June 2014 - upd April 2019 (in red the additions in April 2019)
George Psarakis LL.M. (mult.), PgCert
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 it is 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 collateral 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.
Upd: The situation we described in 2014 has become even more pressing today, on the one hand after the assignment of the management of non-performing loans to Claims Management companies, which have already started to proceed with enforcement actions, and on the other hand after the expiry of the provisions of the "Katseli" law for the protection of the first home. More and more cases are coming before the courts, and as a result the case law on the issues discussed in this note is becoming increasingly rich.
In these bailout cases, the key question on everyone's mind is how they can get rid of the debts passed on to them. There are no easy answers here. Each case needs a good deal of research to see if it falls within some of the situations in which our case law has accepted the discharge of the guarantor. By way of illustration, we may mention the following cases:
a) In the case of some of the following cases, the following examples may be cited
In simple terms, a plea of unenforceability is 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 are divided: according to the Athens Court of Appeal decision 5253/2003, the clause in a mortgage loan contract providing for the guarantor's waiver of the objection to the 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 the 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.
Upd: No decision to date has been issued which accepts the invalidity or obscurity of the waiver of the plea in bar. However, objections have been accepted regarding the improper execution on a property of the guarantor's primary residence with already registered encumbrances (lien, etc.) by another credit institution, when there is already a lien on the property of the primary debtor or another guarantor which covers the entire alleged claim (see e.g. Athens Single-Member Court of First Instance 741/2018, Sparta Single-Member Court of First Instance 345/2018). In other words, it should be clear that the credit institution has no advantage from the auction of a guarantor's property, when there are other alternatives that are much more advantageous for it, such as the auction of the property of the primary debtor on which it has already registered a lien and which can cover the entire debt and not part of it, etc.
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. According to 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 as a certain and sole source of satisfaction the guarantor, who was negligent in this phase, 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 Civil Code) 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 participation or a legal interest in the debtor's business and therefore cannot have any knowledge of the facts.
At the same time, the particular nature of the cause of the guarantee, which confirms its ancillary and subsidiary character vis-à-vis 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 himself as much as possible from 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.
Upd: A more specific analysis of this issue was published on our website here in 2017.
An indicative decision which ruled on the objection to release is No. 222/2016 of the Single Judge Court of Appeal of Thrace. The court upheld the release objection of the opposing guarantor, attributing gross negligence to the creditor bank, as in September 2009, when the creditor-debtor became defaulting on the repayment of his debt, it did not carry out a final closure of the credit service account and a forced sale of his mortgaged property. In 2009 the market value of the property in question was sufficient to satisfy the secured claim. On the other hand, at the beginning of 2012, when the credit agreement was terminated and the contested payment order was issued, the value of the property had halved as a result of the economic crisis and the creditor's debts to third parties had increased significantly. The Court of Appeal therefore ruled in favour of releasing the guarantor, who was recognised as having no obligation towards the bank.
It is also worth mentioning the following: the waiver of the objection to release contained in General Conditions of Transactions (e.g. credit agreements) is invalid in any case, even for slight negligence (under Article 332(2) of the Civil Code).
c) Invalidity of the guarantee contract due to its improper use on the basis of its being contrary to morality (CC 178)
"Guarantees provided under banking contracts by relatives of the primary 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. Sales by instalment in breach of the above provisions had the effect of stripping the seller of any claim. The nullity of the contract was disputed 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 the Decree 699/2010, which transposed in Greece the Directive 2008/48/EC on consumer credit, the obligation of the creditor to check the creditworthiness and solvency of the borrower before granting credit is explicitly 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.
In the light of all the above, claims have been made before the Greek courts that the guarantee agreement is invalid because of the existence of certain conditions which render 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 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 specific facts or circumstances, such as e.g. e.g. the guarantor being influenced by an employee of the credit institution, who has 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).
Update: A critical observation on the issue of "unethical guarantee" is that credit institutions deliberately require guarantees from relatives (mainly children) even if the latter have no property or income, due to their young age, in order to "tie" the primary debtor emotionally and prevent abusive transfers in the future. As written: "On the other hand, banks, as part of their financial policy, seem, however, to accept or even seek, when there is no collateral in rem, a guarantee offered by family members, because, in this way, the possibility of a virtual transfer of assets to relatives in order to avoid seizure is avoided, since they themselves are involved, but also because they believe that, in this way, the primary debtor will be more careful in repaying the loan and will be more emotionally pressured to fulfil his obligations in order not to burden his children and his wife... ".
A recent decision on this issue, which accepted a claim of invalidity of the guarantee contract due to a breach of morality, is the decision No. 92/2016 of the Single Judge of the Court of First Instance of Chios. According to that judgment: 'The bank, in addition to not having properly checked its ability and its financial reserves and range to provide a guarantee and to undertake such an obligation, did not take the necessary steps, and violated its contractual obligation to inform the bank properly, based on the principle of transparency of the terms of the guarantee contract concluded between them. [...] The second opposing party (the guarantor) lacked bargaining power and contractual freedom and was forced into this solution, together with the fact that the first debtor reassured it that nothing bad would happen, that it was a matter of simple formal signatures ('a formal matter') and the undertaking of a simple auxiliary and supportive assistance to itself ('a simple service'). [...] Thus, in order to guarantee the bank, possibly because the primary debtor could not find any other capable and available guarantor to guarantee the defendant for the loan she had received and which only she had reaped-indeed, the guarantor with whom she has no other relationship other than that of an employee took advantage of her deafness, inexperience and her precarious professional and financial position and submitted to her the signing of the guarantee agreement on unfavourable and abusive terms to her detriment. [...] Moreover, no profit or benefit accrued to the second applicant from the conclusion of the guarantee agreement and the assumption of the related charges against the bank, which took place for the sole benefit of the first debtor, who received the equivalent of the credit agreement, while the guarantor merely maintained her employment relationship. [... It follows from the above that the transaction in question was obscene, unfair and unfair to the guarantor, because it was concluded without her knowledge on terms that were disproportionately burdensome and unfair to her, without her having the necessary educational and social background to understand, elaborate and foresee the extent and gravity of the contractual obligations, which it undertook under the guarantee contract with the bank, in support of the principal debtor, but also lacking the bargaining power and freedom of will at the time of its conclusion to control and vary the onerous contractual terms it accepted, without being fully and specifically informed and enlightened by the bank, at the bank's risk.