Can you enforce a Personal Guarantee?
Davy Engineering Limited v Marinescape NZ Limited and Ian Mellsop
Davy Engineering and Marinescape had collaborated over the years to their mutual advantage in the construction of aquariums in New Zealand and overseas. Marinescape was the principal contractor who was generally responsible for the design and construction of the aquariums. In a process known as thermoforming, Davy Engineering shaped and cut the thick clear acrylic sheet which were fitted together to create the tanks and tunnels in which the aquatic life was exhibited. Davy was also responsible for the on-site installation of the acrylic sections.
Tensions in the relationship built up in 2001 and then reached breaking point in 2002. A number of issues remained unresolved at this point in time that then became part of High Court proceedings. However in this article I wish to focus upon the issues arising from a personal guarantee.
On 3 August 2001, when relations between Davy Engineering were becoming strained, a letter was written by Davy Engineering to Marinescape. It dealt with a number of differences, but significantly it also dealt with issues as to non-payment of monies owing under the contract. In particular it sought payment of outstanding amounts, a 50% deposit on work not yet completed and finally a satisfactory guarantee of final payment. This letter was responded to and the following key words were included in it:
“So, on the basis that you will re-commence work forthwith I am personally prepared to guarantee your payments as our cash flow allows.”
The wording of this letter became a central issue in this case. It was argued by Davy Engineering that this amounted to a guarantee, whereas the person writing it, Mr Ian Mellsop argued that it was only a letter of comfort.
I imagine that many of you have come across similarly worded letters in an attempt to get a Contractor back to a construction site, or a supplier to keep delivering products to a construction site.
The Court in considering whether this wording amounted to a personal guarantee had this to say:
“A guarantee does not have to be in any particular form, nor does it have to use any particular words. What has to be clear is that the guarantor has bound himself or herself to answer for the default of the principal debtor. The meaning of the words is to be determined objectively, that is, from the point of view of the reasonable man in the shoes of the recipient.”
It was argued by Mr Mellsop that in fact the words meant that he would personally ensure that payments would be made by Marinescape as its cash flow allowed, and that it was not a personal guarantee as such. But the High Court Judge rejected such a restricted reading of these words. Instead he concluded that the meaning of the words was to the effect that Mr Mellsop would guarantee payment by Marinescape as its cash flow allowed. Liability under the guarantee would not therefore arise unless Marinescape defaulted in paying Davy Engineering as its cash flow allowed, based on this wording set out in this letter. The Court went onto find that Mr Mellsop was liable for specific items owing under the contract.
In my opinion, Davy Engineering was particularly lucky to have judgment entered in its favour based upon this guarantee.
In summary, if requesting a guarantee from a Debtor, it seems to me that you are best to send them with a form of document for them to sign, ideally drafted by a solicitor. Better still, at the time of commencement of the contract, ask the Principal of the Company you are contracting with, to guarantee those amounts that become due and owing under the contract. A tightly drafted personal guarantee, may well avoid the need to have to argue about its meaning in Court.
Looking at this case from the other side, be wary of using the words guarantee in correspondence if you are trying to keep commercial relationships alive and viable. The Courts will construe their meaning from the standpoint of the recipient of that correspondence.