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Allan, Barry --- "The validity of informal guarantees" [2013] OtaLawRw 3; (2013) 12 Otago LR 57

Last Updated: 23 April 2015

^{The Validity of Informal Guarantees}

Barry Allan^*

It is commonplace for creditors to seek some assurance over and above the mere contractual obligation of a debtor to repay a debt. They might seek security over some or all of the assets of the debtor or they might seek to have some third party stand in for or with the debtor, with or without security being given by that third party. A range of options have been developed under which third parties can give some sort of assurance that the creditor will be paid, including letters of comfort (which might well attract no legal consequences), indemnities (including performance bonds) and guarantees. There are important distinctions in form between these arrangements: in essence, a guarantee is a contract to answer for the debts of another upon default (so that the guarantor ’s liability is consequential upon and secondary to the liability of the principal debtor) and an indemnity is a contract under which one party has an independent obligation to keep the creditor harmless against loss, with liability arising upon demand rather the default of some other debtor. Davey LJ stated the distinction in this way in Guild & Co v Conrad:¹

In my opinion, there is a plain distinction between a promise to pay the creditor if the principal debtor makes default in payment, and a promise to keep a person who has entered, or is about to enter, into a contract of liability indemnified against that liability, independently of the question whether a third person makes default or not.

Although the distinction is far from clear, and not helped by the tendency of commercial practice to be rather indiscriminating when it comes to putting labels on the various arrangements, it lives on.²

I The Writing and Signature Requirements

There are important consequences of a transaction being characterised as a guarantee. For example, certain dealings between a creditor and a debtor can bring a guarantee to an end or limit the creditor ’s ability to rely upon a guarantee which would not have the same impact on an indemnity. For present purposes, however, the most important consequence is that if an arrangement is characterised as a guarantee, it must both be in writing and signed by the guarantor(s) in order to be enforceable.

No such procedural requirement arises in respect of indemnities or performance bonds (although of course, satisfying these requirements

^* Senior Lecturer, Faculty of Law, Otago University. This article is a re- worked version of an extract from the author ’s forthcoming text, The Law of Secured Credit to be published by Thomson Reuters.

^{1 [1894] UKLawRpKQB 127; [1894] 2 QB 885 at 896.}

^{2 For recent examples, see Meritz Fire & Marine Insurance Co Ltd v Jan de}

^{Nul NV [2011] EWCA Civ 827; 2 Lloyd’s Rep 379 and NZHB Holdings Ltd}

^{v Peters, HC Auckland CP 348-SD02, 20 August 2003.}

makes proof of the arrangement so much easier). Furthermore, unless the transaction is caught by the Credit Contracts and Consumer Finance Act

2003, there is no requirement for any written credit contract or signature by the debtor.³

The requirements for a guarantee to be in writing and signed by the guarantor(s) were introduced out of a fear that a contract of guarantee might otherwise be proven by false evidence or result from loose talk.⁴

The specific requirement enacted in the Statute of Frauds was that no action could be brought to enforce a promise to answer for the debt, default or miscarriage⁵ of another unless the “agreement or some memorandum or note thereof” was in writing and signed by the person to be charged. As Lord Blackburn pointed out in Steele v M’Kinlay, courts were as a result “compelled” not to enforce a promise, no matter how good the evidence of it was, unless there was proof in the mandated form. This was an important check on juries, which at the time had an “uncontrolled discretion”, and provided for a vital source of evidence when the parties themselves were not regarded as competent witnesses.⁶

That statute remained in force in New Zealand until 1956, when it was re-enacted as the Contracts Enforcement Act, but without substantial amendment. The New Zealand Law Commission addressed the continuing need for this provision when considering reform to the Property Law Act 1952.⁷ In England, the law had recently been changed so that a mere note or memorandum of an oral contract for sale of land would no longer suffice: the contract itself must be in writing and oral contracts are prohibited. This was because the doctrine of part

³ In Duncan, Fox and Co v North and South Wales Bank (1880) 6 App Cas 1 at 11; [1874– 1880] All ER Rep Ext 1406 at 1409, Lord Selborne LC said that these “special obligations” do not arise if “there is no contract for suretyship, if the person who has (in fact) made himself answerable for another man’s debt is, towards the creditor, no surety, but a principal”.

⁴ Steele v M’Kinlay (1880) 5 App Cas 754 at 768 per Lord Blackburn. This requirement also reflects the medieval concern with publicity to ensure that secret interests and obligations were not being created.

⁵ While the phrase “debt, default or miscarriage” does not obviously limit the operation to guarantees so as to exclude indemnities, that is the interpretation it has been given: Thomas v Cook [1828] EngR 285; (1828) 8 B & C 728; 108

ER 1213: Guild v Conrad [1894] UKLawRpKQB 127; (1894) 2 QB 885. In the latter case, the plaintiff knew the debtor was having problems repaying existing credit and so had little expectation that it could or would repay a further advance, but was persuaded by the defendant’s promise that he would find the funds to pay the plaintiff. The Court of Appeal held that this was not a promise to pay the firm’s debt if it did not pay itself, but a promise to pay in any event ie an indemnity. This meant that the promise was not to answer for another ’s debts but an “original” promise to pay, and therefore did not need to satisfy the statutory requirements.

⁶ Willis, Hugh Evander “The Statute of Frauds – A Legal Anachronism” (1928) 3 Indiana LJ 427 at 429.

⁷ Law Commission The Property Law Act 1952 (NZLC PP16, 1991) at [101]– [125].

performance had made it so easy to enforce an oral contract that the statute had been “left to beat the air”.

Although our Law Commission was not prepared to recommend such a change for New Zealand in respect of land contracts, it did for guarantees. This was because guarantees were almost universally committed to writing anyway, and only rarely documented by a memorandum, and part performance has no application to guarantees.⁸ Even if technically it might, it would be difficult to show any acts of a creditor sufficiently referable to a guarantee to sustain a claim to part performance. This recommendation is reflected in s 27 Property Law Act 2007 which requires a contract of guarantee to be in writing and signed by the guarantor: a note or memorandum is no longer sufficient. It also provides a refreshed definition of a guarantee⁹ which clearly maintains the distinction between guarantees and indemnities.

The Act, however, does not provide for the consequences of non- compliance, unlike the former Contracts Enforcement Act which had rendered any non-complying guarantee unenforceable. It simply says, in s 27, that a contract of guarantee “must” meet these requirements. The Law Commission and Parliament had the English reforms¹⁰ in mind: it is possible that this was simply a more laconic way of stating the English requirement. There, contracts for the sale of land “can only be made in writing” and only by incorporating all terms expressly agreed upon. That has been interpreted as doing away with the old statutory rule that the rights arising under non-complying contracts exist but are unenforceable: now they are ineffective so that contracts can only be made in writing; anything which does not comply simply is not a contract.¹¹

The difficulty is that contracts which have been lawfully entered into remain enforceable despite being in breach of an enactment, unless that enactment either says otherwise or its objects require unenforceability.¹²

^{To give full effect to the requirement for writing and signature, it needs}

⁸ The Law Commission cited Maddison v Alderson (1883) 8 App Cas 467 as authority. Although that case is not actually on point, it did refer to Britain v Rossiter (1882–83) LR 11 QBD 123 which held that part performance is not to be extended beyond land contracts.

⁹ A guarantee is now defined in s 27(4) as a contract “under which a person agrees to answer to another person for the debt, default, or liability of a third person”. This idea of answering for the debt or liability of a third person makes it clear that the third person must actually be under the obligation in question: the guarantor is taking on a responsibility to satisfy that obligation rather than taking on a fresh and independent obligation. See Moschi v Lep Air Services Ltd [1973] AC 331 at 347; [1972] 2 WLR 1175 at 1182; 2 All ER 393 at 401.

^{10 Section 2 Law of Property (Miscellaneous Provisions) Act 1989 (UK).}

^{11 Firstpost Homes Ltd v Johnson [1995] 4 All ER 355 at 358; [1995] 1 WLR}

^{1567 at 1571. This was the approach taken in Northcott v Davidson HC}

^{Whangarei CIV-2012-488-97, 7 June 2012 at [30] where Associate Judge}

^{Bell described a non-complying guarantee as a “nullity”.}

^{12 Section 5 Illegal Contracts Act 1970.}

to be argued that any guarantee which does not comply with s 27, which is expressed in mandatory terms, has not been lawfully entered into. This is a stretch,¹³ so the alternative argument is that the objects of s 27 require unenforceability. Given that the need for writing has been justified for centuries on the basis of a particular mischief¹⁴ this argument has considerable weight. It is augmented by the importance placed by the House of Lords on upholding the statutory requirement for writing in Actionstrength Ltd v International Glass Engineering In Gl En SpA.¹⁵ The House of Lords dismissed a claim that an oral guarantee created an estoppel, because to allow the very fact of an oral guarantee without more to create an estoppel would frustrate the statutory requirement for writing and render it “nugatory”.¹⁶ Lords Bingham and Hoffmann both recognized that a strict insistence upon written proof of a guarantee could lead to the further injustice of an otherwise binding guarantee being defeated by a lack of writing but the statute was clear in its requirements.¹⁷

The problem with regarding an oral guarantee as unenforceable under s 5 rather than a nullity is that it brings in the possibility of relief in the form of validation under s 7. It appears that the intention with the Property Law Act wording was to modernize the language and make it plain: unfortunately this has complicated the task of establishing the effect of a guarantee which is either not signed, not written or both.

¹³ The Court of Appeal in Warwick Henderson Gallery Ltd v Weston [2006]

^{2 NZLR 145 held that a statute saying a contract “must” be in writing}

^{does not make writing mandatory nor does it make the resulting contract}

^{illegal, at least in determining the consequences of non-compliance. With}

^{respect, that is exactly what s 5 Illegal Contracts Act provides for. This}

^{case involved an employment contract: the statutory context and the}

^{fact that thousands of employment contracts are not in writing made it}

^{clear that writing was not essential. The result is consistent with s 5, as}

^{it provides an exception where the objects of the statute do not require}

^{unenforceability.}

^{14 The concern addressed by the original s 4 Statute of Frauds, from which}

^{s 27 has been taken, was the use of perjury to prove spurious agreements}

^{said to have been made orally.}

^{15 [2003] UKHL 17; [2003] 2 AC 541; 2 All ER 615; [2002] 1 WLR 1346.}

^{16 Per Lord Bingham at [9]. Lord Hoffmann saw no potential for the}

^{statutory requirement and estoppel to co-exist, saying at [26] that to}

^{allow an estoppel would be to repeal the Act. At [52], Lord Walker said}

^{that “it would wholly frustrate the continued operation of s 4 in relation}

^{to contracts of guarantee if an oral promise were to be treated, without}

^{more, as somehow carrying in itself a representation that the promise}

^{would be treated as enforceable”.}

^{17 Per Lords Bingham at [7] and Hoffmann at [20]. The latter noted that}

^{Parliament must have been aware of this potential for injustice and to have}

^{intended it. In respect of land contracts, part performance is available as}

^{a partial mitigation of the mischief created by the Act: the fact that part}

^{performance is not available for guarantees is a further signal that all}

^{turns upon the signed documentation.}

^{II The Contract of Guarantee}

The contract of guarantee must be in writing. A guarantee relationship involves a three-way contract between the debtor, the creditor and the guarantor. The entire agreement may be embodied in a single document, such as when company directors sign a loan agreement both in their capacity as directors and as guarantors. An alternative is to have the guarantors sign a separate guarantee agreement: this is particularly appropriate if a number of obligations by the debtor are contemplated and the intention is to provide a guarantee of them all. The guarantor might itself initiate the guarantee, as in Paulger v Butland Industries Ltd¹⁸ where a company director wrote to creditors of the company to personally guarantee its debts in the hope they would not press for immediate payment. The debtor need not be party to a guarantee although, of course, it needs to be clearly identified so that the obligations to be guaranteed are sufficiently certain.

As with any contract, the same factors which might vitiate a contract (such as misrepresentation, mistake, illegality, duress or undue influence) can have the same impact upon a guarantee. If the guarantee is in respect of a credit contract, consumer lease or buy-back transaction as defined in the Credit Contracts and Consumer Finance Act 2003, then the guarantor may seek to reopen the contract under s 125 on the ground of oppression. There is no facility, however, for the reopening of a guarantee or any provision made for oppression of a guarantor.¹⁹ In order to use the oppression remedy, therefore, the guarantor will need to establish oppression affecting the debtor, which it can then rely upon to relieve it of obligations.

A Interpretation

Because of the need for writing and signature, it might be thought that, while courts generally are manifesting a willingness to go outside written contracts to establish their meaning and effect, they should be more restrained when it comes to guarantees. Nonetheless, English courts have been willing to use extrinsic evidence,²⁰ not only to resolve ambiguities

¹⁸ [1989] NZCA 190; [1989] 3 NZLR 549.

^{19 Re-opening of credit contracts, consumer leases and buy-back transactions}

^{is permitted by s 120, which makes no reference to guarantees. A guarantor}

^{is permitted by s 125 to seek the re-opening of a credit contract, consumer}

^{lease or buy-back transaction if the guarantee relates to one of these}

^{contracts. The definition of a credit contract does not include a guarantee.}

^{While s 119(2) does extend the notion of a credit contract to include other}

^{contracts which are entered into as a term of the credit contract, it will}

^{only bring in such parts of the other contract that “relate to the provision}

^{of credit to, or the payment of money by, a debtor”. There is but a slim}

^{and untested possibility that a guarantee will be within this proximity}

^requirement.

^{20 In Perrylease Ltd v Imecar AG [1987] 2 All ER 373; [1988] 1 WLR 463 the}

^{Court held that so long as there is in fact a complete written guarantee,}

^{the normal approach to interpretation of contracts is just as applicable to}

but to supply absences in the written document. In a recent case, the English High Court found a long history of such use and concluded that extrinsic evidence may be relied upon to identify the guarantor, the creditor, the principal debtor or the obligation to be guaranteed, where any of these have been inadequately or ambiguously described in the relevant document.²¹ This did depend upon an underlying agreement as to these matters: the court cannot invent them. Nor can the court read in material terms of the guarantee contract which have been orally agreed: they must be written.²² The Court went on to say that the evidence of an underlying agreement needs to be “convincing” and that this approach would not be appropriate if the very existence of the term was in dispute, as that would deprive the guarantor of a legitimate statutory defence. Ultimately the Court found that the document was so lacking that to interpret it as a guarantee would require the court to write a new and different contract for the parties.²³

B Contents

In other jurisdictions, a mere note or memorandum of a contract of guarantee will suffice, so that oral guarantees are enforceable if there is a sufficient record of the oral contract. In New Zealand, the requirement is for the contract of guarantee itself to be in writing and signed. Lord Brandon spoke of the distinction in Elpis Maritime Co Ltd v Marti Chartering Co Ltd,²⁴ saying that signing a contract means that any prior oral contracts will be subsumed in the written contract. If a mere note or memorandum is signed, the oral contract remains intact and governs the relationship. It follows that if the creditor is relying upon an oral agreement which has not been subsumed in a written contract, the s 27 writing requirement will not be satisfied, no matter what written record may have been retained. Historically, letters to third parties, diaries, wills, affidavits in other matters have all been held to be a sufficient note or

guarantees as to any other form of contract. In ANZ Bank New Zealand Ltd v Calvert HC Auckland CIV-2012-404-5210, 3 July 2013, Associate Judge Doogue took an orthodox approach to interpretation, and rejected the defendant’s claim on the bases it was contrary to business commonsense and not rational.

²¹ Fairstate Ltd v General Enterprise & Management Ltd [2010] EWHC 3072; (2010) 133 Con LR 112 at [75]–[76]. The lawyer preparing the document had simply taken a standard form guarantee of a bank liability, which was wholly inapplicable to the transaction being guaranteed: in particular, it failed to identify the actual guaranteed obligations. In addition, although he had used the correct names of the parties, he had put the guarantor ’s name in as creditor and the creditor ’s name in as debtor.

^{22 Clipper Maritime Ltd v Shirlstar Container Transport Ltd, The Anemone}

^{[1987] 1 Lloyd’s Rep 546 at 556.}

^{23 State Bank of India v Kaur (1996) 5 Bank LR 158 is another example of the}

^{Court having insufficient extrinsic evidence available to resolve the defect}

^{with the guarantee (the debtor was not identified in the document and}

^{its identity was in dispute).}

^{24 [1992] 1 AC 21 at 32; [1991] 3 WLR 330 at 338; 3 All ER 758 at 765–766.}

memorandum but it is impossible to see such documents as an actual contract of guarantee. More than a record is needed: an intention to be bound by the written version of the agreement.²⁵

That said, even in jurisdictions which require a note or memorandum of the guarantee, the Courts have insisted that the “whole promise”, all material terms of the guarantee, be written down.²⁶ To meet this requirement, the writing must naturally stipulate that there is a guarantee, specify the liabilities to be guaranteed and any variations to the normal incidents of a guarantee. The essential idea is that the writing should provide an account of the terms of the guarantee without recourse to external evidence. Lord Hoffman has described the policy as being “to avoid the need to decide which side was telling the truth about whether or not an oral promise had been made and exactly what he been promised”.²⁷ Now that the entire land contract must be written, a failure to incorporate all expressly agreed terms will void the contract.²⁸

Given the wording of s 27 and the Law Commission’s stated reason for the change of language, an attempt might be made to argue that a guarantee must now be included in a single document, so that it is not possible to garner a guarantee and its terms from a number of documents. Such an interpretation would be commercially unrealistic, as negotiations may generate a trail of correspondence, with the terms to be gleaned from more than one document in the chain. If a single document rule was intended, which would be a substantial departure from normal principles of contract law, clearer words are needed.²⁹

The English Court of Appeal in Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd³⁰ has disposed of this argument. Although negotiations had been conducted by email for several weeks, the creditor relied on just two emails as containing the contract. Tomlinson LJ said that the writing requirement is not aimed at economy of documentation but rather to ensure that a person is not held liable as guarantor on the basis of an oral utterance which is ill-considered, ambiguous or fictitious. This purpose did not require a limitation in the number of documents in which the writing is to be found. Here, the chain of correspondence was modest and by email, so that the entire scope of the communications

²⁵ So if the document relied upon as a contract of guarantee denies or defers any such intention, for example by being “subject to contract”, then it cannot be a contract: Tiverton Estates Limited v Wearwell Ltd [1975] 1 Ch 146.

^{26 Holmes v Mitchell [1859] EngR 831; (1859) 7 CBNS 361; 141 ER 856.}

^{27 Actionstrength Ltd v International Glass Engineering In Gl En Spa [2003] 2}

^{AC 541; 2 All ER 615; [2002] 1 WLR 1346 at [19].}

^{28 The effect has been said to be merciless: Firstpost Homes Ltd v Johnson}

^{[1995] 1 WLR 1567, at 1571; Keay v Morris Homes (West Midlands) Ltd [2012]}

^{EWCA Civ 900; [2012] EWCA Civ 900; [2012] 1 WLR 2855 at [9].}

^{29 Such as those used in s 2 Law of Property (Miscellaneous Provisions)}

^{Act 1989 (UK) which expressly requires land contracts to be in a single}

^{document containing all the terms.}

^{30 [2012] EWCA Civ 265; 1 Lloyd’s Rep 542; [2012] EWCA Civ 265; 3 All ER 842; [2012] 1 WLR 3674}

^{at [21]–[22].}

could readily be determined. His Lordship was careful to say that his decision did not rest on the easiness of this task and made it clear there is no “objection in principle to reference to a sequence of negotiating emails or other documents”. He was concerned with a ship charter, and said that whether difficulties might stand in the way of this approach in other areas of commercial life had to await examination. That said, there is no reason not to regard this approach as being of general application. This is certainly true of his more general statement of principle, that the Act must where possible be construed in a manner which accommodates accepted contemporary business practice and in a way that the adoption of usual and accepted practice could not be used as a vehicle for injustice by permitting parties to break promises.

To avoid doubt, the final signed acceptance needs to at least refer expressly back to the guarantee so that the signature can be seen as embracing the written guarantee. For this reason, the documents involved in Northcott v Davidson³¹ did not pass muster. The guarantee was in writing, and sent under cover of a signed letter. The letter simply mentioned the enclosed document and invited the recipient’s consideration. As Associate Judge Bell noted, the covering letter contained no contractual provisions, nothing in the nature of any promise, and so the signature was not executing any guarantee.

There have been arguments that rectification ought not be available to correct written guarantees. The concern is that this could allow an oral agreement to validate an otherwise ineffective written guarantee. This might be if an orally agreed guarantee provision has been omitted in the written contract or is void for uncertainty. Rectification of land contracts has long been available as Courts of equity will not allow the statute to be an instrument to administer sharp practices.³² In Whiting v Diver Plumbing & Heating Ltd³³ Tipping J reviewed the authorities and academic commentary and concluded that if the facts justify rectification, by granting it “the instrument is deemed to have been in its rectified form from the start” and thus the rectified document would meet the statutory writing requirements. With this theoretical stance, even the most vital of missing elements of a guarantee can be corrected, if there is a genuine underlying agreement: in this case, the written guarantee would be rectified to supply the name of the debtor. An alternative, when there is a clear and unambiguous drafting error, such as the insertion

³¹ HC Whangarei CIV-2012-488-97, 7 June 2012 at [48].

^{32 United States of America v Motor Trucks Ltd [1924] AC 196 at 200; [1923] All}

^{ER Rep Ext 773 at 774.}

^{33 [1992] 1 NZLR 560 at 568. In Craddock Bros Ltd v Hunt [1923] 2 Ch 136}

^{at 151; [1923] All ER Rep 394 at 402 Lord Sterndale MR said that after}

^{“rectification the written agreement does not continue to exist with a}

^{parol variation; it is to be read as if it had been originally drawn in its}

^{rectified form ... and it is that written document, and that alone, of which}

^{specific performance is decreed”, These cases were relied upon to rectify}

^{a guarantee in GMAC Commercial Credit Development Ltd v Sandhu [2004]}

^{EWHC 716 (Comm); [2006] 1 All ER (Comm) 268.}

of an obviously incorrect year, is to simply correct the document in the context of a Court construing it.³⁴

If the statutory requirement is to have the complete contract of guarantee written, then it follows that any variation of the guarantee also needs to be written (and signed). This, of course, does not mean that the principal contract needs to ever be in writing, let alone any variation of it. So if there are variations in the relationship between the debtor and creditor which would operate to discharge the guarantee but the guarantor consents, it can follow that the guarantor ’s consent to that variation need not be in writing. This is on the basis that the variation creates an equity to discharge the guarantee: consent will only affect that equity but not the guarantee itself. Any action will still be on the basis of the original guarantee.³⁵

C Consideration

The one formation aspect which can pose a difficulty specific to guarantees is the need for consideration,³⁶ as it is very common for the guarantor to receive nothing for the obligations it takes on (although some guarantees are in fact paid for). In reality, it is not much of a problem: while the creditor must provide consideration, there is no requirement that the consideration be given to the guarantor. The consideration normally relied upon is the making of advances to the debtor.

