Warranties, representations and guarantees

Warranties, representations and guarantees are similar in that they are all forms of assurances provided by one party (or, in the case of guarantees, by a third party) to the other with respect to a transaction entered into between the parties. However, they do vary in the extent of the obligations that are imposed on the party making the assurance as well as in the remedies available to the party to whom the assurance is made, for breach of the assurance.

Warranties

In a contract for the supply of goods or services, a warranty is an assurance provided by one party to another party about the quality of goods or services to be provided. Warranties may be expressly set out in the contract (eg a warranty may be made that services will be provided to a particular standard). They may also come from statute or, alternatively, be implied by common law.

Generally, breach of a warranty gives a right to claim damages. However, in some limited circumstances, the innocent party may also be entitled to terminate the contract for default (eg where it can be established that the warranty was an essential condition of the contract and breach of the warranty is a fundamental breach of the contract).

Representations

A representation is usually a written or verbal statement of fact. It is typically given prior to, or at the time of, the parties entering into a contract (although representations may be made during the course of a contract). If a representation is made to induce a party to enter into a contract, and if the representation is not correct and the innocent party suffers loss, then the party who did not honour the representation may be liable in damages, either under common law or by action under the Australian Consumer Law.

Guarantees

A guarantee is an undertaking that one party (guarantor) gives to a second party (beneficiary) to be responsible for the debts or defaults of a third party (guaranteed party) in respect of a transaction between the second and third parties (guaranteed obligations). A guarantee provides the beneficiary with security for the performance by the guaranteed party of the guaranteed obligations.

Commonly, guarantees are usually either:

• a guarantee for payment of a specified money amount (usually called a ‘financial guarantee’)
• a guarantee to perform the guaranteed party’s obligations under a contract (usually called a ‘performance guarantee’).

For a guarantee to be enforceable, it must either be in the form of a deed or given for consideration flowing from the beneficiary to the guarantor. Because the guarantor is not an actual party to the contract setting out the guaranteed obligations, courts have traditionally interpreted guarantees strictly against the parties seeking to enforce them, and have also been quick to raise any issues of unconscionability (eg penalties) associated with the giving of the guarantee.

In Commonwealth Bank of Australia Ltd v Witherow [2006] VSCA 45, the Victorian Court of Appeal held that a claim against a guarantor under a guarantee did not attract the operation of proportionate liability legislation as the claim was not for damages caused by a failure to take reasonable care. Instead, it was held that the beneficiary sought specific performance on a guarantee in the payment of a definite sum.

In St George Bank Ltd v Quinerts Pty Ltd [2009] VSCA 245, the Victorian Court of Appeal decision held that a claim against a guarantor under a guarantee did not attract the operation of proportionate liability legislation because it could not be demonstrated that it was responsible for the same damage or loss as the party alleging concurrent liability. The court held that it is necessary to analyse carefully the role of each potential wrongdoer in causing a plaintiff’s loss to establish whether they are a ‘concurrent wrongdoer’ for the purposes of the proportionate liability regime.

However, in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10, the High Court distanced itself from the Quinerts decision by finding that there can be a single loss capable of apportionment under the proportionate liability legislation, despite there being entirely separate causes of the loss.