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What is a guarantee?

The word "guarantee" can mean different things to different people. It is often used commonly as a synonym for the word "warranty" in the sense of being an agreement with respect to the quality or properties of goods sold or services performed. For example, a tradesman might say that he "guarantees" his work for a year. On the other hand, for a lawyer, a "guarantee" may constitute a number of distinct forms of legal obligations. For example, standby letters of credit are sometimes described as "performance guarantees" or "bank guarantees". Properly speaking, however, a guarantee can be defined as a promise to answer for the debt, default or miscarriage of another person.

Who are the parties to a guarantee?

A guarantee requires 3 parties: the party to whom the debt or obligation is owed (the "creditor"); the party owing the payment or obligation (the "debtor"); and the party giving the guarantee (the "guarantor").

What is essential to the enforceability of a guarantee?

There are two pieces of legislation in Alberta that apply to guarantees. The first is the Statute of Frauds, which is old English legislation which still applies in common law provinces except Manitoba. This Act states that guarantees to be enforceable must be in writing or evidenced by a written memorandum and signed by the guarantor. The Guarantees Acknowledgement Act also applies in Alberta. Under this legislation, a guarantor executing a written guarantee must appear before a notary public to acknowledge he executed the guarantee. The notary public must then sign a Certificate under his seal certifying that the guarantor is aware of the contents of the guarantee and understands it. The Certificate must be attached to the guarantee. The form of Certificate is prescribed in the Regulations passed under the Act. Noncompliance with the Act makes the guarantee unenforceable. Alberta is the only province in Canada to have such legislation (with the exception of Saskatchewan on farm loans). The Guarantees Acknowledgement Act of Alberta applies only to guarantees executed by individuals and does not apply to corporate guarantees. Nor does it apply to parol guarantees.

It should be noted that the Statute of Frauds and the Guarantees Acknowledgement Act of Alberta do not apply to indemnities. The distinction between a guarantee and an indemnity is very often murky and will require a professional opinion from a lawyer.

Quite often, factual situations giving rise to a guarantee may not be obvious except to the trained eye. For example, a husband is indebted to a lender for a business loan. The lender asks the husband to pledge his house as security for the loan. The house happens to be owned by the wife who grants a mortgage on her title in favour of the lender. No communication takes place between the wife and the lender directly. No written guarantee agreement exists between the wife and the lender. However, a guarantee situation has arisen since the wife by granting the mortgage purports to guarantee the husband’s obligation to the lender. The guarantee is unenforceable since there is no written guarantee signed by the wife as required by the Statute of Frauds (the mortgage is simply a security for the guarantee) and no notarial certificate exists as required by the Guarantees Acknowledgement Act of Alberta. Caron & Partners has successfully defended a wife in this exact factual situation, and has recently been retained in another similar situation.

We have already noted the statutorial requirements imposed on contracts of guarantees under the Statute of Frauds and the Guarantees Acknowledgement Act of Alberta. Since guarantees are a contractual form of liability, it is necessary for a guarantee to satisfy the requirements of any contractual obligation. Certainty of terms must exist, the guarantor must have capacity to contract, in some cases consideration may be a requirement, duress and undue influence may constitute a defense, etc.

The law of guarantees is complex and in any dispute between the creditor and guarantor, both parties are advised to seek professional opinions from a lawyer qualified to give such opinion.

This Paper Was Prepared By Paul J. Caron, Q.C.