Signing blind

Commercial | Print Article

[Winter 2012]

Common sense says that before you sign a contract, you should read it and make sure you understand what you are signing. You may be surprised to learn how infrequently this happens. This is especially so when the contracting parties have an established trading relationship. In a High Court case in Palmerston North, two directors received a nasty shock after learning that they had personally guaranteed the debts of a company. They were found liable for $544,909.81, which included over $200,000 default interest and legal costs.

The result in Ravensdown Fertiliser Co-Operative Ltd v Eveleigh [2012] NZHC 660 is not surprising. It does, however, serve as a timely reminder of the importance of knowing and understanding what you are agreeing to. The background of the case provides some insight as to why this particular contract was not read in detail.

The Eveleigh Farming Company Limited (‘Eveleigh’) had been a customer of Ravensdown since February 2002. Eveleigh was run by a father and son who were both directors and shareholders. The trading relationship started when Eveleigh applied for a credit account with Ravensdown on Ravensdown’s usual one month credit terms. Ravensdown subsequently opened an account in Eveleigh’s name. The father and son were not required to personally guarantee this account.

During the course of the trading relationship, a number of changes were made to the credit arrangements between Ravensdown and Eveleigh. In October 2002 and until early 2004, Eveleigh had negotiated a special credit arrangement which provided for payments to be deferred for five months, and a two month interest free period.

In 2004, due to heavy flooding in the region, Ravensdown provided Eveleigh with a temporary flood relief package which included a nine month interest free period. None of those changes to the trading relationship required the father and son to provide personal guarantees.

In late 2005, Eveleigh applied for an extended line of credit under a particular facility developed by Ravensdown. An application form was sent to Eveleigh and the father and son signed the form as directors and returned it to Ravensdown. The application was accepted and a credit line of $200,000 on a deferred payment basis was extended to Eveleigh. This was subsequently increased to $400,000.

The application form was a double sided document which had the application on one side and the ‘Terms of Trade’ on the other. The application page contained an area for the father and son to sign as directors of Eveleigh. The application page also contained an acknowledgment which said:

I/We apply for Ravensdown Fertiliser Co-Operative Ltd’s extended credit facility (Super Plan Extend) and agree to comply with the Terms and Conditions on the reverse…

 The Terms and Conditions contained the following term:

GUARANTEE (where the applicant is a Company)

I/We the Directors of the Company agree to guarantee all amounts which are payable to you at any time by the Company and acknowledge that you may demand and recover from us any amounts which are payable by the Company instead of or as well as demanding payment from the Company.

The father and son directors’ position was that they had not read the Terms and Conditions on the reverse of the application page. They said that a personal guarantee had never formed part of Eveleigh’s trading relationship with Ravensdown.

It was clear that the term headed ‘Guarantee’ was a personal guarantee. The father and son, however, argued that they were required to be given special notice that the Extended Credit application contained a guarantee. They had never been required to give a guarantee in the past and were not put on notice that they would be required to give one. The Court did not accept that argument. The Court found that the father and son were referred to the Terms and Conditions in the wording of the application itself and it could not be Ravensdown’s fault that the father and son did not turn the page.

In order for a guarantee to be enforceable, it must be in writing and it must be signed by the person giving the guarantee. The father and son argued that they only signed the Extended Credit application in their role as directors. They said that they had not intended to give a guarantee. If that argument was accepted, the guarantee would have been unenforceable. However, the Court found that the father and son signed the contract in dual capacity as both directors and as guarantors. The contract contained an acknowledgement that they, as directors, agreed to comply with the terms and conditions on the reverse of the form. The reverse contained a guarantee as a term of the intended contract.

The Court had no hesitation in finding that the father and son had given personal guarantees and they were held to be liable for over $500,000.

As mentioned above, the result is not surprising. What is surprising is that despite the Terms and Conditions being on the reverse of the application, the father and son failed to read them. Had they read them, they may not have signed the Extended Credit application, or may have sought to delete or limit the personal guarantee.

The message in this case is clear – if you are being asked to sign a contract, make sure you read and understand it before you sign it. It is your responsibility to know what your obligations are. If you are unsure what those obligations are, do not sign until you have sought advice on how the contract will affect you. A small cost upfront may help you avoid a large cost down the road.