Commercial practice often tests the capacity of courts to navigate between, on the one hand, case law and/or regulations which lay out formalities and, on the other , the flexibility and evolving manner by which an industry tends to conduct itself. Although the general rule of freedom of contract recognises a wide range of means of agreeing to contractual obligation, there are certain exceptions which require that specific contracts are evidenced in a particular manner. Such is the case with the Statute of Frauds 1677.
In Golden Ocean Group Limited v Salgaocar Mining Industries PVT Ltd and another [2012] Civ 265, the English Court of Appeal considered the application of the Statute of Frauds to modern shipping business practices such as negotiation by email through brokers of a charterparty incorporating a guarantee.
During the negotiations of a long term charterparty, Salgaocar Mining Industries (SMI), via their brokers, offered owners, Golden Ocean, their chartering arm as charterers with a guarantee from SMI: “a/c Trustworth Pte Limited Singapore [“Trustworth”] fully guaranteed by Salgaocar Mining Industry Goa”. Negotiations were further conducted and concluded on that basis.
Following repudiation of the contract by Trustworth, Golden Ocean brought a claim against SMI under the guarantee alleging that Trustworth had failed to honour the charterparty. SMI contended that such guarantee was not enforceable under s. 4 Statute of Frauds 1677 which requires that a guarantee must be in writing and signed by the guarantor or a person authorised by the guarantor in order to be binding:
“No action shall be brought….whereby to charge the Defendant upon any special promise to answer for the debt of another person unless the Agreement upon which such Action shall be brought or some Memorandum or Note thereof shall be in Writing and signed by the party to be charged therewith”.
In view of these allegations, the Court of Appeal had occasion to consider whether an enforceable contract of guarantee can arise from a series of email exchanges without a formal document being signed.
The Court reached the conclusion that the chain of emails satisfied the requirements of the two-pronged test of s. 4 on the basis that:
i) The “agreement in writing” requirement does not necessarily compel this to be in one single document or even a small number. The sequence of emails could be put together to constitute a guarantee for this purpose.
ii) The guarantee was validly “signed” due to the signature of the email used by the parties and or their brokers. For this purpose, an electronic signature is deemed sufficient and so are the names or even initials which, assuming authority, may be regarded as authentication of the contract of guarantee contained in those emails.
This decision may therefore be seen as an example of a common sense approach to the compliance of formalities which takes into account both the real purpose of the Statute (avoidance of guarantees based solely on oral evidence), and the commercial reality or history of the negotiations behind this particular agreement which was that Golden Ocean would not have entered into such an agreement with Trustworth without a guarantee from a solvent company such as SMI.
Given this decision, care should be taken to avoid inadvertently entering into a binding guarantee; in the course of negotiations which include guarantees which may be subject to English Law parties should adopt a cautious approach, expressly state that the guarantee shall not be binding unless executed in a formal document and, in addition, mark all exchanges by email and otherwise as “subject to contract”.
Article by Alfonso Carmona
