Guarantees are now more common than ever for individuals and business trying to finding credit or rent property. In the event primary debtors default, creditors are usually quick to claim against guarantors but guarantees will not always be considered binding when challenged in the courts. The idea that a guarantee might be set aside on the basis of fraud or misrepresentation may be clear enough. Where undue influence is at issue, more challenging questions can arise.
The Nature of Guarantees
A guarantee is essentially a contract whereby the guarantor agrees to stand behind some or all of the liability of another, the principal debtor; to a third party, the creditor. The guarantor is liable for the performance of the principal debtor's obligations and for damages in the event those obligations are not performed.
It is well established in case law that a guarantee will not be upheld where it can be shown that the guarantor was induced into the contract by either th e creditor, the principal debtor or a third party due to fraud, misrepresentation or undue influence.
A Creditor at Fault
Where fraud or misrepresentation has induced a guarantor to stand behind the obligations of another person or entity, creditors are unlikely to be successful in enforcing against the guarantor.
Undue influence can also lead to a contract of guarantee being set aside. This might entail actual undue influence or the existence of a relationship that creates a presumption of undue influence, such as a solicitor-client relationship. A bank's relationship with its customer will not usually fall within this definition.
A Principal Debtor or Third Party at Fault
Fraud, misrepresentation of fact or wrongful conduct that amounts to undue influence by the principal debtor or a third party, such as a creditor's agent, will enable a guarantor to have the contract set aside. In the case of presumed undue influence, again there must exist a relationship that could lead to such a presumption.
Where the principal debtor is at fault, his interaction with the creditor will be taken into account - if the creditor is aware of the fraud or misrepresentation or undue influence then the guarantee is voidable. Wilful ignorance by a creditor who fails to make proper enquiries before the guarantee is entered into may also lead to it being set aside.
Rollingsons has lawyers experienced in negotiating contracts of guarantee and resolving related disputes; if you need advice or would like more information please contact James Crighton (JCrighton@rollingsons.co.uk) via e-mail or by phone on 0207 611 4848.