Guarantees are frequently an integral part of a security package. Once the guarantee is obtained, it is important to ensure that it remains valid and enforceable during the life of the loan it supports.
Although guarantees typically contain clauses waiving traditional defences and providing that they remain in effect despite the occurrence of various events involving the borrower, the reality is that when guarantees are called, guarantors will often ask the courts to relieve them from their contractual obligations because of those events. Sometimes the courts are receptive or motivated by circumstances to help a particular guarantor in the right fact situation, and in others they enforce the guarantee contract in accordance with its terms.
Of course you can never prevent a particular guarantor from trying to deny liability, but there are things that a lender can do to guard against a guarantor in denial. Each time there is any material amendment made to the terms of the borrowing arrangement (whether it is an increase in the loan or interest rate, change in covenants or release of another guarantor or security, each a “Change in Credit Terms”), the guarantor should be kept informed of this and a Guarantor’s Acknowledgment should be obtained. The Acknowledgment will confirm that the guarantor’s guarantee (and any related security) continues to stand and remains in full force and effect notwithstanding the Change in Credit Terms. This will preclude the guarantor from later alleging that it was not involved in significant changes to the borrowing terms that could impact upon the likelihood of its guarantee being called. The Acknowledgment also confirms that the guarantee extends to any increased indebtedness arising from the Change in Credit Terms. The goal is to prevent the guarantor from claiming that the Change in Credit Terms represents a fundamental change to the business deal, thereby voiding or limiting its guarantee. If the guarantor is a party to the original Credit Agreement or terms letter, the Guarantor’s Acknowledgment can be included in the credit amending document itself to which the guarantor will be a party.
So in setting up the terms of any material credit amendment, it would be prudent to include a Guarantor’s Acknowledgment in your conditions precedent. We would be happy to assist you with this document.