Court refuses to redraft a defective guarantee

27 April, 2011

In the recent case of Fairstate Ltd v General Enterprise & Management Ltd1, the High Court has refused to apply the established legal principles of construction (i.e. the interpretation of contracts) and rectification to correct defective drafting in a guarantee.

The case concerned a corporate landlord and an individual who had been asked to manage a property on the landlord’s behalf via a special purpose vehicle (SPV). The landlord wanted a personal guarantee from the individual guaranteeing the obligations of the SPV but the parties ended up signing a poorly drafted guarantee which was substantially in the form of a third-party guarantee required by a bank as a guarantee for the indebtedness of a customer. The court held that the guarantee was so fundamentally flawed and unsuitable for the transaction that it could not be sufficiently cured by either purposive construction or rectification.

The court considered that to apply the principles of construction or rectification to the guarantee would effectively mean that it would be writing a new contract for the parties under the guise of interpreting an existing one. That approach would go against the statutory defence under section 4 of the Statute of Frauds 1677 which would enable the guarantor to argue that there was no binding agreement because the guarantee would have to be in writing and state all the material terms of the contract which had been agreed, which, in its poorly drafted form, the signed guarantee did not.

This case serves as a useful reminder of the need to ensure that guarantees are accurately drafted and demonstrates that, despite the established principles of construction and rectification, creditors should not expect the court to step in and correct their drafting mistakes.

1Link to judgment: Fairstate Ltd v General Enterprise & Management Ltd and another [2010] EWHC 3072 (QB)

 

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