It is a sad fact, perhaps, that many people sign guarantees in respect of liabilities within their business without reading them. We all take an optimistic view of the future of our business and if, on that view, there is no likelihood that the business will fall into financial difficulties what could possibly be the problem in signing such a document?
It is therefore often not until steps are taken to enforce the guarantee that a guarantor will decide to take advice on how it may be interpreted, but, of course, by then he is bound by the terms of the document that he has signed. Even so, it is clear from a number of recent cases that the courts are prepared to examine such a document carefully in order to understand precisely the nature and effect of it and to determine whether, and if so to what extent, the guarantor will have any liability under it.
In an earlier article we reported on a case in which a guarantor was able to escape liability under a composite guarantee due to the circumstances in which it had been entered into. It is clear from the case law that judges will not assume that all guarantees have the same effect and will therefore review every single clause of a guarantee document in order to understand the nature of the liability that is created by it.
Different types of guarantee
It is common ground that a guarantee of a loan, for example, may impose one or more of the following types of liability on the guarantor. These are:-
A “See To It” obligation: i.e. an undertaking by the guarantor that the principal debtor will perform his own contract with the creditor.
A conditional payment obligation: a promise by the guarantor to pay the instalments of principal and interest which fall due if (but only if) the principal debtor fails to make those payments;
An indemnity;
A concurrent liability with the debtor for what is due under the contract of loan.
The obligations in classes (2) & (4) create a liability in debt. However it is well established that any indemnity is enforceable by way of an action for unliquidated damages on the basis that the liability arises from the failure of the indemnifier to prevent the person indemnified from suffering the type of loss specified in the contract. A contract of the “See To It” type has also been held to create a liability in damages. The obligation undertaken by the guarantor is not one to pay the debt but consists of a promise by the guarantor that the debt will be paid by the principal debtor.
Does this make any difference? In many cases it will not; the amount of damages that would be paid would be equivalent to the amount of the loan or debt that remained outstanding. However the extensive analysis that took place in the case of McGuinness –v- Norwich and Peterborough Building Society [2011] EWC Civ 1286 shows that it in some circumstances it can.
In that case, the guarantor appealed against a bankruptcy order on the grounds that a creditor was only entitled to petition for bankruptcy in respect of a debt which was for a “liquidated sum”; the guarantor claimed that the guarantee did not give rise to an obligation to pay an liquidated sum. On the facts of the case, the Court of Appeal decided that wording of that particular guarantee document did create such a debt. However, the detailed analysis that was conducted makes it clear that if the wording of the particular guarantee had been different, the obligation may have only given rise to a claim in damages which would not have been a “liquidated sum” and the bankruptcy order may well have been overturned.
Summary and recommendation
When being pursued for a payment under a guarantee document, do not assume that simply because you have signed it this means that you will be liable in all the circumstances of the case. Prepare a detailed statement of the circumstances in which the guarantee was entered into, the way in which the liability arose and whether other parties were involved and any other relevant facts and then take legal advice. You may be presently surprised to find that you have a strong argument to put forward which entitles you to avoid part or all of the liability for the sum claimed.