factual question: does the creditor have notice that undue influence may have been brought to bear? The English Court of Appeal’s decision in Barclays Bank plc v. O’Brien reinvigorated the law in this area and has been followed across Canada. It establishes that where the creditor has or ought to have such notice, the creditor must take steps to ensure that the guarantor receives or is advised to seek independent legal advice. A creditor who delivers a guarantee to the principal to procure their spouse’s signature, without taking steps to ensure the spouse has independent advice, does so at its peril. Amendments to a guarantee present particular complexity in the spousal context: as the Federal Court of Appeal held in Kilback v. Canada, where a wife signed an original guarantee but not an amending agreement, it was open on the evidence to infer her consent to the amendment from the surrounding circumstances.

Independent Legal Advice

In the ordinary case, there is no requirement that a guarantor must receive independent legal advice before a guarantee is enforceable. But where the circumstances raise a genuine risk of undue influence, unconscionability, or misrepresentation, independent legal advice plays a critical role.

The purpose of independent legal advice is not procedural: it is to ensure that the guarantor genuinely understands the obligation they are assuming and is capable of making a free and informed decision. As the court stated in Barclays Bank Plc v. Coleman, where a creditor suspects or has notice that a guarantee may have been provided under the undue influence of the principal or some other person, the creditor may shore up the guarantee by ensuring the surety obtains independent legal advice before entering the transaction. A lawyer who is asked to provide independent legal advice to a guarantor must take the obligation seriously. It requires a genuine review of the documents, a clear explanation of the scope and amount of the liability being assumed, a discussion of any unusual or onerous provisions such as waivers of defences, and an inquiry into the possibility of undue influence or misrepresentation. The lawyer must interview the client in private, without the principal present.

No certificate of independent legal advice should ever be provided where the lawyer has reason to suspect that undue influence, duress, or misrepresentation has been exerted on the guarantor. The provision of perfunctory or inadequate independent legal advice is itself a source of professional negligence exposure.

Misrepresentation and Non-Disclosure

A guarantee may be voided where it was induced by a misrepresentation. A fraudulent misrepresentation will void the guarantee without any need to prove materiality. A negligent or innocent misrepresentation must be shown to be material and to have been relied upon.

Guarantees are not contracts of utmost good faith in the way that insurance contracts are. A creditor is not generally obliged to volunteer all information it has about the principal’s financial condition. The surety takes the debtor as found. But the duty of disclosure is not entirely absent. Where the contractual relationship between the creditor and the principal is of a kind that the surety could not reasonably be expected to know about, the creditor must disclose it. A creditor who conceals the principal’s existing default on other obligations when obtaining a continuing guarantee that will cover that existing default risks having the guarantee voided for misrepresentation by silence.

Where the guarantor asks a specific question, the creditor must give a truthful and complete answer. A partial or inaccurate answer to a direct inquiry risks voiding the guarantee. The concealment of material facts, whether deliberate or innocent, is sufficient to invalidate a guarantee where the concealment was such as to have influenced the guarantor in undertaking their liability.

Non Est Factum

The defence of non est factum (“it is not my deed”) is available where a guarantor signed a document in the genuine belief that it was a fundamentally different type of document. The defence requires that the guarantor did not know the actual contents or character of what they signed, and that the document was radically and fundamentally different from what they believed it to be. A mere misunderstanding of the scope of the guarantee is not sufficient.

The defence is narrow and rarely succeeds for sophisticated business people who had an opportunity to read the document. Carelessness in failing to read a guarantee will generally defeat the defence. It has succeeded most often for those who, due to blindness, illiteracy, or comparable disability, were necessarily dependent on others when entering into written agreements.

Discharge by Material Variation: The Rule in Holme v. Brunskill

One of the most important defences in guarantee law is discharge by material variation. Any material variation of the terms of the principal contract, made after the guarantee was given without the consent of the guarantor, will discharge the guarantor from liability.

The rule derives from the English Court of Appeal’s decision in Holme v. Brunskill, and has been followed consistently throughout the common law world. Its rationale is fundamental: the guarantor agreed to assume responsibility for the risk that existed at the time the guarantee was given. If the creditor and the principal subsequently alter the terms of the underlying contract, the guarantor may be exposed to a different and potentially greater risk. The guarantor never agreed to that altered risk.

