Written by Holly Eastway
The recent case of Pugwall v Arthur McKenzie Investments Pty Ltd  VSCA 272, in the Victorian Court of Appeal, serves as a reminder of the risks of personal guarantees for directors, revealing the dangers of personally guaranteeing the obligations of a company, especially where one may consider themselves safe under the corporate veil.
A joint venture agreement (“JVA”) between two constructions companies, concerning the development of residential units in Seaford, Victoria turned sour following issues with funding.
Mr Clark, the sole director and secretary of one of the parties, and Mr McKenzie the sole director and secretary of the other, gave personal guarantees on behalf of their own respective companies.
The problem was that, despite being personally named as guarantors within the JVA, neither Mr Clark nor Mr McKenzie signed the JVA in their personal capacities.
First Instance Decision
The trial judge held, among other things, that McKenzie could not be held liable in his personal capacity pursuant to the guarantee.
The Court confirmed that the court will assess a party’s intention to be bound to the terms of a contract on the basis of an objective construction of the document as a whole, rather than the subjective, uncommunicated intentions of that party. Upon assessing the JVA in its entirety, it was found that the JVA evidenced the intention for the guarantors to be personally liable and that the formal way in which a party signs a contractual document, will not be determinative of a party’s intention.
Mr McKenzie submitted that his signature to the JVA was only in his capacity as sole director/secretary, and that no signing clause was provided for him in his personal capacity as guarantor. However, the Court found on appeal that the entirety of the JVA evidenced otherwise.
Pugwall v Arthur McKenzie Investments Pty Ltd is a potent reminder of the dangers of personal guarantees. It demonstrates the importance for lawyers to understand the wide ramifications of commercial relationships gone bad and the significance of good legal drafting skills. All in all, the Victorian Court of Appeal has set a precedent for ignoring the subjective intentions of parties to a contract in favour of an objective analysis of the contract itself.
If you’re thinking of entering into a contractual arrangement as a guarantor, seek legal advice in advance. Uther Webster & Evans can provide you with advice and guidance, so contact our office here.
Disclaimer: the contents of this article are for informational purposes only and do not constitute legal advice, nor are the contents of this article intended to be a substitute for legal advice or to be relied upon as such.