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IM On The Money - Issue Two

Will The Court Rectify A Defective Guarantee?

In Fairstate Ltd v General Enterprise & Management Ltd and another, the first Defendant managed a property which was owned by the Claimant by way of a long lease. The second Defendant was a director of the first Defendant. The management contract between the Claimant and the first defendant provided that the second Defendant would enter into a personal guarantee against any loss or damage to the Claimant. The management contract and guarantee were drafted by the Claimant’s solicitor.

The guarantee contained a number of errors. In particular the parties were detailed incorrectly so that the second Defendant was named as the beneficiary and the Claimant the principal debtor. The guaranteed liabilities were also described incorrectly.

The guarantee had been signed by the second Defendant, but when a dispute arose and the Claimant called upon the guarantee, the second Defendant denied that the guarantee was effective.

The court held that the personal guarantee was ineffective as a matter of contract and unenforceable under Section 4 of the Statute of Frauds Act 1677. Although the guarantee was signed by the second Defendant, the drafting errors meant that the guarantee was fundamentally flawed.

Whilst the court could have rectified the guarantee, in this instance the defects were too extensive and fundamental to be corrected. The Court considered that if it corrected the guarantee, it would be creating a new contract for the parties and in doing so, it would deprive the Defendant of a legitimate statutory defence.

In summary, the courts will construct and rectify defective guarantees when it contains minor errors. However, the Court will not rectify a guarantee when the effect would be to write a new contract between the parties. Guarantees should be accurately drafted to reflect what the parties agreed as the court will not rectify fundamental mistakes.

Mark Elder, Partner

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