A guaranty agreement is a contract where a third party agrees to perform a signatory’s duties under a contract in the event the signatory fails to do so.
- Agreeing to step in and fulfill someone else’s contractual duty in the event that they fail to do so despite all reasonable efforts
- Seeking someone to step in on your behalf to fulfill some contractual duty in the event that you fail to do so despite all reasonable efforts
Sometimes, parties to financial transactions require additional protection against risk. A guaranty agreement is a contract in which a third party guarantees the performance of one of the parties to a separate agreement by stepping in if the signatory fails to perform. Guaranty agreements are very risky to the third party making the guaranty, or the “guarantor,” because he or she takes on the risk of someone else’s default. However, the guarantor is only obligated to step in if the original party made ever reasonable, good-faith effort to fulfill its obligations under the agreement. If the original party failed to perform due to neglect, fraud, or other improper purpose, he does not get the benefits of the guarantor’s protection. Guaranty agreements are sometimes required to shore up someone’s credit when they are applying for a personal or business loan. For example, you may wish to guaranty a bank’s loan to a family member if you want to help them get back on their feet, or you may seek a guarantor to help you negotiate better terms for a financing arrangement. Because guaranty agreements involve potentially substantial legal liability it is critical to make sure that they include all relevant and legally-mandated information. Use this interactive form to help you create a guaranty agreement that can protect your rights.