Property and Commercial Tips and Traps – May 2015

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By Tony Butler, Partner and Tim Cox, Partner

Co-Guarantors – all things being equal, a right to contribution may be guaranteed

A guarantor who pays a creditor more than their proportionate amount of a guaranteed debt is entitled to recover contribution from the co-guarantor, despite the fact the creditor has given the co-guarantor a covenant not to sue for payment of the guaranteed debt.

A case involving five co-guarantors was recently considered by the High Court of Australia. In that case, one guarantor negotiated to pay a reduced sum of money with the bank who’d called on the guarantee, in exchange for the bank agreeing not to sue the guarantor for any further contribution.

The first guarantor wrongly assumed that her obligation to pay under the guarantee ended when the bank released her, and did not consider her obligations to her co-guarantors.

The remaining guarantors then paid the balance of the debt, and successfully sued the first guarantor to contribute an additional amount so that their contributions were all equal.

To avoid this situation, it is best practice for guarantors to ensure that any co-guarantors are included in settlement negotiations and any settlement agreements should deal with both the rights between the creditor and co-guarantors, as well as the rights between co-guarantors.

Supreme Court of Queensland considers principal developer’s right to liquidated damages

The Supreme Court of Queensland has recently upheld a principal developer’s right to recover Liquidated Damages (LD’s).

Parties to an amended AS4300-1995 D&C contract, head contractor Grocon sued developer Juniper for $10M+ which it claimed to be owing. Juniper counterclaimed $30M+ for LD’s.

In issue was the LD’s clause in the contract and whether it was a penalty. Grocon argued it was a penalty because it was exposed to substantial payment obligations for ‘trivial’ breaches of the contract (e.g. minor requirements prior to Practical Completion (PC) like labelling keys). Grocon said the LD’s clause was a penalty because the amount recoverable by Juniper was disproportionate to the loss suffered.

Juniper disputed that the LD’s clause was a penalty or that its loss was disproportionate. It stood to loose sales revenue where settlement of contracts with purchasers was delayed for want of vacant possession. Further the LD’s clause only operated where Grocon failed to achieve PC by the Date for PC.

The Court agreed with Juniper, confirming for industry participants that LD’s clauses are enforceable in circumstances where they represent a genuine pre-estimate of loss.

Parties to contracts containing LD’s clauses (likely most contractors and developers) with questions regarding the implications of these developments should contact the Mills Oakley Building, Construction and Infrastructure Team for further guidance and assistance.

Is good faith enough?

The Queensland Supreme Court has again considered the obligations of “good faith” and “reasonable endeavours”.

In many recent cases, the Courts have demonstrated a willingness to enforce obligations of good faith where a transaction has not proceeded and a party claims a lack of good faith to be the cause.

In this particular case however, the Court declined to find that a party had breached its obligations under a memorandum of understanding (MOU) to use reasonable endeavours, and work in good faith, to negotiate a formal agreement. This was because in the absence of a pre-existing formal agreement, the Court could not determine what the parties should have been reasonably expected to do to progress the transaction and satisfy their obligation of good faith.

It is common for parties to enter into a MOU once basic commercial terms are agreed, to give the parties more certainty the transaction will proceed, while a formal agreement is prepared. However, as this case shows, a MOU may not ultimately offer the certainty the parties’ desire. Accordingly, it is important to ensure that the MOU is clear on what both parties’ expect from the other when it comes to negotiating a formal agreement.

Executor’s Liability

An Executor should not be lulled into a false sense of security when relying on the fundamental legal principle that they are not personally liable for debts of the Estate.

A general exemption is available to an Executor for personal liability to meet the debts of the estate – but only insofar as those debts do not arise from the Executor’s personal conduct.

The courts have previously refused to allow an Executor to be indemnified from estate assets where the executor is reckless, indifferent, negligent or dishonest so as to impose unnecessary costs. Further where trust assets are insufficient to meet those debts then a creditor is entitled to look at the conduct of the Executor to see if personal liability should be imposed.

Accordingly, Executors should exercise caution when incurring expenses (or causing expenses to be incurred) in the course of the administration and ensure they act prudently and reasonably. Before making substantive decisions, it may be appropriate for Executors to obtain independent business and or/legal advice.

The mobile phone is mightier than the sword

In today’s modern world of communication, a recent decision of the Supreme Court of Western Australia serves as a timely reminder that an enforceable agreement can be formed outside the age old method of the pen – even via exchange of text message.

While there is always a desire for a swift and amicable resolution to disputes, it is good practice to consult your solicitor prior to engaging in settlement communications, even informally, given what may be considered an informal communication to be “formally” agreed later, may in fact result in a binding agreement.

For further information, please do not hesitate to contact us.

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