Mind your language — personal guarantees and personal interpretation

The past, present and future walked into a bar. It was tense!

And yes - I promise there’s a link to the law here: it’s all about different interpretations of personal guarantees in contracts.

While that’s not such a witty one-liner, the approach to this issue has been the subject of much judicial consideration over the years.

Let’s look at a recent example.

The recent sheriff court appeal case of (Shireen Anne Shade v A N Young Limited and Alastair Niall Young [2019] SAC (CIV) 22) shows how easy it is for parties to differently interpret the intention of a personal guarantee — a contract where the guarantor guarantees certain obligations of, usually, a company — and whether it is applied to a certain debt, or all debts past, present and future.

The dispute arose from alleged defective dry rot and damp proofing works A N Young Limited carried out at Ms Shade’s premises.

Mr Young, director of A N Young Limited, was brought into the action with Ms Shade saying he was jointly and separately liable for any sum found due by his company because of a personal guarantee.

Mr Young disputed this.

Background

Before this court action, Ms Shade had raised another action against A N Young Limited relating to defective works at another property.

In that case, Mr Young, on behalf of his company, had offered a settlement proposing to pay the total sum sued for in instalments of £1,000 per month.

Ms Shade’s solicitor said in an email to Mr Young that his proposal was accepted if he signed a personal guarantee over the sums his company owed. The email also confirmed Ms Shade’s legal team would get a court order for the full amount, but wouldn’t enforce it if payments were made.

The minute of agreement and guarantee was drafted and, in the covering letter to Mr Young, the solicitor advised him to seek legal advice on the documents. However, Mr Young signed the guarantee and minute of agreement without legal advice.

The guarantee said: “I do hereby undertake to personally settle any enforceable debts due by [A N Young Limited] to [Ms Shade]”.

Here and now

Considering the language used, and what a reasonable person would have understood the parties to have meant with the background to hand, in the latest case the sheriff found in favour of Ms Shade that Mr Young had personally guaranteed all debts past, present and future. Not just the debt sued for in the previous court action.

He considered the conditions set out in the original email could not override the very plain terms of the guarantee.

On appeal, Mr Young’s counsel argued the overall purpose of the guarantee had to be considered, and argued - taking the email into account - the overall purpose was to guarantee the sum of £16,101 (the sum sued for in the earlier action).

He accepted the guarantee referred to ‘any debts’ but submitted that could have meant the sums due under the court order, which could be broken down into three separate debts, and that ‘any enforceable debts’ gave rise to an ambiguity because it could mean either any debts due at the time, or any debts due then or in the future.

He considered this ambiguity could be resolved by considering the background circumstances, in this case the email.

Ms Shade’s counsel argued an email is not a contract, and the wording in the guarantee was clear that it covered all debts (past, present and future).

He added the court should not rewrite the contract because it may think Mr Young made an unwise bargain.

The appeal court agreed with the initial sheriff’s findings.

It found the key words were straightforward, and it was hard to identify any other meaning than that any debt due by the company was covered by the guarantee.

The court did go on to explain the time-honoured Scots Law rule of evidence, which says it’s incompetent to contradict, modify or explain written contracts by parole or extrinsic evidence.

This generally disallows taking evidence from outside a written contract to show a different meaning than what is set out in the contract’s terms. That said, the court did acknowledge there was an uneasy tension between this rule and the contextual approach to construction of a contract.

This is an unfortunate outcome for Mr Young, but whilst each case will turn on its own facts and circumstances, the outcome shows once again the care needed when considering language agreed in a contract.

Laura Edmunds

Senior solicitor Laura Edmunds works in the commercial litigation team in Aberdeen advising companies and individuals on a wide variety of contentious matters. Laura has particular experience in UK and cross border commercial contract disputes and debt recovery in the offshore sector.

Posted, 29 May 2019 by Laura Edmunds
Categories: Commercial contracts | Corporate | Litigation

Mike Cunningham

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