Harmans Lawyers
02 March 2021

The Pitfalls of Guarantees

All Articles & News, Litigation and Dispute Resolution

In a recent case of Brougham v Regan, the New Zealand Supreme Court has unanimously confirmed the strict application of s27(2) of the Property Law Act 2007, requiring all guarantee agreements to be in writing and signed by the guarantors.

Background

Mr Brougham and Ms Dey were in a de facto relationship when they incorporated a company that borrowed $50,000 from the trustees of the Winchester Trust. They each agreed to be a guarantor of the loan. The loan agreement was drafted using the standard ADLS form. Mr Brougham signed the agreement as the company director and a guarantor of the loan, but Ms Dey only signed as a director. The agreement did not explicitly refer to any obligations of the guarantor. Instead, it required the person providing the guarantee to sign a separate guarantee agreement.

The relationship between Mr Brougham and Ms Dey subsequently ended, and the company was put into liquidation. The trustees attempted to enforce Mr Brougham’s personal guarantee. They lost in the District Court and High Court. However, the Court of Appeal overruled the lower courts’ decisions and held that Mr Brougham was liable for the full amount of $50,000.

The Supreme Court

The Supreme Court made four findings:

1. A guarantee agreement must be in writing.

Section 27(2) of the Property Law Act requires any guarantee agreement to be in writing and signed by the guarantors. The Supreme Court held that the loan agreement did not spell out that Mr Brougham agreed to answer for the debt, default or liability of a third party. Therefore, it was not a guarantee agreement. Mr Brougham was not liable as a guarantor. The Supreme Court confirmed that this requirement must be applied strictly to achieve the consumer protection purpose of s27(2).

2. A guarantee agreement must be signed by all of the guarantors.

The Supreme Court went on to say that even if the “in writing” requirement was met, the guarantee was unlikely to be enforceable because Ms Dey never signed the agreement as a guarantor. She was named as a guarantor, but only Mr Brougham signed as a guarantor. They had to both sign as a guarantor for the agreement to be enforceable.

3. The general law of estoppel does not apply

The Court rejected the Trustees’ argument that Mr Brougham was estopped from escaping his obligations under the loan agreement. For this argument to succeed, Mr Brougham would have had to affirm the guarantee before the loan was advanced, which did not happen in this case.

4. Specific performance

The Trustees argued that they should be entitled to require Mr Brougham to perform his obligations by way of specific performance. The Court pointed out that there was no obligation under the loan agreement that could be enforced. Therefore, there was no commitment made by him. However, the Court left the question open whether specific performance could be available on other facts.

Lessons to be learned

The law on guarantees and indemnities will be strictly enforced. A guarantee agreement which only indicates the guarantor’s intention without identifying what the guarantor’s obligations are is not enforceable. A guarantee must also strictly meet the formality requirements of s27(2). Resting in place a separate agreement that records the terms of the guarantee is best practice. Furthermore, where more than one guarantor is named all of them must sign the guarantee. Otherwise it may not be enforceable.

The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.