Guarantees

Nature

A guarantee in the strict sense is an agreement between a guarantor and a lender that the guarantor is liable for the debt of the guaranteed borrower, if that borrower defaults in his, her or its obligations to the lender. This means that the guarantor’s liability depends on the borrower’s liability being validly in place and there being a default.

Most standard bank guarantees strengthen the lender’s position by including an indemnity and/or primary obligation on the part of the guarantor. This makes the guarantor liable, even if the original loan agreement cannot be enforced against the borrower for some reason.

Having a guarantee means that an additional person, whether an individual or company, is potentially liable on the loan. The guarantor’s creditworthiness and personal assets stand behind the guarantee. A guarantee may be limited in recourse so that, for example, it may only be enforced against a particular asset.

Generally, a lender is entitled to enforce any security as it sees fit. Therefore, if a mortgagee has a guarantee, it is not necessarily obliged to enforce the mortgage or sue for the debt, before enforcing the guarantee.


Common Limitations

A guarantee may be limited to a maximum specified sum. In this case, the guaranteed amount is presumed to be reduced as the loan is repaid. A so-called “continuing” guarantee covers the loan balance or balances that are outstanding from time to time so that the guarantee continues as the balance increase and decreases.

A guarantee may be limited to a particular maximum amount. A guarantee may be payable on demand or on default. Where two or more people jointly and severally guarantee the debt, the lender may pursue either or both for the whole loan monies.

Because the guarantee is usually drafted by the lender, it is interpreted strictly and against the lender’s interests. An ambiguity or lack of clarity is likely to the interpreted in favour of the guarantor.


Minimum Requirements for Guarantees

A guarantee is a contract and must be given for “consideration.” This means there must be something in return, e.g. the lender agreeing to enter the loan agreement with the borrower.  Alternatively, the guarantee may be executed as a deed (formerly under seal).

A guarantee must be proved by a note in writing, signed by the guarantor. The written agreement must contain all material terms of the guarantee. An oral guarantee is not enforceable.

In a Consumer Credit Act case, the guarantee must be written and signed by all parties. A consumer credit non-housing guarantee is enforceable, only if the guarantor has been given a copy of the guarantee and credit agreement within 10 days of being entered. The Consumer Protection Code makes additional requirements.


Rights of the Guarantor

There are several default rules in relation to guarantees, which protect the position of the guarantor. Most standard form guarantees reverse these rules so as to give the lender as much advantage as possible. In addition, certain rules which might lessen the effectiveness of the guarantee are removed. In some cases, where shorter form guarantees are used, these rules affecting guarantees may not be fully excluded and may apply.

A guarantor who pays off all or part of the debt has a right to be indemnified by the guaranteed borrower.  This right is often removed in a guarantee until the loan has been paid off in full (in cases where the guarantee does not cover all liability). This is to prevent the guarantor competing with the lender in seeking payment.

In addition to the guarantor’s right of indemnity where it has paid off the loan, the guarantor will have a right of subrogation in relation to the lender’s securities. This means that the guarantor may take over the benefit of the lender’s security if it pays off the debt. If the guarantee is only for a pro rata part of the debt, the guarantor may be entitled to the benefit of part of the security, unless this right is varied (as it usually is).

A guarantor does not have the right to require the lender to sue the borrower or enforce other security before enforcing the guarantee.  The general principle is that the lender may enforce any or all of its securities in any way it wishes.


Release

There are certain circumstances in which a guarantee may be released and discharged by reason of the lender’s actions. If the lender releases the debtor, this will generally release the guarantor. If the creditor breaches the loan agreement in a manner which entitles it to terminate the loan agreement, the guarantor is also released, unless the guarantee wording specifically provides otherwise. Standard guarantees forms reverse this position and avoid these possibilities by providing for an indemnity and co-liability and/or making provision upholding validity, notwithstanding such events.

If the loan agreement is changed in a material way, then the guarantee may be discharged. This is because the guarantor guarantees a particular agreement and any material change may change the nature of what is guaranteed. If a debtor is given more time for payment than originally allowed, the guarantor may be relieved of liability. Typically, standard guarantees forms contain clauses permitting the creditor to vary the terms of the loan or allow more time, without affecting the guarantor’s liability.

A guarantor is presumed to be released if the creditor does not take or complete the taking of a security agreed to be given or releases a security. This is because the guarantor’s right of subrogation is thereby impaired.  This is usually varied.


Potential Invalidity

Guarantees may be set aside on the basis of undue influence.  The risk of undue influence is strongest where there is a guarantor, with no interest in the guaranteed debt, who is pressured to enter a guarantee. The absence of independent legal advice may cause a guarantee to be set aside.

The lender may be deemed to be on notice of the undue influence, even where (as is usual) it emanates from the borrower and is exerted on the third-party guarantor. In this case, the guarantee would be invalidated against the lender may be imputed with the consequence of the undue influence, where there is no independent legal advice. For this reason, lenders often insist that independent legal advice is taken.

Generally, a guarantor is not entitled to information regarding the background to the principal loan.  The creditor need not disclose unusual features of the loan agreement or matters which impact on the creditworthiness of the debtor. In particular unusual circumstances a duty may arise on the part of the lender.

Standard form guarantees in consumer cases are subject to the Unfair Contract Terms Regulations.  It is possible in a consumer case that some of the harsher terms of standard guarantees might be unenforceable. Most standard guarantees do the maximum possible to strengthen the lender’s position at the expense of the guarantor.  The Regulations provide that a clause which provides a significant imbalance in the rights of the parties is potentially void.


References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017

Timothy N Parsons  Lingard’s Bank Security Documents 6th Ed 2015