A collateral arrangement is a legally binding agreement whereby the signatory assumes responsibility for another person`s contractual obligations, usually the payment of a loan if the primary borrower defaults or defaults. The person who signs this type of contract is more often called a co-signer. While the common law has historically distinguished co-signatories (those who sign surety contracts) from guarantors, U.S. law makes the two terms virtually identical. A guarantor who promises to act or pay in case of someone else`s default: a guarantor. is someone who promises to pay or perform an obligation owed by the principal debtorThe person whose debt is secured by a guarantor., and strictly speaking, the guarantor is primarily responsible for the debt: the creditor can demand payment of the guarantee when the debt is due. The creditor is the person to whom the principal debtor (and strictly speaking, the guarantor) has an obligation. Very often, the creditor first requires the debtor to provide security to secure the debt and, in addition, that the debtor provide security to ensure that the creditor is paid or that the service is provided. For example, David Debtor wants the bank to lend $100,000 to his company, David Debtor, Inc. The bank says, “Okay, Mr. Debtor, we`re going to lend money to the company, but we want their computer equipment to be a guarantee, and we want you to personally guarantee the debt if the company can`t pay.” Sometimes, however, the guarantor and the principal debtor do not have an agreement between them; The guarantor may have entered into an agreement with the creditor to act as guarantor without the consent or knowledge of the principal debtor.
Consequently, since the contract of guarantee must relate to the same subject matter as the principal obligation, it must not be of a greater or more onerous magnitude than that principal obligation in its amount, in time, in the manner or in the place of performance; and if it exceeds that, it will be zero with respect to such a surplus. However, the guarantor`s obligation may be less onerous than that of the principal debtor, both in terms of its amount and in the time, place and manner in which it is fulfilled; This can be for a smaller amount, or the time may be longer. Creditors often require not only the guarantee of a guarantee from the debtor, but also that the debtor provide a guarantee. A surety contract is a type of insurance policy in which the guarantor (insurance company) promises the creditor that if the principal debtor does not perform, the guarantor will instead perform in good faith. However, a difference between insurance and guarantee is that the guarantor is entitled to reimbursement by the principal debtor if the guarantor pays. The guarantee may also give entitlement to discharge, subrogation and contribution. Both the principal debtor and the guarantor have defences at their disposal: some are personal to the debtor, others are joint defences and others are personal to the guarantor. Collateral arrangements are quite common in creditor-debtor transactions. However, a guarantor`s rights and defenses can be complex and confusing. For example, a guarantor is like a guarantor, but he has completely different obligations. Contact an experienced financial lawyer to learn more about your collateral arrangement or to find out if you want to become a guarantor. The principal debtor may invoke all standard contractual remedies against the creditor, including impossibility, illegality, incapacity, fraud, coercion, insolvency or discharge from insolvency.
However, the guarantor may enter into a contract with the creditor in order to be liable despite the principal`s defence, and a guarantor who has taken over the security in knowledge of fraud or coercion from the creditor remains liable, even if the principal debtor is dismissed. If the guarantor turns to the principal debtor and demands repayment, he may – as already mentioned – have defenses against the guarantor because he acted in bad faith. A guarantorAny person who undertakes to pay or fulfil a contractual obligation in the event of default by another; a guarantee. is also someone who guarantees an obligation of others, and for practical purposes, therefore, guarantor is usually synonymous with guarantee – the terms are used quite interchangeably. But here`s the technical difference: a guarantor is usually a party to the original contract and signs his name in the original agreement with the guarantor; The counterparty of the customer`s contract is the same as the counterparty of the guarantor – he has been bound by the contract from the beginning, and he is also expected to know the default of the principal debtor, so that the creditor`s failure to inform him about it does not release him from any liability. On the other hand, a guarantor generally does not agree with the creditor at the same time as the principal debtor: this is a separate contract that requires separate examination, and if the guarantor is not informed of the principal debtor`s default, the guarantor may require performance of the obligation if a non-notification affects it. But since the terms are mostly synonymous, security is used here to encompass both. If there is a public or private interest that requires protection against the possibility of default, guarantees are collected. For example, a landlord may require a commercial tenant not only to file a deposit, but also to prove that they have an online security that is willing to bear three months` rent if the tenant defaults. Often, a municipal government wants its contractor to prove that it has a warranty available in case the contractor is unable to complete the project for some reason.
Many States require general contractors to have bonds purchased from insurance companies as a condition of obtaining a contractor`s licence; The insurance company is the guarantee – it pays if the contractor does not complete the work on the client`s house. These are types of performance guaranteeA guaranteeA guarantee that ensures an owner (as a developer or municipality) conclude a construction contract or pay for actual damages to the extent of the bond if the contractor does not comply with it. A judge will often require a criminal defendant to post bail that guarantees their court appearance – this is a type of bond where the surety is the guarantor – or for a plaintiff to post a bond that compensates the defendant for the costs of delays caused by the lawsuit – a judicial bondA bond deposited with the court as security. For example, a party to a lawsuit may post judicial bail to secure payment of a judgment while an appeal is being considered. A bank enters into an obligation through its employees in case they steal money from the bank – the bank employee is the principal debtor in this case (a loyalty debtA pledge that is usually acquired by an employer to cover employees loaded with valuable goods or funds.). However, as we will see, guarantors do not expect financial losses like insurance companies: the guarantor usually expects him to be reimbursed when he has to provide a service. The principal debtor goes to an insurance company and buys the bond – the guarantee policy. The cost of the premium depends on the coverage, the type of bond requested and the applicant`s financial history. A solid estimate of premium costs is 1-4%, but if a guarantee classifies an applicant as high risk, the premium decreases between 5% and 20% of the amount of the bond. If the buyer of a property agrees to take over the mortgage from the seller (promises to pay the mortgage debt), the seller then becomes the guarantor: if the mortgagee does not release the seller (unlikely), the seller must pay if the buyer defaults.
A guarantee is created by a contract. If you are a guarantor, you have made an explicit promise to be liable for a debtor`s debts. Creditors can withdraw directly from the guarantee. For example, a bank can only give you a loan if your father co-signs it. In this way, your father becomes the guarantor of your loan and the bank can demand payment directly from your father. The guarantee can only be created by contract. The general principles of contract law apply to the guarantee. Thus, a person with the general capacity to enter into contracts has the power to become a guarantor. A collateral arrangement requires consideration: If the debtor asks a friend to act as guarantor for the creditor to grant a loan to the debtor, the consideration that the debtor gives to the creditor also acts as consideration that the friend provides. If the security arises after the creditor has already granted a loan, further examination would be necessary (without applying the doctrine of the prohibition of promissory notes American Druggists` Ins. Co.
v. Shoppe, 448 N.W.2d 103, Minn. App. (1989).). You can recall in the contract chapters that a person`s promise to pay or pay another person`s debts or defaults must be proven by a letter under the Fraud Act (subject to the “principal purpose” exception). A guarantee is more common in contracts where a party questions whether the counterparty in the contract will be able to meet all the requirements. The party may ask the other party to contact a guarantor in order to reduce the risk, with the guarantor concluding a guarantee contract. This is to reduce the risk for the lender, which in turn could lower interest rates for the borrower. A guarantee can take the form of a “guarantee”.
The person to whom it has committed must be as liable as the person giving the undertaking, otherwise it would be a principal agreement and not an ancillary one, and the debtor would be liable in the first place; For example, a married woman would not be held liable under her contract, and the person who should vouch for her performance would be liable as principal rather than guarantor.
