A “Gentlemen’s Agreement’ : Will a handshake agreement release me from my obligations as guarantor?

The recent case of Harburg Nominees Pty Ltd & Anor v Deen [2019] QSC 291, highlights the weight courts will give to consistent evidence, reliable testimony and surrounding circumstances when considering whether an alleged representation has actually been made.

In this case the Court found against the defendant who claimed he was not liable under a guarantee because of reliance he had placed on alleged representations made by an agent and representative of the two Plaintiffs (Harburg Nominees Pty Ltd and Harburg Investments Pty Ltd, in their respective capacities as trustees).

Specifically, the Court found that it was inherently improbable that the pleaded representations were made by the Plaintiffs’ agent and representative (Mr Harburg), and accordingly, the Defendant (Mr Deen) was held personally liable for the outstanding debt of $40,057,964.18 in addition to bearing the Plaintiffs’ costs arising from the proceeding. 

Facts of the Case

This case concerns an agreement made on the 3 June 2016 wherein the Plaintiff would advance a further $4,450,000 to Warapar Resources Pty Ltd to facilitate the completion of a real estate development project, and as part of that loan, Mr Deen (Warapar Resources Pty Ltd’s sole director) would act as guarantor.

Mr Deen claimed that in signing the guarantee agreement, he relied on the following representations made by Mr Harburg (the Plaintiffs’ director and representative):

  1. That neither the guarantee dated 3 June 2016, nor any earlier guarantee would be enforced by the Plaintiffs against Mr Deen; and
  1. That sufficient funds would be provided to support Warapar Resources Pty Ltd’s completion of the project.

Mr Deen asserted that, were the representations not made, he never would have executed the loan agreement on 3 June 2016, and further, that he would have obtained finance from an alternative lender and sourced another developer.

What did the Court consider?

The threshold issue considered by the court was whether the Plaintiffs’ director and representative, Mr Peter Harburg, actually made the alleged representations.

Plaintiff & Defendant Positions

Mr Deen swore in his affidavit that in a meeting in or about late May 2016, he had a meeting with Mr Harburg and:

“… after the provision of [documentation relating to the project, including costs estimates for project completion], wherein [Mr Harburg] indicated that he had been through the document and that he wished to continue the funding and that he was able to source the necessary funds by alternate means. I told Peter Harburg that I was concerned about my personal liability under the Guarantee that I had previously signed on 18 February 2015 and any earlier Guarantees that I had signed. I had told him that I would be obtaining finance from an alternate lender if some assurance could not be given about the Guarantees.

26. He said to me words to the effect that the First and Second Plaintiffs would provide sufficient finance and support to Warapar Resources Pty Ltd to enable it to complete the development and therefore repay the principal and interest. I distinctly recall that Peter Harburg said to me ‘I have never had to rely on a guarantee’ and ‘I am with you until the end’. He then said that neither the Guarantee that I had previously signed on 18 February 2015 nor any earlier Guarantees that I had signed nor any further Guarantee would ever be enforced. I distinctly recall shaking hands with Peter Harburg both in his office and out at the lifts as I was leaving. He said to me that the relevant documents would be prepared shortly.”

This alleged agreement was not reduced to writing because it was alleged to be considered by both parties to be a “gentlemen’s agreement.”

Mr Harburg denied making the representations altogether and stated that he was “absolutely certain” that no agreement was made to refrain from enforcing the guarantee.

Notably, the agreement that was alleged by Mr Deen to have occurred in May 2016 was not reduced into writing.

 Court considerations:

In assessing whether the alleged representation was made, the court referred to the following principles often cited from Watson v Foxman (1995) 49 NSWLR 315, [318]-[319];

Where conduct being examined is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances.

Moreover, Watson v Foxman was relied on in acknowledging the flawed nature of human memory which has an effect on the reliability of both Mr Deen and Mr Harburg’s evidence. Mr Deen’s recollection of the aforementioned discussion was held to be an “unreliable reconstruction.”

This finding was made in light of the following factors:

  1. The original defence filed in April 2017 did not reference either of the alleged representations, nor were they recorded in any notes made by Mr Deen’s solicitor after advising him about the guarantee in early June 2016.

The inference drawn by the court in light of these factors was that Mr Deen had not reported the alleged representations to his solicitor either, at the time of signing the guarantee, nor anytime prior to the defence being filed in April 2017.

  1. The alleged representations were made prior to Mr Deen signing the guarantee agreement.

The court considered it illogical that Mr Deen would have signed an agreement on the basis of an understanding that it would never be enforced rather than simply throwing out the guarantee altogether.

  1. The improbability of Mr Harburg making an open-ended financial commitment to Mr Deen, of which he carried all the risk in being unable to recover the amount advanced.

The court emphasised the fact that Mr Harburg had no reason to make a promise to provide further funds and refrain from enforcing a guarantee whereby his prospects of recovering money owed would be reduced. 

Decision:

The defendant did not prove, with a sufficient degree of precision that the alleged representations were made and accordingly the court found him personally liable for the outstanding money owed of $40,057,964.18 in addition to bearing the plaintiffs costs.

Takeaway:

This case provides an important reminder of the importance of;

  • Written evidence in support of oral testimony when asserting a representation was both made in the first instance, and subsequently relied on.
  • Including all relevant factors in original submissions and any accompanying written statements.
  • Carefully considering the risk and accompanying obligations when signing guarantee agreements.
  • Keeping written records of all informal oral agreements regardless of the personal relationship between parties.
  • Where a critical oral representation is relied upon in entering into an agreement, that oral representation should be agreed to in writing.

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