It is not uncommon for guarantors to raise technical defences when seeking to avoid liability.

In a recent Western Australian case, Australian Regional Wholesalers Pty Ltd v Gardiner [2014] WASC 439, a supplier was owed a significant amount by its customer. To deal with this, the supplier took a very common approach and stopped supply.

The customer then paid the outstanding debt, and asked the supplier to resume supply on credit. The supplier agreed, but required the directors of the customer to provide personal guarantees. The customer’s directors provided these guarantees. At the time, the customer did not owe the supplier any money and no further goods had been supplied on credit.

Approximately two weeks after the guarantees were given, the customer sent a completed credit application to the supplier in which the customer sought credit up to the limit of $75,000.

The customer then incurred a liability of approximately $737,000 on the credit account.

After not receiving payment, the supplier sued the guarantors for the amount of the outstanding debt.

The clauses in the guarantees

The guarantees provided:

  • that they were provided in consideration of the supplier, at the request of the guarantor, having supplied and/or agreed to supply from time to time hereafter goods and/or services’;
  • by clause 1, that the guarantor guaranteed the payment by the customer of all amounts due and owing by the customer on any account whatsoever in respect of goods and services purchased by the customer from the supplier;
  • by clause 2, that the guarantee would be a guarantee for the whole debt owing by the customer to the supplier in respect of goods and services purchased.

The guarantors’ defence

The guarantors argued they were not liable because the guarantees were:

  • not in the form of a deed;
  • not enforceable as an agreement because, at the date of the guarantees, there was no consideration from the supplier;
  • unenforceable, because the supplier had allowed the credit limit to increase above the $75,000 limit, substantially prejudicially affecting the rights of the guarantors.
  • Alternatively, they argued their liability was limited to $75,000.

The dispute about deeds and consideration

The Court held that the guarantees had not been executed as a deed and that they would need to be supported by relevant consideration from the supplier in order to be enforceable.

The guarantors argued that there was no consideration because, when the guarantees were provided:

  • there was no outstanding debt owing to the supplier and the supplier had not agreed to supply any goods on credit;
  • the credit application was provided some two weeks after the guarantors signed the guarantees;
  • there was no agreement for the supplier to supply goods until the supplier accepted the credit application and this happened when the supplier accepted the first order for goods;
  • the guarantees used the words ‘having supplied and/or agreed to supply from time to time hereafter’.

The expression ‘having supplied and/or agreed to supply from time to time hereafter’ was ambiguous because the provisions of the guarantee seemed to operate in relation to future agreements to supply.

To resolve this ambiguity, the Court took into account evidence of the surrounding circumstances and the objective aim of the transaction, including the fact that the guarantors knew that the supplier would not enter into a new trade agreement unless the guarantees were provided. Taking this into account, the Court interpreted the phrase as referring to agreements made after the guarantees were signed. This being the case, consideration had been provided by the supplier for the guarantees.

Were the guarantees limited to $75,000?

After determining that there was sufficient consideration, the Court had to consider whether there was a limit to the guarantors’ liability under the guarantees.

On this issue, the guarantors argued that their exposure under the guarantees should be limited to $75,000 on the basis that the director of the customer identified this amount in the credit application.

However, this argument was not successful because:

  • the guarantors did not communicate to the supplier their intention for the guarantees to be limited to $75,000;
  • no matter what the subjective intention may have been when specifying the credit limit figure, the director did not communicate to the supplier any connection between the figure of $75, 000 and the guarantees;
  • it was inconsistent with clauses 1 and 2 of the guarantee;
  • the guarantors were the directors of the customer and they controlled their exposure under the guarantees – there was no reason why they could not have ensured that no more than $75,000 worth of goods was supplied on credit;
  • it was not enough for the guarantors to argue that they did not personally place the orders and that project managers (in what was a relatively large organisation) were in fact responsible for placing orders; and
  • the guarantees operated by their terms, were not subject to any limitation by reference to the credit application and extended to all amounts due as a result of goods supplied to the customer.

Implications

Guarantees are often signed as deeds and, if this is the case, you must comply with the statutory requirements for signing deeds. These requirements are different for individuals and companies and also vary across the States and Territories. You should always obtain advice to make sure you are complying with the relevant requirements.

For suppliers it is important to ensure that:

  • if the guarantee is not a deed, there is consideration for the guarantee and that consideration is clear and unambiguous;
  • the guarantee includes other provisions to protect the supplier from the risk of equitable defences being raised by the guarantor; and
  • the guarantee states the conditions that must be satisfied by a guarantor to give notice revoking the guarantee in relation to future liabilities not incurred.

For guarantors, care needs to be taken to make sure that:

  • guarantees are reviewed and understood before they are signed;
  • if a guarantee is to be limited, this is clearly stated;
  • guarantors are aware of any clauses that:
    • extend their liability to ‘all money’ owing by a customer;
    • exclude any equitable defences they could make;
    • place conditions on the ability to revoke the guarantee in relation to future liabilities not incurred;
    • provide security rights to any supplier that could affect the guarantors’ assets.