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Drafting an Enforceable Guarantee – the Supreme Court’s Views
25 January, 2021 | Nathan Tetzlaff
Guarantees are a good way to ensure that when you deal with a company, or a person who might not be able to pay their debts, you aren’t left unpaid and without a remedy. They are often the key factor that allows a deal to proceed so it’s very important that they are reliable.
The Supreme Court has made a Judgment emphasising the importance of ensuring that guarantee documents are in the correct form at the beginning of a transaction. It’s also a good illustration of the many twists and turns that can occur in a Court case.
The case of Brougham v Regan was about whether Mr Brougham was liable as a guarantor. A company owned by Mr Brougham and his partner Ms Dey took a loan to purchase a business, where the initial understanding was that they would each personally guarantee half the loan amount. The loan document included spaces for guarantors to sign and stated that “if any person is named in this agreement as a guarantor, the guarantor must have signed a deed of guarantee…”. Mr Brougham signed the loan agreement as a guarantor, but Ms Dey changed her mind and did not sign. There was no separate deed of guarantee signed.
This case started in the District Court which found that the guarantee was ineffective, and Mr Brougham was not liable. That decision was upheld by the High Court, reversed by the Court of Appeal, but upheld again by the Supreme Court. It’s an example of how New Zealand’s Courts can still take very different approaches to one another (even at the highest levels), and appeals can be unpredictable.
There were three issues before the Supreme Court. These were:
- Whether the lack of a separate deed of guarantee meant that the guarantee was not in writing (which is required by the Property Law Act) and therefore ineffective;
- Whether the guarantee was only enforceable once both guarantors signed; and
- Whether the lender can rely on “equitable estoppel” to enforce the guarantee.
The Court went into quite a lot of detail, examining cases from New Zealand and overseas. It concluded, on the first issue, that “the loan agreement makes it clear that a separate [guarantee] document to that effect is required… In the absence of that further document, no guarantee liability arises.” This means that the guarantee did not meet the legal requirement that the guarantee be in writing.
On the second issue, the Court referred to and agreed with “the default position that, where a purported guarantee document shows on its face that more than one guarantor is required to sign and only one does, the one who signs is not liable.”
On the third issue, the Court noted prior cases where representations by a guarantor made it unfair and unconscionable for the guarantor to rely on a technicality to sidestep their liability. This could be relevant where a statement by the guarantor caused a person to do something in reliance on that guarantee, but that did not occur in this particular case.
Lessons learned from this case are the importance of ensuring that the documents prepared in a transaction are tailored to be correct for the situation and carefully checked, that anything required by these documents is properly completed (such as signing other documents), and that a guarantee may not be enforceable until all the guarantors have signed it.
To ensure that your transactional documents are carefully prepared and fully enforceable please contact Bret Gower in Smith and Partners’ commercial law team. If things have gone wrong and it is necessary to argue for or against the enforceability of a guarantee, contact Nathan Tetzlaff in Smith and Partners’ litigation team.