The Liability of Debtors and Guarantors Under Contracts Discharged For Breach

[VOL.
22
THE LIABILITY OF DEBTORS AND

GUARANTORS UNDER CONTRACTS
DISCHARGED FOR BREACH*
J W CARTER** AND J C PHILLIPS***
It I S trite luw,that a contrac,t may he termrnatedorr the basis o f u rep~pr*dlariorr,o breac.h

o f condition, a srnbstarltral breach ofan internrrdiute term. orpursrwnt to u termrnutron
clause. What is less often al~preuc.iatc,d1s that rei-mi nu ti or^, especrally in the context of
on irlstalment c.ontruc.t, may well hu1.r. ad1,enc.e c~onseyuenc.c~s,for reco1,er:v k o m the
debtor or its guarutrror either in debtor rn damages ThiliS artio.le exumirres thepotential
prohlems wh1o.h (,anarrse und suggests methods by wh1c.h they o.un he overcome.
LIABILITY OF DEBTORS
1. Introduction - consequences of termination
(a) Background
There is a basic distinction between termination of a contract for breach
and rescission of a contract for misrepresentation or mistake. It is suggested
in Lord Diplock's speech in Photo Produc.tion Ltd vSrcuric,or TransportLtd'
that to understand the effects of termination we have to grasp a distinction not
only between primary and secondary obligations, which is reasonable
enough, but also between secondary obligations and "anticipatory" second-
* This is a revised version of two papers presented for the Committee for Postgraduate
Stud~esin the Faculty o f Law, University of Sydney, November 1091 and the Centre for
Commercial and Resources Law, Faculties of Law, The University of Western Australia
and Murdoch University, July 1992.
** BA LLB(Syd) PhD(Cantab); Associate Professor of Law, University of Sydney.
*** BA (Cantab) PhD(Qld); Professor of Law, The University of Wcstern Australia.
1. [ 19801 AC 827, 849-850.
DEC 19921 DEBTORS AND GUARANTORS 339
ary obligations. Reported in the same year was another decision of the House
of Lords, Hyundai Heavy Industries Co Ltd v Papadopoulos2 ("Hyundai"),
which told us that a shipbuilding contract is really more like a contract for the
hire of goods than one for the sale of goods, with the result that the shipbuilder
may recover an overdue payment even though there is no evidence that any
part of the ship has been built and notwithstanding that the builder has been
discharged from the obligation to build the vessel. Credulity is strained still
further by the decision in Shevill v Builders Licensing Board3 ("Shevill") that
when a lease is terminated by the lessor in exercise of an express right for
breach by the lessee in not paying rent on time, the lessor's loss of bargain is
caused not by the lessee's breach but instead by the lessor's foolishness in
terminating the lease merely because the lessee's breach of contract gave rise
to a right to do so. Perhaps the final blow to understanding the effect of
termination came in Esanda Finance Corp Ltd v Plessnig4 where the High
Court held5that it is quite proper to have an agreed damages clause, applying
on termination and allowing the recovery of loss of bargain damages, for the
very kind of breach which in Shevill had been regarded as too minor to sustain
such a claim. The time has come to get back to first principles.
(b) Termination and rescission

The starting point must be Justice Dixon's famous statement inMcDonald
v Dennys Lascelles Ltd ("Dennys Lascelles") explaining the distinction
between termination and rescission:
When a party to a simple contract, upon a breach by the other contracting party of a
condition of the contract, elects to treat the contract as no longer binding upon him, the
contract is not rescinded as from the beginning. Bothpartles are discharged from the
further performance ofthe contract, but rights are not divested or discharged which
have already been unconditionally acquired. Rights and obligations whrch arisefrom
the partial execution of the contract and causes of action which have accrued from its
breach alike continue unaffected. When a contract is rescinded because of matters
which affect its formation, as in the case of fraud, the parties are to be rehabilitated and
restored, so far as may be, to the position they occupied before the contract was made.
But when a contract, which 1s not void or voidable at law, or liable to be set aside in
equity, is dissolved at the election of one party because the other has not observed an
essential condition or has committed a breach going to its root, the contract is
determined so far as it is executory only and the party in default is liable for damages
for its b r e a ~ h . ~
2. [I9801 1 WLR 1129.

3. (1982) 149 CLR 620.
4. (1989)166CLR131.
5. Applylng dicta inAMEIJ-UDC F~nanceLtd v Austin (1986) 162 CLR 170.
6. (1933) 48 CLR 457,476-477 (emphasis added).
340 WESTERN AUSTRALIAN LAW REVIEW [VOL. 22
The key words, italicised, express three basic propositions about the
consequences involved when the performance of a contract is terminated for
breach or repudiation.'
(1 ) Terminat~ondischarges both parties from the obligation to perform the contract;
(2) This discharge does not affect rights and obligations which havc arisen from
partial performance; and
(3) Discharge does not affect causes of act~onwhich accrued from the breach which
led to termmalion.
Propositions (1) and (2) have their main relevance to claims in relation to
sums fixed by the contract. Proposition (3) applies mainly to claims for
damages for breach of contract.
One point of confusion has arisen in relation to Proposition (1). Did
Justice Dixon mean that. apart from accrued rights, all obligations which
have not been performed come to an end or was he referring only to those
which had not, at the time of termination, fallen due for performance? The
correct view is that he was referring both to (future and contingent) obliga-
tions which had not matured and to those which had fallen due but not been
performed. Countless passages could be cited, most to be found in the
speeches of Lord Diplock; but the following, from Moschi v Lep Air Sprvices
Ltd ("Mosc.hiW)(a key case in the context of claims against guarantors), is
representative.
Generally speaking, the rescission [terminalion] of the contract puts an end to (he
primary obligations of the party not in dehult to perform any of his contractual
promises which he has not already performed by the time of the resc~ssion... The
primary obl~gationsof the party in default to perform any of the promises made by him
and remaining unperformed likewise come to an end ...%
In F J Rloemen Pty Ltd 1, Council of the City ($Gold Coust City CounciP
the Privy Council held that a term requiring the payment of interest on unpaid
sums payable to a contractor was not enforceable after termination, and did
not think it necessary to consider separately sums due prior to termination and
sums which would have fallen due had termination not occurred. Thus, the
prima facie rule is that unpaid sums are not recoverable once termination has
occurred. Nevertheless, the influence of a narrower view on the effects of
7. They also apply where termination is based on repudiation. See.lohnson v Agnew ( 19801
AC367,396 where the passagein Dixon J'sjudgment wasadopted by the House ofL>ords.
8. 11 9731 AC 33 1,350. Fordiscussion see inka n 132.It was quoted with approval by Rogers
CJ Comrn D in Womhoirr Pry L,~tlv Sui~utrtrcihIslatrd Trudi~rgP i y Ltd ( 1990) 19 NSWLR
364, 369.
9. 1 19731 AC 1 15.
DEC 19921 DEBTORS AND GUARANTORS 34 1
termination has been considerable and creates uncertainty in a fundamental

aspect of the law.
(c) Intention and the consequences of termination

Since we are concerned with contract law, it must be acknowledged,
indeed emphasised, that Justice Dixon was stating prima facie rules applica-
ble where the parties have not expressed an intention regarding the conse-
quences of termination. Parties are free to agree to a different set of
consequences, subject to statutory restrictions which govern particular kinds
of contracts and terms, and also the common law and equitable rules on
penalty clauses and relief against forfeiture. Justice Dixon said as much in
Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers
Ltd ("Westralian Farmers") when, after referring to his earlier statement in
Dennys Lascelles, he (and Justice Evatt) said: "No doubt it is open to the
parties to provide in advance for such an event [termination] and by a
stipulation to the contrary to produce some other effect"."'
The most common sources for such agreements are terms expressing
rights on termination and regulating the consequences of termination.'' But
many termination clauses go no further than the expression of termination
rights. Do Justice Dixon's propositions then apply? No less an authority than
Sir Frederick Jordan thought so in Larratt v Bankers and Traders Insurance
Co Ltd ("Larratt"), where he held that the consequences which flow from
termination by virtue of an express right:
depend on the intention of the parties, actual or imputed, and, in the absence of some
express or implied indication of intention to the contrary, are governed by the ordinary
law applicable to the avoidance of contracts for breaches of essential promise^.'^
Justices Dixon and Evatt were clearly of like opinion in Westralian

Farmers, where they said: "When the parties themselves have provided for
the determination of the contract on a given contingency, the consequences
flow altogether from their contractual stipulation and are governed by their
intention, either actual or imputed".I3 This statement clearly influenced Chief
Justice Jordan in Larratt. All that he did was to add the presumption that the
rules applicable to termination for breach of condition apply where termina-
tion takes place in reliance on an express right. But in that addition lies a large
10. (1936) 54 CLR 361, 379.

1 1. See generally B R Opeskin "Damages for Breach of Contract Terminated Under Express
Terms" (1990) 106 LQR 293: J W Carter "Termination Clauses" (1990) 3 JCL 90.
12. (1941) 41 SR (NSW) 215,225-226.
13. Supra n 10.
part of the current difficulties in the recovery of damages following termina-

tion.
2. Instalment payments
(a) General
Instalment payments fall into three main groups:
(I) Promises to make periodic payments for an executed consideration under credit
contracts (of sale or loan) where the principal is payable (with interest) by
instalments;
(2) Conditional sale contracts under which ownership in the subject matter of the
contract is to be transferred on payment of the final instalment of the purchase
price (and any other contract in which a lump sum payment is apportioned over
time without express reference to the extent of performance); and
(3) Severable contracts which fix amounts to be paid, at specified intervals, for the
use of land or goods or for services rendered, according to the progress of work
under a construction contract, or for deliveries of goods under instalment sales
contracts.
The feature which is common to all these groups of instalment payments

