Court of Appeal rules parties are not bound by unsigned guarantee

Following on from the case of RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh & Company [2010] covered in our April update, the issue of contract formation remains a hot topic. In the recent case of Investec Bank (UK) Limited v Zulman and another (2010) the Court of Appeal was asked to consider whether an unsigned amended guarantee given by a Borrower to a Bank was enforceable. The negotiation of the draft amended was not expressed to be subject to contract. The Court held that, while the Guarantors had orally indicated that they accepted the terms of the draft amended guarantee, a binding agreement had not come into existence because the draft amended guarantee had expressed that the Guarantor should seek legal advice before executing the document. The Court's view was that this would be a "pointless provision" if the parties had intended to be bound by an earlier oral agreement. While the case is fact sensitive, it is useful to note that the absence of the term "subject to contract" is not decisive, the issue regarding contract formation is one of substance not form.

Dispute: following a change of circumstances (which are not discussed in this article), the parties agreed to revise the financial threshold of an existing guarantee. A draft amended guarantee was negotiated but never signed. The negotiations for the original guarantee were stated to be "subject to contract"; the negotiations for the amended guarantee were not.

The Borrower defaulted and the Bank sought to enforce the guarantee. The Borrower refused to pay on the basis that they had never signed the amended guarantee and because they had not become liable under the terms of the original guarantee. The Bank argued that the Borrower was bound by the draft amended guarantee because they had orally agreed to its terms and the negotiations relating to the amended guarantee were not expressed to be subject to contract.

As explained above, the Court held that, while the Guarantors had orally indicated that they accepted the terms of the draft amended guarantee, a binding agreement had not come into existence because the draft amended guarantee had expressed that the Guarantor should seek legal advice before executing the document. The Court's view was that this would be a "pointless provision" if the parties had intended to be bound by an earlier oral agreement. While the case is fact sensitise, it is useful to note that the absence of the term "subject to contract" is not decisive, the issue regarding contract formation is one of substance not form.

 Advice: At a time when additional security can be crucial, it is vital to ensure that not only are guarantees (and other forms of security such as performance bonds) correctly drafted but also that they are correctly executed. Clarke Willmott has an experienced team of construction solicitors who can guide you through this process.

For further information in relation to our specialist construction services please contact Priscilla Hall (Partner) on 0845 209 1435 or Coriander Davies on 0845 209 1425.

Disclaimer: This article should not be relied upon or taken as factual statements of law. If necessary, professional legal advice should be taken.

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