The importance of exclusion clauses in guarantees

A recent decision of the New South Wales Court of Appeal has reiterated the importance of including a clear and unequivocal exclusion clause in a guarantee that prevents the guarantor discharging its liabilities based on a breach of the creditor's obligations under the guarantee.

Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 dealt with the enforceability of a guarantee following the disclosure of confidential information by the creditor in breach of clause 22 of the Code of Banking Practice, which applied to the guarantee.

The court held that the breach of the duty of confidentiality under the Code did not constitute a discharge of the guarantors' liabilities under their respective guarantees to the creditor. While the court affirmed that a strict interpretation of clauses in favour of the guarantor is necessary when construing a guarantee, it was found that an exclusion clause in the guarantee was clear enough to deny the guarantor the right to terminate the guarantee based on the breach by the creditor.

This case serves as a reminder to creditors that:

• special rules of construction apply to guarantees and, specifically, an obligation in the guarantee bearing an ambiguous contractual status will be construed as a condition in favour of the guarantor;
• in light of this rule, the creditor may be required to strictly perform that obligation or the guarantor may be entitled to terminate the guarante; and
• it is therefore important for creditors to ensure that guarantees include a clear and unequivocal exclusion clause that prevents the guarantor discharging its liabilities based on a breach of the creditor's obligations under the guarantee.