The statutory requirement for writing had led the common law to require that the consideration actually be stated, but this opened the door to spurious technical defences so the need to stipulate the consideration has been done away with by statute.³⁷

It remains wise to state the consideration, however, so that it can be made clear that the advance made to the debtor, or provision of goods or forbearance to sue is in fact in consideration for the guarantee, otherwise the creditor might have difficulty establishing the necessary causal connection between the guarantee and whatever it relies upon as

³⁴ Rattrays Wholesale Ltd v Meredyth-Young & A’Court Ltd [1996] NZHC 1837; [1997] 2 NZLR 363 at 371–372. This case was applied in Marac Finance Ltd v McFarlane HC Wellington CIV-2010-485-185, 15 October 2010, where the date of advance in a six-month loan contract was written in as being a whole year prior to signing the loan agreement.

^{35 Credit Suisse v Borough Council of Allerdale [1995] 1 Lloyd’s Rep 315 at 371.}

^{36 One means of overcoming this is to simply have the guarantee executed}

^{as a deed. The formal requirements are set out in s 9 Property Law Act}

^{2007. There is no need for the creditor to be a formal party to or signatory}

^{of the deed, as the law has recognized a specific form of one-sided deed,}

^{called a deed poll: Chelsea and Walham Green Building Society v Armstrong}

^{[1951] 1 Ch 853; Moody v Condor Insurance Ltd [2006] 1 WLR 1847; Marac}

^{Finance Ltd v McFarlane HC Wellington CIV-2010-485-185, 15 October}

^{2010. If the formal requirements of a deed are not satisfied, the agreement}

^{might still be a simple contract, if all requirements are met: ANZ Bank}

^{New Zealand Ltd v Calvert HC Auckland CIV-2012-404-5210, 3 July 2013.}

^{37 Section 27(3) Property Law Act 2007.}

its consideration. The idea is that the guarantor and the creditor make their promises or performance in exchange for that of the other. For example, giving the debtor more time to pay will not be consideration for a guarantee unless that indulgence is the value given by the creditor in exchange for the guarantee. A creditor which suffers some detriment (such as giving the debtor an indulgence or releasing a security) cannot subsequently rely upon that detriment as consideration for a guarantee it obtains after the event, as it would be past consideration. Of course, if the creditor is pressing the debtor for payment and agrees not to commence proceedings, or even to give further time, in exchange for a guarantee, then its forbearance from suing will provide consideration. If a creditor does stipulate the consideration in its guarantee, it needs to be careful in framing this stipulation to avoid a suggestion that the guarantee is only being given for something the creditor has already done.³⁸

The guarantor raised a point about consideration in ANZ Bank New Zealand Ltd v Calvert.³⁹ He had given a guarantee in respect of a loan made to the debtor for the purchase of a particular property. That loan was repaid, and the creditor made a fresh advance to allow the purchase of a second property. The creditor then made demand on the guarantor in relation to the second advance: he argued fresh consideration was required to secure the second advance. That might have been true had the repayment of the original advance discharged the guarantee, but because it was not discharged, consideration was only required in relation to his entry into the guarantee.

D Digital Guarantees

Electronic forms of communication are commonly used to negotiate and reach agreement, so that all elements of an alleged contract of guarantee might be in a facsimile, email or recorded in digital form (either on a website or in a data storage device). It should be difficult to argue that a facsimile or email is not in writing, as both forms get around the essential mischief which led to s 27. One problem does intervene: s 29 Interpretation Act 1999 defines writing to mean “representing or reproducing words, figures, or symbols in a visible and tangible form and medium (for example, in print)”. This does little to legitimize modern forms of communication and digital media. Clearly, there is no problem for facsimiles, as they are both visible and tangible.⁴⁰ But when it comes to

³⁸ If the reality is that the creditor is still to perform obligations or suffer detriments, it might get away with showing evidence of this but there is a risk that it will not and, in any event, will be likely to provide the guarantor with technical defences sufficient to prevent the entry of summary judgment. In Bell v Welch [1850] EngR 210; (1850) 9 CB 154; 137 ER 851 even where the guarantee was expressed to be for money advanced and to be advanced but to cease when a particular amount was repaid, the fact that that amount had already been advanced when taking the guarantee meant that the consideration relied upon was past consideration.

^{39 HC Auckland CIV-2012-404-5210, 3 July 2013.}

^{40 Welsh v Gatchell [2009] 1 NZLR 241 at [44].}

emails, they are not tangible. Although the Welsh case was not concerned with emails, after considering a number of foreign cases concerning email communications, Miller J did say at [61] that “the writing itself may take electronic form”. In Golden Ocean Group, no issue was taken with the fact that the communications were by email, but no statutory definition of writing was in play. When it comes to data storage devices, the words are not visible until processed, but the definition does not make the ability to retrieve data relevant.

Of course, the Electronic Transactions Act 2002 was passed to facilitate the use of electronic communications in contract-making. That Act applies to every New Zealand statute which is not excluded by s 14(2). Neither the Property Law Act 2007 nor its predecessor, the Contracts Enforcement Act, are listed as an excluded Act. Any information which must be in writing can, by s 18, be in electronic form so long as the electronic information is readily accessible so as to be usable for subsequent reference. This clearly includes a guarantee in electronic form, so electronic communications and data storage can be relied on to meet the s 27 requirement for a written guarantee.

III The Signature

In addition to the guarantee contract being written, s 27 requires that it be signed. Signatures are given a near mystical quality in contract law. The act of signing conveys approval of a document, whether it has been read or not.⁴¹ In the absence of fraud or misrepresentation, a signature is recognized by the world as a formal device, a badge of acceptance. The ordinary connotation is a person writing his or her name or mark on a document.⁴²

Miller J closely analysed the signature requirement in Welsh v Gatchell,⁴³ where a facsimile was relied upon as sufficient note or memorandum of a land sale. The issue was whether it had been signed, which makes his analysis relevant to guarantees. When a signature is required for s 27, it is to serve two functions: it identifies the person signing, and its presence on the document evidences his or her intent to be bound to its contents. Whatever is relied upon as a signature must do both.⁴⁴ The signature can be the full name, last name prefixed by initials, or initials only; it might even be a pseudonym or a combination of letters and numbers⁴⁵ and

⁴¹ L’Estrange v F Graucob Ltd [1934] 2 KB 394 at 403; Toll (FGCT) Pty Ltd v

^{Alphaparm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165; 211 ALR 342 at [45]–[46].}

^{42 T A Dellaca Ltd v PDL Industries Ltd [1992] 3 NZLR 88 at 98.}

^{43 [2009] 1 NZLR 241, [46]–[52].}

^{44 Welsh v Gatchell [2009] 1 NZLR 241 at [46]. In Selby v Selby (1817) 3 Mer}

^{2 at 6; [1817] EngR 409; 36 ER 1 the writing in question was a hand-written letter from a}

^{mother to her son. She did not sign it, but did close with words equivalent}

^{to “Your dear mother”. The Court dismissed these as “ordinary terms of}

^{ceremony” rather than as authenticating the promises contained in the}

^letter.

