Key Points: Guarantees in commercial contracts will need to be
carefully reviewed to ensure the guarantor isn't liable for the
payment of a non-existing obligation.
Can you guarantee payment of an obligation which doesn't
The answer, according to the Supreme Court of Victoria, is
definitely Yes. In a recent case, it said that a guarantor of a
seller's obligations could be liable even if the seller was
no longer subject to the obligations.
The court's reasoning will require a careful
re-examination of the drafting of guarantees in commercial
It's relatively common for a seller's obligations under
a sale agreement to be guaranteed by a parent company. It's
also market practice for many of the seller's obligations under
the sale agreement to be subject to a range of limitations eg.
minimum claim thresholds and time limitations.
It has widely been believed that a buyer could not make a claim
against the seller's guarantor if the buyer could not bring
that claim against the seller.
The Supreme Court of Victoria has now cast significant doubt on
this general proposition.
The facts in Healthscope v Australian Hospital
In Healthscope v Australian Hospital Care, the share sale
agreement allowed the buyer to make claims against the seller for
outgoings and other normally apportioned expenses.
The sale agreement expressly provided that any claim for these
expenses/outgoings had to be made within 12 months from the
The buyer subsequently wanted to make such claim. Unfortunately
for the buyer, the 12 month limitation period had expired. The
buyer decided to claim under the guarantee instead.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
The court dismissed the buyer's claim on other grounds.
However, it considered whether the buyer could have claimed under
the guarantee, even though the seller's obligations under
the apportionment clause had expired.
The court thought that this issue was "not free from
difficulty". Nevertheless, it believed that the better view
was that the time bar did not apply to claims for the same thing
under the guarantee.
On this view, therefore, the buyer could claim against the
guarantor even after the time limit had expired.
This will no doubt be a very surprising outcome for most M&A
practitioners. The idea that a buyer can essentially override the
extensive and usually very closely negotiated limitation provisions
seems profoundly contrary to the risk allocation agreed between the
parties. For instance, the same rationale would mean that a maximum
cap limitation (eg. X% of the purchase price) may not apply to
claims made directly by the buyer against the seller's
guarantor (ie. liability would be unlimited). Other limitations
(eg. warranty claim periods) may also not apply to claims made by a
buyer against the seller's guarantor.
In the Healthscope case, the court made specific reference to a
term of the guarantee which preserved the guarantor's liability
notwithstanding the invalidity or unenforceability of the
seller's obligation or liability. With respect, this is a very
standard provision included in guarantees for other reasons. It is
difficult to conclude that the parties to a commercial contract
would have intended this type of provision to preserve liability
when it is essentially the buyer's own delay which has resulted
in it being unable to claim against the seller.
It remains to be seen whether future cases will follow the
court's surprising views on this issue. Nevertheless, prudent
guarantors should now be more hesitant to give a seller's
guarantee unless it is expressly made subject to the same
limitations that apply to the seller's liability.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).