When does a guarantee become binding on guarantors?
The issue of when a guarantee actually becomes binding on a guarantor was considered recently in the UK in John Spencer Harvey -v- Dunbar Assets Plc  EWCA Civ 952. In this case, the signature of one of four co-guarantors to a guarantee was a forgery. The appellant, Mr Harvey, argued in the Court of Appeal that as all four co-guarantors had not signed the guarantee in question, the guarantee never came into existence and therefore was not binding on Mr Harvey.
The issue before the Court of Appeal was whether or not the liability of Mr Harvey under the guarantee was conditional upon the execution of the guarantee by the three other co-guarantors?
In January 2008, Dunbar Assets Plc (formerly known as Dunbar Bank Plc) (the Bank) made loan facilities of €3,535,000 available to Vison Development Ashbrooke Limited (the Company) for the purposes of refinancing the cost of a development site in Ashbrooke, Sunderland and to finance the costs of completing the development.
The Facility Letter provided that part of the security package for the Company's indebtedness would consist of a joint and several guarantee from four individuals (including Mr Harvey, the Appellant) (together the Guarantors) in the principal sum of €720,000, plus interest and other costs.
The development project was unsuccessful and the Bank demanded repayment of the loan to the Company and called on the Guarantors to repay the guaranteed sum plus interest.
The Bank issued a statutory demand to Mr Harvey on 16 June 2011. Mr Harvey challenged this statutory demand by the Bank on the grounds of promissory estoppel. Mr Harvey claimed estoppel on the basis that a representation had been made by the Bank prior to execution of the Guarantee, that the Guarantee would not be enforced against the Guarantors. This application and defence was dismissed.
It later transpired that one of Mr Harvey's co-guarantors, Mr Lenny, had successfully had his statutory demand by the Bank set aside on the basis that his signature to the Guarantee was a forgery. Mr Harvey then appealed the decision in his case in light of this new information.
Mr Harvey was granted permission to have his case appealed to the High Court. Mr Harvey then argued that he was not liable under the Guarantee because not all of the co-guarantors had signed the Guarantee as Mr Lenny's signature was a forgery.
The High Court considered that Mr Harvey was jointly and severally liable under the Guarantee and that the failure to take security from one Guarantor did not discharge or otherwise affect the liability of the other co-guarantors. This decision was appealed to the Court of Appeal.
Court of Appeal
The issue before the Appeal Court was whether the enforceability of a Guarantee, which was expressed to be joint and several, is conditional upon the due execution of the Guarantee by all Guarantors.
The Judge considered the construction of the Guarantee. Key factors included the following:
- The Guarantee was a single composite document;
- The liability of the Guarantors under the Guarantee was expressed to be joint and several;
- The Guarantors were referred to collectively as the "Guarantor".
- Clause 4(a) (Invalidity and Indulgence) stated that:
"neither the obligations of the Guarantor herein contained…..shall be discharged, impaired otherwise affected by: ….(iv) any failure to take or fully to take any security contemplated by or otherwise agreed to be taken in respect of the Principal Debtor's obligations to the Bank;"
- Clause 15 (Joint and Several Liability):
"The liability under this Deed of the Guarantor….shall not be avoided or invalidated by reason of any guarantee or charge by and [sic] co-surety being invalid or unenforceable."
The Judge noted that the decision of the High Court was that the provisions of Clause 4(a)(iv) - that the liability under the Guarantee shall not be avoided due to the lack of security from another co-guarantor - were wide enough to preserve the Bank's rights and therefore Mr Harvey was deemed bound by the Guarantee.The approach of the Appeal Court Judge was to firstly consider the construction of the Guarantee and the question as to whether Mr Harvey in fact ever became liable under the Guarantee.
The Appeal Court Judge determined that as the Guarantee was a single composite document which defined all four Guarantors as "the Guarantor", the execution by all four Guarantors was an essential precondition to its enforceability.
The Appeal Court Judge then examined the Guarantee to establish whether or not it contained any provisions that might displace his conclusion. The Appeal Court Judge determined that the Guarantee did not contain any express or implied provision that displaced the prima facie position, i.e. that all four intended guarantors were intended to sign a composite joint and several guarantee.
Accordingly, the Judge determined that as Mr Lenny's signature was a forgery and the Guarantee had not been signed by all four Guarantors, Mr Harvey was not a "Guarantor" and was not liable under the Guarantee.
In determining that no liability under the Guarantee actually arose, the Judge noted that the Bank could not derive any assistance from the provisions of Clause 4(a)(iv) or Clause 15 of the Guarantee.
While this case does not give rise to any new law as it was essentially decided on its facts and the construction of the guarantee, it does raise the question as to whether "precedent" guarantees, which are constructed as "composite" guarantees to be executed by a number of co-guarantors, are sufficiently clear and precise in their wording so as to ensure that a guarantor is bound by a guarantee at the point of signing (if that is the intention of the parties) regardless of whether or not the other co-guarantors have actually signed. If a guarantor is to be so bound, such guarantees should be drafted so as to clearly identify the point at which a guarantor is to become so bound and so as to avoid lengthy disputes as to liability.