A Contract of Guarantee Must Be in Writing and Signed by the Party to Be Charged in Order

Guarantees

A contract of guarantee must be in writing and signed by the party to be charged in order to be enforceable. Section 56(1) of the Property Law Act 1971 (Qld) provides:

No action may be brought upon any promise to guarantee any liability of another unless the promise upon which such action is brought, or some memorandum or note of the promise, is in writing, and signed by the party to be charged, or by some other person by the party lawfully authorised.

Nature of Guarantee

A contract of guarantee has been defined as ‘a contract to answer for the debt, default or miscarriage of another who is primarily liable to the promisee. The person who provides the guarantee is referred to interchangeable as the guarantor or surety.

In situations were a guarantee is given there will be two separate transactions. The first (principal transaction) between lender and debtor and the second transaction (contract of guarantee) makes the guarantor secondarily liable, a liability which only arises if the principal transaction between the lender of the debtor is valid and has been defaulted.

Transactions which are not guarantees

Transaction which are not guarantees will not have to comply with the statutory requirements of formalities.

Contracts of indemnity

In an indemnity, the surety undertakes primary liability, rather than secondary liability, meaning that the surety will be liable notwithstanding that the principal transaction is unenforceable (Yeoman Credit Ltd v Latter)

Promise of guarantee made to the debtor

It is possible for a person to promise the principal obligator (the debtor), rather than the creditor, that he or she will pay the debt of the debtor. As the promise is not made to the person with whom the principal obligor contracts, the contract is not one of guarantee (Eastwood v Kenyon).

Person agree to take over the debt of another

Where a debtor and creditor have entered into a contract of loan, it could occur that t third party agrees with the creditor to take over the debt of the debtor (Gray v Pearson).

The agreement imposes no personal liability on the person

If a person does not undertake personal liability, but instead proffers his or her property as security to the promisee under the principal transaction it is not a guarantee (Harvey v Edwards, Dunlop & Co).

In Harvey v Edwards, Dunlop & Co Ltd liability was imposed only on the proceeds of the sale of the property not the debt of the company and if proceeds of sale were insufficient to cover the debt, there was no obligation on Harvey to pay out of his other assets’.

Letters of comfort

When third parties are not prepared to provide the lender with a guarantee they may, as a compromise, be prepared to give the lender some assurance about the likelihood of the debtor meeting obligation under the principal contract. Whether a letter of comfort is binding as a guarantee depends on the construction of the document.

Requirement of writing: content

Harvey v Edwards, Dunlop & Co, provides that the document must contain ‘all essential terms of the agreement’.

(a) Information particular to the guarantee

First, the guarantee must contain the names of the relevant parties: the lender, the debtor and the guarantor. Authorities suggest that even if a party is not expressly identified, ‘a description of the party will be sufficient if the description used can be explained by extrinsic evidence without having to resort to evidence to prove the intention of the author (Rosser v Austral Wine & Spirit Co).

While the lender must provide valuable consideration to the guarantor for a valid contract of guarantee to be formed, the nature of that consideration is not required to be contained in the guarantee (Property Law Act 1974 (Qld) s 56(2)).

Requirement of writing: signed by party to be charged or agent

Upon the debtor’s default, the lender will seek to enforce the guarantee against the guarantor therefore, it is the guarantor who is the party to be charged.

Authenticated Signature of Fiction

A person may have been taken to sign a document if the signature is absent as long as the name of the party is placed on the document and that party expressly or impliedly indicates that he or she recognizes the writing as being an authenticated expression of the contract (Durrell v Evans).

Therefore, if the guarantor’s name appears on the guarantee, and it is the guarantor’s intention that the name authenticates the document, it will be sufficient to satisfy the statutory requirement.

The statutory provision makes it clear that the signature can be by the guarantor or the agent acting on the guarantor’s behalf. Appointment of this guarantor need not be in writing.

Contracts relating to land

Section 59 of the Property Law Act (Qld) requires the statutory requirement for formality where the contract concerns land. Section 59 provides:

59 Contracts for sale etc. of land to be in writing

No action may be brought upon any contract for the sale or other disposition of land or any interest in land unless the contract upon which such action is brought, or some memorandum or note of the contract, is in writing, and signed by the party to be charged, or by some person by the party lawfully authorised.

Requirement of writing: content

The majority judgment in Harvey v Edwards, Dunlop & Co, that the document must contain ‘all the essential terms’, is also relevant to land.

a) Information particular to the contract

It was suggested in Twynam Pastoral Co v Anburn that there are four matters that must be recorded to satisfy the statutory requirement in a contract involving land.

First, the document must contain the parties to the contract (Williams v Byrnes). Authorities suggest that even if a party is not expressly identified, ‘a description of the party will be sufficient if the description used can be explained by extrinsic evidence without having to resort to evidence to prove the intention of the author (Rosser v Austral Wine & Spirit Co).

Second, the property must be adequately described. If the property the subject of the sale is part only of a particular lot, care must be taken to specifically identify the portion being sold (Pirie v Saunders). In contrast, if freehold property is sold subject to an existing leasehold and the leasehold interest is known to the purchaser, there is authority to suggest that the property is sufficiently described even if there is no reference to the lease (Timmins v Moreland Street Property Co).

