In business, you often hear the expression “my word is my bond”! This statement is usually intended to provide reassurance in relation to a verbal agreement. The realities of business sometimes require transactions to be conducted on a verbal basis. Unfortunately, if a verbal promise constitutes a guarantee, it will be unenforceable. Due to rather ancient legal requirements ( section 4 of the Statute of Frauds 1677 ), guarantees can only be enforced if they are in writing signed by or on behalf of the guarantor. Section 4 of the Statute of Frauds 1677 applies to a “special promise to answer for the debt default or miscarriages of another person” i.e. a guarantee.
So, how do you recognize a guarantee? Contracts of guarantees can arise in various commercial transactions. For example, if someone promises to pay off another person’s debt or perform their contract obligations if they fail to do so, they are giving a guarantee.
The following example provides an illustration of how a guarantee can arise.
An employment services agency is providing temporary construction workers to a construction company. The construction company has a contract with a property developer to build a block of flats. The construction company has failed to pay several agency invoices. So, the agency complains directly to the property developer, and threatens to take the workers off the project. The property developer informs the agency that if there are any more problems with payment, that it will pay any monies owed by the construction company. This is a guarantee and needs to be in writing and signed by the developer, otherwise this agreement is unenforceable. A similar case ended up in court with the claimant unable to enforce an oral guarantee, and being out of pocket by over £1,000,000.
Someone’s word is no substitute for a written guarantee!
