Creditors commonly ask a principal borrower to provide a third-party personal guarantee as a condition of the offer a loan. Should that principal borrower default and not fulfil all its contractual obligations, the creditor may seek repayment from the third-party guarantor directly under the terms of that guarantee.
While personal guarantees are often clear and enforceable, a guarantor with any doubt should seek legal advice on the validity of the personal guarantee. There are a number of uncertainties that can arise relating to guarantor repayment as guarantors may only be contractually liable for some or even none of the amount due if the contract or a term in the contract is limited or unenforceable.
Lenders on the other hand must be sure that personal guarantees are carefully drafted to avoid enforcement issues.
Areas that Provide Opportunity for Challenge of Personal Guarantees
Naturally the starting point is that all documentation that might support the guarantor’s claims in these instances must be secured and reviewed thoroughly. A solicitor will then generally examine several principle areas which might absolve a guarantor from financial liability.
Firstly, the creditor must have proceeded correctly against the guarantor in pursuing collection. If the procedure was carried out incorrectly, this might invalidate the claim under the guarantee. Even if the correct procedure has been followed, then there may still be legal claims available to the guarantor that could reduce any liability or provide a complete defence to financial liability.
As a second example, the creditor may render a personal guarantee unenforceable by its own actions such as varying the terms of the loan agreement outside the terms of the contract. This might be done by the lender increasing the amount lent or by the lender giving the borrower more time to pay. These defences are based upon equitable principles that arise from the fact that the guarantor is not party to the agreement between lender and borrower.
A potentially viable defence that can be raised by consumers is that the terms were unfair according to the Unfair Terms in Consumer Contracts Regulations of 1999 (UTCCR). Under the UTCCR, a term is unfair if it "has not been individually negotiated [it] shall be regarded as unfair if, contrary to the requirement of good faith, it causes significant imbalance in the parties' rights and obligations arising from the contract, to the detriment of the consumer."
Further, the UTCCR addresses issues with negotiating terms: "a term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term." If successful, this defence can reduce or eliminate liability but it is risky as litigation costs can be high.
Other issues that affect enforceability can also arise such as misrepresentations that induce guarantors into providing guarantees.
Comment
Guarantors should be aware that, even if the guarantee is legally unenforceable, creditors will vigorously pursue collection and defend the right to collect the amount for several reasons. Creditors have mandatory rejection responses to guarantors who seek to reduce liability in order to ensure the best chance of recovering the amount lent to the principal borrower, and these measures can be difficult for a guarantor to circumvent without legal assistance.
Additionally, creditors will make all efforts to receive money prior to any court action. This could, however, work in favour of the guarantor because, if the creditor believes there is a possibility of setting a judicial precedent that could negatively affect the creditor’s ability to collect in the future or could affect industry standards in a manner perceived as unfavourable, it is more likely they will settle out of court for a lesser amount.
For specialist advice about enforcing or defending claims based on personal guarantees contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.
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