Liability of a guarantor in a loan agreement - When can a payment order issued against a guarantor be cancelled?
A large amount of information is currently available on the internet regarding the liability of a loan guarantor with a counterparty credit institution. The issue is topical due to the large number of terminated loan agreements, but also extremely interesting in that it concerns the liability of a third party, usually a relative of the original debtor, who, for gratuitous reasons, in most cases, has placed his property as security for the original debtor's creditors. The credit institutions, on several occasions, did not even check the solvency of the guarantor, or at least did not care whether he was creditworthy or not. As long as his signature was on the contract. In recent years, following the successive terminations of loan agreements and the transition to the stage of legal recourse, guarantors have found themselves in a rather difficult position, especially when they find themselves liable for large sums of money which they themselves had never enjoyed, but which their, usually related, primary debtors had never enjoyed.
In these bail cases, the main question on everyone's mind is how they can be relieved of the debts passed on to them. There are no easy answers here. Each case needs a lot of research to see if it falls within some of the cases in which our jurisprudence has accepted the discharge of the guarantor. By way of illustration, we may mention the following cases:
a) Invalidity of a clause waiving the right to object to a plea in law
A plea in law is, in simple terms, the right of the guarantor to refuse to pay the debt to the creditor until the latter attempts to enforce the debt against the primary debtor and is unsuccessful. Only if enforcement against the first debtor is unsuccessful can the guarantor be required to pay the debt himself. Although this basic right is provided for in the Civil Code (CC 855), it is legally valid to waive it by means of a clause in the guarantee contract. Needless to say, all credit institutions have included such a waiver clause in their contracts. However, the question that arises and is of interest is whether such a waiver is valid under the law of the General Conditions of Transactions (Law 2251/1994). For such a clause to be validly agreed, it must be transparent, i.e. the guarantor must understand what he is signing, and in this particular case understand what the meaning of the phrase "objection to litigation" is. Here opinions differ: according to the Athens Court of Appeal decision 5253/2003, the clause in a mortgage loan contract that provided for the guarantor's waiver of the objection to a claim is not opaque and therefore not abusive, because the guarantor has the possibility of being informed of the meaning of the legal concept of "objection to a claim" by his legal representative (his lawyer). The Athens Court of First Instance has ruled to the contrary in its judgment No 1990/2004. In any event, in recent years banks have included an explanation of this objection in their contracts and the term has therefore become transparent, regardless of whether or not a legal representative is present. The issue remains, however, for those bank contracts that do not contain this explanation.
b) Objection to the release of the guarantor on the basis of the credit institution's misconduct
Irresponsible credit to the primary debtor may lead to a full release of the guarantor under CC 862. Under CC 862, the guarantor is released if the creditor's fault has made it impossible for the primary debtor to satisfy the guarantor. This may occur, inter alia, if the creditor, knowing or at any rate ignoring through slight or gross negligence the deterioration of the financial situation of the primary debtor and the absence of any hope of recovery, neglects for a long period of time to take legal action or to register a charge against the primary debtor, counting on the guarantor, who was negligent at this stage, as the only certain source of satisfaction, thus contributing by further crediting the primary debtor's over-indebtedness (cf. MAPR 199/2009, LAW: 'The creditor's failure or delay in taking appropriate measures against the primary debtor involves the element of fault and the corresponding liability, which is reflected in the relations between the creditor and the guarantor'). In addition, the lender's fault is reinforced by the breach of his obligation to inform the guarantor (arising from Article 288 of the CC 288) of a possible change for the worse in the debtor's personal and financial situation which has come, or ought to have come, to his knowledge through the regular checks he carries out (cf. Markou, The creditor's obligation to inform the guarantor, CJEU 2002/362, pp. 366-367: 'These obligations of the creditor include the obligation to inform the guarantor of events which bring about a change in the personal and financial situation of the debtor and which worsen the guarantor's position. [...] In particular, it is an obligation to provide the guarantor with information, in particular in the form of notification and communication to the guarantor of information (unknown to the guarantor) concerning facts which come into his possession relating to the situation of the principal debt, the personal situation or the debtor's assets, in so far as they affect his ability to meet the debt in concreto or the occurrence of which would make the guarantor's position worse'). If the guarantor has not been informed in good time by the creditor of unfavourable facts of which he is unaware and which come to the creditor's knowledge through periodic checks, he automatically loses the possibility of taking security measures to protect himself. This is particularly the case where the guarantor does not have a de facto interest or a legal relationship with the debtor's business and therefore cannot have any knowledge of the facts.
