Analysis of a one page guarantee

In this case1, the court had to consider whether a non-standard one page guarantee adequately identified the plaintiff, whether it was simply an agreement to guarantee, whether consideration was given and whether the guarantee was an independent obligation.

A family trust was the owner of a property on which a new home was to be constructed. The first and second defendants were a director and a shareholder of the construction company that carried out the work on the house. A contract was entered into in April 2004. The work started later than anticipated and there were various delays, which are the subject of another dispute between the parties.

In December 2005, a document titled "Guarantee" purporting to guarantee the obligations of the construction company up to $500,000, was signed by the defendants. The guarantee was not market standard, and was only one page long.

In March 2006, the trust gave notice of cancellation of the contract and notice to the defendants of claim under the guarantee.

The court had to consider the following issues:

Was the guarantee invalid for failure to identify the plaintiffs?

The defendants argued that the guarantee was unenforceable because the trust, in whose favour it was given, was not a legal person and the identity of the recipient of the guarantee was a material term.

The court determined that even though it is not a legal entity, naming the trust as the recipient of the guarantee was sufficient identification to allow the guarantee to be enforceable for the purposes of the Contracts Enforcement Act.

Was the document only an agreement to agree?

The opening paragraph of the guarantee recorded that the defendants" are jointly and/or individually to enter into and sign in favour of [the trust] a deed of guarantee.".

The court decided that the opening paragraph was merely a preamble to the operative part of the document and that the operative provisions made it clear that it was intended to be a binding guarantee and not an agreement to enter into a guarantee in the future.

Was consideration needed and, if so, was it given?

The court decided that because the formalities required by section 4(1) of the Property Law Act were all present:

• it was signed by the party to be bound;
  
  
• it was attested to by a witness who had added his signature, place of abode and calling; and
  
  
• it was a deed and therefore consideration was not necessary.

The court also noted (quoting O'Donovan & Phillips, The Modern Contract of Guarantee) that it was not necessary for the parties suing under the guarantee to sign it.

Was the guarantee an independent obligation or dependent on a breach by the construction company?

The court determined that the guarantee was an independent obligation because it stated that the guarantors were "liable as principal guarantors".

 

1 Rhee Family Trust & Anor v Cho & Anor AK CIV 2006-404-1512, 28 August 2006

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