Principles of Enforcement of a Guarantee

Taylor Square TT Pty Ltd v Kinselas Pty Ltd (No 2)[2024] NSWSC 987 (9 August 2024) affords a helpful discussion on the legal principles applicable enforcement of a guarantee. Rees J wrote:  

20. Before considering whether the Court ought compel the guarantor to perform his obligations, it is necessary to consider the scope of those obligations. The guarantee forms part of a commercial contract. The relevant principles of construction are notorious, recently repeated in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 at [27], quoting Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 at [16] (per Kiefel, Bell and Gordon JJ):

“It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.”

21. If after considering the contract as a whole and the surrounding circumstances, the Court concludes that the language of a contract is unambiguous, then the Court must give effect to that language unless to do so would give the contract an absurd operation: Cherry v Steele-Park (2017) 96 NSWLR 548; [2017] NSWCA 295 at [73]-[75] (per Leeming JA, Gleeson and White JJA agreeing).

22. When construing a contract of guarantee, the court is still entitled to look to the general setting in which the contract came into existence but the liability of a guarantor is strictissimi juris and ambiguous contractual provisions in a guarantee should be construed in the surety’s favour: Ankar at 561; Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28 at [17]-[19], [23]. Doubt as to the construction of a guarantee “may arise not only from the uncertain meaning of a particular expression but from its apparent width of possible application”: Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [53] (per Gummow, Hayne, Heydon, Kiefel and Bell JJ).

23. As an aspect of the contra proferentum rule, it should be used whilst “bearing in mind the fundamental purpose of construction of a document, namely, to ascertain the intention of the parties arising from the document as a whole and reading the document with such background information as was known by all the parties to it”: Rava v Logan Wines Pty Ltd [2007] NSWCA 62 at [51], [53] (Campbell JA). As Campbell JA there explained, “The contra proferentem rule is to be used only where the document is otherwise ambiguous, and … is a principle of last resort …. Where it is understood in that way, the application of the principle for construction of guarantees … does not involve preparing a list of all the possible meanings of a clause that the language can bear without breaking, and choosing the meaning that it most favourable to the guarantor … Rather, the choice is limited to choosing amongst meanings that are fairly open by reason of the application of other rules of construction”: at [55]-[56].

24. The contra proferentum rule is of limited assistance here, where Mr Toma did not identify any ambiguity in the contractual provisions.

25. As to the scope of a guarantor’s obligations, it has been said that the liability incurred by a guarantor when guaranteeing the principal’s performance of a contract may be an undertaking by the guarantor to render the performance contracted for should the principal not render it or a promise to ensure (‘to see to it’) that the principal performs: M P Ellinghaus, “Essentials of the Modern Law of Guarantees” (1989) 2(2) Corporate & Business Law Journal 144 at 145-6. (Where the guarantor’s obligation is to ‘see to it’ that the principal performs their obligations, then the guarantor may be entitled to an order for specific performance compelling the principal to perform their obligation: Moschi v Lep Air Services Ltd [1973] AC 331 at 348 (Lord Diplock).) Everything turns on the terms of the guarantee, where “the parties are at liberty to make such agreement as they choose”: Sunbird at 256; Ellinghaus at 147.

26. In Sunbird, Mason CJ (Deane, Dawson and Toohey JJ agreeing) rejected any general proposition that a guarantee is an undertaking to ‘see to it’ that the principal contract is performed: “It is fictitious and quite unrealistic to suggest that this version of the guarantor’s undertaking, rather than a promise to ‘answer for’ the debt or default of the debtor, is the true nature of the guarantor’s obligation”: at 256. In doing so, Mason CJ preferred the views expressed by Lord Reid in Moschi,where the House of Lords considered a guarantee of a debtor’s payment of a £40,000 debt by weekly instalments. The question was whether the guarantor was liable for instalments due and payable when the contract between the creditor and debtor was terminated, or liable for all instalments payable under the contract even if not then due. Lord Reid observed at 344-345:

“… there are at least two possible forms of agreement. A person might undertake no more than that if the principal debtor fails to pay any instalment he will pay it. That would be a conditional agreement. … There would then on the debtor’s failure arise an obligation to pay. …

On the other hand, the guarantor’s obligation might be of a different kind. He might undertake that the principal debtor will carry out his contract. Then if at any time and for any reason the principal debtor acts or fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor, not for the unpaid instalment but for damages. His contract being that the principal debtor would carry out the principal contract, the damages payable by the guarantor must then be the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor undertook that he would do.”

27. Lord Reid considered that the guarantee was of the latter type – the guarantor undertook that the principal would carry out their contract – and the guarantor was liable to pay damages, being all instalments payable under the contract even if not then due. (As Lord Reid noted, the two classes of guarantee considered in Moschi were not exhaustive.) Mason CJ agreed in Sunbird; where a guarantor gives an undertaking that a debtor will carry out their contract “a failure by the debtor to perform his contract puts the guarantor in breach of his”: at 256.

28. In Sunbird, the vendor agreed to sell a home unit ‘off the plan’ to the purchaser. A deposit was payable on exchange of contracts and the balance was to be paid “upon settlement”. Two guarantors jointly and severally guaranteed “THE PERFORMANCE BY the said abovementioned Purchaser OF ALL THE TERMS AND CONDITIONS of the Contract including the payment of all moneys payable hereunder by the said abovementioned Purchaser.” The vendor obtained orders for specific performance against the purchaser, which were not complied with. The vendor then sought to recover the purchase price from the guarantors. That is, the Court did not consider whether the vendor was entitled to an order for specific performance against the guarantor, but whether the purchase price was “moneys payable” by the purchaser and thus within the scope of the guarantee. Where the contract of sale obliged the purchaser to pay the balance of the purchase price “upon settlement”, the vendor was not entitled to sue for the purchase price where the contract had not been completed by conveyance, following McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476 (Dixon J).

29. Mason CJ considered that the guarantors promised that the purchaser would perform their obligations including payment of all “moneys payable”, but the balance of the purchase price did not become payable: at 257. Mason CJ rejected the suggestion that such a construction failed to give effect to the purpose which the guarantee must be taken to have served, where the terms of the guarantee were specific and clear on the point: at 257-8. Gaudron J came to a similar conclusion, observing at 271:

“The guarantee does not in terms oblige the [guarantors] to pay the balance [of the] purchase price in the event of the purchaser’s failure to complete the contract. In the context where, as here, the purchase price is payable by the purchaser upon settlement and is not recoverable as a debt prior to settlement, a promise of ‘performance by the … purchaser of all the terms and conditions of the contract including the payment of all moneys payable …’ does not, standing alone, import an obligation that the [guarantors] will themselves pay the balance purchase price if the purchaser fails to do so. Such an obligation, if it exists, must be spelt out from the word ‘guarantee’ in its particular contractual setting.”

Her Honour considered that the contractual setting did not permit the implication of an obligation that the guarantors would pay the purchase price, when regard was had to other contractual provisions which altered the guarantors’ obligations if the contract was assigned by the purchaser: at 271-2.

 (emphasis added)

A link to the decision is here.