The principle of freedom to contract, as a result of which parties are entitled to form contracts without the need for the terms to be written down, is fundamental to English law.  But there are exceptions where further formalities are imposed by law.  One example is the requirement imposed by the Statute of Frauds 1677 that a guarantee be signed and in writing.

A number of recent cases have considered how the formalities of a guarantee, (that is, a secondary obligation to settle a liability or repay a debt if the original obligor fails to do so), can be satisfied through the use of electronic communications.  The outcomes of these cases have shown that commercial parties ought to consider carefully what they agree and confirm by electronic communications such as emails and Society for Worldwide Interbank Financial Telecommunication (SWIFT) messages.

Signatures and Emails

In Golden Ocean Group Limited v Salgaocar Mining Industries PVT Ltdand another [2012] EWCA Civ 265, the Court of Appeal of England and Wales had to consider a chain of emails between Golden Ocean Group and Trustworth Shipping, by which Trustworth Shipping agreed the charter of a vessel.  In the course of the email correspondence, reference was made to the deal being “fully guaranteed by” an affiliate of Trustworth, Salgaocar Mining Industries Ltd (SMI).  When Trustworth repudiated the charterparty, Golden Ocean Group looked to recover from SMI under the purported guarantee.  SMI contended that the guarantee was unenforceable under the Statute of Frauds because it was neither in writing nor signed.

The Court of Appeal held that Section 4 of the Statute of Frauds did not require the “agreement in writing” to be in a single document or even in a small number of documents.  A series of negotiating emails, or other, similar documents, signed properly would constitute a guarantee, provided that the parties intended to be bound by the agreement.  A distinction was made between this situation and a situation where parties negotiate “subject to contract” and do not intend to be bound until a formal document is executed.

On the second issue of the requirement for the guarantee to be “signed”, it was concluded that if a person puts their name on an email to indicate that it comes with their authority and that they take responsibility for its contents, it is “sufficient authentication” for the purposes of Section 4 of the Statute of Frauds.  In coming to its conclusion, the Court of Appeal noted that commercial parties “may communicate with one another in a familiar manner but that does not detract from the seriousness of the business they are conducting”. 

This case highlights that the courts are willing to accept that what might otherwise be regarded as casual means of communication, such as an email signed with an informal valediction, even one as informal as the first name (as in Golden Ocean Group), initials or even a “matey” name, can satisfy the requirements of Section 4 of the Statute of Frauds, provided the parties intend to be bound by the terms set out in those communications.

SWIFT Messages

In WS Tankship II BV v The Kwangju Bank Ltd and Another [2011] EWHC 3103, the High Court considered the validity of a letter of guarantee sent by SWIFT message.  SWIFT is a secure international messaging service used by financial institutions. 

Although the Court concluded on the facts that the agreement imposed a primary liability on the defendant bank, rather than secondary liability (as a result of which the agreement in question was not actually a guarantee within the meaning of the Statute of Frauds), the Court did state obiter that a guarantee issued and sent by SWIFT message was “in writing and signed by the party to be charged” for the purpose of Section 4 of the Statute of Frauds 1677.

While it was accepted that the party name did not appear in the text of the body of the message containing the guarantee, it did appear in the header that was inserted automatically into the SWIFT message.  By virtue of the defendant bank sending the message, with the knowledge that its name would appear automatically in the message header, it was accepted that it had “caused” its name to appear.  That voluntary act constituted a sufficient signature for the purposes of the Statute of Frauds.  It was noted that “authentication by sending [of a SWIFT message] was equivalent (in modern terms) to authentication by signing, and so within the spirit, if not the letter, of Section 4 of the Statute of Frauds”.

The Court noted that the position was analogous to the position considered in Golden Ocean Group because the important distinction was not whether there was evidence of an actual written signature, but whether the signature, however expressed or created, signified authentication by a person with relevant authority of the contents of the message.  This case is of particular interest to entities that are involved regularly in transactions that require collateral in the form of a guarantee, such as guarantees issued through the SWIFT system.

New Technology, Old Law

These cases demonstrate the willingness of the courts to apply practical, modern interpretation to old laws to reflect the way transactions are conducted in the 21st Century, using new technology.  As a result, entities that enter into negotiations or discussions regularly ought to be wary of what they agree in their electronic communications and be aware of how the English courts will now apply the law to them.

There are some practical points to consider in light of these cases in order to avoid being bound inadvertently by a guarantee obligation:

  • Ensure all negotiations, whether oral, in writing or communicated electronically, are expressly stated to be subject to contract.
  • Where terms are agreed over a series of communications, always ensure a single, final written agreement is prepared to reflect the entire agreement.
  • If there is an intention to create binding terms by electronic means, ensure the scope of those terms is identified with sufficient clarity before sending a further communication to agree terms with an electronic signature.
  • Keep a clear audit trail of all electronic communications during contractual negotiations.