• The Importance of Consideration in Loan Guarantees
  • February 25, 2015 | Author: Rick L. Knuth
  • Law Firm: Jones, Waldo, Holbrook & McDonough A Professional Corporation - Salt Lake City Office
  • As do all contracts, the loan guaranty must be supported by consideration. "Consideration" is the benefit or the detriment to one or both parties that separates an enforceable contract from a mere casual agreement. Consideration is often recited in contracts, using some nominal amount, such as "For the sum of Ten (10) Dollars, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged . . . ."

    Guarantees are contracts and, as such, there must be consideration. Generally, the consideration is the giving of the loan to a borrower where it he loan will benefit the guarantor. So, when a shareholder or an equity member of a borrower guarantees the loan, the guarantor benefits and that benefit is consideration for the guarantee.

    Be mindful of consideration, though, in the case of new guarantees of existing loans. Make sure that the new guarantor benefits from giving the guarantee. The classic case is where the lender intended to get a guarantee - say, from a spouse for another shareholder - but failed to do so before the loan transaction was fully consummated. Or, where the loan has been transferred and the new lender wants additional guarantees, even though the loan is current. In these kind of situations, there is no consideration, as there would be if the loan were in default and the additional guarantee was a condition of forbearance or where the loan is being extended or modified to the borrower’s (and the guarantor’s) benefit. Also, don’t assume that there is consideration when a spouse who does not own any interest in the borrower-entity gives a guarantee.

    The takeaway: Think carefully through the facts and considerations to assure yourself that there is consideration for any guarantee.