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.
In
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.
Comment
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