The variation must be material. A variation is material if it has a potentially substantial effect on the rights or exposure of the guarantor. Critically, proof of actual prejudice is not required; the possibility of prejudice is sufficient. Where the variation could only have benefited the guarantor, no discharge results. Where the variation has the potential for prejudice, the creditor must obtain the guarantor’s consent before making it.

Common examples of material variations that have discharged guarantors include extensions of time given to the principal, increases in the guaranteed debt, changes to interest rates, changes to security arrangements, and material changes to the commercial terms of the underlying contract.

The right to be discharged for material variation is almost invariably waived in bank guarantee forms, through broadly drafted clauses permitting the creditor to extend time, increase or decrease credit, take or release securities, and otherwise deal with the principal and the guaranteed obligation without the guarantor’s consent. These waivers are enforceable. A guarantor who has signed a standard bank form has almost certainly waived this defence.

Discharge of the Principal Debtor

A guarantee is a secondary obligation. If the creditor releases the principal from their obligations, the guarantor is also released, because the guarantee cannot exist without the primary obligation to which it relates. If the principal pays the guaranteed debt in full, the guarantor is discharged. The guarantor is never liable for more than the principal owes.

Creditor’s Loss or Impairment of Security

A creditor who carelessly allows security to be lost or diminished risks having the guarantee reduced or discharged to the extent of the prejudice suffered by the guarantor. If the creditor releases security held in connection with the guaranteed obligation without the guarantor’s consent and the release has the potential for prejudice to the guarantor, the guarantee may be voided to the extent of that prejudice or entirely. The creditor must use ordinary diligence in dealing with the securities it holds.

Other Defences

Additional defences available to a guarantor include: the failure by the creditor to satisfy conditions precedent to the guarantee’s operation; the guarantor’s right of set-off against the creditor; the guarantor’s right to raise any defence available to the principal against the creditor (with limited exceptions for defences personal solely to the principal); breach of the principal contract by the creditor; and the laches or delay doctrine in equity.

Waivers of Defence

Standard form guarantee documents, particularly those used by banks and other institutional lenders, invariably contain extensive lists of express waivers of the defences to which the guarantor would otherwise be entitled. These typically include waivers of the right to be discharged by material variation, extension of time, release of co-sureties, release of security, and changes to the principal contract.

Courts enforce waiver clauses that are clearly and unambiguously worded. The clear wording test requires that the language of the waiver clause specifically identifies the right being waived in unambiguous terms. A clause that is merely capable of being read as a waiver, but is equally capable of being read as requiring good faith conduct, will not be treated as eliminating the relevant right. A creditor who wishes to rely on a waiver clause is entitled to do so only insofar as their conduct is consistent with the plain ordinary meaning of the clause.

The presence of broad waiver clauses in a guarantee document is one of the most significant practical factors in any guarantee dispute. Guarantors who have signed documents containing such clauses are in a much weaker position than those who have not.

Surety Bonds

Surety bonds are a specialized form of guarantee agreement most commonly encountered in the construction industry and in certain regulated sectors. They are usually issued by a bonding or insurance company (the surety), committing the surety to pay a named beneficiary (the obligee) a sum up to a stated maximum (the penalty sum), subject to the proviso that the obligation will cease if certain conditions are met relating to the performance of the principal.

Like simple guarantees, surety bonds are “on default” obligations. The surety’s liability arises only upon the default of the principal, not merely upon demand. This distinguishes surety bonds from standby letters of credit and bank “performance guarantees,” which are independent obligations crystallizing on demand, regardless of whether the principal has actually defaulted.

There are several common forms of surety bond encountered in Canadian commercial practice. Bid bonds guarantee that a party will enter into a contract if their tender is accepted. Performance bonds guarantee that the contractor will complete the contract in accordance with its terms; the penalty sum caps the surety’s maximum liability, not its presumed extent. Labour and material payment bonds guarantee that subcontractors and suppliers will be paid for their work and materials in connection with a construction project. Repayment bonds guarantee the return of advance payments if the principal fails to perform. Court bonds are posted as security for costs or the due execution of court orders.

