Guarantees are a very common form of security. Lenders often ask for guarantees from the principals behind a business to whom they are going to extend credit. Landlords will seek them from the principals of a corporate tenant. Suppliers often make them part of a credit application. Typically, guarantees are one of several documents signed as part of a new credit arrangement. Guarantees can be unlimited or limited in amount. After they are signed, everyone tends to forget about them but they remain in the creditors file. Only if things go badly, often years later, does the guarantee resurface. If the business runs into trouble, the creditor will sue for any outstanding debt. Only at this point do the guarantors come to realize the legal consequences of the guarantee they signed so long ago. Naturally enough, they frequently seek to avoid this obligation. A review of a handful of recent guarantee cases illustrates how difficult it is to avoid a guarantee.
One common defence is that the creditor has done something the effect of which at law is to release the guarantors. For example, one principle of guarantee law is that a guarantor who pays the debt is entitled to an assignment from the creditor of all the available security against the debtor. Where the creditor has released or otherwise impaired that security, this can relieve the guarantor of the entire debt. This principle collides with another fundamental tenet of guarantee law: a guarantee is a matter of contract and the parties are free to contract out of the protections the law would otherwise extend to guarantors.
This later principle prevailed in a recent case, Royal Bank of Canada v. Bush, where the creditor held a mortgage and a guarantee as security. The creditor foreclosed on the property and suffered a shortfall. The creditor then sued the guarantor who argued that because the creditor could not assign the mortgage security to him, his guarantee was excused. The court disagreed noting that the language of the guarantee (as is common) provided that its enforceability was unaffected by “the fact any obligation of the debtor to the creditor may be invalid, void, voidable or unenforceable.”