Oops! I’ve accidentally guaranteed my company’s contractual obligations

Before signing any contract, a party should consider whether they are binding themselves personally to a contract, or on behalf of another (e.g. as a director on behalf of a company). When it comes to liability, the distinction is important!

Signing clause

Typically, words used in a signing block will describe whether a party is signing the contract personally or on behalf of someone else. Courts tend to favour the plain, ordinary meaning of the words in a signing clause, regardless of the parties’ subjective intentions, as was demonstrated in the case of Ye v Chen [2022] NSWCA 219 (Ye v Chen).

One of the issues that arose in the case of Ye v Chen was whether the appellant signed a guarantee in favour of the respondent in their personal capacity or as director of the company, thus making the company  the guarantor. Despite the appellant’s belief that she was signing a guarantee on behalf of the company, the New South Wales Court of Appeal determined that the appellant in fact signed the guarantee in her personal capacity. This was because the words used in the signing block did not refer to the company, but rather, referred to the appellant in her individual capacity (as opposed to the appellant signing on behalf of the company).

Contractual terms

In addition to the signing block, courts also construe the overall contract itself to determine a party’s signing capacity.

In Findex Group Ltd v McKay [2019] FCA 2129, it was held that the respondent, had bound himself personally and as agent for the company in question, to a shareholders’ agreement (SHA) irrespective of the fact that the respondent only signed the SHA in his capacity as director of the company.

The Court looked beyond the signing block and found that the following factors contributed to the finding that the respondent was personally bound to the SHA:

1. the respondent was named as a ‘party’;
2. various express obligations were placed on the respondent personally (as a ‘Covenantor’), including an obligation to not misuse any confidential information or intellectual property of the company (another party to the SHA); and
3. the SHA contained restraint provisions which restricted the covenantors (which included the respondent) and others from doing certain things.

It was, therefore, evident from the express contractual terms that the respondent was personally bound to the SHA, in addition to being bound as director/agent for the company.

Key takeaways

Before you sign any contract:

1. Consider what capacity you are signing a contract: personally, or on behalf of a company?
2. Review the signing block to ensure it is consistent with the above.
3. Review the contract (or have it reviewed) to ensure it is consistent with the capacity you are executing the contract.

Queries

If you have any questions about what you should do next or to begin a review of your contract terms, please get in touch with an author or any member of our Corporate team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.