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Quick overview

  • Supply contracts that include director’s guarantees often contain “fine print” charging clauses that charge any land which the director owns as security for the director’s guarantee obligations.
  • This allows the supplier to lodge a caveat over land owned by the director.
  • Generally speaking, these clauses are legally effective.

Guarantee and charging clauses in supply contracts

Given that the company is the preferred vehicle for operating a small business, it is not surprising that businesses which supply goods or services on credit to companies often insist on obtaining some form of security from the company’s directors, in case the company itself (being the customer) has no assets to satisfy a judgment debt if the supplier sues the company for unpaid invoices.

A reasonably common scenario is that a director of a company which has hit financial trouble suddenly finds that his or her family home has had a caveat placed on it by a supplier of goods or services to the director’s company.

How can this happen?

Read the fine print

Often, a supply contract provided to a company will incorporate a guarantee from the company’s directors (i.e., the directors of the company guarantee the company’s obligations to the supplier).

Often, the guarantee clause will contain a “charging clause”, under which the director charges any interest he or she has in real property, including property acquired after signing the guarantee, as security for the director’s guarantee obligations.

The magic words required to charge a property as security for payment of a debt can be as simple as the following one liner: “The guarantor charges all of his or her real property (present or future) as security for the guarantor’s obligations under this guarantee.”

The use of these magic words (or words similar to them) allows the supplier to put a caveat over the guarantor’s property, including the family home, to protect the supplier’s interest in any land which the director owns. The supplier can then apply to the Court for the property to be sold in order to realise its security.

The validity of such clauses was upheld relatively recently in Re Carter Holt Harvey Woodproducts (Australia) Pty Ltd (No 1) [2017] VSC 499.

Lessons

  1. If you are a director of a company signing a supply contract, read the fine print carefully and be on the look out for charging clauses.
  2. If you are a supplier, consider adding a charging clause into your standard terms, but be wary that in NSW it may be subject to challenge under the Contracts Review Act 1980(NSW), and also possibly subject to challenge under the unfair contract term provisions of the Australian Consumer Law that apply to small businesses.