What’s in a name: can an unnamed principal enforce a guarantee provided to its agent?

A recent Victorian Supreme Court decision considered the issue of whether or not an unnamed principal can enforce a guarantee that has been provided to its agent.

The decision in Goldsmith v Macquarie Leasing Pty Ltd [2013] VSC 332 (Goldsmith) confirmed that an unnamed principal can enforce a guarantee entered into by its agent in circumstances where it is clear that the benefit of the guarantee was intended to apply to the principal.

Background

In Goldsmith, a hire purchase agreement (HP Agreement) for broadcasting equipment was entered into between Corporate Finance Pty Ltd as the financier (Financier) and YoMo Australia Pty Ltd as the customer (Customer).  However the Financier entered into the agreement as the agent of Macquarie Leasing Pty Ltd (Principal). 

The HP Agreement named each of the directors of the Customer as guarantors.  The Principal was not named in the HP Agreement.

The Customer defaulted under the HP Agreement and the Principal and the Financier commenced proceedings against the guarantors to recover the outstanding debt.

The issues

The main issue to be determined by the Court was whether or not the Principal was entitled to enforce the guarantee in the HP Agreement even though it was not a party to the HP Agreement and was not a disclosed principal of the Financier.

The directors defended the claim on the basis that the Principal was not entitled to enforce the guarantee against them in the Principal’s capacity as an undisclosed principal.

The decision

The earlier case of Garrett v Handley (1825) 4 B & C 664 (Garrett) established that if a party to a guarantee is acting as an agent for a principal, the principal may enforce the guarantee even though it is not named within the guarantee. 

Justice Dixon found similarly in Goldsmith, that the whole of the HP Agreement demonstrated that the guarantee was not intended to be solely for the benefit of the Financier.  The guarantee was clearly intended to be for the benefit of the “Owner” which extended to the Principal.  “Owner” was defined as “the person described in the schedule” to the HP Agreement and its assigns.  The schedule noted the Financier as the “Owner”.  Furthermore, references to a “person” in the HP Agreement also included that person and its successors.  For the purposes of this case, the definition of “Owner” was therefore found to constitute a disclosure of the Principal.

However, Justice Dixon considered that even if the definition of “Owner” was not taken to have disclosed the identity of the Principal, the Principal was entitled to enforce the guarantee.  In Capital Finance Australia Ltd v Karabassis [2003] NSWSC 737 the court found that, based on the principles of Garrett, an undisclosed principal was entitled to sue on the guarantee.

Lavan Legal comment

Although the decision in Goldsmith supports the position that an undisclosed principal is entitled to enforce a guarantee, it would be prudent to disclose the identity of any known principal in the relevant finance agreement and in the guarantee (if it is a separate document), to avoid any issues arising in an enforcement context.

Furthermore, an undisclosed principal can only rely on this rule if it is clear from the terms of the guarantee, that the benefit of that guarantee is intended to extend to the principal. 

Financiers need to ensure that the terms of a guarantee to be provided to an agent sufficiently capture the principal’s ability to enforce that guarantee; whether by actually disclosing the principal or by incorporating terms which extend the benefit of the guarantee to the undisclosed principal.