^{45 J Pereira Fernandes SA v Mehta [2006] EWHC 813; [2006] 2 All ER 891 at [26].}

may be stamped, printed or typed.⁴⁶ The point is to affix the means of identification in a way that it authenticates the entire document, in the sense of adopting the contents of the document. While it is possible that the signature might appear anywhere on the writing, it must be inserted in such a way that it clearly governs the document as a whole.⁴⁷ Thus simply including the guarantor ’s name (perhaps in the recital), even if written in by the putative guarantor, will not suffice:

A signature is a distinct and personal act that identifies the party to be charged and evidences his or her intention to be bound by the contents of the document. For that reason, a name need not be interpreted as a signature where it serves some other purpose, as in the case where it appears as part of the substantive content.⁴⁸

A robust approach was taken to finding an intention to be bound in CSR Building Products (NZ) Ltd v McAneaney⁴⁹ where the form of guarantee had provision for signing by either a corporate guarantor or an individual one. The defendant signed in the space for the corporate guarantor and denied any intention to be bound personally. The Court held that the only reasonable interpretation available was that he was intending to give a guarantee. The defendant had argued his company was the intended guarantor: given that this company was the debtor, it would have rendered the guarantee meaningless and so that was not a reasonable interpretation.

A Digital Signatures

An electronic signature needs to serve the same purpose as any signature in this context, and so writing or typing the guarantor ’s name at the bottom of an email or facsimile message is normally a reliable signifier of intention to be bound by the contents of the message.⁵⁰ But might a mechanism designed to identify the sender also serve as a signature? Information in the header of an email cannot suffice as the signature because that is inserted automatically by the email client and cannot be seen to be a personal act of the sender indicating an intention to be bound. To hold otherwise would undermine the statutory purpose, be contrary to the underlying principle to be derived from the case law and

⁴⁶ Schneider v Norris [1814] EngR 211; (1814) 2 M & S 286 at 288; [1814] EngR 211; 105 ER 388: Goodman v J Eban

^{Ltd [1954] 1 QB 550 at 557.}

^{47 Evans v Hoare [1892] UKLawRpKQB 63; [1892] 1 QB 593; Caton v Caton (1867) LR 2 HL 127 at 142}

^{and 146.}

^{48 Welsh v Gatchell [2009] 1 NZLR 241 at [51].}

^{49 HC Auckland CIV-2008-404-3596, 11 May 2009.}

^{50 In Shattuck v Klotzbach 14 Mass L Rep 360 (2001) the Court saw the typed}

^{name at the end of an e-mail as more indicative of a party’s intent to}

^{authenticate than that of a telegram, because the sender of an e-mail types}

^{and sends the message on his own accord and types his own name as he}

^{so chooses, and thus the e-mails were intended to be authenticated by}

^{the sender ’s deliberate choice to type his name at the conclusion of all}

^{e-mails. This leaves as an unsolved but problematic variation where the}

^{email client automatically inserts the sender ’s name.}

would have widespread and wholly unintended legal and commercial effects.⁵¹ Miller J took the same approach at [63] to the sender ’s name printed automatically at the top of a facsimile by the facsimile machine rather than as a conscious act by the sender. It could only identify the source, but not signify any intention in relation to the contents.

An electronic signature can also be relied upon if it adequately identifies the party signing and “adequately indicates the signatory’s approval of the information to which the signature relates”.⁵² For want of a better test, it is unlikely that a signature which does not meet the common law test for demonstrating an intention to be bound will meet this requirement. So an email which is signed off with just the first name of the sender can still be regarded as signed, so long as the use of the name indicates that it came with the named person’s authority and that he is taking responsibility for the contents.⁵³ By s 22(1)(b), the signature must also be as reliable as is required by the purpose of the signature and the circumstances in which it is given. There is a presumption of reliability under s 24 if the means of creating the signature are exclusively linked to and under the exclusive control of the person signing and any subsequent alteration to the signature and the information is detectable. This means that when an email client automatically generates a “signature”, that ought to attract the presumption.

If the guarantee is in the form of a deed, it will need to be witnessed: s 23 Electronic Transactions Act 2002 provides for the signatures of witnesses to be given electronically. An electronic signature by a witness which both adequately identifies the witness and indicates witnessing the signature will be sufficient if it meets the s 23(1)(b)(ii) reliability test.

B Signing in Dual Capacity

People will often sign documents in a dual capacity: for example, they might be both a director of a debtor and an intended guarantor. Creditors need to do more than just make a guarantee an integral part of a credit application, either by ensuring that those signing in a dual capacity do so twice or by stipulating that a person who is both director and guarantor is signing in both capacities.⁵⁴ For example, in Bradley West

⁵¹ J Pereira Fernandes SA v Mehta [2006] EWHC 813; [2006] 2 All ER 891 at [29]. Compare SM Integrated Transware Pte Ltd v Schenker Singapore (Pte) Ltd [2005] SGHC 58, where the Court held that the absence of any name at the bottom of the email was explicable as the sender knew his name would be included in the header to identify him as the source. As Miller J, with respect, correctly pointed out in Welsh v Gatchell at [55] this does not signify any intention to be bound.

^{52 Sections 18 and 22 Electronic Transactions Act 2002.}

^{53 Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd [2012] EWCA}

^{Civ 265; 1 Lloyd’s Rep 542; [2012] EWCA Civ 265; 3 All ER 842; [2012] 1 WLR 3674 at [32].}

^{54 In Ravensdown Fertiliser Co-Operative Ltd v Eveleigh HC PN CIV-2010-454-}

^{831, 30 June 2011, the credit application included a provision stating that}

^{“I/We the Directors agree to guarantee...” which made it arguable that}

^{when they signed as directors, they were also guaranteeing. Unfortunately}

Solicitors Nominee Co Ltd v Keeman⁵⁵ the guarantors signed a document which was a combined loan agreement and guarantee: they signed both as directors of the debtor and in their personal capacity as guarantors. This was made clear in the document, as they had to sign twice, and the document stipulated they were signing as guarantors.

Not all situations are as clear cut, unfortunately. In Young v Schuler⁵⁶ the guarantor was attorney for the debtor. The creditor used a combined loan and guarantee document. It made provision for signing by the debtor but not the guarantor. The intended guarantor actually signed but his signature was qualified as being “P.P.A.” the debtor. The lower Court had held that when he signed, he must have read the document and thus intended to sign in a dual capacity. The Court of Appeal rejected this signature as evidence of his intention to be bound to the guarantee. Luckily for the creditor, as the guarantor signed, he had said words clearly showing he was signing in a dual capacity. The Court used this evidence to find he also intended a guarantee.

In Elpis Maritime Co Ltd v Marti Chartering Co Ltd⁵⁷ there was an oral contract of guarantee but no additional evidence of this nature. This guarantee was included in a written charterparty. The guarantor was agent for the charterer, and signed the charter agreement guarantor but under the words “For and on behalf of charterers as brokers only”. It also initialled each page without qualification. The guarantee clause itself was on a subsequent page, among a number of special conditions, which the guarantor signed and added the word “charterer”. In the lower Courts, the validity of the guarantee had turned upon the broker ’s intention when it signed: if it signed solely as agent, then there could be no signed guarantee. The Court of Appeal saw that as at least arguable, which prevented the entry of summary judgment. The case did go to the House of Lords, where Lord Brandon held that even if it had signed purely as agent, there was clearly a note or memorandum of the oral contract, and that note was signed by the party to be charged. Its intentions in doing so were “wholly irrelevant”. This approach is not available in New Zealand, because a mere note or memorandum will not be sufficient.⁵⁸

