A guaranty is a written promise by one person to pay another’s debt. In a commercial setting, a guaranty is typically the promise of an owner or officer to pay the debt of a corporate entity should it default on its obligation. A commercial guaranty provides additional security and consideration for the creditor. It’s an additional incentive for the corporate entity to fulfill its obligations. A guaranty also provides additional collection opportunities in the event of a default.
Clients may be asked to sign personal guarantees by vendors, lenders, or others. If the lender or credit grantor will not proceed without the personal guarantee and the borrower wants the goods or services, the borrower will sign.
In some cases, the credit grantor may believe they have a personal guarantee when they actually have a corporate guaranty. If the corporate account goes bankrupt, the creditor will try to pursue the individual based on the guaranty. Unfortunately, because of the way the guarantor signed the guarantee, it is not enforceable against the individual. It is enforceable only against the corporation.
Why is this?
How You Sign Matters
Form matters when interpreting whether a guaranty is personal or corporate. For a guarantee to be enforceable, the language it uses must express the intention of the person executing the guarantee to be held liable. Once an unambiguous guaranty exists, it is especially important to ensure the guarantor’s signature binds the intended party.
If the intention is for the signer/guarantor to be bound personally, the signer’s name and/or signature cannot include their corporate title. Some guarantors add their corporate titles or other descriptive terms to their signature on a guaranty to avoid personal liability. In other situations, an unknowing creditor will include a line or field for the corporate title. However, this makes it so that the signer cannot be held personally liable.
A famous New York case, Salzman Sign Co. v. Beck, from 1961 sets the standard:
In modern times, most commercial business is done between corporations. Everyone in business knows that an individual stockholder or officer is not liable for his corporation’s engagements unless he signs individually, and where individual responsibility is demanded, the nearly universal practice is that the officer signs twice—once as an officer and again as an individual.
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