Everyone makes assumptions in relation to bank guarantees (i) that they are pretty standard documents which you have little choice but to sign "as is"; (ii) that they understand the concept and the risks in providing one; and (ii) the effect of signing is that they become liable to pay another persons debt if that person fails to pay.
How many of those assumptions are true? The answer is none of them! A recent case has brought into sharp focus the risk of failing to read and understand guarantee obligations properly. In this case a couple (the "Guarantors") had guaranteed the obligations of a company under a loan agreement. The lender demanded payment from the Company under the loan agreement and when it failed to pay it requested the full amount from the Guarantors. The Company had not paid the lender because it had various defences to the claim for payment and the Guarantors argued that these defences were also available to them with the result they could not be obliged to pay out under the guarantee.
The court held that the wording in the guarantee meant that the guarantors had to pay the full sum as certified by the lender and they were not able to take advantage of the company's defences. The guarantee was drafted as an "on demand" guarantee so all the lender required to do to get payment was certify the amount and request funds which it had done – payment was therefore required.
From the lender's point of view the guarantee did exactly what it was designed to do, it ensured that they got paid, but it seems to me unlikely that the Guarantors understood that they would be obliged to pay out even in circumstances where the Company may not be obliged to do so.
The moral of the story is:-
- try to avoid giving guarantees where possible;
- if you must give one review the terms properly
– not all guarantees are the same;
- do not accept assertions that the guarantee has
"standard" wording, make sure the guarantor is only
obliged to pay if the person with the principal payment
obligation is required to do so. If amendments to the
documents are required then take proper advice to ensure you
do not end up having to pay out in circumstances you did not
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