(Un)Limited Personal Guarantees: No Limit Means Unlimited

It's not uncommon for suppliers in the construction industry to sell supplies on account. When they do this, a personal guarantee is often required. A recent case shows that despite some novel arguments, the principals of the company were personally liable for the debts of their company.

Facts:

In Convoy Supply Ltd. v. CDN Roof Doctor Ltd., CDN Roof Doctor Ltd. (the "Contractor") applied to Convoy Supply Ltd. (the "Convoy") for credit. Two principals of the Contractor signed the credit application on behalf of the Contractor. The credit application did not specify a monetary limit to the amount of credit that was sought. Attached to the credit application was a personal guarantee that was signed by the two principals. The personal guarantee said that the liability of the personal guarantors would not be affected by any dealings whatsoever between Convoy and the Contractor.

Convoy approved the Contractor's application for credit. The approval letter did not stipulate a monetary limit to the account, but the initial credit advanced was $25,000. At the Contractor's verbal request, Convoy later increased the account limit to $50,000, and then to $100,000. The personal guarantee was never amended to reflect these increases.

When the Contractor failed to pay for the supplies purchased on account, Convoy sued both the Contractor and the two principals.

Issue:

Were the two principals personally liable?

Court Decision:

At trial, the two principals argued that they were not personally liable since the guarantee did not specify in writing the amount of the personal guarantee. This was the case for both the original request and the subsequent extensions. They argued that pursuant to the Law and Equity Act, in order for a guarantee to be binding, all essential elements of a guarantee, including any monetary limits, have to be reduced to writing. Since no limit was specified, they argued that it was unenforceable.

The court rejected this argument. The court found that while the credit application allowed the parties to stipulate a limit to the credit, no limit was specified. As such, while the Law and Equity Act requires guarantees to be in writing, since no limit was specified, it was an unlimited personally guarantee. The oral evidence about the original $25,000, and the subsequent extensions was inadmissible evidence and could not be relied upon to try and limit the personal guarantees since the wording of the guarantees was sufficiently clear. Extrinsic evidence is only relied upon by the courts to interpret a contract if the wording of a contract is unclear. This is called the "parole evidence rule." It prevents a party to a written contract from presenting extrinsic evidence that contradicts or adds to the written terms of a contract that appears to be whole. This applies to personal guarantees and other written contracts.

The court also found that the two principals could not rely on the increases to the credit agreement to nullify their personal guarantees. This was because the guarantee expressly provided that their liability would not be affected by any dealings whatsoever between Convoy and the Contractor.

Lessons Learned:

1.     Personal guarantees need to be in writing.

2.     If the written terms of a personal guarantee do not specify a limit, it will likely have no limit, and be an unlimited personal guarantee.

3.     If you want to be notified of any changes to the underlying agreement you are personally guaranteeing, make sure that this is specified in the personal guarantee.

This article was written by Ian C. Moes, a lawyer with the law firm of Kuhn LLP. It is only intended as a guide and it is important to get legal advice for specific situations. If you have questions or comments about this case or other legal matters, please contact Ian at 604-682-8868.