The following introduction applies to all guarantees, whether or not they are regulated by the NCC. The provisions of the Code of Banking Practice regarding guarantees may also apply to protect guarantors who are not covered by the NCC. The Code of Banking Practice requires credit providers who have subscribed to the Code to give a proposed guarantor Notice that legal and financial advice is sought before entering into the guarantee, to give a person the opportunity to understand the nature and implications of the guarantee.
What is a guarantee?
Guarantees are binding agreements that involve three parties:
1. the credit provider (lender);
2. the debtor (borrower); and
3. the guarantor.
Guarantees are sometimes required by credit providers before they agree to lend money if they suspect the debtor may not be able to make all repayments. A "guarantor" promises the credit provider to pay the loan if the debtor refuses or is unable to do so. Agreeing to become a guarantor may cause financial hardship. It involves more than helping out a friend or relative who needs money or wants to buy goods on credit, because if the debtor stops making repayments the guarantor will have to pay.
Think very carefully before you agree to guarantee anyone's debts, even the debts of family members. If the credit provider won't take the risk, can you afford to?
Rights of a guarantor
A guarantee involves a promise by the guarantor that the debt owing to the credit provider will be paid if the debtor is unable to do so. Unless the guarantee document is a deed, meaning that the document contains the words "signed, sealed and delivered", the guarantee must be given before or at the time the creditor lends to the debtor. So if the debtor has already borrowed money, it may be that the guarantee was not given in exchange for the loan. This would make the guarantee unenforceable.
Also, if the credit provider used any force, fraud, illegality, duress, undue influence or allowed the guarantor to be mistaken as to rights and liabilities under the guarantee, the guarantee may be avoided.
What if the guarantor pays?
The guarantor is entitled to recover any money paid from the debtor, if that is possible. Also, the guarantor is entitled to any securities held by the creditor.
Other ways a person can escape liability under the guarantee
A guarantor may be freed from their obligations if:
- the guarantee is altered by the creditor, e.g. the name of one co-guarantor is struck out;
- the creditor changes;
- the guarantor is called on to pay but the creditor cannot hand over securities it has taken;
- the creditor fails to protect the guarantor, e.g. fails to insure when there is an obligation to do so; or
- the creditor alters the guaranteed contract, e.g. by giving the borrower more time to pay than the original contract provides for, so long as this alteration is by a binding contract.
However, the terms of the guarantee may be framed so as to make the guarantor still liable even if one of the matters listed above has occurred.
THE NCC AND GUARANTEES
Formalities of guarantees
The NCC provides a number of additional requirements where a guarantee is entered into in relation to a credit contractregulated by the Code. A guarantee must be in writing and signed by the guarantor, although it is sufficient compliance if a guarantee is contained within a mortgagesigned by the guarantor (s.55). The guarantee will not be enforceable unless these requirements are complied with.
A copy of the credit contract must be given to the guarantor before the obligations under the credit contract are secured by the guarantee (s.56(1)(a)). A failure to do so renders the guarantee unenforceable (s 56(2)).
The credit provider must also give the prospective guarantor a copy of a booklet entitled Things You Should Know About Your Guarantee (s.56(1)(b)).
The credit provider must, within 14 days after the guarantee is signed, give the guarantor a copy of the guarantee and any related credit contract or proposed credit contract (if a copy of the related contract has not previously been given to the guarantor) (s.57).
Can a guarantee be cancelled?
Section 58 of the NCC allows a guarantor to withdraw from a guarantee although the guarantee has been made, where either:
- the guarantor withdraws from the guarantee before credit is first provided under the credit contract; or
- the guarantor withdraws from the guarantee even though credit has been provided under the contract if the credit contract as finally entered into differs in some materialrespect from the proposed credit contract or pre-contractual statement given to the guarantor before the guarantee is signed.
Under section 59 of the NCC, a guarantee may provide that the guarantor guarantees the debtor's obligations under a particular credit contract, and also all obligations arising between that particular debtor and credit provider. These obligations may not only be those obligations existing at the time the guarantee is signed, but can include obligations yet to be created under a future credit contract. The guarantee will only be enforceable in relation to guaranteeing a future credit contract if the credit provider has given the guarantor a copy of the contract document of that future credit contract, and subsequently obtained from the guarantor a written acceptance of the extension of the guarantee.
Increasing the guarantor's liabilities
Under section 61, a guarantor's obligations under a guarantee can be significantly increased in a variety of ways. For instance the credit contract subject to the guarantee may allow the debtor and credit provider to agree to vary the contract by providing further amounts of credit under that contract to the debtor. That increase in liability will have no effect unless:
- the credit provider gives to the guarantor a written notice setting out the particulars of the change in the terms of the credit contract that will allow an increase in the guarantor's liabilities; and
- the credit provider subsequently obtains from the guarantor an acceptance of the extension of the guarantee to that increased liability.
Certain exceptions to these requirements are set out under section 61(2).
More information about guarantees can be found on Money Smart - under Loans involving Family and Friends.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.