17 December, 2006
The parties to a contract are, largely, allowed to agree on whatever terms they like. They can agree on the price, the date for payment, when and where delivery is going to take place. They can also agree what is to happen when things go wrong, such as:
We would normally recommend that a seller has standard terms of trading professionally drawn up to give themselves maximum protection.
When extending credit to a company a seller must be aware of the credit worthiness of that company. But even the most apparently solvent company can get into trouble. One way of trying to get added security was scrutinised by the Courts, in the case of Manches v Carl Freer. In that case a solicitor conducted some corporate work on behalf of a company client who ran up a bill of £570,000. The solicitor had terms of trading, signed by the managing director of their client, which said 'Where our client is a company, then the directors shall be directly liable for our fees in the event that the company fails to pay them'.
While that might seem to be clear enough, the director argued he signed them in his capacity as director, and had not intended to accept personal responsibility. The Court agreed. The Judge said that while a party who signed a contract was deemed to have read, understood and agreed to be bound by its terms, the evidence showed that the director was only signing for the company and not himself personally.
This case illustrates that, while a seller can make the directors personally liable for the company's debts, the guarantee must be worded clearly and the proper formalities have to be observed when it is signed if it is going to be effective.
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