Director-shareholder's suretyship annulled for abuse

Suretyship and personal security in the legal profession

Three courts of appeal annulled personal suretyships and guarantees that lawyers required from their clients for the company's unpaid fees. In each case the conduct breached Rule of Conduct 28(1): a lawyer may not accept any security other than a payment on account. The client's dependent position renders such security voidable for abuse of circumstances — even where the limitation period has already expired.

Director-shareholder signs suretyship just before the hearing — claim for €8,203 dismissed

The appellant is waiting for the hearing at Breda District Court. His lawyer appears, thrusts a note under his nose and says he needs to sign it — otherwise the lawyer cannot proceed with the case. The appellant signs. Only later, during the proceedings, does he discover what he has signed: a suretyship for all outstanding fees of his company Product Source B.V., amounting to €8,203.66. The 's-Hertogenbosch Court of Appeal rejected the claim under that suretyship and annulled the instrument for abuse of circumstances.

This was not the first time a court of appeal had ruled this way. In 2012 the same court annulled a declaration of joint and several liability that the law firm GCA had extracted from a director-shareholder in exchange for release of the case file — at a time when the director-shareholder was unfit for work and the company was on the brink of bankruptcy. In 2014 the Amsterdam Court of Appeal annulled a personal guarantee that GMW Advocaten had obtained through a series of escalating emails shortly before a hearing: "You do not have much time left", read one of those emails.

Three courts of appeal, three annulments. The line of authority is clear.

Rule of Conduct 28(1) as a civil-law standard: breach leads to annulment

The three decisions turn on Section 3:44 DCC — abuse of circumstances — in combination with Rule of Conduct 28(1) of the Rules of Conduct for the Legal Profession 1992. That rule provides that a lawyer is not permitted to accept, for payment of a fee, any security other than a payment on account in money, save in exceptional cases and then only after consulting the Dean of the Bar.

A suretyship, a declaration of joint and several liability, a personal guarantee — these all amount to "other security". In none of the three cases had the lawyer consulted the Dean of the Bar. In none of the three cases had exceptional circumstances been put forward that could have made such consultation unnecessary.

The courts expressly took this disciplinary standard into account in their civil-law assessment. The fact that only the disciplinary tribunal has jurisdiction to impose a measure for a breach of the rules of conduct does not stand in the way of this. Rule of Conduct 28(1) marks out what a lawyer knows or ought to know — and that knowledge ought to have deterred him from requiring or accepting the security.

In the courts' view, the dependent relationship between lawyer and client follows from the very nature of the relationship. In the 2016 case the lawyer was aware of the company's financial distress and had the director-shareholder sign in the courthouse, just before the hearing. In the 2012 case the law firm was also handling the client's divorce, while the client was suffering burnout and was unfit for work. In the 2014 case the lawyer threatened to withdraw ahead of an imminent hearing for which no replacement appeared to be readily available. Each of these situations amounted to abuse of circumstances within the meaning of Section 3:44(4) DCC.

What can a director-shareholder do if the lawyer asks for personal security?

A suretyship or guarantee that a lawyer takes without consulting the Dean and in breach of Rule of Conduct 28(1) is voidable for abuse of circumstances. This is so even where the director-shareholder proposed the security himself: the Amsterdam Court of Appeal expressly held that the lawyer ought to have deterred the client, because the client was not familiar with Rule of Conduct 28(1).

Even where the three-year limitation period under Section 3:52 DCC has already expired, the plea of annulment may be raised as a defence to a claim founded on the instrument. Section 3:51(3) DCC allows this at any time. The 2012 case illustrates the point: the instrument dated from 2004, the plea of annulment was raised in 2011, and the court upheld it.

A director-shareholder faced with a pending claim under a suretyship or guarantee instrument is well advised to have the background of that instrument reviewed. This is especially so where the security was requested just before a hearing, under pressure of withdrawal of the engagement, or without the lawyer mentioning Rule of Conduct 28(1). The case law on this point is consistent. See also the practice in the area of commercial litigation and the relationship between lawyer and client.

Frequently asked questions

Can a lawyer never ask for a personal suretyship?

It is possible in exceptional cases, but only after consulting the Dean of the Bar. The courts point out that none of the lawyers involved had held that consultation, nor had put forward exceptional circumstances that would make such consultation unnecessary. Without those steps, the suretyship is in principle contrary to Rule of Conduct 28(1) of the Rules of Conduct for the Legal Profession 1992.

What if the director-shareholder proposed the guarantee himself?

The Amsterdam Court of Appeal held that this makes no difference. The lawyer ought to have deterred the director-shareholder from entering into the guarantee, because he knew — or ought to have known — that this was contrary to the Rules of Conduct. The fact that the director-shareholder had initiated the guarantee himself, and had later done something similar with another lawyer, did not lead to a different conclusion.

Can the suretyship still be annulled if it was entered into years ago?

Yes. Section 3:51(3) DCC provides that a ground for annulment may be invoked at any time as a defence to a claim founded on the legal act. The ordinary three-year limitation period does not stand in the way once the lawyer brings the claim. Both the 's-Hertogenbosch Court of Appeal (2012) and the 's-Hertogenbosch Court of Appeal (2016) applied this rule.

's-Hertogenbosch Court of Appeal, 18 October 2016, ECLI:NL:GHSHE:2016:4681; 's-Hertogenbosch Court of Appeal, 29 May 2012, ECLI:NL:GHSHE:2012:BW7211; Amsterdam Court of Appeal, 3 June 2014, ECLI:NL:GHAMS:2014:2410.

Cited case law

Courts of Appeal: ECLI:NL:GHSHE:2016:4681 · ECLI:NL:GHSHE:2012:BW7211 · ECLI:NL:GHAMS:2014:2410

Juriaan de Vries — lawyer at Prime Law, specialising in corporate and commercial litigation. See the disclaimer.