Partners’ and directors’ bank guarantees are usually
joint and several. This means that any partner or direc-
tor is obliged to pay the whole debt and may then sue his
co-partners or co-directors for a contribution. The
nature of this liability is explained in Chapter 5 and the
formalities necessary for a guarantee in Chapter 7.
Guarantees can be open, that is to cover whatever
figure a loan or overdraft may reach, or be limited to a
fixed amount.
Independent advice
A special problem has arisen in business law in rela-
tion to the giving of guarantees and other securities,
e.g. charges over land, by third parties to support the
business borrowing of another. The major examples
relate to the giving of guarantees and other securities
by a spouse or elderly parent to a bank to support
the business borrowing of the other spouse or a son or
daughter.
After much case law, often of an involved and less
than definitive nature, those in business have now
mainly to know the ruling of the House of Lords in
Royal Bank of Scotlandv Etridge (No 2)(2001). This
ruling of the House of Lords simplifies, at least for busi-
ness lenders, such as banks, the law in relation to undue
influence which is the contractual concept at the root of
the lender’s problems in these situations. The changes
made by Etridgeplace significant burdens upon solic-
itors advising those entering into a security arrange-
ment for the borrowing of another. These obligations
are not of any real concern to the business person since,
if the lawyer does not give the kind of independent
advice required of him or her by Etridge, it is the lawyer
who will be sued in negligence and/or breach of con-
tract. The security will be enforceable and this is really
the only concern of the lender.
Little needs to be said about the facts of Etridge except
that a wife in that case had charged her joint interest
in the family home in favour of the bank as security for
the debts of her husband and his business. She later
wished to avoid the contract of charge and issues of
undue influence and lack of proper advice were raised.
The House of Lords dismissed Mrs Etridge’s case finding
on the facts that she had not established grounds to
avoid the security. However, the House of Lords went
on to lay down definitive guidelines for lenders and legal
advisers. So far as business lenders are concerned the posi-
tion is as follows:
■A transaction under which a wife guarantees her hus-
band’s debts does not call for an explanation of itself
but it is clear that the lender is put on notice that
undue influence is a possibility whenever a wife (or
husband) offers to guarantee the other spouse’s debts
and/or those of his or her company. This applies
whether the couple are married, or, being homo-
sexual, have registered a civil partnership under the
Civil Partnership Act 2004, or are just living together
in a heterosexual or homosexual relationship.
■However, the lender need go no further than taking
reasonable steps to satisfy itself that the wife or other
third party has brought home to her or him in a
meaningful way the practical implications of the pro-
posed transaction, e.g. in the case of a joint interest
in the family home, that the home will be sold if the
debt is not repaid and the joint interest will be lost.
■To achieve the above, the lender will ensure that the
wife has independent legal advice and will provide
that adviser with all the financial information needed
to give appropriate advice. The wife should be con-
tacted directly and the lender should ensure that it has
the husband’s authority to give the necessary informa-
tion. If not the transaction should not proceed.
■From then on, if the transaction does proceed and
all permissions are given, the business lender can
assume that the legal adviser has carried out his or
her function as laid down in the Etridgecase. The
lender will have an enforceable transaction against
the wife.
■Where the legal adviser has failed in his or her duties
in terms of giving proper advice, the wife may make a
claim against the adviser.Part 2Business organisations
82
Signed and delivered as a deed by the said
Joseph Jones in my presence after the contents
of this guarantee had been fully explained by me
to him.SignedSolicitorFigure 4.2An appropriate form of words for a
guarantee