Eureka 2 Holdings v Palasty [2010] NSWSC 526

The defendant was guarantor of a loan from the plaintiff to a company in the amount of $1.4 million. The loan was not repaid and the lender applied for summary judgement against the guarantor for the amount outstanding with interest and costs. The guarantor argued monies were owed by the lender to other entities associated with him which could be set off against the amount claimed by the lender. The lender relied on the loan and guarantee contracts which prohibited the use of a set-off to prevent or delay the demand for money payable under the guarantee.

Justice Price applied the principles of summary judgement stated in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 per Barwick CJ at 129, that the defence had to be so obviously untenable it could not possibly succeed.  

The defendant relied on a termination Deed to which the plaintiff was not a party. As a result, no defence could be made out that the plaintiff had released the defendant from its obligations as guarantor pursuant to the loan agreement and guarantee.

Justice Price stated the relevant legal principles as to set off, as follows:

It is well-established that a right to a set-off can be excluded by agreement between the parties: see Daewoo Australia Pty Ltd v Porter Crane Imports Pty Ltd/t as Betta Machinery Sales [2000] QSC 050; L.U. Simon Builders Pty Ltd v H.D. Fowles [1992] 2 VR 189; Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168. If the parties intend to exclude the right to set-off clear words must be used.

The guarantee provided in clause 8.1 under the heading “Guarantor’s rights are suspended”:

As long as there is any Guaranteed Money, the Guarantor may not, without the Financier’s consent:

(a) reduce its liability under this guarantee and indemnity by claiming that it or the Debtor or any other person has a right of set-off or counterclaim against the Financier.

Clause 12.1(a) provided that:

the Guarantor agrees to make payments under this guarantee and indemnity:

(a) in full without set-off or counterclaim and without any deduction in respect of Taxes unless prohibited by law.

Justice Price found that the words of clauses 8.1(a) and 12.1(a) of the guarantee were clear words of exclusion, with the result that the guarantor was unable to use set-off to prevent the lender from claiming from the guarantor the amount due under the loan agreement, which upon default remained unpaid.    

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