Fairstate Ltd v General Enterprise & Management Ltd & Anor

Contracts of guarantee are construed by the ordinary principles applicable to commercial contracts. Extrinsic evidence may identify an inadequately described guarantor, creditor, principal debtor or guaranteed obligation. However, the court must be particularly cautious where contested evidence is relied on to defeat a statutory defence under Statute of Frauds 1677, section 4.

Construction cannot be used to write a substantially different contract. Rectification requires certainty that the parties had agreed the material terms and that the document recorded them inaccurately. It cannot supply uncertain material terms merely because the parties had a general intention to provide security. Estoppel cannot ordinarily defeat reliance on defects in a guarantee prepared by the creditor’s solicitor without a separate representation or unconscionable conduct.

Fairstate claimed money from General Enterprise & Management Ltd under a management contract and from Atef Sarian under a document described as a guarantee. The preliminary issue was whether Mr Sarian was personally liable as guarantor.

The signed guarantee contained extensive errors. It identified the wrong creditor and principal debtor, described banking liabilities rather than liabilities under the management contract, and contained inappropriate or incomplete provisions. The court found that Mr Sarian had agreed to give a personal guarantee, but had to determine whether the document was effective as a contract, complied with section 4 of the Statute of Frauds 1677, could be construed or rectified, or gave rise to an estoppel.

1. Disposition. The claim against Mr Sarian was dismissed. The court found that he had agreed to provide a personal guarantee of General Enterprise & Management Ltd’s liabilities and that his misrepresentation and agency defences failed on the facts.
2. Section 4 of the Statute of Frauds 1677 requires the written agreement or memorandum to contain the material terms of the guarantee. The identity of the principal debtor is a material term. In this case, the parties intended that a written guarantee should be provided, so the relevant question was whether the signed written document itself was effective.
3. Guarantees are subject to the ordinary principles of commercial construction. Suitable extrinsic evidence may identify an inadequately or ambiguously described guarantor, creditor, principal debtor or obligation. The court must nevertheless examine contested evidence with particular care, since otherwise the statutory policy of avoiding disputes about oral promises would be undermined.
4. The Guarantee Form could not be construed by correcting its wording. The necessary changes would have altered the creditor, principal debtor, guaranteed liabilities and numerous banking provisions. That would have created a new contract rather than interpreted the existing one.
5. Rectification was available in principle for a guarantee, but the remedy required certainty about all material terms. The parties had agreed only the general provision of security. They had not agreed the detailed terms, including the duration and operation of the guarantee. Rectification therefore could not cure the defects, and the document was ineffective in contract and unenforceable under section 4.
6. Estoppel by convention did not assist Fairstate. Mr Sarian’s signature of the defective documents was insufficient inducement or encouragement, and there was no separate representation or unconscionability in his relying on the statutory defence.

First-instance decision on a preliminary issue concerning Mr Sarian’s liability as guarantor. No prior appellate decision was stated.