At the same time, the specific nature of the cause of the guarantee, which confirms its ancillary and subsidiary nature in relation to the principal debt, also supports the specific application of CC 862. As early as the last century, a prominent figure in the law of obligations in Greece (Litzeropoulos) wrote: "... the creditor must therefore spare as much as possible of the interests of the guarantor".
In view of all the above, it is clear that the creditor must look after the reasonable interests of the guarantor. The guarantor is always a third party and cannot be treated as the principal debtor. Above all, the creditor cannot rest on his laurels because he has secured the guarantee of a third, creditworthy person and then be indifferent to the fate of his principal claim against the debtor. The guarantor does not give a blank cheque to the other two parties to do as they please and, if something goes wrong, to bear the financial burden alone. Imposing the risk on the creditor himself, who is indifferent to his own interests, is a fundamental requirement of the legal order and cannot be excluded from private will.
c) Invalidity of the guarantee agreement on the ground that it is unfair on the grounds of unfairness (CC 178)
"Guarantees provided under banking contracts by relatives of the principal debtor, motivated by kinship and sentimental reasons, who undertake particularly harsh obligations towards the banks, not corresponding to their weak financial situation, without even deriving any financial benefit of their own, while the banks do not adequately inform them of the seriousness of the obligations they undertake, suffer nullity under CC 178 and 288, because the content of such contracts makes manifest a disorderly".
The principle of responsible lending has already existed among legal authorities in our country for decades. As early as the 1950s, its legislative example can be traced in Law no. 3838/1958, where the legislator, in order to deal with the risk of over-indebtedness from the sale of goods on instalments, authorised the Monetary Commission to determine by its decisions a minimum amount of the price to be paid in cash, a maximum period of repayment and various other restrictions. Sale by instalment in breach of the above provisions had the effect of stripping the seller of any claim. The nullity of the contract was contested since the law did not expressly provide for it. However, despite the absence of such a provision, it was argued that invalidity could be inferred from the provision of Article 174 of the CC.
According to Article 8 of Decree 699/2010, which transposed Directive 2008/48/EC on consumer credit in Greece, the obligation of the creditor to check the creditworthiness and solvency of the borrower before granting credit is expressly established. Furthermore, although not expressly provided for, a teleological interpretation of that provision leads to the view being adopted that the creditor is obliged not to grant credit if he knows or can reasonably be expected to know that the borrower is unable to repay the credit. That obligation is a genuine obligation on the part of the bank, which can be inferred from the purpose of that provision, which is to prevent the borrower from becoming over-indebted, and from its very wording, implicitly but clearly imposed as such (genuine) by the purpose of other provisions relating to the supervision of financial institutions and, in any event, bearing in mind that the creditor, by virtue of its organisation, is in a position to prevent the unacceptable - individually and socially - phenomenon of over-indebtedness.
Based on all of the above, claims have been raised before Greek courts regarding the invalidity of the guarantee agreement due to the existence of specific conditions that make the commitment to the credit institution immoral and abusive. A well-known example, for example, in Greek jurisprudence is the actual case of the decision of the Athens Court of First Instance No. 7241/1999 (Legal Step 2000/1146), where a natural person of 19 years of age guaranteed a loan of 63,000,000 drs. The court ruled that "...the exploitation by the bank of the guarantor's inexperience in order to impose the one-sided satisfaction of its interests by the assumption by the bank (guarantor) of excessive obligations in favour of its relatives, without the latter enjoying corresponding benefits from these commitments, when this is known to the bank, constitutes conduct contrary to good morals" (cf. See also PPR 44277/2007 and PPR 18503/2009, Isokratis SNP).
In general, it can be argued that there could be a conflict of good morals in the case of a large disproportion between the extent of liability and the financial means of the guarantor (e.g. the child or spouse of the primary debtor), which makes the guarantee financially pointless, if it is combined with other special facts or circumstances, such as e.g. e.g. the guarantor being influenced by an employee of the credit institution, who downgraded the scope and risk of the guarantee, or the exploitation of a state of mental distress of the guarantor and/or the primary debtor (see Apostolos Georgiadis, The Securing of Credit, 2008, p. 39).
