Pitts & Ors v Jones

The appellants, minority shareholders and employees, sued the respondent, the majority shareholder and managing director, for breach of contract after an oral undertaking that he would pay for the appellants' shares if the purchaser failed to do so. The recorder dismissed the claim on two legal grounds: first for want of consideration and alternatively because the oral promise was a contract of guarantee within section 4 of the Statute of Frauds 1677 and therefore unenforceable without writing.

The Court of Appeal held that the recorder was wrong to treat the appellants' cooperation on 7 January 2003 as lacking consideration; there was a sufficient causal and chronological link between the respondent's undertaking and the appellants' agreement to sign option documents and to consent to abridged notice, so that the cooperation constituted good consideration. However, the court nonetheless dismissed the appeal because the respondent's undertaking was a promise to answer for the debt of another and therefore a guarantee within section 4 of the Statute of Frauds 1677. The court distinguished indemnities from guarantees by reference to authorities including Harburg and Sutton, and concluded that the undertaking was not an incident of a larger contract but related solely to support of the appellants' options, and so required written evidence.

Background and parties: The appellants were minority shareholders and employees of HM Shopfitting Ltd; the respondent was the managing director and majority shareholder. The respondent sought to sell his shares to a purchaser (via a vehicle, Birch). The appellants were asked to waive pre-emption rights and to enter option agreements to sell their own shares to Birch; they were given an oral undertaking that the respondent would pay for their shares if Birch failed to do so. Birch later became insolvent and the appellants received nothing for their shares. The appellants sued for the sums they alleged they were promised.

Procedural posture: At first instance Mr Recorder Prosser dismissed the appellants' claims on 7 July 2006, holding the promise lacked consideration and, alternatively, was an unenforceable guarantee under the Statute of Frauds. Permission to appeal was given and the case came to the Court of Appeal.

Nature of the claim / relief sought: Damages for breach of contract based on an oral undertaking by the respondent to pay the appellants £714.29 per share if the purchasing company did not pay.

Issues framed:

• Whether the respondent's oral undertaking was supported by consideration.
• Whether the undertaking was enforceable or whether it was a contract of guarantee caught by section 4 of the Statute of Frauds 1677 and therefore unenforceable unless evidenced in writing.

Court’s reasoning: On consideration the court held that the recorder placed undue emphasis on the appellants' subjective state of mind. There was a clear chronological and causal link: the appellants were unhappy at the proposed terms and only agreed to sign the option documents and to consent to abridged notice after the respondent gave his undertaking. That cooperation constituted legal consideration despite the appellants not having consciously formulated the alternative of withholding cooperation.

On enforceability the court analysed the distinction between an indemnity and a guarantee, reviewing authorities including Sutton, Couturier v Hastie and Harburg. Applying the test whether the obligation to pay was an incident of a larger contract or the central obligation, the court concluded that the respondent’s undertaking related solely to support of the appellants’ option agreements and was a promise to answer for the debt of another. It was therefore a guarantee within section 4 of the Statute of Frauds and unenforceable in the absence of signed written evidence.

Outcome: The appeal was dismissed. The court observed the appellants’ position was unfortunate but the statutory formality in relation to guarantees barred enforcement.

The appeal is dismissed. The Court of Appeal held that the appellants' cooperation in signing option agreements and consenting to abridged notice constituted valid consideration for the respondent's oral undertaking, but that the undertaking was a promise to answer for the debt of another and therefore a guarantee within section 4 of the Statute of Frauds 1677; lacking the required written evidence, it was unenforceable.

Appeal from Dewsbury County Court (Recorder Prosser, 7 July 2006) where the appellants' claims for breach of contract were dismissed. Permission to appeal was given by Sir Henry Brooke; appeal determined in the Court of Appeal [2007] EWCA Civ 1301 (judgment delivered 6 December 2007).