By: Thomas S. Tripodianos Published: January 2014

Is the Guaranty Agreement Signed by the Guarantor Effective?

Question.   The Guarantor signed a guaranty. The Supplier has sales orders, invoices and statements for purchases made by the Plumbing Company.  The billing statements indicate that the balance for those purchases remains unpaid. The Plumbing Company’s Principal states that the personal guaranty by the Guarantor was made in connection with a prior credit application that the Guarantor made to the Supplier but that credit was never issued in connection with the Guarantor's credit application. Further, the Plumbing Company’s Principal' claims that the Supplier issued credit to the Plumbing Company based on its own subsequent application, and that the Supplier assured the Plumbing Company’s Principal that the Guarantor was not personally liable for the Plumbing Company's debt.

Is the guaranty agreement signed by the Guarantor effective?

Answer. No

The Supplier did not extend credit to the Plumbing Company in reliance on the Guarantor’s guaranty. The Guarantor made the guaranty in expectation of receiving credit from the Supplier.  The Supplier did not provide such credit.  No credit was extended to the Plumbing Company until after a subsequent application by the Plumbing Company’s Principal.

The Guarantor's evidence demonstrating a lack of consideration defeats the Supplier's claim for enforcement of the guaranty. Under suretyship principles, a guarantor relationship arises when one party becomes bound to satisfy an obligation owed by another  A suretyship or other contract is not a guaranty unless there is a primary or principal obligation to which the surety's agreement is collateral.  Here, although the Supplier provided evidence that it extended credit to the Plumbing Company subsequent to the execution of the guaranty, the Guarantor rebutted that claim with evidence that the credit was not extended in connection with the Guarantor’s guaranty. The Guarantor offered credible evidence that the guaranty was signed in conjunction with a prior credit application made by the Guarantor, which was denied. The Guarantor further demonstrated that the grant of credit to the Plumbing Company was in fact in reliance on an application made by the Plumbing Company’s Principal, and not in reliance on the Guarantor’s guaranty. Because the evidence indicates that credit was not extended to the Plumbing Company in reliance on the Guarantor's application, the guaranty lacks consideration and is not effective.

© Welby, Brady & Greenblatt, LLP.
All Rights Reserved. By visiting this site, you agree to our Terms of Service. For more information please read our Privacy Policy Attorney Advertising