What Your Business Needs to Know About Personal Guarantees

September 26, 2023

What Your Business Needs to Know About Personal Guarantees

A personal guarantee is the promise of an individual to become responsible for repaying a loan or for curing a default, of a business. Typically, a personal guarantee is given by an executive or the owner of the company. This guarantee will allow the personal assets of the guarantor to secure the company’s performance under a contract with another party.

As a business owner, you may be required to sign a personal guarantee to secure an obligation of the company. Or, as part of the business operations, a personal guarantee may be required from a customer to secure an obligation owed to your business.

The attorneys and the team of legal professionals at The Shenon Law, located near you in the Los Angeles area, advises business owners on the terms of personal guarantees when the business is the creditor accepting a guarantee from another, or when the client is guaranteeing the performance of its company.

A personal guarantee must contain four elements in order to be enforceable.

California Law Requires all Guarantees to be in Writing

A separate paragraph at the end of a contract entitled “Guarantee” and signed by the person purporting to assume any responsibility under the contract may not be sufficient to enforce the guarantee. Under California law, a guarantee must contain language to define and identify the specific terms of the guarantee.

There Must be Writing in Place to Enforce a Personal Guarantee

An enforceable personal guarantee must contain all of the following elements:

  • There needs to exist an underlying obligation of the company
  • The guarantee must be in writing and must stand on its own as an enforceable contract
  • There needs to be a default in the primary obligation of the company
  • There cannot be a default by the creditor, or the party benefiting from the personal guarantee

If any of the above elements are not present, then the personal guarantee cannot be enforced.

Guarantees are Contracts

A guarantee is a contract, and a contract must meet certain criteria to be enforceable. A personal guarantee must stand on its own, separate and apart from the underlying document. However, the guarantee must incorporate the underlying document either by reference or by attachment.

At a minimum, all contracts must expressly state the term, the intent of both parties, and the conditions of when the provisions come into effect.

Any Ambiguities Go Against the Drafter of the Guarantee

In California, any ambiguous terms within a contract will go against the party responsible for preparing the contract. This means that any term that is open-ended or non-conclusive will automatically go to the benefit of the party not responsible for writing the contract.

If you, as a business owner, are required to give a personal guarantee for any obligation of your company, or if your business accepts a personal guarantee from a customer, then please contact the legal professionals at The Shenon Law, practicing in the Los Angeles area, where new clients are always welcome.

The Shenon Law is trusted and highly recommended in all areas of business law.