Court changed the case law on the liability of sureties

Triniti

 

On 5 May 2012 Vilnius District Court decided that a financial institution having failed to assess the feasibility of the sureties to perform the suretyship contracts must assume the risk of default on these contracts. The court dismissed the plaintiff’s claim for debt and damages from the sureties.In this case, the company’s owners granted a personal suretyship for the performance of the leasing agreement entered into by the company. The leasing contract was terminated due to delayed payments by the company, the property was recovered by the leasing company and then sold. The leasing company requested the court to award the outstanding interest not paid by the company, penalties and damages, a total of over LTL 150 thousand, from the sureties.

In the hearing it was found that prior to signing the suretyship contracts the leasing company had failed to find out whether the sureties had had any assets and had not assessed whether they would have been able, in financial terms, to perform these contracts. It turned out that even before granting of the suretyship the sureties had taken personal loans by pledging their only real estate. The sureties had no other assets to make recovery possible.

The court held that the leasing company should have figured out this background information, and could also become aware and could have understood that the performance of suretyship contracts would be particularly difficult due to the financial situation of the respondents. The court stated that the leasing company should have observed the high standards of care and diligence, which require the provision of financial services to be extremely careful and diligent. In addition, the Civil Code provides that the guarantor can be an individual holding sufficient assets to fulfil the obligation, and the Law on Financial Institutions requires the plaintiff to make sure that the client’s financial and economic situation and its forecasts allow to expect that the client would be able to meet his commitments.

The leasing company’s failure to assess the sureties’ property and to make sure whether they would actually be able to meet their commitments, before requiring to sign suretyship contracts, shall be considered inadequate care and diligence and therefore the leasing company has to assume a part of the risk of default on the suretyship contracts. As the surety amount was greater than LTL 1.7 million and the leasing company’s losses have been insignificant compared with the suretyship amount, the court held that this loss is at fault of the leasing company and the sureties were held fully exempt from the civil liability.

This court judgment is not final and may be appealed to a higher court. However, the court’s arguments allows to expect that courts would look more closely at the conduct of banks and other financial institutions in concluding suretyship contracts and would reasonably balance the risk and liability for non-performance of this type of contracts.

Leave a Reply

Your email address will not be published. Required fields are marked *