Newsletter
FTC WARNS BANKS OVER GUARANTEE AGREEMENTS
In a June 2007 letter to the Bankers Association of the ROC, the Fair Trade Commission (FTC) noted that in judgments to date the courts have refused to apply the Consumer Protection Act to guarantee agreements, and that when examining the validity of contractual terms that define the maximum amount payable by a guarantor, they have largely based their determination on the face of the agreement, rather than substantively investigating the true intent of the guarantor when accepting joint and several liability.
The FTC stated that in view of this situation, if a financial institution, in order to protect its creditor rights, attempts to transfer the whole of the risk associated with its lending to a guarantor who is in a relatively weak bargaining position, and unilaterally imposes terms that extend the scope of the guarantee to all obligations arising out of the principal debtor's all dealings with the institution, there is a real risk that an imbalance of rights and obligations will be created between the financial institution and the guarantor. The FTC further stated that such practices are wide-spread in the loans market, and are likely to ad-versely affect the overall orderly conduct of trade in that market.
In view of this, the FTC requires that when ne-gotiating with a guarantor for the scope of its guarantee liability, a financial institution should not request the guarantor to agree to terms that do not define a maximum guarantee amount or a specific guarantee period. In addition, the scope of the guarantee should be based on debts arising out of a specific legal relationship between the principal debtor and the financial institution, and the relevant terms may not stipulate that the scope of a guarantee extends to "all past, present, and future debts of the debtor". Otherwise, the guarantee agreement is likely to violate Article 24 of the Fair Trade Act (FTA).
The FTC also requires that when a financial in-stitution draws up standardized guarantee terms as part of a lending agreement or guarantee agreement, it should print important information concerning the transaction (such as the scope of the debts guaranteed, the duration of the guar-antee, and the methods of performing rights and obligations) prominently in bold type, and should ensure that a guarantor has read and agreed to each of such clauses individually by having the guarantor tick each clause and sign against it.
Therefore, in future, when requesting loan guarantors, financial institutions should be sure to comply with the above requirements of the FTC, or they may be held to have violated the FTA.