Can a lender sue somebody who countersigns a loan agreement as “guarantor", if the loan agreement does not otherwise contain any terms providing for a guarantee? And what if the agreement lists two parties signing as guarantor, but only one signs?
The Court of Appeal was confronted with these issues recently in Regan & Tuffin v Broughham & Day (which can be found here). It held that the guarantee was enforceable, primarily on the basis that the guarantor must have intended to commit to a guarantee, because there is no other reason they would have signed in that capacity. It was prepared to give effect to that intention, notwithstanding the other issues the case presented.
Lenders will take significant comfort from the decision, both for its conclusion and for its reasoning. In reaching its decision the Court addressed a number of problems that commonly arise with guarantee obligations. In particular:
No guarantee terms?
The Court held that the guarantee was enforceable, despite the absence of any terms. What mattered were that the terms of the loan were clear, and that there was an intention to “guarantee" them. Nothing else is required for a legally complete and certain guarantee agreement.
But was it in writing?
In order to be enforceable, contracts of guarantee must be “in writing": s 27 Property Law Act 2007. The Court of Appeal concluded that this guarantee agreement was “in writing", despite the absence of an express promise to guarantee. Signing the document as “guarantor" was itself a promise to guarantee the loan, and the loan agreement was in writing, such that all of the essential components of the agreement were “in writing" for the purposes of the legislation.
What about the condition requiring a separate deed?
The fact that the agreement contemplated a separate guarantee does not mean that this was required to complete the contract of guarantee. The borrower had waived the condition that required the separate deed, such that the loan agreement – and the guarantee – were enforceable without it.
What about the other named guarantor?
The alleged guarantor relied on authority from England to argue that if an agreement names two guarantors, but only one signs, then the guarantee is not enforceable against the signatory. This is because their agreement was to guarantee alongside the other intended guarantor, rather than alone. The Court rejected this authority. It said that liability was intended to be joint and several among the guarantors, and it was therefore enforceable against the single guarantor in this case.
Although this decision will be of significant comfort to lenders, it is a classic case of a dispute that could have been avoided by small additional steps at the outset. A separate deed of guarantee would have removed all doubt about the matter, as would an acknowledgement from the guarantor that no separate deed would be required.
If you have any questions about the issues raised in this article, please contact the authors or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.