Lloyd's Maritime and Commercial Law Quarterly
When should the guarantor be permitted to rely on the principal’s set-off?
John Phillips *
This article explores the circumstances in which a guarantor in defending an action to enforce the guarantee may rely on a set-off possessed by the principal debtor as against the creditor. Current case law gives no clear guidance. The author argues that the guarantor should be permitted to rely on the principal’s claim when it amounts to an abatement or equitable set-off since in such a case the claim will be “closely connected” to the guaranteed debt, but not in the case of a legal set-off not related to the guaranteed transaction.
1. The importance of the issue
A guarantor will often wish to resist a claim upon a guarantee by relying on a set-off which the principal debtor may possess as against the creditor. This is especially so in the context of summary proceedings in which the guarantor will seek to plead the set-off as a defence, without joining the principal debtor as a party to the proceedings. This article explains the circumstances in which the guarantor may exercise this right, and whether or not the present law is satisfactory.
This issue is important because neither the principal loan contract nor the guarantee may adequately exclude the right of set-off. Clear and unequivocal words (or an obvious implication) are required to achieve this effect.1
Thus, clauses providing that amounts are to be paid “without any deduction”2
or “without discount”3
have been held to be insufficient to exclude the right of equitable set-off. Similarly, more general provisions stating that the guarantor’s obligations are to be unaffected “by any matter whatsoever”4
(which commonly appear in guarantees) are unlikely to preclude the guarantor relying on the principal’s set-off. A clause in the guarantee deeming the guarantor to be a “principal debtor in all respects” is also thought to be ineffective for that purpose. Indeed, it would appear to reinforce the fact that, if the principal debtor possesses a set-off as against the creditor, the guarantor should also be entitled to rely on it as if he were the principal debtor
.5
After all, the clause purports to place him in that position. Even if there is a
* Professor of English Law, King’s College London.
1. Gilbert Nash (Northern) Ltd
v. Modern Engineering (Bristol) Ltd
[1974] A.C. 689.
2. Connaught Restaurants Ltd
v. Indoor Leisure Ltd
[1994] 1 W.L.R. 501.
3. The Teno
[1997] 2 Lloyd’s Rep. 289.
4. BOC Group Plc
v. Centeon
[1999] 1 All E.R. (Comm.) 53; aff’d ibid
. 970 (C.A.), although in this case, the clause appeared in the principal transaction. See also on this issue of construction Glencore Grain Ltd
v. Agros Trading Co, Ltd
[1999] 2 Lloyd’s Rep. 410; Sinochem International Oil (London) Co. Ltd v. Mobil
[1999] 2 Lloyd’s Rep. 769 (Longmore, J.), rvsd
[2000] 1 Lloyd’s Rep. 339 (C.A.).
5. Cf.
however, Slade, J., in National Westminster Bank
v. Skelton
[1993] 1 W.L.R. 72, 80, although it was not a standard “principal debtor” clause in that case.
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