When a person who is a debtor or agent of a debtor and a guarantor signs, it remains necessary to decide whether it does so with the requisite intention to be legally bound. It is highly unlikely that either of the qualified signatures in these English cases could be viewed as

for the creditor, this was not sufficiently certain to allow a summary

^{judgment application to succeed.}

^{55 [1993] NZHC 1160; [1994] 2 NZLR 111.}

^{56 [1883] UKLawRpKQB 118; (1883) 11 QBD 651.}

^{57 [1992] 1 AC 21.}

^{58 The Court of Appeal applied Elpis in Doughty-Pratt Group Ltd v Perry Castle}

^{[1995] 2 NZLR 398; (1995) 6 TCLR 354 but the law in New Zealand at}

^{that time made a note or memorandum of a guarantee sufficient. It is no}

^{longer good law: Northcott v Davidson HC Whangarei CIV-2012-488-97,}

^{7 June 2012 at [38].}

manifesting that intention. In Vuletic v Contributory Mortgage Nominees Ltd⁵⁹ a land sale agreement contained a guarantee, but the appellant signed once, and identified herself as “director” of the buyer. The Court accepted the possibility of a dual signature but noted a presumption that if someone is signing as agent, that is the only capacity in which he or she signs. There was no evidence to displace that presumption. The English Court of Appeal took a very pragmatic approach in Moat Financial Services v Wilkinson,⁶⁰ where the creditor had issued a loan facility letter to the debtor for £100,000 and taken guarantees from the directors which specified that they were for that amount. The debtor obtained an increase in the loan facility to £250,000, which the creditor documented by sending a letter confirming the increase and stating that the agreement was otherwise on the terms and conditions of the original loan facility agreement. This letter was sent to the directors and asked them to signify acceptance by signing “on your own behalf” and on behalf of the debtor. This was done. Neuberger LJ held that when the guarantors signed the top up letter, they were agreeing to provide the required security ie the guarantee for £250,000. Construing it other than an agreement to increase their guaranteed amount was unreal. Because this was a construction of a written document signed by the guarantors, that disposed of an argument that the formal writing requirements had not been satisfied. There were, however, comments about the rather clumsy way in which the creditor achieved this: it would have been far cleaner to simply have the letter stipulate the guarantors’ agreement to the amount being increased.

If someone who is a trustee signs a guarantee, there is a presumption that someone who signs as trustee is also personally liable,⁶¹ so something more than a mere identification of a person as a trustee is needed. An express provision negating any personal liability will naturally be optimal, and this can be achieved by providing that the person contracts “as such trustee but not otherwise”.⁶²

C Authenticated Signatures

The common law focus on a signature functioning to authenticate a

⁵⁹ [2006] NZCA 191; (2006) 22 NZTC 20,003; (2006) 7 NZCPR 552.

^{60 [2005] EWCA Civ 1253.}

^{61 Lumsden v Buchanan (1865) 4 Macq 950; Muir v City of Glasgow Bank (1879)}

^{4 AC 337; Helvetic Investment Corporation Pty Ltd v Knight (1982) 7 ACLR}

^{225; (1984) 9 ACLR 773.}

^{62 NZHB Holdings Ltd v Bartells (2005) 5 NZCPR 506. In Beale v BR Properties}

^{No 8 Ltd HC Auckland CIV-2005-404-6009, 30 March 2007) the Court}

^{found that the language of the guarantee was sufficiently contradictory}

^{as to whether the person signing was disclaiming personal liability to}

^{prevent the entry of summary judgment. Another trustee had specifically}

^{declared that it was entering “only in its capacity as trustee” and “not}

^{otherwise and it shall not be personally liable”, so there was no issue at}

^{all concerning its status. Somehow, this was taken as a suggestion, to be}

^{explored at trial, that all trustees had signed in a similarly limited capacity.}

document led to the so-called authenticated signature fiction. Under specific circumstances, the guarantor ’s name may have been written, printed or typed on to a document in such a way that the Court will accept that name as a substitute for an actual signature. It is fair to say that while the fiction has not yet been abolished, its continued application to guarantees is dubious at best.

One important limit is that the name must have been written in by the guarantor itself, although more is required. In Evans v Hoare⁶³ for example, a letter set out terms of employment (so constituted a contract) and had to be signed by the employer to be binding. The letter in question had been prepared by the employer, but it was for the employee to sign and send back to signify his agreement. Denman J said that if the employer has put before the employee a document containing the employer ’s name in full as that of the party with whom the contract is to be made, so the document is an offer, and the employee signs by way of acceptance, that is sufficient. Cave J further explained this by saying that the employer placed its name on the document in circumstances where it was clear the employer intended to be bound. In an earlier case,⁶⁴ a seller had written the buyer ’s name onto a pre-printed sales docket containing the seller ’s name. In issue was whether the seller had signed. Bayley J said that by writing in the buyer ’s name, the seller recognized the terms of the contract: by recognizing the buyer had bought, there was also recognition the seller had sold or adoption by the seller of its name as its signature. Thus the seller had, in effect, signed.

More recently, the English Court of Appeal has shown a clear reluctance to even acknowledge the continued existence of this fiction. In Firstpost Homes Ltd v Johnson,⁶⁵ a house buyer prepared a letter, purporting to come from the vendor and addressed to the buyer, with provision at the base for the vendor to sign. There was no provision for the buyer to sign and it did not: it instead relied upon the fact that it had prepared the letter and addressed it to itself as a signature. Peter Gibson LJ accepted the similarity to Evans v Hoare but rejected the general proposition that the writing of the name in this way was a signature as an “artificial use of language”. He did acknowledge the authorities but held that they did not continue to govern after the 1989 legislative changes:

Oral contracts are no longer permitted... Parliament intended that questions as to whether there was a contract, and what were the terms of the contract, should be readily ascertained by looking at the single document said to constitute the contract. To accept [the buyer ’s] contentions would be to allow the courts to consider matters outside the claimed contractual document such as what the parties subjectively intended by the document or by the name to be found on it or who prepared the document. For my part, I do not see why it is right to encumber the new Act with so much ancient baggage, particularly when

⁶³ [1892] UKLawRpKQB 63; [1892] 1 QB 593.

^{64 Schneider v Norris [1814] EngR 211; (1814) 2 M & S 286; 105 ER 388.}

^{65 [1995] 4 All ER 355; [1995] 1 WLR 1567.}

it does not leave the word ‘signed’ with a meaning which the ordinary man would understand it to have...

The High Court addressed the application of the authenticated signature fiction to guarantees in light of s 27 and the Firspost case in Northcott v Davidson.⁶⁶ Associate Judge Bell, in refusing summary judgment, commented that a written record of a contract is no longer sufficient, in the interests of more certainty as to whether someone has entered into a binding guarantee. Accepting an artificial signature runs counter to that legislative purpose.

Even where a note or memorandum will suffice, the notion has come in for a sceptical response. In Sturt v McInnes⁶⁷ a real estate agent prepared an agreement for sale and purchase of land on the vendor ’s instructions, which the purchaser signed. The vendor did not sign, but the buyer relied upon her instructions to the agent which had led to the agent writing the vendor ’s name in as seller. Sinclair J confessed to an initial reaction that such a document could not possibly be an enforceable contract and said that this would be the reaction of the man in the street. Nonetheless, he found considerable authority for the authenticated signature fiction, which led him to conclude that for it to operate, certain conditions had to be satisfied. If the fiction survives and adapting these conditions to guarantees, they are:

(1) The contract of guarantee must have been prepared by the party

^{sought to be charged ie the guarantor or an agent of the guarantor;}

(2) The guarantee must have the guarantor ’s name written or printed

^{on it;}

(3) It must be handed or sent by the guarantor (or its agent) to the other party (the creditor) for that other party to sign, and that party must sign.

(4) It must be shown, either from the form of the document or from the surrounding circumstances, that it is not intended to be signed by anyone other than the creditor and that, when signed by the creditor, it shall constitute a complete and binding contract between the parties.

