In a recent decision of the Victorian Court of Appeal in Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd and Arthur Charles McKenzie [2022] VSCA 272, a director was found to have provided a personal guarantee in respect of a joint venture agreement, despite not being named as a party to the agreement and signing the agreement as a company director and not in a personal capacity. 

This case covered a dispute between Pugwall Pty Ltd (Pugwall), its director Martin Clark (Clark), Arthur McKenzie Investments Pty Ltd (AMI) and its director Arthur McKenzie (McKenzie).

Pugwall and AMI were commercial building companies who were parties to a joint venture agreement (JV Agreement) for the constructions of nineteen residential units. 

The JV Agreement included a substantive guarantee clause pursuant to which Clark guaranteed the obligations of Pugwall and McKenzie guaranteed the obligations of AMI. 

The joint venture failed and incurred losses. It was common ground that AMI was liable for 50% of those losses. Pugwall also sought to recover AMI’s share of the loss from McKenzie under the personal guarantee clause in the JV Agreement. 

At first instance the trial judge ordered that AMI was to pay Pugway just under $1.35 million and held that McKenzie was not personally liable as he did not intend to provide a personal guarantee under the JV Agreement. 

On appeal the only issue to be decided by the Court of Appeal was whether McKenzie intended to be bound by the personal guarantee contained within the JV Agreement. The Court decided that McKenzie intended to be bound by the guarantee. 

Whether McKenzie was a party to the JV Agreement

McKenzie argued that he could not be a guarantor under the JV Agreement as he was not a named party to the JV Agreement. The front page of the JV Agreement provided that the JV Agreement was ‘Between’ the ‘Parties’: Pugwall, AMI and Ponza, a list that did not include McKenzie.[1] 

The Court when considering whether McKenzie was a party to the JV Agreement paid careful attention to several often overlooked operational clauses. 

The acknowledgement of legal advice clause used the wording “each Joint Venturer or party”, implying that a person other than a Joint Venturer (Joint Venturers was defined to only include AMI and Pugwall) could be a party to the JV Agreement. 

The notice clause of the JV Agreement set out the procedure for sending notices to the parties, this clause included both McKenzie’s and AMI’s addresses, which were the same. The Court noted that it would be redundant to list McKenzie and AMI’s address separately unless McKenzie was a party to the contract. 

The Guarantee clause read together with clause 1 (definitions) clearly provided that McKenzie was to guarantee AMI’s obligations.

 For these and other reasons the Court held that McKenzie was a party to the JV Agreement. 

The importance of considering the construction of the JV Agreement

Whether a person intends to be bound by a contract is an objective question based on the construction of the document and all surrounding relevant circumstances. 

As discussed above, the Court concluded that McKenzie was a party to the JV Agreement and the contract clearly specified McKenzie was to provide a guarantee for AMI. 

The Court said that “McKenzie’s signature suggests that he read and approved these terms, or was ‘willing to take the chance of being bound by them’.”[2]

With regard to the context of the contract, the court said that “[a]lthough the Joint Venturers were corporate entities, it was the two men who effectively entered into a business venture together (given they controlled and owned both corporate entities). It would be consistent with this commercial context that each single director could look to the other to account for any losses of the venture.”[3]

The Court ultimately held that McKenzie had indeed intended to be personally bound by the guarantee. 

Section 126 of the Instruments Act 1958 (Vic) 

Section 126 of the Instruments Act 1958 (Vic) provides that, in Victoria, guarantees must be in writing and signed by the person to be charged (or by a person lawfully authorised in writing to sign on behalf of the person to be charged). 

In Queensland, s 56 of the Property Law Act 1974 (Qld) is of similar effect. 

The Court held that the capacity in which a person signs an agreement is not relevant to the application of s 126.

Takeaways

• Whether a party intends to be bound by a contract is based on the construction of the contract and the relevant circumstances.
• Always ensure that any contracts that you sign are clear and carefully drafted to minimise the chance of any disputes. The safest course of action will generally be to have your contracts reviewed by a reputable lawyer.
• Directors must be careful in ensuring that they understand how the actions they take in their capacity as directors can affect or create personal obligations.
• Boilerplate and procedural clauses, including notice clauses should be drafted with care as they can significantly impact how the contract will be interpreted. 

For advice regarding commercial contracts or other corporate and commercial legal questions, please contact John by email or 07 3220 1144.

[1] Ponza was a new company incorporated to act as a manager of the joint venture.

[2] Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd and Arthur Charles McKenzie [2022] VSCA 272 at [55]

[3] Ibid [58]