April 1, 2015
What is a guarantee?
A guarantee is an undertaking given by a surety to a creditor in respect of the payment obligation of a principal debtor towards the creditor. It does not create a security interest and is a mere contractual obligation. A guarantee is also a secondary obligation - the guarantor is only liable when the primary debtor fails to perform. If the primary obligation is discharged or becomes void, the guarantee also falls away. However, if the guarantee contains an indemnity given by the guarantor, it then becomes a direct contractual undertaking to compensate for loss, turning it into a primary obligation.
Didn’t read terms?
The general rule set out in Soon Kok Tiang v DBS Bank Ltd  1 SLR 397 is that a person who signed a contractual document is, in the absence of fraud or misrepresentation, bound by its terms even though he has not read them. Defences alleging fraud, undue influence and unconscionable bargains can go towards making the guarantee void.
Higher lenders’ responsibility in United Kingdom
In the United Kingdom, the law has increasingly leaned towards favouring guarantors, especially the less advantaged and less knowledgeable guarantors. The test established by Royal Bank of Scotland v Etridge No 2  3 WLR 1021 (Etridge) is that once a lender is aware that the guarantee is given for a non-commercial purpose and without any benefit to the guarantor, steps will have to be taken by the lender to ensure the validity of the guarantee. Where a lender is put on notice that the guarantee may have been procured under undue influence, this may enable the guarantor to set aside the transaction if undue influence is shown to be present. This then makes it onerous on lenders and makes the guarantee a less valuable security because of uncertainty and the additional hoops that lenders now have to jump through to safeguard their interest under the guarantee.
Lower lenders’ responsibility in Singapore – elements of fraudulent misrepresentation
In Singapore, however, the courts appear to be more reluctant in favouring guarantors in cases where guarantees were given in a family context and undue influence was alleged. As seen in Oversea-Chinese Banking Corp Ltd v Chng Sock Lee  4 SLR 370, Standard Chartered Bank v Uniden Systems (S) Pte Ltd  2 SLR 385 and The Bank of East Asia v Mody Sonal M  4 SLR 113, the courts, while referring to Etridge, did not expressly or impliedly affirm the English case.
Where the guarantee is given in a commercial context, this court similarly did not want to interfere with what parties had commercially agreed to. In the recent decision in Bank of China Limited (Singapore Branch) v Huang Ziqiang  SGHC 245, the guarantor alleged fraudulent misrepresentation. Huang Ziqiang (Huang) gave a personal guarantee (the Guarantee) as additional security to the Bank of China Limited (Singapore Branch) (BOC) for the variation of credit facilities granted to Yuan Sheng Shipping (Singapore) Pte Ltd (YSS). BOC had earlier granted a loan to YSS to partially finance the purchase of a bulk carrier. Subsequently, YSS anticipated difficulties in keeping up with the loan instalments. After negotiations, BOC revised and rescheduled the original repayment schedule and requested for additional security, which included, inter alia, a personal guarantee to be given by Huang.
Huang claimed that BOC’s officers had fraudulently misrepresented to him that (i) BOC would continue to provide the facilities to YSS only if he provided a personal guarantee; (ii) that BOC would not call on and enforce its rights under the Guarantee; and (iii) the Guarantee was a formality required by BOC, and he had relied on these misrepresentations that allegedly induced him to execute the Guarantee.
The court referred to the elements of fraud set out by the Court of Appeal in Panatron Pte Ltd v Lee Cheow Lee  2 SLR(R) 435 and stated that fraud would be present if BOC had acted ‘without any honest belief that they [representations made by BOC officers] were true, or made the representations recklessly or carelessly without regard to whether they were true or false’. Based on the facts, the court found the absence of fraud on the part of BOC . The court went on to say that there was no basis for concluding that Huang was, “somehow duped into executing the Guarantee” and Huang had failed to mount a credible case that BOC gave representations that it would not enforce its strict legal rights under the Guarantee.
While the court held that it was no longer necessary to dwell on the parties’ motive since Huang had failed to prove fraud, it held that it was not persuaded by Huang’s argument that it would not have ‘made any commercial sense’ for him to execute the Guarantee if he had not received misrepresentation from BOC. The purpose of the Guarantee was to serve as additional security as YSS had no unencumbered assets available to offer to BOC. Further, the restructuring of the loan was mutually beneficial to the parties and the Guarantee was intended to be an additional security necessary to secure much-needed time in order for YSS to recover from difficult business conditions and to work towards repaying the loan.
In cases involving instruments with similar commercial effect as a guarantee, like performance bonds and on demand guarantees, the Singapore courts have established that the threshold for a defence of unconscionability is high and one needs to have a strong prima facie case of unconscionability. In BS Mount Sophia Pte Ltd v Join-Am Pte Ltd  3 SLR 352, a case involving performance bonds, a high bar was deemed necessary because once unconscionability is established, the effect of it would be to restrict the beneficiary of the performance bond or on demand guarantee from enforcing a substantive right which he has contracted for. Similar holdings were given for on-demand guarantees in CAA Technologies Pte Ltd v BHCC Construction Pte Ltd and ABN Amro Bank N.V.  SGDC 25.
The line of cases show that the Singapore courts are generally more resistant in interfering with parties’ contractual agreements and the courts cannot act as a shield for what one had agreed to contractually. This is similar to the approach taken in the recent line of investment cases where the courts held that individual investors who were fairly well educated, but not financially savvy should be taken to understand the key terms of the contracts between the bank and themselves and held to be responsible for their own trading decisions, most recently in Deutsche Bank AG v Chang Tse Wen  4 SLR 886. Save in cases where strong prima facie evidence of unfairness to the guarantor is found, lenders can feel assured that their right of enforcement under guarantees would not be diluted by such allegations and continue using the guarantee as a form of collateral security to give them additional comfort.
While the law recognises that there are certain situations where some intervention is required, particularly in the context of non-business, family arrangements, lenders still need to be prudent and take steps to safeguard their own interest in ensuring the validity of guarantees. These include adequate disclosure of the benefit of the transaction to the guarantor, recommending that the guarantor obtains independent legal advice and getting confirmation from the independent legal advisor that the risks have been highlighted to the guarantor. The guarantor should also be informed about the loan amount, amount of indebtedness, loan tenure and purpose.