Failure to Understand Terms of Personal Guarantee Agreements Will Likely Cost You

In nearly 30 years of litigation I have sought to enforce countless guarantees. I have also defended many who found themselves asked to answer for the debts of another because the deal they signed, sometimes years earlier, came back to haunt them in the form of a written guarantee.

Hindsight is, of course, 20/20. If you asked those he who signed personal guarantees, I’m certain most would say they never expected to be called upon to pay up. Some deals simply will not be closed without a personal guarantee of the debt or obligation.

What I have found most surprising is how often the guarantor, when faced with a collection action, claims not to have fully understood the obligation assumed when it was assumed. Regardless, if such claims can be proven to be true, barring fraud in the inducement or some other recognized legal bar (and there are very few), personal guarantee likely will be enforced. It is best to know and understand at the front end what may befall at the back end of any deal.

Let’s start with what a guarantee is – it’s a contract. And under Michigan law a guarantor is not liable beyond the express terms of the guarantee contract.  Indeed, the Michigan courts treat the assumption of another’s debt as a substantial undertaking. As such, the courts will not assume a guarantee obligation exists without a clearly expressed intention of the contracting parties. 

For this reason, MLC 566.132(1)(b) provides that a contract “to answer for the debt, default, or misdoings of another person” is void unless that contract “is in writing and signed with an authorized signature by the party to be charged.” Even with a signed writing, the creation of a guarantee must be clear. The courts have held that a personal guarantee will not be implied from contract language that does not clearly and unambiguously express an intention to create a guarantee. 

Very often, personal guarantees are separate documents and expressly titled as a “Personal Guarantee.”  However, guarantee contracts need not be stand-alone agreements. Guarantee contracts are construed like any other contract.  The parties’ intent will be collected and gleaned from the whole instrument, or the several instruments and writings, used make up the contract.

Language that is clear and unambiguous will be construed by the court as a question of law.  When deciding if chosen language is unambiguous and subject to legal enforcement the court will construe operative language by applying its plain and ordinary meaning. Even so, if a purported guarantee is inartfully drafted, it will be deemed unambiguous and legally enforceable if the chosen language can only fairly support one interpretation. 

So, if the language used is found to be clear and unambiguous the court must enforced the contract as written; the court may not rewrite a contract or even consider extrinsic evidence to show that the parties meant something different than the writing clearly states. 

On the other hand, purported guarantee contracts that offers two reasonable interpretations, likely will be found to create a question of fact.  In such cases, the factual question of whether an enforceable guarantee exists will be the topic of discovery and possibly a determination at trial by the trier of fact. 

The moral of this story? Don’t ever sign anything you do not fully understand, particularly something suggestive of a personal guarantee. Michigan law presumes that if you sign a contract you know and understand the nature of what you have signed. 

If the signed contract is judged to be a personal guarantee, and if that guarantee obligation is clearly expressed, the collection action will be an unwelcome place to challenge the contract or to plead to the court to save you from the deal you made.   

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