PP 2013/133

The signatures of all the intended guarantors may be essential to the validity of a composite guarantee prepared for signature by several sureties   The courts long ago acknowledged that guarantors are often “the object of some favour both at law and in equity” (Re Sherry (1884) 25 Ch D 692).  As a result, there are numerous traps for the recipients of guarantees. Harvey v Dunbar Assets plc [2013] EWCA Civ 952; [2013] PLSCS 188 reminds us of an important principle, which is all too easy to overlook. Where a guarantor agrees to give a guarantee on condition that other named persons also sign the guarantee as co-sureties, the guarantor will not be liable if any of those persons do not sign, or if any of their signatures are forged. This is because sureties are entitled to a contribution from every co–surety, and to the benefit of every security held by the creditor, in respect of the debt guaranteed. Therefore, if sureties are to be deprived of that right, the guarantee must say so. The guarantor entered into a joint and several guarantee with three others to enable a company to finance a development. The development was unsuccessful and the lender called upon the guarantee. The guarantor claimed that the guarantee was unenforceable because one of the signatures that appeared on the document was, in fact, a forgery. The issue of whether the signature was genuine or not had not been determined when the case was heard. However, the Court of Appeal ruled that the guarantor would not be liable under the guarantee if it transpired that the signature was forged. The lender tried to persuade the court that the guarantee did not contain any provision that expressly provided for the liability of each guarantor to be dependent upon the other named guarantors being liable under the guarantee – and invited the court to construe the guarantee as a whole. It relied, in particular, on a provision in the guarantee to the effect that the obligations of the guarantor would not be 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”. Nonetheless, the Court of Appeal upheld the guarantor’s claim. It accepted that English law does not recognise any wider relief in equity based upon a mere expectation on the part of a guarantor that a further guarantee will be executed by a third person. It noted that the position may be different where separate documents are prepared for signature by separate individuals – but this was a composite guarantee. This suggested that the parties had intended all the sureties named in the document to sign it and that the signatures of all the sureties were necessary for its validity. The provision that the lender was relying on to preserve the guarantee prevented subsisting obligations from being affected by future events. It did not state that signatories would become liable even if any of the other intended guarantors failed to sign the document and so did not address the initial validity of the guarantee. The decision highlights the importance of including provisions in a composite guarantee stating that each guarantor will be 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.  Allyson Colby, property law consultant