What are guarantees and bonds?

These are the contracts under which a party, guarantor or surety, assumes the obligation to comply with what is contracted by the other, guarantied or secured party (principal debtor), in the case of not doing so, against its creditor.

They are a guarantee of the obligation contracted by the main debtor, against its creditor.

The guarantee, unless otherwise agreed, is configured by three characteristics:

• Benefit of preference: the creditor has to follow the order by first addressing the principal debtor and only if the latter cannot meet the debt can it be directed against the guarantor.
• Benefit of excussion: is the benefit for which the creditor is first directed against the assets of the principal debtor rather than against the guarantor.
• Benefit of division: implies that, if there are several guarantors or sureties, the debt is divided equally among all of them, claiming to each of them only the part according to the division.

What are the issues that arise?

Generally, loans require the provision of guarantees. However, lenders usually request the provision of additional guarantees to many people other than the debtor, these being guarantors or sureties.

Thus, in the event that the loan was not repaid to the entity, the latter could bring its claim to recover the debt against the guarantor or surety. The guarantor is, therefore, the person who covers the debtor’s risks, jointly and severally liable for the payments that correspond to the debtor.

Issues that arise are (i) that these operations are carried out by waiving the rights that the guarantee entails without having knowledge of it, or (ii) the guarantors and sureties, even though aware of the conditions of the guarantees they sign, provide excessive guarantees in relation to the loan granted (over-security), and when this happens the option to claim nullity of the financing clause or pact in the loan may be considered.

This problem usually arises in the case of mortgage loans, in which it is required that in addition to the guarantee provided with the property itself, other additional guarantees are provided, excessive in relation to the debt incurred. But there have also been cases of provision of additional guarantees when a loan is granted to a company, such as in the ruling of the CJEU of March 14, 2013[1].

What are the main events of nullity ascertained by the courts and tribunals?

The main events of nullity of a guarantee or bond are:

1. For granting a loan, when the entity imposes the provision of a bond or guarantee as a condition precedent, without the need for the second one, this would be a case of over-security. This accumulation of unnecessary guarantees may be considered abusive in terms of the General Law for the Defence of Consumers and Users[2](“the imposition of disproportionate guarantees having regard to the risk assumed”), if this is applicable because the guarantors or sureties are considered as such, or due to abuse of rights, abuse of a dominant position and bad faith, causing a significant imbalance between the parties.
2. In most of these operations, the contract includes the waiver of benefits of division, excussion and preference recognized by the Civil Code. This is contrary to Additional Provision 1º, 14, of the Law on General Contracting Conditions (“that imposition of waivers and limitations of consumer rights”),[3] if it has not been negotiated individually or if no information has been given regarding the loss of these rights.

In these events, the judges and courts proceed to the declaration of nullity of these additional guarantees, which has no effect on the main loan contracts.  

ANNEX I

What have judges considered in relation to these clauses?

Below we will briefly review some of the most noteworthy pronouncements, both nationally and in Europe, given the notable influence that the latter have had on the former.

Judgment of the Court of Justice of the European Union of March 14, 2013: Consumer concept

Before the CJEU, the reference was made with respect to when a guarantor should be considered a consumer and, therefore, when it was possible to apply the regulations for the protection of consumers and users in relation to guarantees.

In these proceedings, an individual had secured an operation between a bank and a company in which he himself had a significant stake. The CJEU concluded that the individual who has close links with the company he endorses (for example, membership of the Board of Directors, significant participation in the shareholding, etc.) cannot be considered as a consumer.

Court records of the CJEU of November 19, 2015 and September 14, 2016: Vice of consent

In these proceedings, individuals provided security to two companies without having a professional relationship with them, as the link that tied them to the same was based on family or affective relationships, so they should be protected as consumers, since when they accepted the conditions imposed by the entity they knew the scope or consequences thereof.

Supreme Court of Spain judgments of June 3, 2016 and January 20, 2017: Abuse

In cases involving professionals carrying out these legal transactions, [the court] held that, although the business was between professionals, this did not mean that there was no abuse of a dominant position by one of the parties.

