Guarantees - ease of enforcement
SOURCE: CHARTERED BANKER, AUGUST / SEPTEMBER 2009
Guarantees are becoming more common in the current lending environment. We have previously considered issues that commonly arise when you obtain a Guarantee (click here to see article from Aug/Sept 2006), and in this article, we shall consider provisions that should be included in a Guarantee to make it easier, and cheaper, to enforce.
To enforce a basic Guarantee, you would raise a court action to, establish the debt due, and obtain a decree, which would then require to be enforced.
However, it is possible to avoid the time and expense of a court action to obtain a decree, provided that the sum due can be clearly ascertained (see below), and the Guarantee provides that it can be “registered for execution and preservation”. The effect of this is that by merely registering the guarantee in the Books of Council & Session (being effectively a “decree”), you can move straight to enforcement in respect of the amount due.
Clearly, including the consent to registration wording is essential, and if included, it is difficult to dispute that point. However, there have been cases recently which have considered whether the sum due has been clearly ascertained.
A Guarantee ought to provide that the amount due will be established by a certificate issued by the lender. In a recent case McLaughlin, the Guarantee did not prescribe a form for the certificate, and a demand letter was issued stating the principal amount due, but with no reference to interest. The Guarantor argued that the letter did not have the same status as a certificate. However, the court decided that the Guarantor had sufficient knowledge as to what was outstanding from the terms of the Guarantee and the demand letter, and the enforcement action was allowed.
Therefore, whilst the court was supportive of the lender in this case, time and expense would have been saved by clearly providing for the form of the certificate in the Guarantee.
The Guarantor also challenged the exclusion clauses in the Guarantee and tried to argue that she had a right to off-set other obligations, and that the lender had waived the right to enforce the guarantee; but both these arguments were rejected.
Doubts have been expressed in the past as to the effectiveness and enforceability of exclusion clauses, but the recent decision in Kaupthing Singer & Friedlander Ltd (in administration) specifically confirmed that parties could exclude legal set-off by contract. Again, this is a provision that should always be included in a Guarantee to avoid the Guarantor attempting to reduce its liability to the lender.
Finally, another recent case (Bank of Scotland plc v Makris and O’Sullivan) has helped to clarify whether the amendments to a guaranteed facility were a variation of contract or the issue of a new facility. This distinction is very important as the liability of a Guarantor may cease if the underlying contract is varied to the detriment of the Guarantor without obtaining the consent of the Guarantor (see Article Oct/Nov 2007).
In this case, the original facility did not proceed due to difficulties with the conditions precedent, and the bank then issued a second offer letter for a reduced amount and without some of the conditions precedent. The Guarantor argued that second facility was a material variation of the first facility, and so Guarantee would not be enforceable. However, the Court held that the second facility was not a material variation, but it was a new facility, and as the Guarantee was for all sums due, it was enforceable.
We have been undertaking Security Reviews for various banks, and these are the type of issues that are arising, and therefore, it is very important to ensure that your Guarantees are properly prepared, and that you carefully consider all variations of Facility documents as they may affect the enforceability of both Guarantees and other securities.
author: alex innes