Konstantina Daskalopoulou, LL.M
Summary: A guarantee is a particularly common contractual form and is generally requested in the context of financing a person or business, particularly when such financing is provided by a banking institution. In our previous notes, we have examined the issues of the liability of the guarantor in a loan (see here), as well as the issues of the guarantor's release, with a discussion of the relevant objections in the Civil Code (see here). In this note, we will deal with those cases where the guarantee provided is contrary to the so-called general morality clause (CC 178, 179), or, in other words, bears an immoral character, necessitating the release of the guarantor from it.
"Unsecured financing is not conceivable". The preceding sentence captures a central rule in the field of financial transactions and in particular in the field of banking transaction practice. Credit institutions, which in modern economic reality have the primary role of lender, do not disburse the requested credit until they have obtained the necessary collateral to protect themselves against the risk of insolvency of their principal debtor. When the security required cannot be in rem (for example, because the primary debtor has no real estate to pledge), the credit institution will de facto turn to the alternative of providing a guarantee, which allows it to be satisfied from the property of a third party, that of the guarantor, in the event that the primary debtor defaults on the debt. Particularly in the case of low-volume consumer loans, the credit institution will, for reasons of speed, prefer the guarantee from the outset to the more time-consuming mortgage procedure. At the same time, it is common in practice for the guarantee to be provided by persons who do not have the financial means to repay the debt, taking a risk that is much greater than they can afford. In many cases, these persons come from the close family environment of the primary debtor (partner/spouse, children), while case law already knows examples of persons who, without being related to the primary debtor, are otherwise dependent on him (e.g. in the context of a dependent employment relationship). The provision of a guarantee by transactionally inexperienced persons who lack personal property and are forced to do so because of the relationship between them and the primary debtor has been examined by case law to see whether it is in accordance with the principles of morality. If the result of the test is negative, the court shall declare the guarantee contract null and void, relieving the inexperienced guarantor of the excessive obligation he has been called upon to assume.
III. Indicators of immorality
In approaching the question of immorality in the field of the conclusion of guarantee contracts, both case-law and legal theory have developed certain indicators, the existence of which leads to the affirmation that the guarantee provided is contrary to morality and, consequently, to its nullity.
1. The financial situation of the guarantor at the time of providing the guarantee: The lack of income of the guarantor from personal employment or other sources at the time of the provision of the guarantee or the existence of income that marginally covers his living needs renders the requested guarantee pointless, at least from a financial point of view. In other words, it is not particularly realistic for a credit institution, which is required to assess the financial circumstances of the persons dealing with it, to refrain from obtaining a guarantee which has nothing to offer in financial terms, given the guarantor's meagre income.
2. Transactional inexperience, age and education of the guarantor: The young age of the guarantor, combined with his educational level and lack of previous experience in banking transactions, are regularly considered in the context of judicial decisions ruling on whether the guarantee is contrary to morality, as highlighted below. The bargaining power of a credit institution, which in any event exists in bank-consumer relations, is even more pronounced when the potential counterparty has just come of age, has not studied or chosen to study a field of study unrelated to economics, particularly finance, and has no experience of banking transactions, so that he is not equipped to understand the risk he is taking.
3. The guarantor-debtor relationship: The close emotional or dependency relationship between the primary debtor and the guarantor is the reason for the guarantee provided when it is not justified on the basis of the financial situation of the guarantor. The existence of an emotional link is a two-way street: the guarantor, because of his emotional and possibly financial dependence on the primary debtor (e.g. where the guarantor is the father of the guarantor and the latter is financially dependent on the former because of his young age) finds it difficult to refuse to sign the guarantee agreement, and the primary debtor feels additional pressure to keep up to date by regularly servicing his debt in order not to leave the guarantor exposed. In these relationships, the risk of the primary debtor influencing the guarantor is taken for granted because of the relationship of trust that normally exists between the two persons.
4. Lack of benefit to the guarantor from the credit for which the guarantee is granted: This condition is met when the credit for the saving of which the guarantee is sought is solely for the business or personal needs of the primary debtor, with the guarantor deriving no benefit from it. On the other hand, there is a benefit when, for example, the loan is intended to purchase a house, of which the primary debtor and the guarantor are co-owners.
