ORAL GUARANTEES — ARE THEY WITHOUT EFFECT?

• Citation: (2003) 15 SAcLJ 409
• Date: 01 December 2003
• Author: TER KAH LENG
• Published date: 01 December 2003

Actionstrength Ltd v International Glass Engineering in.Gl.En.SpA and others 1

1 This note considers whether the effect of an oral contract of guarantee which falls within section 4 of the Statute of Frauds 16772 might be circumvented so as to avoid any putative injustice that might result from the reliance by one party on the lack of written evidence to defeat the commercial expectations of the other party when he seeks to enforce the oral agreement. This is said to be the mischief that is capable of arising from the requirement by the Statute of some written evidence of the oral contract. Indeed, Lord Bingham has questioned whether in oral guarantees, the original mischief was not now outweighed by the second mischief to which it could give rise but that was not a question for the House sitting judicially.3

2 This note suggests that the second mischief can, in certain circumstances, be avoided by invoking the principles of estoppel and restitution. The former was raised in Actionstrength Ltd v International Glass Engineering in.Gl.En. SpA and others4 to stop the guarantor from relying on the Statute. Actionstrength was a labour-only subcontractor to Inglen which had been engaged by St-Gobain as main contractors to build a glass float factory. From the start, Inglen had been in arrears of payment and Actionstrength threatened to terminate its supply of labour under the terms of the agreement with Inglen. This would have been prejudicial to St-Gobain’s interest in the early completion of the factory. According to Actionstrength, St-Gobain induced it not to withdraw its labour from the site by promising that, if Inglen did not pay Actionstrength any arrears which were owing, St-Gobain would do

so. On that undertaking, Actionstrength kept its workforce on site and St-Gobain received the benefit of a month’s work done by the labour supplied. By then, Ingren’s indebtedness to its subcontractor had increased fivefold. Actionstrength obtained a default judgment against Inglen for about £1.3m but Ingren was insolvent. Actionstrength turned to St-Gobain for payment under the alleged oral guarantee. The latter denied having made the alleged oral guarantee and in any event, pleaded an absence of a written memorandum or note of the agreement to defeat the claim. Actionstrength argued that St-Gobain should not be allowed to rely on the Statute because, on the assumed facts, it would be unconscionable for them not to keep their promise. It claimed that St-Gobain were estopped for the following reasons: (1) St-Gobain had encouraged Actionstrength not to withdraw its labour from the site; (2) on the faith of the assurance by St-Gobain that Actionstrength would receive any amount due to it from Inglen, Actionstrength acted to its detriment in continuing to supply labour for the site; (3) it would therefore be unconscionable for St-Gobain to deny that it entered into a binding agreement with Actionstrength. The estoppel argument received short shrift in the Court of Appeal. Simon Brown LJ said that it was “quite hopeless” and dismissed it in one paragraph.5 He said that: “Estoppel cannot depend merely on sympathy and an assessment of comparative hardship”.6 Similarly, the House of Lords (Lords Bingham of Cornhill, Hoffman, Clyde, Walker and Woolf) dismissed the estoppel argument based on the assumed facts of the case. Lord Bingham, however, expressed reluctance and Lord Woolf regretted at having to do so, there being nothing on the facts which could establish the estoppel contended for. It is noteworthy that their Lordships did not entirely rule out the possibility of its application in answer to section 4.

A Estoppel

(1) Can the estoppel principle apply to guarantees?

3 The estoppel which was relied upon in the present case was the broad general principle of estoppel7 stated by Oliver J in Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd (Note)8 and since approved and followed by many higher courts. It was argued that the estoppel principle, which partly underpinned the doctrine of part

performance, was wide enough to be applied to contracts of guarantee.9 Although counsel for Actionstrength could find no case in any jurisdiction in which estoppel had been applied to enforce an oral contract of guarantee, it was nowhere suggested that estoppel could not be applied to guarantees. It was used in the well-known case of Amalgamated Investment & Property Co Ltd (In Liquidation) v Texas Commerce International bank Ltd10 to estop a party from disputing the assumed effect of a guarantee. In Bank of Scotland v Wright,11 Brooke J observed that:

In the light of these authorities12 I would not exclude the possibility that circumstances might arise in which a guarantor might have acted in such a way as to create or influence the other party’s mistaken belief in the effectiveness of his guarantee so that it would be unconscionable to allow him to rely on the Statute of Frauds. Such a finding would depend very much on the court’s views, on the facts of any particular case, of the personalities and attributes of the two parties between whom the alleged estoppel was alleged to have arisen.13

Lord Walker saw no reason to disagree with those observations, but they presupposed some sort of representation by the guarantor, together with unconscionability; not just unconscionability on its own.14 Lord Clyde similarly assumed that there might be such a case where a guarantor might be estopped from invoking section 4.15

(2) What are the factors sufficient to raise an estoppel?

4 Although the Law Lords did not find it necessary to consider whether circumstances might arise in which a guarantor might be estopped from relying on the Statute, the speeches of their Lordships provide some indication of the circumstances which might be sufficient to raise an estoppel. In the context of Actionstrength’s case, Lord Bingham stated that estoppel involved asking three questions: (a) What is the assumption which Actionstrength made? (b) Did St-Gobain

induce or encourage the making of that assumption? (c) Is it in all the circumstances unconscionable for St-Gobain to place reliance on section 4? Lord Bingham concluded that Actionstrength believed itself to be the beneficiary of an effective guarantee but the insuperable difficulty lay with the second question. Beyond the oral agreement, which was rendered unenforceable, Actionstrength could not show inducement or encouragement. There was no representation by St-Gobain that it would honour the agreement despite the absence of writing, nor did it make any payment direct to Actionstrength which could arguably be relied on as affirming the oral agreement or inducing Actionstrength to go on supplying labour. Lord Bingham went on to say that if St-Gobain could be estopped in this case, then any oral guarantor would be similarly estopped. That would be to render nugatory a provision that Parliament had deliberately chosen to retain.

5 Lord Clyde took a similar view. He elaborated that an estoppel based on...