How many people have signed a guarantee without considering all the consequences? A guarantee is often a heavy commitment for the person who accepts it. In the field of consumer creditThis guarantee has given rise to a great deal of litigation.
French legislation has gradually introduced protective mechanisms for guarantors, in recognition of their vulnerability. These protections are all the more essential as individuals who act as guarantors generally do so out of solidarity with family or friends.
Protective formalism: a bulwark against rash commitments
The legislator has introduced strict formalities for guarantees given by natural persons to professional creditors.
Mandatory handwritten information
Article L. 331-1 of the Consumer Code requires the guarantor to handwrite the following statement: "By guaranteeing X..., up to the sum of..., covering payment of the principal, interest and, where applicable, penalties or interest for late payment and for the duration of..., I undertake to repay to the lender the sums due out of my income and property if X... fails to do so himself."
This requirement is designed to ensure informed consent. Failure to comply will render the guarantee null and void. However, case law allows for certain minor variations in the legal text, provided they do not alter its meaning.
As the Court of Cassation stated in a ruling dated 5 April 2011, "the nullity of a surety undertaking given by a natural person to a professional creditor is incurred by the sole fact that the handwritten wording on the surety undertaking is not identical to the wording prescribed by articles L. 341-2 and L. 341-3 of the Consumer Code". (Cass. com., 5 Apr. 2011, no. 09-14.358).
Specific features of joint and several guarantees
For joint and several guarantees, Article L. 331-2 of the Consumer Code requires an additional statement: "By waiving the benefit of discussion defined in article 2298 of the Civil Code and by jointly and severally obliging myself with X..., I undertake to repay the creditor without being able to demand that he first sue X...".
The absence of this statement does not render the guarantee totally void, but it does deprive it of its joint and several nature. This is what the First Civil Chamber of the Court of Cassation ruled on 5 April 2012 (Cass. 1re civ., 5 Apr. 2012, no. 12-14.122).
Notarial deeds
Until 1 January 2022, notarial deeds benefited from a special regime. Article 1369 paragraph 3 of the Civil Code exempted deeds received by a notary from any handwritten mention required by law.
The reform of the law on securities introduced by Order no. 2021-1192 of 15 September 2021 has changed this legal landscape.
Proportionality of the guarantee: protection on the merits
In addition to the formalities, the Consumer Code imposes substantial protection: the guarantee must be proportionate to the guarantor's financial capacity.
The obligation to verify financial standing
Prior to the 2021 reform, article L. 332-1 of the Consumer Code provided that a professional creditor could not rely on a guarantee entered into by an individual if the commitment was, at the time it was entered into, manifestly disproportionate in relation to the individual's assets and income.
This rule is included in Article 2300 of the Civil Code. The creditor must assess repayment capacity of the guarantor before accepting his undertaking.
In practice, the courts take into account all the guarantor's income and expenses. The Court of Cassation has specified that "the proportionality of the guarantor's commitment cannot be assessed in the light of the expected income from the guaranteed transaction". (Cass. com., 15 Nov. 2017, no. 15-27.703).
Penalties for disproportionate guarantees
In the event of manifest disproportion, the creditor cannot invoke the guarantee against the guarantor. However, this protection is not absolute.
The Code provides for one exception: the creditor may enforce the guarantee if the guarantor, at the time it is called upon, is in a position to do so. This is an important distinction.
This does not mean that the guarantee is null and void, but that it is temporarily impossible to take advantage of it. As the Court of Cassation ruled, "It is incumbent on a professional creditor who intends to rely on a surety agreement that was manifestly disproportionate at the time it was entered into to the assets and income of the guarantor, a natural person, to establish that at the time the creditor calls on the guarantor, the latter's assets enable him to meet his obligation. (Cass. com., 15 Nov. 2017, no. 17-22.943).
Information obligations towards guarantors: maintaining transparency
The protective measures also include information obligations during the performance of the contract.
Information in the event of a payment incident
Article 2302 of the Civil Code (since the 2021 reform) requires the creditor to inform the guarantor of the first payment incident that is not rectified within one month of the due date.
Failure to comply with this obligation will result in forfeiture of interest and penalties accrued between the date of the incident and the date on which the guarantor was informed.
This rule is designed to enable the guarantor to intervene quickly with the principal debtor, before the debt reaches too large an amount.
Mandatory annual information
Before 31 March each year, the professional creditor must also inform the guarantor of the amount of principal, interest and ancillary costs outstanding at 31 December of the previous year.
This information must also mention the term of the commitment and the possibility of revocation if the guarantee is for an indefinite period.
Failure to provide annual information will result in the forfeiture of interest accrued since the previous information was provided until the new information is provided.
The burden of proof that these formalities have been completed lies with the creditor. The Court of Cassation has specified that "the mere production of copies of newsletters is not sufficient to justify that they were sent". (Cass. 1st civ., 6 Sept. 2017, no. 16-18.258).
The reform of securities law: a major turning point
The reform of the law on sureties introduced by Order no. 2021-1192 of 15 September 2021 has radically altered the rules governing surety bonds.
Since 1 January 2022, the provisions relating to surety bonds have been transferred from the Consumer Code to the Civil Code. This transfer is accompanied by a harmonisation of the rules, regardless of the guarantor's status.
Articles 2302 to 2304 of the Civil Code apply to all guarantees, including those entered into previously. However, the other provisions only apply to guarantees entered into after 1 January 2022.
In addition, the statute of limitations for actions for disproportionality has been the subject of recent case law. The Court of Cassation has ruled that "the action shall be barred after five years from the date of the formal notice to pay the sums owed by the borrower as a result of his default". (Cass. 1re civ., 5 Jan. 2022, no. 20-17.325).
Enhanced bond protection: leave no stone unturned
Guarantees for consumer credit may seem trivial at the time of signing. However, the financial consequences can be dramatic for the borrower. ill-informed guarantors.
Case law illustrates the complexity of this area and the many subtleties that can overturn the validity of a commitment. An incomplete handwritten note, an undetected disproportion or information not provided can radically change the outcome of a dispute.
When you are asked to act as a guarantor, a prior consultation with a lawyer enables you to assess the real scope of the commitment and check that all the legal safeguards are respected. For creditors, legal assistance is just as essential to secure their guarantees.
Our firm analyses each situation in detail. We intervene both for sureties seeking to assert their rights for creditors who want to meet their obligations. Contact us for a personalised review of your case.
Sources
- Consumer Code, articles L. 331-1 et seq (prior to the 2021 reform)
- Civil Code, articles 2288 to 2320 (after the 2021 reform)
- Order no. 2021-1192 of 15 September 2021 reforming the law on securities
- Cass. com., 5 Apr. 2011, no. 09-14.358, JurisData no. 2011-005704
- Cass. 1re civ., 5 Apr. 2012, no. 11-12.515, JurisData no. 2012-006566
- Cass. com. 15 Nov. 2017, no. 15-27.703, JurisData no. 2017-022802
- Cass. 1st civ., 6 Sept. 2017, n° 16-18.258, JurisData n° 2017-017323
- Cass. 1st civ., 5 Jan. 2022, n° 20-17.325, JurisData n° 2022-000038
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