is that they are recoverable when they fall due as debts and not as damages
for breach of contract. They share a feature common to all liquidated sums,
namely, that they have the character of a debt which, as a distinct chose in
action, is thought of as possessing proprietary characteristics.I4 This is
attractive for a number of reasons, including the availability of summary
recovery procedure^,'^ the absence of any requirement of proving loss or
damage,Ihandthe inapplicability of rules dealing with the mitigation of loss,"
which frequently apply to actions for damages.
14. Ibid, Dixon and Evatt JJ, 380. See also Young v Queensland Trustees Ltd (1956) 99 CLR
560, 567.
15. If liquidated by the contract the sum may be recoverable under summary procedures, even
if strictly liability is not in debt: see Spain v Union Steamship C o of New Zcaland Ltd
(1923) 32 CLR 138, 142; Coast Securities No 9 Pty Ltd v Alahac Pt?,Ltd [I9841 2 Qd R
25.
16. Infra n 75-96 (penalty clauses).
17. This may provide an incentive to keep the contract on foot rather than to terminate: see
White and Carter (Councils) Lid v McGregor 119621 AC 413 (recovery of instalments
under advertising contract); Muridukis v Kouvaris (1975) 5 ALR 197 (principles
governing mitigation of damages not relevant to claims for rent under lease where lessee
abandoned premises); Keen Mar Corp Pry Ltd v Labrador Park Shopping Centre Pty Ltd
(1988) ATPR 40-853, 49,196 (where lessee repudiates lease and abandons premises
lessor may keep the lease on foot and sue for rent as it falls due).
Many of the contracts within group (1) are governed by statute;'' and we
will not find anything of general interest there. The approach of creditors is
to sue for debts as they fall due rather than following termination." Where the
loan is secured by mortgage, termination, even under common law rules,20is
affected by principles of relief against forfeiture. But where termination does
take place, any payments outstanding can be recovered, though not those due
in the future." Mainly our concern is with groups (2) and (3).
In deciding whether a plaintiff possessed an accrued right to receive all
or part of the other party's performance, regard should be had to:22(1) the
terms of the contract; (2) the performance rendered by the party claiming the
accrued right; and (3) the relation between the obligation sought to be
enforced and the obligations discharged by termination.
Although this analysis is based mainly on the reasoning in Dennys
La.scelle~,~~it can be applied to all types of instalment payments. In Dennys
Lascelles, the High Court decided that, in the absence of a forfeiture clause,
part-payments within group (2) are not recoverable from a purchaser of land
even if due at the time of termination. Since the relationship between the
obligation of the purchaser to make payments and that of the vendor to remain
ready and willing to transfer ownership is one of dependency, the parties must
be taken to have agreed that the money is no longer payable once termination
has occurred without the vendor transferring ~wnership.'~ In the words of
Justice Dixon, the vendor's right to an overdue payment was not "uncondi-
tionally" acquired
18. See (ACT) Credit Act 1985; (NSW) Credit Act 1984; (Qld) Credit Act 1987; (SA)
Consumer Cred~tAct 1972; (Vic) Credit Act 1984; (WA) Credit Act 1984 (regulated
credit contracts).
19. Specific performance may be available: Beswick v Beswic,k [I9681 AC 58 (sale of coal
merchant's business by A to B in return for a promise by B to pay a weekly sum to C).
20. There have been suggestions that contracts with an executed consideration do not come
within the general rules on termination and that a promisee must look to an express
provision for termination. See Mackenzie v Kees (1 941) 65 CLR 1, 15 (bill of exchange);
Progre.s.sive Mailing Housr Pty Ltd v Tubuli Pty Ltd (1985) 157 CLR 17,44-46 (executed
lease). The question was left open in Wigan v Edwards (1973) 1 ALR 497 (compromise
of disputed claim). But the better view is that termination is available: Moschi supra n 8
(debt payable by instalments).
2 1. Tnfra n 52 (discount of damages). For acceleration of liability under a penalty clause infra
n 88.
22. See J W Carter Brruch ofContrac,t 2nd ed (Sydney: Law Book Co, 1991) para 1235.
23. Supranh.
24. "The very idea of payment falls to the ground when both have treated the bargain as at an
end; and from that moment the vendor holds the money advanced to the use of the
purchaser"; Palmer v Temple (1839) 9 Ad & E 508,520-521, 112 ER 1304, 1309.
Another way of expressing the point, which should not in our view be
regarded as a different general principle and which will also apply to all types
of payments, is to say that an instalment payment will not be recoverable from
a defendant where the defendant would have the right to get it back.25The test
for whether an instalment payment can be recovered is the restitutionary
principle of unjust e n r i ~ h m e n t The
. ~ ~ plaintiff ("payee") would receive a
benefit (money) at the defendant's expense in circumstances where it would
be unjust for the payee to retain it. The traditional expression of the injustice
element is the requirement of a "total failure of consideration". Thus, in
Dennys Lascelles itself, the vendor could not recover any overdue payments
because their enforcement would have involved a total failure of considera-
tion. Where the idea of total failure of consideration is excluded by an express
or implied provision for forfeiture, the criterion for injustice is the willing-
ness of the court to grant the payer relief against forfeiture. We need not be
concerned with this because there is no case in which this defence has been
put forward. But it should be noted that in Dennys Lascelles, in a sale of land
context, Justice Dixon said:
Although the parties might by express agreement give the vendor an absolute right at
law to retain the instalments in the event of the contract going off, yet in equity such
a contract is considered to involve a forfeiture from which the purchaser is entitled to
be relie~ed.~'
This means that even an express forfeiture provision will not be effective
in a sale of land context. It is suggested that this approach may be relied on
as a defence to a claim for an instalment payment.
(b) Commercial contracts

Although the principles governing conveyancing transactions are more
or less settled, at least in Australia, there is considerable uncertainty in
relation to commercial contracts. This is unfortunate because there is no
reason for the basic approach to be any different. A good context to
investigate the issues is the decision in Hyundai where Hyundai ("the
builders") entered into a construction contract to "build, launch, equip and
complete" a multi-purpose cargo ship for buyers who agreed to pay the price
($US 14.3 million) by instalments representing specified percentages of the
25. See Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [I9431 AC 32,53
(avoidance of circuity of action).
26. Compare Peter Birks "Restitution after Ineffective Contracts: Issues for the 1990s"
(1990) 2 JCL 227.
27. Supra n 6,477.
total price.28 Construction of the vessel was to proceed continuously from

keel laying until delivery and the contract expressly provided that the price
of the vessel included "all costs and expenses for designing and supplying all
necessary drawings for the vessel".
Article 10(b) of the construction contract in Hyundai stated that any
money paid was to be refunded on cancellation except as provided by article
11. Article 11, which conferred a right to "rescind" the contract where an
instalment was not paid, provided that, in the case of default, the builder's
rights under the contract were to be in addition to any (common law) rights,
powers and remedies they might have in consequence of default by the buyer.
A valid notice of rescission was duly given in respect of the second
instalment, the first having been paid on time. Although there was in fact no
claim by the builder in Hyundai against the buyers, three of their Lordships
(Viscount Dilhorne, Lords Edmund-Davies and Fraser) expressed the view
that termination would not have prevented the buyers being held liable to
make the payment due prior to t e r m i n a t i ~ n .On
~ ~ the other hand, Lords
Russell and Keith, without considering the issue in detail, expressed doubts
on the ability of the builder to sue.
One approach to this case would have been to hold that the terms of the
contract, which would have entitled the builder to retain the second instal-
ment had it actually been paid, indicated an intention that payment was to be
recoverable from the buyer following termination. After all, the buyer could
hardly be in a better position by reason of not having paid the instalment than
it would have been had the payment been made.30 Yet Viscount Dilhorne
expressly disclaimed reliance on the clause.31Having taken this view, the
case depended solely on the application of common law principles.
Their Lordships held that, once the time for payment had arrived, there
was an accrued right to receive performance. Viscount Dilhome held that any
other view would have led to the "curious consequence ...that the very ground
28. Supra n 2, the specified percentages being 2.5, 10, 17.5 and 67.5%. See also J W Carter
supra n 22, para 1239; J Beatson "Discharge for Breach: The Position of Instalments,
Deposits and Other Payments Due Before Completion" (1983) 97 LQR 389.
29. A contract of guarantee was entered into between the builders and Papadopoulos and
others ("the guarantors") who agreed to pay "all sums due" by the buyers under the
construction contract. This contract stated that the guarantors would, in the event of
default by the buyers, make payment oil behalf of the buyers. The House of Lords
unanimously held that the guarantors were liable even if the buyers were not. See further
below; infra n 159.
30. This is the basis on which deposit payments may be recovered following termination, but
the authorities are far from unanimous. See J W Carter supra n 22, paras 1251-1255.
31. See supra n 2, 1132.
for cancellation was destroyed by the act of ~ancellation".~~

Lord Edmund-
Davies quoted with approval the following passage from Treitel:
Rescission ... releases the party in breach for the future from his primary obligations
to perform. But he is not released from primary obligations already due at the time of
rescission, and he also comes under a secondary liability to pay damages. His liability
may thus relate both to breaches committed before rescission and to losses suffered by
the victim as a result of the defaulting party's repudiation of future obligation^.'^
We have already seen that the more usual, and it is suggested more
accurate, expression of the scope of termination is that it relates to all
"unperformed" obligations. What Viscount Dilhorne described as the "curi-
ous consequence" is in fact the normal or usual c~nsequence.'~ Thus, where
a vendor terminates performance after the date for settlement, we know that
the purchaser is not liable to pay the price. We also know that a seller who
terminates a sale of goods contract after the date for payment has arrived is
not entitled to the price unless property in the goods has passed to the buyer.
More generally, we know that merely keeping a contract open and not
exercising aright of termination until after a date for payment has passed does
not serve to increase the plaintiff's payment right^.'^
The right torecoverthe payment was testedinHyundai by asking whether
the buyer could have recovered it back on the ground of a total failure of
c~nsideration.'~ Had the contract been for the sale of goods, their Lordships
conceded that there might have been such a failure of consideration."
However, they held that the shipbuilding contract was more in the nature of
a contract for services.'' In an analogy which seems to exist more in the
imagination of their Lordships than in the real world, they relied on cases
involving contracts of hire and hire-purchase as authority for the proposition
that termination does not cause a total failure of consideration. It is easy
32. Ibid, 1134 and 1141.

33. G H Treitel The Law o f Contruc.r 5th edn (London: Stevens & Sons. 1979) 641 (see now
8th ed 1991, 748).
34. See Moschi snpra n 8, 345 where Lord Reid said that he could not agree that after an
"accepted repudiation the contractual obligations still exist as obligations"; Womboin Pty
Ltd v Savarzrluh Island Trading Pty Ltd supra n 8, 368.
35. Unless there has also been performance by the plaintiff. See White and Carter (Councils)
Ltdv McGregor supra n 17 and the commentary thereon by L J Priestley "Conduct after
Breach: The Position of the Party Not in Breach" ( 1991) 3 JCL 2 18.
36. See supra n 2, 1134.1 136, 1142 and 1147-1 148.
37. They doubted, but left open, the widerview of Stable J in Dies v British andlnternationol
Mining and Finance Corporation Ltd 119391 1 KB 724, 743 that a payment may be
recovered where there is no total failure of consideration. See supra n 2, 1134, 1142 and
1148.
38. See supra n 2, 1134-1136, 1142 and 1148-1149.
enough to accept an analogy with a building contract;'%ut to treat $US350 000

as due under acontract where nothing had been delivered because in an earlier
case a hirer of furniture had been held liable to pay a few pounds for the use
of goods under a consumer hire contract seems strange.
Lord Edmund-Davies sought to buttress his analysis4' by relying on that
part of Justice Dixon's statement in Dennys Lascelles quoted earlier.4' Since
Justice Dixon referred to rights accruing through "partial execution" of the
contract, one would have thought that this necessitated some analysis of the
builder's performance. After all, partial execution involves something more
than that the time for performance has arrived. There was no clear evidence
as to whether the builder had in fact carried out its obligations to start
designing and building the vessel. Yet only Lord Fraser referred to the
builder's performance. He emphasised that, in the absence of any allegation
or proof to the contrary, it had to be assumed that the builder had performed
its obligations under the contract.42So, presumably, the other judges thought
that the buyer's promise to pay did not depend on any performance by the
builder.43
This analysis comes down to two possibilities:
(I) Either the buyer had bargained for the builder's promise to do the work, that is,
promised to pay independently of performance by the builder; or
(2) The consideration for the buyer's payment had not failed totally because it had
admitted performance on the builder's part.
If this is correct, there was in fact no need to rely on the supposed analogy
with cases on contracts of hire, except to the extent that they illustrate (as do
many other authorities) a partial failure of consideration. However, it is still
perplexing that the builder was entitled to a payment when the buyer may
have received no performance at all, particularly since, whatever work the
builder did, it was (it seems) entitled to keep and use it for its own benefit.
Contracts for the construction of ships have in fact usually been treated as
analogous to contracts of sale. Advance payments have been recovered by
purchasers, after termination, on the ground of failure of consideration and
39. See Rover International Ltd v Cannon Film Sales Ltd [I9891 1 WLR 912,93 1. Compare
Re Continental C & CRubber Co Pty Ltd(l9 19) 27 CLR 194 (manufactur? of rnr?ci~i;~e~y).
40. See supra n 2, 1141.
41. Tnfra n 6.
42. See supra n 2, 1148 and 1150.
43. This may be the explanation for the difficult decision of the High Court inRe Continental
C & G Rubber Co Pty Ltd supra n 39 (no failure of consideration where contract for
manufacture of machinery frustrated before delivery).
even though the builders had almost certainly begun c o n s t r ~ c t i o n . ~ ~
(c) Implications for drafting

