A guarantee is a contract by which a person, called a "guarantor", agrees to pay money if the person who actually owes the money fails to do so. The guarantor can be a person or a company. (See the question” Can a company be a guarantor?”)

For example, a guarantor may agree to pay a loan if the actual borrower fails to pay it back. If the guarantor has to step in and pay on behalf of the borrower, the guarantor can then demand the money from the borrower.

A contract of guarantee is almost always in writing. In fact, a written contract of guarantee is highly recommended so that its existence and contents can be easily proved.

A guarantee is sometimes part of a loan agreement between a lender and borrower. If this is the case, the guarantor should make sure that she is signing the loan agreement as a guarantor and not as a co-borrower.

Financial institutions ask for guarantees to reduce the risk of not being reimbursed if a borrower does not have enough money or other assets (equipment, buildings, etc.) to pay back the money owed.

When you sign a loan agreement with a financial institution to finance your company’s operations, you are in fact signing in the company’s name. So it’s the company that is borrowing the money and agreeing to reimburse it.

To protect itself against the risk that your company may not fully pay back its loan, a financial institution may ask one or more people (the guarantors) to personally guarantee the loan. If the company does not reimburse the financial institution, the institution can ask the guarantors to pay instead.

Providing a guarantee is often one of the only ways a borrower can get financing for her company, especially when the company has little money or few assets (equipment, buildings, etc.). So it’s easy to understand why a person would agree to be a guarantor for her own company: she expects to benefit from her company doing well.

In other situations, there are several reasons a person might act as a guarantor. For example, a company selling exotic fruits might have an interest in acting as the guarantor for a company that imports the exotic fruits it needs. A person might also accept to act as a guarantor in return for getting paid to do so.

In all cases, the decision to act as a guarantor depends entirely on a person’s confidence in the borrower and the borrower’s financial situation. Confidence is essential because acting as a guarantor can have serious consequences.

In theory, any adult can act as a guarantor. In practice, it’s the financial institution providing the loan that usually tells the borrower who will act as guarantor.

However, sometimes the borrower undertakes to provide a guarantor and then it will be up to the borrower to choose the guarantor. In these situations, the borrower must find a guarantor who lives in Canada (in the case of a company, has its head office in Canada) and has enough money or other assets (property, for example) in Quebec to be able to reimburse the loan. Of course, a lender might accept a guarantor who does not meet these requirements, but this would not be in the lender’s best interests.

The law allows the directors of a company to authorize the company to be a guarantor. They must also choose a representative to sign the contract of garantee in the company’s name because the company itself cannot sign. The directors’ authorization and the representative’s name must be written in a document signed by all of the directors. This document is called a “resolution”.

In the case of a Quebec company (a company created under Part IA of the Companies Act), the law also requires the authorization of company shareholders. In fact, when the company is created, the shareholders usually adopt a rule that allows the directors to do this without the shareholders’ authorization.

In practice, it is best to check (or ask a legal professional to check) whether a company’s internal rules limit the power of its directors to authorize the company to act as a guarantor. Also, in certain situations, the law prevents a company from providing guarantees. It is also important to check that a company’s contracts with other people do not include limits or special requirements regarding the company’s guarantees. This is often the case with financing contracts.

In theory, yes. But, in practice, financial institutions use their own models that usually cannot be negotiated and must be signed as is. Contracts like this that cannot be negotiated are often called “contracts of adhesion”.

To protect people who sign contracts of adhesion, the law has created certain rules:

• If a contract of adhesion refers to another document, the lender must make sure that the guarantor has knowledge of the other document. If the lender does not do this and, as a result, the guarantor suffers damage, the guarantor can sue the lender.
  
  
• If a problem arises between the guarantor and the lender because of information in the contract of guarantee that a court decides is “incomprehensible”, “illegible” or “abusive”, the part of the contract containing this information may be considered to be invalid.

The guarantor should always take the time to read the contract of guarantee and the main loan agreement carefully. In fact, the contract of guarantee often states that conditions imposed on the borrower in the loan agreement also apply to the guarantee.

Yes. Guarantees are not only used for loans. In fact, almost any commitment can be guaranteed, so long as the commitment is valid. If the commitment is not valid, the guarantee isn’t either.

For example, it is possible to guarantee:

• a lease: imagine that your company signs a 12-month lease in a building and agrees to pay $2,000 per month to the landlord. You personally guarantee the company’s commitment to pay the rent. If your company doesn’t pay the rent, you may have to pay it yourself.
  
  
• a line of credit: when you signed the guarantee for your company’s line of credit, there was no money that needed to be reimbursed. Even though this debt only comes into existence when the company borrows money from its line of credit, the guarantee is still valid. For more information on this subject, read the answer to the question “Can the guarantor guarantee a line of credit?”

Yes. The financial institution must act in good faith and answer a guarantor’s questions about the amount of money guaranteed and the conditions of the loan.

A guarantor cannot give up the right to be kept informed by the lender. Even if she does, the law does not recognize this surrender of rights as valid.

Unless the contract of guarantee says otherwise, the guarantee covers the whole loan given by the financial institution, including interest and all of the other fees related to the loan.

However, nothing prevents the guarantor from negotiating limits since sometimes the lender is willing to limit the extent of the guarantee. For example, the guarantor could request that:

• the guarantee only last for the first year of the loan
  
• the guarantee only cover the amount of the actual loan, and not the interest or other fees related to the loan
  
• a cap be put on the amount of the guarantee (For example: “The amount of the guarantee will not exceed $250,000, including interest, penalties and all other fees.”)

In financing matters, some model contracts state that the guarantor guarantees all of the borrower’s current and future loans. Depending on the situation, it might be better for the guarantor to negotiate a guarantee that is not so broad, so that the risks are reduced.

Yes, but the lender cannot demand that the guarantor pay more than what the borrower owes at any given time.

For example, a loan of $100,000 might be guaranteed by a guarantee of $200,000. Six months later, the borrower owes $110,000 to the lender because $10,000 in interest has been added. If the borrower is unable to pay back the loan, the lender can only demand that the guarantor pay $110,000 or less.

Yes. But you should know that as long as the line of credit is used (and this might be for several years!), the guarantor will be responsible for reimbursing amounts borrowed from the line of credit and not paid back.

However, the law allows a guarantor to free herself from future debts after 3 years by sending a notice to the people concerned (including the borrower and the financial institution). For more information on this subject, the question, “Can a guarantor put an end to the guarantee of a credit card?” in our Infosheet Guarantees: How They Work and Come to an End.