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On 30 October 2020 the Supreme Court delivered a landmark judgment in the context of contracts of guarantee in the case of Brougham v Regan [2020] NZSC 118. A summary of the key facts of the matter and important points in the Court's decision follow.
In 2010 the Trustees of the Winchester Trust agreed to grant a loan to B & R Enterprises Limited, a company incorporated by Mr Brougham and his then de facto partner, Ms Dey. A loan agreement was prepared in the edition of the Auckland District Law Society form current at that time. Originally, it was intended that Mr Brougham and Ms Dey would each guarantee 50% of the loan. Mr Brougham signed the loan agreement in his capacity as director of the company, and in his personal capacity as guarantor for the loan. However, Ms Dey only signed the loan agreement in her capacity as co-director of the company.
The loan agreement contained a clause requiring that, as a condition precedent to the advance, all guarantors of the loan were to sign a deed of guarantee and indemnity. However, neither Mr Brougham nor Ms Dey executed a separate deed of guarantee, and the loan was advanced to the company as soon as the loan agreement was executed. When the company began defaulting on its loan repayments and was subsequently liquidated, the Trustees sought to enforce the guarantee against Mr Brougham so as to claim the full outstanding amount of the loan from him alone.
The Trustees were unsuccessful in a claim against Mr Brougham in the District Court and in the High Court, but succeeded on appeal to the Court of Appeal. Mr Brougham then appealed the Court of Appeal's decision to the Supreme Court.
The key question to be determined by the Supreme Court was whether the loan agreement signed by Mr Brougham complied with Section 27(2) of the Property Law Act 2007 ("the Act"), which prescribes that a contract of guarantee must be in writing and signed by the guarantor.
The Court considered that Section 27 of the Act was intended to impose more stringent requirements than had been imposed by the Contracts Enforcement Act 1956 which formerly governed contracts of guarantee.1 Additionally, Section 27(4) of the Act expressly defines a contract of guarantee as a contract under which a person agrees to answer to another for the debt, default or liability of a third person.
The Trustees argued that a separate guarantee was not necessary, because Mr Brougham had already signed the loan agreement as guarantor. The Supreme Court expressed no doubt that there was a written agreement and that it was signed. However, the Court considered that the conditions of the loan agreement were expressed in terms that made it clear that they were provisions binding the Trust as lender and the company as borrower, but not the guarantors.2
The Supreme Court held that because there was nothing in the loan agreement recording an agreement by Mr Brougham to answer for the debt or liability of the company, and in the absence of a separate deed of guarantee, the claimed guarantee did not meet the writing requirements of Section 27 and was unenforceable against Mr Brougham.3 In other words, it was not enough for the document to simply describe one of the persons signing the document as a "guarantor". Somewhere in the document there needed to be a term recording that the person agreed to guarantee an obligation and what that guaranteed obligation was. The Supreme Court therefore overturned the Court of Appeal's judgment, thereby imposing a strict interpretation of the requirements for valid contracts of guarantees.
The Court made a further important observation for valid contracts of guarantee. It held that even if a document satisfies the requirements in Section 27(2), where a guarantee document shows on the face that more than one guarantor is required to sign and only one does, the one who signs is not liable.4
The take-away from this decision is that, in preparing any document purporting to bind someone as guarantor, whether it be a loan, a lease or any other agreement, it is important to ensure that the document sufficiently records an agreement by the guarantor(s) to answer for the debt, default or liability of a third person, or better yet, to have all guarantors execute a separate deed of guarantee containing terms sufficient to bind the guarantor(s) to the associated obligation. Also, in the case of multiple named guarantors, it is essential to have all guarantors sign the document and/or deed of guarantee.
In respect of existing guarantees, it is important to note that the strict procedural requirements prescribed by Section 27 of the Act apply only in respect of contracts of guarantees coming into operation on or after 1 January 2008. Contracts of guarantee to which the Act does not apply are still governed by the Contracts Enforcement Act 1956, which imposes less stringent writing and signature requirements.
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1 At [26], [27] and [35].
2 At [35] - [38].
3 At [36] and [38].
4 At [47].
© McVeagh Fleming 2021
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