Pitts & Ors v Jones

A promise is supported by consideration where the promisee’s cooperation is given in return for it. The promisee need not consciously identify the detriment constituting that consideration.

Whether a promise to meet another person’s liability is a guarantee or an indemnity depends on the object and subject matter of the transaction. A promise is an indemnity where payment of another’s debt is merely incidental to a larger transaction in which the promisor has a real interest. A promise whose central object is to answer for another’s default is a guarantee and, under section 4 of the Statute of Frauds Act 1677, requires signed written evidence to be enforceable.

The appellants were employees and minority shareholders of a company whose managing director and majority shareholder was the respondent. They waived pre-emption rights and later entered options under which a purchasing company would acquire their shares. To secure their cooperation with the sale arrangements, the respondent orally promised to pay for their shares if the purchaser failed to do so.

The purchaser became insolvent without paying the appellants. Mr Recorder Prosser dismissed their contractual claims in the Dewsbury County Court. He held that the promise lacked consideration and, alternatively, that it was an unwritten guarantee rendered unenforceable by section 4 of the Statute of Frauds Act 1677.

The appeal raised two questions: whether the appellants’ cooperation amounted to consideration despite their lack of conscious analysis of it, and whether the respondent’s promise was a guarantee or an indemnity.

1. Appeal dismissed unanimously. Lady Justice Smith delivered the judgment, with which Lord Justice Wilson and Lord Justice Ward agreed.

2. The Recorder erred on consideration. The appellants became unwilling to sign the option agreements after learning that payment was deferred and unsecured. The respondent then gave his undertaking, after which they immediately signed the options and consented to abridged notice for the extraordinary general meeting. That close chronological connection supported the natural inference that their cooperation was given in return for the undertaking. Consideration does not fail merely because the promisees did not consciously identify the detriment they were undertaking: para 18.

3. A guarantee is a form of indemnity under which the promisor answers for another person’s debt or default. The distinction relevant to section 4 of the Statute of Frauds Act 1677 turns on the object and subject matter of the contract. Where there is a larger contract and payment of another’s debt is only incidental to its principal object, the promise may be an original indemnity. A motive or indirect commercial interest is insufficient; the promisor must have a real interest in the subject matter: paras 21–32.

4. The sale of the respondent’s shares and the appellants’ option agreements were linked but remained separate transactions. The respondent’s benefits arose solely from the sale of his own shares. Although he had negotiated the appellants’ options and promised payment to obtain their cooperation, he could derive no benefit from the options themselves. His undertaking was therefore not incidental to a larger contract. Its sole function was to support the purchaser’s liability under the options: paras 34–38.

5. The undertaking was consequently a guarantee within section 4. Because it was not evidenced in writing signed by or on behalf of the respondent, it was unenforceable. The Recorder’s dismissal of the claims therefore stood: paras 38–40.

1. Court of Appeal (Civil Division): The appeal was dismissed. The court reversed the Recorder’s conclusion that the promise lacked consideration, but upheld his alternative conclusion that it was an unenforceable oral guarantee: [2007] EWCA Civ 1301.

2. Dewsbury County Court: Mr Recorder Prosser dismissed the claims on 7 July 2006. He held that the respondent’s undertaking was unsupported by consideration and, alternatively, was an unwritten guarantee unenforceable under section 4 of the Statute of Frauds Act 1677.