Legal Blog

Guarantee (Guaranty) Gone

When is a guarantee not a guarantee? When the original covenantor becomes bankrupt and the guarantee clause is not wide enough to cover the bankruptcy.

A guarantee is a promise to do something undertaken by another, if that person does not do it. The courts have held that if the other person is unable to perform due to bankruptcy, then the guarantor no longer has to perform on the guarantee – unless the guarantee specifically covers a bankruptcy situation: Cummer-Yonge Investments Ltd. V. Fagot et al 8 C.B.R. (N.S.) 62.

     In Glenview Corp. v. Lavolpicella, an unreported 1997 decision of the Ontario Court (General Division), a “guarantor” was attempting to use this argument. The dispute related to obligations under a lease. However, the landlord’s assertion of liability was not based on a simple guarantee; it was based on an assignment of lease. The “guarantor” was attempting to have himself cast as a guarantor when, as the court found, he was never a guarantor, only an assignor.

     Keep the rule in mind when you are drafting guarantees.