Australia: Guarantees – The Effectiveness of Suspension Of Rights Clauses

By Leo Tyndall, Barrister at law. Four St James Chambers. Email: leotyndall@stjames.net.au

HOW EFFECTIVE ARE SUSPENSION OF RIGHTS CLAUSES?

ABSTRACT

The effectiveness of suspension of rights clauses was considered by the Supreme Court on 2 May 2012 in Bank of Western Australia Limited v O'Brien [2012] NSWSC ("Bankwest O'Brien") which upheld that the suspension of rights clause was enforceable in precluding the guarantor from bringing a cross-claim until the guaranteed debt was paid in full. However, there are limitations to the operation of suspension of rights clauses in circumstances where the agreement containing a suspension of rights clause is itself impugned or the clause exceeds its purpose to suspend, but extinguishes rights that are implicit in legislation.

Summary judgment is possible if the only ground for defence relies on a cross claim and the suspension of rights clause is enforceable. It would mean the cross claimant is not able to raise the triable issue of the cross claim in the application for summary judgment, consequently no triable issue would exist.

A suspension of rights clause is often inserted in guarantees to postpone the rights of a guarantor to cross-claim or set off until debts have been paid in full. They are desirable for creditors dealing with situations when debts are due and payable. Under a typical creditors agreement, the creditor can bring proceedings to demand payment from the borrower or guarantor.

However, there are occasions where the borrower or guarantor (where applicable) may:

• attempt to offset their liability with their claim against the borrower prior to payment to the creditor; or
• deny their requirement to pay on disputed grounds; or
• make a claim directly against the borrower for the full amount and attempt to postpone any demand for payment until that claim is resolved.

In most cases, it will be effected by filing a cross summons or cross claim. These are often sought against the creditors in order to reduce or discharge the liability to repay debts. The cross claimant usually proposes to the court that a valid cross claim is ground to adjourn any hearing of a claim by the creditor to enable the cross claim to be heard concurrently. Consequently a borrower or guarantor could delay the process of enforcing a claim.

The insertion of suspension of rights clauses can reduce the risk of creditors from delays in recovering the money and preventing the above occurrences. Furthermore, it can safeguard the creditor's rights to recover debts since the borrower or guarantors who raise a cross-claim must pay the full amount prior to enforcement of any such claim. In some cases, where payment of the full amount fails to occur, the creditor may be able to obtain judgment resulting in the borrower or guarantor being declared bankrupt. Consequently this adds a further obstacle to any cross claim proceedings as the counterparty will be unable to proceed without the support of the bankruptcy trustee. In accordance with s56 of Uniform Civil Procedure Act (NSW)("ACT"), the objective of the Act is to "...facilitate the just, quick and cheap resolution of the real issues in the dispute", any application requiring more time from the courts to have a cross claim heard at the same time as the claim is less likely to be successful if there is a valid suspension of rights clause as it will not be considered that it meets the objectives of the ACT.

Possible cross-claims are generally focused on the validity of the creditor's agreement or guarantee, circumstances surrounding the entering of the agreement or guarantee or the exercise of the agreement or guarantee. Intervention of the rights of the borrower or guarantor to bring cross-claims in relation to these factors might seem to be immoral and unfair. However if, it merely goes to postpone or suspend the right, in this respect, McDougall J ruled on 2 May 2012 in Bankwest O'Brien that suspension of rights clauses are generally enforceable. O'Brien, McDougall J at [28] referred to Capital Finance Australia Limited v Davies [2002] NSWSC 1146, Bryson J at [97] said:

The jurisdiction of courts and the rights of parties to make claims before courts are not conferred by contract and cannot be ousted by contract. Furthermore if, the clause itself goes to extinguishing this right it is likely to be unenforceable. In my opinion, there is no infringement of this principle where parties agree that in stated circumstances, a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them. In the contract of guarantee there is no infringement of the principle where parties agree to ensure that the guaranteed sum will be paid, and make this the more certain by postponing litigation raising any cross-claim or set-off.

Accordingly, a suspension of rights clause is enforceable. Whilst a right to make a claim against a party is a right which cannot be removed by contract, as long as the clause does not prohibit a party from the right to make claims, but merely suspending such right until the occurrence of an agreed event, the clause is effective and enforceable.

A key limitation on the operation of suspension of rights clause relates to circumstances where the agreement containing a suspension of rights clause is itself impugned. In St George Bank Limited v Field [2007] NSWSC 902 ("Field"), McDougall J held at [18] that:

The Supreme Court of Queensland considered this principle in Capital Finance Australia Limited v Airstar Aviation Pty Ltd [2003] QSC 151 ("Airstar Aviation"). In Airstar Aviation, the plaintiff lender sought summary judgment against guarantors who secured the payment obligations of an aircraft concern. The guarantee contained a suspension of rights clause. The guarantors pleaded unconscionable conduct, and misleading or deceptive conduct, relating to the entry of the guarantees. Orders sought included the setting aside of the guarantees. Holmes J concluded at [13] – [17], after addressing relevant pleadings points, that the defendant guarantors should have leave to replead the defence to address the factual points relating to "invalidity or complete discharge of the guarantees".

Implicit in the approach in Airstar Aviation and Field is that, where the suspension of rights clause is itself capable of being set aside as part of the rescission of a broader agreement, it is illogical to suggest that a suspension of rights clause (whose validity is itself under examination) must itself be adhered to before such rescission may be sought.

Furthermore, there are limitations of suspension of rights clause, in Bitannia Constructions Pty Limited v Parkline Constructions Pty Limited (2006) 67 NSWLR 9, Hodgson JA, Tobias JA & Basten JA concluded that a provision of a state statute preventing certain defences from being raised to a claim in a state court, could not prevent the defendant from raising, in answer to that claim, a defence said to be available under federal legislation, being misleading or deceptive conduct of the other party at the time of the formation of contract according to the Trade and Practices Act 1974 (Cth).

It is referable from this case that if the debts demanded were due as a result of the arrival of the termination date, debts would have to be paid before guarantors can counter-claim if a suspension of rights clause existed in the agreed guarantee. Yet if, the debts became overdue as a result of the exercise of a term in the guarantee which is subject to misleading or deceptive or unconscionable conduct, the defendant would have a triable defence.case proceeded on the basis that the test for summary judgment is whether the defences showed any triable issue, instead of the prospects of success of the guarantors. Since the effect of the sus-pension of rights clause was upheld, McDougall J granted summary judgment for the bank since the guarantor's listed defence could not be raised in court subject to the suspension of rights clause.

Suspension of rights clause was held enforceable in the Bankwest O'Brien. It has the effect to suspend the guarantor's right to set-off or counterclaim, but not purporting to extinguish such right is generally enforceable by the creditor. Subject to the enforceability of the clause, borrowers or guarantors being agreed to the contract will be bound by the terms, and are prevented from making claims in court against the creditor, in which the creditor would be entitle to summary judgment. Yet the suspension of rights clause could not preclude claims made under federal law where the suspension extinguishes the right, or the claim is against the validity of the guarantee itself.