Personal Guarantees

Personal guarantees are important tools in New Jersey business law.  In a personal guaranty, one party agrees to be responsible for the debts of another, third party should they default on their obligations.  They can be used as an extra layer of protection for creditors which convinces them to extend credit.  They provide security for one side to go into a transaction with a partner with limited resources or experience.  The downside for the one giving the personal guaranty (known as a “guarantor”), is that if the third party defaults, and not before, the guarantor becomes personally liable.

The New Jersey Supreme Court explained that “A personal guaranty is an individual’s promise to a third party to answer for a principal’s debt or performance on an underlying contract, payable to the third party only upon the principal’s default or failure to perform.  A guaranty is fundamentally separate from the underlying contract, and its “independence is not affected by the fact that both contracts are written on the same paper or instrument or are contemporaneously executed.”  But it is still a type of contract, and its enforceability therefore depends — as with any contract — on mutual assent between the parties.”

Requirements for Enforcing Personal Guarantees

In that same case, the Court went on to explain that the crux of a personal guaranty is that the written document containing the guaranty expresses the intent of the parties. “In the corporate context, an officer is not personally liable on a contract between the corporation and a third party — that is, the officer does not serve as a guarantor of the corporation’s obligation — simply by signing the contract in an organizational capacity or by virtue of a corporate position.  The officer may, however, personally guarantee the company’s obligation if both the officer and the third party so agree.”   

Therefore, the guaranty must express the clear and unambiguous intent of the guarantor to personally guarantee the debt. Thus, a corporate officer will not be found to have personally guaranteed an obligation of the company just because he signed the contract.  The contract must additionally make clear that he is also signing as a personal guarantor, not just signing to bind his company.

In addition, New Jersey’s Statute of Frauds requires that personal guarantees must be in writing signed by the parties.

Finally, while there are multiple written methods to draft an enforceable, signed, written personal guarantee under New Jersey business law, the New Jersey Supreme Court has given only three examples of methods which would hold up in court.  It explained: “There are multiple ways a corporate representative can unambiguously manifest an intent to personally guarantee an underlying agreement.  The representative may (1) execute a separate personal guaranty agreement; (2) sign the underlying agreement once as a corporate representative and again individually; or (3) sign the underlying agreement a single time, provided that the agreement explicitly states the individual intends their single signature to bind both the company and the representative individually.”

Thus, it is smartest to utilize one of these three methods when drafting a personal guaranty.

Uses of Personal Guarantees

There are many conceivable uses for personal guarantees.  Some common uses include:

• Business Loans: Personal guarantees are often required by lenders when a business seeks a loan.
• Lease Agreements: Landlords may require a personal guarantee for commercial rental agreements.
• Equipment Leasing: Businesses leasing equipment may be required to provide a personal guarantee.
• Mortgages: Personal guarantees are often required for commercial real estate loans for small businesses.
• Small Business Administration (SBA) Loans: SBA loans often require a personal guarantee from business owners.
• Vendor Agreements: Suppliers may require personal guarantees for inventory and supply agreements.
• Franchise Agreements: Personal guarantees are often part of franchise agreements.
• Line of Credit: Banks may require a personal guarantee as a condition for issuing a line of credit to small businesses.
• Co-signing a Loan: Co-signing a loan usually involves providing a personal guarantee.
• Trade Credit: A personal guarantee may be required for businesses seeking to establish trade credit.
• Factoring Agreements: In factoring, the borrower may be asked to provide a personal guarantee.
• Vehicle Financing: Personal guarantees can be used in financing agreements for vehicles.

Enforcement and Defenses

Subject to the writing requirements of the Statute of Frauds, personal guarantees are reviewed by courts under basic New Jersey contract law.  Thus, litigation to enforce a personal guaranty or to defend against accusations that a party is liable for a personal guaranty proceeds as normal contract litigation.

Contact Us

Our New Jersey business attorneys are experienced in all aspects of business law, including negotiating, drafting and litigating over contracts and personal guarantees.  If you need legal assistance related to New Jersey business law, contract drafting and negotiations, business litigation or personal guarantees, please contact McLaughlin & Nardi, LLC at (973) 890-0004 or fill out the contact form on this page for professional support.