Personal guarantees: what do they include?

A personal guarantee is an agreement between a business owner and lender, stating that the individual who signs is responsible for paying back a loan should the business ever be unable to make payments. There are a number of scenarios when a personal guarantee would be used, for example:

• Business loans
• Property mortgages and leases
• Asset leases.

What a personal guarantee includes is determined by the relevant contractual documentation and the surrounding circumstances at the time the contract was made. Essentially this is determined by applying the normal principles of contractual interpretation. Problems can arise where there is ambiguity in the contractual documentation or where the subsequent actions of the lender and borrower have impacted the amount owing under any guarantee.

What does a personal guarantee include?

The first thing any good lawyer will do for you is to check what is included in your personal guarantee. This means checking the scope of the guarantee that has been given to a lender against what is being demanded from the guarantor.

Your business may during its lifetime have taken a number of bank facilities of different types and at different times. If a demand is made by a lender in connection with a particular lending facility, then the wording of the guarantee needs to be checked to ensure that it covers the particular liability for which the demand for payment is based.

For example, a demand for payment may come as a complete surprise to you because your bank is making a demand on a guarantee in relation to a recent overdraft facility. You believed that the guarantee related to a much earlier loan agreement that was repaid by the business some years ago.

Therefore, it is necessary to look at the guarantee and understand its contractual terms.

If the guarantee clearly refers to a particular facility only and that facility has been repaid, then the lender will not be able to make a claim against the guarantor for liabilities arising in connection with other facilities. However, if the wording of the guarantee clearly relates to “all monies” given by the lender to the borrower at any time, the position may be clear enough.

What if the wording in my personal guarantee is unclear?

In the case of Hyundai Shipbuilding & Heavy Industries Co. Ltd. v Pournaras [1978] 2 Lloyd’s Rep 502, the judge said that the guarantee should be construed as a whole against “the factual matrix of the background”. Therefore, your guarantee will need to be considered in the overall context, which will include all relevant circumstances at the time and all other relevant contract documents.

Encouragingly, the courts are not slow in applying business common sense to questions of interpretation. In Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C.191, the judge said that “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”.

Subsequent changes to the loan arrangements and personal guarantees

The extent of the contractual liability can be affected by the behaviour of the parties after a lender grants a facility to a limited company and has taken a guarantee from the company director.

For example, the facility is limited to £50,000 and the guarantee contains a provision that the lender can make any amendment to the loan agreements “without reference to the guarantor”. Subsequent to the date of the original loan and guarantee, the original facility is increased substantially. Will the guarantee now include amounts over and above the original £50,000?

This was considered by the court in the case of Triodos Bank NV v Dobbs [2005] EWCA Civ 630. In that case the judge decided that against the facts of the particular case, the extent of the subsequent borrowing was so far outside the scope of the original facility that in effect it amounted to a new loan and accordingly was not covered by the guarantee. The guarantee was completely discharged, although later cases suggest that the original amount guaranteed is still payable but not the excess over that amount.

There are a number of other types of behaviour that a lender might engage in with the borrower, after a guarantee has been given, that can potentially affect its validity and whether anything is payable by the guarantor. Such behaviour is generally anything that is likely to materially change the guarantor’s risk, such as granting the borrower additional time to pay or releasing co-guarantors. Therefore, any such behaviour will always need to be looked at carefully in conjunction with the wording of the guarantee. Bank guarantees are nearly always drafted against the guarantor in respect of such behaviour but there are many different types of guarantees with a wide variation in drafting and it always pays to check.

Defining what a personal guarantee includes can be complicated and requires careful reading of all relevant documents. A conclusive answer on its interpretation may depend upon all the surrounding circumstances and even the conduct of the parties after the guarantee has been given.

If you require assistance with reviewing what a personal guarantee you have taken includes, get in touch with Patrick Selley using the below details.

If a guarantor finds they are facing a demand on a guarantee, the relevant contractual documents will also need to be analysed to see if it is enforceable. Click here to read more about the options for guarantors.