BENDIGO and Adelaide Bank Limited v Rawson

Bendigo and Adelaide Bank Limited (the Bank) brought proceedings against Mr. Rawson (the Guarantor) seeking to recover moneys owed under a guarantee. The dispute concerned whether the Guarantor was released from his obligations under the guarantee due to the Bank's conduct in relation to the principal debtor, a company called G.J. & D. Pty Ltd. The matter was heard in the County Court of Victoria.

The primary legal issue before the court was whether the Bank's actions, specifically its decision to allow G.J. & D. Pty Ltd to continue trading despite knowing it was insolvent, constituted a breach of the duty of good faith and fair dealing implied in the guarantee contract, thereby releasing the Guarantor from his obligations. The Guarantor contended that the Bank's conduct fundamentally altered the nature of the risk he had undertaken by guaranteeing the company's debts.

Judge Manousaridis found that the implied duty of good faith and fair dealing in a contract does not extend to requiring a creditor to take steps to protect a guarantor from the consequences of the principal debtor's insolvency, particularly where the guarantor has agreed to guarantee the debts of a company. The court held that the Bank was entitled to act in its own commercial interests and was not obliged to take action that would prejudice its own position to protect the Guarantor. The Bank's conduct in allowing the company to continue trading, while potentially detrimental to the Guarantor, did not breach the implied duty of good faith owed to him under the guarantee.

The court ordered that judgment be entered for the Bank against the Guarantor for the amount claimed.