Clayton Utz Insights
13 September 2012
By Sam Cottell.
Even a seemingly informal use of the party's name (or the name of its agent) in correspondence with the other party can constitute a "signature" and thereby make a guarantee enforceable.
One of the last remaining aspects from the Statute of Frauds (1677) that still applies in most Australian jurisdictions is the requirement that a guarantee (or a note or memorandum evidencing the guarantee) must be in writing and be signed by or on behalf of the guarantor in order to be enforceable.
A recent UK case demonstrates that a relatively informal sequence of emails can satisfy the writing requirement even if the final email in the sequence does not of itself expressly refer to the guarantee. The case also demonstrates that the salutary inclusion of your name in an email sent by you can constitute your signature.
A couple of recent Australian cases also show that the signature requirement can be satisfied even if the guarantor only signs the relevant document in some other capacity (eg. as a director of the guaranteed company, rather than in the guarantor's personal capacity) and subjectively may never have intended to be bound by the guarantee.
In Golden Ocean v Salgaocar  EWCA Civ 265, the English Court of Appeal considered a dispute relating to a charter party arrangement.
The negotiations for the charter party were conducted by brokers on behalf of their principals. All of the negotiations occurred by email. The emails made it clear that the charterer would be a subsidiary of Salgaocar Mining Industries (SMI) and that Salgaocar would "fully guarantee" to Golden Ocean (the ship owner) all of the subsidiary's obligations under the charter. There were several email exchanges which recapped on the agreed key terms, including that the charterer would be "fully guaranteed" by SMI.
The final email in the sequence was sent by SMI's broker. It confirmed agreement to the last remaining issue being negotiated. The email ended with the words "THANKS V MUCH" and contained the name of SMI's broker in a way which indicated that it was SMI's broker who sent the email. Looked at in isolation, this email did not of itself contain a final recap on all of the agreed terms and nor did it expressly refer to the guarantee.
The email correspondence contemplated that formal charterparty documents would be prepared and signed, but they never were. SMI subsequently sought to walk away from the deal. It denied that there was a legally binding agreement. The trial judge disagreed (this aspect was not challenged on appeal). Golden Ocean then sought to claim against SMI under the guarantee for the charterer's repudiation of the agreement. Golden Ocean sought and was given permission by the court to serve its claim on SMI in Goa (India) (SMI's home jurisdiction). SMI challenged that permission on the basis that the guarantee was unenforceable because of section 4 of the Statute of Frauds.
In particular, SMI argued that:
- the final email did not refer to the guarantee;
- the final email had not been "signed" by SMI's broker; and
- even if the email had been signed, the broker did not have authority to sign a contract of guarantee on behalf of SMI.
Statute of Frauds
The modern form of section 4 of the Statute of Frauds as currently applying in the UK is as follows:
"No action shall be brought whereby to charge the Defendant upon any special promise to answer for the debt default or miscarriage of another person unless the Agreement upon which such Action shall be brought or some Memorandum or Note thereof shall be in Writing and signed by the party to be charged therewith or some other person thereunto by him lawfully authorised."
Most Australian States and Territories contain their own legislative enactment of this section in similar terms (see for example section 126 of the Instruments Act 1958 (Vic)).
Why this exchange of emails made up a contract of guarantee
The court held that the final email sent by SMI's broker was the final piece in a sequence of emails that together made up the contract of guarantee. It did not think it material that the "guarantee" was not actually referred to in the final email, or that the contract of guarantee was contained in several different emails, rather than just a single email. Overall, the sequence of emails constituted the agreement in writing, rather than the final email being a memorandum or note of the contract of guarantee.
The court also held that the email had been signed by SMI's broker. While the final email simply contained the name of SMI's broker, rather than a handwritten or electronic signature, the court held that the broker's name had been included in such a way as to indicate that the email was sent with the broker's authority. Even the broker's nickname or initials would have sufficed. Overall, inclusion of the broker's name was an assent to the email's terms and was a sufficient authentication of the guarantee contained in the email sequence.
The court did not decide whether SMI's broker was "lawfully authorised" to sign the email. However, the court thought that Golden Ocean had a "good arguable case" that such authority existed, particularly since it had already been held that the broker had authority to reach a binding agreement on the charter party. Ultimately, this aspect needed to be remitted to the trial judge.
It is interesting to note that in the UK, the "lawful authority" from the principal need not be evidenced in writing, however, in Australia this authorisation typically does need to be granted in writing (see for example section 126(1) of the Instruments Act 1958 (Vic)).
In any case, the court made it clear that there only needed to be authority to sign the email that was sent. Golden Ocean did not need to prove any greater authority and nor did Golden Ocean need to prove that SMI's broker intended to make the guarantee enforceable by sending and "signing" the email.
Recent Australian cases
Two recent Australian cases have considered whether the signing requirement is satisfied where a person signs a document not in their capacity as guarantor but in a different capacity.
In Alonso v SRS Investments the question was whether a director's signature on a lease document that contained a director's guarantee would bind the director where it was only expressed to be signed by the director in that person's capacity as a director of the lessee company, rather than in the guarantor's personal capacity. The lease in question contained separate execution clauses for signing by the lessee company and the guarantor/director, however, the director only signed the execution clause for the lessee company. The court held that the signature of the guarantor as director was nevertheless sufficient to make the guarantee enforceable.
In Padstow Corp Pty v Fleming two directors signed a lease in their capacity as directors of the lessee company. They did not separately sign in their personal capacity. The lease in question actually named the directors as being guarantors and further provided that the guarantee applied if those persons "signed the lease". The court held the directors' signatures bound them personally to the guarantee because the signing requirement under the Statute of Frauds is not dependent upon the capacity in which the document is signed.
Both these cases demonstrate that the signing requirement is simply a question of fact: is there a guarantee document which has been signed by the guarantor? Whether the director intended to be bound in his or her personal capacity is a different question. This intention is that which is objectively manifested in light of the subject matter of the agreement, the status of the parties and the surrounding circumstances, rather than the uncommunicated subjective belief or intention of the signor. A signature may assist the court to ascertain this intention because the signature ordinarily manifests an objective intention to be bound.
Parties negotiating any transaction involving a guarantee need to be aware that a legally enforceable guarantee can arise even if there is no formal contract of guarantee prepared or signed. Moreover, parties need to be aware that a seemingly informal use of the party's name (or the name of its agent) in correspondence with the other party can constitute a "signature" and thereby make a guarantee enforceable even if the email or other correspondence so signed does not make any express reference to the guarantee.
The safest course is to make it clear that no legally binding relations arise unless and until formal documents are signed. Even then, the recent Australian cases show that guarantors generally cannot escape liability just because they sign in some other capacity or do not place their signature in the proper execution clause.
Tel: +61 3 9286 6374
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
- What's on your mind? Write a comment - but check your facts before you post
- Did You Know - What's the difference between Deeds and Agreements?
- East Timor commences proceedings in respect of Greater Sunrise revenue sharing treaty with Australia
- Trash into treasure - landfill gas and the Carbon Farming Initiative