The Release of the Guarantor due to the late termination of the Bank (CC 868)

Legal Insight

September 2020

Dimitris Veziridis, LL.M.

The Release of the Guarantor due to the late termination of the Bank (CC 868)

Summary: In this briefing note we will analyse one of the ways in which it is possible for a guarantor (usually in a bank contract) to be released from its guarantee liability. In particular, we will examine the terms and conditions under which it is possible to effectively raise the so-called "release objection", pursuant to Article 868 of the Civil Code (CC), which provides for: "If a termination by the creditor is required to make the principal debt demanded, the guarantor may, after one year has passed since the guarantee was given, demand that the creditor terminate and pursue his claim in court within one month, and continue the proceedings without undue delay. If the creditor fails to comply with the guarantor's claim, the guarantor shall be released."

The legislator, recognising the strong social and economic interest of the guarantee, introduced the provision of Article 868 of the Civil Code in order to protect the guarantor, so that he would not be forever at the mercy of any (fraudulent or negligent) delays (sometimes even for several years) in collecting the claim on the part of the creditor. The guarantor may be required to pay the bank, with all that this entails for the latter (e.g. in relation to the possibly excessive interest during the intervening period, which exponentially increases the debt, etc.).   

The existence of this provision is thus dictated, on the one hand, by the need not to perpetuate the guarantor's liability and, on the other, by the need to distribute the rights and obligations of the parties in an equal and fair manner. That is to say, on the one hand, the reasonable interest of the creditor in retaining some security for the money he has lent to the creditor until it is repaid to him is recognised, but on the other hand, the reasonable interest of the guarantor in not having his property tied up for too long a period of time under the 'sword of Damocles' of his creditor is also recognised. At the same time, the purpose of the provision of Article 868 CC was, in addition to the above, the need to compensate for the lack of the possibility of immediate release (right of termination) of the guarantor from the guarantee agreement.

In this context, the conditions for the application of 868 CC are as follows: 

a) The existence of a guarantee for an indefinite period of time. The guarantee is considered to be of indefinite duration when the relevant contract does not contain an express and clear agreement between the parties to limit the guarantor's liability for an indefinite period of time. In any case, if the text of the contract does not clearly indicate what type of guarantee has been given, it is considered to be of unlimited duration. Guarantees, with a few exceptions usually found in old banking contracts, are of indefinite duration. On the contrary, if the guarantee contract is of a fixed term (e.g. it was agreed that it would be valid only for 6 months or 1 year), then Article 868 CC does not apply, but Article 866 CC applies. According to the latter, the creditor must, within one month of the expiry of the agreed period for which the guarantee contract is valid, pursue his claim in court and pursue it without undue delay, otherwise the guarantor is released.

b) Dependence of the receivability of the primary debt on termination by the creditor. In order for the debt for which the guarantor is also liable to become due and enforceable, the loan agreement must first be terminated by the lender, for example.  This provision will therefore also apply to lending through a mutual account and through an interest-bearing loan agreement (e.g. a mortgage loan) under which termination is required in order for future instalments to become due. In contrast, if the guarantee is for a fixed term, then the contract does not need to be terminated. This is because, as provided for in Article 866 CC, only the expiry of the period of time for which the guarantee agreement was agreed to be valid is sufficient to start the one-month period within which the creditor must pursue his claims in court. 

c) The expiry of one year from the date of the guarantee. At least one (1) year must have elapsed between the signing of the guarantee agreement and the invocation of the right granted in Article 868 CC. 

d) The guarantor's claim that the creditor should terminate the contract and pursue his claim in court. This is perhaps the most important condition for the application of the provision of Art. 868 CC. The guarantor should clearly demand/request the creditor (usually by means of a statement in writing, but an e-mail etc. is also sufficient) to terminate the contract and pursue his claim in court. The 'trap' hidden in this condition, which is the reason why Article 868 CC is often not applied in practice, is precisely because the guarantor in question will not easily go to the trouble of asking the bank to initiate legal action to recover its claim. This is for the simple reason that, by terminating the contract, the bank may take legal action against the guarantor himself. However, the guarantor, lacking legal knowledge and fearing the bank's reaction, loses an important 'weapon' that could lead to his definitive and complete disengagement from the guarantee contract.

e) The lender's compliance with the above invitation of the guarantor must take place within an exclusive period of one (1) month. In order to avoid the discharge of the guarantor under CC 868, the lender must terminate the contract and at the same time pursue his claim in court within an exclusive period of one (1) month, which (month) starts from the day after the above invitation of the guarantor to the lender to terminate the contract. 

It should be noted here that the term "judicial pursuit of the claim" means only the filing of a lawsuit or the issuance of a payment order by the Bank and not the sending of a simple out-of-court statement, presumably in response to the previous out-of-court statement addressed to it by the guarantor. Thus, if the guarantor invites the bank to terminate and pursue its claim in court, but the bank at this stage merely settles for an out-of-court demand from the primary debtor, the guarantor is still discharged. Because an extrajudicial demand is not enough; he should have brought an action, for example.

However, even if, after the guarantor has received the out-of-court notice, the creditor does indeed terminate the loan agreement and bring an action within the statutory one-month period, this does not automatically mean that the bank has 'blocked the escape route' of the guarantor and that the latter has lost the possibility of being released for good. This is because the law imposes an additional condition: the creditor must continue the legal proceedings to pursue the claim without undue delay. This means that even if the bank takes the appropriate action within the one-month time limit, but fails to pursue it as any creditor who genuinely wants to collect his claim would do (e.g. culpable suspension or in any way obstructing the pending proceedings), the guarantor is released because the creditor 'failed to pursue the proceedings without culpable delay'.     

f) Failure of the creditor to comply with the guarantor's invitation. If the creditor fails to do the above or fails to do so as required by law, the guarantor is released from the guarantee without any further action on his part (automatic release).  

An example:

A shareholder of a joint stock company acts as a guarantor for a loan taken by the latter. Subsequently, for various reasons, the company becomes in default and remains so for several years. For its part, the Bank has not terminated the contract or pursued its claim in court over the years. The shareholder then sends the Bank an extrajudicial declaration, inviting it to terminate the contract and pursue its claim in court, in the manner described above. This is because there is a security interest in the name of the debtor company and the delay in collection inflates the debt against it. For its part, the Bank proceeds to terminate the contract, not within one month, as provided for, but after several months, and has not yet taken any legal action to recover its claim. In this example, the shareholder can bring an action before the competent court seeking a declaration that it has been released from its guarantee liability. He will base his action on Article 868 of the Civil Code, claiming that the bank, although requested by him, did not give notice within one month.

With the above example, we would like to make it clear that any person who has contracted as a guarantor understands that the Bank is not acting as it should have acted or as any other lender in its position would have acted, should immediately seek appropriate advice and assistance in order to free himself - if possible in the particular circumstances of each case - from a guarantee which no longer serves the purpose for which it was given but has become a 'chronic burden' without end. This is, moreover, likely to be the case, in our experience, where the bank has collateral in excess of the debt and therefore any delay in collection is not at its expense but at the expense of the guarantor.