Hard negotiation or economic duress? High Court gives guidance

Sydney Mitchell LLP

Businesspeople who personally guarantee corporate debts may feel they are under such extreme pressure to do so that they have no choice. As a High Court ruling showed, however, only in very rare cases will judges find that such pressure crosses the line between the ordinary rough and tumble of commercial negotiation and illegitimate economic duress.

The case concerned a director who personally guaranteed his company's past and future debts to a supplier. After the company went into administration, the supplier launched proceedings to enforce the guarantee. However, the director asserted, amongst other things, that the guarantee was invalid in that his signature on the document had been obtained by economic duress.

He contended that two of the supplier's senior employees had threatened him that, unless he entered into the guarantee, the supplier would cease trading with the company and take immediate steps to enforce its liabilities. The Court, however, found on the evidence that no such threats were uttered.

Although the director no doubt felt that he had no choice but to sign the document, what occurred was an ordinary process of commercial negotiation. The supplier had, through its employees, made no demands against the director that could be described as reprehensible or unconscionable. The demand for a personal guarantee was justified in the supplier's commercial self-interest. The director's other defences to the claim were also rejected and, pursuant to the guarantee, he was ordered to pay the supplier over £1.5 million.

Anyone contemplating giving a personal guarantee should understand the risks involved and consider taking advice. It may be that there are alternatives and, even if not, it is possible that some of the terms of the guarantee can be negotiated to improve the guarantor’s position.

Our commercial lawyers have significant expertise and experience in advising on a wide range of contractual matters and arrangements. Please contact us to find out how we may be able to help you – call Julian Milan j.milan@sydneymitchell.co.uk on 08081668860.

If you are being pursued by a creditor, based on a personal guarantee, then please speak to Leanne Schneider-Rose l.schneider-rose@sydneymitchell.co.uk 0121 698 2200 / 080816668827.