In Padstow Corporation Pty Ltd v Fleming  NSWSC
1337 (31 October 2011) the plaintiff sued the defendants as
guarantors for amounts allegedly owed jointly and severally. The
plaintiff discontinued its claims against the first defendant under
Terms of Settlement. Addisons acted for the first defendant.
The issue for the second defendant was whether the Terms of
Settlement amounted to a release thereby releasing him also from
Whether settlement terms operate as a covenant not to sue or as
a release of the obligations owed by co-guarantors depends upon the
proper construction of the document;
A covenant not to sue prevents the creditor from suing that
guarantor but preserves the creditors rights against
Where a covenant is expressed in terms of a release it is
generally construed as such1 and if the covenant
reserves rights against other co-debtors the document will be
construed as a covenant not to sue as between the parties to the
Gzell J held that the Terms of Settlement incorporated a
covenant not to sue only. The clause expressly covenanted not to
sue the first defendant and reserved the plaintiff's rights
against the co-guarantor. The clause also recognised the first
defendant's remedy of contribution. The facts construed
together constituted a covenant not to sue.
Lessons from the case
A creditor may want to settle a claim against one debtor or
guarantor but preserve its rights against co-debtors/co-guarantors.
The creditor must be careful to phrase its settlement terms so its
effect is not to release co-obligors.
This usually requires:
clear language of a covenant not to sue (not a release);
language preserving creditor's rights against
Note: The proceedings continued subsequently with our client
succeeding in a very complex action against his co-guarantor. See
Padstow Corporation Pty Ltd v Fleming ( No 2 ) NSWSC 1572 (16
1 Wolmerhausen v Gullick  2 Ch 514 at .
2 Carr v Thomas  NSWCA 208 at ,
36 and , Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR
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