Guarantees – be careful!

February 2012

Most contracts you enter into can be terminated one way or another. They usually have inbuilt provisions saying that they last for a certain period or that the parties can terminate by giving a period of notice. And if they don’t the law is usually that either side can terminate by giving whatever notice period is ‘reasonable’.

Guarantees often aren’t like that. If you guarantee the performance of someone (say, a company of which you are a director or shareholder) you will generally remain on the hook indefinitely, at least in relation to the amount owed to the creditor at the time you give notice to the creditor that you are terminating your guarantee (eg an outstanding loan, or the balance of the overdraft when the notice takes effect). If you want to be fully clear of the guarantee you will either have to make sure that the guaranteed obligations are discharged (eg a loan repaid by your company) or you will need to get the agreement of the party you have given the guarantee to. They may decide to agree if you can give them a good reason, eg by replacing your guarantee with the guarantee of someone even better. But they have no obligation to agree to this. This point was reinforced by a recent case, United Dominion Trust Ltd v Dohil.

This issue often comes up if you are selling your business, or if you are a shareholder  leaving a joint venture company. If you have given guarantees (eg to the company’s bank or a major supplier) you should try very hard to get these guarantees released before you leave. If you can’t, you should try to impose strong obligations on the buyers to try very hard to procure your release as soon as possible, and to indemnify you against any liabilities you may end up having under the guarantee. But the best solution is to get yourself released before you leave!