Personal Guarantee Legal Advice

What is a personal guarantee?

A guarantee is a contractual promise by an individual “the Guarantor” to fulfil certain obligations in the event that a third party “the Borrower” defaults on its obligations to a lender “the Lender”. The obligation usually relates to payment but can relate to other matters such as performance obligations.

A guarantee must be in writing and signed by the Guarantor or a person authorised by it in order to be binding.

It is important to recognise that a guarantee serves as a secondary obligation and only becomes enforceable if the Borrower defaults on their primary obligation to the Lender. Accordingly, in circumstances where the Borrower’s primary obligation is discharged, the Guarantor’s liability will also fall away.

Can I challenge a personal guarantee?

There are various ways to seek to challenge a personal guarantee and we set out some considerations below.

Contractual promise

A personal guarantee is a contractual promise and is therefore subject to contract law and principles. If one of the elements outlined below is missing, the basic requirements of a contract will not have been established and a personal guarantee will not be enforceable:

(i) Offer;

(ii) Acceptance;

(iii) Intention to create legal relations;

(iv) Consideration;

(v) Certainty of terms.

Contrariwise, if you are a Lender, it is important to seek legal advice before a personal guarantee is executed to ensure it is valid and enforceable and the contractual elements referred to above are present. For example, it is good practice to ensure a personal guarantee is executed as a Deed to avoid any potential dispute that no adequate consideration has been provided and thus no binding contract established.

Unfair terms

In certain circumstances, it may be possible to challenge a personal guarantee on the basis that it contravenes consumer rights legislation. For example, where a guarantee has been provided before 1 October 2015, the Unfair Contract Terms Act 1977 may be engaged. It is often the case that individuals (as opposed to companies) provide personal guarantees. Where an individual has signed a personal guarantee before 1 October 2015, the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) may be engaged which sets out a test of fairness which must be adhered to. If the terms of a personal guarantee fail to satisfy the test of fairness, it may render the personal guarantee unenforceable. For personal guarantees entered into after 1 October 2015, consideration should be given to the Consumer Rights Act 2015.

Undue influence and duress

It is also possible to seek to set aside a personal guarantee on the basis of undue influence and/or duress. Duress arises where a party is forced into signing a document where actual or threatened violence has been imposed. If a personal guarantee is signed under duress, the contract will automatically be voidable (ie the contract will remain effective until it is rescinded).

Undue influence is predicated on a relationship of “trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other” (see Royal Bank of Scotland Plc v Etridge (No 2) 2002 2 AC 773). The doctrine of undue influence in the context of personal guarantees may arise where a Guarantor has been unduly coerced into signing a personal guarantee. If a personal guarantee is signed under undue influence, the personal guarantee will be voidable in accordance with equitable remedies.

Seeking to challenge a personal guarantee is a complex area of law. If you have concerns that a personal guarantee may be unenforceable, you should contact our specialist team of commercial lawyers to seek advice on your options as soon as possible.

Can a personal guarantee be varied?

If the primary obligation under the personal guarantee is amended after the document has been executed, a Guarantor’s liability will be automatically discharged (save in limited circumstances as outlined below):

1. If the amendment cannot in any way prejudice the Guarantor;

2. If the amendment is consented to by the Guarantor.

(See Holme v Brunskill 1877 3 QBD 495.)

If you are a Guarantor and are concerned that a Lender has varied and/or is seeking to unfairly amend the personal guarantee, you should seek legal advice as soon as possible.

Can a Guarantor claim back money from the Borrower?

It is well established that there is an implied contractual obligation on the Borrower to indemnify the Guarantor in circumstances where a personal guarantee has been provided by a Guarantor upon the Borrower’s explicit request (see Re Debtor 1937 ch 156).

Effective drafting of personal guarantees

If you are a Lender, it is imperative that you take steps to ensure that a personal guarantee is drafted in such a way so that it is valid and enforceable. For example, it is important to be aware of the difference between a guarantee and an indemnity. An indemnity is a promise to provide security or protection against a third party’s loss.

The principal difference between a guarantee and an indemnity is that the latter does not require any formal requirements in order to be binding. In addition, an indemnity constitutes a primary obligation which makes it more onerous on an indemnifier. Contrary to the position in relation to personal guarantees, amending an indemnity after it has been executed will generally not release the indemnifier’s primary obligation.

Where a document is drafted ambiguously and it remains unclear as to whether it is intended to be a personal guarantee or an indemnity, the court will adopt an interpretation which is more favourable to the Guarantor/indemnifier. In these circumstances, the court will usually interpret the document as a personal guarantee, which can have significant repercussions for a Lender.

Do not delay seeking advice. Call our expert team on 020 7467 3980 now, complete the enquiry form or Contact our specialist team for further advice.