Egan v Static Control Components (Europe) Ltd.

A guarantee is interpreted in the same way as any other contract. The court must ascertain what the document would convey to a reasonable person possessing the background knowledge reasonably available to the parties. An apparently clear literal meaning does not prevent consideration of that background.

Where the context shows that the language has gone wrong, the court may adopt the meaning which accords with the parties’ objectively understood common aim and business common sense. This is interpretation, rather than impermissible rewriting. The contra proferentem rule applies only if doubt remains after the document has been properly interpreted. It has no place where relevant background evidence resolves the scope of a guarantee.

The appellant director had given successive personal guarantees for debts owed by his company to the respondent supplier. When substantial existing indebtedness had accrued, he signed a replacement guarantee increasing his maximum liability from £75,000 to £150,000. Its wording referred both to goods which the supplier “may supply” and to liability for “the whole debt”.

Following the company’s administrative receivership, the respondent claimed £111,883.82. The Recorder held that the guarantee covered debts arising from goods supplied both before and after its execution, and entered judgment for the full sum. The appellant appealed from Oldham County Court, contending that the guarantee covered future supplies only and should be construed strictly or contra proferentem. The central issue was whether the factual background could establish that the guarantee extended to the existing debt despite the prospective wording.

1. Appeal dismissed. The Recorder correctly held that the guarantee covered the existing debt as well as debt arising from future supplies. Judgment for £111,883.82 therefore stood.
2. Holman J held that the principles in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 apply to guarantees as they do to other contracts. The controlling question was what the document would convey to a reasonable person with the background knowledge reasonably available to the parties when it was made. Arden LJ agreed and emphasised that there are not separate linguistic and contextual constructions. There is one true interpretation reached by reading the provision in context.
3. The relevant objective background included the parties’ established trading relationship, the successive guarantees, the existing debt of about £143,000, the agreed continuation of supplies, and the increase of the guarantee limit from £75,000 to £150,000. Limiting the new guarantee to future supplies made no commercial sense because future credit was expected not to exceed about £72,000 and would deprive the supplier of security for the existing debt. The reference to “the whole debt” was unqualified. A reasonable person would understand the guarantee to cover both existing and future indebtedness.
4. The concluded agreement reached at the meeting on 2 September 1999 formed part of the admissible background. It was no longer a matter of mere negotiation. The court nevertheless excluded any reliance on the guarantor’s subjective knowledge and proceeded by reference to information objectively available to the parties.
5. The background demonstrated that the prospective wording had gone wrong. Giving it the contextual meaning which included goods already supplied was legitimate interpretation, not creative rewriting. Holman J considered that the notion that a guarantee should be strictly construed may add nothing to the ordinary objective approach.
6. Arden LJ held that contra proferentem applies only if a document remains doubtful after proper interpretation. Because the relevant background resolved the scope of this guarantee, the rule had no place. No public policy required guarantees generally to be construed otherwise than under ordinary contractual interpretation principles.

1. Court of Appeal (Civil Division): The appeal was dismissed. The court upheld the Recorder’s construction of the guarantee and the judgment for £111,883.82.
2. Oldham County Court: Mr Recorder Hinchliffe QC held that the guarantee covered debt arising both before and after 2 September 1999 and entered judgment for the claimant for £111,883.82 plus interest. Permission to appeal was granted by Tuckey LJ.