5. The downgrading of the seriousness of the guarantee liability by the credit institution: credit institutions are required to provide information and explanations to the potential guarantor regarding the risk to be assumed. The guarantor is thus entitled to know the nature and amount of the debt for which he is going to guarantee and the financial situation of the principal debtor, so that he can assess the chances of being called upon to service the principal debt. To reduce the status of the guarantor's signature to a mere formality facilitating the obtaining of credit by the principal debtor is in breach of the credit institution's obligation to inform and educate the guarantor, by not allowing the guarantor to enter into the contract 'with his eyes open' as regards its main parameters.
6. Waiver by the guarantor of the objections of the Civil Code: As a rule, the terms and conditions contained in the guarantee contracts concluded by banks with their customers contain a clause waiving the guarantor's rights to the protective provisions of the Civil Code. That clause is, in principle, valid. However, in combination with the circumstances described above, it increases the disadvantage of the guarantor who, without any relevant benefit, assumes excessive financial obligations and, at the same time, waives the possibility of invoking claims which would allow him to be exonerated or his liability to be limited.
IV. Legal Examples
The case law of our courts in a series of decisions that have recognised the immoral nature of guarantees granted, mainly by young persons, is based on the criteria analysed above.
Important considerations concerning the provision of a guarantee contrary to morality were first set out in Greek case law in judgment No 7241/1999 of the Athens Court of First Instance. In the case at issue, a 19-year-old woman had entered into a guarantee contract for the financing needs of the professional activity of her relatives. The court found that the provision of a guarantee by young persons, who do not have an economic interest in the main transaction and who guarantee the business risk of third parties to an extent far exceeding their financial capacity, waiving all the protective provisions of the Civil Code, constitutes a typical case of a contract with a content which is 'unusually onerous and manifestly disproportionate' for one of the contracting parties. The young age and the consequent low level of professional education of those persons do not enable them to assess properly the risk they are assuming, with the result that they are in a disadvantaged position in terms of bargaining power vis-à-vis the credit institution. That inequality is maintained, if not exacerbated, by the fact that 'the creditor does not, before the guarantee contract is concluded, draw the weak party's attention to the risks he faces'. In the light of those considerations, the Court of First Instance concluded that 'the exploitation by the bank of the guarantor's inexperience in order to impose the one-sided satisfaction of its interests by the guarantor's excessive commitments in favour of its relatives, without the latter enjoying the corresponding benefits from those commitments, when the bank is aware of that, constitutes conduct contrary to good morals'.
Recently, the Athens Court of First Instance, in its decision No. 184/2019, ruled that the guarantee given by a 23-year-old woman, with no previous experience in the field of banking transactions, under a consumer loan contract taken out by her partner, in order to repay the latter's debts to other credit institutions, is invalid. The 23-year-old girl, who had 'no particular university education, having graduated from high school and worked as a private employee (secretary)', acted as guarantor in the credit agreement in question, 'induced by the assurances of the defendant's employee', who, taking advantage of her deafness and youthful inexperience in transactions, not only did not inform her - as she should have done - of the risks involved in signing the above-mentioned loan agreement, but on the contrary, she artificially concealed them, presenting the fact that her signature on the loan agreement was a completely formal procedure'. In this way, the guarantor, without realising the importance and the extent of the responsibility involved in her action, and after the assurances of the bank official that she had 'nothing to fear', since it was 'a completely formal procedure which would facilitate the approval of the loan by the central authorities', undertook an excessive commitment, without even the slightest benefit from it. In particular, the guarantor in question did not have any financial resources other than her salary which would have enabled her to cover her living needs and subsequently repay the principal debt, and she did not benefit in the least from the financing in question, since it was used exclusively by her partner, the principal debtor. As a result of the foregoing, the court acknowledged the invalidity of the guarantee at issue, on the ground that it was contrary to public policy, and released the 23-year-old from the relevant guarantee liability.
