In a recent decision, the Supreme Court held that a clause in a guarantee creating a cap on a guarantor’s liability for a debt did not prevent a court from awarding court interest resulting in a total award which was 43% above the guarantee cap.
The guarantor had provided a personal guarantee to First Active plc (the Bank) capped at a fixed sum for the debts of a number of companies, which he controlled (the Companies). The High Court granted judgment to the Bank on foot of this guarantee up to the full amount of the cap. The High Court also ordered the guarantor to pay court interest on this amount. At the time, court interest was set at 8% under Section 22 of the Courts Act 1981 (the 1981 Act). Section 22 of the 1981 Act gives a court discretion to award interest for the period from the date of the cause of action to the date of the judgment. The rate of interest under Section 22 is set by the Minister for Justice (the Minister). In this instance, the High Court award provided that the interest was to be backdated to the date of initiation of the proceedings resulting in an award to the Bank which was 43% above the guarantee cap.
Claim that interest was excessive and punitive in nature
The guarantor appealed to the Supreme Court and one of the arguments that he made was that the High Court had no right to award the interest as the underlying loan agreements between the Bank and the Companies, which he had guaranteed, contained interest provisions and so came within the exception set out in Section 22(2)(b) of the 1981 Act.
Section 22(2)(b) of the 1981 Act provides that court interest does not apply to:
“any debt upon which interest is payable as of right whether by virtue of any agreement or otherwise.”
The guarantor also argued that even if the High Court did have a right to award interest the judge should have exercised his discretion not to award it in this case. The guarantor argued that the level of interest awarded was punitive, unrealistic to the marketplace and would result in “windfall profits” for the Bank.
Contractual interest arrangements
The Supreme Court outlined that in any guarantee arrangement there are at least three parties involved and most likely at least two contractual arrangements. In this instance, the first arrangement was between the Bank and the Companies, and the second arrangement was the personal guarantee provided by the guarantor. In the vast majority of cases it is only where there is a default on payment under the first arrangement, that the guarantee is called on. In this instance, the first arrangement provided for payment of contractual interest on overdue payments to the Bank but the guarantee document did not. The Supreme Court noted that where a demand for payment is made under a guarantee, the obligations of the guarantor are to be found solely within the guarantee document. The fact that the first contractual arrangement contained interest provisions was not relevant to the obligations of the guarantor.
The Supreme Court held that the fact that the guarantee was capped was not relevant to the application of court interest.
Court’s discretion to award interest
The Supreme Court noted that as the rate of interest under Section 22 of the 1981 Act is set by ministerial order the judge is obliged when awarding interest, to apply this rate. The Supreme Court noted that as of 1 January 2017, the interest rate has been reduced to 2%. This indicates that the Minister is aware of market conditions and prevailing trends and will change the rate when he considers it appropriate to do so.
The Supreme Court found that the court interest awarded by the High Court was within the parameters of the discretion awarded to the judge in applying Section 22. The guarantor’s case was dismissed.
Lessons for Guarantors and Lenders
This case highlights that a guarantor is not protected from an award of court interest by capping their liability with a fixed sum guarantee. The award of court interest can be quite significant and a guarantor should be aware that there is a chance they will be obliged to pay over and above the fixed sum agreed to. For lenders, this case highlights that a lender is not always restricted from succeeding in an award of interest in the case of a fixed guarantee and an award of interest should be investigated by their legal team.