Vol 15 (2018) - Issue 6

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Disproportionate Guarantees may be Counterproductive in France: Implications for Risk Mapping

Synopsis
Guarantees are by nature designed to protect creditors against their debtors’ failure to fulfil their obligations. In some instances, however, excessive protection may be counterproductive and detrimental to the creditors. French law indeed provides that a guarantee can become unenforceable if it is disproportionate either to the guarantor’s fortune or to the secured debt, when the borrower is in financial trouble. There is thus a true creditor’s dilemma: while seeking to protect their legitimate interests, creditors need to carefully appraise, depending on the borrower’s financial situation, how and to what extent to secure the reimbursement of their claims or loans. French courts are the custodians of the aforementioned proportionality principle and ensure that it is complied with. Lenders therefore need to factor this principle into their risk mapping analysis. The authors summarise the key points to consider under French law and propose an approach to address and reduce the risks to which lenders may be exposed. The suggested approach, however, has its limits since the last word will always rest with the courts and that case law is by nature evolving.