Guarantee

How BC law treats it

Section 59(6) of the Law and Equity Act, RSBC 1996, c 253 provides that a guarantee or indemnity is not enforceable unless it is evidenced by writing signed by the guarantor (or the guarantor's agent), or the guarantor has done an act indicating that a guarantee consistent with the one alleged was made. BC has no notarial acknowledgment requirement. The Guarantees Acknowledgment Act is an Alberta statute and does not apply here. A guarantee is a secondary obligation: the guarantor is liable only if the principal debtor defaults. At common law, a material change to the principal contract without the guarantor's consent can release the guarantor, and courts read guarantees strictly in the guarantor's favour (Manulife Bank of Canada v Conlin, [1996] 3 SCR 415). For that reason, lender and landlord forms usually let the creditor extend time, amend terms and release security without discharging the guarantor, and often make the guarantor liable as a principal debtor. Where two or more people give a joint and several guarantee, the creditor may recover the whole debt from any one of them. A guarantor who pays more than its share can usually claim contribution from co-guarantors and step into the creditor's rights against the debtor. Under the Limitation Act, SBC 2012, c 13, the basic limitation period is two years from the date the claim is discovered. Many guarantees are payable on demand, so the timing of the demand matters to when the clock starts.

What it means for your business

Banks, equipment lessors, suppliers and commercial landlords in BC routinely require personal guarantees from the owners of small and mid-sized companies. A personal guarantee removes the limited liability protection the company was formed to provide, often for an unlimited amount and with no end date. Owners should negotiate caps, time limits, release on assignment or sale, and burn-off clauses, and should remember that a guarantee usually survives their exit from the business unless it is formally released. Example: Two shareholders of a Richmond restaurant company sign a joint and several guarantee of its 10-year lease. When the business fails, the landlord sues only the wealthier shareholder for the full shortfall, and he must then pursue his partner for contribution.

Risks and common mistakes

Signing a guarantee with no dollar cap or time limit. Selling the business or assigning the lease without obtaining a written release of the personal guarantee. Assuming an oral promise to guarantee a debt is enforceable without writing or conduct showing it was given. Relying on a material change to the debt to escape liability when the guarantee expressly permits such changes. Not realizing a joint and several guarantee lets the creditor collect the entire debt from one guarantor.