Notifying A Guarantor of the Acceptance of the Credit Application & Guarantee

We recently acted for a Client who was pursuing a Guarantor for an unpaid debt, owed by a Company that had since gone into Liquidation.

During the hearing, the Defendant (the Guarantor) raised some important issues regarding the procedure used by our Client in obtaining Guarantees and notifying Guarantors of the acceptance of those Guarantees and the subsequent Credit Applications.

The case of Northstate Carpet Mills Pty Ltd v B R Industries Pty Ltd

[2006] NSWSC 1057 (9 October 2006) (“Northstate”) was raised by the Guarantor to argue that the communication of the acceptance of the Credit Application and Guarantee document was not specifically made clear to the Guarantor and therefore a valid contract of Guarantee was never entered into.

The case of Northstate discusses the leading case in contracts and guarantees, Latec Finance Pty Ltd v Knight [1962] 2 NSWR 79, which states that “a contract is not made, and an offer is not accepted, until the acceptance of the offer has been communicated. If the parties, as they are entitled to do, wish to vary this rule such an intention must be made clear in the offer.”

Young CJ in Equity in Northstate also noted at Paragraph 40 that it is becoming commonplace for commercial entities to cut corners in the name of cost reduction. Young CJ stated it is quite common for entities (in that case a finance company) to not send the Customer and Guarantor copies of completed contracts, thereby showing too little attention to the formation of the contract and jeopardising the validity of the Guarantee.

We recommend to all of our Clients to review their standard procedures for notifying Customers and Guarantors that the Credit Application and Guarantee has been accepted and the Account has been opened. We recommend that care be taken to write specifically to the Guarantor once the documents have been accepted. This is particularly important where the Guarantor is not involved in the day to day running of the business. Why not also consider sending separate copies of the Guarantees to the Guarantors at the same time as the “Welcome Aboard” letter to the Customer?

For more information, contact Natalie Ledlin, Lawyer and Practice Director


Direct Line:        02-8488-3383