The New South Wales Court of Appeal recently handed down an important decision regarding the scope of “suspension clauses” in the case of O’Brien v Bank of Western Australia Ltd [2013] NSWCA 71.

Suspension clauses typically provide that the debtor agrees not to raise any set-offs, cross-claims or deductions until after the debt has been repaid in full. They therefore “suspend” any rights of a borrower or guarantor against the lender until after the loan has been repaid.

The facts

In O’Brien, there was a loan agreement between the Bank of Western Australia Ltd (“BankWest”) and a company called FOB Airlie Beach Pty. Limited (“the Borrower”) to complete a construction of a development. The loan was secured by, amongst other things, guarantee and indemnity agreements entered into by the director and another of his companies, Bakota Holdings Pty. Limited (together “the Guarantors”).

Under the loan agreement (which was varied and agreed upon) the amount borrowed and interest accrued was to be repaid on 15 January 2009. On 6 April 2009, when the loan was not repaid, BankWest issued a letter of demand to the Borrower for the outstanding monies. BankWest subsequently appointed receivers and managers to the Borrower and sold the property that was security for the loan agreement.

Supreme Court Proceedings

As the proceeds from the sale of the property did not satisfy the amount owing to BankWest, BankWest commenced proceedings in the Supreme Court of New South Wales against the Guarantors to recover the outstanding balance. The Guarantors filed defences which asserted that they were not liable to repay the loan to BankWest because of alleged representations by BankWest to them (both before and after 15 January 2009) that BankWest would roll over the facility.

The Guarantors sought to rely on BankWest’s representations to argue that: –

1. BankWest was estopped from asserting that there was an “event of default” on 6 April 2009 because there was no “relevant failure” to repay the loan on 15 January 2009; and
2. The Guarantors should be relieved from liability to repay the loan under section 12GM of the Australian Securities and Investments Commission Act 2001 (Cth.) (“the ASIC Act”) (which allows the court to vary a contract or to relieve a party from its obligations under the contract which has been tainted by misleading and deceptive representations).

BankWest, in turn, applied for summary judgment against the Guarantors. In support of its application for summary judgment, BankWest relied on the suspension clauses in the loan agreement and argued that:-

1. The Guarantors did not have a defence because the Borrower had agreed that the loan was payable on 15 January 2009 “in full without set-off, counterclaim or deduction”; and
2. The Guarantors had themselves agreed that, until the loan was repaid, they would not rely on any cross-claims, set-offs or deductions to reduce their liability under the guarantees.

The court in the first instance did not accept these arguments, and entered judgment in favour of BankWest for $158,661,356. The Guarantors appealed this decision.

In the Court of Appeal

The Guarantors were successful in their appeal in the New South Wales Court of Appeal. In overturning the earlier decision, the Court of Appeal stated the following in relation to suspension clauses: –

1. The suspension clauses in this instance operated only when a liability had arisen under the guarantees (Ward J at paragraph [88]). This means that suspension clauses may still operate in circumstances where the debtor concedes that the debt is due and owing (but contends that there are other set-offs, cross-claims or deductions that reduce the amount payable).
2. However, the suspension clauses do not prevent a debtor from arguing that, by reason of certain circumstances, there was not any debt due and payable:“[T]he suspension clauses are predicated on an amount being…unpaid and if there is an arguable defence that…there was no sum due and payable at the date demand was made of the borrower, then there is no right/liability upon which the suspension clause can operate”.
3. Suspension clauses cannot protect BankWest against the grant of statutory remedies for misleading and deceptive conduct. This is because borrowers and guarantors may seek orders under the ASIC Act that:
   1. A loan agreement or guarantee be declared void; or
   2. They be absolved retrospectively from their obligations under the loan agreements.

Moving forward

The decision in O’Brien v Bank of Western Australia Ltd makes it clear that suspension clauses in the form currently used by many lenders cannot prevent a debtor from challenging the underlying debt itself.

Financiers are no longer able to assume that a clause requiring payment in full “without deduction, set-off or counterclaim” will be upheld by the courts, and should consider whether their existing suspension clauses need to be revisited in light of this decision.