Under scrutiny in the Court of Appeal, the wording of a guarantee did not allow for a bank to enforce a statutory demand against one of the personal guarantors. Consequently, the bank was unable to recover losses sustained under a loan. This decision gives a clear warning about the importance of clear and precise drafting of legal documents.

Background

Mr Harvey provided a personal guarantee (up to a maximum of £720,000) along with 3 other individuals, to Dunbar Asset Plc (the “Bank”) in respect of loans it had provided to a company, Vision, for the purposes of a property development project. The project was unsuccessful and the Bank sought to recover its losses, which were in excess of £4.8 million.

The Bank sought to enforce the personal guarantees against Mr Harvey and the other guarantors and issued a statutory demand for the sums due under the guarantee. Mr Lenney, one of Mr Harvey’s fellow guarantors, alleged that his signature had been forged by a third party. Mr Harvey, therefore, made an application to set aside the statutory demand on the basis that the guarantee itself was void. The Court held that, when construed as a whole, the guarantee provided that each guarantor was jointly and severably liable, even if the guarantee had not been properly executed by all parties. Looking at the construction of the provisions of the guarantee, the Court found that Mr Harvey was liable to pay the Bank and so the statutory demand could be enforced. At first instance, the statutory demand was held to remain in place.

Court of Appeal Decision

On appeal, the issue before the Court was whether, on the construction of the guarantee, the liability of an intended guarantor who has signed the document is conditional upon the execution of the other guarantors.

In summary, Counsel for Mr Harvey argued that unless the guarantee was duly executed by all those who the Bank envisaged would sign it, the guarantee was not valid. The Bank argued, however, that there was no principle that in the case of a composite guarantee, one guarantor would not be liable in the event that the other named guarantors did not sign the guarantee.

The Court of Appeal looked carefully at several well-established authorities, such as Evans v Bemridge (1855), Hansard v Lethbridge (1892) and James Graham & Co (Timber) Limited v Southgate Sands (1986) and practitioners’ texts on the construction of contracts. It was accepted that the principles of these authorities would apply to guarantees as they do to contracts.

The authorities, it seemed to the Appeal Court, did not determine an absolute principle that if an intended guarantor does not sign the guarantee, the other guarantors are not bound. It depends on the construction of the guarantee. In this instance, the provisions of the guarantee showed that it was a single composite document and that all four guarantors were together defined as ‘the Guarantor’. Consequently, prima facie, the liability of the guarantors was joint and several.  The Court of Appeal determined this was the starting point when considering the construction of the guarantee and that the next step should be to ascertain whether any of the guarantee’s express or implied terms operated to exclude the prima facie position.

The Court of Appeal held that, on its true construction, the guarantee was drafted in such a way that the liability of a guarantor was only imposed if all named individuals duly executed the guarantee. This meant that Mr Harvey was not liable under the guarantee as a result of the forgery on the part of Mr Lenney. Consequently, the statutory demand would be set aside and the Bank was not able to recover any of its losses.

Practical Considerations

This case highlights the need to carefully consider the exact terms of a guarantee. If the beneficiary of the guarantee intends that the individual signatories are to be liable even in the event that one guarantor is not considered to be bound, there should be a clear provision to this effect. As with many legal documents, there is a tendency to rely on standard or precedent wording when drafting guarantees. However, this case illustrates the need to take time and care when crafting the terms of a guarantee.

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