Failure of a lender to sign a guarantee will not make the guarantee unenforceable.

In FBME Bank Ltd v Elwes and another, the claimant entered into a facility agreement with the defendants' company for a non-revolving short-term loan, supported by guarantees provided by the defendants. The guarantees were not to exceed £50,000 and had an addendum to them (signed by the defendants but not the claimants) providing that any liability under the guarantee would be discharged in full by the guarantor making five equal instalments. These were to be payable annually on each anniversary of a demand having been made.

The defendants then entered into a second facility agreement with the claimant which provided for the borrowed sums to be used for a specified purpose only. When the defendants' company sought to drawdown from the second facility, the claimant declined as the money was not going to be used for the purpose it had been agreed. The company subsequently went into administration and the claimant sought payment from the defendants under the guarantees in the sum of £50,000 each by instalments.

The second defendant denied liability under the guarantee claiming it was unenforceable as the claimant had not signed it and had not been entitled to refuse to permit the drawdown as it had done.

The High Court held that as the second defendant had signed the guarantee, he was bound by it. The claimant had not needed to sign it to make it enforceable. Also, the provisions of the second facility agreement were clear. The claimant was entitled to refuse to permit drawdowns that were not provided for in the agreement. The claimant was entitled to judgment for the sum of the instalment that had fallen due.

Things to consider

It was clear from the face of the facility agreement that the loan was for an intended purpose and the lender was within its rights to refuse to allow drawdown for any other purpose. Had the borrower wished to use the money for a different purpose, it should have tried to agree a variation to the loan, which it had failed to do.