Guarantors who seek to avoid liability: unsigned guarantee documents

In Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168, recent addition to the bench, Edelman J dealt with the all too familiar argument advanced by guarantors who seek to avoid liability on the basis that they did not sign the guarantee document or did so in another capacity.  His Honour found that despite the absence of a signature in the guarantor execution clause, the guarantor was nevertheless bound in her personal capacity. 

Background

The case involved a lease agreement dated 27 July 2007 (Lease) in respect of a commercial property in Wangara, entered into between Mr Alonso, the plaintiff, as lessor (Lessor), SRS Investments (WA) Pty Ltd, the first defendant, as lessee (Lessee) and Ms Elliot (nee Sandford), the second defendant and director of the Lessee, as guarantor (Guarantor).

The Lease contained guarantee provisions and made specific reference to the Guarantor as guarantor of the Lessee’s obligations under the Lease.  

The execution page included separate execution clauses for the Lessee and the Guarantor.  The execution clause for the Lessee was signed by the Guarantor above the word “Director” and her full name was printed above the words “Full Name”.  The Guarantor’s name was printed next to the words “Signed as a deed by” in the Guarantor’s execution clause.  Importantly, however, there was no signature next to the Guarantor’s printed name and the Guarantor denied having printed her name next to the words “Signed as a deed by”. 

Guarantor’s arguments

The Guarantor sought to avoid liability on several grounds including, most relevantly, the following:

1. She had no intention of being legally bound by the Lease in her capacity as a guarantor.

2. Section 4 of the Statute of Frauds 1677 (Imp) (Statute of Frauds) rendered the Lease unenforceable against her.

Intention to be legally bound

The court identified the question to be answered as whether the Guarantor had an objective or manifest intention to be legally bound by the Lease, noting that her subjective beliefs and intentions are irrelevant.  

The court held that the Guarantor did have an objectively intention to be legally bound by the Lease as guarantor of the Lessee’s obligations, noting that the absence of a signature does not preclude a finding that the Guarantor had the requisite intention.

Statute of Frauds

The Guarantor sought to rely on section 4 of the Statute of Frauds, arguing that the guarantee provisions of the Lease were unenforceable because she had only signed the Lease on behalf of the Lessee and not as a guarantor.

The court rejected this argument, noting that the capacity in which the Guarantor signed the Lease is irrelevant to the question of enforceability under section 4.  It was held that the Guarantor’s signature in the Lease (irrespective of the capacity in which she purported to sign) charged her with personal liability.

Result

The Guarantor was found to be liable under guarantee provisions and ordered to pay the Lessor the sum of $71,990.10 plus interest being rent due and owing by the Lessee under the Lease. 

Lavan Legal comment

Although ultimately the Guarantor was found to be liable under the guarantee provisions in the Lease, the case highlights the importance in lenders ensuring at all documentation is executed correctly and unambiguously.  As noted by the court, the act of signing is a formal act which will convey a representation that the person signing intends to be legally bound by the contents of the document. 

While this case concerned a guarantee with respect to a lease agreement, the principles apply equally to guarantees of obligations under lending instruments.  Ensuring proper execution of facility and security documents will minimise the risk of the lender encountering problems at enforcement stage.

It is also critical that the capacity of the parties in signing the document is clearly identified.  For example, where a guarantor is also a director of a corporate borrower, care must be taken to ensure that the document is executed by the person both in their capacity as director (and for and on behalf of the corporate borrower) as well as in their personal capacity as a guarantor.  To that end, separate execution clauses should always be used.

In the case of ill-documented or irregular guarantees, the case serves to caution guarantors against taking a robust approach in denying liability on the basis of signing irregularities.

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