The modern commercial environment is awash with companies, trusts and special purpose vehicles, as well as real people acting both as officers of such entities and for themselves personally. When preparing agreements it can be challenging to ensure that the drafting of your documents and your internal processes will put all the "fish" you want to catch "on the hook".

In Gounden v Lovegrove Realty Ltd [2012] NZHC 2010, the High Court allowed an appeal by an individual who had been found personally liable in the District Court to pay a real estate commission under a listing agreement.

The owner of the relevant property was a company of which Mr Gounden was a co-director. Mr Gounden's co-director signed the listing agreement, seemingly on behalf of the vendor (although erroneously adding that he was signing as a trustee). There were several amendments to the description of the vendor in the agreement before the correct vendor company was added, one of the crossed out parties being a trust.

The listing agreement included a clause whereby the person signing for the vendor warranted that:

  • If they were a joint owner, they had the authority of all owners to enter the agreement
  • If the vendor were a trust, all trustees had consented to enter the agreement, and the trustee executing would be personally liable under the agreement.

The Court confirmed the default position that a director does not incur personal liability for a company's obligation due only to having executed the relevant document on behalf of that company. Even if the company was holding the property as trustee, it was the company that would incur liability under the clause in question, and to treat the directors as trustees for this purpose would ignore the separate legal personality of the company and the directors. Further, even if the clause did apply, it would not apply to Mr Gounden, as he was not the one who executed the agreement. Mr Gounden's physical presence (or otherwise) at the signing of the agreement was seen as irrelevant.

Gounden v Lovegrove is a useful reminder to carefully consider clauses in any agreements that are intended to deal with risk in relation to who actually signs agreements. For example, when dealing with companies, it may be desirable to include explicit provision for personal guarantees from the directors or shareholders of the relevant company. Of course, the desire to spread the net of liability as wide as possible must be weighed against whether it is commercially appropriate in all the circumstances to impose liability. In any case, it is always useful to understand the limitations of any such provisions (or lack thereof), as this understanding can inform internal processes and decisions regarding:

  • Whether the correct entity is described as the party to an agreement
  • The relationship between the actual person(s) with whom you are dealing and the party to the agreement
  • The relationship between the person(s) actually signing the agreement and the party to the agreement.