Guarantee or indemnity?

When is a guarantee not a guarantee? When it is an indemnity, as a recent appeal court ruling illustrates.

This was the issue in a case in which the Court of Appeal concluded that an oral promise – an indemnity – to pay an individual’s legal fees and costs was not an unenforceable guarantee but a primary obligation. It was therefore valid and binding on the promisor.

What’s the background?

In Deepak Abbhi v Richard John Slade (trading as Richard Slade and Company) [2019] EWCA Civ 2175 an individual (S) had earlier brought proceedings in relation to a family trust of property. Relying on a Hindu custom, he argued that the property in question was subject to a common intention constructive trust and he was entitled to partition it.

During the course of litigation, he changed solicitors because the principal solicitor at the original firm fell ill just a few months before the trial. A meeting between the solicitor at the new law firm and S’s son-in-law (Deepak Abbhi (DA)) took place, at which DA said S could not pay any legal fees. He said if the solicitor, Richard Slade, acted for S, then he would pay his fees and disbursements for him by way of cash payment (paid directly to S not to the firm itself).

On the strength of this oral agreement, the solicitor agreed to act for S in the forthcoming litigation. He did so; S’s claim was dismissed at trial and the solicitor’s costs were paid in part. Sadly, S died leaving an insolvent estate but DA refused to pay the outstanding legal fees to the solicitors. There was a total balance outstanding of £317,823.63 (representing £251,743 in unpaid counsel's fees, £5,700 in further disbursements and £69,226 in the solicitor’s own unpaid legal fees).

The law firm brought proceedings against DA, relying on his oral representation to pay S’s fees on his behalf. DA argued that the oral agreement was neither valid nor enforceable as it failed to comply with section 4 of the Statute of Frauds 1677, which requires a guarantee to be recorded in writing, and signed by the parties. This oral agreement was not written – and S was not even present at the time.

The firm succeeded at first instance and DA appealed, arguing that the judge erred in law in holding that the oral agreement fell outside section 4 of the 1677 statute. The Court of Appeal upheld the judge’s decision.

The appeal judges’ rationale

So how did the Court of Appeal dispose of DA’s reliance on the 1677 Act? It found that the circumstances in which the oral agreement had been made were clear: the oral agreement was predicated upon S being unable to pay the legal fees to fund the litigation. Furthermore, that was a term of the oral agreement under which DA had agreed that in consideration for Richard Slade agreeing to act as solicitor, DA would pay the legal fees. In other words, said the appeal court, DA was agreeing to fund the litigation - as he had done to date.

Therefore, the court found that on the evidence behind this oral agreement, DA had adopted a primary liability - an “absolute obligation” - to pay the law firm’s legal fees having given a promise (an indemnity) to pay them independently of any default by S. This, said the court, is different from providing a guarantee that he would pay them if S failed to pay them.

Also, the parties knew from the outset that S would be unable to pay any legal fees and that DA would be paying them. It was on that basis that the solicitor agreed to act on his behalf.

It is further worth noting that the court said that the fundamental question concerned the nature of the promise made in the oral agreement. DA’s promise was a promise to pay S’s bills “in any event, independently of any default by [S]”.

Therefore, DA’s liability was primary not secondary; and it was not an unenforceable guarantee. For that reason, the claim clearly fell outside of section 4.

What does this mean?

The ruling is a salutary reminder of the need to understand the nature of a promise, and the difference between a guarantee and an indemnity, otherwise a misapprehension could prove to be costly for one of the parties. Any agreements and promises should always be put in writing and signed by the parties to minimise the risk of a dispute.

Solicitors agreeing to accept payment of funds from a third party in respect of a client’ legal fees ought also to consider recording the agreement in writing for the same reasons.

 

 

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