Guaranty absolute: Overview, definition, and example
What is a guaranty absolute?
A guaranty absolute is a type of guarantee where the guarantor agrees to take full responsibility for the debt or obligation of another party, regardless of the circumstances. Unlike other types of guarantees that may include conditions or require the creditor to first attempt to collect from the primary borrower, a guaranty absolute provides unconditional assurance that the guarantor will pay the debt if the borrower defaults. This type of guaranty is legally binding and enforceable, meaning the guarantor cannot avoid liability based on the borrower’s situation or any other conditions.
For example, if a company signs an absolute guaranty for a loan, they are legally bound to repay the debt if the borrower defaults, without any conditions or requirements for the lender to first pursue the borrower.
Why is a guaranty absolute important?
A guaranty absolute is important because it provides the lender or creditor with a high level of security, knowing that the debt will be paid regardless of the borrower’s ability or willingness to pay. This type of guarantee reduces the risk for the lender, as they do not need to exhaust other options or attempt to collect from the borrower first. For the guarantor, it carries a higher level of responsibility, as they are fully liable for the debt without conditions. This can also make it more difficult for the guarantor to withdraw from the obligation or dispute the claim.
Understanding a guaranty absolute through an example
Let’s say a bank loans $100,000 to a small business, and the business owner’s friend agrees to provide an absolute guaranty on the loan. If the business fails to repay the loan, the bank can immediately demand payment from the friend who provided the guaranty, regardless of the circumstances surrounding the default. The friend cannot argue that the bank should first pursue the business or that other conditions must be met before paying. The friend is absolutely responsible for the loan repayment.
In another example, a parent may offer an absolute guaranty for a child’s car loan. If the child defaults on the loan, the lender can go directly to the parent to recover the remaining balance, even if the parent was not involved in the purchase or decision-making process.
An example of a guaranty absolute clause
Here’s how a guaranty absolute clause might appear in a loan agreement or business contract:
“The Guarantor hereby unconditionally and absolutely guarantees the full payment and performance of all obligations of the Borrower under this Agreement. In the event of default by the Borrower, the Guarantor shall immediately pay the full amount owed, without any requirement for the Creditor to pursue the Borrower or exhaust other remedies.”
Conclusion
A guaranty absolute provides strong protection for creditors by ensuring that they will receive payment in the event of default, regardless of the circumstances. For the guarantor, it represents a high level of responsibility, as they are unconditionally liable for the debt. Understanding the implications of a guaranty absolute is essential for both lenders and guarantors to ensure that the terms of the agreement are clear and that all parties are aware of their obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.