For a guarantee to be enforceable, the requirements set out in section 27 of the Property Law Act 2007 (Act) must be strictly complied with. This is what the NZSC held in Brougham v Regan.
The key issue in the case related to whether Mr Brougham was liable as a guarantor of a loan to B & R Enterprises Limited (Company) from the trustees of the Winchester Trust (Trustees).
The Court found that Mr Brougham was not liable for the Company’s obligations as a guarantor for the reasons further described below.
The Trustees entered into a written loan agreement with the Company. The loan agreement did not contain terms specifying that the guarantors were responsible for the Company’s obligations if the Company failed to meet those obligations. Instead, the loan agreement included a condition which required Mr Brougham and Ms Dey (being the directors of the Company) to enter into a separate written guarantee before the Trustees made the loan advance to the Company.
The signing blocks in the loan agreement provided that Mr Brougham and Ms Dey would sign the loan agreement as both a director and a guarantor. Mr Brougham signed the agreement as a director and a guarantor but Ms Dey signed the agreement as a director only.
The Trustees advanced the loan to the Company despite there being no separate written guarantee prepared and entered into by Mr Brougham or Ms Dey.
Subsequently, the Company was liquidated and the Trustees sought to enforce the guarantee against Mr Brougham.
Contracts of guarantee must be in writing
The key issue before the Court was whether the loan agreement (which Mr Brougham had signed as a guarantor) made Mr Brougham liable as a guarantor for the Company’s debts. For a guarantee to be enforceable, section 27(2) of the Act provides that the contract of guarantee must be:
- in writing; and
- signed by the guarantor.
As noted above, the loan agreement did not include any obligations on the guarantor to guarantee the Company’s obligations. As such, the Court held that there was no contract of guarantee in writing. As the written requirements in section 27(2) were not satisfied, Mr Brougham was not liable as a guarantor.
Estoppel arguments rejected
The Trustees claimed that Mr Brougham was prevented from avoiding his obligations as a guarantor as it was clear from the evidence that he had intended to be a guarantor. The Court rejected this argument as accepting this would undermine section 27(2) of the Act. Strict compliance was required to safeguard the consumer protection purpose of the section. The Court held that as there was inadequate documentation, there was no enforceable guarantee.
Further, the Court rejected the Trustees’ request for an order requiring Mr Brougham to sign a written guarantee as contemplated in the loan agreement. The Court held that although the loan agreement stipulated that a written guarantee was required to be signed before the Trustees would make the advance, the Trustees had waived this requirement when they made the advance to the Company.
All named guarantors must sign the guarantee for it to be enforceable
The Court also stated that even if the procedures in section 27(2) of the Act were satisfied, the guarantee was likely not enforceable as it had named both Mr Brougham and Ms Dey as the guarantors but only Mr Brougham signed as a guarantor. A guarantee is presumed not to be enforceable unless all the named guarantors sign the guarantee (or the terms of the guarantee provide that the guarantee is enforceable on a signed party irrespective of whether other named parties sign).
Anyone asking for a guarantee (usually landlords, creditors and suppliers) must ensure that the terms of their guarantee are in writing and that all of the named guarantors have validly signed the guarantee.
Further, terms referring to the obligations of the guarantors should be included in the main agreement to which the guarantee relates (in addition to a separate signed written guarantee, if applicable) to limit the risk of waiving the requirement to enter into a separate guarantee as a pre-condition to the main agreement.
If you would like any assistance or advice with a guarantee, including drafting a standalone deed of guarantee and indemnity, or including a guarantee as a mode of security in a commercial contract, please get in touch with our Business Advice Team or your usual contact at Hesketh Henry.
The full decision can be found here.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.