Property Ligitation Newsletter – June 2010
Is an unsigned Guarantee binding?
Time and time again in the property industry the issue of whether an unsigned document is binding arises - the Court of Appeal considered the issue in the case of Investec Bank (UK) Limited v Zulman and Another.
The Facts
In this case, the Respondents were the directors of a company that had a facility with Investec. As part of the facility, the Directors of the company had given Investec a guarantee whereby the Directors would be liable for the company's borrowing but only insofar as the liability to Investec exceeded £2 million.
Later the Directors arranged to use £1 million that they held on deposit with Investec to repay some of the debt owed by the company. All of the parties agreed that it would be appropriate to revise the guarantee at that point to remove the £2 million threshold. Negotiations in relation to the amended guarantee commenced and, although a draft was prepared, it was never signed.
The negotiations in relation to the original guarantee were expressed to be "subject to contract", but the subsequent set of negotiations regarding the amended guarantee were not.
The company defaulted and Investec sought to enforce the draft amended guarantee against the Directors. The Directors had never signed the draft amended guarantee and so refused to pay on the grounds that the amount claimed was under the £2 million threshold provided for by the original guarantee.
Investec argued that the Directors were bound by the draft amended guarantee because they had orally agreed to its terms and because the negotiations in relation to the draft amended guarantee were not expressed to be "subject to contract".
How did the Court view the facts of the case?
The Court of Appeal held that, although the Directors had orally indicated their acceptance of the terms of the draft amended guarantee, a binding agreement had not come into existence because the draft amended guarantee contained a statement that the Directors should obtain legal advice before they signed it.
The Court of Appeal's view was that this would have been a "pointless provision" if the parties intended to be bound by the terms of an earlier oral agreement. This was for the obvious reason that if the Directors' solicitors advised them against signing the draft amended guarantee, the Directors had to be in a position to act on that advice and refuse to sign.
What can we take from the Court of Appeal's decision?
While the case was decided on its own facts it provides a salient reminder that even where correspondence and documentation is not marked "subject to contract" this is not of itself decisive as to whether a contract has been formed.
It is also ironic that the standard "boiler plate" clause advising the Directors to seek legal advice, which would have been included primarily to protect Investec from allegations of duress and undue influence, provided a key reason for the Court's conclusion that no contract had come into existence in relation to the draft amended guarantee. The lesson is that if the other side will not sign up then you need to quickly consider how to "persuade" them to do so.
Rob Nicholson is a partner at Michelmores and Head of the Property Litigation Team. For further information on the issues raised in this article, please contact Rob at rob.nicholson@michelmores.com.
This information has been prepared by Michelmores LLP as a general guide only and does not constitute legal advice on any specific matter and should not be relied upon as such. We recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of this information.