Judgment of the Provincial Court of Barcelona of February 28, 2017: Vice of consent and lack of proportionality

“In the so-called security clause, the personal guarantor of the guarantors was established on a joint and several basis, so that the lender could claim against any of the guarantors and against one of them, expressly waiving the legal benefits of division, excussion and preference.

Nullity was sought on the basis of the legal regulations that protect consumer and user rights, since the clauses in question do not meet the requirements of transparency, clarity, and simplicity of inclusion control. The appellant alleged, in order to reinforce its opposition, that the plaintiff did not know how to read or speak Spanish and that, with little income, proceeded to secure a high amount, disproportionate to his earnings.

It is necessary to remember the general criteria laid down by the Court of Justice of the European Union (CJEU) to declare that a clause under Directive 93/13 as abusive.

In this sense, the judgment of the CJEU in the case of VB Penzugyi indicated that this analysis should be done in two phases. Thus, in the first place, the judge had to ascertain if there is a contract between a professional and a consumer that has not been subject to individual negotiation. And, secondly, once this characteristic has been determined, the judge must declare whether or not the clause is abusive based on the criteria that the Court of Justice may have indicated, as the case may be.

For the purposes of declaring whether or not a given clause as abusive, the Court of Justice has indicated that not only the specific clause must be assessed, but must that all the clauses of the contract must be taken into account so that it can be assessed if there is a significant imbalance between the rights and obligations of the contract. It should be verified “if the professional could reasonably estimate that, dealing in a fair and equitable manner with the consumer, the consumer would accept such a clause in the framework of an individual negotiation”.

Although the clause meets the condition of inclusion or formal transparency, as formally the clause is written in a clear and grammatically intelligible manner, the clause fails to comply with the actual transparency check because we understand that the plaintiff did not really understand the legal position assumed in the contract and especially the economic consequences that resulted therefrom.

The waiver of the benefits of preference, excussion and division that legally corresponds to them as guarantors is not adapted to the provisions of Directive 93/13, as it entails an unjustified waiver of consumer rights, imposed by the lender, without proof of an individual negotiation that in no way justifies this over-guarantee, since, in itself, the mortgage already represents a sufficiently consolidated real security as such.

Hence, the waiver of the plaintiff (whose status as consumer/debtor is not controversial) was disproportionate, since the plaintiff was placed in a less favourable legal situation than would be reasonable, as there were, cumulatively, a principal debtor, a real security and a personal guarantee, which means that waiving those legal benefits was entirely unjustified and contrary to good faith. Such a clause, with the waiver of the legally established benefits, becomes objectively disproportionate and causes a significant imbalance provoked by the professional to the detriment of the plaintiff, (the consumer), when an unnecessary over-guarantee is established. The declaration of abusiveness of this clause does not affect the main purpose of the loan contract, but it must have an inexorable effect, given the principle of effectiveness that is set forth by the Directive and, since it prevents an unfavourable integration to the consumer, must result in this clause being declared null and void, which entails releasing the plaintiff from the personal guarantee provided.”

Commercial Court of San Sebastián of September 30, 2014: Abuse

In this case, the court declared a clause for securing a mortgage loan as null and void, on the understanding that there had been abuse by the entity in that the latter had imposed the waiver of the aforementioned benefits and that a reasonably well-informed average consumer would not have accepted the same. These rights were waived without explanation and the fact that there was already a mortgage guaranteeing the loan mad the waiver of those rights disproportionate.  If it had been negotiated in a fair and equitable manner, those waivers would not have been accepted (since the guarantors/sureties did not obtain any benefit by placing themselves in the debtor’s position).

Commercial Court No. 1 of San Sebastián of October 2, 2014: Abuse and disproportionality

The clause is declared null and void as abusive, without affecting the rest of the loan contract, since it is not an essential clause of the contract (the joint and several responsibility is established, together with a waiver of rights granted, both for themselves and their heirs,) even allowing the creditor not to notify the principal debtor). The court considered that this was in breach of section 8.2 LCGC. It is considered unlikely that the situation of the guarantor/surety was desired by the latter.

These benefits waived by the guarantor are waived without explanation, such waiver being disproportionate to the risk they assume, resulting in an unfavourable situation that would not have been accepted if it had been negotiated in a fair and equitable manner. Therefore, the fair balance of benefits had not been respected.

