Australia: WA Court of Appeal finds guarantor's liability rescinded by subsequent credit contract

This week's TGIF considers the decision in ANZ v Manasseh [2016] WASCA 41, where the court considered the enforceability of a guarantee when a subsequent credit contract is entered into without the guarantor's consent.

FACTS

The respondent entered into a contract of guarantee with the bank in October 2006 to guarantee a finance facility agreement between the bank and a third party borrower.  The terms of the guarantee did not extend to "any new or replacement arrangements" unless the respondent had given consent.

In 2009, the borrower entered into a further letter of offer with the bank.  The letter of offer increased the facility limit, imposed additional fees and updated other terms of the October 2006 agreement.   

It was a condition precedent of the 2009 letter of offer that the respondent, as guarantor under the October 2006 agreement, signed an acknowledgement that the guarantee was to continue to apply to the borrower's obligations. However, the respondent refused to consent. 

The bank subsequently sought to call on the guarantee.  The question for the court was whether the 2009 letter of offer was a new or replacement arrangement, or a variation of the October 2006 agreement.

At first instance, the Supreme Court of WA held that the 2009 agreement was a new contract or a replacement arrangement, rather than a variation of the 2006 agreement.

DECISION

The Court of Appeal (McLure P, Murphy and Buss JJA) dismissed the bank's appeal.

McLure P and Buss JA took the view that although the 2009 letter of offer was not a "new" arrangement, it was a "replacement" arrangement which had the effect of terminating and replacing the October 2006 agreement.  The 2009 arrangement was stated to be an exhaustive statement of all the terms and conditions governing the facility, and did not require the continuing existence of the 2006 agreement.

Their Honours inferred that the condition precedent of the 2009 letter of offer (that the guarantor would acknowledge that the guarantee would continue to apply to the replacement letter of offer) had been waived by the bank before funds were advanced.

Murphy JA took the alternative view that the 2009 letter of offer was a variation.  His Honour considered the meaning of the word "replacement" required the new agreement to expressly or impliedly bring the 2006 agreement to an end.  On His Honour's view of all the surrounding circumstances, the 2009 arrangements were in the nature of a variation rather than a replacement. However, His Honour ultimately dismissed the bank's appeal on other grounds.

COMMENT

This case emphasises the importance for lenders to obtain the consent of existing guarantors, or enter into new guarantees, when replacing a borrower's facility agreement.  Lenders should also ensure all conditions precedent are met before allowing borrowers to drawdown funds.

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