“Let’s FaceTime later?” – “WhatsApp me ok?”- “Drop me a Snapchat?”
Almost overnight these once alien terms for communication are commonplace for how we converse with each other in 2019.
£1.2 billion people worldwide use WhatsApp, with 35% of UK users using the communication tool daily. Skype has 600 million users worldwide, and is more frequently used for business, with new features allowing the transfer of files and cheap international call and conferencing features.
However, when it comes to the giving of personal guarantees, and specifically the provision of independent legal advice, it appears we are still back in the previous century.
When a lender asks for a personal guarantee, it usually comes with the requirement that the proposed guarantor seeks independent legal advice. The reason for this is to avoid any suggestion of undue influence.
When a person has guaranteed or given security for somebody else’s loan, and was induced to do so by the ‘undue influence’ of the principal debtor, the security or guarantee may be unenforceable by the lender.
Case law* makes clear that a lender is put ‘on notice’ of undue influence if there is a non-commercial relationship between the guarantor and borrower. In these circumstances, lenders will almost always require the personal guarantor to seek independent legal advice to provide comfort to the lender that:
- the guarantor freely enters into the guarantee; and
- the guarantor fully understands the consequences and risks associated with giving the guarantee.
So, in this digital age, why can’t independent legal advice be given by Skype or FaceTime? Given we can now serve court summons by Facebook, hold board meetings by tele conference and even sign contracts electronically – it seems archaic to actually have to have a face-to-face meeting with a lawyer!!!
The reason behind this is not to ‘create’ work. The case law sets out guidance for solicitors giving independent legal advice to personal guarantors. One of the key requirements is that the meeting be face-to-face and in the absence of the principal debtor. This helps to ensure that the solicitor giving the advice can clearly see that the guarantor does not appear to be threatened or intimidated by the borrower but is free to discuss and ask questions about the risks involved and whether or not they want to proceed.
There is no specific guidance about the method of a ‘face to face’ meeting (save that it should be in the absence of the debtor), but given that the guidance generally is intended to ensure there is no undue influence, logically that means it needs to be clear to the solicitor that nobody else is in the room with the guarantor. The only way to ascertain this seems to be for the lawyers to physically be in the same location. Electronic communication cannot (yet) overcome this hurdle.
This face-to-face meeting must be remembered when executing a personal guarantee, by both lender and guarantor. Time must be provisioned in transactions and costs must be set aside to allow for this, as despite the increased use of electronic communications, this particular area of case law doesn’t seem to be budging. Case law can always be tested, but until the next case dealing with the provision of advice electronically is tested in front of the court, it’s still in with the old and out with the new.
*Royal Bank of Scotland v Etridge (No 2) and other appeals  3 FCR 481
Tip – If you are going to be granting a personal guarantee, ask your solicitors in advance whether or not you’ll have to take independent legal advice and ask if they can point you in the direction of someone who can do this for a reasonable fee with minimum fuss.
This blog post was written by Gemma Flanders.
For further information please contact:
Gemma Flanders, Associate, Banking Unit
T: 0121 289 5721