In Life, There Are No [Personal] Guarantees (Especially When They Are Buried In An Ambiguous Provision Of A Contract)

by: Peter J. Gallagher (@pjsgallagher)

In a recent unpublished decision, the Law Division refused to enforce a purported personal guarantee in a commercial contract. Individuals and entities that include such guarantees in their contracts with customers should read the decision (or just continue reading below).

In Century Star Fuel Corp. v. Jaffe, defendant entered into a contract with plaintiff whereby defendant obtained a line of credit from plaintiff that defendant could use to purchase heating oil from plaintiff. The one-page contract, which was prepared by plaintiff, contained a single signature line for defendant’s president to sign on behalf of defendant. It also contained what the court described as “boilerplate language” providing the following: “Applicant . . . agrees and acknowledges that the person who signs this Application has the Authority to do so; and Personally Guarantees all present and future extensions of credit.” Defendant was identified as the “Applicant” in the signature line. Plaintiff alleged that this clause was unambiguous and rendered defendant’s president personally liable for defendant’s debts. Defendant disagreed and argued that the clause was unenforceable because its president never intended to be personally bound. Both parties moved for summary judgment. The trial court sided with defendant.

 

The Court first noted that a guaranty is a separate contract where one party agrees to answer for the “primary obligor’s debt on the default of the primary obligor.” The Court further observed that a guarantor is “generally” a “different person from the maker or, if the same person, signs in different capacities when signing as maker and guarantor (e.g., an individual may sign as an officer of a corporate maker and also sign individually as a guarantor of the corporate obligation).”

In Jaffe, the Court held that the “plain language” of the contract made it “abundantly clear” that there was no separate agreement through which defendant’s president agreed to be personally liable for defendant’s obligations. There was only one signature line for the “Applicant,” and “Applicant” was defined in more than one place in the contract as defendant. With regard to the provision that plaintiff relied upon in its efforts to hold defendant’s president liable, the Court characterized it as “inconsistent,” “altogether unclear,” and “inarticulate at best.” Finally, the Court held:

“[A] separate and distinct provision, with a separate and distinct signature, must exist to bind the individual officer, director, or shareholder. A buried clause in a corporate credit agreement is wholly insufficient as a matter of law to bind the signatory corporate representative or agent. Clearly, [plaintiff’s] instant Contract fails to accomplish this. Although brevity may have been a stated goal, confusion and ultimately a legally unenforceable contract is the result.”

Therefore, while brevity may be the soul of wit, it is not necessarily the soul of an enforceable personal guarantee.