Whenever interrelated contracts apply, different laws, issues and defences may arise owing to the discrepancies between the applicable legal systems. In HSBC Bank PLC v. Pearl Corporation SA and Ors,1 the High Court had to consider Greek law defences to a personal guarantee, governed by Greek law, in the context of a loan agreement governed by English law. It was held that on the particular facts the defences under Greek law failed. Nevertheless, such defences may be available in a future similar case in the context of different circumstances.
Personal guarantees in the Greek shipping market
It is not uncommon in the Greek shipping market, for personal bank guarantees to be governed by Greek law in the context of loan agreements governed by another legal system, usually English law. Why, one may ask, would someone do this? There are several reasons put forward for such an arrangement. First, as a matter of Greek law, consideration is not a prerequisite for contracts. A valid guarantee may be issued without referring to actual or ‘iconic’ consideration. Secondly, in the context of the Greek shipping market, the guarantors are usually domiciled in Greece, with personal assets there. Thirdly, Greek banks and the Greek branches of international banks are usually more familiar with Greek guarantees. Therefore, for various largely practical and historical reasons, such a practice prevails in the Greek shipping market. However, such an arrangement gives rise to potential issues and arguments that would not have arisen if the guarantee was governed by the same law as that of the loan agreement.
Background to HSBC Bank PLC v. Pearl Corporation SA and Ors
HSBC Bank (the Bank) entered into loan facility agreements with two ship-owning companies (the Borrowers), which were themselves beneficially owned by a well-known Greek shipowner, Dimitrios Kritsas (the Guarantor). The loans were advanced in 2010 in respect of two ships and contained a minimum asset cover ratio (ACR) covenant. The ACR required the total security provided for the loan to be maintained at 135 per cent of the outstanding loan debt. Where the value of the security fell below this ratio, the Bank could demand additional security or prepayment.
As security for the loans, there was a mortgage over each ship and a personal guarantee (the Guarantees) provided by the Guarantor. The Guarantees were subject to Greek law and contained a broad waiver clause. This waived various rights of objection that would ordinarily be available to a guarantor under Greek law, including, for example, the right available under article 855 of the Greek Civil Code, which provides for the benefit of excussion or discussion. Such a right allows a guarantor to resist paying the lender until all remedies have been exhausted against the primary debtor.