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Guarantees – test extended

A recent HC case considered the common situation where a company director gave personal guarantees in relation to loans provided to a limited company (interestingly, a law firm which had gone into liquidation).

Barclays had provided two loan facilities – one was an overdraft and the other a term loan. Two demands were sent to a director for sums owed. The first was £500 above the specified amount contained in the guarantee. The other demand failed to reach the director due to an address error.

In relation to the first demand the court distinguished a line of authorities which established that a principal debtor obligation creates a primary liability which is not contingent on demand. In the present case, a demand was referred to in both the debtor and surety/guarantee clauses without any identifiable distinction. As such, the HC concluded that in both instances, a demand is required to trigger an obligation to pay.

The HC also had to decide whether the first demand was invalid because the amount demanded was excessive. The judge stated that the guarantee should always be looked at on its own terms and in the proper context. In this case, HC held that the demand was not invalid by reason of demanding an additional £500.

HC did not decide on whether the second demand (not received by the director) could be relied on and would need to be determined at trial

The case extends the established test that a demand made under a guarantee for an excessive amount may nevertheless be effective as a demand for what is due in circumstances where the amount that has been demanded in fact exceeds an express liability cap. Guarantors and their advisers should thus be aware of the extension of this authority.

Source: [2019] 83 Commercial Litigation Journal 18 and Barclays Bank plc v Price [2018] EWHC 2719 (Comm).

 

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