Mr Harvey (H) and three others entered into a ‘joint and several’ single composite guarantee (defining all four intended guarantors collectively as ‘the guarantor’) to enable a company to obtain development finance from Dunbar Assets Plc (D). ‘Joint and several’ liability meant that the guarantors could be sued together or separately for the liability. The development was unsuccessful and D called upon the guarantee, serving a written demand on H and the other guarantors. Subsequently, D served a statutory demand on H.
H claimed that the guarantee was unenforceable because one of the signatures on the document was (allegedly) forged. The issue as to whether the signature was forged had not been determined when the case was heard. However, on the assumption that one signature was a forgery, H argued that none of the sureties were bound, and that he, as a co-guarantor, had no liability. He asked that the statutory demand be set aside.
The court had to decide whether, on construction of the guarantee, the valid execution by all intended guarantors was a precondition of its enforceability.
The Court of Appeal agreed with H and decided that it was. In reaching that decision, the court stated that the answer to the question was essentially a matter of construing the guarantee against its factual matrix. Having considered the authorities, the court concluded:
The court then went on to look at the terms of the guarantee to determine whether there were any express or implied terms to displace that result. The court did not believe that there were. They first looked at the definition of 'guarantor'. The contract defined it as meaning ‘every person liable under this deed’. The court felt H never became liable under the guarantee (because the precondition that all four co-guarantors sign was not satisfied). As a result, H never fell within the definition of ‘guarantor’ so the normal ‘invalidity and Indulgence’ provisions (see below) never applied to H. The normal ‘invalidity and Indulgence’ provision read:
'The liability under this deed of the guarantor and each of them if more than one shall not be avoided or invalidated by reason of any guarantee or any charge by and [sic] co-security being invalid or unenforceable'. (It was accepted that the word 'and' was intended to be 'any').
The guarantee also contained a term that ‘Neither the obligations of the guarantor herein contained nor the rights powers and remedies conferred in respect of the guarantor upon the bank by .. this deed … shall be discharged impaired or otherwise affected by … any failure to take or fully to take any security contemplated by or otherwise agreed to be taken in respect of the principal debtor’s obligations to the bank’.
Again, because of the underlined wording above, the court concluded that this provision would only bite in once a person became liable under the guarantee and fell within the definition of ‘guarantor’.
Many guarantees are likely to be caught by this decision, meaning that for such guarantees to be valid, all guarantors must validly execute the guarantee. The moral of the story: check execution of your documents carefully. Get guarantees amended and re-executed if necessary where there are changes to the parties standing as guarantor.
Also, where there is more than one guarantor, it may be advisable to include wording stating that each guarantor is bound even if any person who was intended to execute it, or to be bound by it, may not execute it or may not be so bound.