Common sense says that the first thing you should do after receiving a contract that you are being asked to sign, is to read it. 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 their company. They were found liable for $544,909.81, which included over $200,000 default interest plus solicitor/client costs.
The result in Ravensdown Fertiliser Co-Operative Ltd v Eveleigh HC Palmerston North CIV-2010-454-831, 4 April 2012 is not surprising. However, it does 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 (“EFC”) had been a customer of Ravensdown since February 2002. EFC was run by a father and son who were both directors and shareholders. The trading relationship started when EFC applied for a credit account with Ravensdown on Ravensdown’s usual one month credit terms. Ravensdown subsequently opened an account in EFC’s name. The Eveleighs were not required to guarantee this account.
During the course of the trading relationship, a number of changes were made to the credit arrangements between Ravensdown and EFC. In October 2002 and until early 2004, EFC 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 EFC with a temporary flood relief package which included a nine month interest free period. None of those changes to the trading relationship required the Eveleighs to provide personal guarantees.
In late 2005, EFC applied for an extended line of credit under a particular facility developed by Ravensdown. An application form was sent to EFC and the Eveleighs 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 EFC. This was subsequently increased to $400,000.
The application form was a one page, two 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 Eveleighs to sign as directors of EFC. 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 Eveleighs’ 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 EFC’s trading relationship from Ravensdown.
The questions for the Court were:
- Was the guarantee provision on the Extended Credit application a personal guarantee?
- Does the Eveleighs’ lack of awareness of the terms and conditions on the reverse of the Extended Credit application impact on whether the guarantee is binding and enforceable against them?
- Did the Eveleighs sign the Extended Credit application in a dual capacity as directors and guarantors or only as directors of the company?
The Eveleighs did not argue that the guarantee provision was not a personal guarantee. It is clear from the wording of the guarantee that it was.
The Eveleighs 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 found that the Eveleighs were referred to the Terms and Conditions in the wording of the application itself and it could not be Ravensdown’s fault that they did not read them.
The Eveleighs also argued that they only signed the Extended Credit application in their role as directors and not in a dual capacity as directors and as guarantors. The Court disagreed. The Eveleighs signed an acknowledgement as directors that they 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 Eveleighs had given a personal guarantee 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 Eveleighs failed to read them. Had they read them, they may not have signed the Extended Credit application, or may have sought to delete the personal guarantee.
The message in this case is clear – read everything before you sign it. It is your responsibility to know what your obligations are. If you are unsure of the effect of what you are being asked to sign, come and see us and we can help you understand your obligations. A small cost upfront may help you avoid a large cost later on down the road.
Published: 28 May 2012