Recovering fees

Professional firms seeking to enhance the prospect of recovering their fees from companies by obtaining a personal guarantee from an individual director, and a director in the position to be giving such a guarantee, should take heed of the recent High Court decision of Manches LLP v Freer [2006] EWHC 991, in which the advising firm, M, brought an action against F for the recovery of unpaid fees of G, a company of which F was a director and shareholder.

It is a timely reminder of the need to take considerable care if it is intended that payment of fees is to be guaranteed by an individual director by the same document as that establishing the retainer. For an officer of the client company, it will come as a relief to know that specific terms have to be agreed before personal liability results.

Background facts

M's standard terms of business included the following :

''¦Where our client is a company, then the directors shall be liable for our fees and disbursements in the event that the company fails to pay them'¦ By signing and accepting both [M's terms of business and engagement letter] you are accepting that you fully understand the contents
of the terms of business and engagement letter'¦'

At a meeting in April 2004, F was presented with a letter of engagement addressed to him and two copies of M's terms of business in relation to three separate retainers. F did not sign a copy of the terms of business, but he did countersign the letters of engagement beneath the wording: 'I confirm that I agree to the terms of this letter and the terms of business enclosed with it.'

Issues in dispute

M sought to recover its fees from F personally on the bases that, by signing the engagement letters, F had guaranteed payment of M's outstanding fees and disbursements in the event that the client company, F, failed to pay them in accordance with M's terms of business and that verbal assurances given by F that he would be paying M's fees amounted to an acknowledgement of his personal liability.

There was, however, no express agreement or understanding that F would sign both in his capacity as a director and personal capacity and M did not consider whether F should sign the documents twice. There was also no discussion as to the capacity in which F did in fact sign the letter.

Court decision

In assessing whether F could be personally liable, Judge Price QC considered two authorities in which agreements had been signed in two capacities. In VSH Ltd v VKS Transport Ltd and Stevens [1964] 1 Lloyds List 460, the managing director of VKS had signed the relevant documents 'being a director of and duly authorised in that behalf by [the name of the company]'. By signing the documents in this way, he was held to be bound by a personal guarantee to pay the liabilities of VKS. Unlike the present case, however, there had been some discussion as to whether the MD needed to sign the relevant paperwork twice and it was agreed between those present at the time that one signature from him would be sufficient to bind both VKS and himself personally as guarantor. Equally, in Young v Schuler [1883] 11 QBD 651, the agreement in question expressly named S as a guarantor and he also signed his own name as well as that of the company. The court therefore found that S had intended to sign on his own behalf as well as the company of which he was a director.

In Manches, however, there was no discussion as to whether F intended to bind himself and/or to render himself personally liable, nor was his signature of the engagement letters qualified in any way. His assurances as to funding were therefore to be treated only as 'mere statements of comfort', reiterating his willingness to make available funds to the client companies to discharge their outstanding fees. Consequently, it was held that F had signed the letters of engagement on behalf of the companies only and had not intended to bind himself legally to any guarantee of payment of sums to M by G and the claim failed.

Practice points

This case illustrates the need for all professional firms to take particular care if they seek to enjoy the protection of a personal guarantee. As well as ensuring that any guarantee is recorded in writing (as is required by the Statute of Frauds 1677), if a director's signature of a legal document is intended to serve a dual purpose and bind not only his company but also himself personally, that intention should be discussed and documented between the parties beforehand.

If possible, any signature should also be qualified to make the status in which it is signed unequivocal. Mere reliance upon an unqualified signature, unsupported by a common understanding and/or agreement as to its purpose, is unlikely to be sufficient, and verbal assurances in isolation that sums will be paid personally will be unlikely to assist.