Are Your Guarantors Avoiding Payment?

You may recall from our summer 2013 Debt Newsletter that a guarantee is a promise to fulfil a third party’s obligations if that third party fails to do so. It is a contractual agreement that creates a secondary obligation to support a primary obligation of one party to another, for instance a director’s promise to pay professional charges due from a company.

What may be considered as a personal guarantee on the face of it, may not be enforceable.  As the personal guarantee is contractual,a guarantor may attempt to argue that it is invalid, which will include arguments such as:

1. There was no consideration
The doctrine of consideration requires both parties to ‘benefit’ from the contractual arrangement in some way. The entity requesting the guarantee will obviously have the benefit of the guarantee; however the party giving the guarantee does not necessarily personally benefit, unless it can be shown that there is some indirect benefit. The way to avoid this argument is to create the personal guarantee by a Deed. 

2.The guarantor did not have the authority to give a personal guarantee
The personal guarantee is personal to the individual giving it rather than in connection with the entity which is requiring a service.  However, it is important that the individual providing a personal guarantee understands what it is that they are signing and it is therefore advisable that this is discussed with the guarantor and a note is made of the discussion.  It is also advisable to ask the guarantor to seek independent legal advice if there is any doubt about their understanding of the terms. 

3. The guarantee is not reasonable
The guarantee may include terms which are overly onerous on the guarantor, rendering the guarantee invalid.  Accordingly, you should consider the terms of the guarantee carefully and restrict the same to what is required from the other party under the primary obligation. 

4.The guarantor was induced to give the personal guarantee by duress, misrepresentation or undue influence
In the event that the guarantor was induced to give the personal guarantee by duress, misrepresentation or undue influence, this may render the guarantee invalid; however it will be for the guarantor to give evidence in this regard and substantiate such assertions.  In order to avoid this argument, it is again advisable to make a concise and clear note of the discussions taken place with the guarantor and suggest that the guarantor take independent legal advice.

The steps taken by you with regards to ensuring the validity of the personal guarantee may be dependent on the nature of the client, the value of the likely transactions and the risks.  However we would suggest that you carefully review any documents which you may use to avoid the risks of such a personal guarantee later being determined invalid. 

If you would like us to review any existing personal guarantees and/or prepare the same for you, please contact Matthew Miles.