Archontoula Tsogia, LL.M
Summary: Often in commercial practice, the lender, in order to provide the requested financing, requires a third party to provide a guarantee in his favour, i.e. to undertake towards the lender the obligation to fulfil the provision of the same (the principal debtor) in case the latter fails to do so; l. e.g. in order for a bank (the lender) to grant a loan to a person (the borrower - the debtor), it usually requires a third party (the guarantor) to provide a guarantee for the borrower in order to ensure that the borrower will repay the loan received. The guarantor, in the event that he is called upon and actually fulfils the obligation of the primary debtor towards his creditor, is entitled, under certain conditions, to take recourse (recourse right) against the primary debtor and is substituted by law for the rights of the creditor to the extent that he has satisfied the latter (Art. 858 CC).
A guarantee is a tripartite relationship between the creditor, the primary debtor and the guarantor. The object of the guarantee is the obligation undertaken by the guarantor to fulfil, through his own property, the primary debtor's obligation to the creditor in the event of the latter's default. We note, therefore, the existence and operation of three separate legal relationships between the above persons: (a) the contract between the creditor and the primary debtor; (b) the guarantee contract, which is agreed exclusively between the guarantor and the creditor (it is not even necessary for the debtor to be aware of the existence of a guarantee contract); and (c) the internal legal relationship between the guarantor and the primary debtor, which operates independently of both the guarantee contract and the contract concluded between the guarantor and the creditor. In many cases, given the insolvency of the principal debtor, the third party in the relationship, the guarantor, is called upon to pay the creditor part or all of the debt. The following is a brief but clear description of the conditions under which the right of the guarantor who has actually repaid the debt to take action against the debtor in order to obtain from the latter what he has paid, and the way in which this right is exercised by means of examples from the case-law.
2. Conditions for substitution of the guarantor for the rights of the creditor:
a) The guarantor must have previously satisfied the creditor: The satisfaction must be definitive and real (it is not sufficient to simply discharge the guarantor by debt forgiveness), may be partial or total, and may be effected by payment or other substitute means (set-off against the guarantor's counterclaim, public deposit in the Deposit and Loan Fund, etc.). etc.), as well as upon acceleration of enforcement by the lender (e.g. the guarantor paying voluntarily or upon seizure/auction of his assets by the lending bank all or part of the instalments due by the borrower to the latter). Note that in the case of partial satisfaction, the guarantor is subrogated to the rights of the lender to the extent and to the extent that he has satisfied the latter.
b) The guarantor has a right of recourse against the primary debtor: The guarantor, after having satisfied the creditor, as described above (see paragraph 2(a)), in order to subrogate the latter against the primary debtor, this must be justified by the internal legal relationship between the guarantor and the primary debtor. That is to say, whether the guarantor will have the right to take action against the primary debtor and to seek from the latter what he has paid to the creditor depends on the internal legal relationship between the primary debtor and the guarantor, the nature of which will be determined in each case according to the facts of the case. Only where the relationship between the latter can justify the satisfaction of the creditor by the guarantor will the guarantor have a right of recourse against the primary debtor (e.g. where the guarantor has given the guarantee to the debtor under a mandate given to him by the latter or under a contract of work between them). On the other hand, the guarantor will not have a right of recourse and will therefore not be entitled to take action against the primary debtor in cases where the legal relationship between the guarantor and the primary debtor is of such a nature that it cannot justify its existence (e.g. where the guarantor has given the guarantee to the debtor as a gift, in the context of a donation). The guarantor must invoke and prove the existence of the right of recourse, as stated above (AS 1614/19999, Elldni 2000, 382). If the primary debtor disputes the existence of a right of recourse, the guarantor is entitled to bring a declaratory action against the primary debtor, requesting recognition of the existence of a right of recourse, provided that the creditor has paid the debtor (AS 1065/1990 OJ 1991, 424). This action must clearly and fully set out the guarantor's right of recourse, otherwise it will be vague, which cannot be remedied by means of proposals or reference to documents (AS 784/75 ArchN 26.235).
3. Cases of the most basic internal relations, which may or may not justify the creation of a right of recourse of the guarantor against the principal debtor.
