By Jacqueline Monk, Special Counsel

You’ve just acquired a new business, you’re getting settled in, meeting the employees, reviewing the financials and then discover that things are not as they seem. While the seller gave warranties that all information provided was true and accurate, it clearly wasn’t and this is now costing you dearly. You serve the seller with a warranty claim, only to discover that they have closed up shop, distributed the sale proceeds and wound up the business. Fortunately, you had insisted on including a guarantee in the sale agreement and so now you can be sure that the guarantor will make good on the deal. Can’t you…?

Many business and share acquisitions include a guarantee, often given by a founder or significant stakeholder. Such arrangements are a useful mechanism to protect buyers in the event the seller intends to wind up after the sale. Similarly, parent company guarantees are commonly sought by sellers for protection when a newly-incorporated entity or special purpose vehicle is nominated to act as purchaser. But the wording of such guarantees is really important.

If you are seeking a guarantee have you checked that the terms of your guarantee do what you need them to do?

Sometimes you win, sometimes you don’t…

Two recent cases illustrate that the words of a guarantee can make all the difference.

One case involved the sale of a Box Hill property for $20.6 million (Evagelakos v UPG 318 Pty Ltd ) and the other of Kinselas Hotel and Courthouse Hotel in Darlinghurst for $61 million (Taylor Square TT Pty Ltd v Kinselas Pty Ltd (No 2)).

Both cases were heard by Rees J in the Supreme Court of NSW, Evagelakos decided in September 2024 and Taylor Square in August 2024. In Evagelakos, the guarantor was not required to specifically perform the contract and complete the sale if the buyer failed to do so. In Taylor Square, however, the guarantor was ordered to specifically perform the contract and pay the purchase price to the sellers.

So what was the difference? Why did one guarantor have to step up and front the cash and the other did not?

This is where the terms of the guarantee are critical.

Taylor Square Guarantee

In Taylor Square, the guarantee provided that:

“The Guarantor guarantees to the Vendor prompt performance of all of the obligations of the Purchaser contained or implied in this Contract. If the obligation is to pay money, the vendor may immediately recover the money from the Guarantor as a liquidated debt without first commencing proceedings or enforcing any other right against the Purchaser or any other person.”

Her Honour focused particularly on the first sentence of this guarantee and concluded that the scope of the guarantor’s obligation includes “an undertaking to render performance of the purchasers’ obligation to complete the purchase if the purchasers do not.”

The fact that the guarantor controlled the purchasers in this scenario, and was not an unrelated third party, also had a bearing on the Court’s finding.

Evagelakos Guarantee

In Evagelakos, the guarantee provided that:

“The guarantor…guarantees to the Vendor the observance by the Purchaser of the terms of this contract.”

Her Honour noted that the language of this guarantee is “less than emphatic in imposing an obligation on Mr Bhushan to render the performance contract for if UPG 318 (the buyer) does not.” She concluded that the words of the guarantee did not require the guarantor to pay the purchase price for the property if the buyer (UPG 318) failed to do so. Rather, the guarantor’s liability was limited to an action for damages at common law – not an action for specific performance.

Key takeaways

Her Honour emphasised the words of the guarantee itself will be critical in determining how the guarantee is applied and stated that “clear drafting which imposes an obligation to perform the contract if the purchaser does not will obviously assist a vendor who seeks an order for specific performance against the guarantor.”

If you have included a guarantee in your contract and agreed that the guarantor will step in and perform the agreement if the buyer/seller cannot, it’s important to make sure that is what the contract actually says in clear and unambiguous terms.

Walter Baden specialises in mergers and acquisitions and in the many forms of guarantee that can be incorporated into business and share acquisitions as a risk mitigant. The Corporate team is well placed to advise on market approaches to and the commercial considerations underpinning these arrangements.