Thu 05 Sep 2019

Guarantees: some key pointers

I came across the English High Court case of Martin v McLaren Construction Ltd last week which involved questions around the validity of a statutory demand having been made under guarantee.  

The case is an English High Court case so does not carry the same weight as one from an appellate court.  It also did not involve a bank guarantee.  However, it is worthy of consideration all the same for lawyers and anyone dealing with guarantees in Scotland given that it acts as a welcome reminder of some key drafting and enforcement principles.

In this case Barber J decided to set aside a statutory demand made in relation to a guarantee because the creditor had not issued a demand under the guarantee ahead of the statutory demand having been made.  The guarantee was an "on demand" guarantee, obliging the guarantor to make payment under the guarantee immediately following a demand for payment.  The guarantee also contained notice provisions which required that any notice or demand be made in writing and sent by any of (i) hand delivery, (ii) post or (iii) fax.  The creditor argued that failure to follow those requirements did not affect any liability on the guarantor's part given other terms of the guarantee but the court did not agree.

Those involved in drafting or enforcing guarantees should take the case as a reminder that:

  • if a guarantee sets out a process to be followed when serving notices or demands under it, it is vital from the creditor's perspective that such process is followed whenever notice is issued to or demand made on a guarantor.  If particular addresses are specified, those addresses must be used.  If a creditor is aware (but has not been expressly told by the guarantor) that the address of the guarantor specified in the guarantee is no longer correct, it would be prudent to serve notice or demand on the guarantor at the specified address and at the then correct address so as to ensure the process set out in the guarantee has been followed and the guarantor actually receives the relevant notice or demand;
  • a statutory demand can only be served in respect of a debt that is payable immediately - serving a statutory demand before first triggering liability under a guarantee (by service of a demand in accordance with the terms of the relevant guarantee) will not constitute a valid demand under that guarantee.  A demand must first be made under the relevant guarantee;
  • in the case of guarantees which are not expressed to be on demand guarantee and under which the guarantor only becomes liable after a failure by the principal to do something, the creditor must ensure the principal is in breach of the primary obligation and take whatever steps the relevant documentation requires in relation to the principal before taking enforcement action under the guarantee; and
  • from a drafting perspective, if you know at the outset that particular processes and procedures will cause administrative headaches or timing issues from the creditor's perspective, keep the processes which must be followed on an enforcement as simple as possible.

Make an Enquiry

From our offices we serve the whole of Scotland, as well as clients around the world with interests in Scotland. Please complete the form below, and a member of our team will be in touch shortly.

Morton Fraser MacRoberts LLP will use the information you provide to contact you about your inquiry. The information is confidential. For more information on our privacy practices please see our Privacy Notice