Personal Guarantees Across the Border: Formalities, Spousal Guarantees, Bad-Boy Carve-Outs and Waivers

The short answer

A guarantee is often the real security in a private loan, especially where anti-deficiency rules limit recovery against the land. But guarantees fail for technical reasons more often than for lack of assets. Each side of the border has formal and substantive traps that should be addressed at signing, not discovered in litigation.

Canada: formalities and discharge

Alberta's notarial certificate. Under the Guarantees Acknowledgment Act, R.S.A. 2000, c. G-11, a guarantee given by an individual is unenforceable unless the guarantor appears before a lawyer, acknowledges that they executed it, and the lawyer completes a certificate confirming the guarantor understood it. The certificate requirement does not apply to guarantees given by corporations. A US lender taking an individual guarantee from an Alberta resident must build this step into closing.

Writing. In common law provinces, a guarantee must generally be in writing and signed to be enforceable, a rule traced to the Statute of Frauds (in Ontario, R.S.O. 1990, c. S.19, s. 4).

Discharge by material variation. In Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415, the Supreme Court held that a guarantor was discharged when the lender and borrower renewed the mortgage on new terms without the guarantor's consent. Guarantees should expressly permit renewals, extensions, rate changes and releases of security without discharging the guarantor, and lenders should still obtain guarantor acknowledgments on every renewal.

Independent legal advice. Where a spouse or family member guarantees a borrower's debt, Canadian courts look closely at undue influence. Lenders commonly require a certificate of independent legal advice for non-commercial guarantors.

Quebec. Suretyship is governed by the Civil Code of Québec (arts. 2333 and following). The rules on benefit of discussion and division differ from common law guarantees; contracts commonly include express solidary (joint and several) suretyship and waivers. See Article 14.

United States: federal and state rules

Spousal guarantees and Regulation B. The Equal Credit Opportunity Act and Regulation B apply to business credit as well as consumer credit. Under 12 C.F.R. § 1002.7(d), a creditor generally cannot require the signature of an applicant's spouse, including as a guarantor, if the applicant individually qualifies for the credit. Lenders should document why any additional guarantor is required.

Suretyship defenses and California waivers. US guarantors have common law suretyship defenses, such as discharge where the creditor impairs collateral. California codifies these defenses and allows guarantors to waive them under Civil Code § 2856. Because California's anti-deficiency rules can affect guarantors, California guarantees typically include detailed § 2856 waivers. California courts can also disregard a guarantee where the guarantor is in substance the borrower (the "sham guaranty" doctrine), so guarantees from the principals of a single-asset entity need careful drafting.

Bad-boy carve-outs. Nonrecourse loans often become recourse to the guarantor if specified "bad acts" occur, such as voluntary bankruptcy, unauthorized transfers or fraud. In Wells Fargo Bank, N.A. v. Cherryland Mall Ltd. Partnership, 295 Mich. App. 99 (2011), the Michigan Court of Appeals held that a borrower's insolvency breached a separateness covenant, triggering full recourse against the guarantor. Michigan's legislature responded with the Nonrecourse Mortgage Loan Act in 2012. The lesson: courts will enforce carve-out language as written, so both lenders and guarantors should draft it carefully.

Enforcing a guarantee across the border

A guarantee is a personal obligation, so it can be enforced wherever the guarantor or their assets are found (Article 8). Practical drafting points:

• Governing law and non-exclusive forum clause in the guarantee itself
• Consent to jurisdiction and an agent for service in the guarantor's home jurisdiction
• Waiver of jury trial where enforceable (US)
• Express consent to renewals, extensions and amendments (Conlin)
• Alberta notarial certificate for individual guarantors
• Independent legal advice certificate for spouses and family members
• Financial statements and asset disclosure covenants

Frequently asked questions

This content is general information for industry professionals and is not legal, tax or financial advice. Laws change and apply differently to each transaction; obtain advice from qualified counsel in each relevant jurisdiction. Legal counsel to the Cross-Border Private Lenders Association: Jasmine Daya & Co. Questions: info@cbpla.com