Guaranty Agreement
A contract by which a guarantor agrees to be secondarily liable for the obligation of a primary obligor to a third party. Guaranties are fundamental to commercial credit: landlords require lease guarantees, banks require personal guarantees from business owners, vendors require parent-company guarantees of subsidiaries.
A guaranty agreement is a contract by which one party (the "guarantor") agrees to be secondarily liable for the obligation of another party (the "primary obligor") to a third party (the "guaranteed party," typically a creditor). If the primary obligor defaults, the guaranteed party may pursue the guarantor for performance. Guaranty agreements are fundamental to commercial credit. Landlords require lease guarantees, banks require personal guarantees from business owners, vendors require parent-company guarantees of subsidiaries.
Distinguished from suretyship
Texas statutes and rules often group guarantors and sureties together. Under Texas Rule of Civil Procedure 31, a surety may not be sued alone unless the principal is joined or a judgment has already been rendered against the principal, except as otherwise provided by law, and Tex. Civ. Prac. & Rem. Code § 17.001(b) lists circumstances in which a guarantor or surety may be sued without the principal obligor.
Continuing vs. limited guaranty
A continuing guaranty covers all obligations of the primary obligor incurred during the guaranty period, including future obligations. A limited guaranty is restricted to a specific obligation, dollar amount, or time period. Continuing guaranties typically include language specifying that the guaranty cannot be revoked as to existing debt and survives the death or incapacity of an individual guarantor.
Common limitations a guarantor may negotiate
(1) Cap on guaranty amount; (2) maximum duration; (3) notice of default before guaranty obligation triggers; (4) preservation of defenses available to the primary obligor; (5) carve-outs for specific events (e.g., guarantor's interest sold). Lenders often resist these limitations.
Defenses to guaranty enforcement
Texas recognizes few defenses against a clear written guaranty: failure of consideration (rare in commercial context); fraud in the inducement; statute of limitations; modification of the underlying obligation without guarantor consent (in some circumstances). General unfairness or hardship is not a defense.
Personal guarantees from business owners are common in Texas commercial lending to closely held businesses. Limitations are negotiated before signing, because the defenses available against a clear written guaranty are narrow. A personal guaranty exposes the owner's personal assets to the guaranteed debt, up to any cap the guaranty contains.