When a Bank asks someone to sign a Guarantee the general response seems to be that a Guarantee is a fairly standard document - one form of Guarantee is very much like another - and has to be signed. There also seems to be an assumption about the legal effect of giving a Guarantee, namely, the Guarantor is taking on a liability for another person's debt and if that debtor fails to pay then the guarantor will be liable.
However, the judgment of the Court of Appeal in a recent English case has highlighted the risks that a Guarantor takes on when signing a standard form Guarantee. The case, IIG Capital Llc v Van Der Merwe, involved Mr and Mrs Van Der Merwe who had given a Guarantee to IIG Capital Llc (IIG) in respect of the liabilities of a company (Hurst Parnell Imports and Exports Limited (HPIE)) under a Loan Agreement. On 12 January 2007 IIG demanded US$30,303,576 from HPIE which they claimed was due under the Loan Agreement. HPIE did not pay; so on 16 January 2007 IIG made a demand under the Guarantee against Mr and Mrs Van Der Merwe for payment of the full amount. Mr and Mrs Van Der Merwe argued that the defences available to HPIE as a Borrower against IIG's claims for repayment of the loan were available to them as Guarantors so that IIG could not claim against them under the Guarantee.
The Court did not agree and held that the Guarantors had to pay under the terms of the Guarantee. Although the Court acknowledged that the Borrower in this particular case might have had defences against IIG's claim for repayment of the loan, it held that the wording of the Guarantee meant that the Guarantors had to pay on demand the amount certified by IIG as due and payable.
In giving their judgment the Court concluded that the effect of all the relevant clauses in the Guarantee was that the Guarantee was an on demand Guarantee - in other words all IIG had to do in relation to the Guarantee was to demand payment and certify the amount that was due and the Guarantors had to pay.
As far as IIG were concerned the Guarantee did precisely what it was supposed to do. However, for Mr & Mrs Van Der Merwe it appears to have come as a surprise that IIG could go against them in a situation where IIG wouldn’t necessarily have been successful against the Borrower (HPIE).
A Guarantee can be a fairly standard document; but it is designed to protect the party receiving the benefit of it. However, the fact that it is a standard document does not mean it cannot be changed.
Published in the July/August 2008 edition of the Glasgow Chamber of Commerce Business Magazine.
For further information please contact Tony Watson at tony.watson@todsmurray.com
Tony Watson