Harvey v Dunbar Assets highlights the potential adverse consequences for lenders when guarantees are not fully or correctly executed. When a single composite guarantee is not correctly entered into by all parties, the guarantee may itself be unenforce
Harvey and three others entered into a guarantee to enable a company to secure a £3 million loan facility. The guarantee imposed joint and several liability on the co-sureties meaning that if one guarantor were to be sued for the full amount, they would have a claim against their fellow guarantors for a contribution.
One guarantor claimed that his signature was a forgery and he had never actually signed the guarantee. When the bank subsequently tried to enforce the guarantee against another guarantor, Harvey, he claimed that on the assumption that one signature was a forgery none of the sureties were bound.
There were standard provisions within the guarantee which stated that the liability of any guarantor would not be affected by the invalidity or unenforceability of the guarantee against a co-surety. However the Court of Appeal decided that based on the assumption of a forgery, none of the sureties would be bound. This was because without all four signatures the guarantee had never come into force at all.
Based on the true construction of the guarantee, the court ruled that all four guarantors had to sign the document for it to become enforceable. Defining all four intended parties as "the Guarantor" and drafting the guarantee as a single document all indicated that this was the parties' intention. However, the court made it clear that express or implied terms in the guarantee itself could rebut this assumption; they found none in this case.
The bank argued that the standard provisions within the guarantee which aimed to ensure continuing enforceability meant that even if the fourth guarantor did not sign, the other three would remain bound. The Court of Appeal disagreed. The bank also sought to rely on clauses that provided for continuing enforceability of the guarantee even if a guarantor's liability were later found to be invalid. The court stated that these clauses were of no help to the bank since they only took effect once the guarantee had come into force. In this case, without all four valid signatures it had not.
Although this case does not create an absolute rule, it is a clear warning to look very carefully at the drafting and execution of guarantees.
If there is a change of parties standing as guarantor, or an improper execution by one, you may need to get guarantees amended and re-executed by all parties.
It is also worth considering including wording in new guarantees that each signatory shall be bound by the guarantee from the time they sign, even if others named as parties do not execute it.
If you are unsure about the drafting or effectiveness of guarantees, do seek legal advice.
Case: Harvey v Dunbar Assets plc  EWCA Civ 952