A demand made under a guarantee may be effective even when the amount demanded exceeds an express liability cap.
Mr Cohen was a director of the law firm Jeffrey Green Russell Limited (JGR). When JGR went into liquidation, it owed money to Barclays Bank plc. Barclays enforced various guarantees given by the law firm's directors.
Barclays had provided an overdraft facility and a term loan to JGR in 2012. Under these arrangements, guarantees were provided by way of security. One of the guarantees was described as: "A guarantee from Philip Graham Cohen on the Bank's standard form limited to £55,500.00". The guarantee was signed by Cohen on 20 August 2012. The guarantee contained both an unconditional guarantee clause and a separate principal debtor clause; the latter rendered Cohen liable to Barclays for any customer liabilities that could not be recovered from him as guarantor. Any sums demanded under this clause would be payable immediately but would be no more than the defined "specified amount" of the aggregate of:
- one ninth of the balance outstanding on the 2012 term loan; and
- a maximum of £55,000 of the balance outstanding on the 2012 overdraft facility or any other account which may be substituted for it.
The 2012 term loan was repaid and in 2013 JGR refinanced the overdraft facility by entering into a new facility agreement for £600,000. No new security was required but the 2013 facility agreement expressly referred to the existing security. This reference to existing security directly referred to the guarantee.
Barclays sent two demands to Cohen for sums owed.
First demand – October 2015 Barclays demanded payment pursuant to the guarantee for £55,500 (£500 more than the specified amount, but the same amount as specified by the 2012 and 2013 agreements with Barclays).
Second demand – March 2016 The following year, Barclays sent its second demand to Cohen for £55,000 under cover of a letter before action dated 17 March 2016. Although the correct address was included on the second demand itself, the letter before action contained an error in Cohen's address. Cohen stated that:
- as a result of that mistake, he did not receive the letter before action (and therefore the second demand enclosed with it) on time; and
- he had only discovered the existence of the letter before action from his co-defendants.
Cohen applied for strike out or summary judgment against Barclays. The following issues were at stake:
- Was Barclays required to issue a demand in order to claim under the guarantee or could it rely on the principal debtor clause?
- If Barclays was required to issue a demand under the guarantee:?
- was the first demand invalid because Barclays had demanded an excessive amount; or
- was it able to rely on the second demand even though it had been sent under cover of the letter before action which had contained an error in Cohen's address?
The court followed a line of authorities which established that a principal debtor obligation has the effect of creating a primary liability which is not contingent on a demand (even in instances where the words 'repayable on demand' are used).(1) A demand was referred to in both the principal debtor and the surety/guarantee clauses without any identifiable distinction. As such, the judge concluded that in both instances the reference to a demand was to be construed in the same way (ie, a demand is required to trigger an obligation to pay).
The judge stated that a guarantee should always be looked at on its own terms and in the proper context. Although there are authorities stating that a demand for an excessive amount may be valid, the conclusion will turn on the specific facts in question.(2) The judge noted that the test established in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd(3) (ie, that even if notices contain some errors, they should be "sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate") must be applied in an "objective way" as regards the "reasonable recipient" of a demand. On this basis, the judge concluded that he was in no doubt that the first demand was not invalid by reason of demanding an additional £500. The reasonable recipient would have been in no doubt that the reserved right was being exercised by Barclays. Further, no form of demand had been specified by the guarantee.
The judge concluded that the question as to whether Barclays could rely on the second demand was not a matter which could be decided in the present application, as it raised triable issues of fact and would need to be determined at trial. The judge therefore did not strike out this claim or give summary judgment on it.
This case extends the established test that a demand made under a guarantee for an excessive amount may nevertheless be effective as a demand for what is due in circumstances where the amount that has been demanded exceeds an express liability cap.
Guarantors should be aware of the extension of this authority in circumstances where they may consider that they have reason to reject a demand on such basis. Meanwhile, this judgment will surely be a welcome extension of the authorities relating to the operation of guarantees (and the demands made thereunder) for the creditors that benefit from such arrangements.
For further information on this topic please contact Sarah Shaul or Andy McGregor at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
(2) Bank of Baroda v Panessae  1 Ch 335; Arab Banking Corporation v Saad Trading & Financial Services Company  EWHC 509 (Comm); Modern Contract of Guarantee (O'Donovan and Phillips) and Law of Guarantees (The Honourable Mrs Justice Andrews DBE and Richard Millett QC).
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