The High Court has recently considered a number of questions of contractual construction in the context of guarantees: Barclays Bank plc v Price & Ors  EWHC 2719 (Comm).
Financial institutions should welcome the pragmatic and commercial approach adopted by the court to the question of whether a demand to claim under a guarantee was valid. In the context of an application by the guarantor for strike out/summary judgment, the court found that a minor error in the amount specified in the demand (overstating the maximum amount covered by the guarantee by £500) did not invalidate the demand. The court held that the reasonable recipient could not have been left in any doubt at all that the right reserved was being exercised, bearing in mind that no particular form of demand was stipulated in the guarantee in question.
The court also considered whether the bank was required to send a demand at all in order to claim under the guarantee, given that the guarantee contained a ‘principal debtor’ clause. The court emphasised that this will be a question of contractual construction, which will turn on the wording of the particular guarantee. In the instant case, the court was persuaded that the guarantee required a demand to be served because of the use of the word ‘demand’ twice in the guarantee, notwithstanding the principal debtor clause. Given the importance of guarantees in the security position of lending banks, this decision emphasises the need when drafting such instruments to determine at the outset how and when liability is intended to arise, and then to ensure that the drafting achieves this intention.
In 2012, Barclays Bank plc (the “Bank“) provided the law firm Jeffrey Green Russell Limited (“JGR“) with an overdraft facility and term loan. The relevant facility agreements provided for various forms of security to be provided by the directors of JGR, including “A guarantee from Philip Graham Cohen on the Bank’s standard form limited to £55,500.”
Mr Cohen duly executed a guarantee (by way of deed) in favour of the Bank (the “Guarantee“). The relevant part of the Guarantee stated that the maximum sum payable by Mr Cohen was £55,000. Clause 6 of the Guarantee provided that he was liable to the Bank as principal debtor for any liabilities covered by the Guarantee that could not be recovered from him as guarantor.
JGR subsequently went into liquidation, and the Bank sought to enforce its rights under guarantees provided to it by the directors of JGR, including Mr Cohen.
In October 2015, the Bank sent a demand to Mr Cohen, demanding payment of his liability under the Guarantee. The demand listed the “principal sum due” as being £55,500 (£500 more than the maximum specified in the relevant part of the Guarantee).
Correspondence ensued between the Bank and Mr Cohen, including attempted service of a second demand by the Bank. This culminated in Mr Cohen issuing an application seeking strike-out of the claim and/or summary judgment.
The court dismissed the application. In reaching this conclusion, it considered two principal questions:
- Was the Bank required to issue a demand in order to claim under the Guarantee or could it rely on the principal debtor clause (clause 6 of the Guarantee)?
- If the Bank was required to issue a demand under the Guarantee, was the demand invalid by reason of having demanded an excessive amount?
There was a further issue as to whether a second demand sent by the bank (for the sum of £55,000) was valid in circumstances where Mr Cohen alleged that the covering Letter Before Action contained an error in his address. However, the court held that this was a question for trial and so it is not considered further in this e-bulletin.
The Bank’s position was that it did not need to make a demand at all, because clause 6 of the Guarantee contained a principal debtor obligation.
The court referred to authorities that establish that principal debtor clauses have the effect of creating a primary liability, which is not contingent on demand, even where the words “repayable on demand” have been used in the instrument in the context of the surety’s liability (M.S. Fashions Ltd & Ors v BCCI (In Liquidation) & Ors  Ch 425). However, the court emphasised that the question is one of contractual construction.
The court held that on its true construction, the Guarantee required a demand to be served on Mr Cohen before an obligation to pay would arise. In particular, the court noted that a ‘demand’ was referred to twice within the wording of the Guarantee.
An error in the demand
Mr Cohen contended that the demand was invalid because it sought payment of £55,500 against a maximum specified liability under the Guarantee of £55,000.
In considering the validity of the demand, the court accepted that the applicable test was the one laid down by the House of Lords in Mannai Investment Co. Ltd v Eagle Star Life Assurance Co Ltd  AC 749. That case considered whether notices to determine leases were effective, but suggested that notices under break clauses in leases were not a unique category and belonged to the general class of unilateral notices served under contractual rights reserved. Mannai confirmed that even if such notices contain errors, they may be valid if they are “sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate“.
The court stated that the Mannai test should be approached objectively, i.e. as by a reasonable recipient of the demand. It held that each guarantee must be looked at on its own terms and in its proper context; and that the factors which may be relevant in any given case will include what liabilities were guaranteed.
The court had no doubt that the demand was not invalid by reason of demanding £500 more than the maximum specified amount. It found that the reasonable recipient could not have been left in any doubt at all that the right reserved was being exercised, bearing in mind that no particular form of demand was stipulated in the Guarantee. Given that all the relevant facts and matters were before the court on this issue (and with the agreement of both sides), the court decided this point finally on the application.
Accordingly, the court dismissed the application for strike-out/summary judgment.