Can a “Gentleman’s Agreement” not to enforce a guarantee be relied upon?

In Harburg Nominees Pty Ltd & Anor v Deen,[1] the Supreme Court of Queensland considered whether an oral “gentleman’s agreement”, that is the oral representations made, meant that the guarantees were unenforceable.

The facts

As at May 2015, Harburg Nominees Pty Ltd (Harburg) had, over time, advanced approximately $18.5 million to Warapar Resources Pty Ltd (Warapar) for a development project. As security, Warapar provided a mortgage over the land and its sole director, Mr Deen provided various guarantees.

There were problems with progressing the development project and by May 2016, Mr Deen had a meeting with Harburg’s director and representative, Mr Harburg, to discuss project costs and further funding. It was at this meeting that Mr Deen alleged that a “gentleman’s agreement” was reached and representations were made to him that meant he should not be held liable under the guarantee he subsequently signed or any existing guarantees.

In December 2016, Warapar was placed into receivership and Harburg sought to enforce the guarantees given by Mr Deen.

Mr Deen’s version of events is that at the meeting:

• Mr Harburg had said to him that he had never had to rely on a guarantee and that the guarantees previously signed by Mr Deen and any further guarantees signed by Mr Deen would never be enforced.
• Mr Harburg also said that Harburg would continue to provide sufficient funding and support to Warapar until the project was completed.
• They shook hands on this understanding and Mr Deen did not ask for this to be confirmed in writing as “gentleman’s agreements” were commonplace in his industry.

Mr Deen’s position is that if Mr Harburg had not made the representations, he would not have signed the guarantee securing a further loan to Warapar in June 2016 and would have made other arrangements for completion of the development project.

In contrast, Mr Harburg says that at the time of the meeting he had significant concerns about the project and was “absolutely certain” that he did not suggest or agree that the guarantees given by Mr Deen would never be enforced. According to Mr Harburg, his usual practice was to obtain guarantees from directors of companies that they had lent money to.

The Court’s decision

His Honour found that neither Mr Deen nor Mr Harburg had a good memory of what took place at the meeting and the alleged representations made. In considering the competing version of events put forward by Mr Deen and Mr Harburg, the Court was guided by the following principle:

“Where the conduct 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 circumstances.”

The Court considered that it would be improbable that Mr Harburg would have agreed to never enforce the guarantees given by Mr Deen or make an “open-ended” promise to provide whatever finance was required to complete the project. This conclusion was reached in light of Harburg’s usual business practice when lending money, the extent of Warapar’s indebtedness and Mr Harburg’s overall concerns about the project.

In finding that Mr Deen remained liable under the guarantees, the Court considered that his subsequent actions were inconsistent with the terms of the “gentleman’s agreement”. In particular, the Court observed that:

• After meeting with Mr Harburg, Mr Deen still proceeded to sign the guarantee in June 2016 which was inconsistent behaviour if Mr Harburg had indicated the guarantee would never be enforced.
• When meeting with his own solicitors in June 2016, Mr Deen appears not to have informed his solicitors about the “gentleman’s agreement”.
• During the course of the litigation, Mr Deen had an opportunity to, but did not raise the “gentleman’s agreement” as a reason for not being liable under the guarantee until much later in litigation.

The Court concluded from the above that Mr Deen’s recollection was unreliable, and that Mr Deen had failed to demonstrate with sufficient precision that the representations were in fact made by Mr Harburg.

As a result, Mr Deen was held liable for more than $40 million under the guarantees and ordered to pay Harburg’s costs.

Key takeaway

This case is a timely reminder:

• to ensure that accurate, contemporaneous records are kept of any “informal” oral agreements that may alter the liability or obligations of another party; and
• that if the oral agreement does indeed make a change, then it ought to be reduced in writing.

Authored by:

Susan Forrest, Partner
Petar Damnjanovic, Solicitor