Bushnell Builders Limited v Mcgoverne HC Christchurch CIV-2008-409-1785, 16 December 2009
- Court
- High Court
- Judgment
- 16 December 2009
Areas of law
Judgment analysis
AI-generated summary
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Facts
Bushnell constructed a commercial building for ORRL under a contract where payment was guaranteed by the defendant, Mr. McGoverne, and a Mr. Egden. ORRL failed to make the final payment due in March 2008. The final amount owing was agreed to be $396,762.68 in June 2008. On 27 June 2008, a Heads of Agreement was signed by Bushnell, ORRL, and Mr. Egden, establishing repayment arrangements and a forbearance by Bushnell from suing until 31 December 2008. Mr. McGoverne was not a party to this later agreement. He made one payment of $10,000 in September 2008 but failed to pay the balance. Bushnell seeks summary judgment for the outstanding amount based on the guarantee. Mr. McGoverne opposes, arguing that the June 2008 Heads of Agreement and associated loan agreement discharged his liability under the guarantee.
Held
- The express terms of a guarantee, particularly clauses that deem the guarantor a 'principal debtor' and state that liability is not affected by forbearance or time extensions granted to the debtor, override common law defences available to a surety.
- A subsequent agreement between a creditor and a principal debtor that constitutes a forbearance to sue rather than a final settlement does not discharge a guarantor's liability, especially where the guarantee contains a 'continuing guarantee' clause requiring a formal written discharge.
- The doctrine of merger does not apply to extinguish a guarantee where a subsequent security is entered into with a different combination of parties than the original obligation.
- Summary judgment will not be deferred to allow a defendant to join a third party for contribution where the defendant has accepted liability as a principal under a clear contractual arrangement and the plaintiff is entitled to prompt judgment.
Orders
Judgment for the plaintiff against the defendant for $396,762.68, plus interest at 16% per annum from 1 April 2008 to the date of judgment. The defendant is to pay the plaintiff's costs on a solicitor and own client basis. The defendant's application for leave to join a third party is dismissed.
Key passages9
The onus is on the plaintiff seeking summary judgment to show that there is no arguable defence, and the Court must be left without any real doubt or uncertainty on the matter.
“The onus is on the plaintiff seeking summary judgment to show that there is no arguable defence. The Court must be left without any real doubt or uncertainty on the matter.”
The general principles governing guarantees can be modified or negated by the express or implied terms of the particular contract. Each contract of guarantee should be construed according to its own terms.
“The general principles governing the rights and obligations of the parties to a contract of guarantee may in many instances be modified or negative by the express of implied terms of the particular contract. ... Each contract of guarantee should be construed according to its own terms.”
Wide clauses in a guarantee will be given full effect, even if they negate defences that would otherwise be available to the guarantor. It is a question of construction whether the guarantor's right to treat the guarantee as discharged has been effectively excluded.
“...the question is purely one of construction to determine whether the surety's right to treat the guarantee as discharged has been effectively excluded”
At common law, if a principal obligation is discharged by performance, the guarantee is also thereby discharged, as its purpose has been fulfilled.
“Ms Harley for Mr McGoverne relied on the principle that if a principal obligation is discharged by performance, the guarantee is also thereby discharged.”
A subsequent loan agreement that records a forbearance from suing on the original debt does not constitute a discharge of the original contract by performance.
“The loan agreement clearly indicates that what the parties were agreeing to was not a discharge of the original contract by performance but rather a forbearance from suing on the original contract while repayment arrangements were put into effect.”
The doctrine of merger operates where a creditor takes a security of a higher nature than one already possessed, extinguishing remedies on the minor security.
“It is a general rule of law, that a party by taking or acquiring a security of a higher nature in legal operation than the one he already possesses, merges and extinguishes his legal remedies upon the minor security or cause of action...”
For merger to occur, the superior security must be co-extensive with the inferior security and between the same parties.
“For this purpose, however, the superior security must be co-extensive with the inferior security and between the same parties.”
A guarantor is discharged if the creditor, without consent, enters a binding arrangement to give the principal debtor time, without reserving rights against the guarantor.
“The third limb of Ms Harley’s submissions was that a guarantor is discharged if the creditor, without the guarantor’s consent, either releases the principal debtor or enters into a binding arrangement with him to give him time without reserving rights against the guarantor.”
A guarantor who has assumed a primary liability as a principal debtor is not discharged if the creditor gives time to the principal.
“Hence a guarantor who has assumed a primary liability will not be discharged if the creditor gives time to the principal.”
Cases mentioned in judgment
Legislation mentioned
- High Court Rules, r 12.2
- General Conditions of Contract NZS 3910:1998