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In this article, David Bailey, Partner & head of Dispute Resolution at Healys LLP, outlines what creditors need to consider when enforcing the guarantee against a guarantor.
A guarantee is a promise by one party (the guarantor) to a creditor to pay the debt or perform the obligation of another party (the principal) if the principal fails to do so. A guarantee can be a useful way of securing credit or performance from a principal, especially if the principal has a weak financial position or credit rating.
However, if the principal defaults, the creditor may need to enforce the guarantee against the guarantor. This can involve several steps and challenges, depending on the terms of the guarantee and the circumstances of the case.
First, the creditor must check that the guarantee is valid and enforceable. This means that the guarantee must comply with certain formalities, such as being in writing and signed by the guarantor. The guarantee must also be clear and unambiguous about the scope and extent of the guarantor’s liability. The creditor must also ensure that the guarantee has not been discharged or terminated by any events, such as variation of the guaranteed obligations, release of the principal or co-guarantors, or expiry of a limitation period.
Second, the creditor must follow any procedural requirements under the guarantee, such as giving notice of default to the guarantor or obtaining consent from other parties. The creditor must also consider whether it has any duties towards the guarantor, such as acting in good faith, mitigating its loss, or protecting any security held for the guarantee.
Third, the creditor must choose an appropriate method of enforcement, such as suing the guarantor in court, enforcing any security or collateral provided by the guarantor, or exercising any rights of set-off or counterclaim. The lender must also be aware of any cross-border issues if the guarantor is based outside the UK, such as jurisdiction, choice of law, and recognition and enforcement of judgments.
Finally, the creditor must be prepared for any defences or counterclaims that the guarantor may raise, such as fraud, duress, undue influence, misrepresentation, mistake, or breach of contract. The creditor must also respect any rights that the guarantor may have against the borrower or co-guarantors, such as subrogation, contribution, indemnity, hotchpot, or marshalling.
Enforcing a guarantee can be a complex and costly process. Therefore, parties should carefully draft and review their guarantees to ensure that they are clear and enforceable.
Creditors should also seek legal advice before taking any enforcement action against a guarantor.
If you are considering enforcing a guarantee, you should seek legal advice first to ensure that you have the grounds to do so and you are following the correct procedure.
Healys Dispute Resolution team is recognised by the Legal 500 as a Leading Firm in the areas of Dispute Resolution and Commercial Litigation; with Head of Dispute Resolution David Bailey ranked as a ‘Recommended Lawyer’.
For more legal advice regarding enforcement of guarantees, or any other dispute related matter, please don’t hesitate to contact us.
