Key Points:
Guarantees in commercial contracts will need to be
carefully reviewed to ensure the guarantor isn't liable for the
payment of a non-existing obligation.
Can you guarantee payment of an obligation which doesn't
exist?
The answer, according to the Supreme Court of Victoria, is
definitely Yes. In a recent case, it said that a guarantor of a
seller's obligations could be liable even if the seller was
no longer subject to the obligations.
The court's reasoning will require a careful
re-examination of the drafting of guarantees in commercial
contracts.
Background
It's relatively common for a seller's obligations under
a sale agreement to be guaranteed by a parent company. It's
also market practice for many of the seller's obligations under
the sale agreement to be subject to a range of limitations eg.
minimum claim thresholds and time limitations.
