Excessive demands under a guarantee – are they still valid?

Facts

Barclays Bank PLC (Barclays) provided an overdraft facility and a term loan facility to law firm Jeffrey Green Russell Limited (JGR). The defendants (including a director of JGR, Mr Cohen) executed guarantees in favour of Barclays in August 2012. Mr Cohen's guarantee (the Guarantee) provided that, amongst other things:

• Mr Cohen would "unconditionally guarantee that [any money and liabilities which JGR now owes or may owe in the future in any way] (the Customer Liabilities) will be paid or be satisfied". Mr Cohen would immediately pay the amount guaranteed when Barclays made demand.
• The total amount that Mr Cohen had to pay under the Guarantee would not be more than the "Specified Amount", plus interest and certain other amounts. The "Specified Amount" was an amount equal to the Customer Liabilities in respect of the aggregate of:
• one ninth of the balance outstanding on the term loan
• a maximum of £55,000 of the balance outstanding on the overdraft facility, or any other account which may be substituted for it.
• Mr Cohen was liable to Barclays as principal debtor for any Customer Liabilities that could not be recovered from him as guarantor.

The term loan had been repaid and the overdraft facility was refinanced in March 2013.The new facility agreement put in place in 2013 expressly referred to the existing Guarantee from Mr Cohen for £55,500.

JGR went into liquidation whilst still owing sums to Barclays. Barclays sent a demand to Mr Cohen in October 2015 demanding immediate payment (the First Demand). The amount demanded was in fact £500 more than the maximum Specified Amount in the Guarantee. Further to correspondence with Mr Cohen, Barclays followed up by letter with Mr Cohen to confirm that he was required to make payment of the lower sum of £55,000.

Barclays sent a further demand in March 2016 demanding the sum of £55,000; the demand was sent under the cover of a Letter Before Action which had an error in Mr Cohen's address (the Second Demand). Mr Cohen stated that he had not received the letter.

The High Court considered three issues in Barclays' application:

• Was Barclays required to issue a demand in order to claim under the Guarantee?
• Was the First Demand invalid by reason of having demanded an excessive amount?
• Was Barclays able to rely on the Second Demand even though it was sent under cover of the Letter Before Action?

Judgment

Was Barclays required to issue a demand in order to claim under the Guarantee?

The High Court referred to case law which confirm that the "principal debtor" clauses create a primary liability which is not contingent on a demand, notwithstanding that the words "repayable on demand" may be used in the guarantee document[1]. However, Daniel Toledano Q.C. reasserted that, as in the previous authorities, the question as to whether an actual demand is required is dependent on the construction of the particular contract.

Based on the specific agreements in this context, Daniel Toledano QC resolved that on its true construction, the Guarantee required a demand to be served before an obligation to pay arose; he did not see any material distinction between the way in which a demand was dealt with in the principal obligor clause and the clause in the Guarantee.

Was the First Demand invalid by reason of having demanded an excessive amount?

Toledano QC revisited the Mannai test from the House of Lords decision in Mannai Investment Co. Ltd v Eagle Star Life Assurance Co Ltd[2] in which Lord Steyn stated that, even if notices (in that case relating to the determination of leases) contained 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".

In addition a body of case law was cited which suggested that a request for more than was due under a guarantee should not invalidate the demand. In this case, Toledano QC concluded that a reasonable recipient would not have been left in any doubt that the right reserved was being exercised, particularly noting that:

• No form of demand was stipulated in the Guarantee.
• The demand referred expressly to the dated Guarantee document.
• The reasonable recipient would have known that the terms of the Guarantee included an express "Specified Amount".

Was Barclays able to rely on the Second Demand even though it was sent under cover of the Letter Before Action?

The third issue was held to raise a triable issue of fact and therefore was not struck out nor dealt with in any detail in the summary judgment.

Comment

This summary judgment is a useful confirmation and reminder of the Mannai test and existing case law on guarantee demands. It is favourable to creditors seeking to claim under existing guarantees whilst also serving as a warning to guarantors who may want to challenge a demand.

As in all cases, each guarantee will be considered on a case by case basis and the courts will have particular regard to what the "man on the Clapham omnibus" would think on receipt of such a demand.

Barclays Bank PLC v Price et al [2018] EWHC 2719

[1] M.S. Fashions Ltd and Ors v BCCI (In Liquidation) and Ors [1993] Ch 425; TS&S Global Limited v John Fithian-Franks and Ors [2007] EWHC 1401 (Ch).

[2] [1997] AC 749