This case concerns the construction of a contract of guarantee which was executed by the Plaintiff in favour of Danske Bank (theBank) in respect of borrowings of the Plaintiff's husband and son (the Guarantee). The Plaintiff claimed that she had revoked the Guarantee in accordance with its provisions and therefore she was under no obligation to the Bank as the Bank had not issued a demand for payment under the Guarantee within the specified three month notice period. The Bank claimed that the effect of the notice of termination issued by the plaintiff was merely to crystallise the liability of the Plaintiff at that date and limit the Plaintiff's liability in respect of all future debts.
- The Guarantee was expressed to be an "all sums" guarantee for the obligations of the Plaintiff's husband and son.
- Sums due by the Plaintiff under the Guarantee were expressed to be payable "on demand" by the Bank.
- The Guarantee provided that it would be a continuing security until such time as the Plaintiff gave to the Bank three months' notice in writing to "discontinue and determine" the Guarantee.
- The Plaintiff served a notice of termination (the Notice) on the Bank on 5 May 2011 to the effect that "as the monies due and owing under the terms of the [Letter of loan offer] were discharged this personal guarantee is no longer valid, however for the avoidance of any doubt we hereby formally notify you that the personal guarantee is terminated".
- The Bank issued a letter of demand to the Plaintiff on 7 November 2012 seeking payment on foot of the Guarantee.
The two issues for the Court to determine were:
- Was the Notice served by the Plaintiff on the Bank sufficient to terminate the Guarantee?
- If so, what was the effect of such termination?
Validity of the Notice
The Bank disputed the validity of the Notice on the grounds: that the Guarantee was an "all sums" guarantee and was not limited to any particular facility; monies were still outstanding by the principal debtors; and that the Notice did not "track" the wording of the Guarantee i.e. "discontinue and determine" the Guarantee.
The Judge rejected these arguments on the basis that the only requirement in the Guarantee was that the Notice be in writing and dismissed as irrelevant that the Plaintiff may have misunderstood the extent of the Guarantee. The Judge stated that it was clear that the intention of the Plaintiff was to terminate the Guarantee.
Effect of the Notice
The Bank contended that the effect of the Notice was to limit the liability of the Plaintiff in respect of future borrowings.
The Plaintiff argued that the effect of the Notice was (i) to initiate a three month notice period within which the Bank could have made a demand on the Plaintiff and after the expiry of which, any demands by the Bank for payment were unlawful and without effect; and (ii) to discontinue and determine the Guarantee in respect of all existing and historic borrowings after the elapse of the three month notice period.
The Plaintiff argued that as the Bank had not made a demand under the Guarantee within the notice period, that any attempt to do so after that time was invalid.
The Judge noted that while the general rule in relation to guarantees is that the revocation or cancellation of a guarantee only relieves the guarantor in respect of future borrowings but does not relieve a guarantor in respect of existing liabilities; this principle does not extend to "on demand" guarantees. Under an "on demand" guarantee, liability of the guarantor is contingent upon demand and a creditor has no cause of action against a surety until such time as a demand has been made. Therefore:
- The guarantee was a demand guarantee which created a contingent liability and which was capable of termination by notice in accordance with its terms.
- Failure on the part of the Bank to issue a demand within the three month notice period led to an extinguishment of the Guarantee and the Bank's entitlement to pursue the Plaintiff.
The Judge also acknowledged that the Guarantee did not contain any clause which could alter the status of the guarantor to that of a principal debtor. The liability of a guarantor under a guarantee with an "on demand" and a "principal debtor" clause will arise without the need for a demand from the creditor even if the guarantee is expressed to be on demand. However, best practice is to serve a demand on a guarantor to establish a fixed date for the purposes of, for example, applying interest payable under the guarantee.
While this judgment is very specific to its own facts, it highlights some key issues in relation to "on demand" guarantees: the contingent nature of "on demand" guarantee in the absence of a clause that ensures that all liabilities incurred by the principal debtor up to the date of termination are crystallised at that point; and importance of making a demand within the requisite period of notice of termination.