Statute of Frauds 1677 – Guarantee – Indemnity – Respondent giving oral undertaking to purchase shares if potential purchaser failed to pay – Promise not made in writing signed by or on behalf of guarantor – Whether promise being guarantee or indemnity – Whether promise being enforceable – Appeal dismissed
The appellants were employees of and minority shareholders in a company of which the respondent was the managing director and majority shareholder. In November 2002, the respondent reached a provisional agreement to sell his shares to B. He subsequently told the appellants, who had a right of pre-emption, of his intention to sell and that he had negotiated a deal with B to purchase their shares at the same price. In those circumstances, the appellants agreed to waive their right of pre-emption. As part of the deal, the respondent promised that, should B fail to pay for the appellants’ shares, he would do so.
When B failed to pay, the appellants sought to enforce that oral undertaking. The recorder held that the respondent’s undertaking to pay was not a contractual promise; it was unsupported by consideration and was of no legal effect. Even if that were wrong, the appellants’ claim would still fail since, if there was a contract between the respondent and the appellants, it was a contract of guarantee and unenforceable under section 4 of the Statute of Frauds 1677. It was not evidenced in writing, signed by or on behalf of the guarantor.
The appellants appealed, arguing that there was a contract between the parties that constituted an indemnity rather than a guarantee and that the contract fell outside the 1677 Act and was ostensibly enforceable.
Held: The appeal was dismissed.
On the evidence, the respondent’s undertaking was supported by consideration and was therefore a contractual agreement. There was so clear a chronological link between the respondent’s offer of the undertaking and the appellants’ willingness to sign the documents that the natural inference to draw was that the two were directly connected. The appellants’ co-operation was given in return for the respondent’s undertaking.
However, the respondent’s promise was a guarantee within section 4 of the 1677 Act and, as such, was unenforceable since it was not evidenced in writing, signed by or on behalf of the guarantor.
Although it was common ground that a contract of guarantee was a type of indemnity, it was important to distinguish between the two because section 4 of the 1677 Act applied only to contracts of guarantee. In deciding whether a contract was a guarantee or an indemnity, instead of asking whether the promisor had any interest in the transaction, the court should ask what was the object of the contract or transaction. If the promisor’s obligation to pay arose incidental to the central object of the contract or transaction, that obligation would be an indemnity, whereas if it was the central obligation of the contract or transaction, it would be a guarantee. Not every interest in the transaction would take the promise out of the statute. If the promisor had no real interest in the subject matter of the contract but only a motive for offering its promise, the promise would be a contract of guarantee: Sutton & Co v Grey [1894] 1 QB 285 and Harburg India Rubber Comb Co v Martin [1902] 1 KB 778 considered.
In the present case, the respondent’s undertaking had been given solely to support the appellants’ share options and the respondent had had no other role or interest in those transactions than that of promising to pay the appellants if B failed to do so. The respondent’s promise was therefore an unenforceable guarantee.
Peter Cherry (instructed by Chadwick Lawrence LLP, of Huddersfield) appeared for the appellants; Darren Finlay (instructed by Lupton Fawcett, of Leeds) appeared for the respondent.
Eileen O’Grady, barrister