
Trump Administration Executive Order (EO) Tracker
A company (the "Guarantor") gave a guarantee (the "Guarantee") to an insurer in a property development context. The homes built by a property developer, whose obligations to the insurer were the subject of the Guarantee, turned out to be defective. The insurer had to pay to rectify the building defects as a result of a guarantee which it in turn had issued to house purchasers. The insurer then claimed against the Guarantor for payment under the Guarantee.
The Guarantor argued that:
The judge decided that:
Whilst this is only a County Court judgment, it is helpful on the important question of whether a failed deed can survive as a simple contract provided that the other conditions for the existence of a valid contract are met (being the need for consideration; the authority of the signatory to sign; and valid execution of the contract). Any claim under the relevant agreement would also have to have been made within the 6 year limitation period.
This is an area of the law where there are conflicting cases. It is notable that the Guarantor did not argue the invalidity case strongly and, in particular, did not cite the Mercury case[1] in which Mr Justice Underhill held that a defective deed did not survive as a simple contract, saying "the parties intended them to be deeds and their validity must be judged on that basis".
On the other hand, Mr Justice Behrens in Bank of Scotland v Waugh[2] came to a similar conclusion to the County Court in this case. He held that although a legal charge which had been invalidly executed as a deed was void for the purposes of conveying a legal estate under s52 Law of Property Act 1925, that did not make the charge void for all purposes and held that the charge was effective as an equitable charge.
The Law Commission looked at this legal uncertainty in its 1998 report but concluded back then that it would not be appropriate to put a rule in place as each case should be decided on the merits of the facts of that case. Perhaps it is now time for the law makers to think again?
One practical step which could be taken by those seeking to rely on agreements executed as deeds, and which this case demonstrates the worth of, is inserting a recital in the agreement confirming that consideration was given.
This decision is also important in the context of the application of the rule in Shah v Shah regarding estoppel – whilst the principle developed in Shah could apply in theory to the execution of a guarantee by a company in accordance with the Companies Act, it will not be applied where the defect is obvious on its face.
This decision forms another salutary lesson that execution formalities must always be checked with a keen eye for detail.