In the same sense, judgments of the same court of March 9, 2015.

Commercial Court nº10 of Barcelona of 2017: Vice of consent

The Court held that there was a waiver of benefits and that it had not been proven that the entity understandably explained the implications of the waiver, adding to the lack of clarity and information of the unlimited personal liability clause of a mortgage.

Court of First Instance nº5 of Palma de Mallorca of January 15, 2018: Abuse and disproportionality

A guarantee clause in a mortgage loan contract was annulled because it was not considered to be in good faith or in balance between the parties, since it was not proven that it was previously negotiated but it was a sine qua non condition to formalize the business.

“The Explanatory Memorandum of the General Conditions of Contract Law (EDL 1998/43305) clearly indicates that the concept of abuse is limited to contracts with consumers, but it adds: “This does not mean that in the general conditions between professionals there can be no abuse of a dominant position. But such a concept will be subject to the general rules of contractual nullity. That is to say, nothing prevents a court to also declare the nullity of a general condition that is abusive when it is contrary to good faith and causes a significant imbalance between the rights and obligations of the parties, even if the relevant contracts have been signed between professionals or businessmen”

Order of the Provincial Court of Barcelona of June 28, 2018: Consumer concept

Regarding the status of the guarantor as consumer, the CJEU of November 19, 2015 declares that in a real estate guarantee or security agreement entered into between an individual and a credit institution to secure the obligations contractually assumed by a commercial company as against the aforementioned entity in the framework of a credit agreement, consumer protection legislation will only be applicable when that individual acts with a purpose unrelated to their professional activity and lacks functional links with said company.

In this case, this circumstance does not apply. In relation to Mr. Pedro Enrique, it is clear that he has a functional link with the borrower, a commercial company, as he was its sole administrator at the time of subscribing the mortgage-backed credit agreement whose debit balance is claimed in the court records. Further problems arise from the co-guarantor Mrs. Tomasa, because she does not state the relationship she had with the aforementioned company. However, the non-accreditation of this circumstance, given that she was the one who claimed to have consumer status, can only be harmful to her, as the burden of the proof lies on her, both by virtue of the normal distribution of evidentiary burdens set forth by art. 217 LEC and because of it was easier for her to prove this circumstance.

Judgment of the Provincial Court of Álava of June 12, 2017: Vice of consent

Mr. Eutimio had believed that he would only be accountable if the borrower did not answer for the debt with all his assets, and this was due to lack of information. When securing a third party debt, the guarantor was aware of the mortgage security that had been constituted on the property acquired by Mrs. Enma. Therefore, the debtor understood that it was for his ex-wife to repay the debt, and if she did not, there was a property that will be used to repay the debt with preference over the rest of their assets. Only if the debtor does not pay, if the mortgage guarantee is insufficient and if the debtor’s assets do not cover the credit, the personal guarantee provided by guarantors or sureties would be would be enforced.

The plaintiff had no way of supplementing that lack of information by other means. In accordance with the foregoing, the Chamber ratifies the findings of the lower court judge, the Bank did not explain to the plaintiff the characteristics of the guarantee, and this lack of information led to Mr. Eutimio having a wrong representation of his responsibility. He thought that he would be responsible for the debt only in event that the mortgaged property was insufficient, and the other assets of the borrower were not enough to cover the debt. He also thought that the debt would be divided among all those responsible, debtor and guarantor. But this was not the case, and the Bank claimed the debt when the borrower did not comply with the loan instalments, the guarantor had to pay when required as a consequence of the waiver of the rights of preference, excussion and division, and he was placed in the same position as the main debtor.

[1] See Annex I.

[2] In relation to the application of consumer protection regulations, a preliminary ruling was submitted to the Court of Justice of the European Union to determine when the guarantor should be considered to be a consumer and when not. Pronouncement commented on point 4.

[3] The General Conditions of Contract Law of 1998, with the Supreme Court Judgment of May 9, 2013, set forth the requirements for a bargaining clause to be considered a general condition of the contract: 1) Contractual nature, insertion in the contract not required by an imperative provision, 2) Predisposition, previously drawn up and not the result of any negotiation, 3) Imposition by the employer so that the contract is either signed or not and 4) Generality, incorporated into a plurality of contracts.