The same conclusion that a guarantee contract is void for breach of morality can be reached if there is certainty from the outset as to the insolvency of the primary debtor and therefore the guarantor is not only taking a risk but is certain to be called upon to cover the debt of the primary debtor. 'The conclusion of a guarantee agreement for a purpose other than the assumption of risk, as in the case where there is no risk but certainty from the outset - already at the stage of granting the credit and consequently of concluding the guarantee agreement - as to the insolvency of the primary debtor, is clearly contrary to good morals, at least to the extent that the guarantor consented in ignorance of the factual situation of which the lending bank was aware and, despite the obvious error of the guarantor, avoided clarifying to the latter, as he was obliged to do under CC 197' (Kornilakis, Elldni 2013/1577).
d) Objection of invalidity of a guarantee contract due to an error between declaration and intention
An error relating to a person's qualities is considered material if, in good faith and in accordance with commercial morals, those qualities are so important for the entire transaction that if the person knew the actual situation he would not have attempted the transaction (see CC 142). A person's quality is also an element of his solvency. Therefore, if the guarantor of the legal guarantee relied on the creditworthiness of the original debtor, which was assumed to him due to false representations made by the original debtor, without the creditor informing him of the truth of the matter, even though he was obliged to do so, and if he would not have attempted the transaction if he had discovered the insolvency of the original debtor, the transaction is voidable. Although the error concerns the productive causes of the intention, it is so essential that the CC has accepted its effect on the validity of the legal transaction. Indeed, it is not within the pale of reason for a relative or friend to guarantee a primary debtor who is knowingly insolvent and will never repay the debt. There is no benefit to the guarantor in this case and no intention of the guarantor actually losing his personal property which is bound to suffer a reduction equivalent to the guarantee. In such cases we may accept that it is a voidable bail and consequently the court may be asked to cancel it.
Also typical is the case dealt with in Supreme Court case No. 1096/2006, where the guarantor considered that he was only pledging (placing as collateral) a specific property on which a mortgage lien would be registered and not his entire personal property. Although the guarantor is liable with all his personal property, in this particular case the court held that there was a material error as the guarantor signed a document thinking that it had a certain content, when in fact it had a different content, and accepted the limitation of liability only to the specific property which had been mortgaged (see also no. 104/2012 of the Corinthian Court of First Instance). A crucial condition for the confirmation of a material mistake is that it must be mentioned in a point of such importance for the whole contract that if the guarantor had known the true state of affairs he would never have signed the guarantee contract. In other words, in this case, the guarantor would never have wanted to put at risk (pledge) his entire personal property, but only the specific asset.
e) Plea of nullity of the contract on the grounds of fraud
It is accepted that if the insolvency of the primary debtor was a foregone conclusion from the outset and this was fraudulently concealed from the creditor and the primary debtor to the guarantor, there is a ground for voiding the guarantee agreement on the ground of fraud (see CC 238/1977, NoB 25/1183). Indeed, this applies even if only the primary debtor deceived the guarantor in the culpable ignorance of the creditor (CC 147 para. b); or if the debtor and the creditor have concealed important facts or have been unaware of them even though they were obliged to provide full information (see AS 373/2008, ELΔNI 2009/448; AS 898/2000, ELΔNI 41/1586). Moreover, the solvency of the primary debtor at the time the guarantee agreement was concluded is the main criterion both for the conclusion of the guarantee agreement and for the main credit agreement. This is the basis on which the parties to the guarantee contract conclude the guarantee agreement and on which the entire guarantee system in the CC is based. It is also the basis on which the credit institution authorises the granting of credit, since the latter is not entitled to grant credit to an insolvent person (see the relevant banking supervisory rules). The lender must answer the guarantor's questions truthfully and must not knowingly underestimate or reduce the risk assumed by the guarantor by presenting the guarantee as a 'mere formality'.
f) Invalidity of the guarantee contract due to lack of signature of the guarantor
Although rare, it is not entirely unlikely to have occurred, but it is not entirely unlikely to have gone unreported. This ground arises where the signature on the guarantee contract is not provided by the alleged debtor-guarantor but by a third party, or where there is no signature at all, and therefore the alleged guarantor can raise this ground and be discharged from its obligations. Since the guarantor did not sign, he cannot bear the relevant obligation, since the guarantee contract is by law a formal legal transaction, i.e. it is necessary for the guarantor's handwritten signature to be placed on the document for the contract to be valid (CC 849).
In conclusion, it should be pointed out that, in addition to the above objections which the guarantor may raise, provided that the relevant facts are present, the guarantor has the possibility to contest the existence of the debt itself, regardless of whether the primary debtor deals with it or not (who e.g. (whether the primary debtor (who, for example, due to lack of personal property, may not be interested in the fate of the case at all), on the basis of, for example, abusive and invalid terms of the contract itself, as we have written in earlier posts. This is because the basic principle of the guarantee contract is the principle of the interference of the guarantee, according to which the guarantor is only liable to the extent that the primary debtor is liable, or in other words, the guarantor is only obliged to pay to the extent that the primary debtor is obliged to pay.