Α. Cases in which a right of recourse is justified:
i) Mandate Contract: A contract of mandate (Art. 713 et seq. CC) is a contract between two persons (in this case the principal debtor - guarantor), of a personal and confidential nature, whereby the principal (principal debtor) entrusts the principal (guarantor), without remuneration, with the conduct of a case. The contract of mandate may also be drawn up informally between the parties, expressly or implicitly, but it must always be clearly stated. The contract of mandate essentially gives the principal the right to claim from the principal the reimbursement of the expenses incurred by him in the normal performance of the mandate (713 and 722 CC). The following are examples of case law decisions in which the existence of a right of recourse for the guarantor has been recognised where the internal relationship between the principal and the guarantor was that of a mandate:
ii) Νegotiorum gestio: negotiorum gestio (Art.730-740 CC) is a factual situation between the administrator (guarantor) and the principal (debtor), which is recognised as existing by law by the mere fact that the administrator handles and administers a foreign case without having any right or obligation to do so. In this respect, if the guarantor, as a foreign administrator, undertakes the (handling) of the foreign case in the interest of and in accordance with the actual or presumed will of a principal (primary debtor), he is entitled to claim from him the costs of the administration and the compensation of the losses (Art. 713 et seq, 730and 736 CC). However, if these conditions are not met, namely (a) the conduct of a case, (b) the nature of the case as 'foreign' and (c) it is not a contract of mandate, the administrator will only be entitled to claim reimbursement of the costs incurred, in accordance with the provisions on unjust enrichment (Art. It should be noted that the character of the case as 'foreign' is determined according to the facts of the case (e.g. in cases of closed-type capital companies (often of a family nature), where the shares/shares are owned by a limited number of persons, who usually also exercise administrative - management functions (substantial owners) and personally guarantee the debts of the legal person, despite the fact that they are independent legal persons, however, the act of the guarantor - shareholder - manager to guarantee the company may not be a foreign case, but a case of its own). The following is an example from case law, in which the existence of a right of recourse for the guarantor was recognised in a case where the internal relationship between the primary debtor and the guarantor was that of a fair administration of a third party:
Β. Cases where the creation of a right of recourse is not justified:
i) Payment out of liberality - by gift (e.g. gift): as mentioned above, no right of recourse exists if it cannot be justified by the internal relationship (primary debtor - guarantor). This is particularly the case when the legal relationship between guarantor and primary debtor is a gift, such as when the reason for the assumption of the guarantee was a gift from the guarantor to the primary debtor. In the following, relevant court decisions are cited, which lead to the assumption that there is no right of recourse for the guarantor (and therefore no substitution of the guarantor for the rights of the creditor) in cases where the internal relationship between the primary debtor and the guarantor was a gift:
4. Effects - Consequences of the substitution of the guarantor on the rights of the creditor
If the above conditions are fulfilled, then, as soon as the guarantor has satisfied the creditor, he is subrogated by law to the rights of the latter (to the extent that he has satisfied him) and is entitled to take action against the original debtor in order to obtain what he has paid. In particular, the creditor's claim against the first debtor for payment of the latter's debt is legally subrogated to the guarantor to the extent and in the state he was in at the time of satisfaction. In addition, the guarantor (Art. 458 CC) acquires all the creditor's rights ancillary to the claim to secure the principal debt (e.g. the creditor's lien or mortgage on the property of the original debtor or a third party, other guarantees, etc.), as well as any privileges the creditor may have in enforcement proceedings. With regard to other types of security which the creditor may have obtained to secure his claim against the first debtor (e.g. retention of title to the debtor's or a third party's property), although they are not automatically transferred by law to the guarantor, the creditor is nevertheless obliged to take the necessary steps to transfer them. Finally, the guarantor also acts in place of the creditor in cases where the latter has taken legal action against the debtor.
5. Recourse against the guarantors
If there are several guarantors in connection with the same debt, if one of them satisfies the creditor (pays all or part of the debt to the creditor) and has a right of recourse (see paragraph 2 above), he may take action against the other co-guarantors to the extent and for the amount that he has a right of recourse against them (Art. 860 CC). Most of the guarantors (joint guarantors) are jointly and severally liable to the creditor, even if they did not jointly assume the guarantee (Art. 854, 860 and 487 CC). Unless the internal relationship between the joint guarantors indicates otherwise, they are all equally liable ((Article 487(1) CC). Therefore, the subrogation of the guarantor who has paid the creditor's rights against the other guarantors will be limited only to the amount of the principal debt remaining after deduction of the part of the debt for which he is responsible as guarantor. The remainder, therefore, is divided in equal parts among the other co-guarantors (if nothing else follows from their internal relationship) and the paying co-guarantor will be able to claim it from the other co-guarantors (See, for example, Piraeus Court of First Instance 1756/2017).
6. Loss of the guarantor's right of recourse
A guarantor who, in accordance with all of the above, has repaid part or all of the debt and has a right of recourse against the primary debtor (or the other co-guarantors) may lose this right and may not be able to take recourse against the latter persons to claim what he has paid. This would be the case if, before paying part or all of the debt to the creditor, he failed to raise valid objections which the original debtor had (Art. 853 CC), which he knew or ought to have known (Art. 859 CC) and which were decisive for the fate of the principal debt. The guarantor must have been negligent in failing to raise these objections, which is a matter of fact, but otherwise he is not deprived of his right of recourse (e.g. in the event that the creditor takes action against the guarantor and demands payment of the debt, the guarantor may have to act with due diligence and inform the primary debtor so that he himself can receive information on any objections raised by the latter and present them to the creditor in good time). It should be noted that the primary debtor will have to prove that the above conditions are met and therefore the guarantor has forfeited its right of recourse, and the guarantor may object that it was not aware of the existence of the specific objections. However, even if the guarantor is deprived of his right of recourse because he negligently failed to raise the primary debtor's objections in time, he may still have a claim for unjust enrichment against the primary debtor (or the co-guarantors) or the creditor (Art. 904 CC).
7. Instead of an epilogue
In case the guarantor actually pays to the creditor part or all of the primary debtor's debt and a subrogation case arises, according to the above, the former acquires (after transfer) directly by operation of law the creditor's claim against the primary debtor (or the co-guarantors) and is therefore entitled to claim from the latter and receive what he has paid. At the same time, the guarantor's claim against the primary debtor continues to exist by virtue of the internal relationship between them at any given time (e.g. a mandate) and is the reason why the guarantor has guaranteed the primary debtor against the creditor. The two claims exist in parallel and it is up to the guarantor's discretion as to which of the two he will seek to satisfy his right (305 et seq. CC) in order to obtain from the primary debtor what he has paid to the creditor.