The enforceability of a personal guarantee depends on which specific state's law applies to the personal guarantee. While the personal guarantee may be signed in one state, it is entirely possible that it is enforced under the laws of another state. Fore example, the parties sign a personal guarantee in Los Angeles California which specifies that the law of the state of New York shall apply.
This legal guide is applicable only when the personal guarantee is to be interpreted under California law.
Do I Know Who Can Enforce My Personal Guarantee?
Under California law, a personal guarantee is only enforceable as between the original parties signing the contract. If any parties to the contract assign their interests to a third party, the personal guarantee becomes unenforceable. This often happens when one bank is sold to another or when the bank, lender or landlord goes out of business and its successor in interest now seeks to enforce your guarantee even though they were not an original party to the contract.
Do I Know What Transactions My Personal Guarantee Covers?
Under California law, a personal guarantee is only enforceable as to the original contracted transaction. Accordingly, if the terms of the original contract are materially changed, the personal guarantee becomes unenforceable. This often occurs when there is a change in scope or the price increases above the contract amount.
Will the Enforcing Party Let Me Cure the Defaulting Party's Nonpayment?
California law requires the party enforcing the personal guarantee to give the guarantor the chance to first step into the shoes of the defaulting, or guaranteed party, and satisfy any obligations to the enforcing party. This is called subrogation. If the enforcing party fails to permit the guarantor to subrogate, the personal guarantee becomes unenforceable.
Are Personal Guarantees Ever Enforeable?
Personal Guarantees are routinely enforced by the Courts because what California law giveth, California law also taketh. In California, it is perfectly legal for the lender, bank or landlords personal guarantee to have language which waives the above enforceability requirements. These are known in California as the Gradsky Waivers from the landmark case of Union Bank v. Gradsky 265 Cal. App. 2d 40 (Cal. Ct. App. 1968).
Additional resources provided by the author
Before signing any personal guarantee you should consult an attorney who practices in that area of law. Often times my clients come to my only after they have signed the guarantee and are now being sued. Remember, everything in business, including personal guarantees, is negotiable.