1.What is the contract of guarantee?

The practical significance of the contract lies in the following: a person (the guarantor) guarantees that the debtor will fulfill his obligation to the creditor. For this reason, they agree with the creditor that in case the debtor fails to meet his obligation, then the creditor will have the right to turn directly to the guarantor and demand the debt from them. Therefore, if a contract of guarantee is concluded, the creditor now has 2 claims:

• A claim against the debtor from the basic legal relationship between them (sale, lease, etc.).
• A claim against the guarantor in case the debtor does not satisfy the creditor.

2.How is this contract drafted?

For a contract of guarantee to be valid and to produce its effects in law:

• It must be made by private/contractual document.
• It is not necessary for the debtor to know that the guarantor is contributing on their behalf for the debt owed to the creditor.
• Nor is it necessary for the creditor to know the existence of the guarantor (though usually they would).
• Guarantee can be given for any debt (even one that will arise in the future/non-monetary).
• If the guarantee is given without a document and yet the guarantor fulfills the debt to the creditor, then the invalidity is cured = there is no problem with the contract.

3.What is the role of the guarantor?

In the law of guarantee, there is the following rule: The guarantor is liable exactly as the principal debtor = they are obliged to pay the creditor exactly the same amount of principal, interest, and expenses of the claim as the principal debtor. The only exception to the above rule is that the guarantor may agree with the creditor on a lighter liability (of the guarantor) = on more favourable terms, and in no case on more burdensome terms.

If the debtor pays the debt to the creditor, the rule is also that the guarantor is released, and therefore the creditor cannot turn against them. Furthermore, if the debtor pays the debt to the creditor before a contract of guarantee is concluded (e.g., because they were unaware that someone guaranteed on their behalf), then the contract of guarantee concluded later will be void, as it would essentially have no reason for existence.

Finally, for the guarantor to be liable for ancillary debts of the debtor to the creditor (e.g., if they had agreed on some penalty clause and it became due = demanded by the creditor), the guarantor must have known in advance the ancillary debts of the debtor and explicitly guaranteed them when signing the contract.

4.Does the guarantor have objections?

In order for the guarantor to defend against the creditor when the latter turns against them demanding the debt of the principal debtor, they have the following options:

• To propose the objections of the principal debtor against the creditor, as long as they are not personal.
• It is without consequences if the debtor themselves waived their objections.
• To propose the objections that the guarantor themselves has against the creditor and arise from the contract of guarantee.
• To propose objections that the guarantor has against the creditor and are personal.
• No objection from the guarantor-debtor relationship can be proposed against the creditor.

A significant objection of the guarantor against the creditor is the ”objection of exhaustion”, according to which the creditor must first attempt an enforcement proceeding on the debtor’s property, and the forced execution must have no result for the creditor = no sufficient assets of the debtor are found to cover the debt to the creditor. Especially if the creditor has a lien on some movable property of the debtor, for example, a car, then they must attempt forced execution on it as movable property before turning against the guarantor.

5.And in practice?What happens with the general terms of banks?

It is common practice in almost all banking contracts for the terms to be pre-formulated based on which:

• The guarantor waives in advance objections under articles 852, 853, 855, 856, 862, 863 of Civil Code = all objections mentioned above.
• Therefore, the guarantor is now liable as if they were the principal debtor, as they have almost no objections to oppose against the creditor.
• So the creditor can turn against whichever of the two they prefer, and in any order, of course.
• In case the creditor turns against one (e.g., the guarantor) and they do not fully satisfy them, then for the remainder, the creditor can turn against the other.
• It is not excluded for the bank to also request tangible security from the guarantor (e.g., to register a mortgage note on their property), so in this case, the guarantor will be in a quite ‘difficult’ position.

6.And if the guarantor pays the debtor’s debt?

A fundamental consequence in the law of guarantee is that, if the guarantor satisfies the creditor, they will have the right of recourse against the principal debtor. Essentially, they will acquire the same rights that the creditor had against the principal debtor for the collection of the claim before it was satisfied by the guarantor. However, it is crucial to consider the internal relationship between the guarantor and the principal debtor = the consideration that the guarantor may have received to guarantee the debtor. Because from this internal relationship, we will see if the guarantor is entitled to recourse against the principal debtor (for example, if the mandate contract explicitly provides for the right of recourse, but not other contracts).

