Expiration clauses in a guaranty are used to limit liability the guarantor can incur. They place a temporal limitation on what would otherwise be a guarantee of unlimited duration. As discussed below, guarantors can still be exposed to liability for continuing or future obligations under the guaranty, even past the date of an expiration clause, where the obligation was incurred prior to the expiration of the guaranty. 

Louis Dreyfus Energy Corp. v MG Refining and Marketing, Inc.

The Court of Appeals addressed this situation in Louis Dreyfus Energy Corp. v MG Refining and Marketing, Inc. At issue in this case was whether a continuing guaranty containing an expiration date requires the guarantor to pay obligations that were contractually binding, but were not yet due and payable, at the time the guaranty expired. Effectively, the question was whether the guarantor’s pre-existing obligations survived the expiration of the guaranty.

On September 27, 1993, the appellant entered into two contracts with the respondent’s subsidiary under which the appellant would purchase a specified amount of gasoline and fuel oil for a fixed price no later than September 30, 2003. The contracts contained an option for the appellant to take its profit in cash should the price of petroleum futures exceed the price fixed in the contract. Both contracts were guaranteed by the respondent, and the guaranty contained a clause under which it expired on September 30, 1994 – one year after the two contracts were effectuated.

Following the expiration of the guaranty, the appellant exercised its option under both contracts, demanding payment from the respondent’s subsidiary. The demand for payment was rejected with respect to the first contract and ignored with respect to the second. The appellant sued, seeking payment from the respondent as guarantor under the terms of the guaranty. The respondent argued that it was free from liability because the guaranty had expired, and the case was dismissed on summary judgment. The Appellate Division affirmed, and an appeal to the Court of Appeals followed. 

The Court noted that what was unique about the situation was that the obligations incurred by the respondent-guarantor became binding prior to the expiration, but not due and payable until after the guaranty had expired. The respondent-guarantor’s obligation to pay on the contracts was incurred when the contracts were entered into on September 27, 1993 – prior to the guaranty’s expiration a year later. In determining whether the pre-existing obligations survived the guaranty’s expiration, the Court looked at the parties’ intent and the circumstances surrounding the issuing of the guaranty.

The Court specifically noted that the parties’ multi-year business relationships showed a pattern of only dealing with each other with the protection of a guaranty, and that the “only logical inference supported by this record” was that neither party “wanted to take the risk of relying on each other’s unsupported credit.” That risk was only eliminated if the expiration of the guaranty left the guarantor still liable for obligations that could become due in the future, but to which it was already bound. Importantly, the Court noted that if expiration of the guaranty protected the guarantor “against obligations not yet due under existing contracts, the opposite party would be left with exactly the problem the guaranty was designed to avoid–a debt from the subsidiary, unsupported by the parent-guarantor’s credit.” 

The Court concluded that the guaranty must be read as requiring the guarantor to pay obligations that were entered into before the expiration date of the guaranty, even where the obligations became due and payable after the guaranty expired. This is notable because it resulted in the respondent being liable for obligations that did not become due and payable until after the guaranty expired.

Importantly, other courts have applied Louis Dreyfus’s holding to revocation clauses as well. In a case out of the Southern District, United States District Judge Rakoff found that a guarantor was liable despite the presence and invocation of a revocation clause, because the obligation arose prior to the revocation of the contract. Essentially, the guarantor could not revoke the guaranty to avoid paying an obligation it had previously incurred but had not yet come due.

Unexpected Liability for Guarantors

Consideration should be taken by the guarantor when entering into a guaranty with an expiration clause, and it is important to understand that the guarantor could still be liable for obligations that arise after the expiration of the guaranty. This is especially true where the nature of the contract involves continuing payments or payment at a later date. The obligation to pay is incurred when the contract is entered into, and the guarantor should expect to be liable for those obligations even after the expiration of the guaranty under the holding of Louis Dreyfus. 

Guarantors can avoid or limit liability by specifically addressing such situations in the drafting phase of a guaranty. For example, language specifying that obligations incurred prior to the expiration date are extinguished by the expiration of the guaranty could expressly shield the guarantor from such liability.

This article was originally posted in The Daily Record.

Ryan Lefkowitz is an associate with the law firm Adams Leclair LLP and can be reached at rlefkowitz@adamsleclair.law.