Suspension, indemnity and demand – a recent decision of the West Australian Court of Appeal

The West Australian Court of Appeal (Martin CJ,Murphy and Newnes JJA) recently delivered its reasons for decision in George 218 Pty Ltd v Bank of Queensland Limited (No 2) [2016] WASCA 182, an appeal from the decision of His Honour Mitchell J in the Supreme Court of WA in George 218 Pty Ltd v Bank of Queensland Ltd [2015] WASC 434.


The initial proceedings involved a trial of preliminary issues, the principal issue in which was whether Ms Tina Bazzo and other companies that she controlled were liable to the Bank as guarantors for loans made by the Bank to Success Asset Pty Ltd (the Company).

Three Guarantors initially commenced proceedings against the Bank seeking declarations that they were not liable under a guarantee and deed of consent. During the course of the proceedings a fourth guarantor, Gucce Holdings Pty Ltd (Gucce) also joined the proceedings against the Bank seeking to avoid liability.

The Bank opposed the Guarantors’ application and counterclaimed against the Guarantors for the amount the Bank was owed pursuant to the guarantee.

In response to the Bank’s counterclaim, the Guarantors alleged that their liability under the guarantee should be reduced. The Guarantors claimed that the
Bank’s receivers sold the Company’s security property at an undervalue and as such the Bank’s receivers breached duties owed to them by virtue of the sale of the properties.

First instance decision

At first instance, His Honour Mitchell J found (amongst other things) that:

  • The guarantees, as modified under s 22 of the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth), operated to secure money owed by the Company to the Bank.
  • Even if the guarantees did not secure that money, a conventional estoppel would preclude the Guarantors from denying that they were liable to the Bank.
  • By reason of the suspension clause in the guarantee, the alleged claims in relation to the receiver’s sale at an under value were suspended until the Guarantors had paid the full amount owed to the Bank.

In respect of the principle that the suspension clause operated to preclude the Guarantors from relying on alleged breaches of duties by the Bank’s receivers to deny the Bank its entitlement to payment under the Guarantees, His Honour Mitchell J stated at [288] to [289] (references removed):

"It is well recognised that such clauses are enforceable and exclude set off or a counterclaim whether the claim arising is statutory, common law or equitable. Clauses of this kind are generally construed as meaning what they say and as precluding reliance on any claim which does not impeach the guarantee itself. The purpose of such clauses is to prevent the commercial purpose of a guarantee being defeated by a plea of a set off or counterclaim by the guarantor as a defence to an action to enforce the guarantee.

In the present case the claimed breaches of duty concern the enforcement of the securities held by the Bank and do not deny the existence of the plaintiffs’ liability
under the Guarantees. They are pleaded only to resist the Bank’s claim under the Guarantees. That is, they are in substance pleaded as a set off which is precluded by cl 17 of the Guarantees. The pleas, even if made out, do not impeach the Guarantees themselves and do not provide a basis for denying the Bank’s counterclaim or granting the declaratory relief which the plaintiffs seek."

The Appeal

At the commencement of the appeal hearing, the Guarantors abandoned their argument that they were entitled to run their claim in relation to the sale of the Company’s properties by the Bank’s receivers without first repaying the total amounts owing to the Bank as required by clause 17 of the guarantees.

The Court of Appeal (Martin CJ, Murphy and Newnes JJA) agreed with each of the Trial Judge’s findings and unanimously dismissed the Guarantors’ appeal in its entirety.

Lavan Comment

The time for the Guarantors to seek special leave to apply to the High Court has not yet expired so it may be that the findings of the Court of Appeal will be subject to review in due course, however, for the moment suspension or “pay now litigate later” clauses that are incorporated into guarantees and other financing documents can be relied on to require guarantors or borrowers to pay the amount owed under the financing document before they are entitled to agitate any set off or other claims against the financier. If the amount
owing remains outstanding, then any claim by that guarantor or other party will be stayed.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.