Facts and Points Decided

French law is extremely protective of persons who agree to become sureties for the debts of another. A contract of surety falls under Article 1326 of the Civil Code, which provides that contracts by which a person undertakes to another to pay a sum of money must be in writing, be signed by the person to be bound, and contain a handwritten endorsement by the latter setting out in figures and in letters the amount of the undertaking. This rule does not however apply in commercial matters. This case concerns the application of these principles in a matter where two persons guaranteed the debt of a company in which one of the two was a manager and the other a shareholder. The case makes an interesting distinction between the two.
Held: The contract of surety as signed, without the specific endorsement of Article 1326, is prima facie evidence of the guarantee obligation, which, however, must be further proved by evidence extrinsic to the document itself. In the case of the manager, who must be presumed to know the full extent of the surety he is signing, since he manages the company whose debt is guaranteed, the mere fact of his being manager provides this extra extrinsic evidence. In the case of the shareholder, however, even if he holds a majority of the shares, the fact of his having that status is not sufficient, for a shareholder cannot be presumed to know the extent of his undertaking.

At the public hearing of 29 March 1994, THE COURT:

Whereas, according to the judgement brought before this Court, 1) under an agreement of 7 February 1983, SOFEG, a company, granted a loan to Benech Frères SARL (Benech), in order to finance the purchase of a vehicle; 2) under two separate contracts of 15 February 1984, Messrs. André and Jacques Benech jointly and severally guaranteed to SOFEG the performance of this agreement; 3) Benech ceased to make due payments and SOFEG requested payment of the balance of the loan, which had fallen due; 4) Benech was put into administration and SOFEG’s claim was accepted on 31 October 1985; 5) on 10 July 1986, under a draft supplement to the loan agreement, Euro-Voyages undertook assume the debts owed by Benech to SOFEG; 6) Euro-Voyages was put into liquidation and Technicrédit, assuming SOFEG’s rights, brought an action for payment against the guarantor; 7) the Court of Appeal accepted this action;

As regards the first argument:

Whereas Messrs. André and Jacques Benech criticise the judgement for finding as it did, whilst, according to the Appeal, 1) article 1273 of the Civil Code does not require that the intention to novate be expressed in formal terms; 2) indeed, novation can result from positive unequivocal written documents; 3) in this instance, the Court of Appeal should have investigated, as it was invited to do, whether a) the express terms of the supplementary agreement of 10 July 1986, b) the fact that this text was written out on the headed paper of “Volvo Crédit SOFEG”, c) and the fact that Technicrédit had allowed Euro-Voyages to transfer the registration documents of the vehicles in question, SOFEG taking a new pledge against Euro-Voyages, the new debtor, did not demonstrate the creditor’s will to novate; 4) by refraining from this investigation, and by simply stating that there was no novation as the supplementary agreement did not contain the creditor’s signature, the Court of Appeal’s judgement lacks legal basis as regards articles 1271 and 1273 of the Civil Code;

But whereas by noting that the supplement to the loan agreement, written out on the creditor company’s headed paper, had not been signed by the latter, and by holding that, later, Technicrédit was correct to claim that it had never accepted the substitution of debtor, the Court of Appeal has carried out the investigation allegedly omitted; the argument is ill founded;

As regards the second argument, taken in its three limbs, as set out by Mr. André Benech:

Whereas Mr. André Benech criticises the judgement in the same way, whilst, according to the argument, on one hand 1) it is for the party basing himself on a document which does not follow article 1326 of the Civil Code and which serves as written prima facie evidence, to provide further proof of his allegations; 2) Technicrédit did not even offer to provide such proof; 3) consequently, the Court of Appeal could not hold that the status of Messrs. Benech and the handwritten endorsement on the document constituted the additional proof, without violating article 16 of the new Code of Civil Procedure; whilst, on the other hand, 1) to complete written prima facie evidence, the court must base itself on an element extrinsic to the document; 2) in this instance, the Court of Appeal holds that the additional proof resulted from the fact the document signed by Mr. Jacques Benech bore the handwritten endoresement “valid for joint and several surety as above”, which constitutes a reference to the text of the undertaking which is not unambiguous; 3) it follows that by thus extracting an additional proof from the text itself of the document taken as prima facie evidence, the Court of Appeal has violated article 1347 of the Civil Code; 4) and finally, the status of manager or shareholder of the debtor company is not in itself sufficient to establish that, in spite of the irregularity of the handwritten note, the guarantor was informed of the extent of the obligation entered into; 5) in this instance, the Court of Appeal holds that Mr. André Benech, as Manager of Benech, and Mr. Jacques Benech, as shareholder, were completely informed of the true extent of their undertaking, and that their undertaking was consequently “completely valid”; 6) by coming to this conclusion, the Court of Appeal has once again violated article 1347 of the Civil Code;

But whereas the judgement holds that 1) the guarantee document signed by Mr. André Benech on 15 February 1983, even if it does not contain the handwritten note of the sum guaranteed, constitutes handwritten prima facie evidence and Mr. André Benech was Manager of Benech; 2) the Court of Appeal, using only the elements produced at Court, has thus correctly decided that the proof of Mr. André Benech’s guarantee was complete; 3) the argument does not have legal basis in any of its three limbs;

But as regards the second argument, taken in its three limbs, as set out by Mr. Jacques Benech:

In view of articles 1326 and 1347 of the Civil Code;

Whereas, in order to decide that the proof of the existence of the guarantee of Mr. Jacques Benech has been established before the Court, the judgement, far from making use of the formal confession noted by the first judges, after correctly holding that the document of 15 February 1983 signed by Mr. Jacques Benech but bearing an insufficient handwritten endorsement, constituted handwritten prima facie evidence, goes no further than holding that, firstly, Mr. Jacques Benech is a Benech shareholder and concludes that in this capacity, he was completely informed of the true extent of his undertaking, and secondly, that the handwritten endorsement referred back to the body of the guarantee document;

Whereas by relying on such grounds, whilst the reference, in the handwritten endorsement, to the body of the guarantee document does not constitute an extrinsic element and the status of shareholder, even if it is that of a majority shareholder, alone, is inadequate to complete validly the handwritten prima facie evidence, the Court of Appeal’s judgement lacks legal basis;

ON THESE GROUNDS:

QUASHES AND ANNULS, but only insofar as it has ordered Mr. Jacques Benech to pay Technicrédit the principal sum of FF 773,057, the judgement rendered between the parties on 27 June 1991 by the Toulouse Court of Appeal; thus reverts both the matter and the parties involved to their respective positions prior to the aforementioned judgement and, that justice may be done, sends them back to the Pau Court of Appeal;

Dismisses […]

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