By Russell Cocks, Solicitor
First published in the Law Institute Journal
Prior to the introduction of the 2008 copyright Contract of Sale of Real Estate it was common for a vendor to include a standard form guarantee in a proposed contract and to require directors of a corporate purchaser to personally guarantee the performance of the contract by signing that guarantee at the time that the contract was executed by the company.
However the copyright 2008 contract introduced a standard general condition (GC) that was designed to overcome the need for a guarantee to be included in the contract. GC 20 provides ‘The vendor may require one or more directors of the purchaser to guarantee the purchaser’s performance of this contract if the purchaser is a proprietary company’. thereby creating a right in favour of the vendor, at any time during the continuance of the contract, to require the director to sign a guarantee.
But what if, when subsequently required to enter into such a guarantee, the director refuses or fails to do so? The vendor’s rights pursuant to the contract are limited to the parties to that contract, essentially the purchaser. If the vendor is to enforce the right created by the contract, the vendor must establish a right against the directors of the company that exists outside of the contract, as the directors are not parties to the contract.
It is submitted that the vendor can successfully establish such a right based on the general principles of unconscionability, both at common law and in their statutory form. There can be no doubt that a corporate purchaser is engaging in trade and commerce when entering into a contract of sale of land and the directors, as the human force behind the company, are equally so engaged. Trade practices law has undergone considerable development in recent years with the states adopting the Australian Consumer Law, including a general duty to act in good faith.
It is submitted that a director of a company who causes the company to enter into a contract containing GC 20 will be found to be making a representation to the vendor that the director knows that the vendor is relying on the director signing a guarantee if called upon to do so and a refusal or failure to sign the guarantee will constitute unconscionable conduct and entitle the vendor to remedies directly against the director. This argument is strengthened by the High Court decision in Toll (FGCT) P/L v Alphapharm P/L [2004] HCA 52 to the effect that parties engaged in trade and commerce are taken to have read and understood the meaning and effect of contractual documents, specifically GC 20.
Corporations have no ‘life’ of their own. They are creatures of statute and are only capable of acting on the basis of the decisions made by their officers. Those decisions are to be made, in the case of multi-director companies, by the directors in formal or informal meetings of the directors. A vendor is therefore entitled to assume that a contract that, on the face of the document, is signed on behalf of a corporation has been read by the relevant officers of the corporation and that those officers are thereby aware of the terms of the contract. The directors will thereby be taken to be aware of the vendor’s entitlement to call for directors’ guarantees, and to thereafter refuse or fail to sign the guarantee when called upon to do so is unconscionable.
A disappointed vendor might also consider relying on the High Court case of Houghton v Arms [2006] HCA 59 where employees of an insolvent defendant were held liable for misrepresentations made by the corporation. It might be argued that by signing a contract including GC 20 the corporation is representing to the vendor that the directors will sign a guarantee when called upon to do so in the future and that the directors have accessorial liability for that representation such as to make the directors directly liable to the vendor. If the purchaser company fails to fulfil the contract the vendor may seek damages against the directors, not on the basis of a signed guarantee, but rather on the basis that the failure of the directors to sign the guarantee is a breach of the company’s representation to the vendor that the directors would sign and that the directors are personally responsible for that misrepresentation.
Alternatively, a disappointed vendor might appoint a liquidator to the insolvent company and pursue the directors who refused to sign the guarantee on the basis of the directors’ duties to the company. By authorising the company to enter into the contract the directors exposed the company to the possibility of loss. By not signing the guarantee when called upon to do so, and ultimately honouring the guarantee, the directors, in breach of their duty to the company, are responsible for the company’s loss, being the debt to the vendor arising out of the contract.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.