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Queensland University of Technology

Nick Dowse Guarantees Guarantees – Structure of Answer 1. Draw a diagram of the relationships. a. Guarantor = person who gives the guarantee, person who will pay if the debtor defaults b. Creditor = person who takes the guarantee, the person lending the money to the debtor c. Debtor = person whose performance is being guaranteed 2. Definition of guarantee a. A guarantee is a collateral contract to answer for the debt of another who is liable to the creditor (McDonald v Dennys) b. There are 3 different relationships i. The creditor and the debtor have a contractual relationship, which is the principal/head contract. ii. The creditor and the guarantor have a contractual relationship, which is the collateral contract – the guarantee. iii. There is an overarching relationship between the 3 parties which does not depend at all on contract, but can be. c. The assumption of a personal liability by the guarantor is not essential (Perry) i. The guarantor can give a mortgage of their land to secure the debt of the debtor, in which case the land is available to make good the debt, but liability of guarantor is limited to value of land because there is no personal promise. ii. The guarantor can deliver a cheque to the creditor as security for the amount of a debt lent to the debtor – there is no personal promise here – limited to amount of cheque. d. A guarantee can be given to secure the payment of a debt (Moschi) i. i.e. if debtor defaults, guarantor to pay a liquidated (pre-defined) amount. e. A guarantee can be given to secure performance of other obligations (Moschi) i. i.e. if debtor defaults, the creditor’s action is for damages for breach of contract (not liquidated damages). f. A guarantee is not a promise to “see to it” that the principal debtor fulfils their obligations (Sunbird). 3. Is this a guarantee? (distinguish from other things it could be) a. Just because the contract refers to itself as a “guarantee” does not mean it is a guarantee – terminology not conclusive. (Western Credit) b. Is it an indemnity? i. Whether a contract is a guarantee or an indemnity is a question of construction. ii. They are not mutually exclusive – the contract can be an indemnity and a guarantee. iii. An indemnity is a contract by which one person promises the promisee to save them from loss they might suffer as a result of entering into the transaction with the debtor, at the request of the promisor. 1. Thus, it is a primary obligation. iv. It will be an indemnity when there is a promise to make good a loss, and no other party is responsible for that loss (Direct Acceptance) 1. In a guarantee, obligation is to step in upon the default of another to pay (Western Credit) v. It will be an indemnity if the contract requires the making good of any and all loss (ie the totality of the transaction) 1. In a guarantee, obligation to make good only particular breaches of a contract, so that they can be enforced. vi. It will be an indemnity where the liability of the guarantor under the contract is different to the liability of the debtor under its contract (Direct Acceptance) 1. In a guarantee, the liabilities of both parties must be identical (Western Credit). vii. Examples: Page 1 of 7 Nick Dowse Guarantees 1. Document described as “guarantee”, but says “to indemnify you” in this “guarantee” = guarantee because liability under the contract was not consistent with that of an indemnity (Western Credit v Albury) 2. If contract does not rely on any default by the debtor (ie creditor can call on guarantor when there might be some future default) = indemnity because gives more protection than would get under guarantee (Direct Acceptance Finance v Cumberland Furnishing) viii. Relevance of Finding of Guarantee or Indemnity 1. If guarantee, requires writing under s 56 PLA, signed by the party to be charged or their agent. a. Can be note or memorandum. b. If indemnity, no writing required. 2. If guarantee, the guarantor’s liability depends on the liability of the principal debtor to the creditor. a. If indemnity, does not rely on the liability of the debtor, but instead can result from a breach of another contract. 3. If guarantee, the guarantee is unenforceable against the guarantor when the principal/head contract is void or voidable. a. If indemnity, indemnity enforceable notwithstanding ineffectuality of principal/head contract. 4. If guarantee, guarantor be completely discharged from all liability if creditor breaches terms of guarantee, or puts the guarantor in a worse position without their consent. a. If indemnity, this conduct will not discharge the indemnifier. c. Is it a contract of insurance? i. An insurance contract is a promise to pay if an event happens, not upon the default of another. ii. It is a direct, independent contract. iii. This higher risk influences the insurance premium, so insurances require the uberrimae fidei (utmost good faith). 