Perhaps Hyundai is authority for the view that it is sufficient to draft a
contract which makes payments due at particulartimes. But the mere fact that
a contract obliges the payee to incur expenditure before completion of the
contract is not of itself sufficient to prevent a total failure of c ~ n s i d e r a t i o n . ~ ~
An express provision for recovery will be subject to principles governing
relief against forfeiture. Although this may seem no more than a theoretical
possibility in commercial contracts, it should not be discounted entirely.46
Greater security is offered by the apportionment of payments to perform-
ance. The simple expedient of lining up payments and performance, that is,
instalment payments within group (3), seems to be virtually unchallengable.
There are many authorities in which instalment payments have been recov-
ered under such "severable" contract^;^' the only difficulty is in drafting a
lump sum contract in a way which makes it severable. But the progress
payments due under a building contract provide a good illustration of the
proper way to ensure the recovery of instalments under such contracts.
There are two final points. First, the emphasis on the accrual of rights to
payment through performance means that even a payment which was not due
at the time of termination may be recovered after termination, assuming it had
44. See F~brosaSpolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd supra n 25 is the
leading case, and nothing turns on the point that the contract was discharged by
frustration; Reid v Macbeth & Gray [I9041 AC 223; and compare McDougall v
Aeromarine ofEmsworth Ltd [I9581 1 WLR 1126 (termination by buyer).
45. See Terrex Resources NL v Magnet Petroleum Pty Ltd [I9881 1 WAR 144, 147-148.
46. See Stockloser v Johnson [I9541 1 QB 476, 490 (sale of goods by instalments), the
authority of which has been left open by the High Court (see Legione v Hateley (1983)
152 CLR 406,443-444) and the House of Lords (see Scandinavian Trading Tanker Co
AB v Flota Petrolera Ecuatoriana [I9831 2 AC 694,702-703); O'Dea v AllstatesLeasing
System ( W A ) Pty Ltd (1983) 152 CLR 359, 392; Esanda Finance Corp Ltd v Plessnig
(1989) 166 CLR 131,151; and compare Esanda Finance Corp Ltd v Plessnig at 147-148
(exercise of contractual power may be "unconscionable" or "oppressive").
47. See Brooks v Beirnstein [I9091 1 KB 98 (hire payments due under contract for the hire
of goods); Leslie Shipping Co v Welstead [I9211 3 KB 420 (withdrawal of thevesselunder
a time charterparty after the charterer has had the benefit of the services does not prevent
recovery of the agreed hire as a liquidated sum); Chatterton v Maclean [I9511 1 All ER
761 (hire-purchaser liable for hire due prior to repossession, pursuant to a contractual
r~ght,on breach by the hirer); Financings Ltd v Baldock [I9631 2 QB 104 (rent due under
hire-purchase contract); Overstone Ltd v Shipway [I9631 1 WLR 117 (rent due under hire-
purchase contract): Canas Property Co Ltd v K L Television Services Ltd [I9701 2 QB 433
(recovery of rent under lease due prior to re-entry on termination).
been earned at that time.48But the plaintiff must wait until the payment was
due before bringing the claim.49Second, although the cases usually deal with
the position where the plaintiff is the terminating party, the same analysis can
be made in favour of a party in breach. Payments which have been earned
through performance are recoverable by such a party.5o
3. Loss of bargain damages

(a) The concept
Loss of bargain damages are damages assessed by reference to the
difference between the market value of the contract or its subject matter at the
time of breach and the price (or monetary equivalent) expressed in the
~ o n t r a c t . Where
~' the value of the contract is simply what the defendant
agreed to pay, or the defendant's performance involved the payment of
money by instalments for an executed consideration, the instalments must be
discounted to their present value when assessing the value of the ~ontract.'~
Discharge of the contract, by termination for breach or repudiation, is
necessary before such damages can be recovered.53But equally it is now clear
that the mere fact of termination for breach is not enough to entitle a plaintiff
to recover such damages.
The reference in Justice Dixon's statement in Dennys Lascelles to causes
48. See Westralian Farmers Ltd supra n 10 (termination without breach); Bank of Boston
Connecticut v European Grain and Sh~pplngLrd [I9891 AC 1056 (ability of shipowner
to recover advance freight under a voyage charterparty).
49. Compare P v D l and D2 (The "C" & "J") [I98412 Lloyd's Rep 601 andZeaStar Shipping
Co SA v Parley Augustsson (ln1,esr) AIS [I9841 2 Lloyd's Rep 605 (amendment of
pleadings not permitted).
50. See Boston Deep Sea Fishing andlce Co vAnsell(1888) 39 Ch D 339,352,360 and 366-
7; Mersey Steel andlron Co Ltd v A;aylor Benzon & Co (1884) 9 App Cas 434; Ettridge
v Vermin Board of the Distrlct ofMurat Bay [I9281 SASR 124, 128; Auromatrc Frre
Sprinklers Pt); Ltd v Watson (1946) 72 CLR 435,461; Hyundai supra n 2, 1136; Bank of
Boston Connecticut v European Grain and Shipp~ngLtd supra n 48.
5 1. See J W Carter "The Effect of Discharge of a Contract on the Assessment of Damages for
Breach or Repudiation" (1988) 1 JCL 113 and 249.
52. See Moschi supra n 8, 358-359. See also J W Carter and D J Harland, Contr.ac,tLaw in
Australia 2nd ed (Australia: Butterworths, 1991) para 2161 (discounting an award for
subsequent events and accrued nghts).
53. Sunbird Plaza Pt); Ltd v Maloney ("Sunh~rdPlaza") (1988) 166 CLR 245 (not following
Ogle Y Comhoyuro 1n1~esrmentsPt); Lrd (1976) 136 CLR 444, 450); The Mlllstr.ean7 P t j
Ltd v Schultz [I9801 1 NSWLR 547,554; and compare Photo Prodlccrrorr Ltd 1.Se1,rii.ic~or.
Transport Lrd [I9801 AC 827, 849 ("anticipatory secondary obligation" to make
compensation Implied In addition to the general secondary obligat~on).
of action which accrued from the breach preserves any right to claim loss of
bargain damages.j4The question which arises is, what cause of action should
be taken as having accrued, by reason of the breach, at the time of termina-
tion? One approach would be to say that it is simply a matter of looking at the
breach itself. But this is wrong. Where a buyer terminates performance of a
sale of goods contract on the ground that the seller tendered the goods late,
and the termination is valid because time was essential, the cause of action
which the buyer relies upon in claiming damages is for non-delivery, not late
delivery.55Damages for non-delivery are a form of loss of bargain damages.
The sale of goods example is not unique. The principle applies also to a
purchaser's damages claim following termination of a sale of land contract
for the failure of the vendor to attend settlement where time is of the essence.
In both cases, the breach might involve no more than a few days' delay and
it might, objectively, be quite minor; but termination perfects the plaintiff's
cause of action for loss of bargain damages. Indeed, the general principle is
that, where any contract is terminated for breach or repudiation on the part of
the promisor, and the promisee relies on the general law rather than an express
termination clause, loss of bargain damages are r e ~ o v e r a b l eBut
. ~ ~according
to Shevill this analysis does not apply where termination is based on an
express termination clause.57
(b) The Shevill doctrine

In Shevill, the Board ("the lessor") leased land to a lessee for seven years
from 7 March 1976. The Shevills were guarantors of the lessee's obliga-
tions.j8Rent was payable by monthly instalments and clause 9(a) of the lease
conferred on the lessor a right to re-enter the land in the event of the rent being
unpaid for 14 days. The right of re-entry was expressed to be "without
prejudice to any action or other remedy" of the lessor. At a time when two
months' rent was outstanding the lessor took proceedings for possession and
sued the guarantors for damages. The High Court held that only nominal
damages could be recovered because there was no repudiation or breach of
54. Supra n 6,476-477.

55. Damages are governed by (ACT) Sale of Goods Act 1954 s 54; (NSW) Sale of Goods Act
1923 s 53; (NT) Sale of Goods Act 1972 s 53; (Qld) Sale of Goods Act 1896 s 52; (SA)
Sale of Goods Act 1895 s 50; (Tas) Sale of Goods Act 1896 s 55; (Vic) Goods Act 1958
s 57; (WA) Sale of Goods Act 1895 s 50.
56. See Dominion Coal Lrd v Dominion Iron & Steel Co Ltd [I9091 AC 293, 31 1; Sunbird
Plaza supra n 53,260; Foran v Wlght (1989) 168 CLR 385,430.
57. Supra n 3.
58. Ib~d.
DEC 19921 DEBTORS AND GUARANTORS
any term entitling termination under common law principle^.'^ The loss of the
bargain was caused by the lessor's election to terminate rather than the
lessee's breach.'jO
Implicit in this decision was the rejection of Chief Justice Jordan's view
in Larratt6' that there is a presumption that the rules applicable to termination
for breach of condition apply where termination takes place in reliance on an
express right. It would have been sufficient to decide Shevill by saying that
the presumption was rebutted when termination took place under a clause
which might operate in circumstances where there was no breach. However,
Larratt was not discussed, and although the views of Chief Justice Jordan
have been referred to in some of the subsequent cases, and been given some
only if Shevill is overruled can they be applied to the recovery of
loss of bargain damages.'j3
The general approach of the common law to contractual terms requiring
the payment of money is that the failure to pay on time is neither the breach
of an essential term64nor a repudiation of ~ b l i g a t i o nThe
. ~ ~ real or practical
59. The trial judge had awarded damages calculated by deducting the rent which would be
received by the lessor for the remainder of the lease from the rent reserved for the period
remaining at the time of termination. An appeal to the NSW Court of Appeal was
dismissed (Samuels JA dissenting).
60. For comparable English cases, almost all dealing with consumer h ~ r eand hire-purchase
contracts, see Frnancings Ltd v Baldock [I9631 2 QB 104; United Dominions Trust
(Commercial)Ltd v Ennis [I9681 1 QB 54; Eshun 1%Moorgare Mercantile C o Ltd [I9711
1 WLR 722.
61. Supra n 12.
62. See Progressive Mailing House Pty Lid v Tabali P o Ltd supra n 20,55 (dicta); AMEV-
UDC Finance Ltd v Austirz (1986) 162 CLR 170, 205-207 and 216-220 (dissenting
judgments).
63. See AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564,
566 and 585-586.
64. See Decro-Wall International SA v Practitioners in Marketing Lrd [I9711 1 WLR 361 at
368 (agency contract); Shevill supra n 3, 627 (lease). Contrast time stipulations dealing
with deposits which are usually essential. See Strearfield v Wrnchcombe Carson Trustee
C o (Canberra) Ltd [I9811 1 NSWLR 519 (deposit payable on "signing" of contract for
sale of land); Brien v Dwyer (1978) 141 CLR 378 (sale of land); Portar.ia Shrppirzg C o 1%
Gu[fPacific Navigation C o Ltd (The Selene G ) [I9811 2 Lloyd's Rep 180, 185 (sale of
goods requiring payment within 48 hours); Mrllichamp ?Jones [I9821 1 WLR 1422,1431
(10% deposit payable on exercise of option to purchase land); Damorr Compania Na~,iera
SA v Hapag-Lloydlnrernarional SA (The Blankenstern) [I9851 1 WLR 435 (payment on
signing a standard form for the sale of goods): Tsimidopoulos I, Mulson Holditl~sPt?. Ltd
[I9891 WAR 359,369-370 (sale of newspaper business and leasehold, deposit payable
by instalments).
65. See Decro-Wall Internatronal SA v Practitroners rn Marketing Lid, ibid, (not a repudia-
tion for agents to be continually a few days late in honouring bills of exchange payable
to their principals); Eshlrn 1, Moor.gare Merc,antile Co Lid supra n 60.726 (non-payment
impact of Shevill is that something more than the exercise of an express right
of termination must be This includes, outside the context of late
payment of money, that the term which is the subject of an express right be
a condition under the general law.67
(c) Implications for drafting