The key here is that whatever is counted upon as being the signature needs to function as a talisman of an intention to be bound, which may well require extrinsic evidence. In Hucklesby v Hook⁶⁸ Buckley J said a

⁶⁶ HC Whangarei CIV-2012-488-97, 7 June 2012 at [38].

^{67 [1974] 1 NZLR 729 at 733–734. This case has been followed in Van der}

^{Veeken v Watsons Farm (Pukepoto) Ltd [1974] 2 NZLR 146; TA Dellaca Ltd v}

^{PDL Industries Ltd [1992] 3 NZLR 88; Tait-Jamieson v Cardrona Ski Resort}

^{Ltd [2011] NZHC 969; [2012] 1 NZLR 105. In each case, the party relying upon the fiction}

^{was unable to satisfy the requirement for signature by the other party.}

^{68 (1900) 82 LT 117. See also Leeman v Stocks [1951] Ch 941; [1951] 1 All ER}

^{1043 where the lack of signature was not fatal because the parties never}

^{intended any other signature to be added to that document: they intended}

^{that this should be the final written record of the contract.}

person might have sufficiently signed if was to take a document in his own writing, hand it to another and say “This is the document which I ask you to take as forming the contract that you are going to sign”. In Sturt the buyer had given the document to the vendor on the understanding the vendor would also sign it: this prevented any reliance upon the authenticated signature fiction. Although it is not explicitly stated in the above cases, it is important that the document which is alleged to be signed meets the statutory requirement that it be the written contract.⁶⁹

With guarantees, it is the signature of the guarantor which is vital, rather than that of the creditor. It is relatively rare that the creditor needs to sign a guarantee at all, and even more so for the kinds of letters from guarantors which might trigger the possible application of the doctrine. The fact that the creditor is not required to sign a guarantee is no reason, however, to regard the lack of a creditor ’s signature as unimportant to the application of the authenticated signature fiction.⁷⁰

There is, however, an alternate authenticated signature fiction which can be deployed when a properly signed document has, after signature, been altered. The original signature can be revived if there is clear evidence of the guarantor has acquiesced in the alteration.⁷¹ Another mechanism for reaching the same result would be to look to whether the guarantor has appointed the creditor its agent to make the variations, as in the D’Oyly Downs case. The fact that the guarantors were present and agreed to the dates written in to a document they had already signed was held to authenticate their signatures in Madden v UDC Finance Ltd.⁷²

D Co-Guarantors

Creditors need to be particularly careful to get all necessary signatures if there is more than one guarantor. The general position is that where there are co-guarantors who are to be jointly and severally liable, no guarantor is liable until all have signed.⁷³ This includes situations where

⁶⁹ In Pirie v Saunders (1961) 104 CLR 149 the High Court of Australia found that a solicitor ’s note of instructions was not recognizable as a note or memorandum of a concluded agreement. Now, of course, not even such a note or memorandum will suffice.

^{70 Tait-Jamieson v Cardrona Ski Resort Ltd [2011] NZHC 969; [2012] 1 NZLR 105 at [38].}

^{71 Stewart v Eddowes [1874] UKLawRpCP 27; (1874) LR 9 CP 311; Koenigsblatt v Sweet [1923] 2 Ch}

^{314 (CA); D’Oyly Downs Ltd v Galloway [1970] NZLR 1077 at 1085–1086;}

^{Lambton Holdings Ltd v Mai [1976] 2 NZLR 757.}

^{72 [1996] 1 NZLR 542.}

^{73 Evans v Bremridge (1856) 8 De GM & G 100; 44 ER 327: Greer v Cattle [1938]}

^{AC 156; [1937] 4 All ER 396: James Graham & Co (Timber) Ltd v Southgate-}

^{Sands [1986] QB 80; [1985] 2 All ER 344; 2 WLR 1044: Byblos Bank Sal v Al-}

^{Khudhairy [1985] UKHL 11; [1987] BCLC 232; 2 BCC 99: TCB Ltd v Gray [1987] Ch 458; [1988]}

^{1 All ER 108 and Kolmar Investments Ltd v R Hannah & Co Ltd HC Auckland}

^{CIV-2002-404-1861, 5 June 2003. A mere “expectation” that another will}

^{sign which does not amount to a condition precedent or implied term}

^{will not allow for any equitable relief: Capital Bank Cashflow Finance Ltd v}

^{Southall [2004] EWCA Civ 81; 2 All ER (Comm) 675 at [16]. At [17], Mance}

^{LJ said that in deciding whether there is a condition precedent, the fact}

the signature of one guarantor has been forged and thus that guarantor has not signed, as in the James Graham case. One rationale for this is that the co-guarantors are to have equitable rights of contribution from each other, which would not be available against those who are intended to sign but have not. A further rationale is that if a guarantor signs in the belief that others will be signing, their failure to do so will significantly alter the responsibilities the signing party understands himself to be undertaking.⁷⁴ It is possible to avoid this by providing in the guarantee that each guarantor is bound immediately upon signing.⁷⁵

In particular circumstances, it might also be possible to show that, despite the guarantee document naming and making provision for a number of guarantors, signature by one or more was not in fact contemplated (for example, if one such guarantor was to die without signing and all other guarantors knew of that death and subsequently signed).

E Corporate Guarantors

If the guarantor is a company, an issue may be raised that the person signing on behalf of the company lacked authority to do so or, indeed, that the company had no authority to give guarantees. Historically, these sorts of arguments were quite fertile but the current Companies Act 1993 has rendered them largely ineffective. Companies are deemed by s 16 to have full legal capacity and, even if they have chosen to restrict their capacity or powers in the constitution, by s 17 that will not invalidate any action of the company. Lack of authority of a director, employee or agent by s

18 will not affect the creditor unless, by reason of its relationship with the company, the creditor ought to have known of that lack of authority. The question of whether there is such a relationship and what constructive knowledge that will give the creditor is a complex one, beyond the scope of this work. There is, however, authority for the proposition that a creditor which fails to make any inquiry into the status of the person it is dealing with cannot be protected by that lack of inquiry if it transpires there is information suggesting a lack of authority available to those who make reasonable inquiries.⁷⁶ Even forgeries are given full legal effect by s 18(2) unless the creditor has actual knowledge of the forgery.

There are similar provisions in the Local Government Act 2002 to give creditors protection when given guarantees by a local authority. Any obligation related to borrowing or an incidental arrangement and

that a single document is to be signed by a number of co-guarantors, that points to all signatures being necessary for validity. On the other hand, having guarantors sign individual and discrete guarantees points in the other direction.

^{74 Lady Naas v Westminster Bank Ltd [1940] AC 366.}

^{75 The phrase used and upheld in Bank of Scotland v Henry Butcher & Co}

^{[2003] EWCA Civ 67; [2003] 2 All ER (Comm) 557 at [52] was “Each of}

^{us, if more than one, shall be bound by this guarantee, even if any person}

^{who was intended to execute or to be bound by it may not execute it or}

^{may not be so bound”.}

^{76 Pyramid Building Society (In Liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188.}

any guarantee is defined in s 112 as a “protected transaction”. Then in s 117, every protected transaction is deemed to be valid and enforceable, despite a lack of capacity on the part of the local authority, a failure by it to follow any provision of the Act or the lack of authority or proper appointment of a person held out as being a member, employee, agent or attorney of the local authority. One point to note is that local authorities are prohibited by s 62 from giving any guarantee or indemnity of any obligation of a council-controlled trading organization, as defined in s 6.

