Breach of contract by a creditor may void a guarantee

November 2, 2015

Breach of contract

In a decision that is of importance to directors of companies and companies that commonly execute guarantees over loan arrangements, the New South Wales Court of Appeal has handed down the decision in Adisan Pty Ltd v Irwin (2015) NSWCA 217.

The Court decided that in some instances where a creditor has breached a contract then the guarantor should be released from liability under a personal guarantee.
In the Adisan case, there were six guarantors involved in guaranteeing a borrower who borrowed money from a lender for a residential development.  The lender agreed to cap the liability of one guarantor and entered into an agreement with that guarantor.  The other guarantors did not know that the liability of one guarantor had been capped and assumed that all guarantors were jointly and severally liable for the loan.  The guarantee given by all guarantors required that arrangements made with any guarantees were to be disclosed to all other guarantors.  

The Court found that by not disclosing the arrangement to all guarantors, the lender breached the contract as it should have obtained the consent of all guarantors before entering into the new agreement.  

The Court refused to enforce the guarantee.

Lenders and guarantors should carefully consider what contractual obligations are imposed on them and should be careful not to breach their contracts. As was seen in this case, a consequence of breach of a contractual obligation may be that a guarantor is discharged from the personal guarantee. 

 

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