Yuill & Kyle: When will Personal Guarantees be Binding?

Introduction

Credit controllers are always seeking ways of recovering cash. Let’s face it – it’s only natural! One way of doing this, when contracting with smaller limited companies, is to secure directors’ personal guarantees. So if the company becomes insolvent the creditor can look to the debtor company’s director for payment. Our intrepid credit controller is careful. Not only do his terms and conditions form part of the contract but they are actually signed by the director from whom the guarantee is sought.

Then the inevitable happens. The debtor company defaults in payment and the credit controller demands payment from the director in terms of the guarantee. The indignant director’s response is ‘no way!’. Yes, he admits signing the terms and conditions of business but says was unaware there was even a personal guarantee referred to and that they were ‘hidden away’ in the small print.

Will the Guarantee be Binding?

Those readers familiar with contract law will no doubt remember reference to the ‘ticket cases’. The argument in these litigations was whether terms and conditions were incorporated which had not been set out in the contract itself but in some other document.

These cases considered whether terms that were contained in a separate document (usually one party’s standard terms of business) or which were the subject of notice (the “ticket” cases) had been incorporated into the contract. It is in this context that a party putting forward a particular term must draw it to the other’s attention if they want to be able to rely on it, and in this context that Lord Denning made his famous “red hand” statement:

“I quite agree that the more unreasonable a clause is, the greater the notice which must be given of it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient” (J Spurling Ltd v Bradshaw [1956] 2 All ER 121).

Once drawn to the attention of the other party, incorporation may take place if the latter acts in such a way that they are deemed to have accepted the term.

In relation to a term that is contained in the document that the parties sign, a different rule applies. In the absence of fraud or misrepresentation, a party who signs a contract is ordinarily bound by its terms, whether or not he has read them and whether or not he is ignorant of their precise legal effect, and it is wholly immaterial whether he has read the document or not. Other potential vitiating factors include the doctrine of illegality and mistake. In the ordinary course of business in the absence of the foregoing defences it is likely the guarantee will be held to have been valid and to have been granted. Surely this is a sensible approach because by signing the document the signatory represents to the other party that he has made himself acquainted with its contents and assented to them. Certainly, it is important for business certainty.

Questions?

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