In Williamson v. Ill-Eagle Enterprises, Ltd., 2015 WL 802250, a manufacturer of framed art and wall décor sued the New Jersey-based designer of those items and its corporate President (the “Guarantor”) for breach of contract and breach of a written guaranty, respectively. The guaranty contained a forum selection clause fixing Illinois as the site for any litigation related to the contract and guaranty.
The Guarantor moved to dismiss claiming the guaranty lacked consideration (that is, he didn’t get anything in return for signing the guaranty) and that it was signed under duress. The corporate defendant filed counterclaims which the plaintiff moved to dismiss.
Denying both motions (the Guarantor’s and plaintiff’s motions to dismiss), the court addressed important questions concerning the enforceability of personal guarantees signed after an underlying contract is signed and how specific a claimant must allege lost profits when seeking them as part of its damage claim. (Part 2 of this post will discuss the lost profits analysis.)
In disposing of the guarantor’s motion to dismiss, the court pronounced these key principles:
– A guaranty that is signed after a contractual obligation already exists is enforceable but only if additional consideration is given to the guarantor;
– A promise not to sue a corporate principal is sufficient additional consideration to support a post-contract guaranty;
– The consideration to support a guaranty doesn’t have to flow directly to the guarantor; instead, a promise to benefit a third party is sufficient;
– Where a party forgoes a claim in good faith, even it ultimately proves invalid, that forbearance is still sufficient to support a guaranty.
Here, the court found that the Guarantor signed the guaranty to avoid the plaintiff suing his company for over $300,000 in merchandise. As a result, the plaintiff’s promise not to sue was sufficient consideration to bind the Guarantor.
Next, the court rejected the Guarantor’s argument that he was coerced into signing the guaranty. Economic duress, also known as business compulsion, releases a party from a contract who is strong-armed into signing it under duress.
It’s hard to prove duress under Illinois law though. The duress defense only applies where one is induced by a wrongful act or threat to sign a contract under circumstances that deprive him of his free will. Hard bargaining or exerting financial pressure isn’t enough to show duress or business compulsion.
The court found the plaintiff at most engaged in hard bargaining by requiring the corporate President’s guaranty. This was evident by the fact that the corporate defendant owed plaintiff over $300K and was long in arrears at the time the guaranty was signed.
Plaintiff’s chosen business tactic of conditioning future product deliveries on the Guarantor’s promising to pay the corporate debt to the Plaintiff as added security for payment, wasn’t extreme enough to deprive the Guarantor of his freedom of choice, the court said.
1/ A guaranty signed after the underlying contract is signed is still enforceable if extra consideration is furnished to the guarantor;
/2 A promise to not sue the guarantor’s corporate employer (or affiliate) can be sufficient consideration to support a guaranty;
3/ Economic duress or business compulsion requires more than one party exerting financial pressure on another. The conduct must be wrongful in the moral sense and eliminate the other party’s free will.