Quest 4 Finance Ltd v Maxfield QBD October 2007
This case highlights the dangers of making statements in documents intended to have legal effect that convey one message to the reader whilst the author intended something quite different. In this case, the financier’s brochure promoting its financial product stated: “no personal guarantees are required from company directors”. For the defendants, who were keen to avoid creating further personal guarantees, this statement was very attractive. The defendants read the statement and, believing it to be true, entered into the financing agreement.
Instead of asking for a personal guarantee, the brochure said that Quest only “required a warranty … to cover the event of any fraudulent acts being knowingly committed”. When the warranty document was produced for signature by the defendants it contained warranties that the company was in compliance with all its warranties under the finance agreement (which included a statement that the company was not involved in any insolvency proceedings at the time) and would, at all times during the life of the finance agreement, continue to comply with those warranties. Breach of warranty by the company would be a termination event upon which all monies due would be payable and also a breach of warranty by the defendants giving rise to a claim by the financier.
The court had to determine what the defendants had actually signed. The document was called a “warranty”, not a guarantee. The brochure said there would be no personal guarantee required and any warranty given would only be called in the event of a fraud, which was not applicable to the facts of this case. The defendants argued that consequently there was no liability on them to pay the outstanding finance sums. For the court, the use of the label “warranty” did not disguise the fact that the substance of the obligation undertaken by the defendants was a guarantee, a promise that the company would perform its obligations, namely to comply with its warranties under the finance agreement, including no step being taken to enter administration. A promise does not have to relate solely to payment to constitute a guarantee, nor be called a guarantee, if it is of a character of a guarantee. The court held the warranty from the defendants was actually a personal guarantee.
It was further held that the statement in the brochure that no personal guarantee would be taken was not correct, nor was the statement that the warranty required was only to protect the financier in the event of fraud. Both statements were misleading, amounting to a misrepresentation, although innocent, that was intended to be relied on by potential customers and which was believed to be true and relied on by the defendants. This material representation would be enough to set aside the warranty.
Finally it was held that the financier could not rely on a “non-reliance clause” contained in the warranty. The aim of such a clause is to ensure all the rights of the parties are governed by the written terms of the agreement and, in this case, to separate the claim under the warranty from the (incorrect) statements in the brochure. It was held that Quest, knowing that the statements in the brochure that no personal guarantee was required and the warranty only related to fraud, would be attractive enough to potential customers to cause them to enter the agreements, could not then believe the declaration of non-reliance signed by the directors to be true and rely on it to recover against the defendants.
Misrepresentation is a powerful weapon against a contract, even where experienced businessmen are involved and there is no fraudulent or negligent statement made by the other party. Statements made with the intention that they be believed and relied on by another party in entering a contract must be true; if not, the contract may be set aside.
It is not possible to slip a guarantee in by the back door. The courts will look at the substance of an obligation, not the form. Calling a promise that has the nature of a guarantee by another name, will not hide it from the scrutiny of the courts, which tend to construe guarantees against the party seeking to enforce them. Some statements made in the course of negotiation may be so significant that they cannot be disregarded in the context of the final written agreement and any attempt to exclude them from having an effect may not be successful if the documents themselves are inconsistent and the court is unconvinced that the party relying on the non-reliance clause could believe the declaration to be true in the context of statements it intends to exclude.