Giving and taking guarantees – points to be aware of

Posted on: August 22nd, 2013

When clients ask for, or are asked to give guarantees, and when more than one guarantor is required, it would seem to be common sense that those guarantors who sign the guarantee will be bound by it, and if one proposed guarantor fails to sign the document, he or she is the lucky one who gets away with it!

However a recent case has in fact turned this approach on its head. A composite guarantee was rejected and found to be unenforceable upon the basis that one of the intended guarantors had not signed it. It was even found to be unenforceable against those who had signed it.

The rationale behind this was that a reasonable person, when confronted with a guarantee to be signed by a number of individual guarantors, would proceed on the assumption that each of them ought to sign and so unless each did, none would be liable.

There is a principal known as “subrogation” which gives co-guarantors rights against each other if a claim is made by, say, a bank and some of those guarantors do not pay out on their proportionate share of the guarantee liability. The judges in this case reasoned that a notional reasonable person would be aware of this right and would consider that it would be an important safeguard for them.

Therefore, on the face of it, the effect of one non signature was to impair a guarantee given by the guarantor signing earlier. Overall, no guarantee liability at all came into existence until every guarantor had signed.

Banks will obviously need to make sure that all guarantors sign up to composite guarantees, and indeed trading companies who often ask for directors’ guarantees would also need to be aware that if requested from more than one director, all directors requested to sign the guarantee have signed before it becomes enforceable at all.

It is possible to draft around this, and the wording in guarantees could be amended such that even if a guarantee is expressed to be given by more than one guarantor, the absence of a signature by one of those guarantors would not invalidate the right against the guarantor who had signed.

This development in the law is also likely to affect guarantors or sureties under leases, so property investors should also be aware of this decision. In practice, most landlords are more fastidious in getting tenants and guarantors to sign all necessary paperwork before allowing occupation: however, in the fast moving world of general trading, it is easy to imagine how a supplier maybe pressurised to deliver goods before its customer’s directors have signed the personal guarantee! It is a question really of good housekeeping.