The Single Court of First Instance of Chios, by its decision No 92/2016, annulled a payment order, in so far as it was directed against a guarantor, who had entered into a guarantee agreement in favour of her employer for a loan to support her business activity. The guarantor in question was a salaried saleswoman with a low monthly income and whose only asset was her main residence. Therefore, her financial strength did not justify her assuming guarantee liability for a loan of €50,000 'of her own free will and consciousness of her actions'. According to the decisive considerations of the judgment, the guarantor 'did not have any particular education, whether educational, professional or social, to understand the importance of entering into a guarantee contract with the bank', and the reason why she was persuaded to enter into the contract was the 'fear of losing her job and her only income from it, and her objective difficulty in seeking and finding another job', in particular because she was 'advanced in age, unskilled, without formal qualifications'. The guarantor's primary debtor and employer influenced her by downplaying the seriousness of the consequences of signing the guarantee agreement, giving her the impression that it was a formality, an impression which the lending bank did not - although it should have - attempted to overturn, since it never informed the guarantor of the extent of the responsibility it was assuming and of the risk of being exposed and losing her only real property. At the same time, the Court notes that, also in this case, the guarantor did not derive any benefit from the loan at issue, since the entire amount was used by her primary debtor employer. In the words of the court, 'the guarantor ... was excessively bound beyond any notion of contractual freedom and reasonableness, without having as a counterpart any interest or interest in the credit agreement in favour of the principal debtor, from which only the bank and the creditor benefited, and it is obvious that there is a supply and consideration imbalance between the parties to the credit-guarantee agreement'.
Recently, the Athens Court of Appeal, in its decision No. 3858/2019, recognized the invalidity of a guarantee contract, due to its contrary to good morals, by annulling the payment order issued against a guarantor, who, at the age of 19, a student and completely inexperienced, without income from work or any other source, guaranteed the repayment of a debt of €560,000 in favour of his mother, the borrower. In fact, at the time the guarantee contract in question was concluded, the 19-year-old assumed a guarantee liability for obligations of his relatives towards the credit institution in question, totalling €4,500,000! The court, taking into account the above excessive commitment undertaken by the guarantor, but also the fact that the financial data of the borrower's mother, at the time of the provision of the guarantee, "was far from favourable for the repayment of the loan, since she was not working, was a housewife ..., and declared an annual income ... 12. 120.91', combined with the failure of the credit institution to inform the guarantor, who was inexperienced in business, of the risk posed by the aforementioned insolvency of his mother, concluded that 'it would be extremely undesirable and abusive, contrary to the principle of proportionality and freedom of contract, [...] to oblige the applicant-objector, as guarantor, to bear the burden and the adverse consequences of the non-servicing of the aforementioned loan no. .... loan agreement and the loan agreement No. ..., as well as the loan agreement No. .... ... additional deed of guarantee, on the part of the first debtor borrower, inasmuch as it is considered that the guarantee agreement is contrary to good faith and to accepted principles of morality and good faith and is therefore invalid'.
On the other hand, the Supreme Court, in its decision no. 2193/2013, ruled that a guarantee contract in which an adult person with university studies (even if not of economic content), who is also a relative of the primary debtor, a member of a commercial company and a holder of a bank cheque book, contributes as guarantor, cannot be characterized as advantageous (and in substance, contrary to good morals), in the sense of exploiting inexperience. In this case, that is to say, the 24-year-old guarantor's previous banking transaction experience and his participation in a personal company preclude the guarantee granted by him from being contrary to good morals.
V. Instead of an epilogue
The assumption of guarantee liability often places the guarantor in a particularly disadvantageous position, since he is at the mercy of the contractual choices and the solvency of the primary debtor; he cannot influence the course of the primary debt, being obliged only to repay it if the primary debtor fails to do so. If the guarantee is contrary to accepted principles of morality, it allows the guarantor to be definitively discharged from liability, since it leads to the nullity of the contract in question. This nullity is, ultimately, in the cases discussed above, the surest means of remedying the contractual injustice caused by the commitment of a person in the role of guarantor, without being able to serve that role economically.