CM July and August 2018

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LEGAL MATTERS Personal guarantees and indemnities This article explores some of the key issues the Creditor should consider when taking a personal guarantee and/or indemnity for the liabilities of another Principal Debtor. DD +44 113 261 6177 E Duraid.Al-Musaied@dwf.law W www.dwf.law/recover Duraid.Al-Musaied Specialist Manager Recoveries BOTH a guarantee and an indemnity constitute a promise to be responsible for the loss of another. While a guarantee creates a secondary obligation to support a primary obligation of one party to another, an indemnity is a primary obligation given by the indemnifier to the person to be indemnified. Whereas the obligations under a guarantee are, therefore, dependent on the Principal Debtor's primary obligation, an indemnity is independent of the obligations of the Principal Debtor. It follows, that if for any reason the underlying agreement between Creditor and Principal Debtor is set aside, an indemnity will remain valid whereas a Creditor will be unable to rely on a guarantee given its dependence on a now defunct primary obligation. The first thing to consider is, therefore, whether your document is a guarantee, an indemnity, or both. An indemnity, or a combined indemnity and guarantee is preferable to a guarantee alone, but in practice most documents that are described simply as guarantees are in fact combined guarantees and indemnities. The distinction remains important, however, because a guarantee will confer on the guarantor a number of important rights as against the Principal Debtor and the Creditor, and the courts have, therefore, traditionally been protective of guarantors. A guarantee may be open to challenge if changes are made to the underlying agreement. In particular, any amendment to the agreement after the execution of the guarantee may discharge the guarantor's liability under the guarantee in the absence of their consent to the variation or, unless the variation is insubstantial or incapable of adversely affecting the guarantor. A guarantee will automatically provide a guarantor with certain rights (such as the right to an indemnity from the Principal Debtor) which are not automatically provided by an indemnity. These rights may come into conflict with your rights as a Creditor and it may be necessary for you to seek to exclude or restrict their application in the guarantee document. PRACTICAL POINTS Guarantees and indemnities (collectively referred to as Security hereafter) are contractual agreements and they require: offer; acceptance; consideration (i.e. reciprocity); and the intention to create legal relations. There is no requirement for the Security to be in writing, though it is advisable, as in the event of any dispute a written agreement will help to demonstrate offer and acceptance and an intention to create legal relations. Ensuring there is valid consideration for the Security can be tricky and in this respect timing is critical. In contract law past consideration is not usually valid consideration. As such, you should avoid executing the Security after the underlying agreement in circumstances where the Principal Debtor's underlying obligation constitutes the consideration for the Security. Consideration can also be problematic where your guarantor is otherwise unconnected with the underlying transaction. For example, where Security is given in respect of a loan, the loan monies will pass between the Creditor and Principal Debtor, but not the guarantor. To overcome this problem, the Security should be executed as a deed as opposed to a simple contract as there is no requirement for consideration when an agreement is by deed. Beware, however, as deeds have their own particular requirements in that they must be witnessed, and the guarantor will be bound only from the date the deed is delivered. CONTINUING GUARANTEE If you advance credit to your Principal Debtor pursuant to a revolving credit facility, they will inevitably borrow, repay and borrow more money over the course of the trading relationship. To ensure that the guarantor's liability under the Security is not eroded as the Principal Debtor repays its debt, you should ensure that the Security explicitly provides that further advances will also be covered by its terms. UNDUE INFLUENCE AND MISREPRESENTATION Security may be set aside if obtained by undue influence or misrepresentation. The safest way to protect against this line of argument is to insist that any guarantor takes separate legal advice on the effect of the Security prior to execution. For completeness, you should then obtain confirmation from their legal representative that it has given the guarantor advice on the implications of the Security and their potential liability under it. AS A CICM MEMBER YOU CAN RECEIVE FREE LEGAL ADVICE FROM DWF VISIT THE CICM WEBSITE AND CLICK ON THE FREE ADVICE LINE. The Recognised Standard / www.cicm.com / July/August 2018 / PAGE 40
Regional Representative vacancies We are looking for one Regional Representative for each of the following regions: East Midlands London South West Wales West Midlands Yorkshire and Humber The position of Regional Representative is a rewarding voluntary role. In order to apply you must be a fully paid up member and attached to a Branch within the applicable region. To view the criteria, find out more and to apply, visit: www.cicm.com/about-cicm/vacancies. Closing date 5 August. Please email governance@cicm.com with any questions. Call 01494 790600 for a FREE trial* *Trial valid for UK Ltd report The Recognised Standard / www.cicm.com / July/August 2018 / PAGE 41
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CM July and August 2018

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