One of the recurring issues that Buffington Law Firm’s Orange County business litigation attorneys deal with concerns personal guarantees. This is a frequently misunderstood issue in breach of contract lawsuits and often exposes people to legal liability that they did not know that they had.
A personal guaranty is a very simple concept, but it is also deceptive. Essentially, most personal guarantees in the context of business litigation deal with contracts between two corporations. One of the contracting corporations demands that the owner of the other side’s corporation also sign the contract as a guarantor. People often do this, assuming that such a requirement is “boilerplate” and thus they sign the contract individually as well as for their corporation without much thought.
In reality, a personal guaranty is a far-reaching concession by the side that agrees to do it. Essentially, when a business owner signs a personal guaranty on a contract he or she is giving up all of the protection that derives from doing business as a corporation instead of as an individual. If the corporation fails to make a go of it and cannot carry out the rest of the contract, the business owner who guaranteed the contract is personally liable and can be sued for the corporation’s breach of contract. The main point in forming a corporation to do business is to shield a business owner from personal liability of this type. When the other side demands a personal guaranty, they are demanding that you give up this corporate shield. While sometimes this may be necessary as a business deal point, it is not something that the business owner should concede lightly. It is a deal point and at a minimum it should be conceded in exchange for something else. Better still: don’t make this concession.
In California a startling percentage of personal guarantees eventually turn into actual liability by the guarantor. This is far from a “boilerplate” contract term.
If you are involved in a breach of contract or business litigation matter, we invite you to call Buffington Law Firm to speak directly with one of our experienced Orange County business litigation attorneys in a free legal consultation. Naturally, the consultation is confidential and there is no obligation