Guarantees and the lack of writing

Updated March 2011

We are often instructed where there has been a defect in the bank's guarantee, such as a lack of writing or signature.

Section 4 of the Statute of Frauds Act 1677 requires both a written document and a signature before the guarantor is liable. This means that any failure of either requirement renders the guarantee unenforceable.

What does the law say?

A recent case – Fairstate Limited v General Enterprise & Management Limited and Sarian, [2010] EWHC 3072 – has shown that there are other ways of making the guarantor liable despite the lack of writing or signature.

The first method is to show that:

• The guarantor has made a representation that he would honour the guarantee despite its technical defects, such as by paying a sum of money on behalf of the principal;
• The bank has relied upon such representation so that it has changed its position, such as by giving more time to the principal debtor;
• It is 'unfair' to allow the guarantor to rely on the technical defects.

There are no reported cases in which this method has been successfully pleaded, and it did not work in Fairstate, but the courts have repeatedly recognised that it is a valid line of argument.

The second line of argument is to ask the court to rectify the defects in the guarantee, which it has the power to do. In cases where it is clear that the common intention of the parties was that there should be a guarantee, the court may be prepared to agree to liability being fixed on the intended guarantor. This will enable the bank to enforce the guarantee.

What can we do to help?

We suggest that our clients do not, therefore, regard the lack of writing or even signature as necessarily fatal and to instruct us to explore these alternatives in appropriate cases.

For further information please contact Jonathan Hoey or your regular TLT adviser.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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