Personal Guarantees in Construction

Enforceability and other potential legal grounds examined.

Signing a personal guarantee as a company director is often necessary when securing financing or if you need to enlist a new build warranty provider for a property development. However in doing it exposes you to significant personal financial risk. If your company faces financial difficulties, you might find yourself personally liable for a debt. Although personal guarantees are not always called upon, should a lender or warranty provider do so then the consequences of that can potentially be significant. The purpose of this article is to outline potential strategies and legal grounds when looking to escape liability under a personal guarantee.

1. Review the signing process: were correct procedures followed?

One of the first steps in disputing a personal guarantee is to look at the signing process. Errors in how the document was executed could provide a basis for challenging its validity.

  • Check for proper execution: Was the guarantee signed in the presence of witnesses? Were all required signatures, including those of any co-signers, correctly obtained? If the document was improperly executed, it might not be enforceable.

2. Examine the circumstances: were you pressured into signing?

The context in which you executed the guarantee may be crucial. If you were pressured into signing, you might have grounds to dispute it. Undue influence is based on a relationship that has been exploited, whereas duress is based on a threat.

  • Undue influence or duress: Reflect on whether you were pressured to sign without fully understanding the consequences. Duress or undue influence can be significant factors in disputing the agreement.

3. Look at the details: were all risks and terms disclosed?

For a guarantee to be enforceable, you must have been fully informed about all relevant risks and conditions.

  • Non-disclosure of risks: Consider whether the lender or warranty provider failed to disclose any significant risks that would have influenced your decision to sign. If you were kept in the dark about key details, this could present potential grounds for challenging the guarantee.
  • Hidden terms: Were there any terms in the guarantee that were not clearly explained, or you did not see the fine print? If these terms significantly increase your liability, they might not be enforceable.
  • Misrepresentation: Were you provided accurate information about the loan or warranty terms? If you were misled by false statements or incomplete disclosures, this could void the guarantee.

4. Assess if there were changes to the underlying agreement: Did the terms change after it was signed?

If the terms of the underlying loan or contract were altered after you signed the guarantee, without your consent, the guarantee might no longer be valid.

  • Unauthorised changes: Review any changes made to the loan or contract after you signed the guarantee. If these changes were made without your knowledge or approval, it may be that the guarantee is no longer enforceable.
  • Implied release: If the lender or warranty provider has taken actions that suggest you are no longer liable, this could remove you from the guarantee.

5. Consider errors: are there errors in the document capable of being disputed?

Legal technicalities, while sometimes overlooked, can sometimes be useful when disputing a personal guarantee.

  • Statute of limitations: Determine whether action has not being taken within the relevant legal time frame to enforce the guarantee. If there has been a significant delay, you might be released from your contractual liabilities.
  • Documentation errors: Look for any clerical errors, such as incorrect names, loan amounts, or dates, that could render the guarantee invalid. This may however, be overcome if there is an interpretation clause.

6. Examine the primary liability: does responsibility now fall to you?

A guarantee imposes a secondary liability on a guarantor to carry out an obligation. This means that legally there will another person or company who is primarily liable for the same obligation.

  • Relevant history: Consider what the person with the primary liability has done (or not done) to fulfil their obligations. It is not always clear who is responsible for a particular task, job or remedial work. It is worth checking what has  happened with the party with the primary liability, and whether the secondary liability under a guarantee has been triggered.

7. Can you settle the dispute without going to court?

Ensure you speak to a solicitor to explore if possible settlement could be an option.

  • Settlement: If appropriate, consider proposing an offer to pay a settlement sum so as to try and avoid potential lengthy and costly legal proceedings. This might involve a single lump sum payment or a structured payment plan.
  • Debt restructuring: Early discussions to restructure the debt under potential new terms could be appropriate. This may involve extending the repayment period or applying a varied rate of interest.

Conclusion: Be proactive and seek legal advice

Escaping potential liability on a director’s personal guarantee requires a proactive approach. By carefully analysing the circumstances, identifying potential legal grounds, entering possible negotiations and seeking legal advice early on, you can take steps to manage your personal financial risk.

At Herrington Carmichael LLP, our construction team advises project clients, main and sub-contractors, on both personal guarantees and indemnities. Prevention is always better than a cure, so it is worth having a personal guarantee reviewed before it is executed. Please contact us to speak to a member of our Construction Team.

Credit: Morgan Cook

Jake Gatley
Senior Solicitor, Dispute Resolution
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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