Ultra Vires: State corporation laws, as well as the guarantor’s charter and bylaws, may deny or restrict the ability of the guarantor to give a guaranty. This is one reason why the “Authorization Documentation” discussed in Chapter 2, including articles of formation and bylaws should be reviewed.
Board of Directors/Shareholder Approval: Similarly, board of director and/or shareholder approval may be required for some guaranties. Review Resolutions carefully.
Consideration: Under common law, guaranties (like all other contracts) must be supported by consideration. In most cases, the guaranty is required as a condition to making of the loan. In these cases, the consideration is the reliance of the Bank in making the loan to the borrower. If the guaranty is given after the loan has been made, new consideration is necessary. This new consideration can take many forms, including inducement for the Bank to renew, extend or modify the terms or increase the amount of the loan.
Statute of Frauds: Generally, the so-called Statute of Frauds applies to guaranties. Therefore, oral guaranties are not enforceable. A guaranty must be in writing.
Waivers and Consents: A well-drafted guaranty will contain (i) waivers by the guarantor of various notices and defenses otherwise available to the guarantor and (ii) blanket advance consents by the guarantor to various actions and circumstances which might otherwise release the guarantor or otherwise limit the right of the Bank to enforce the guaranty. Such provisions are intended to make the guarantor’s obligation “absolute and unconditional.” If, following the giving of a guaranty, the Bank proposes to take or consent to any action with respect to the loan, the borrower or any collateral or other guaranty securing the loan and if the Bank or its counsel is concerned that such action might invalidate the guaranty, the Bank should insist upon the guarantor giving its consent to such action.
Revocation/Termination: A well-drafted guaranty will contain language making it clear that the guaranty is a continuing guaranty which cannot be revoked by the guarantor as to existing debt. If the guarantor is an individual, the guaranty should provide that it will not terminate upon the death or insanity of the guarantor. If the guaranty is limited in amount, it should provide that the Bank may extend credit to the borrower above that amount and that such extension of credit will not invalidate the guaranty. A continuing guaranty can be revoked as to future indebtedness of the borrower but it requires actual written notice of revocation received by the bank. Additionally, revocation of the guaranty typically creates an event of default on the existing debt. The guarantor should be made to understand that revocation of the guaranty may make it more likely that the guaranty will be called on as to the existing debt.