Fred agreed to loan George $10,000 for his retail store for which George signed a promissory note.Two months later,Fred heard that George's business was in trouble and that he might not be able to repay the loan.As a result of hearing this information,Fred asked Herman to guarantee the loan.Herman gave a glowing oral endorsement of George and of George's business and then orally promised to pay the $10,000 if George did not.Herman has done business with George for 10 years and George buys his entire inventory from Herman's wholesale outlet.Herman adds that George is his major customer.Is Herman's agreement to pay the $10,000 if George does not pay it enforceable?

Question

Quizplus · Accepted Answer

The statute of frauds requires that a guaranty agreement be in writing to be enforceable, but there is an exception known as the main purpose rule. Under this exception, if the guarantor's primary purpose in agreeing to pay the debt is to secure his or her own economic interests (such as continuing a business relationship with the debtor), then the agreement may be enforceable even if it is not in writing. In this case, Herman's endorsement and promise to pay were likely motivated by his desire to maintain his relationship with George as a major customer and supplier, so the main purpose rule would likely apply and make the agreement enforceable.

Fred Agreed to Loan George $10,000 for His Retail Store