Author Name:   DhruvDesai

action shall be brought whereby to charge the Defendant upon any special promise to answer for the debt, default or miscarriage of another person unless the Agreement upon which such Action...

Most countries continue to retain provisions in their laws that were drafted more than a century ago, and while most of these provisions may still make perfect commercial sense, there are a few that don’t. Recently, the question whether guarantees transmitted via SWIFT and/or e-mails are enforceable was placed for adjudication before the learned judges of the High Court of England and Court of Appeal. This article reviews the cases that were argued, the corresponding laws, the concern, if any, for strict interpretation, and concludes that, while the provisions of legislations like Statute of Fraud, 1677 (UK) are not in step with the extant commercial practices and needs, at least interpretation thereof, most certainly is.

It is a common practice, in modern commercial transactions, to send/ receive guarantees by e-mails or SWIFTS. This is a practice that is being followed even though there may not be any explicit statutory provision allowing it.

Section 4 of the United Kingdom’s Statute of Frauds, 1677 reads as follows:
No action shall be brought whereby to charge the Defendant upon any special promise to answer for the debt, default or miscarriage 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 or some other person thereunto by him lawfully authorise. (Emphasis supplied)

However, when it came to helping draft the definition of ‘guarantee’ in Section 126 of the Indian Contract Act, 1872 the following definition was accepted:

A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety", the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written. (Emphasis supplied)

It may be noted that, while it was seemed perfectly acceptable to exclude oral undertakings in the Statute of Fraud, somehow it was fine incorporating it in the Indian Contact Act. One can only honestly and curiously wonder why?

In Golden Ocean Group Ltd v Salgaocar Mining Industries a charter party contract concluded amongst Golden Ocean (Ship Owning Company), M/s. Salgaocar (Guarantor); and the Charterer (a chartering arm of M/s. Salgaocar) contained a guarantee undertaking whereby the Charterer’s liability to make good any loss to the Ship Owner was covered by M/s. Salgaocar. The only issue was, like the other commercial terms of the contract, even this guarantee undertaking was communicated/ confirmed by e-mail instead of it being in writing. There was no formal charter contract or guarantee executed.

Thereafter, due to the business and commercial, and with it, the shipping industry, going down the proverbial drain, the Charterer, finding it difficult to make any profit and seeking to wriggle out of the commercial undertaking repudiated the contract. This led to Golden Ocean seeking enforcement of the guarantee against Salgaocar.

In the proceedings before the High Court (Queens Bench), the defendants applied to set aside leave to serve the claim form, arguing that the alleged guarantee was not binding, as there was no signed written memorandum of the guarantee, as required by the Statute of Frauds. The judge having refused to set aside the leave, the defendants appealed.

On considering the arguments made by the parties to the matter, the Court of Appeal, dismissing the appeal of the defendants stated:
1. The Statute of Frauds did not require the agreement to be in one or even in a limited number of documents. The conclusion of commercial contracts by an exchange of e-mails was entirely commonplace. This was the case even if the parties expected a formal guarantee to be drawn up in the future.

2. An electronic signature in an e-mail (assuming the signatory had authority), however informal, authenticated the contract of guarantee referred to in the email and other documents in the sequence. If it was established that the signatory (in Golden Ocean case, the broker) had authority to conclude a contract of guarantee, there was little practical scope for the success of an argument that his signature on the e-mail was ineffective for the purposes of the Statute of Frauds.

Whereas, in Tankship case, although the same issue concerning transmission of guarantees was argued, it is crucial to note what the judge said with regard to transmission of guarantees by SWIFT. Tankship case involved a dispute between the buyers of a ship and the Korean bank issuing a refund guarantee on behalf of the sellers. The Korean Bank in this case was Kwangju Bank Limited (issuing bank). At the time of issuing the guarantee the issuing bank had no concerns in transmitting the guarantee by SWIFT, it was only when the Guarantee was invoked that it raised any concerns of the guarantee not being signed as was required by the Statute of Fraud.

The issuing bank’s name (i.e. Kwangju Bank Ltd.) did not appear anywhere in the terms of the guarantee - the issuing bank was merely referred to throughout as “we.” However, considering that their name was captured in the header of the SWIFT, the issuing bank seems to have had little choice but to accept that the guarantee was properly issued, fully authorised and was intended to be relied upon by the beneficiary.
However, making the case simple for the beneficiary, it was noted by the judge that, the guarantee was not a true “see to it” / classic guarantee; but instead was an on-demand guarantee where the liability of the guarantor to make payment was primary. This, as rightly observed by the judge placed the current guarantee out of the purview of the Statue of Fraud as the said legislation does not address such on-demand guarantees.

