Legal Definitions - main-purpose rule

The main-purpose rule is an important exception in contract law, specifically related to promises to pay another person's debt.

Generally, under a legal principle known as the Statute of Frauds, certain types of contracts must be in writing to be legally enforceable. One such type is a promise to guarantee or answer for the debt of another person. This requirement exists to prevent fraudulent claims and ensure clear evidence of such significant commitments.

However, the main-purpose rule states that if the person making the promise to guarantee someone else's debt does so primarily for their own direct benefit or to protect their own significant interest, then that promise does not need to be in writing to be enforceable. In such cases, the primary motivation for the guarantee is not merely to help the debtor, but to serve a substantial financial or business interest of the guarantor themselves.

Here are some examples to illustrate the main-purpose rule:

• Protecting a Business Relationship: Imagine a small manufacturing company, "Widgets Inc.," relies heavily on a specific supplier for a unique component. The supplier is facing financial difficulties and is at risk of defaulting on a loan from their bank, which would force them to close. To ensure the continued supply of the critical component and prevent disruption to its own production, Widgets Inc.'s CEO orally promises the supplier's bank that Widgets Inc. will cover the supplier's loan payments if the supplier defaults. The CEO's primary motivation here is to protect Widgets Inc.'s own supply chain and business operations, not just to help the supplier. Because the promise was made primarily for Widgets Inc.'s own benefit, it would likely be enforceable even without a written agreement.

• Ensuring Project Completion: A general contractor, "BuildFast Construction," is managing a large commercial building project with a strict deadline and significant penalties for delays. One of their key subcontractors, responsible for the electrical work, runs into financial trouble and cannot afford to pay for necessary materials. To prevent the subcontractor from abandoning the job and causing costly delays for the entire project, BuildFast Construction's project manager orally assures the electrical material supplier that BuildFast will pay for the materials if the subcontractor fails to. BuildFast's main purpose in making this promise is to ensure the project stays on schedule and avoid financial penalties, directly benefiting BuildFast. Therefore, this oral promise could be legally binding under the main-purpose rule.

• Safeguarding Personal Investment: Consider a significant shareholder who owns 40% of a struggling startup technology company. The company needs a crucial loan to develop its next product, but the bank is hesitant without a personal guarantee. To protect their substantial investment in the company and prevent its failure, the shareholder orally promises the bank that they will personally guarantee the startup's loan. The shareholder's primary objective is to safeguard their own financial stake and see their investment succeed. Under the main-purpose rule, this oral guarantee could be enforceable because it was made primarily for the shareholder's direct financial benefit.