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Guaranteed to fail? Oral funding arrangements may be enforceable

09 January 2020. Published by Geraldine Elliott, Partner and James Taylor, Associate

Funding arrangements should be in writing, or at least impose a primary obligation on the funder to pay. So said the Court of Appeal in exploring whether an oral arrangement to fund a litigant was an unenforceable guarantee or an enforceable agreement to pay in any event (Deepak Abbhi and Richard John Slade (t/a Richard Slade and Company)(1)

The background facts

Mr Singh had been engaged in extensive litigation against his son (the Singh Proceedings), funded by Mr Abbhi (DA). A few months before trial, Mr Singh changed solicitors and instructed RS to act for him. Mr Singh and RS met on 11 July 2013; the meeting was predicated upon Mr Singh not being able to pay RS' bills if he agreed to take on the case. Subsequently RS agreed orally with DA that DA would pay such fees and disbursements on Mr Singh's behalf or lend Mr Singh enough funds to pay (the Oral Agreement).

DA paid RS £185,000 in fees, leaving £317,823.63 outstanding. Mr Singh then died on 9 February 2015, leaving an insolvent estate.

Primary versus secondary liability

The question before the Court of Appeal was whether the Oral Agreement amounted to a primary obligation to pay RS by DA or a secondary obligation to guarantee the payments by Mr Singh to RS. If it were found to be a primary obligation, or debt, it would be enforceable against DA but if it were a guarantee, it would be unenforceable by virtue of the Statute of Frauds 1677 (the Statute) that states that guarantees are only enforceable if recorded in writing(2).

In submitting that the agreement was a guarantee, DA's counsel argued that a guarantor's liability is secondary to that of some other person, the primary debtor. (Guarantees are to be distinguished from indemnities because indemnities impose a new, primary obligation on the promisor to indemnify without reference to a pre-existing debt)(3). DA's counsel submitted that DA's liability was defined by reference to the liability of Mr Singh to RS and was therefore secondary and fell within Section 4 of the Statute; DA had promised that he would put Mr Singh in funds so that Mr Singh could write a cheque to RS paying his fees and this was therefore a “see to it” guarantee(4). Consequently, counsel for DA submitted, the promise by DA was not actionable until Mr Singh was in default under the retainer and, accordingly, DA's liability was equivalent to the primary liability of Mr Singh.

In arguing that the obligation gave rise to an enforceable debt, RS' counsel submitted that DA said he would pay RS's bills, meaning that he would pay RS on behalf of a man who could not pay. He would put Mr Singh in funds first to enable Mr Singh to write a cheque lawfully; the nature of that agreement was a question of fact and the trial judge had been correct to determine that this imposed a primary obligation on DA to pay Mr Singh's bills in any event(5).

The decision

The Court found that the Oral Agreement was predicated upon Mr Singh being unable to pay the legal fees to fund the litigation. That amounted to a term of the Oral Agreement, under which DA agreed that, in consideration for RS agreeing to act as solicitor, he would pay the legal fees. In other words, he was agreeing to fund the litigation.

DA's obligation under the Oral Agreement was thus not simply a “see to it” guarantee, but an independent, primary and absolute obligation, assumed by DA, to put Mr Singh in funds in sufficient time before the expiry of the grace period to meet any particular bill. Consequently, the Oral Agreement did not fall under Section 4 of the Statute and was enforceable, despite not being in writing.

The critical question which determines whether a contract is one of guarantee within Section 4 of the Statute is not that the promise is to pay another’s debt but whether (a) that promise is to pay if the other does not pay, in which case it is within the Statute of Frauds; or (b) whether it is a promise to put the debtor in funds in any event, in which case it falls outside that piece of legislation(6).

Here, the promise to pay was in any event.

Comment

As with all contracts, recording them in writing gives all parties certainty. In the context of funding arrangements, it is especially important to avoid the possibility of it falling foul of the Statute and the rule on guarantees. If this is not possible, give thought to the nature of the promise made in any oral agreement so as to ensure that the promise to pay is primary and thus ensure that an oral funding contract is enforceable. The Court noted that such cases are always likely to be heavily fact-specific but the key point is to ensure that the nature of the agreement is to pay come what may.

(1) [2019] EWCA Civ 2175.
(2) Section 4 of the Statute of Frauds
(3) Harburg India Rubber Comb Company v Martin [1902] 1 KB 778 at 784-5.
(4) Associated British Ports v Ferryways NV [2008] EWHC 1265 (Comm).
(5) Guild & Co v Conrad [1894] 2 QB 885.
(6) In the words of Lindley LJ in Guild & Co v Conrad.