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 a 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 two loan facilities to JGR in 2012. One was an Overdraft Facility and the other was a Term Loan. 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). The Guarantee was signed by Mr. Cohen on 20 August 2012.
The Guarantee contained both an unconditional guarantee clause and a separate principal debtor clause; the latter rendered Mr. 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: (i) one ninth of the balance of outstanding on the 2012 Term Loan (ii) 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 the Overdraft Facility was refinanced by JGR entering into a new Facility Agreement in 2013 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.
Demands & notices
Barclays sent two demands to Mr. Cohen for sums owed.
First demand – October 2015
Barclays demanded payment pursuant to the Guarantee for the sum of £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 Mr. 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 Mr. Cohen's address. Mr. 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 that he had only discovered the existence of the letter before action from his co-defendants. Mr Cohen applied for strike out or summary judgment against Barclays . The three issues at stake were:
- 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?
- was it able to rely on the second demand even though it was sent under cover of the letter before action which contained an error in Mr. Cohen's address?
Requirement of a demand – the first demand
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). A demand was referred to both in the principal debtor and the surety/guarantee clauses without any identifiable distinction. As such, the judge concluded that in both such instances the reference to a demand was to be construed in the same way, i.e. a demand is required to trigger an obligation to pay.
Was the first demand invalid because the amount demanded was excessive?
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. The judge noted that the test established by Mannai Investment Co. Ltd v Eagle Star Life Assurance Co Ltd which was 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. Furthermore, no form of demand had been specified by the Guarantee.
The judge concluded that the question as to whether or not Barclays could rely on the second demand was not a matter which could be decided on the present application as it raises triable issues of fact and would need to be determined at trial. The judge did not therefore strike out this claim nor 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 in fact exceeds an express liability cap.
Guarantors should be alive to the extension of this authority in circumstances where they may consider 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 under them) for the creditors who benefit from such arrangements.