Director's Guarantee Not Unfair

An entrepreneur who challenged the Royal Bank of Scotland’s (RBS) attempt to enforce the director’s guarantee he had given was unsuccessful in persuading the court that the guarantee contained unfair contract terms.

Mr Singh’s company provided small businesses with secretarial and administrative assistance. It had incurred an overdraft of £900,000 with the bank when the company failed.

Mr Singh argued that RBS could not enforce the guarantee since he believed that he had a partnership with the bank. He considered there was an agreement whereby RBS was going to market his company’s services and that his company was induced to borrow the funds on the understanding that such a partnership existed. He argued that when the bank failed to market his business services it was in breach of the partnership agreement and caused the failure of his company. He also argued that he would not have agreed to give a director’s guarantee had the bank not agreed to market his company’s services.

This first line of argument failed to impress the court as there was no evidence of a partnership agreement since nothing was done or said which could have been interpreted as an offer of a partnership or joint venture. Furthermore, it was not reasonable for Mr Singh to believe that the bank official with whom he was dealing could commit RBS to such an agreement.

Mr Singh then sought to have the bank’s guarantee arrangement ruled unfair because it had a ‘no set-off’ clause, which he felt was unreasonable under the Unfair Contract Terms Act 1977 (UCTA). Such clauses are standard in guarantees and act to prevent a bank’s right to recovery under the guarantee being frustrated by claims against it. In other words, whatever Mr Singh’s claims against RBS might be, he had to repay the amount he had guaranteed and pursue his claims separately.

The judge could not agree with Mr Singh. The UCTA regulates contracts between sellers and consumers and is designed to protect consumers in circumstances in which there is a large preponderance of power in the hands of the seller. In this instance, RBS was selling a service to the company. Mr Singh would only have a liability under the guarantee if his company failed to repay its borrowings. The UCTA was not applicable in such circumstances. However, the court also considered what the position would be if UCTA did apply and concluded that even if it did, the ‘no set-off’ clause could not be unfair – it was not unfair for RBS to protect itself by taking additional security.