Guarantees: the risks of unclear documents and “Entire Agreement” clauses

In a recent judgment, the court decided that an assurance by the director of a company that he would pay the fees it owed was not a guarantee of those fees. This was in spite of a letter he signed at the same time, which included a term stating that the directors would be directly liable where the company failed to pay.

Even if the assurance had been a guarantee, a formal guarantee made later by the same director for the fees outstanding at that time had superseded it, because the deed included a clause stating that it superseded any previous agreement relating to its subject matter (an “Entire Agreement” clause).

For a guarantee to be enforced, it must be given or evidenced in writing, and signed by the guarantor.

In this case, the director signed a letter accepting the terms of business of his company’s solicitors. One of the terms stated that the directors would be directly liable where the company failed to pay. At the same time, the director made comments along the lines of “you don’t have to worry, I will be paying your fees”.

Later, the directors of the company gave formal guarantees by deed relating to specific outstanding fees, which were paid off.

When the company became unable to pay further outstanding fees, the solicitors argued they were guaranteed by the director.

The court held that the director had not intended to enter a legally binding guarantee when signing the letter and making the statement, since:-

• in the absence of any clear evidence otherwise, his signature bound the company and not the director personally; and-
• his statement was just a statement of comfort reiterating his willingness to make funds available to the company.

The actions of the parties after the signing of the letter reinforced this view.

Also, if any guarantee had been given, it would have been superseded by the later formal guarantee due to the “Entire Agreement” clause.

This case is a reminder of the dangers of relying on oral assurances that are not clearly documented. The documentation should show a clear intention for a guarantee to be given, since this will be difficult to prove otherwise. Failing this, unless the assurance is factual and inaccurate at the time it is given (such as a statement that funds are available when they are not), there is unlikely to be any liability.

Any documentation referring to a third party's liability for a debtor’s obligations should provide that: -

• any guarantees provided are clearly spelled out in a document signed by the guarantor; and-
• there is no risk of “Entire Agreement” clauses being included without consideration of previous guarantees they may supersede.

This could include bank standard form agreements and security documentation.

Law: Manches v Freer [2006] All ER (D) 428 (Nov) [2006] EWHC 991 (QB)

Co-author Ed Robinson at edmund.robinson@cms-cmck.com or +44 (0)20 7367 2963.