However, what matters is that the guarantor loses the right of recourse against the principal debtor if, when the creditor demanded payment from them (the guarantor), the guarantor failed to assert valid objections that the principal debtor would have had against the creditor = possibly reducing the debt/delaying its fulfillment, essentially resulting in a loss of benefit.

Finally, it may seem obvious, but it is not, if the guarantor satisfies the creditor, they may receive from them the tangible securities that the creditor had until then against the debtor (for example, to request if, for example, there is a mortgage registered on the debtor’s property in favor of the debtor, after the satisfaction of the creditor by the guarantor, the relevant entry in the mortgage books or the Land Registry to be changed).

7.Differentiating between a guarantee and a letter of guarantee

Many often confuse them, however, the distinction is significant. The characteristics of a letter of guarantee are as follows:

• Usually provided by a bank upon the client’s request.
• Once the counterparty of the client notifies the bank that the condition set as a term has occurred, the letter of guarantee lapses.
• Therefore, the bank is immediately obligated to pay the amount specified to the client’s counterparty.
• This avoids lengthy legal battles.
• In return, the bank usually freezes some of the client’s deposit accounts.
• If the letter of guarantee is specified as ‘on first demand,’ then as soon as the client’s counterparty notifies the bank, the bank immediately pays the amount.
• With the difference that it does not even check if the condition has occurred/if the claim is valid, etc.

8.When does the guarantee contract ‘expire’?

There are both general and specific reasons for the termination of the guarantee contract. Here, we will mainly focus on the specific reasons, which are:

• If the creditor was unable to satisfy their claim against the principal debtor, the guarantor is released.
• If the creditor waived tangible securities (collaterals, mortgages) they held on the debtor’s property, resulting in harm to the guarantor.
• If the main debt is extinguished in any way (e.g., if the debtor pays the creditor, if the two parties agree to debt forgiveness).
• If the guarantor guaranteed for a specified period, once one month has passed after the expiration of this period and the creditor fails to satisfy their claim against the debtor, the guarantor is released.
• If the guarantor guaranteed for an indefinite period, the same applies as above.

9.How many guarantors are allowed to guarantee?

In practice, there are instances of joint surety = multiple guarantors providing their guarantee for one debtor. Usually, to grant a loan/credit to the debtor, the bank would seek greater security, as one guarantor may not be sufficient. In principle, there is no limited number of guarantors for a certain debtor (provided, of course, there is no abuse), and each guarantor does not need to be aware that there are other guarantors who guaranteed for the debtor along with them.

Regarding the liability of guarantors, the rule is that they are jointly liable among themselves = the creditor can demand the entire amount from any of them, in whatever order they choose. However, agreements are allowed whereby each guarantor limits their liability for a portion of the claim.

For example, if A received a loan of 100,000 euros from the bank and B, C, D guaranteed for them, it is possible to stipulate that B will be liable for 30,000 euros, C also up to 30,000 euros, and D up to 40,000 euros, so that the guarantors do not assume excessive financial risks.

10.Does the condemnation of debtors apply to the guarantor?

There are quite a few judicial decisions that address the application of provisions for the condemnation of debtors to the guarantor, not just the principal debtor, which is the norm. They stipulate that if the guarantor provided tangible security to the bank = typically registered a mortgage on the debtor’s property, and before the debt became due, transferred the property to a third party to avoid foreclosure, then the bank is entitled to sue for breach (as well) against the guarantor.

The issue is particularly interesting, especially in cases where the debtor transfers the provision to the guarantor before the debt becomes due, to avoid fulfillment, and thus there was a legislative gap regarding whether the guarantor is subject to the condemnation provisions. Following recent jurisprudence, the issue has been resolved in a (correct) direction, as it no longer provides grounds for abuses and collusion between the debtor and the guarantor.

 

The above does not constitute legal advice, and no liability is assumed for it. For more information, please contact us.