Equity is a body of legal principles based on fairness which has origins in the English legal system. In England equity evolved to counteract the harshness of the common law (which is the decisions made by the courts). Equity had its roots in the Middle Ages when claimants unable to bring an action in the common law courts were able to petition the King to exercise his discretion and decide the case. Separate courts of equity evolved in England to decide these cases. Nowadays there are no separate courts of equity but the principles of equity which have evolved over the centuries are applied in our courts alongside other legal principles.
There are numerous maxims of equity which characterise the legal principles of equity. One of those maxims is the saying: “Equity treats as done that which ought to have been done”. An example of the application of this principle arose in a recent case (Chambers v Chatfield [2016] NZHC 1871).
Tenant promises to provide a personal guarantee
In Chambers v Chatfield a company entered into an agreement to lease a property. The agreement provided that the company would sign a Deed of Lease in a standard form. The standard form of the Deed of Lease to be signed contained a guarantee. The agreement to lease also provided that the personal guarantees of the directors and/or major shareholders of the tenant company would be arranged by the tenant company. The director of the tenant company signed the agreement to lease on behalf of the tenant and the guarantor.
Things did not go well for the tenant company. It was placed into liquidation. The liquidator disclaimed the lease. The lessor sued the director of the tenant for outstanding rent under the “guarantee”.
Law relating to guarantees subject to equity
Section 27 of the Property Law Act 2007 requires a contract of guarantee to be in writing and to be signed by the guarantor. In Chambers v Chatfield the director of the tenant had not signed the guarantee itself. That was because the guarantee was contained within the Deed of Lease which the tenant company had agreed to provide, but had not yet provided.
Despite the fact that the guarantor had not complied with the letter of the law and signed the guarantee as required by the Property Law Act, the judge held that the equitable principle pronounced in the 1882 English case of Walsh v Lonsdale applied: “Equity regards as done that which ought to be done.” This meant that the director of the tenant company was treated as if he had actually signed the guarantee, because he ought to have done so. The director was therefore liable to honour his guarantee.
The law is not always an ass
If the court in Chambers v Chatfield had held that the director of the tenant was not liable under the guarantee because he had not signed the guarantee, even though he had signed an agreement promising to sign the guarantee, most of us would think that result unfair, if not ridiculous. We can take comfort that judges have the principles of equity available to them where the strict application of the law would result in an outcome which is unfair and flies in the face of common sense.
Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.
Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.