Thereafter, the judge went to provide his views (obiter) on what would have been the outcome, if the present guarantee was found not to be an on-demand guarantee. The learned judge observed that, by sending the message the defendant had caused its name to be inserted into the SWIFT message and that this constituted a sufficient signature for the purposes of the Statute of Frauds. The method of transmission also provided sufficient authentication to enable the SWIFT message recipient to know that the message was from Kwangju Bank Ltd, with the judge noting that as a matter of common sense, “authentication by sending [of a SWIFT message] was equivalent (in modern terms) to authentication by signing, and so within the spirit, if not the letter of section 4 of the Statute of Frauds”. (Emphasis supplied).

The aforesaid cases need to be differentiated from the High Court decision in Metha v J Pereira Fernandes SA. In the Mehta case, one Mr. Metha had sent an email to another person, which contained a guarantee. While Mr. Metha did not actually type his name at the end of the email, his email address namely, nelmehta@aol.com, was automatically inserted into the email header. In the Mehta case, the court decided that this was not sufficient to act as authentication of the message since there was no signature and so the guarantee was unenforceable. On the basis of this decision, one may be lead to believe that the distinction may be: While in a formal messaging system such as SWIFT, one can assume that all messages have been automatically authenticated by the sender, whereas the same does not hold true for messages from a more informal personal email address.

However, with all due respect, the decision in the Metha case, with regard to insertion of name at the end of the e-mail, does not seem to hold water any more, particularly in light of the decisions discussed hereinabove.

On a lighter note, analyzing the manner in which judges have interpreted the law, there is no doubt that some people may now utilize the maximum random characters permitted as password for e-mail accounts. It may even be understandable if some even choose to place their computers in lockers in their absence. However, the rational course would be to subject all e-mail correspondence in guarantee undertakings, if not commercial contracts, to the statement “subject to formal contract.”

Conclusion:
While it makes perfect sense (or common sense) to ensure that stern doctrine is followed while dealing with or interpreting terms of documentary credits for uniform interpretation, it would be disastrous to strictly follow the stipulations of any archaic law in adjudication of 21st century commercial disputes. However, it seems that, soon the need for clarity in commercial contracts will ensure that these archaic laws are changed to keep up with the current market practices otherwise one will have to be satisfied with the interpretation given by reasonable men understanding commerce.
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# Society for Worldwide Interbank Financial Telecommunication
# Instances of laws in India have been provided to draw a comparative understanding.
# For ad-verbatim text refer to: http://www.legislation.gov.uk/aep/Cha2/29/3
# Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd and another [2012] EWCA Civ 265
# Alternately relief in the form of breach of warranty of authority was also sought against the person who controlled M/s. Salgaocar and on whose instructions the broker, responsible for brokering the deal on behalf of M/s. Salgaocar was acting. This is not deliberated in the present article.
# Not ad-verbatim text.
# For reference to Indian Laws on this point, see Section 91 of the Indian Evidence Act.
# For reference to Indian Laws on acceptability of electronic contracts, see Sections 10A, 11, 12, 13 of the Information Technology Act, 2000 (Amendment of 2008) read with Indian Evidence Act, 1872: # Sections 85A, 85B, 88A, 90A, and 85C which deal with the presumptions as to electronic records whereas Section 65B relates to the admissibility of electronic record (On admissibility see: State v Navjot # Sandhu (2005) 11 SCC 600). Note: While there are several procedures available for forming an e-contract. The general conditions for contract formation remain constant. Reader is advised to refer to appropriate books/ articles on this issue. Also see, P.R. Transport Agency vs. Union of India & others AIR2006All23, 2006(1) AWC504.
# Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd and another [2012] EWCA Civ 265
# WS Tankship II BV v Kwangju Bank Ltd and another; WS Tankship III BV v Seoul Guarantee Insurance Co; WS Tankship IV BV v Seoul Guarantee Insurance Co. [2011] EWHC 3103 QBD, # Commercial Court
# Commercial Bench, Blair J
# [2006] EWHC 813
# See FN number 8.

The  author can be reached at: dhruvddesai@legalserviceindia.com

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