Although the courts can apply principles of construction and rectification to remedy defective guarantees, they will not do so where the effect would be to write a new contract for the parties.
This was the finding in Fairstate Ltd v General Enterprise & Management Ltd and another. The claimant owned a long lease of a property. The first defendant was to manage the property for the claimant. That management contract provided that the second defendant (S),who was a director of the first defendant, would enter into a personal guarantee against any loss or damage to the claimant. The management contract and guarantee were drafted by the claimant's solicitor. Although the guarantee was signed by S, it contained numerous drafting errors. The names of the principal debtor, creditor and guarantor were confused so that S was named as the beneficiary and Fairstate the principal debtor. The guaranteed liabilities were also mis-described. A dispute arose and the claimant called upon the guarantee. S denied the guarantee was effective.
The court held that although S knew he was signing a personal guarantee, it was ineffective as a matter of contract and unenforceable under s4 of the Statute of Frauds Act 1677 which provides that to be enforceable, a guarantee must be in writing and signed by the guarantor. The drafting deficiencies rendered the guarantee fundamentally flawed. Whilst the court could, in theory, rectify the guarantee, the defects were too fundamental and extensive to be corrected as it would, in effect, be creating a new contract for the parties and in so doing, deprive the defendant of a legitimate statutory defence.
Things to consider
Guarantees should be properly and accurately drafted to reflect what the parties have agreed. Although the court can and will rectify minor errors, this case shows that creditors cannot expect the court to step in and correct mistakes, particularly where they are fundamental, and particularly where the party's own solicitor has drafted the guarantee in the first place.