Key developments in B&F case law guarantees

Banking & Finance analysis: Patrick Selley, bank guarantee & financial dispute specialist and consult-ant solicitor, Keystone Law, discusses the key cases and developments in relation to guarantees over the past 12 months.

This article was first written for, and featured in, LexisPSL.

What have been the key cases in this area over the past 12 months?

Ashwood Enterprises Ltd v Governor and the Company of the Bank of Ireland [2014] EWHC 2624 (Ch)

The rule in Holme v Brunskill (1878) 3 QBD 495 does not apply to ‘all moneys’ guarantees–whether a guarantee is in fact an ‘all moneys’ guarantee will depend on the interpretation of the guarantee itself and the surrounding circumstances (see Bank of Baroda v Patel [1996] 1 Lloyd’s Reports 391, where a separate facility letter was considered to be the principal document).

Recently, in National Merchant Buying Society v Bellamy [2013] EWCA Civ 452, [2013] 2 All ER (Comm) 674, the Court of Appeal found that the drafting of the guarantee had been clear and that it had been drafted to cover anything due or to become due, without limit. It was held that a contract of guarantee is first and foremost a contract and ought to be construed as such, thereby settling this issue (see Paget’s Law of Banking at c 18, pt 2).

In Ashwood, the High Court applied established principles of construction to determine the scope of an all monies clause in a third-party legal charge (TPLC). The court was required to determine preliminary issues concerning the claimants’ liability under a TPLC, which was an all monies clause expressed to secure the debtors’ obligations.

Where the court is asked to construe a provision in a contract that can have more than one possible meaning, the meaning that is consistent with commercial common sense is to be preferred (Rainy Sky v Kookmin Bank [2011] UKSC 50, [2012] 1 All ER 1137 followed). This decision is helpful in confirming that, akin to the decision in Bellamy, unless the factual background to a contract shows that the ordinary meaning cannot be given to the words in the contract or that there is an ambiguity, the ordinary meaning of those words will prevail. Consequently, it stops references to negotiations and other background when interpreting a written contract.

Ramsay v Love [2015] EWHC 65 (Ch), [2015] All ER (D) 130 (Jan)

The use of ghostwriters by celebrities to pen autobiographies is widely known and generally accepted. However, using a ghost writer to sign a personal guarantee–thereby creating a legal obligation to pay over £600,000–is precisely what happened to celebrity chef Gordon Ramsay. The High Court delivered its judgment in January 2015.

The ghostwriter in question was a ghostwriter manual feed signature machine. In this case, it was found by the court that Ramsay gave a wide general authority to his father-in-law, Christopher Hutcheson, to conduct the business of Ramsay’s companies and, indeed, Ramsay’s own business affairs. It was also held that it was expressly understood that Ramsay would provide personal guarantees of leases of premises where this was a business requirement. It was found that Mr Ramsay was not always aware of the detail of specific business transactions.

Mr Hutcheson, pursuant to this particular general authority, used the machine to place Ramsay’s ‘signature’ on a lease and on a personal guarantee contained within it. Ramsay contested the validity of the guarantee, and lost after a trial that lasted over a week. The fact that Ramsay was not holding the pen and was not even there when it was signed mattered not. It was signed on his behalf and pursuant to his authority. The Statute of Frauds 1677 requires a guarantee to be evidenced in writing and signed by or on behalf of the guarantor.

How have these cases changed lawyers’ approach in this area?

These cases do not represent a sea-change in terms of practical approach, but in terms of take-away points for lawyers:

• clients should be very careful to mean what they say when drawing up a guarantee (Ashwood)
• ensure the client does not confer authority upon others to sign guarantees, because those guarantees will not be held valid by the court (Ramsay)
• ensure you receive a satisfactory explanation from your client of the way the business operates (Ramsay)

What themes are developing in this area?

There is nothing noticeable at the moment–the law in this area is settled. The last case that really decided anything was Bellamy back in 2013.

What are the most important cases in this area on the horizon?

The whole area of financial mis-selling is far from over. Currently, interest rate hedging products, be they swaps, caps or collars, are very much under consideration by the Financial Conduct Authority and there is much litigation concerning consequential losses in the pipeline. There is also a very large looming cloud involving tailored business loans, where the documentation contained embedded interest rate swaps without signature of a separate swap contract. Much of the pipeline litigation on behalf of borrowers will inevitably involve allegations of deliberate misrepresentation. Where personal guarantees have been given by business owners, then it is highly likely that the same representations will have been made to business owners in their capacity as prospective guarantors. Should allegations of misrepresentation be upheld by the courts, then we are likely to see guarantees defended on the basis that they have been discharged having been induced by misrepresentation.