This article is aimed at informing you of things you must know about a guarantee contract before you finally make that decision to be a guarantor.
A guarantee contract is a tripartite agreement between a creditor (the person lending the money/Lender), the borrower and a third person known as the guarantor, wherein the guarantor gives a solemn promise that he would repay the loan or money given to the borrower by the lender when the borrower defaults in the repayment of the loan, or if the borrower is unable to pay.
A guarantee contract could sometimes extend beyond the repayment of money. Its primary purpose is to guarantee the performance of a duty. It could be used to guarantee the performance of any duty when the person whom the duty is owed fears that the party who owes him the duty might default or become unable to perform those duties.
I would give a few instances where a guarantee contract is used: it is most often used by a bank where the debtor has no collateral to secure the loan he seeks, it could be used by a landlord where he doubts the ability of the tenant to continue paying his rents when due, it could also be used by a Lender in a hire-purchase agreement to secure the discharge of the hirer’s duty to him. An employer could also require a guarantor to guarantee the diligent and efficient discharge of duties by an employee and to further give assurances that in the event of any loss or liability arising from a failure of such an employee to discharge his duties, the guarantor would be personally liable.
A guarantee contract or Agreement could be used in a number of situations. If you are unsure as to whether or not a guarantee Contract could be used to secure the performance of any duty just ask the following simple questions:
- Is there an obligation owed me?
- Is there a possibility that the obligation owed me may not be discharged?
- Do I stand to lose if that obligation or duty owed me is not discharged?
If your answer to the above questions is yes, then that means you can ensure that the duties owed you are discharged by executing a Guarantee Agreement.
HOW IT REALLY WORKS
In the simplest of terms, here we would be considering the liability of the guarantor vis-à-vis the right of the lender and when the liability arises.
THE AGREEMENT MUST BE IN WRITING
A guarantee contract or Agreement would not be enforceable against the guarantor unless it is in writing. The Agreement should be in writing and it should clearly spell out the terms of the contract. It should state when the guarantor’s obligation to repay arises. Usually it arises when the loan becomes due and the borrower is unable to pay or when he defaults in payment, it could also arise when the Lender has demanded repayment and the borrower is unable to repay. The agreement should also state in clear terms the extent of the guarantor’s liability, the duty or loan which the guarantor is guaranteeing.
The guarantor would not be liable for anything which is not clearly spelt out and agreed to in the contract. It goes without saying that such a written contract must be signed by all the parties else it becomes a worthless piece of paper which would not be binding on the guarantor.
GUARANTOR’S DUTY TO REPAY
As has been stated earlier, the guarantor’s duty to repay arises on the occurrence of the terms stated in the contract. If the contract stipulates that a duty to repay arises when the borrower defaults, then upon the default of the borrower, the guarantor’s duty to repay becomes enforceable against him.
The implication of a guarantee contract is that the guarantor is saying “hey!!!! I trust that this guy would pay you so give him the money, however, if he is unable to pay, I will most definitely repay you”.
The guarantor’s obligation to repay the lender/creditor when the borrower defaults is a legal obligation, which is enforceable against the guarantor by the creditor. Most people sometimes think that a guarantee contract is a harmless contract with no legal implications, which just requires the guarantor to append his signature to a document. This is not true. It simply means that you would repay the sum guaranteed if the borrower is unable to do so.
This obligation is binding and the guarantor cannot unilaterally pull out of the agreement by saying “he does not want to be a guarantor anymore”. The obligation of the guarantor to repay the loan or secure the performance of a duty continues until the loan is repaid by the borrower or until the loan or obligation is discharged by the guarantor. Even death does not terminate the obligation to repay the loan; the money can still be recovered from the estate of the deceased guarantor.
The lender has a right to demand payment of the loan from the guarantor when the borrower becomes unable to, or when he defaults in repaying the money advanced. This is the primary right of the lender, however, the terms of the contract may vest more rights on the lender.
CAN THE GUARANTOR RECOVER HIS MONEY?
When a guarantor pays the debt owed by the borrower whose debt he guaranteed, he can still recover his money. He can sue the borrower in order to recover the money. However, it is pertinent to ask; If he could not pay up his debt to his lender, how would he pay me? This however, does not preclude the guarantor from instituting an action in court for recovery of his money.
So when next you are presented with a Guarantee Agreement, ask yourself if you are willing to pay up the debt of the borrower if he becomes unable to pay and of course if for one reason or the other you feel inclined to stand as his guarantor, take the contract to a lawyer, your lawyer would go over the contract and advise you accordingly. It is important that a lawyer goes over the Agreement before you sign it, this would ensure that you are protected in every way possible in the event of the borrower’s default or inability to pay.