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Archaic it might be, but the law requires guarantees in writing

From time to time your friends or colleagues may ask you for a reference for a venture they want to embark upon, or property they want to rent. Usually you give the reference willingly and write fulsomely about their impeccable credentials, valuable personal qualities and tidy habits.

Every now and then, you may be asked to act as guarantor for the same sort of venture and then the lawyer in you advises caution.

A guarantee is a rather one-sided arrangement, whereby the guarantor agrees to underwrite their friend's indebtedness. The lender relies on it, safe in the knowledge that if the friend defaults, the guarantor will cough up.

This is fine, of course, if it is in your interests to give the guarantee, if the borrower is, for example, a business you are backing or your spouse. If not, then you stand to gain little and lose a lot.

There is, however, another trap for the unwary in the law of guarantees, which was laid by the Statute of Frauds in 1677.

Our 17th century forebears, it seems, had realised the truth in the old adage that an oral contract was not worth the paper it was written on. The usual courtroom dramas about who had said what had gained an unsavoury edge in that some people were lying through their teeth in the witness box in order to support spurious agreements said to have been made orally.

Parliament then intervened and created five classes of contract for which a signed written record was required for the agreement to be enforced. One of the five was an agreement under which it was sought to 'charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person', that is, a guarantee. The downside of this new law was that a borrower who acted on what they thought to be a binding agreement could be disappointed when it came to payback time, if the guarantor was able to avoid paying because there was nothing in writing.

Early in the last century, the Statute of Frauds was reviewed but the requirement for a signed record of a guarantee was retained because it was felt it would protect inexperienced people from undertaking obligations they did not understand.

It was against this background that the facts of Actionstrength v International Glass Engineering (3.4.03) were played out. The defendant, Inglen, was engaged by St-Gobain as main contractor to build a float glass factory in Yorkshire. Actionstrength was the labour-only subcontractor. As the works progressed, Inglen fell behind with its payments to Actionstrength, which threatened to withdraw its labour from site. At this point Actionstrength alleged that, in order to prevent delays to the project, St-Gobain agreed to prevail upon Inglen to pay up, failing which St-Gobain promised to pay Actionstrength. On the strength of this promise Actionstrength continued with the subcontract until it was owed £1.3 million. When Inglen failed to pay, it looked to StGobain. St-Gobain denied the agreement. In any event, it argued that the promise was unenforceable because there was no signed written note, as required by the Statute of Frauds.

So what did the House of Lords make of it? Not surprisingly, it was far from happy that St-Gobain, which had a clear commercial incentive to keep Actionstrength on site, might avoid its bargain by virtue of this ancient law, especially as English contract law does not usually require writing as a condition of enforceability. Nor was this an agreement between inexperienced people who required paternalist protection.

Nevertheless, the alleged promise was a guarantee and the applicable law, however venerable, required it to be in writing. Actionstrength's attempts to avoid the consequences of its failure to obtain a signed written commitment from St-Gobain, on the grounds that it would be 'unconscionable' for St-Gobain not to be held to its promise, had previously been dismissed as 'quite hopeless'. The House of Lords was kinder, but pointed out that the outcome of the case really depended on who had said what and that, in the case of guarantees, was exactly why the Statute of Frauds had been introduced.

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