Always read the contract before signing

Always read the contract before signing

RTBM: Read the Bloody Manual. One of the greatest challenges in IT is fighting the urge to say this to difficult customers. In law, the equivalent is RTBC: Read the contract… before you sign it. Ignoring this golden rule was costly to the defendants in two recent High Court cases.

The first case involved two directors of an electrical service company who wanted to buy goods from a supplier. They signed the supplier’s terms of trade – a contract, of course. One important term was that the supplier required personal guarantees from the company’s directors. The directors signed a second piece of paper that turned out to be a binding personal guarantee for outstanding money owed by the company. The rest is a business cliché: the company ran up large bills with the supplier, but didn’t pay. When the company went into liquidation, the supplier tried to recover money from the directors under the guarantees. When the directors did not pay up, the supplier went to court.

The directors said they didn’t pay because they didn’t know they had signed a personal guarantee. They said an employee of the company had said “sign here” on a page and that they didn’t know what it was – they just signed it to get on with the deal. The court was unconvinced by the directors’ arguments. The guarantee paper they acknowledged signing said “Print Name of Guarantor” which they did. If the directors signed a piece of paper without checking the details of what they were signing, that did nothing to change the fact they had signed a valid contract that was binding on them. The supplier was permitted to enforce the guarantees.

The second case concerned a car auctioneer who wanted to offer finance to car purchasers. He negotiated with a finance company and began offering finance on the basis of a “full recourse” finance contract: that is, the auctioneer would underwrite the consumer loans. Some of the key details of the auctioneer’s obligations to the finance company were set out in an unsigned memorandum, which he received before he started offering finance. The finance company lent money to purchasers of cars. When the car purchasers missed payments, the finance company sought payment from the auctioneer. He didn’t pay up, so the finance company took him to court.

The auctioneer argued that the “full recourse” provision of the contract was a guarantee of borrowers’ overdue debts, and that it could not be enforced because he had not signed the memorandum. There is an old law originally intended to reduce fraud, which says debt guarantees must be in writing and signed by the guarantor. However, the court found the “full recourse” clause was not a guarantee against default and was instead a contractual obligation to repay the money. It did not need to be signed: it was just part of the general deal. The auctioneer was ordered to pay the missed car payments. He ended up being liable for debts of about $500,000.

Saying “I didn’t know what I was signing” rarely gets people out of contracts, unless there are really extenuating circumstances such as threats of violence. Don’t sign anything unless you have read it thoroughly. If you don’t understand every word of it, get advice before you sign. When it comes to signing bits of paper, especially contracts, courts assume that experienced traders and business people are big and tough enough to look after themselves. So RTBC!

Correction: Gremlins attacked the print copy of Rae Nield’s last column about the Waste Minimisation (Solids) Bill: it should have read “So I was one of the few who didn’t say that the bill was a bad idea”!

Richard Anstice is a staff solicitor. This article is intended for general information, and should not be relied on as specific legal advice.

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