Beware the Unwitting Personal Guarantee

A recent decision in the Scottish courts has clarified what a supplier needs to do in order to include a personal guarantee by a company director in a standard form contract.

WHAT WAS THE CASE ABOUT?
Ten years ago, the court made clear that a personal guarantee in a contract is something which is not unusual, but if it is to be included, fair notice of it must be given to the person giving the guarantee.

In the recent case, a director signed a standard form contract [for plant hire] which included a section headed  “GUARANTEE” which went on to state that the person signing undertook to make full settlement of any money due to the supplier and claimed that the signatory was giving a personal guarantee of the debt and all related  costs. This section had a box for the director to sign.

WHAT DID THE COURT SAY?
The argument presented to the court was that the director signed only as a director of the company and not in a personal capacity. The court said however that the use of the heading “ GUARANTEE” and the fact that the detailed wording used the term “personally guarantee” was sufficient notice that the director signing was also undertaking personal responsibility and that by signing that section he must have been agreeing to bind himself personally.   

WHAT DOES IT MEAN FOR ME AND WHAT SHOULD I DO?
The effect of this case depends on whether you are the customer or the supplier.
If you are being asked to sign any standard form contract on behalf of the company it is ESSENTIAL that you take time to read the document you are signing carefully. If you see a section headed “Guarantee” or “Indemnity” or see those words anywhere in a standard form contract DO NOT SIGN unless you are absolutely sure that you are prepared to accept personal liability. If you are uncertain ALWAYS ASK FOR OUR ADVICE – it cheaper to ask now than to wait until you have a problem.

If you are the supplier, it does mean that it is not difficult to tie in a director to personal liability and, where you are dealing with a small company, it is well worth considering in the current climate. We will be happy to discuss how you can set up your terms and conditions to allow you to do this.

Speak to Robin Millar (rm@businesslaw.co.uk; 01383 72161) if you think this might be relevant to you personally, or to your business.