Although s 180(1)(a) Companies Act 1993 generally requires two directors to sign a deed, this only becomes important if it is necessary for a company to contract by way of a deed. A guarantee may be by deed, and will need to be if there is no consideration, but otherwise there is no legal requirement that a deed be used for a company guarantee. As a result, meeting the normal requirements for writing and signing applicable to any guarantee will suffice.⁷⁷

IV Estoppel

Even where there is no written, signed guarantee it is possible that the guarantor has acted in such a way as to create an estoppel so that creditors will still be able to enforce the informal promise.

Although the House of Lords in Actionstrength Ltd v International Glass Engineering In Gl En SpA⁷⁸ unanimously rejected the argument that a mere guarantee could give rise to an estoppel, it also accepted that if there was something more to go on, an estoppel might arise. Lord Clyde at [34] said that the guarantor would need to lead the creditor to believe the promise would be honoured despite the lack of writing and Lord Walker [50] looked for conduct by the guarantor encouraging a mistaken belief on the part of the creditor in the effectiveness of the guarantee, such as a “specific assurance” that the Act would not be relied on. Lord Bingham at [9] suggested that a representation that the guarantor would pay even in the absence of a written guarantee might be a sufficient inducement to allow an estoppel, if the creditor acted upon it. Although he also suggested an actual payment could have the same effect, the creditor might have difficulty in establishing it acted on that payment in any relevant way. Lord Hoffmann at [28] saw it as irrelevant that the creditor had provided staff to the debtor on the strength of the oral guarantee, because the creditor ’s performance of its underlying obligations to the debtor attends every guarantee, in the sense creditors insisting on a guarantee normally require it to be in place before they will perform.

This possibility has been picked up in the recent case of Tait-Jamieson v Cardrona Ski Resort Ltd.⁷⁹ The creditor was the provider of a training programme: when community funding was in jeopardy, three parents

⁷⁷ Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd (2008) 10

^{NZCLC 264, 407; [2008] NZHC 555; [2009] NZCCLR 3.}

^{78 [2003] UKHL 17; [2003] 2 AC 541; 2 All ER 615; [2002] 1 WLR 1346.}

^{79 [2011] NZHC 969; [2012] 1 NZLR 105.}

volunteered to guarantee the training costs. There was a written guarantee which contemplated signature by all three as guarantors. Only one signed. The creditor continued to provide training and, when it pressed the parents for payment, one refused on the basis that he had not signed. According to Actionstrength, the continued making of advances by the creditor is not sufficient to create an estoppel. French J noted this at [53], saying that the creditor will have always acted to its detriment by performance prior to making a claim. Allowing that detriment to found an estoppel would make all oral guarantees enforceable, and thus defeat the statutory purpose.

Her Honour found that the fact that the guarantee was at least recorded in writing made a difference (presumably because this minimized the concern that the alleged promise was ill-considered, ambiguous or fictitious). More importantly, although the guarantor had not referred to his lack of signature or the consequences of no signature, he knew that the creditor had the written guarantee. When the creditor discovered the debtor would not be paying, the guarantor orally confirmed his commitment to the creditor. With respect, the need for “something more” seems to have been satisfied by the fact there were two rather than one oral promises, the second coming after the creditor had substantially performed. Her Honour went on to say that the “something more” requirement was satisfied by giving the written form of guarantee, although it has to be said that a tacit approval ought not replace the statutory signature. Perhaps the creditor did rely on this document, but the question of whether it is reasonable to rely upon an unsigned guarantee must be important.

Finally on estoppel, at [55] French J articulated four elements which must be present:

(1) The creditor must make an assumption which goes beyond the primary assumption that the guarantor will honour their promise, such as an assumption that the guarantor regards the agreement as enforceable.

(2) The assumption is induced or encouraged by the guarantor. (3) The creditor relied on that assumption.

(4) It would be unconscionable in all the circumstances for the guarantor to place reliance on the statute.

The House of Lords in Actionstrength was looking for conduct which indicated that the lack of signing would not be relied upon, and seems to be suggesting a need that the guarantor be conscious of the effect a lack of writing would otherwise have. Insofar as this is what the House of Lords was suggesting, it becomes difficult to see the sort of facts which arose in Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd⁸⁰ as giving rise to an estoppel. This was not a case about an absent signature: instead, the bank had taken a guarantee in respect of all

⁸⁰ [1982] QB 84; [1981] 3 All ER 577; [1981] 3 WLR 565.

advances it might make, but then advanced the money through a wholly owned subsidiary. On the wording of the guarantee, these advances were not covered. The bank, the guarantor and the debtor had all dealt with each other in connection with the financing of a construction party as if they were immediate parties and never made mention of the subsidiary. This was because the bank employees, the guarantor and the debtor were all unaware of the subsidiary’s existence: they believed the bank had made the advance. This makes it difficult to regard the conduct of the guarantor as in any way a conscious representation that it would not make anything of the fact that the subsidiary had made the advance rather than the bank.

V Part Performance

The effect of no writing or signature is to prevent the enforcement, possibly even the existence, of an oral contract. This gives rise to concerns that a party might encourage another to partially perform the oral agreement, receive its benefits even, and then refuse to undertake any obligation on the ground that the lack of formality means it is not under any obligation. Apart from estoppel, equity developed the notion of part performance so that, if one party partly performed a contract it could, in some circumstances, obtain an order for specific performance against the other. This was a variety of estoppel recognizing the unconscionability of allowing the beneficiary of the performance to raise the technical defence of informality. A secondary justification was that the acts of performance could be used as evidence of the contract.

The now repealed Contracts Enforcement Act 1956 required that guarantees and contracts for the sale of land to be in writing but, in s 2(3)(c) specified that nothing was to affect the law of part performance. Section 26 Property Law Act 2007 still preserves part performance, but is expressly limited in its operation to contracts for the sale of land. As a result, there is no statutory saving of part performance when it comes to the s 27 requirements for writing and signature. Even before this Act came into force, it was unlikely, although not settled, that a creditor could rely upon part performance to enforce an informal guarantee. One problem is that guarantors rarely have anything to perform, so there are no actions which can be relied upon as proof of an intention to guarantee. The first act of performance is called for in the event of default by the debtor, but this is when guarantors will typically raise the informality as a defence. A second problem is the same as for estoppel: the actual promise to guarantee and performance by the creditor are both ruled out as creating an equity in favour of the creditor. There is rarely anything else.

Lord Hoffmann addressed this in Actionstrength Ltd v International Glass Engineering In Gl En SpA.⁸¹ In an action relying upon part performance, it is not the contract which is being enforced, instead the defendant is being “charged” upon the acts done by the plaintiff in performing the alleged

⁸¹ [2003] UKHL 17; [2003] 2 AC 541; 2 All ER 615; [2002] 1 WLR 1346 at [22]–[26].

contract. This allowed the Act and the doctrine of part performance to co-exist, at least for land contracts. His discussion then merges part performance with estoppel, but he was clearly still addressing part performance as a peculiar version of an estoppel when he said:

no such co-existence is possible between the Statute of Frauds and the estoppel for which [the creditor] contends. It is in the nature of a contract of guarantee that the party seeking to enforce it will always have performed first. Unless he has advanced credit or foreborne from withdrawing credit, there will be no guaranteed debt for which he can sue. It will always be the case that the creditor will have acted to his prejudice on the faith of the guarantor ’s promise. To admit an estoppel on these grounds would be to repeal the Statute of Frauds.

This is because if every supply of credit or other advance by a creditor was counted as an act of part performance, every oral guarantee contract followed by such a supply would become binding. Furthermore, to count as an act of part performance, the reasonable explanation for that act would need to be that the parties have entered a guarantee.⁸² This will rarely be the case.

⁸² [1976] AC 536; [1974] 2 All ER 977; [1974] 3 WLR 56.