In Padstow Corporation Pty Ltd v Fleming [2011] 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 liability;
  • 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 co-guarantors;
  • 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 release.

Judgment

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 co-obligors.

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 )[2011] NSWSC 1572 (16 December 2011).

Footnotes

1 Wolmerhausen v Gullick [1893] 2 Ch 514 at [545].
2 Carr v Thomas [2009] NSWCA 208 at [17],
36 and [37], Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164.

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