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Contracts must be carefully drafted if personal liability is to be avoided

30 April 2018

Mr Haines and Mr Hornsby entered into various property transactions. They included the sale of Mr Haines property to a company owned by Mr Hornsby, the lease back of part of it to Mr Haines and a mortgage for some of the purchase price to Mr Haines.

When Mr Hornsby’s company did not make a mortgage repayment when due Mr Haines and Mr Hornsby prepared and signed their own one page agreement recording a resolution of the issues that had arisen between them. Mr Hornsby did not make a payment due under the one page agreement. Mr Haines drafted another agreement which they both signed.

Although Mr Hornsby eventually repaid the mortgage Mr Haines claimed there was still money owing to him. Mr Hornsby responded by saying he was not personally liable and only his company was liable to Mr Haines under the agreements they had prepared and signed themselves. Mr Hornsby also claimed he was forced to sign the agreements under “economic duress”.

The law of personal liability

In this case the judged stated the law relating to personal liability. He said that a party to a contract will be personally liable if that party has, objectively, shown an intention to be bound by it. It is assumed that an entity that signs a written document intends to be bound by it (an entity could, for example, be a person or a company). The contract must be very clear if personal liability is to be excluded.  If the document makes it clear the party is signing as an agent for someone else then that party will not be personally liable. It is also possible for someone to sign the contract in more than one capacity – for example, the person could sign on behalf of a company and in his or her personal capacity as well.

The judge found Mr Hornsby personally liable. He held that the two documents Mr Hornsby and Mr Haines signed did not make it clear Mr Hornsby was acting as an agent for his company. The references to Mr Hornsby’s company in the two documents were not sufficient to negate Mr Hornsby’s personal liability. The judge also said that the wording of the agreements meant that Mr Hornsby’s company might also be liable.

Some jobs are for professionals

Lawyers often become involved when a dispute arises over a home-made agreement. Sometimes people prepare their own agreements because they do not appreciate the pitfalls of doing so. Sometimes they wish to avoid the cost of a lawyer. Unfortunately, the costs of involving the lawyer when a dispute arises usually far outweigh the costs of involving a lawyer to prepare the contract.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott