In Lee v ATL (Australia) Pty Ltd [2023] NSWCA 327, the NSW Supreme Court considered whether a guarantor was liable under a loan deed that was amended by a side letter between the borrower and the lender (but not the guarantor). The Court decided that as a matter of contractual construction, the guarantor was not liable to the lender at all.
This case is a cautionary tale for all lenders. Always ensure that a guarantor signs off on changes to the underlying facility documents (including all last minute changes) to avoid losing the benefit of a guarantee.
Facts
On 13 March 2017, Mr Lee and three others signed a loan deed as guarantors for the borrower. Under the loan deed, interest accrued from when the lender advanced funds to the borrower.
At 3:55pm on 14 March 2017, the lender sent a side letter to the borrower. Under the side letter, interest under the loan deed was said to have started accruing in two tranches, on 10 March 2017 and 13 March 2017 respectively. In other words, the side letter interest began to accrue sooner than under the loan deed.
At 4:27 pm on 14 March 2017, the lender received the loan deed signed by Mr Lee, the other guarantors and the borrower.
At 5:46pm on 14 March 2017, the borrower confirmed the side letter by email. There was no evidence to suggest the side letter had been signed by or otherwise brought to the attention of Mr Lee and the other guarantors.
On 15 March 2017, the borrower sent the lender a utilisation notice and the lender advanced the funds to the borrower.
Issues
The Court identified 3 issues on appeal:
- the scope of liability issue: what was the guarantor liable for?
- the variation rule issue: alternatively to (1), was the guarantor discharged by reason of the agreement between the lender and borrower in the side letter with reference to the principal contract?
- the indemnity issue: if otherwise applicable, was the variation rule ousted because the guarantee is, in substance, an indemnity?
Held
The Court of Appeal held in relation to each issue:
- Mr Lee had no liability to the lender. The Court held that, as a matter of contractual construction, Mr Lee’s guarantee did not extend to the borrower’s obligations as amended by the side letter. Accordingly, Mr Lee did not give a guarantee and Mr Lee had no obligations to the lender.
- The variation rule only applies where there is a guarantee. It had no application to this case because Mr Lee was never bound by a guarantee.
- No.
As a result, the Court upheld the appeal. The lender’s claim against Mr Lee was dismissed and the lender was ordered to pay Mr Lee’s costs of the first instance proceeding and the appeal.
Reasoning – scope of liability issue
Critical to the Court’s reasoning was a finding that the side letter amended the borrower’s obligations to the lender in the draft loan agreement and therefore had a superseding effect. It was not a separate and distinct agreement between the lender and the borrower.
This finding was important because it meant that there was a mis-match between what Mr Lee agreed to (the unamended loan deed) and what the borrower and lender agreed to (the loan deed amended by the side letter). This is evidence from the timing of the document exchange because:
- Mr Lee had already signed the (unamended) loan deed by the time the lender sent the side deed to the borrower; and
- the borrower only confirmed the side deed after the lender had received Mr Lee’s counterpart of the (unamended) loan deed.
The Court found that as a matter of contractual construction, this meant Mr Lee did not guarantee the borrower’s obligations under the (amended) loan deed and Mr Lee had no liability to the Lender. Mr Lee was held to be free from his guarantee even though he had willingly signed the original (albeit superseded) loan deed.
Key takeaway
This case is a timely reminder that lenders must keep guarantors “in the tent”. If last minute changes need to be made to the facility documents, a prudent lender makes sure any guarantor gives a written confirmation of their agreement to the change, ideally by resigning the loan documents. Otherwise, the lender risks losing the benefit of the guarantee.
If you would like to discuss this article with us, please contact David Greenberg, partner, or Victoria Caldwell, Senior Associate on (02) 9261 5900.