The liability of the surety under a bond is construed strictly in accordance with the terms of the bond document. The surety is not liable for more than the penalty sum, and the scope of the surety’s obligation is limited to what is expressly provided for in the bond. A performance bond covering the cost of completion does not, by implication, extend to delay damages unless the bond expressly provides for them.

Contractual Indemnities

A contractual indemnity is an independent obligation to make good a loss, which does not depend on the default of any third party. Because it is not a secondary obligation, it is not subject to the writing requirements of the Statute of Frauds, and many of the equitable protections that apply to sureties do not automatically apply to indemnitors.

However, because many of the same commercial situations that give rise to guarantees also give rise to indemnities, and because the principles applicable to each overlap significantly, the courts treat material variations and other conduct with similar effect in the indemnity context. A material variation of the risk to which an indemnitor is exposed, made without their consent, will often have the same discharging effect as in the guarantee context.

The scope of a contractual indemnity is determined by its terms, which are interpreted in accordance with ordinary contractual principles. Indemnities against costs, including legal costs incurred in defending third party claims, are common in commercial contracts. The scope of such indemnities requires careful interpretation: an indemnity against “all costs” may or may not extend to legal costs on a solicitor and own client basis, and the answer depends on the precise wording of the clause.

Rights of the Guarantor After Payment

A guarantor who has paid the guaranteed debt is not without recourse. The law gives guarantors a substantial array of rights against both the creditor and the principal.

Subrogation and Assignment of Security

A guarantor who pays the guaranteed debt in full is subrogated to the creditor’s position. This means the guarantor steps into the creditor’s shoes and can use all rights and remedies that the creditor had against the principal, including the benefit of any security the creditor held. If the creditor held a mortgage, a security interest, or other collateral, the guarantor who pays is entitled to have those securities assigned to them.

By statute in Ontario (under the Mercantile Law Amendment Act), every person who pays a guaranteed debt as surety is entitled to have assigned to them every judgment, specialty, or other security held by the creditor in respect of the debt. This right applies whether or not the judgment or security is deemed satisfied by the payment. A guarantor who is not aware of this right, and does not promptly assert it, may find that the creditor has dissipated or released the security in a way that eliminates its value.

Indemnity from the Principal

The principal is ultimately liable for the guaranteed debt. A guarantor who pays is entitled to recover from the principal the full amount paid, together with interest and reasonable legal costs. This right of indemnity arises by operation of law, not by contract, and exists even in the absence of any express indemnity agreement between the guarantor and the principal. The guarantor may bring an action against the principal in the guarantor’s own name.

Before paying, a guarantor may bring a quia timet action against the principal to compel the principal to pay the creditor directly, relieving the guarantor of the need to do so. This requires the guarantor to admit their own liability under the guarantee, and the right is subject to conditions, but it can be useful where the principal appears to have the means to pay but is refusing or failing to do so.

Rights in the Principal’s Bankruptcy

A guarantor is a creditor of the principal within the meaning of the Bankruptcy and Insolvency Act, even before making any payment under the guarantee, because the guarantor’s claim is contingent rather than non-existent. This means that if the principal becomes bankrupt, the guarantor can file a proof of claim in the bankruptcy in respect of amounts they expect to be called upon to pay. Where the guarantee covers only part of the principal’s total debt and the guarantor has paid their share, they are entitled to claim for and receive dividends out of the principal’s estate.

Contribution from Co-Sureties

Where two or more persons have each guaranteed the same obligation, each co-surety is liable for a proportionate share of the guaranteed debt. If one co-surety pays more than their proportionate share, they are entitled to recover the excess from the other co-sureties by way of contribution. This right arises by operation of equity, independently of contract, and does not require that the co-sureties be parties to the same document.

The proportion for which each co-surety is liable is generally determined by dividing the total obligation by the number of solvent sureties. If one co-surety becomes insolvent, the proportion borne by the remaining co-sureties increases accordingly. A co-surety who holds security from the principal must hold that security for the benefit of all co-sureties and cannot retain it for their own exclusive benefit.

