How to Challenge the Validity or Enforceability of a Guarantee in the UK

In this article, David Bailey, Partner & head of Dispute Resolution at Healys LLP, outlines what guarantors need to consider if their guarantee is being enforced.

A guarantee is a promise by one party (the guarantor) to pay the debt or perform the obligation of another party (the principal) if the principal fails to do so. A guarantee can be given in favour of a creditor, such as a bank or a supplier, to secure the repayment or performance of the principal.

However, if the principal defaults, the creditor may seek to enforce the guarantee against the guarantor. This can expose the guarantor to significant financial liability, as their personal or business assets can be seized if the guarantee is enforced.

Therefore, it is important for the guarantor to know how to challenge the validity or enforceability of the guarantee, if they have any grounds to do so. Here are some possible ways to do that:

·      Check the formal requirements. A guarantee must comply with certain formal requirements to be valid and enforceable. For example, it must be in writing and signed by the guarantor or their authorised agent. It must also be supported by consideration, which is something of value given or promised in exchange for the guarantee. If these requirements are not met, the guarantee may be unenforceable.

·      Check the terms and conditions. A guarantee must also be clear and unambiguous about the scope and extent of the guarantor’s liability. It must state what obligations are guaranteed, for how long, and for how much. It must also state any conditions or limitations that apply to the guarantee, such as notice requirements, consent requirements, or release clauses. If these terms and conditions are unclear, vague, or inconsistent, the guarantee may be invalid or interpreted in favour of the guarantor.

·      Check the circumstances and events. A guarantee may also be affected by the circumstances and events that occur before or after it is given. For example, a guarantee may be invalid or discharged if it is obtained by fraud, duress, undue influence, misrepresentation, or mistake. A guarantee may also be discharged or reduced if the creditor varies the terms of the contract with the principal without the guarantor’s consent, releases or compromises with the principal or co-guarantors, or fails to protect any security held for the guarantee.

·      Check the equitable principles. A guarantee may also be subject to certain equitable principles that arise independently of the contract terms and protect the guarantor’s interests. For example, a guarantee may be unenforceable if the creditor acts in bad faith, fails to mitigate its loss, or breaches its duties towards the guarantor. A guarantor may also have certain rights against the creditor, such as subrogation, contribution, indemnity, hotch pot, or marshalling.

Challenging a guarantee can be a complex and costly process.Therefore, guarantors should always read and understand the terms of the guarantee carefully before signing it, and seek professional legal advice if they have any doubts or questions.

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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 & Litigation team is recognised by the Legal 500 as a UK Leading Firm in the areas of Dispute Resolution and Commercial Litigation; with Head of Dispute Resolution DavidBailey ranked as a ‘Recommended Lawyer’.

For more legal advice regarding how to challenge the validity or enforceability of a guarantee, or any other dispute related matter, please don’t hesitate to contact David Bailey, Partner & Head of Dispute Resolution at: david.bailey@healys.com

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