Get it in writing: the Supreme Court on guarantees

3 November 2020

​​​A recent Supreme Court decision has affirmed the strict procedural requirements applying to guarantees, shutting down a softer approach signalled by the Court of Appeal.

The judgment in Brougham v Regan1 emphasises the importance of ensuring that the terms of a guarantee are clearly recorded in writing and signed by all of the intended guarantors.

The case concerned the enforceability of a guarantee, said to have been given by Mr Brougham to the trustees of the Winchester Trust (the Trustees). Mr Brougham and his ex-partner, Ms Dey, were the directors of a company that borrowed NZ$50,000 from the Trustees. ​

The terms of the loan were recorded in a written agreement. Two features of the loan agreement were particularly important. First, anyone named as a guarantor was required to sign a deed of guarantee and indemnity, as a pre-condition to any advance being made under the agreement. Second, both the front page and the execution page of the agreement identified both Mr Brougham and Ms Dey as directors and, separately, guarantors under the loan. While Ms Dey signed only as a director, Mr Brougham signed the loan agreement as both a director and guarantor.

The loan was conditional upon the provision of a signed deed of guarantee, which neither Mr Brougham n​or Ms Dey provided. Nevertheless, the Trustees advanced the money to the company on the day the loan was signed. Shortly afterwards, the relationship between Mr Brougham and Ms Dey ended and the company stopped making repayments under the loan.

The Trustees took steps to enforce the guarantee against Mr Brougham.​

A guarantee must be recorded in writi​​ng

Section 27(2) of the Property Law Act 2007 requires that a “contract of guarantee" must be recorded in writing and signed by the guarantor. The first issue the Supreme Court considered was whether the loan agreement, which Mr Brougham had signed in his capacity as guarantor, met these requirements.

The Court held that merely signing a document as a guarantor did not make the document a “contract of guarantee" for the purposes of section 27(2). In order to be a “contract of guarantee", a document must include an agreement by the guarantor to answer for the debt, default or liability of a third person. The loan agreement between the company and the Trustees did not include any clause to that effect. In fact, the terms of the loan made it clear that those obligations would be imposed by a separate contract – the deed of guarantee and indemnity that was never signed. In the absence of that document, Mr Brougham could not be held liable as a guarantor.​

A guarantee must be signed by all of the name​d guarantors

Mr Brougham also argued that, if the loan agreement was a “contract of guarantee" that was recorded in writing, then it should be unenforceable because only one of the named guarantors had signed it. The Supreme Court agreed. Where a contract of guarantee demonstrates, on its face, that the guarantee is intended to be given jointly by a number of guarantors, then the guarantee will only be valid if all of the named guarantors have signed. This presumption can, however, be displaced by clear words in the contract of guarantee.​

Equitable estoppel and specific performance

The Supreme Court considered two further arguments raised by the Trustees.

First, the Trustees argued that Mr Brougham was effectively prevented (estopped) from relying on section 27(2) of the Property Law Act to evade his obligations as a guarantor. The Trustees claimed they had loaned money to the company in reliance upon Mr Brougham's guarantee, and it was unconscionable for him to now abandon that promise. The Supreme Court rejected this argument, which would have undermined the purpose of the protections in section 27(2). Estoppel would only be relevant if Mr Brougham had affirmed the guarantee in some other way, other than by signing the defective loan document.

Second, the Trustees argued that Mr Brougham should be ordered (by way of specific performance) to sign a deed of guarantee and indemnity, as contemplated by the terms of the loan. The Supreme Court rejected this argument. There was nothing in the terms of the loan that required Mr Brougham to sign a deed of guarantee. Rather, the loan was said to be conditional on this being done. However, the Trustees had waived that pre-condition when they made the advance. ​

Issues to consider when see​​king a guarantee

It is clear from the terms of the loan agreement, and from the evidence of the parties, that Mr Brougham was intended to be a guarantor of the company's loan obligations to the Trustees. Unfortunately for the Trustees, however, that intention was defeated by inadequate documentation. In this respect, the outcome of the case is one of form over substance. However, in contrast to the Court of Appeal, the Supreme Court considered this result to be appropriate in light of the “consumer protection" purposes of section 27(2).​

The case reinforces the need for lenders, landlords and anyone else seeking a guarantee to ensure that the terms of the guarantee are clearly recorded in a separate contract and that all of the named guarantors have signed. It is also an important reminder that the wording of contractual obligations is key. If a guarantee is required, then this should be clearly noted as a term of the principal agreement and not only as a condition precedent to that agreement (which risks an inadvertent waiver if the parties proceed without it). ​

If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully advisor. ​

1 ​Brougham v Regan [2020] NZSC 118. ​​


Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.