Thirdly, the consideration for the promise, namely the price, must be recorded (Wain v Walters).

Finally, the principal terms of the contract must be disclosed. For example, if the parties require time to be of the essence, that condition should be included in the contract.

If the term omitted is for the benefit of the plaintiff they may waive the benefit of clause and seek enforcement of the contract without it (Petrie v Jensen).

b) Acknowledgment of agreement

The writing must contain an acknowledgment of agreement as well as the terms of the agreement. Such acknowledgement may be expressed or implied in the writing (Pirie v Saunders).

Requirement of writing: signed by party to be charged or agent

The document must be signed by the party to be charged. If there is purported contract for the sale of the land and the seller claims not to be bound by the agreement, the seller will be the party to be charged for the purposes of any action brought. Similarly, if the buyer claims not to be bound, the buyer will be the party charged.

Authenticated Signature of Fiction

A person may have been taken to sign a document if the signature is absent as long as the name of the party is placed on the document and that party expressly or impliedly indicates that he or she recognizes the writing as being an authenticated expression of the contract (Durrell v Evans).

It is sufficient if the document is signed by a person who is duly authorised by the party to be charged. The agent must be expressly authorised to sign the document on behalf of the party. While the authorization must be express, there is no requirement for it to be in writing.

Joinder of documents

It is possible to satisfy the statutory requirement of writing even if all of the relevant information is not contained in the one document. In certain circumstances, more than one document may be joined together (Harvey v Edwards Dunlop & Co).

A document may be able to be joined if there is a reference, express or implied, to another document or to a transaction.

Reference to a document

Where the document signed makes reference to another document, joinder of that document is permitted.

In Tonitto v Bassal references to ‘option to purchase’ and ‘option agreement’ were sufficient references.

Generally, the joined document will be in existence at the same time the document signed by the defendant. There are two exceptions to this general position.

a) Documents that are physically connected

There is authority that a document physically connected to the document signed by the defendant may be joined (Pearce v Gardner).

b) Documents that are executed at the same time

Where two documents relied on as a memorandum are signed and exchanged at one and the same meeting as part of the same transaction, so that they have been to all intents and purposes contemporaneously signed, the latter document will still be able to be joined to the former e.g. the joining of a receipt to a cheque, even thought the cheque was executed first (Timmins v Moreland Street Property).

Reference to a transaction

A document that refers to a transaction recorded in another document may be joined with the second document because express reference to the transactions is an implied reference to the second document which records it (Elias v George Sahely & Co).

Effect of statutory non-compliance: common law

Contract valid to pass title

Although a contract failing to comply with statutory requirements will be unenforceable, it will be a valid contract. This means that, if the contract is performed by the parties, it will be effective to pass good title (Maywald v Riedel).

Recovery of money paid under unenforceable contract

a) Recovery of deposit

A deposit paid by a buyer is considered to be ‘an earnest to bind the bargain’. If the sale is not completed due to the buyer’s default, the deposit is liable to forfeiture to the vendor (Freedom v AHR Constructions). If the contract fails to meet the statutory requirements, the deposit is still forfeited because the defendant has not need to bring an action within the meaning of the section to hold the deposit (Freedom v AHR Constructions).

Where an enforceable contract for the sale of land is not completed because of the seller’s default, the deposit is recoverable by the buyer as money had an received upon a total failure of consideration, where the consideration for which it was paid is the conveyance or transfer that has not taken place. The action is one brought in restitution, not on the contract.

b) Recovery of amount more than deposit

If the buyer under an unenforceable contract pays more than the deposit before the contract is terminated, the court will attempt to establish what portion of the payment constituted a deposit (usually 10%). The remaining balance will be recoverable by the buyer unless the money was intended to be a deposit liable to forfeiture in event of the contract being defaulted by the buyer. The balance will be recoverable because the buyer will not need to act in reliance on the contract as it is recoverable by restitution (Freedom v AHR Constructions).

Effect of statutory non-compliance: equity

Doctrine of part-performance

If parties enter into an oral contract for the sale of land and, relying on that contract, one party does certain acts, the courts may be prepared to grant that person specific performance of the contract if four conditions are satisfied.

a) Acts are unequivocally referable to some such contract

The acts of part performance relied upon must make clear the nature of the contract relied upon. The acts must be unequivocally referable to some such contract alleged between the parties (Maddison v Alderson).

In Regent v Millet the High Court held that the taking of possession was, of itself, an act which was referable to a contract of the type alleged.

In Regent v Millet the buyer began making mortgage repayments and also undertook some repairs and renovations. The purchasers relied upon these acts as acts of part performance of the oral contract. The court held that the taking of possession was an act which was referable to the contract of the type alleged. The court considered that it would be inequitable for the vendors solely upon the lack of writing to claim there was not contract and thus they were not allowed to do so. While it was held in Regent v Millet that possession alone was sufficient act of part performance, there were a number of other acts performed such as improvements, repairs, renovation and mortgage repayments that my have been relied upon.

The payment of money alone cannot be regarded as a sufficient act of part performance.

b) Acts done in reliance on the agreement and with knowledge of other party

The plaintiff must show that the acts were done in reliance on the agreement and with the knowledge of the other parties (McBride v Sandland). It is not necessary that the acts be required by the contract but the fact that they were done voluntarily is sufficient.