Putting agreed damages clauses the drafting implications of
Shevill are obvious. Indeed, it requires no real imagination or particular
ingenuity to circumvent the decision. There are at least four obvious possi-
bilities, even in the case of failure to pay money. Loss of bargain damages will
be recoverable if the contract: (1) makes time of payment "of the essence";
( 2 ) states that the time stipulation is an essential term;69 (3) deems every
breach of the term to be a serious breach; or (4) deems every breach of the
term to be a repudiation of the whole contract.
These possibilities do no more than define the contractual terms. One
further possibility may be added which does not in our view amount to an
agreed damages clause.70Loss of bargain damages will be recoverable if the
contract provides for aright of termination and states that any loss occasioned
of one or two instalments under hire-purchase agreement not a repudiation); Afovos

Shipping Co SA v Pagnan [I9831 1 WLR 195 (no anticipatory breach of charterparty
where failure topay hire inevitable);FentonInsuranceCoLtdvGothaer Verslcherungsbank
W a G [I9911 1 Lloyd's Rep 172 (delay in payment of balances under insurance treaty not
a repudiation).
66. See W & JInvestments Ltd v Bunting [I9841 1 NSWLR 331 (declaration of inability to
pay rent under chattel lease a repudiation); Progressive Maillng House Pty Ltd v Tahali
Pty Ltd supra n 20 (proof of a repudiation or fundamental breach by lessee of land).
67. This may be the explanation for Sotims Shipping Inc v Sameiet Solholt (The Solholt)
119831 1 Lloyd's Rep 605 where an express right of termination under a contract for the
sale of a ship operated where the vessel was not delivered on time and there may well have
been a right of termination under common law principles enshrined in cases like Bowes
vShand (1 877) 2 App Cas 455 and Bowes v Chaleyer (1923) 32 CLR 159. But the English
Court of Appeal said that loss of bargain damages were recoverable without reliance on
a common law right of termination and Sir John Donaldson MR took the opportunity to
add (see [I9831 1 Lloyd's Rep 605,607) that it is "trite law" that in deciding whether to
exercise a contractual right to cancel the plaintiff need have "no regard to the fact that in
the absence of cancellation he would suffer no loss".
68. Infra n 75-96.
69. It is probably not safe to rely on a term which makes time of payment a "condition"
because that description may well be thought to be ambiguous. See L Schuler AG v
Wickman Machine Tool Sales Ltd [I9741 AC 235 (term in distributorship agreement
which made visits to clients a "condition" of the contract interpreted as intermediate in
character).
70. Compare M P Furmston "Contract Planning: Liquidated Damages, Deposits and the
Foreseeability Rule" (1991) 4 JCL 1.
by the breach, including the loss caused by termination, is to be recoverable.

It would, however, be naive to suggest that success is guaranteed by any of
these drafting techniques. There is what might be called, for want of a better
description, a hidden agenda.
Cases likeshevill have apolicy backing. It is not easy to find but it is there
nonetheless. And the fact that it is there means that there is the danger that a
particular drafting technique will be seen as an unfair way of circumventing
the policy. Thus, inshevill, Chief Justice Gibbs said it "wouldhave been easy,
although inequitable, to provide that in any of the circumstances mentioned
in clause 9(a) the lessor would be entitled to damages for loss of the benefits
which performance of the covenants of the lease would have conferred on
him in the future"." What he did not tell us is whether a court can grant relief
against the "inequity". Again, in Amann Aviation Pty Ltd v The Common-
where the clause enabled the Commonwealth to recover damages
sustained "in consequence of ...cancellation of the contract", Justice Burchett
said that a "disturbing consequence" would occur if the Commonwealth used
the clause to terminate in respect of aminor breach- that consequence being
the recovery of loss of bargain damages "caused" by the election to terminate.
And in Lombard North Central Plc v Butterworth, where a clause in a
consumer lease of goods made time of the essence, thereby classifying
breaches activating a termination clause as serious breaches for which loss of
bargain damages could be recovered, Lord Justice Mustill said that the drafter
had "achieved by one means a result which the law of penalties might have
prevented" by another.'? Similarly, Lord Justice Nicholls viewed the result
with "considerable dissati~faction".'~
It is not easy to explain this hostility to the recovery of loss of bargain
damages. However, the fact that the hostility is there means that anyone
drafting a contract should attempt to make the total result fair or at least
obvious to the other party. It is to be hoped that the courts will wake up to the
fact that commercial people are quite used to liability for loss of bargain
damages, and that the only difference between termination of a contract in
exercise of an express right of termination and termination in reliance on a
clause interpreted as a condition under the common law is form not sub-
stance.
71 Supra n 7,629
72 (1990) 92 ALR 601, 629 (dft~miedon other ground, \ub noln Ihr Cornnzormec~lthI
Amann Ablation P t ) L,td (1991) 104 ALR 1)
77 [ I 9871 1 QB 527, 540
74 I b ~ d546
,
354 WESTERN AUSTRALlAN LAW REVIEW [VOL. 22
4. Penalty clauses
Perhaps thenatural reaction to Shevill is todraft an agreeddamages clause
to specify the damages recoverable. If it is a valid liquidated damages clause
it will be enforceable by a claim for a fixed sum.' But the story of agreed
damages clauses in this context is not a happy one.7hIt is, however, well
knowc, due to the proliferation of a u t h o r i t i e ~in~ ~recent years and the
abundant literatu~-e.7x So perhaps we can be forgiven for expressing the law
in a series of propositions directed to the recovery of instalment payments and
loss of bargain damages.
(1) Because a clause does not fall to be classified as a liquidated damages clause or
a penalty unless it provides for the payment of an additional liability on breach
of a contractual stipulation," a clause which provides for the forfeiture of a sum
of money already paid (or required to be paid at the time of termination) is not
subject to the distinction.
However, as we have already seen,80the clause may be subject to relief

against forfeiture, particularly where termination involves the forfeiture of a
property interest."
(2) It is likewise still possible, at least theoretically, to secure the payment of
instalments by a provision which makes the whole sum payable under the
75. Strictly, a liquidat~onof daniages in the contract does not alter the character of the
defendant's liability, it is still for damages rather than debt. See President oflndia v Lips
Maritime Corp ( 19881 AC 395,425; Hungerfbrds v Walker (1989) 171 CLR 125, 139.
76. It is unfortunate that all the developments have occurred in what is really a very specific
context. The usual context of an agreed damages clause is as compensation for delay in
performance, where they have been much more successful.
77. The key authorities are0'Dea ~Allstarc~s Leusing Sysrcvn (WA)PQ Ltdsupran46; AMEV-
UDC Finunc.c,Ltd I' Austin supra n 62; Esundu Finance Colp Ltd v Plc~ssnigsupra n 46.
Reference can also be made to Bridge v Campbell Discount Cn Ltd 119621AC 600 which
is the origin of the law in relation to chattel leases, and to Citicorp Australia Ltd v Hendty
(1985) 4 NSWLR 1; AMEV Finance Lrd v Artes St~rdzosThoroughbreds Pty Ltd supra n
63 as applications of the High Court decisions. Compare P C Devc1opment.s PQ Ltd v
Revel1 (1991) 22 NSWLR 615.
78. See G D Muir "Stipulations for the Payment of Agreed Sums" (1985) 10 Syd LR 503; R
P Meagher "Penalties in Chattel Leases" in P D Finn (ed) Essays in Equity (Sydney: Law
Book Co. 1985) 46; D S K Ong "Chattel Leasing: Indulgences, Liquidated Damages and
Penalties" (1986) 60 ALJ 272; Rogers JA "Liquidated Damages and Penalties" in J W
Carter (ed) Rights urld Ramedic~s,for Breac.h of Conrruc~l (Sydney: Committee for
Postgraduate Studies, Faculty of Law, University or Sydney, 1987) 96; M P Furmston
supra n 70.
79. See Lefiione v Hateley (1983) 152 CLR 406, per Mason and Deane JJ, 446; Esandu
Finance CorpLrd v PIrssnifi s u p r d , 153; CKA LtdvNZGol~fieldslnvc~stmc~~~ts [ I 9891
VR 873,875.
80. Supra n 28.
8 1. See O'Dea v Allstates Lrusing System ( W A ) Pry Ltd supra n 46.
contract immediately due as a (present) debt, which, by reason of the indulgence

given by the creditor, is payable either in the future, or in a lesser amount,
provided that certain conditions are met with a provision that, on the promisee's
failure to make punctual payment, the whole sum is to become payable."
This has to be described as a theoretical possibility. The doubts cast on

Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltdbi in O'Deu v
Allstates Leasing System (WA) Pty LttY4 make the technique d a n g e r o ~ s ' ~
unless the nature of the contract is such that a present loan is the substance of
the t r a n ~ a c t i o nWe
. ~ ~all know that most of the cases involve leasing not sale."
(3) A clause which provides for the payment of all outstanding instalments (past and
future) is invalid, no matter how serious the breach which led to termination and
irrespective of whether the payments are described as instalments or damages.8x
(4) Where the clause is invalid under proposition (3) or otherwise, the plaintiff is
relegated to a claim for common law damages and the penalty clause is to be
ignored when calculating the plaintiff's loss.R9
The penalty clause is a dead letter.'" It cannot be relied on as expressing

any intention with regard to damages under either limb of the rule in Hadley
v Baxendale." The plaintiff must rely on the general law of damages,
including the doctrine of S h e ~ i l lwithout
, ~ ~ the benefit of the next rule.
(5) Aclause which provides for the payment of all outstanding instalments (past and
future) is valid if the instalments are discounted to their present value and if the
plaintiff gives credit for the value of any benefits received on termination such
as the receipt of goods which were the subject of a lease."
The validity of this rule results from the decision of the High Court to
approach agreed damages clauses in a pragmatic rather than a logical way.
Ibid, Gibbs CJ, 367.

