Guarantees - are the Courts relaxing their approach?

Guarantees - are the Courts relaxing their approach?

Published:

Author: Victoria Sham

Applies to: England and Wales

Over the years we have seen a trend with the Courts in England protecting the guarantor. In this article we take a look at two recent cases where the Courts appear to have shifted to a more creditor friendly approach.

Gordon James Ramsay v Gary Love [2015] EWHC 65 (CH)

In this case, celebrity chef Gordon Ramsay had provided a personal guarantee of the tenant's rent under a lease over the York & Albany hotel/restaurant in London which was signed by way of a ghost signing machine used by his father in law (Christopher Hutcheson). Ghost signing machines reproduce signatures giving an appearance of real ink and are commonly used by celebrities for signing documents. The landlord (Love) was seeking to enforce the guarantee and Ramsay disputed its enforceability on the grounds that (a) Hutcheson did not have authority to bind Ramsay to the guarantee and (b) that Ramsay had not actually signed the guarantee.

The working relationship between Ramsay and Hutcheson was one of principal and agent. Hutcheson was responsible for the management of Ramsay's business affairs and was given wide authority by Ramsay without the need to consult Ramsay, including entering into agreements on behalf of Ramsay with the use of the ghost signing machine. Ramsay had also agreed with Hutcheson that he would be prepared to give a personal guarantee if necessary for the business.

The case centred on the extent of Hutcheson's authority to bind Ramsay in the guarantee and the parties did not argue the validity of execution using the machine. Technically, the guarantee comprised a guarantee and indemnity which meant that the statute of Frauds Act 1677 requirements for guarantees to be evidenced in writing by a document signed by or on behalf of the guarantor did not apply. Previous case law, which suggested that a document was only signed when signed with a pen, was not designed to distinguish between pen and use of a signature machine. No point was raised in relation to use of the machine in meeting statutory requirements for deeds to be signed by the executing party in the presence of a witness. It is interesting, however, that the court accepted it could be signed by an agent applying his principal's signature using a machine.

The High Court held Ramsay liable under the personal guarantee on the basis of the wide authority Hutcheson was operating under as agent for Ramsay.

National Merchant Buying Society v. Bellamy [2013] EWCA Civ 452

The directors of CTF Supplies Limited (CTF) had given a guarantee in favour of National Merchant Buying Society in respect of the liabilities of CTF under a supply agreement entered into with National Merchant Buying Society in 2002. At the time the guarantee was entered into the credit limit on the supply agreement was £200,000 which was subsequently increased in 2007 to £450,000 and to £700,000 in 2008. CTF subsequently went into liquidation and National Merchant Buying Society sought to enforce the guarantee.

The directors disputed the enforceability of the guarantee on the basis that the credit limit had been varied without their consent and such variation had discharged them from their obligations under the guarantee.

The Court of Appeal held that the guarantee which was found to be an all monies guarantee remained in full force and effect notwithstanding the variation to the credit limit in the supply agreement on the basis that it was a true all monies guarantee guaranteeing 'all sums, which are now or may hereafter become owing..'. Therefore any variation to the supply agreement had no impact on the enforceability of the guarantee.

This is different from the approach taken in Bank of Baroda v Patel [1996] 1 Lloyd's Reports 391 which was distinguished on the basis that there the 'all monies' guarantee was given in conjunction with a particular facility.

Conclusion

Whilst the decisions of Ramsay v Love and National Merchant Buying Society are to be welcomed by lenders, we still recommend the following:

  • although lenders are not bound to enquire as to the authority of corporate guarantors, obtain appropriate corporate authorisations approving entry into the guarantee
  • always ensure that the guarantee includes both a guarantee and an indemnity
  • ensure that the guarantee is signed (or, in the case of an indemnity, agreement clearly evidenced) and, where appropriate, obtain evidence of independent legal advice
  • where there is any variation to the facility agreement (or where a new facility is put in place), obtain the consent of the guarantor(s) to the variation and confirmation that their guarantee continues to apply. This is the case for facility specific guarantees and all monies guarantees that could be held to be linked to a specific facility agreement
  • where the intention is that the guarantee should cover all present and future liabilities owed by the company, ensure the guarantee is worded to this effect and not limited to a specific facility agreement.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.