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Contractual ambiguity - even in clarity there can be doubt

Terms of commercial agreements need to be clear and unambiguous, however suppliers often learn the hard way that their Credit Agreements, Deeds of Guarantee, Supply Agreements and the like should have been reviewed by a lawyer, even in situations where the contractual provisions appear to be unequivocal to a layman.

This point came home to roost in the recent case of Asset Flooring Pty Limited v North [2016] VSC 31 in Australia where the correct interpretation of two seemingly conflicting clauses in a supplier’s Deed of Guarantee was determined on appeal by the Supreme Court of Victoria.

Facts

Rahan Construction Pty Limited (Rahan) opened a credit account with Asset Flooring Pty Limited (Asset), for the purchase of flooring material.  Rahan’s director, William North (North), personally guaranteed Rahan’s payment of all moneys owing to Asset.  A little more than a year later Rahan went in to liquidation which caused Asset to immediately seek payment from North pursuant to the guarantee given by him.In seeking judgment against North, Asset relied on clause four of the guarantee, the wording of which was very similar to that contained in many Deeds. It read as follows:

"…that all moneys owing or which may become owing by the customer to the company shall become immediately owing… upon the appointment of … a liquidator..."

In his defense, North argued that Asset’s right to immediate payment was in fact suspended by clause eight of the Deed and that any action instituted before a dividend payment was received from the liquidators was premature.  Clause eight was in the following terms:

"..any guarantor’s rights… shall not arise until the company has received the full amount of the company’s claim … and this guarantee … shall be a security to the company for the payment of any ultimate balance which shall remain due to the company."

Outcome

Surprisingly and despite the common law principle that guarantors cannot force creditors to seek payment from the debtor first, the court at first instance held that the rather unique clause eight did in fact suspend Asset’s right to immediate enforcement and awarded judgment in North’s favor.

On appeal, Justice Dixon took the view that contractual interpretation should encourage commercial efficiency and exclude inconvenience in a way that a reasonable business person would have intended.  His Honour held that clause eight was only applicable should a dividend actually be received and did not impact the immediate rights to collection afforded by clause four.  He ruled that until a dividend payment had been received by Asset, clause eight lay “dormant” and accordingly reversed the magistrate’s decision, thus reinforcing the common law position that it is the duty of the guarantor, not the creditor, to ensure that the debtor performs the principal obligation. 

Practical application

The case has confirmed the common law principal that a creditor can enforce payment from a guarantor immediately.  The facts also serve as a timely reminder of the need to ensure that contractual terms are clear.  In doing so, suppliers will not only achieve the contractual objective sought but also save on unnecessary litigation costs and headaches. 

Polczynski Lawyers can assist companies and individuals in reviewing and accurately drafting Deeds of Guarantee and other commercial legal documents to ensure their effectiveness and enforceability.

For more information contact Polczynski Lawyers, Sydney, Australia : Dajana Malnersic or David Dadic on +61 2 9234 1500.

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