Written by: Bianca Kratt, Q.C.

As a result of being Canada’s largest oil and gas producer, having billions of dollars invested in its innovation and tech industry, and its strong financial sector, Alberta is home to an array of businesses that span across industries. It also provides an abundance of opportunities for individuals who wish to enter the market as potential business owners or investors. However, due to the COVID-19 pandemic and various other external economic factors, commercial activity has faltered. Whether you are one of the many businesses who entered a credit arrangement, an investor looking to sell or purchase a business, or an individual exploring the possibility of a loan, it is important that you are aware of the law around personal guarantees.

What is a Personal Guarantee?

When a person requires financing and decides to enter a credit arrangement with a lender, the lender may request for a personal guarantee to mitigate the risk of default. A personal guarantee in Alberta is a personal promise by the guarantor to be liable for the debts of another entity, most often a seller or lender. Should the guarantor default, the personal guarantee provides the lender with a contractual right to seek repayment from the personal assets of the guarantor.

Procedural Requirements to Effectuate a Personal Guarantee

Uniquely required by Alberta law is a process to effectuate a personal guarantee. As per the Guarantees Acknowledgement Act (GAA) of Alberta, a personal guarantee provided by a person (the guarantor), not a corporation, requires that person to appear before a lawyer. Due to the guarantor losing protection and creating a legal obligation that can result in personal consequences, the lawyer must be satisfied the guarantor understands the contents of the guarantee. If the lawyer is satisfied, they will issue a Guarantees Acknowledgement Act Certificate (GAA Certificate), which is a legal document that must then be signed by the lawyer and the guarantor.

Although the GAA previously required the GAA Certificate to be signed by the guarantor while in the presence of a lawyer, because of the unpredictability of the COVID-19 pandemic, an amendment was made to allow for acknowledgement by video conference. Whether the guarantor and lawyer choose to meet in person or via video conference, the processes are substantively alike.

Obligations under a Personal Guarantee

The guarantor’s obligations under a personal guarantee will vary depending on the terms of the agreement and the type of liability assumed by the guarantor. If the guarantor agrees to be jointly and severally liable, they may be held accountable for the entire debt obligation on their own. This is particularly important when two or more people are borrowing and guaranteeing the debt, as the lender may be able to pick one borrower to collect all the debt from.

The guarantor should also understand the difference between limited and unlimited liability. If the guarantor defaults after agreeing to an unlimited liability, there is no limit to the amount of debt they may face. The lender will also have the right to seize the guarantor’s personal assets to settle any financial obligations. If the guarantor agrees to limited liability, the lender has a right to seek a fixed dollar amount or percentage of the outstanding balance at a given time. For example, if there are four guarantors, the lender may collect 25% from each.

Variation of the Underlying Obligation

Oftentimes, once a claim has been brought forward to enforce the guarantor to settle its financial obligations, the guarantor will state that the lender has varied the terms of the personal guarantee as a defence. In 1996, The Supreme Court of Canada adopted a rule from the old English case of Holme v. Brunskill, which, in sum, states that any variation in the agreement must come after consultation with the guarantor. The rule drawn from modern Canadian case law is that the guarantor will be discharged from its obligations, unless one of four exceptions apply:

  • the alteration is “plainly unsubstantial”;
  • the alteration is “necessarily beneficial” to the guarantor;
  • the guarantor has contracted out of the protection of the rule; or
  • the guarantor has consented to the alteration.

Needless to say, personal guarantees have their hurdles and involve significant risks. It is well-advised that you seek legal advice to overcome the nuances associated with the law of guarantees and to mitigate any associated risks.