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May 1, 2008

Casebook: Conversion

By Verdict Staff

Guarantees – business or consumer?

Business loans guaranteed by individuals involved in the management of the business are not caught by the Unfair Terms in Consumer Contracts Regulations (UTCCR). Such guarantors are unlikely to be able to prove that the terms of such a guarantee are unreasonable and so unenforceable.

Greg StandingIn Barclays Bank Plc v Kufner, the defendant guaranteed a business loan by Barclays to his company. Following default by the company, the bank sought to enforce its guarantee. The defendant argued that a clause in the loan agreement that precluded any form of set-off or cross claim against the sums due under the loan agreement was unenforceable as it was unreasonable under the Unfair Contract Terms Act 1977 (UCTA). He also argued that a term in the guarantee which permitted a release of the principal mortgage without procuring a replacement was unfair under UTCCR, regulation 8 of which provides that “an unfair term in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer”.

In relation to the set-off clause, considering the requirements under UCTA, the court held that, given the defendant was an experienced, wealthy business man, there was no disparity in the bargaining positions of the parties and he was aware of the existence and extent of the term. The court considered the set-off clause to be fair and reasonable as it simply required the principal borrower to pay sums due under the loan agreement without set off. It did not seek to bar the borrower from making a claim against the bank but protected the bank’s commercial interest in receiving payment under the loan agreement when it was due rather than being kept waiting while a cross claim was litigated. 

Further, it was held that UTCCR does apply to a guarantee where both the guarantor and the principal debtor each enter into their respective contracts as “natural persons”, i.e. consumers, and are not acting in the course of their trade or profession. Here, the defendant, a wealthy business man, entered into the guarantee for the purposes of his business. He was the sole beneficial owner of the company whose loan he was guaranteeing and had sought legal advice throughout. UTCCR were not intended to protect such individuals with substantial bargaining power and who enter into contracts on behalf of their businesses at the cost of several million Euros.

The bank was entitled to enforce its guarantee.


An individual guaranteeing a loan or finance agreement to his company will not fall into the consumer category and the test of “unfairness” in UTCCR will not apply.  However, the contract may well still be caught by UCTA where the parties’ relative bargaining strengths and knowledge will be highly relevant.

Greg Standing, a partner in Wragge & Co LLP’s Finance, Insolvency, Recoveries and Sales team

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