1. Whereas, in a guarantee, there is only a limited duty of disclosure, and there is no bargaining about the risk in a guarantee. d. Is it a letter of comfort? i. This is often given as an alternative to a guarantee. ii. It is a statement of intention to the creditor that the letter-writer will ensure that the debtor is maintained in a financial position that will allow them to meet their obligations to the creditor under the creditor’s contract with the debtor. iii. The authorities are divided as to whether or not these letters are binding 1. Need to ask: is there an intention to create a legally enforceable obligation? Are the statements sufficiently promissory to be binding? iv. There is generally no assumption of secondary liability with a letter of comfort; instead, if the writer does not follow the letter of comfort, providing it is enforceable, the creditor can sue the writer for damages. 4. Formalities, if guarantee a. A guarantee is only enforceable if it complies with the writing requirements under the statute of frauds i. Section 56(1) PLA requires the promise, or some note or memorandum of the promise, to be in writing and signed by the party to be charged (the guarantor), or that party’s agent. ii. NOTE: the consideration need not be included in the writing (s 56(2) PLA) b. Consideration must be provided, or the guarantee must be a deed under seal (Barrell v Trussel) i. Consideration for the contract must come from the creditor, but need not pass to the guarantor (ie must move from the promisee but need not move to the Page 2 of 7 Nick Dowse Guarantees promisor) ii. Ordinarily, the consideration is the creditor entering into the transaction with the debtor. c. All the other usual requirements for contracts must also be fulfilled so that the contract is binding i. Offer, acceptance, intention to create legal relations, certainty, capacity etc. d. Conclusion: guarantee meets all formalities or not… therefore prima facie valid and enforceable or not. 5. Company Directors’ Guarantees (only discuss if relevant) a. If a director of a company signs a guarantee, the issue can arise as to whether the obligation is personal or the company’s. b. It is necessary to look at the terms of the contract and the surrounding circumstances (Re Fletcher) c. If sign “Nick Dowse, Director” then better view is that the word ‘director’ is merely descriptive of office held, not enough to bind company (Re Fletcher). i. i.e. does not sign as agent of company ii. Signing “as director” is unlikely to avoid/exclude personal liability d. There is no technical term “directors’ guarantees” e. If the company director is guaranteeing the debt of its own company, then the guarantee must be given in the director’s personal capacity as to hold otherwise would mean that the company is guaranteeing its own debt, which would be worthless. 6. Factors Affecting Validity a. Possible bases for attack: i. Non-disclosure ii. Unconscionable conduct iii. Husband/wife rule from Yerkey v Jones iv. Undue Influence v. Misrepresentation vi. Mistake b. Non-Disclosure i. Guarantees, unlike some contracts, are not contracts of utmost good faith (uberrimae fedei), so there is no general duty on the creditor to disclose financial information about the debtor (Goodwin v NAB) 1. In fact, the creditor cannot disclose much information because they also owe a duty of confidence to the debtor (i.e. if bank making a loan, even if debtor has not been their customer, once they start negotiating for a loan, there is a CL duty of confidence). ii. However, if there is unusual features to the transaction, or if the creditor is asked a question by the guarantor, must disclose (unless prohibited by CL duty of confidence) (Amadio). iii. The reason a creditor must disclose anything unusual is because if they do not, it amounts to an implied representation that the unusual thing does not in fact exist (Amadio per Gibbs CJ). iv. Examples: 1. If debtor has given guarantee to someone else = not unusual, guarantor should expect it (Goodwin v NAB) 2. If debtor in financial difficulties and bank knows = not unusual, bank asking for guarantee means they are not wholly satisfied that the debtor will be able to pay the debt (Amadio) 3. If debtor in joint venture with creditor’s subsidiary = not unusual if doesn’t relate to particular transaction being guaranteed (Amadio) 4. If creditor agrees to increase overdraft with a view to quickly reducing it/clearing it once have guarantee = unusual – must disclose. Idea is to make debtor look financially sound to guarantor. Makes it much more Page 3 of 7 Nick Dowse Guarantees likely guarantor will be called on – so must disclose (Amadio) 5. If creditor is selectively dishonouring debtor’s cheques = unusual – must disclose. Idea is to make debtor look solvent when not. c. Unconscionable Conduct i. To show unconscionable conduct, need to show 3 things: (Amadio) 1. The guarantor must be at a special disadvantage or have a disability
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