Limitation Periods

A claim against a guarantor is subject to a limitation period. In Ontario, for causes of action arising after January 1, 2004, the basic limitation period is two years from the date of discovery, under the Limitations Act, 2002.

The starting point of the limitation period against a guarantor depends on the terms of the guarantee. Where the guarantee provides that the surety will pay “on demand,” the limitation period does not begin to run until the demand for payment is made. Where no demand provision is included, the limitation period generally runs from the date of the principal’s default.

It is important to note that the expiry of the limitation period with respect to the principal’s obligation does not necessarily mean the limitation period for the guarantee has also expired. These are separate obligations. A creditor who has been slow to enforce against the principal but who has made timely demand on the guarantor may still have a valid claim against the guarantor even if the claim against the principal is statute-barred.

Good Faith and Honest Performance

Following the Supreme Court of Canada’s decision in Bhasin v. Hrynew, parties to contracts in Canada are subject to a general organizing principle of good faith, and are required to act honestly in the performance of their contractual obligations. This principle has potential application to guarantee contracts. A creditor who exercises their rights under a guarantee in a dishonest or bad faith manner may face claims beyond the ordinary contractual defences available to guarantors. Courts have not yet fully mapped the implications of Bhasin for guarantee law, but it is reasonable to expect that the duty of honest performance applies to the creditor’s exercise of discretionary rights under a guarantee, including account certification clauses.

Practical Considerations for Guarantors

Given the significant obligations and exposure that a guarantee creates, anyone being asked to sign one should consider the following.

Understand what you are signing. A guarantee makes you personally responsible for someone else’s debt or obligations if they fail to perform. The creditor does not have to pursue the principal first. The amounts can be very large, and an all accounts guarantee can accumulate exposure far beyond what you initially anticipated.

Know whether your guarantee is specific or continuing. A continuing guarantee that has no cap on amount or duration can expose you to obligations that were not contemplated when you signed. If you intend to guarantee only a specific transaction, say so explicitly in writing.

Understand how to terminate. Many continuing guarantees can be revoked by written notice to the creditor for obligations not yet incurred. Revocation does not affect obligations already incurred. The mechanics of revocation are often specified in the guarantee document and must be followed precisely. Know what your options are before signing.

Review the waiver provisions carefully. Standard bank guarantee forms waive most of the equitable defences described in this article. Once those waivers are in place, your options for resisting a claim are significantly narrowed. A lawyer reviewing the document can identify what rights have been waived and whether any of them can be negotiated.

Obtain independent legal advice. A lawyer reviewing a guarantee on your behalf should explain the scope of your liability, when you can be called upon to pay, any provisions that expand the creditor’s rights or limit yours, and your rights against the principal and any co-sureties. If you are guaranteeing a spouse’s or partner’s business obligations, the lawyer should interview you privately, without the principal present.

Monitor the principal’s performance. A guarantor who watches the principal’s financial condition deteriorate without taking action may find that their options are limited by the time the creditor calls. Where a guarantee can be revoked, doing so promptly when warning signs appear can significantly limit exposure.

Negotiate the terms. Guarantee documents are frequently presented as standard forms, but many terms are negotiable. A guarantor may be able to negotiate a cap on liability, a requirement that the creditor exhaust its recourse against the principal and other security first, protection against material variation, and preservation of their right to the benefit of any security the creditor holds.

Conclusion

Guarantees are deceptively simple documents that create serious legal obligations. They are signed in the optimism of a new business relationship, often without full appreciation of what happens when that relationship goes wrong. The law governing them is detailed and demanding, with significant differences in rights and exposure depending on whether the guarantee is specific or continuing, whether waiver clauses are present, whether the guarantor obtained independent legal advice, and whether the creditor has managed the underlying relationship in a way that discharges the guarantor’s liability.

The law does not protect guarantors against their own imprudence. But it does protect them against misrepresentation, undue influence, material variations to the risk they agreed to assume, and a creditor’s careless management of the securities that stand behind the debt. For guarantors who are being called upon to pay, and for creditors who need to enforce, understanding where the law draws these lines is the essential starting point.