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Frequently Asked Questions About Guaranties

Much of our litigation practice involves guaranties.  This blog post discusses many FAQs about guaranties.

Q.        What is a “guaranty”?

A guaranty is an agreement, by which one or more parties (“guarantors”) agree to answer to another for the debt or obligation of a third party (often called a “primary obligor”).

Q.        What is a “guaranty of payment”?

A guaranty of payment makes the guarantor responsible to repay a defaulting primary obligor’s debt to a third party (commonly a lender).  Banks commonly require guaranties of payment in connection with real estate and small business loans to corporations and LLCs.

Q.        What is a “guaranty of performance”?

A guaranty of performance requires the guarantor to fulfill a defaulting primary obligor’s performance obligations.  This type of guaranty commonly appears in real estate construction projects, where the property owner doubts the ability of the contractor to finish the job.

Q.        How are guaranties interpreted?

A guaranty is a contract, and should be interpreted like other contracts.  Where the terms of the guaranty are clear and unambiguous, Illinois courts will enforce them as written.  However, an ambiguous guaranty will be construed strictly in favor of the guarantor.

Q.        Are there limits on a guarantor’s liability?

Illinois courts disfavor unlimited guaranties.  The guarantor’s liability depends on the language of the guaranty document, and courts will not enforce a guaranty beyond what the guarantor agreed to do.  In general, the liability of a guarantor is limited by that of the primary obligor.

Illinois law also recognizes several defenses guarantors may assert.  Generally speaking, actions by the holder of the guaranty (i.e., the bank) which increase the risk of the guarantor will extinguish the guarantor’s liability.  For example, a material change of the underlying obligation, or a release of the primary obligor and/or other guarantors generally discharges the guarantor’s liability.

Having said that, many guaranties expressly waive all defenses, and contain “unlimited guaranty” language.  Therefore, it is critical to read any guaranty carefully, including the “boilerplate.”

Please feel free to call us today if you have any questions about guaranties.

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