What is a Guarantor?
A guarantor is a person or entity that, typically, provides a lender with a contractual promise to be responsible for another party’s debt (a borrower) in accordance with the terms of the guarantee. In most instances, if a borrower defaults on an obligation covered by the guarantee, the lender may seek recovery from the guarantor, subject to the terms of the guarantee and applicable law. Thus, the lender, borrower and guarantor are connected through the lending transaction, each with their own distinct legal obligations.
Guarantors serve a useful function for both the lender and the borrower. The lender benefits, mainly, because the guarantee may reduce its credit risk. Whereas the borrower may receive more funding, which they otherwise would not be able to.
Generally, under Section 4 of the Statute of Frauds, R.S.O. 1990, c. S.19, a guarantee of another party’s debt must be evidenced by a written agreement or memorandum signed by the guarantor or an authorized representative. The terms of the guarantee determine the scope of the guarantor’s obligations and the circumstances in which liability may arise.
A guarantor’s liability will generally depend on the terms of the guarantee and the circumstances in which it becomes enforceable, including when the borrower defaults on an obligation covered by the guarantee. However, in Madison Joe Holdings Inc. v. Mill Street & Co. Inc. (2021), the Ontario Court of Appeal considered whether guarantees could be enforced where an inter-creditor agreement restricted a borrower’s ability to make payments. The guarantors argued that the payment restrictions meant the borrower was not in default and the guarantees were therefore not triggered. The majority dismissed the appeal, upholding the finding that the guarantees were enforceable despite the payment restrictions. The decision illustrates the importance of interpreting guarantees in the context of the parties’ broader contractual arrangements.
Joint and Several Liability
A guarantor’s liability can vary from agreement to agreement. It is important for guarantors to pay attention to the terms they are agreeing to. Liability may be limited under the terms of the agreement, or it may be unlimited. In the former case, the guarantor’s liability could be limited by a dollar amount or confined to certain obligations within a larger agreement and would therefore not be liable to pay outstanding debts outside the terms of their guarantee or that surpass the maximum dollar amount. In the latter case, the guarantor’s liability would not be limited and they could be held responsible for the entirety of the amount owing under the agreement.
Joint and several liability guarantees are a common feature of personal guarantees. Where guarantors are jointly and severally liable, each may be held responsible for the full amount of the guaranteed obligations, rather than merely an equal share of the debt.
Where multiple guarantors are jointly and severally liable under a credit agreement, the lender may be entitled to recover the outstanding guaranteed debt from any one guarantor, several guarantors, or all of them, subject to the terms of the guarantee and applicable law. If one or more guarantors are unable to pay, the lender may seek to recover the outstanding amount from another guarantor who is liable for the full obligation. A guarantor who pays more than their appropriate share may, depending on the circumstances, have a right to seek contribution from the other guarantors.
Borrower Repayment versus Guarantor Repayment
A guarantor who pays a borrower’s outstanding debt may be entitled to recover the amount paid from the borrower. Unlike a borrower who repays their own debt, a guarantor who satisfies the borrower’s obligation may have rights of reimbursement and subrogation against the borrower and other parties liable for the debt.
Under s. 2(1) of Ontario’s Mercantile Law Amendment Act, R.S.O. 1990, c. M.10, a person who acts as a surety for another’s debt and pays that debt is entitled to have assigned any judgment, specialty or other security held by the creditor in respect of the debt. Section 2(2) further provides that the paying surety may stand in the creditor’s place and use available remedies to seek indemnification from the principal debtor, any co-surety, co-contractor or co-debtor. These rights may allow a guarantor to seek reimbursement from the borrower and contribution from other liable parties, although actual recovery will depend on the circumstances and the parties’ respective obligations. (S 2(1), Mercantile Law Amendment Act)
One caveat is that the guarantor who is seeking to recover funds from other liable parties may be limited in the amount that can be recovered from each party. This depends on each party’s role in relation to the credit agreement. For example, a guarantor cannot recover more than a just proportion of the debt from another guarantor. (Section 2(1)-(3), Mercantile Law Amendment Act) Accordingly, a guarantor who pays more than their appropriate share of the debt may seek contribution from other guarantors, but the amount recoverable will depend on their respective obligations and circumstances.
For example, assume five guarantors are equally liable as between themselves for a debt of $10,000, and Guarantor A pays the entire amount to the lender. Each guarantor’s proportionate share would be $2,000. Guarantor A could seek a contribution of $2,000 from each of the other four guarantors. If all four contributions were recovered, each guarantor would ultimately bear $2,000 of the debt. This example assumes equal contribution shares and that no contractual terms or other circumstances alter the allocation of liability.
Conclusion
Each case of recovery turns on the surrounding facts and terms of the agreement and guarantees made. Lenders, borrowers, and guarantors should all be aware of the terms of the credit agreement, who is potentially liable for the debt owed, and in what proportion.
If you are seeking to enforce an outstanding debt or have questions related to collections and recovery, Devry Smith Frank LLP has lawyers who can provide assistance. Reach out by calling 416-449-1400 or by emailing info@devrylaw.ca.
This blog was co-authored by articling student Michael Goodman.
