By Andrew C. Voorhees, Esq.
If your business regularly contracts with other business entities, it is prudent to consider the applicability and benefits of commercial guaranties. A guaranty is the written promise of an individual to pay the debt of another. In a commercial setting, a guaranty is typically the promise of an owner or officer of a corporate entity to pay the debt of that corporate entity should it default on its obligation. The benefits of such an arrangement are obvious in that a commercial guaranty provides additional security and consideration for the creditor, additional incentive for the corporate entity to fulfill its obligations, and additional avenues of collection for the creditor in the event of a default.
It is first important to note that a guaranty must first take the form of a clear an unambiguous writing if the intended guarantor is to be held to the obligation. Courts construe guaranty agreements in the same manner as they interpret contracts. G.F. Business Equipment, Inc. v. Liston (1982), 7 Ohio App.3d 223, 224. One need not go beyond the plain language of the agreement to determine the parties’ rights and obligations if a contract is clear and unambiguous. Uebelacker v. Cincom, Inc. (1988), 48 Ohio App.3d 268, 271. A guarantor is bound only by the precise words of his contract. G.F. Business Equipment, Inc., 7 Ohio App.3d at 224. The guarantee must clearly manifest an intent to bind the defendant. Id. Thus, an officer of a corporation is not personally liable on contracts for which the officer’s principal is liable, unless the officer intentionally or inadvertently binds himself as an individual. Centennial Insurance Co. v. Tanny International (1975), 46 Ohio App.2d 137, 142.
A guaranty must also be in writing if it is to be enforced. Ohio Revised Code § 1335.05 (as well as many comparable state statutes nationwide) require that any agreement to charge an individual to “to answer for the debt, default, or miscarriage of another person” be in writing if it is to be enforced in a court of law. As such, any oral promises from an individual purporting to guarantee the debt of a corporate entity or other individual will not typically be enforced without some written evidence of the agreement. The writing should also be exhaustive in noting the accounts covered by the guaranty, as well as its duration.
Once an unambiguous guaranty exists, it is especially important to ensure the signature of the guarantor binds the intended party. Many individuals attempt to add the words “president”, “officer”, “member” or some other descriptive terms to their signature on a guaranty. Some individuals add this description knowingly in an attempt to avoid personal liability. The question is whether such additions would tend to negate personal liability of the guarantor.
Whether a document has been executed in an individual or representative capacity is a question to be determined from consideration of the whole instrument in each particular case. Aungst v. Creque (1905) 72 Ohio St. 551, 555. In Aungst case the Court states:
It is undoubtedly an accepted principal of commercial law, and a general rule of the law of contracts, that where an agent signs a negotiable instrument by affixing thereto his own signature without adding the name of the principal for whom he acts, the agent so signing is himself personally bound on such instrument although he affixes the word “agent”. Such suffix, under such circumstances, being generally considered and held to be descriptio personae. And the rule is the same where an officer of a corporation without signing the corporate name of a company for whom he acts, subscribes a promissory note in his own name affixing to his signature his official title or designation, such as president, secretary, or treasurer.
Id at 553 (emphasis added). Thus, the addition of the word “president” without any reference that the individual intends to bind the corporation does not render the guaranty of a Note ambiguous or allow a defendant to deny personal liability imposed by clear an unambiguous language of that guaranty. S-S-C Co. v. Hobby Center, Inc. (1992), 1992 Ohio App. LEXIS 6059, *10. In S-S-C Co., the Court held the defendant personally liable for the corporate debt and stated:
Further, the fact that Beth B. Savino wrote the word “President” beneath her signature on the guaranty does not render the guaranty itself ambiguous. The general rule of interpretation governing this kind of signature is that such words as “president” are merely descriptive of the character or capacity of the person signing the document.
Id at *8.
Two competing Ohio cases bear out the importance of the form of a guarantor’s signature on the agreement. In Westgate Village Shopping Center v. Parker (2008), 2008 Ohio 2571, a commercial tenant entered into a lease agreement for space in a shopping center. The tenant eventually fell behind on rent and the landlord sought an eviction and a Judgment for money damages against the tenant and individual guarantor on the lease agreement. On the guaranty, the alleged guarantor added the words “Executive Director” immediately beneath her signature. The guarantor intended to avoid personal liability due to this addition.
The Court held that the guarantor was personally liable for the debt, regardless of the addition to her title on the signature. The Court reasoned that the addition of the words “Executive Director” to her signature was not enough. The guarantor needed to specifically note the principal for which she was signing as an agent, which was not done here. The Court held that the words “Executive Director” were merely descriptive of the person signing the guaranty document and not enough to avoid personal liability.
The Court reached a different conclusion in George Ballas Leasing, Inc. v. State Security Service, Inc. (1991), 1991 Ohio App. LEXIS 6346. In that case, an officer of a corporate lessee signed his name on a guaranty and added the word “president” to the signature.
Here, the Court held that this was enough for the officer to avoid personal liability. The Court applied a three-part test to determine whether the officer was signing the guaranty in his individual or representative capacity. The Court noted that the signature itself represents a clear indication that the signator is acting as an agent if; (1) the name of the principal is disclosed, (2) the signature is preceded by the words of agency such as “by” or “per” or “on behalf of”, and (3) the signature is followed by the title which represents the capacity in which the signator is executing the document, e.g., “Pres.” Or “V.P.” or “Agent.” The Court reasoned that the language of the guaranty was neutral and did not refer to any specific individual, that the officer’s signature was preceded by the preprinted word “by” and is followed by the word “president”. Also, the corporation of which the officer is president is on the document’s face several times. Under these facts and circumstances, the Court did not hold the officer personally liable.
In sum, it is important to furnish your personal guaranty in a way that will be enforced by the Court as desired. The guaranty must be in writing and signed in order to comply with the Ohio Revised Code. Also, the guaranty language must be clear an unambiguous. To that end, be sure that the Guaranty language states the individual’s name who is to be personally liable. Also, avoid ambiguity in the signature by preprinting the guarantor’s name under the signature line and adding the words “guarantor” or “individually”. Do not add the name of the principal business anywhere in the guaranty, and do not allow the guarantor to add his or her title to the signature or the name of the principal business. Following these guidelines will help ensure that your guaranty will be enforced as intended, and maximize security for your business.
Andrew Voorhees practices in Commercial Collections with Weltman, Weinberg & Reis Co., LPA, with a focus on the Commercial Banking, Commercial Business, Special Collections and Commercial/Agency Services Groups. Based in the Cleveland office, Andrew can be reached at 216.685.1050 or firstname.lastname@example.org.