(1906) 4 CLR 672.
Supra n 46, 366-367, 375, 380-383, 386-387 and 403-404.
See Rogers JA supra n 78, 100 ("draftsman beyond price").
Compare A u o n Pacific Ltd v Offshore Oil NL (1 985) 157 CLR 5 14 (moratorium deed);
Oresunds~,ur~~et Aktieholag 1: Murc.os Diurnantis Lemos ("The Angelic Star") [ 19881 1
Lloyd's Rep 122 (loan to be immediately payable).
There may well be taxation implications not to mention problems with the credit and bills
of sale legisation.
See O'Dea vA1l.state.s L e a s i n ~System (WAJPty Llrl supra n 46; AMEV-UDC Finance Ltd
v Austin supra n 62.
See AMEV-UDC Finance Ltd v Austin, ibid C~ticorp; Australia Ltd v Hendry supra n 77.
See ./ohson v Johnson 119891 1 WLR 1026, Nicholls LJ, 1039.
(1854)9Ex341 at345; 156ER 145, 151.
Supra n 3, 58-67.
Sec Esundu Finunc,c~Gorp Ltd v Plessnig supra n 46; AMEV Finance Ltd v Artes Studios
Thoro~cghhredsPty Ltd supra n 63; IAC (Lea.sin,y)Ltd v Humphrey (I 972) 126 CLR 131;
AMEV-UDC Finance Ltd 1. Austirl supra n 62, 197.
356 WESTERN AUSTRALlAN LAW REVIEW [VOL. 22
The court is permitted to take into account the fact that the clause operates on
termination when deciding whether it is ~alid.'~ Thus, an agreed damages
clause may be invoked in the event o f a non-repudiatory breach which allows
the recovery o f more than would be available in a simple action for
damages.95This is subject to suggestions that the exercise o f a contractual
power may be "unconscionable" or "oppressive"" being realised by a
decision that the termination is itself invalid.97
LIABILITY OF GUARANTORS
1. Introduction
There are numerous historical allusions to the risks associated with the
status o f a guarantor. One o f the mottoes inscribed by the seven sages in the
Temple o f Delphi stated simply "Suretyship is the Precursor o f R~in".'~ And
as early as 1,000 BC the Hebrews viewed the position o f the surety in this
way: " I f thou be surety for thy friend, i f thou hast stricken hands with a
stranger thou art snared with the words o f thy mouth."'"
Many creditors, particularly financial institutions, may today take issue
with this perception o f the dire consequences associated with suretyship. A
casual glance at the increasing number o f reported decisions will indicate that
many guarantees are successfully challenged on the basis o f equitable
doctrines, especially undue influenceand unconscionability. Nowhere i s this
trend more evident than in New South Wales where the ContractsReview Act
1980 provides another vehicle for challenge.
This paper, however, indicates that there are potential difficulties for the
unwary creditor other than those arising from the execution o f the guarantee.
The creditor may find that the right to recover from the guarantor, either in
debt or in damages, has been prejudiced both by acombination o f the manner
in which the creditor pursues rights against the principal debtor and by a lack
94. In England this seems not to bc permitted; see Cupitul Finance Co Lrd v Donuti (1977)
121 SJ 270; Lonihard North Ccntrul PIC v Butter~~ortll supra n 73.
95. Generally where it can be seen that a clause is a penalty in respect of one type of breach
it is invalid in respect of any breach thc damagcs for which might in fact have been
genuinely pre-cstlmated by the clause: Pigrunz v Artornc~y-Gc~nc~ral (NSW) (1975) 132
CLR216,221.
96. See Esandu F~nunc.eCorp Ltcl v Plcssnrg supra n 46, 147148.
97. Compare Legion<,1, Hateley supra n 79 (relief against forfeiture by specific performance
or injunction).
98. Proverbs 6: 1 and 2.
99. See T Hewitson S~rretvship:Its Origin crnd Hisrorv rn Outlirre. (1927) 18.
DEC 19921 DEBTORS AND GUARANTORS
of precision in the drafting of the guarantee itself.

At the outset it should be stressed that the usual form of action against the
guarantor will be for a money sum, although (as will be seen) in particular
circumstances an action in damages will be appropriate and necessary. Some
doubt as to the correctness of this usual form of action against the guarantor
has arisen from the decision in Moschi which suggested that the action against
the guarantor should properly be framed only as a claim in damages.lo0The
reasoning was that the obligation of the guarantor should be regarded not as
an obligation to pay a sum of money to the creditor but to "see to it" that the
principal debtor performs the obligation.lO'But in Sunbird Plaza Pty Ltd v
Maloney ("Sunbird Plaza") Chief Justice Mason rejected this view:
It may be that as a matter of history the view that the guarantor has an obligation "to
see to it" that the debtor performs his obligation explains why the guarantor is not
entitled to notice of the debtor's default and why the creditor's cause of action arises
on that default. But theview certainly does not accord with the nature of the guarantor's
obligation as it is understood today. Rarely do guarantors have control of, or acapacity
to influence, the principal debtor such that they would willingly assume an obligation
to ensure that he performs his primary obligation. The fact that at common law the
creditor sued the guarantor in special assumpsit gives some support to the view that the
guarantor's cause of action is for damages forbreach of contract. However, the modem
view that the guarantor promises to answer for the debtor's debt or default has led to
the practiceof suing the guarantorfor themoney sum which thedebtor has failed topay,
a practice which may well have been adopted on the introduction of the Judicature
Acts.lo2
The remainder of this paper will point to problems which arise in

maintaining an action against the guarantor either for a money sum or for
unliquidated damages and, in particular, the effect in this context of the
creditor's action in terminating or, alternatively, affirming the principal
contract.
2. The effect of the terms of the guarantee and principal

transaction on the guarantor's liability for a money sum
The major difficulty here is that both the terms of the guarantee or the
principal agreement may preclude the recovery of the amount owing as a
money sum because the event upon which the debt is payable never occurs.
The leading illustration is Sunbird Plaza. By the terms of the guarantee the
100. See supran 8, LordDiplock 348-349; Lord Simon of Glaisdale; Degman Pq Ltdv Wright
[I9831 2 NSWLR 348, 350-352.
101. Supra n 8, 348.
102. Supra n 53, 255-256. Contra J Harris "Anticaptory Breach - Innocent Party's Right to
Terminate" (1988) 1 JCL 177.
respondent guaranteed "the performance of all the terms and conditions of the
contract including the payment of all moneyspayable by the purchaser under
[he contract".'Oi A deposit was paid and the balance of the purchase price was
to be paid pursuant to the terms of the contract of sale "upon settlement". The
contract of sale provided that settlement should take place within 14 days
after notice from the vendor to the purchaser that the relevant building unit
plan had been registered. Notice in accordance with this clause was given, but
the purchaser wrongfully terminated the contract on the day fixed for
settlement. The vendor elected to affirm the contract and eventually obtained
an order for specific performance against the purchaser. The question arose
whether the vendor could obtain payment from the guarantors.
The High Court held that the purchase price could not be recovered from
the guarantors as a fixed sum because their liability was dependent on
settlement taking place and that had not occurred. This was despite the fact
that settlement did not occur because of the purchaser's wrongful action. As
Justice Gaudron stated:
Even if it be correct that the purchaser is not entitled to aconveyance, that does not alter
the fact that under the contract the balance of the purchase money is payable "upon
settlement", and not upon the date fixed by the contract for settlement.'"
Both Chief Justice Mason (with whom Justices Deane, Dawson and
Toohey agreed) and Justice Gaudron accepted that the purchase price could
be recoverable from the guarantor as a debt if the guarantor had undertaken
to pay the purchase price on the dayfixed for settlement if the debtor failed
to do so. Chief Justice Mason, however, refused to accept that the guarantee
in question could be given that interpretation:
No doubt a promise by a purchaser to pay the balance of the purchase price "upon
settlement" gives less protection to a vendor than a promise to pay on a date fixed for
settlement. But this circumstances cannot justify reading the promise to pay "upon
settlement" ... otherwise than according to its terms.'us
These comments indicate that the vendor should exercise great care to
ensure that the guarantee states expressly that the guarantor will become
liable to pay the purchase price on "the date fixed for settlement by the parties
pursuant to the terms of the contract of sale".
The decision in Surzhird Plaza is illustrative of the established principle
that ambiguous contractual provisions should be construed in favour of the
103. Supra n 53, 245 (emphasis added).

104. Ibid, 268.
105. Ibid, 258.
guarantor;'06 but it is perhaps difficult for even the most careful draftsperson
to appreciate the vast difference between a reference to "settlement", on the
one hand, and "date of settlement", on the other hand, without the wisdom of
hindsight.
When the guarantee is appropriately drafted so that the guarantor is liable
for the purchase price, it is thought that the guarantor would then be entitled
to be subrogated to rights in the property to enforce the right of indemnity
against the purchaser. Although the guarantor has paid the purchase price to
the creditor, the purchaser has not. As a result, vis-8-vis the purchaser, the
creditor has an unpaid vendor's lien to which the guarantor is entitled to be
subrogated.'07
If, however, the drafting in Sunbird Plaza is adopted, Justice Gaudron
appeared to be of the view that the guarantor could never become liable for
the purchase price whilst the purchaser refused to settle. The word "settle-
ment", in the context of this contract of sale, required co-operation between
the parties. She stated:
It is not to the point (if it be the case) that as at the date fixed by the contract for
settlement, [the vendor] had doneeverything on its part necessary for settlement to take
place, for the contract makes it clear that settlement can only take place with the active
participation of the purchaser.lo8
Chief Justice Mason, however, appeared to take a less restrictive view.

The facts were that the vendor had promised to amend certain by-laws
governing the unit to be sold. In order to be effective such amendments
required registration pursuant to the Queensland Building Units and Group
Titles Act 1980, but this was not done by the date which the vendor had fixed
for settlement. The High Court found that the act of the purchaser in not
attending the settlement effectively ensured that the vendor had more time in
which to perform its obligation to secure registration of the altered by-laws.
There was, therefore, no breach by the vendor of this obligation.
In remitting the matter to the Full Court of the Queensland Supreme Court
to frame appropriate orders, Chief Justice Mason stated that there remained
several avenues open to the vendor, having now obtained the registration of
the relevant by-laws. One (discussed below) related to the claim for bargain
106. See Ankar Pty Ltd v National Westminster Finance (Australia)Ltd (1987) 162 CLR 549,
561.
107. See J O'Donovan and J Phillips The Modern Contract of Guarantee (Sydney: Law Book
Co, 1985) 502-522, as to the issue of subrogation. As to subrogationof anunpaidvendor's
lien see Orakpo v Manson Investments Ltd [I9781 AC 95.
108. Supra n 53,268.
damages, but Chief Justice Mason was of the view that an action against the
guarantor in debt was still possible. He stated:
Alternatively, the appellant may decide to take steps which might entitle it to maintain
against the respondents an action on the guarantee for the balance of the purchase price
as a debt then due and payable. If the appellant were to tender to the purchaser a
registrable transfer of the unit, the purchaser might then come under a liability to pay
the balance of the purchase price.lW
Thus, for the purpose of suing the purchaser and consequently the guarantor
in debt, Chief Justice Mason appears to contemplate that the action would
arise simply upon a tender of the documents in proper form.
The difficulties which arose in Sunbird Plaza may be unusual, particu-
larly in the case of a guarantee of a loan, where the guarantor's liability for
a money sum will normally arise on default of the principal. But even here
the creditor must be careful in two respects. First, the creditor must not bring
proceedings where there is no default or before the default has occurred.
Thus, in Eshelby v Federated European Bank Ltd,llo the guarantor of
payments due under a building contract to the building contractor was not
liable on the guarantee when the work was performed defectively with the
result that the principal debtor was not himself liable for the payments and,
therefore, was not in default. Similarly, the guarantor of a bailee's obligations
under a contract of bailment will not be liable where the goods are stolen from
the bailee without any negligence on his or her part, since a bailee is not liable
in the absence of negligence.''' The guarantor for the payment of goods to be
delivered is not liable when the goods are not delivered within the terms of
the principal contract1'*or when the period of credit granted to the principal
by the creditor has not expired113because in both cases the principal's
obligation to pay has not yet arisen. Conditions precedent to the liability of
the principal debtor under the principal contract, such as the giving of notice,
may also need to be satisfied before the principal liability can properly be
regarded as having arisen. l 4
109. Ibid, 264-265.

