Suppliers be warned!

The recent case of Reozone Pty Ltd v Rene Santoro [2016] NSWSC 1383 (Reozone) is a warning to Suppliers to ensure the wording and execution of any agreement with a personal guarantee meets the requirements to enforce it.

When providing goods and services on credit terms, more likely than not, the supplying company requires the director(s) of the purchasing company to personally guarantee the obligations of the company. If the purchasing company fails to make payments under the credit terms, the supplying company will have recourse against the individual(s) who provides the personal guarantee.

The agreement in Reozone

Similar to many trade credit agreements, the agreement in Reozone contained two execution clauses (see the attached agreement):

  1. An execution clause of personal guarantee, in which the director “secures payment by granting a charge over all real estate/property held now and in the future” (the Guarantee Execution Clause); and
  1. An acceptance of the terms and conditions of use clause (the Acceptance Clause).

When executing in the relevant space for the Acceptance Clause, Mrs Santoro, the director of the purchasing company in Reozone, signed against the words “Accepted for and on behalf of the Company [by the director]”. The space for execution next to the Guarantee Execution Clause was otherwise left blank.

The issue

The supplying company in Reozone was forced to think again when it sought to enforce the guarantee that they thought had been provided by Mrs Santoro after the purchasing company, Elite Plant Hire, failed to pay numerous invoices. The critical question that needed to be answered was “where a signature is expressly stated to be given as an acceptance for and on behalf of the company, are the signor still personally bound by the contract if he or she fails to execute the relevant guarantee clause”?

The Court’s approach

 Mrs Santoro submitted that, as she only signed in the relevant space next to the Acceptance Clause, it was only an acceptance of the terms and conditions by the purchasing company rather than herself. Meanwhile, the terms and conditions did not refer to any personal guarantee at all.

The supplying company argued that a reasonable person in the position of the supplying company would believe that, by signing in the Acceptance Clause, it also gave effect to an acceptance of the Guarantee Execution Clause. The supplying company further argued that it would make commercial sense that it would require a director’s guarantee and charge before allowing the purchasing company to incur the very “considerable debts that were incurred.”

The Court found for the purchasing company and rejected the supplying company’s argument on the basis that Mrs Santoro “did not sign the document in her personal capacity so as to indicate her agreement to be personally bound by it.

The court did acknowledge the supplying company’s intention to bind Mrs Santoro personally and to include the grant of a charge by her. However, the burden is on the supplying company when the executed document was received and, if it had been noticed that the Guarantee Execution Clause was not executed, the supplying company should have requested Mrs Santoro to do so which they never did.

Takeaways – the Murphy’s law

Reozone is a reminder of the old cliché that the execution of contractual documentation needs to be complete and accurate. Anything that can go wrong will go wrong!

In Reozone, it could have been as simple as the supplying company placing on hold the supply until the personal guarantee clause was properly executed. We do, however, know that  the trade-off in business is sometimes that documentation isn’t completed correctly. In this case, they definitely did not and, as a supplier, we would always strongly recommend that you review your documentation regularly.

Contact SLF Lawyers if you have any queries about your supply documentation or if you require a full review of your supply documentation.

Article written by Henry Lin of our Brisbane office.

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