In its recent decision in Golden Ocean Group Limited v Salgaocar Mining Industries PVT Ltd and another1 , the Court of Appeal confirmed the High Court’s ruling that an exchange of emails can create an enforceable guarantee.

Background

A guarantee, like any other contract, must satisfy the basic legal requirements for the creation of a contract. These are:  

  1. offer,
  2. acceptance,
  3. intention to create legal relations, and
  4. consideration.  

In addition, in relation to guarantees, section 4 of the Statute of Frauds 1677 provides that in order for a guarantee to be enforceable it (or alternatively some memorandum or note of the guarantee) must be both:

  1. in writing, and
  2. signed by the guarantor or a person authorised by the guarantor.

Facts of the case

The case involved Golden Ocean Group Ltd (Golden Ocean), the owner of a cargo ship which it offered to charter to Salgaocar Mining Industries PVT Ltd (Salgaocar) for ten years through its chartering arm Trustworth Pte Ltd (Trustworth).

Negotiations for the charter proceeded between Golden Ocean and Trustworth/Salgaocar predominantly by email between the respective parties’ shipbrokers.  A number of these early email exchanges referred in their subject headings only to a contract for charter to be entered into with Trustworth being “fully guaranteed by Salgaocar”.  The emails also dealt with the significant terms of the charter and anticipated that agreement would be reached subject to specific conditions (such as board approvals) being satisfied at various stages in the negotiation.  A number of these conditions did not appear to ever be satisfied.

Following the conclusion of the main negotiations, the parties continued to exchange sporadic emails and a few months later, a form of the contract for charter was prepared and circulated by the shipbrokers.  The contract contained no reference to a guarantee by Salgaocar other than in the description of the charterer. On the facts, the contract for charter was never signed and no separate form of guarantee was ever circulated for signature.

Shortly before the scheduled delivery of the vessel, Trustworth and Salgaocar refused to take delivery of the vessel and denied that a contract for charter or a guarantee existed, later arguing (amongst other things) that the contract for charter, and any guarantee within it, were never concluded given that the email exchanges and draft documents were too disjointed and did not end with any form of recap or signed agreement incorporating all the key terms of the charter and guarantee.  

Decision

The Court of Appeal held that (amongst other things):-

  • Section 4 of the Statute of Frauds 1677 does not require that the "agreement in writing" be in a single document or even in a limited number of documents.
  • A sequence of negotiating emails or other documents properly signed could constitute a guarantee if the parties intended to be bound by the agreement contained therein.
  • An email upon which a party puts his name (even if a nickname or not his full name) so as to indicate that the email comes with his authority and that he took responsibility for its contents will be a signature for the purposes of the Statute of Frauds 1677 and thus for the purposes of creating an enforceable guarantee.
  • A person who has been given authority to negotiate and agree the terms of a guarantee on behalf of the guarantor will have sufficient authority, for the purposes of the Statute of Frauds 1677, to sign a written memorandum or note of the guarantee which will be enforceable.

Implications

  • Individuals should exercise caution when negotiating the commercial terms of guarantees because surprisingly informal documentation and signatures can create binding guarantees.
  • In order to attempt to avoid inadvertently creating a guarantee during negotiations, all correspondence and documentation should be marked "SUBJECT TO CONTRACT".
  • We would always recommend that professional legal advice be sought in connection with the negotiation and entry into of any guarantees.