Time and time again we come across a reminder of what can go wrong with a badly drafted agreement. Best case scenario, the supplier does not need to refer to the contract, worst case, it costs millions.
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 be reviewed by a lawyer, even in situations where the contractual provisions appear to be unequivocal.
This point came home in the recent case of Asset Flooring v North  VSC 31 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.
Rahan Construction Pty Ltd (Rahan) opened a credit account with Asset Flooring Pty Ltd (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 4 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 defence, North argued that Asset’s right to immediate payment was in fact suspended by clause 8 of the Deed and that any action instituted before a dividend payment was received from the liquidators was premature. Clause 8 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.”
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 8 did in fact suspend Asset’s right to immediate enforcement and awarded judgment in North’s favour.
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 intend. His Honour held that clause 8 was only applicable should a dividend actually have been received and did not impact the immediate rights afforded by clause 4. He considered that until a dividend payment had been received by Asset clause 8 lay “dormant” and accordingly granted the appeal, thus reinforcing the common law position.
The case has confirmed the common law principal that a creditor can enforce payment from a guarantor immediately. The facts however do 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 Robinson can assist companies in reviewing and accurately drafting Deeds of Guarantee and other commercial legal documents to ensure their effectiveness and enforceability.
For more information, please contact Dajana Malnersic on 02 9234 1500.