Third Party Guarantees - 26 May 2014

When entering into an agreement with a customer you may have concerns about their ability or willingness to pay your account. Third party guarantees are way of avoiding this risk by obtaining a guarantee from a third party associate of that customer. In the event that your customer fails to pay as agreed you have recourse to a backup of being able to pursue the guarantor for payment. A number of clients have successfully used the guarantee route to effect recovery.

AMA can arrange for the appropriate guarantee documentation. A guarantee should always be in writing and should preferably incorporate a clause consenting to registration for execution. This simplifies the process of recovery should there be a default.

There are a few things to bear in mind if negotiating a guarantee

  • It is preferable to avoid a ‘capped’ guarantee. The best option is for an unlimited amount of money.
  • Don’t include an expiry date – it is best to have a continuing obligation.
  • There should be an immediate obligation to pay – not one that exists following a period of time or the performance of arranged actions.

Examples of Third Party Guarantee

Director’s Guarantees

When entering a contract with a limited company the director might personally guarantee the obligations which the company is entering with you.

It is important to consider whether the director is in a secure enough financial position to honour the guarantee.

  • Does the director have the requisite financial worth?
  • What assets do they have?
  • Do they have a house – are there any secured borrowings? What is the equity and value?

Parent Company Guarantees

When dealing with a subsidiary of a large parent company it is important to remember that the parent company will not be responsible for the debts of the subsidiary without express agreement stating this.

In this circumstance it might be appropriate that the parent company grants a guarantee for subsidiary.

Holding the Guarantor to the Guarantee

If the customer does not pay then you will have to contact the guarantor to honour their obligations. Do so in writing.

If they do not act to satisfy the terms of the guarantee then you can consider taking court action against them. Due to the liability being joint and several the court action should be instigated against both the customer and the guarantor.