Mark Pestronk
Q: A highly productive travel advisor would like to join our host agency as an independent contractor; she has her own limited liability company. When we presented our standard IC contract, she strongly objected to the personal guarantee at the end of the agreement. She said that based on her extensive industry experience, we should be able to trust her and not require a personal guarantee.
She also said that her LLC has a lot of other contracts, and no contracting party has ever made her personally guarantee her LLC's obligations. She noted that her LLC has substantial assets to satisfy any claim. Finally, she said that she is so productive that we can always deduct what she owes from her commission split. She said that she will not sign unless we delete the personal guarantee. Under these circumstances, should we agree to delete it?
A: I strongly recommend against deleting the personal guarantee, although you and your attorney can reduce its scope if necessary to get her to sign. Her arguments about trust, her other contracts, her LLC's assets and her productivity should not carry much weight.
Even if you trust the IC, you still need a guarantee to guard against debts that don't depend on how honest the IC is, such as a credit card chargeback that result in supplier claims, or a client claim that names you because you hold the ARC number. Unfortunately, even formerly trustworthy ICs have turned rogue and defrauded their hosts and suppliers and embezzled from their clients.
While it may be true that no other contracting party requires a guarantee from her, that is irrelevant in your case. Unlike you, her LLC's other business creditors aren't liable to third parties for what she does to them. A typical trade creditor would be owed just a finite amount, but your potential liability to third parties is uncapped.
Just because her LLC has a lot of money in the bank today, it does not mean that the money will be there when needed. She can distribute the balance to herself the day after signing or even dissolve her LLC.
Finally, her productivity cuts against her: the more business she has, the more potential for claims against you by clients and suppliers. There certainly could come a time when those claims exceed her commission split.
Here's another reason to hold firm: if only the LLC signs, she is not personally obligated under the nonmonetary provisions in your agreement, such as confidentiality, nonsolicitation, your various client payment protections, liability for sub-IC defaults and adherence to industry laws and practices.
If necessary to get her to sign, you can offer to limit the guarantee's scope to cases where your debt or liability is to a third party, such as a client or a supplier, where your liability is potentially unlimited, not to you directly. For example, the guarantee would not apply to your host agency's fees or refunds of commission draws.