Beware of creating a guarantee by email

Beware of creating a guarantee by email

Published:

Author: Suzanne Love

The decision to guarantee the obligations of another party is not one to be taken lightly. Generally, a guarantee will be documented (and signed) following conclusion of negotiations.

However, following the decision in the Golden Ocean Group Ltd case, parties to such negotiations should beware that, where agreeing terms by email is normal business practice, those emails may create an enforceable guarantee.

This could be the case even if the requirements of a literal interpretation of the relevant legislation are not complied with.

Section 4 of the Statute of Frauds 1677 stipulates that a 'special promise to answer for the debt, default or miscarriage of another person' must be 'in writing and signed by the party to be charged' in order for an action to be brought against them. In the case of Golden Ocean Group Ltd, a chain of emails within which a charter was negotiated was held to fulfil these requirements.

Facts

Mr Guy Hindley was negotiating the charter of a vessel from Golden Ocean on behalf of SMI. Basic terms were agreed by email, including a guarantee from SMI to Golden Ocean. The intention had been that an agreement, incorporating all of the agreed terms, would be drawn up following negotiations - this was never produced. The final email in the sequence did not refer to the guarantee, and was simply signed off by Mr Hindley as 'Guy'.

When the broker refused to take delivery of the vessel, SMI denied that a guarantee had been created, one of their arguments being that there had been no email or signed document incorporating all of the terms that had been agreed.

Decision

The Court of Appeal did not ultimately determine whether there was a guarantee, but after considering the facts of the case and normal business practice in these types of transactions, it did consider that the chain of emails was sufficient to create such binding obligations.

In this market, finalising terms by email was usual, and if there was an intention that the parties intended to be bound by those terms, the fact that all of the terms were not included in one document or email should not prevent the guarantee being enforceable, assuming it was 'signed'.

The court confirmed that an electronic signature of the person with authority to enter the contract would suffice, whether that be a first name, initials, or potentially even a nickname.

How to avoid inadvertently creating a guarantee

With the increasing use of email to negotiate contract terms, it is important to be aware of the risks attached to this type of communication. It is as yet unclear whether a similar decision would be made in other commercial areas or whether the decision will be applied in relation to ship chartering alone, where this type of contract conclusion is commonplace.

To minimise the risk of inadvertently creating an obligation:

  • ensure all negotiations are expressly stated to be subject to contract (although this will not be conclusive if the parties behaviour indicates otherwise)
  • where terms are agreed over a series of communications, ensure a final 'recap' or agreement is drafted to document both parties' shared intentions (where terms can be established by reviewing a limited number of documents, the courts are more likely to consider them binding)
  • if you do intend the terms to be binding, ensure they are clear both in relation to the point at which the parties will be bound and to what extent, and that the person negotiating them has sufficient authority to create such obligations
  • beware patterns of behaviour which could imply that informal communications will be binding, and keep a clear audit trail in case issues subsequently arise

Case: Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd [2012] EWCA Civ 265