It’s personal: when a director may be liable for a company’s guarantee
In the case of Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd[1], the Court of Appeal ruled on the question of whether a director of a company, in signing a guarantee on the company’s behalf, was personally bound by that guarantee. More broadly, the Court considered the question of whether, and in what circumstances, a person objectively has intended to be bound by a contract even if — and the Court’s decision serves as a potent reminder of this — that person may not (subjectively) have intended so.
The facts
The applicant (Pugwall) and first respondent (AMI) on appeal were sole-director companies operating in the building industry. The second respondent (McKenzie) was the director, secretary and effective controller of AMI.
In 2016, the companies entered into a written joint venture agreement (JVA) for the development of land at Seaford in Victoria. The cover page of the JVA identified the companies as parties but did not identify McKenzie as such. Reference was made to McKenzie elsewhere in the JVA, including in clauses providing for guarantees by the companies’ respective directors. Among other things, cl 19.1 of the JVA stated that McKenzie ‘guarantee[d] the obligations of AMI under this Agreement’. There was no separate execution block for McKenzie to sign the JVA as a guarantor — that is, in his own right and capacity — but instead an execution block where he signed ‘for’ AMI.
In or around 2019 and at such time as the parties had fallen into dispute, the respondents’ lawyers prepared a ‘Deed of Agreement’. The document referred to the ‘personal guarantee provided in the JVA’ by McKenzie, but the document was never executed.
At trial
Pugwall commenced a proceeding claiming it had suffered loss and damage arising from AMI’s breach of the JVA. Although it was common ground that AMI was to be liable for 50 percent of any losses incurred, there was a dispute as to quantum. Pugwall also claimed that McKenzie was liable for its loss by reason of what it alleged was his guarantee under the JVA.
At trial, the judge ordered that AMI pay Pugwall a sum representing specific loss arising from AMI’s breach of an implied term of the JVA to exercise reasonable skill and care, but the judge found that McKenzie was not personally liable under the guarantee.[2]
On appeal
Pugwall sought leave to appeal against a finding of the trial judge. The issue for determination was whether the judge had erred in finding McKenzie not personally liable under the JVA guarantee.
Was there an objective intention that the director be bound personally?
In light of the apparent qualification attached to McKenzie’s signature — he signed ‘for’ AMI — the question was whether having regard to all relevant matters McKenzie nonetheless evinced an intention, objectively construed, to be personally bound by the guarantee. The fact that according to the wording of the executory page McKenzie had signed the guarantee ‘for the … company’ was, the Court of Appeal held, merely the ‘starting point’;[3] the Court observed that ‘the issue which then arises is whether, having regard to all relevant matters, McKenzie intended to be personally bound notwithstanding this apparent qualification’.[4]
The Court held that, having regard to all the circumstances, there was an objectively manifested intention that McKenzie be personally bound by the guarantee and the judge erred in finding otherwise. This was so for two key reasons.
First, the Court held that the relevant provisions in the JVA together evinced such an intention.[5] These included a clause defining the term ‘party’ which, when properly construed, was broad enough to extend to McKenzie, as well as a clause which expressly named McKenzie as a ‘guarantor’ (even if it did not specify the capacity in which he was such).
The Court also considered it relevant that there was a clause whereby each party expressly acknowledged having received independent legal and financial advice in respect of ‘all obligations’ under the JVA; the Court stated that ‘[g]iven those obligations expressly included terms which imposed guarantee obligations, McKenzie’s signature suggests that he read and approved these terms, or was “willing to take the chance of being bound by them”’.[6]
Second, despite a lack of evidence of any negotiations giving rise to the JVA, it was apparent from the surrounding circumstances that the agreement was one reached between two individuals with significant experience in the building industry — albeit via corporate entities which they owned and controlled — such that, as the Court held, ‘[i]t would be consistent with this commercial context that each single director could look to the other to account for any losses of the venture’.[7] (So far as the ‘Deed of Agreement’ was concerned — it had been drafted in an apparent effort to settle the dispute in 2019 — the Court held that ‘[g]iven that the proposed Deed was dated some three years after the JVA and was also proffered in the context of discussions to resolve a dispute, it provides no real assistance in determining the intentions of the parties at the time of the JVA’.)[8]
What about the impact of Statute of Frauds-type legislation?
In opposing the application for leave to appeal, McKenzie, among other things, submitted that s 126 of the Instruments Act 1958 (Vic) (Instruments Act) operated as a bar to recovery on his guarantee and that this justified the judge’s finding that he was not personally bound by the guarantee.
Section 126 relevantly provided:
An action must not be brought to charge a person upon a special promise to answer for the debt, default or miscarriage of another person or upon a contract for the sale or other disposition of an interest in land unless the agreement on which the action is brought, or a memorandum or note of the agreement, is in writing signed by the person to be charged or by a person lawfully authorised in writing by that person to sign such an agreement, memorandum or note.
McKenzie submitted that the guarantee did not comply with this requirement and therefore was not enforceable against him personally. He also submitted that s 126 ought be read in a manner that enhanced a guarantor’s property rights in accordance with the Charter of Human Rights and Responsibilities Act 2006 (Vic) (Charter).
The trial judge had not ruled on the operation of s 126, and McKenzie did not file a notice of contention in relation to it, but the Court of Appeal addressed the question nonetheless. The Court held that s 126 did not bar recovery under the guarantee; the JVA, in being signed by McKenzie, was ‘signed by the party to be charged’ for the purposes of s 126 and the particular capacity in which he did so was irrelevant to the meaning of that provision. In reaching that view, the Court noted the approach taken by Edelman J in Alonso v SRS Investments (WA) Pty Ltd.[9] There, his Honour held that the capacity in which a director in that case had signed a document was not relevant to the Statute of Frauds (being the English legislation on which s 126 of the Instruments Act is based).
Finally, so far as application of the Charter was concerned, the Court in Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd held that s 126 related to the enforceability of certain agreements rather than the deprivation of personal property and therefore was not subject to the operation of ss 20 and 32 of the Charter.
[1]: [2022] VSCA 272.
[2]: Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd [2021] VCC 2053.
[3]: Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd [2022] VSCA 272, [53].
[4]: Ibid.
[5]: See ibid [54]–[56], where the Court discusses the relevant provisions of the agreement.
[6]: Ibid [56], quoting TW Timber Treatment Pty Ltd v Giddings [2022] VSCA 147, [47].
[7]: Ibid [58].
[8]: Ibid [60].
[9]: [2012] WASC 168.