1lo. [I9321 1 KB 423.
111. Walker v British Guarantee Association (1852) 21 LJQB 257 As an example of the
absence of default by the principal in fidelity guarantee see Jephson v Howkins 133 ER
787.
112. Schureck v McFarlane (1923) 41 WN (NSW) 3.
113. Turner Manufacturing Co. PiyLtdv Senes [I9641 NSWR 692. A writ issued for payments
of such goods will be issued prematurely.
114. Rickaby v Lewis (1905) 22 TLR 130; Mayor of Wellington v Roberts and McNaught
(1883) NZLR 2 CA 56.
Secondly, the creditor must comply strictly with any conditions prec-
edent to the guarantor's liability. Substantial compliance will not be suffi-
cient. Thus, in Tricontinental Corp Ltd v HDFI Ltd'I5 ("Tricontinental") a
guarantee (in the form of an underpinning agreement) provided that the
entitlement to make a demand upon the guarantor for payment arose "upon
the occurrence of the following events". Those events, in general terms, were
the service of written notices of default upon the principal debtor and also
stipulated notices upon the guarantor within prescribed time limits. Justices
Samuels and Waddell (President Kirby dissenting) held that the relevant
terms were conditions precedent to the performance of the guarantors'
obligations with the result that strict compliance with those terms was
necessary. As Justice Samuels stated:
It seems to me to follow from Ankar Pty Ltd v National Westminster Finance that it is
meaningless to speak of the substantial performance of a condition precedent. Either
it has been performed, or it has not. If it has, performance enlivens the obligation to
which the stipulation is acondition precedent. If it hasnot, the obligationdoesnot arise.
Tricontinental's submission that a tripartite classification of conditions precedent
analogous to that used in assessing the status of promissory terms should therefore be
rejected. Where an act by one party is a condition precedent to the liability of the other,
whether it has occurred or been fulfilled depends upon if the act proffered matches the
description of the condition precedent in the contract, and not upon the seriousness of
the divergence from that des~ription."~
On the facts, the notice provisions were not strictly complied with and the
guarantor was accordingly not liable for the outstanding debt. Although
historically correct,l17 the consequence is that the guarantor is placed in a
more favourable position if it is shown that the relevant term is a condition
precedent and the condition is not fulfilled than if the creditor is in breach of
a promissory stipulation. In the former situation, something less than strict
compliance means that the guarantor is, in effect, automatically discharged,
but in the latter case the guarantor may remain liable, depending on whether
the stipulation is classified as a warranty, condition, or intermediate term.
The determination of whether the term is a condition precedent or a promis-
sory obligation, however, is not always an easy question of construction. In
Tricontinental, the guarantor's liability was drafted so that it was dependent
upon particular events o~curring,"~ but other provisions regarding notice
may be so phrased as to impose obligations rather thanpro~~ide h r contingen-
115. (1990) 21 NSWLR 689; J W Carter "Conditions and Conditions Precedent" (1991) 4 JCL
90.
116. Ibid, 705.
117. Ritchie v Atkinson (1808) 103 ER 787,791.
118. Supra n 115, see cl 2.2.l(a)(b) in the case.
ties."' Indeed, in Tricontinental itself, President Kirby treated the term as an

intermediate promissory obligation, which required only substantial compli-
ance.I2"
The present law regarding the construction of conditions precedent is
unsatisfactory, allowing the guarantor to be discharged for the most trivial
departure from the terms of the guarantee. On a proper construction of the
instrument, it may be appropriate to conclude that only substantial compli-
ance is the condition required. The courts should then be able to interpret the
condition a~cordingly.'~'
3. Termination by the creditor for the principal's breach

It is clear that if the creditor terminates the principal transaction according
to its terms so as to discharge the principal from future liability, the guarantor
of the transaction will be similarly relieved from liability. Thus, if a lessor
gives the lessee a notice to quit in accordance with the terms of the lease, the
lessee and the guarantor of the lessee's obligations will be discharged from
future liability for payment of the rent.'22
It might reasonably be supposed, however, that if the creditor elects to
terminate the principal contract for a breach by the principal in circumstances
in which the principal continues to remain liable to the creditor in damages,
the guarantor will continue to be responsible for such liabilities. This follows
from the fact that the reason for the creditor obtaining the guarantee in the first
place is to protect himself against the contingency of the principal's breach.
However, it has been argued that because the principal contract determines
as a result of the creditor's acceptance of the debtor's breach in such
circumstances, the consequence is that the obligation of the guarantor will
also be extinguished.
Important to an understanding of this argument is the distinction between
two forms of guarantee. The distinction was first drawn by Lord Reid in
119. See in another context, Bremer Handelsgesellschaft mh v Vanden Avenne-Izegem PVBA

[I9781 2 Lloyd's Rep 109;AnkurPty Ltdv Nationul WestminsterFinunce (Australia) Ltd
supra n 106 in which the relevant clauses were defined in terms of obligations.
120. Supran 11.5.
121. Indccd this is an approach which has soinetimes found favour in the construction of
promissory conditions (eg Lunu Park (NSW)Ltd v Tramways Advertising Pty Ltd (1938)
6 1CLR 286). Whether or not this approach survives the adoption of the intermediate term
- -
concept was a matter left open by Samuels JA in Tricontinental, ihid.

122. Giddens v Dodd (1 856) 61 ER 988; Tuyleur v Wildin (1868) LR 3 Exch 303; Associated
Ilairies Ltd 11 Pierce (198 1 ) 256 EG 562.
M o s ~ h iand
' ~ ~subsequently adopted by the High Court in Sunbird Plaza.'24
In the latter case, Chief Justice Mason stated:
There are, however, two common classes of guarantee of the payment of instalments
by the principal debtor. The first is an undertaking by the guarantor that if the debtor
fails to pay an instalment he will pay. This is aconditional agreement. The guarantor's
obligation to pay arises on the debtor's failure to pay. The second is an undertaking by
the guarantor that the debtor will carry out his contract. Then a failure by the debtor to
perform his contract puts the guarantor in breach of his.'zs
An example of the first type of guarantee referred to by Chief Justice

Mason ("Type would be an undertaking that "in case the debtor is in
default of payment we will forthwith make the payment on behalf of the
debtor".I2' A guarantee of "the performance of all the terms and conditions
of the contract" would be an illustration of the second type ("Type (2)").
Sometimes the two forms of guarantee are combined. Thus, in NRG Vision
Ltd v Churchfield Leasing Ltd128the guarantee was stated to be in respect of
"the payment by the customer of all sums due under the agreement'29... and
the due performance of all the customer's obligations thereunder."
If the guarantee is of Type (I), the creditor's cause of action is in debt or
for a money sum, the claim being for a liquidated amount.'30In respect of a
guarantee of Type (2), the cause of action will generally be in damages for
breach of contract; but, even in this case, an action for a liquidated sum will
be appropriate if the amount claimed can be ascertained objectively by
calculation or by other positive data.I3' Bearing in mind the distinction
between these types of guarantee, an examination is required of the effect of
termination of the principal contract by the creditor on both accrued obliga-
tions and future obligations of the principal.
123. Supra n 8, 344-345.

124. Supra n 53.
125. Ibid, 256.
126. A "guarantee of the payment of instalments" will encompass payments of rental pursuant
to a lease and a sale of land by instalments.
127. This is the second part of the guarantee in Hyundai supra n 2. See also the second part of
the clause in Sunbird Plaza supra n 53, (the payment of all moneys "payable by the
purchaser") and the guarantee i ; ~ e e n ev ~ e v i i [I9861
e WAR 217 (a guarantee "to11:ake
good any default on the part of [the principal] in the payment of the said loan and interest").
128. See (1988) 4 BCC 56 (emphasis added); Sunbird Plaza supra n 53.
129. But it is suggested below that in any event this first part of the clause should embrace a
liability for damages.
130. As to the creditor's cause of action generally see below, and Sunbird Plaza supra n 53.
131. Spain v Union Steamship Co of New Zealand Ltd, supra n 15.
(a) Termination and the effect on subsequent obligations

The leading authority on this issue is M o s ~ h i .A' ~guarantee
~ was given to
secure a debt payable by instalments. The guarantor personally guaranteed
the performance by the debtor of its obligations to make the payments. When
the debtor defaulted in making the payments, the creditor accepted this
breach as putting an end to the contract and sought to recover the outstanding
future payments from the guarantor. The guarantor argued that he was
discharged from liability on the basis that once the principal agreement had
come to an end by the creditor's acceptance of the debtor's breach, the
obligation of the debtor to make the future payments also ceased. Although
the debtor would be liable in damages to the creditor, the guarantor argued
that he had not guaranteed the obligation to pay damages but only the
obligation to make the payments.'33
The House of Lords rejected this argument on the basis that the guarantor
by the terms of the guarantee had undertaken that the debtor would carry out
the contract. In other words, the guarantee was of Type (2). Thus, the
guarantor was liable in damages, the breach of the principal contract by the
debtor putting the guarantor in breach of the contract of guarantee.'34The
measure of damages payable by the guarantor would be whatever sum the
creditor could have recovered from the prin~ipa1.l~~
The same reasoning has been applied in Australia. In Nangus Pty Ltd v
Charles Donovan Pty Ltd,'" a guarantor of the "due performance ... and
observance of all the ... conditions ... in [a] lease" was held liable in damages
to the lessor. This was despite the fact that the lease had been determined by
the lessor's acceptance of the lessee's repudiation of the lease, which had
brought the lease to an end and relieved the lessee from making future rental
payments. Similarly, in Womhoin Pty Ltd v Savannah Island Trading Pty
Ltd,I3' the vendor of land recovered damages (being the deficiency on resale)
from a guarantor of "the performance of the covenants and conditions by the
132. Supra n 8.
133. The guarantor also argued that the acceptance of the debtor's breach as putting an end to
the contract was a material variation of the principal contract which extinguished the
guarantor's liability. This argument was also rejected.
134. Supra n 8, Lord Reid, 345; Lord Diplock, 348; Lord Simon of Glaisdale, 356-357; Lord
Kilbrandon, 359.
135. Supra n 8, 339. But see below as to the assessment of damages in an action against the
guarantor.
136. [I9891 VR 184.
137. Supra n 8. See E Peden "Contract of Guarantee - Liability of Guarantor after Termination
of Principal Contract" (1991) 4 JCL 264.
purchaser" of the contract of sale. It was irrelevant that upon the vendor's
acceptance of the purchaser's breach the contract came to an end and the
vendor had no right to claim the contract price from the purchaser as a
liquidated sum.
Lord Reid, however, in Moschi did indicate that if the guarantee only
amounted to an undertaking by the guarantor that he would pay any
instalment not paid by the debtor (a Type (1) guarantee), the guarantor would
be discharged.
A person might undertake no more than that if the principal debtor fails to pay any
instalment he will pay it. That would be a conditional agreement. There would be no
present obligation unless and until the debtor failed to pay. There would then on the
debtor's failure arise an obligation to pay. If for any reason the debtor ceased to have
any obligation to pay the instalment on the due date then he could not fail to pay it on
that date. The condition attached to the undertaking would never be purified and the
subsidiary obligation would never arise.138
Chief Justice Burt in the Supreme Court of Western Australia in Keene v

D e ~ i n e referred
'~~ to this passage with approval. Thus, according to Lord
Reid, if the guarantor's obligation is merely to undertake to pay if the debtor
fails to pay a particular instalment, rather than an undertaking that the
principal debtor will carry out the contract, the guarantor will be discharged
by a determination of the contract before the due date for payment of that
instalment, even though the determination arises out of the creditor's accept-
ance of the principal's breach. This result arises because the terms of the
guarantee indicate that the guarantor has only promised to pay an instalment
if the debtor fails to pay and that obligation to pay never arises because the
contract has been determined. In consequence, an action for a money sum is
not available because the payment has not yet accrued. A claim in damages
is not possible vis-8-vis the guarantor because the terms of the guarantee
contemplate merely a guarantee of the instalment and not a liability in respect
of damages.
No doubt this reasoning is in accordance with the general principles of
strict construction applicable to guarantees. But given that the central object
of the guarantee is to protect the creditor against the contingency of the
138. Supra n 8, 344-345. Note, however, that in Moschr itself none of the other Lordships
specifically discussed the point of construction made by Lord Reid. Eg, the judgments of
Lord Diplock and Lord Simon of Glaisdale appear to contemplate the possib~lityof an
action for damages against the guarantor, even though the guarantee is an undertaking to
pay an ~nstalmentif the debtor falls to pay it. Compare E Peden "A Classification of
Contracts of Guarantee (1991) 13 Syd LR 221.
139. Supra n 127. But on the facts the creditor affirmed rather than terminated the contract so
that the Issue under consideration here did not arise.
principal's breach, the result is unfortunate. The guarantor escapes all

liability in respect of future obligations subsequent to termination because of
somewhat technical distinctions in drafting. It is to be hoped that the courts
will strive for an interpretation of the guarantee that embraces a liability for
damages as well as for the recovery of the instalment as a liquidated sum.'40
For example, a guarantee of "all sums due under the agreement7' could be
viewed as also imposing an obligation to ensure that the debtor pays those
sums. Thus, the agreement would be interpreted as a guarantee of both Types
(1) and (2), 14' rendering the guarantor liable for damages in the event of a
determination of the principal contract and relieving the principal (and,
therefore, theguarantor) from liability for the future instalments as liquidated
sums.142
In any event, the message for the creditor is clear. The guarantee should
contain a specific clause guaranteeing "the performance of the terms and
conditions of the principal contract" so as to render the guarantor liable in
damages in the event of a determination of the principal contract arising from
the principal's breach before the date for payment of future instalments
pursuant to the principal contract arises.
Even if no such clause is included, and the agreement is simply a
guarantee of all sums payable by the principal, the creditor's action against
the guarantor for a money sum may be preserved in the following ways.
(i) By the inclusion of a liquidated damages provision in the principal

contract.
If the principal contract embodies a liquidated damages clause, this may
allow the creditor to recover all outstanding amounts from the guarantor. The
liquidated damages provision will state that upon the principal's default the
principal will become liable for future payments (subject to suitable rebates,
for example, in the case of a lease for the estimated rent obtainable from
releasing for the balance of the term, and also a rebate for early repayment).
In this case the guarantor's liability for the whole sum will arise on default
140. Note that in Womboin Pty Ltd v Savannah Island Tradzng Co Pty Ltd supra n 8 , Rogers
CJ Comm D, 370, was of the view that, "as a matter of general principle" a liability in
damages should survive termination of the principal contract following the principal's
breach. But his Honour's comments are limited to "a guarantor, who guaranteed the
performonc~eof the other party's obligation" (emphasis added). This was the case on the
facts.
141. Supran 126.
142. In such a case, however, damages might be limited to the amount of the debt on the bas~s
that consequential losses are not within the contemplation of the parties.
by the principal and before the contract is determined by the creditor

accepting the principal's repudiation.I4"
The benefit to the creditor of this mechanism is that the cause of action
will be for amoney sum and no duty to mitigate will arise as would be the case
in an action for damages. The danger is that the clause, if improperly drafted,
may be struck down as being in the nature of a ~ e n a 1 t y . I ~ ~
(ii) By an indemnity clause

If the agreement is clearly one of indemnity whereby there is a promise
to pay even in circumstances in which the principal never becomes liable for
the future instalments, the creditor may also recover those instalments as a
money sum.'" The difficulty here is that the drafting of such a clause is not
an easy task. A "principal debtor" clause, whereby the creditor is "given
liberty to act as though the guarantor were a principal debtor",'" will not have
this effect. The effect of such a clause may be to preserve the guarantor's
liability in circumstances in which he would otherwise be discharged, for
example, where the creditor improperly releases a security'" or grants the
principal an extension of time to repay the debt.lA8The clause also obviates
the necessity for a demand to be made upon the guarantor before issuing
proceeding^.'^^ But the dominant view is that the incorporation of a "principal
debtor" clause does not convert what would otherwise be interpreted as a
contract of guarantee into a contract of indemnity.150
See Dlrec.r Acceptance Finance Ltd v Cumherland Furnishirlg P g Ltd [1965] NSWLR
1504, 1509.
See Citicorp Australia Ltd I' Hendi? supra n 77.
See supra n 143.
An example taken from Fletcher Organrsation Pty Lid v Crocus I~zvestmerzrsP g Lid
[I9881 2 Qd R 517.
Ibid.
See Heald 1, O'Cor~nor[I9711 1 WLR 497: Brown Bros ,Zlotor. Lease Carlada L t ~ lI ,
Ganapathr (1983) 139 DLR (3d) 227.
Esso Petroleum C o Ltd Y Alstonhridge Properties Lid [I9751 1 WLR 1474. 1478.
See Citirorp A~~stralia Ltd I , Helldry supra n 77, Clarke J (at first instance), 20: Heald I ,
0'Connor supra n 148; Clipper Maritime Lid v Shirlstar Container Ti.cri~rpor.tLtd ("Tlle
Anemone") [I9871 1 Lloyd's Rep 546, 555; Brown Bros Motor Leasr~Canada Lrd I,
Ganaparhi supran 148. Compare Fletcher Oi-~anisatiorl Pry L t d ~C. r o c ~ u s I ~ ~ ~ ~ e s m
Prj
ie~rrs
Ltd supra n 146.5265-527 and 536 where the effect of a principal debtor clause is equated
with a specific variation of the contractual arrangements n hereby the guarantor clearly
assumes a primary I~ability.See also K P McGuinness The Law, (?fGuaruiitee Trecrrise
on Guarantee, Indemrrity and the Starrdhj Lettei- ofCr.edir (Toronto: Carswell. 19x6) 26
who suggests that the effect of aprincipal debtor clause is "to render the obligatron of the
surety absolute and unconditional".
Even if the agreement is drafted as an indemnity, or there is an indemnity

clause embodied within the guarantee, this may not achieve the desired
objective of rendering the guarantor liable in an action for a money sum for
instalments which fall due subsequent to the termination of the contract.
Thus, in Citicorp Australia Ltd v Hendry, it was held that an indemnity
provision did not preserve the obligor's liability when the sums payable
pursuant to the principal contract were irrecoverable as being in the nature of
a penalty.'51The clause, which preserved the liability of the indemnifier
despite the fact that the moneys "are or may be irrecoverable" from the
debtor, was construed as being applicable only if the indemnifier came under
an existing liability which was then affected by some "supervening
irre~overability"."~According to Justice Priestley this was not the case
because the effect of holding a clause to be a penalty is that no obligation is
ever assumed: "[Ilt is the same as if it was not in the agreement at a11."'j3
An indemnity clause may have the result of preserving the liability of the
indemnifier for the instalments in an action for a money sum when the
principal debtor is no longer liable to pay those instalments if it is drafted in
terms which provide that the obligor assumes a primary liability and
undertakes to pay the moneys secured whether or not any other obligor has
assumed an obligation to pay those moneys and whether or not the sums are
irrecoverable from any other 0b1igor.I~~ The clause should, of course, define
the moneys secured and might also specify the various grounds on which the
moneys are recoverable. But if the clause is embodied in a document which
is otherwise clearly a guarantee, it may be read down to accord with the intent
of that instrument (that is, it is in reality a secondary ~bligation).''~
Indeed, in respect of ascertaining the relationship between the creditor
and the obligor the words of the instrument are not decisive. Thus, in AGC
(Advances)Ltd 1,West,'56 Justice Hodgson, by reference to extrinsic evidence
151. Supran77.
152. Ibid, 41.
153. Ibid, 39.
154. Note, however, Clark J in Citlcorp Australia Ltd v Hendry ibid, 21 was of the view that
it would be contrary to public policy to allow recovery from an indemnifier when the
moneys were irrecoverable from the principal and that to allow recovery from the
indemnifier on the bas~sof a formula which gives rise to an irrecoverable penalty would
not reflect the creditor's true loss. The matter was left open by Prlestley JA on appeal, ibid,
41.
155. There is recent authority indicating that the words of the instrument are not decis~ve.See
.ACC (Adl,onc.es)Ltd I. West (1984) 5 NSWLR 590. On appeal, sub nom West 11 AGC
iAdl,otrc~.s)Ltd (1986) 5 NSWLR 610, the question was not discussed.
156. Ibitl.
and the surrounding circumstances, held that the position of the party who
was the principal borrower according to the instrument was in reality the
guarantor whilst the party designated as the guarantor was in fact the principal
borrower.
(b) Termination and the effect on accrued obligations

When the principal contract is terminated because of the principal's
breach, payments which were due before the date of termination will be
recoverable from the principal (and the guarantor) as a debt. Some difficulty,
however, arises when the accrued payments are recoverable by the principal
debtor from the creditor despite the principal's breach.
The leading Australian authority on the question of the guarantor's
liability in these circumstances is Dennys Luscelles, discussed above.'j7 The
guarantee was given to secure the due payment of an instalment by a
purchaser under a contract for the sale of land. Although the purchaser failed
to pay the instalment when due, the purchaser purported to terminate the
contract for the vendor's breach. This repudiation was accepted by the vendor
as discharging the contract. A valid termination by the purchaser would
certainly have discharged the guarantor because the purchaser would no
longer have been under any liability either for payment of the instalment or
in damages.
It was argued, however, that the purchaser had no valid ground for
terminating the contract, and that the contract was in fact discharged by the
vendor's acceptance of the breach by the purchaser arising from his wrongful
attempt to terminate. Justice Dixon accepted this argument.15*The majority
regarded which party was in breach as irrelevant.lj9 Their reasoning was that,
as this was a contract for the sale of land and there had been a total failure of
consideration (the purchaser obtaining no title to the land), the overdue
instalment ceased to be payable by the purchaser when the contact was
discharged and, indeed, was recoverable by him if he had paid it. It did not
matter that the purchaser was in breach and might be subject to an action for
damages by the vendor. It followed, according to the High Court, that the
guarantors of the instalment must also be discharged.
A different result was reached in Hyundui where a guarantee was given
for the payment of "sums due or to become due ... under a contract" for the
157. Supra n 6.
158. Ibid, 479. See also Evatt J who dissented.
159. Ibld, Dixon J, 479, Starke J, 469, Rich J 467-468.
construction of a ship, the price payable by instalments. Even on the

assumption that the principal was not liable for instalments which had
accrued, it was held that the guarantor still remained liable for those accrued
payments.'" It is not clear why this should be so since the principle of co-
extensiveness applicable to guarantees should lead to the result (as in Dennys
L a s ~ e l l e s ) that
' ~ ' if the instalment is not payable by the purchaser it shouldnot
be recoverable from the guarantor as a liquidated sum. One explanation of the
decision in Hyundai is that the guarantor's obligation was construed by the
court as being a liability to pay regardless of the principal's position; that is,
a primary liability in the nature of an indemnity was assumed. But the terms
of the relevant instrument do not indicate that it was other than a guarantee.'"
In our view, the High Court in Dennys Lascel1e.s was clearly correct in
concluding that if the purchaser is not liable for the accrued payment (or if it
is recoverable by him), it cannot be recovered from the guarantor as a
liquidated sum.'("
Yet there is an outstanding question that was not discussed in that case.
Why, on the facts of Dennys Lu.scelles,''%as the guarantor not liable in
damages? The answer at first glance is simple. The vendor did not bring an
action fordamages, perhaps because the vendor could not show any loss since
the value of the land had risen.'65 More fundamentally, however, if Lord
Reid's view in M o s ~ h iis' ~correct ~ then an action for damages against the
guarantor may not have been possible at all, even if the vendor had been able
to show loss of profit on the sale. The guarantee in Dennys Lascelles was a
160. Supra n 2. In fact the House of Lords held that the party ordering the construction was so
liable.
161. Supran6.
162. The agreement was in these terms: "We hereby jointly and severally irrevocably
guarantee the payment in accordance with the termb of the contract of all sums due or to
become due by the buyer to you under the contract, and in case the buyer is in default of
any such payment we will forthwith make the payment in default on behalf of the buyer"
(see supra n 2, 1 133).
163. Supra n 6.
164. Ibid.
165. Of course the principal must be in breach of contract before an action can be mamtained
against the guarantor. Eg Hrnlrr.son v Rickarts (1884) 63 LJQB 11 1 can probably be
explained on the basis that the creditor, by terminating a sale agreement and seizing the
goods, prevented the property passing so that the consideration for the sale agreement
wholly failed. Thus, the principal could not have been sued even in damages for the
outstanding amounts owing so that the guarantor was also relieved from liability: see the
explanation In Brooks v Bvirnstrin [ 19091 1 K B 98. But in l l t ~ n n y sLascrllrs supra n 6
there was clearly a breach by the principal.
166. Supra n 8, 132.135.
guarantee to pay the instalment if the debtor did not pay167(Type (l))Ihxand
not a guarantee of the purchaser's obligation (Type (2)).'"Vhe result,
according to Lord Reid's reasoning in M ~ s c h i ,would
' ~ ~ be that the guarantee
did not embrace a liability to pay damages but only to pay the instalment,
which was no longer payable by the purchaser. The guarantor would,
therefore, not be liable.
4. Where the creditor elects not to terminate the principal

contract
It will be recalled that in Sunhird Plaza the creditor could not recover the
purchase price from the guarantor as a fixed sum because the event upon
which the money was payable ("settlement") had not ~ c c u r r e d . ' Sunhird
~'
Plaza, however, raises another issue, which is directly related to the decision
of the creditor to affirm the contract of sale. In that case the respondents
guaranteed "the performance ... of all the terms and conditions of the
contract". As has been seen, a guarantee of this type will embrace a liability
for damages.I7?Prima facie, therefore, the breach of contract by the purchas-
ers would have put the guarantors in breach of their guarantee. Why, then,
could not the vendors successfully have sued the guarantors for damages,
be~ngthe loss of profit on the contract?
The answer to this lies in the course of litigation pursued by the vendor
in respect of the contract of sale, namely, that the vendor chose to affirm the
contract rather than terminate it and, indeed, obtained an order of specific
performance of that contract. Loss of bargain damages are only recoverable
if the contract is brought to an end. This was never done.I7' Furthermore,
having obtained an order for specific performance, the contract could not be
terminated without vacation of the order, which requires leave of the court.
This is because the plaintiff cannot be permitted to act inconsistently by
terminating the contract in face of an order of the court requiring him to
~ o m p 1 e t e . IA~ ~present claim for loss of bargain damages was, therefore,
misconceived against the purchasers and consequently against the guarantors
in the present proceedings. The vendor, however, could now apply to the
Ibld. The guarantee was simply a guarantee of "the due payment" of the stipulated sum.
See supra n 126.
See supra n 127-128.
Supra n X.
Supra n 53.
See supra n 100.
Supra n 53, Mason CJ, 260, Gaudron J, 273.
Ibid. 259-261.
court for the order of specific performance to be vacated, terminate the

contract of sale, and seek darn age^."^ Thus, the result of the creditor's
decision to affirm the principal contract was that no action for damages was
possible without the taking of further procedural steps, even though the
guarantee was appropriately drafted so as to embrace a liability for damages.
Sunhird Plaza is not the only example of this result. In Keene v D e ~ i n e , ' ~ ~
the creditor affirmed a loan contract payable at a future date, despite a
declaration (amounting to a repudiation) by the principal debtor that he was
not going to perform. An action for loss of bargain damages was therefore no
longer possible. The guarantee obliged the guarantor "to make good any
default on the part of the debtor in the payment of the said loan and of all
interest ... thereon". Chief Justice Burt held that, since there had been no
default in "the payment of the said loan ...and interest ...thereon" at the date
of the issue of the writ, no cause of action had arisen. The action was
dismissed, leaving the plaintiff to commence proceedings again.
5. Where the principal terminates the principal contract

(a) Termination arising from statutory or contractual right
The principal debtor may validly terminate the principal contract, either
on the basis of a provision in that contract permitting termination or pursuant
to the provisions of a statute.'77Thus, in Insurance Office ofAustralia Ltd v
Burke Pty Ltd,'78the purchaser under a contract for the sale of land exercised
a statutory right to terminate the contract. The result of this termination was
that the purchaser was discharged from liability to pay further instalments of
the purchase price. The guarantor of the performance by the purchaser of the
payment of moneys which would otherwise have become due and payable
under the contract of sale was held to be relieved of liability. Another
illustration involving termination of the principal contract exists in the
context of hire-purchase transactions. If a hirer exercises a right to terminate
the agreement in accordance with its terms and fulfils the other obligations
under the agreement, a guarantor of his or her commitments will be dis-
charged.
-
175. Ibid.
176. Supra n 127.
177. Insurance Office of Australia Ltd v Burke Pty Ltd (1935) 35 SR (NSW) 438 (valid
termination of a lease according to its terns).
178. Ibid.
179. Western Credit Ltd v Alherry [I9641 1 WLR 945.
The effect of termination of the principal contract by the principal in the

caseof aguarantee will be to relieve the guarantor from any future obligations
accruing subsequent to the date of termination. But this will not be the case
if the contract is viewed as one of indemnity. In Direct Acceptance Finance
Ltd v Cumherland Furnishing Pty Ltd,lRn a clause in the relevant agreement
permitted the recovery of payments due under a hire-purchase agreement,
even in circumstances where the principal's obligation to make these pay-
ments had ceased because of an effective termination of the hire-purchase
agreement under the provisions of the New South Wales Hire-Purchase Act
1960. It was held that the plaintiffs could recover as this was an independent
promise to indemnify the plaintiffs and was, therefore, unaffected by any
valid termination of the hire-purchase agreement.'*'
(b) Termination upon the creditor's breach

If the creditor repudiates the principal contract or is in breach of a
condition of that contract, and the principal debtor accepts the repudiation or
breach as terminating the contract, the guarantor will be discharged.Ix2Again,
the guarantor will be discharged in respect of obligations subsequent to the
date of terminati~n.'~' But in this case the guarantor will be able to take
advantage of the claim in damages that the principal has against the creditor,
at least if the principal is joined as a party to the proceeding^.'^^
A guarantor will not be discharged, however, by a non-repudiatory
breach of the principal contract unless it can be shown that the relevant term
of the principal contract has become "embodied" in the guarantee and that
there has been a departure from that term.'85
180. Supra n 143.

181. See also Goulston Discount Cn Ltd ~ ~ C l a[I9671
rk 2 QB 493. Compare Unity Finance Ltd
v Woodcock [I9631 1 WLR 455. The construction of the agreement in the latter case,
however, was doubted in Dir-ec.rAcceptance Financv Ltd v Cumherland Furnishing Pty
Ltd, ibid.
182. National WestminsterBank PIC vRi1c.v [I9861 FLR 213, referring to repudiation, but the
rule should logically apply to a breach of condttion.
183. Exceptionally, where the guarantor will not be discharged because the principal's
promise is independent of the creditor's obligations (eg a tenant's obligation to pay rent
is independent of the landlord's covenant to repair). See Chatfk~ldv Elmstone Resthouse
Ltd 119751 2 NZLR 269,276.
184. See Cellulose Produc,ts PQ I.td $1Truda (1970) 92 WN (NSW) 561.
185. National Westminster Bank PIC 1. Riley supra n 182,223.
6. Conclusion
As has been seen, the rights of the creditor against a debtor or a guarantor
can be very much enhanced by a combination of a (i) careful drafting of the
contract and (ii) exercising the correct options when pursuing rights against
the debtor.
In the context of claims for liquidated sums, greater security is offered by
the express apportionment of payments to performance than agreed damages
clauses. Whereas agreed damages clauses are subject to the rule against
penalties, that rule does not apply to sums representing the agreed price of
performance. The decisions indicate that if a claim for damages must be made
following termination, difficulties are likely to be encountered unless there
is an express definition of obligations or an express provision that any breach
amounts to a repudiation.
In the context of guarantees, Sunbird Plazals6is perhaps the best illustra-
tion. The draftperson in that case could perhaps be excused for failing to
appreciate the difference between liability being dependent on "settlement"
and, alternatively, "on a date fixed for settlement". But the litigator should
not, in our view, have proceeded to obtain an order of specific performance
and thus preclude the client's right to claim loss of bargain damages.
It is not possible, of course, to anticipate every contingency, but the
enforcement of contracts against debtors and guarantors is often made more
difficult by the failure of legal advisers to review thoroughly their standard
form contracts in the light of recent case law.
186. Supra n 53

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[VOL.

THE LIABILITY OF DEBTORS AND

J W CARTER** AND J C PHILLIPS***

It I S trite luw,that a contrac,t may he termrnatedorr the basis o f u rep~pr*dlariorr,o breac.h

1. Introduction - consequences of termination

(b) Termination and rescission

2. [I9801 1 WLR 1129.

termination has been considerable and creates uncertainty in a fundamental

(c) Intention and the consequences of termination

Justices Dixon and Evatt were clearly of like opinion in Westralian

10. (1936) 54 CLR 361, 379.

part of the current difficulties in the recovery of damages following termina-

The feature which is common to all these groups of instalment payments

(b) Commercial contracts

total price.28 Construction of the vessel was to proceed continuously from

for cancellation was destroyed by the act of ~ancellation".~~

32. Ibid, 1134 and 1141.

enough to accept an analogy with a building contract;'%ut to treat $US350 000

even though the builders had almost certainly begun c o n s t r ~ c t i o n . ~ ~

(c) Implications for drafting

3. Loss of bargain damages

(b) The Shevill doctrine

54. Supra n 6,476-477.

(c) Implications for drafting

of one or two instalments under hire-purchase agreement not a repudiation); Afovos

by the breach, including the loss caused by termination, is to be recoverable.

However, as we have already seen,80the clause may be subject to relief

contract immediately due as a (present) debt, which, by reason of the indulgence

This has to be described as a theoretical possibility. The doubts cast on

The penalty clause is a dead letter.'" It cannot be relied on as expressing

Ibid, Gibbs CJ, 367.

of precision in the drafting of the guarantee itself.

The remainder of this paper will point to problems which arise in

2. The effect of the terms of the guarantee and principal

103. Supra n 53, 245 (emphasis added).

Chief Justice Mason, however, appeared to take a less restrictive view.

109. Ibid, 264-265.

ties."' Indeed, in Tricontinental itself, President Kirby treated the term as an

3. Termination by the creditor for the principal's breach

119. See in another context, Bremer Handelsgesellschaft mh v Vanden Avenne-Izegem PVBA

concept was a matter left open by Samuels JA in Tricontinental, ihid.

An example of the first type of guarantee referred to by Chief Justice

123. Supra n 8, 344-345.

(a) Termination and the effect on subsequent obligations

Chief Justice Burt in the Supreme Court of Western Australia in Keene v

principal's breach, the result is unfortunate. The guarantor escapes all

(i) By the inclusion of a liquidated damages provision in the principal

by the principal and before the contract is determined by the creditor

(ii) By an indemnity clause

Even if the agreement is drafted as an indemnity, or there is an indemnity

(b) Termination and the effect on accrued obligations

construction of a ship, the price payable by instalments. Even on the

4. Where the creditor elects not to terminate the principal

court for the order of specific performance to be vacated, terminate the

5. Where the principal terminates the principal contract

The effect of termination of the principal contract by the principal in the

(b) Termination upon the creditor's breach

180. Supra n 143.

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J W CARTER AND J C PHILLIPS*