Assignment of warranties: you can’t have your cake and eat it too

By Alicia Hill, Principal and Harrison Breer, Law Clerk

In the recent case of Langbein v Mottershead Investments Pty Ltd (No 3) [2020] FCA 1790, the Federal Court of Australia considered an appeal from Mr Langbein from the matter Mottershead Investments Pty Ltd v Aircraft Support Industries Engineering Pty Ltd (in liq) [2019] FCCA 1375 regarding issues of valid consideration and an assignment of warranty.

Background

Mr Langbein was the managing director and ultimate shareholder of Aircraft Support Industries Engineering Pty Ltd (ASI), whom owed a debt to SV Partners Advisory (NSW) Pty Ltd (SVP) for accounting services across 17 invoices which totalled $244,198.30 between 2015 and 2017.

Mr Mottershead was an employee and director of SVP, as well as an indirect shareholder through Mottershead Investments Pty Ltd (MI). Mr Mottershead had direct responsibility as an employee of SVP to provide services to ASI, and particularly to Mr Langbein.

In 2017, Mr Mottershead sought to leave SVP and conduct his own business through MI, however the debt owed by ASI impeded this from occurring, as the debt must be firstly settled by either MI or Mr Mottershead himself. On 7 July 2017, Mr Mottershead began the process of separation with SVP through a deed of separation and paying the face value of the unpaid ASI invoices to SVP, along with other amounts. Mr Mottershead claims that this was done on the proviso that Mr Langbein would meet its obligations. However, this did not occur.

On 27 April 2018, SVP had assigned all business of ASI to MI. MI sued Mr Langbein for both the assignment and for misleading or deceptive conduct under s18 of the Competition and Consumer Act 2010 (Cth).

MI was successful in its first claim, however failed on the second. The primary judge agreed that there was a promise from Mr Langbein’s to SVP that he would put ASI (or other companies in the group), in a position to pay the ASI debt, and make said payments. As such, MI was successful in its claim for breach of a warranty that had been validly assigned to it.

Mr Langbein sought to appeal this decision on two grounds, namely that the warranty was not assigned to MI, and that it was also not supported by consideration.

Consideration

The Honourable Justice Stewart firstly dealt with the issue of consideration. Mr Langbein claimed that had he made a promise to MI or his promise to SVP had been assigned to MI, then the contract would be unenforceable as no consideration was present. The previous judgement had found that Mr Mottershead’s availability to provide further work for ASI provided valid consideration on the matter.

Mr Langbein’s argument to this regard hinges on the emails sent between the parties after the meetings on 25 May 2017, whereby he claimed that there was no obligation proposed to either MI or Mr Mottershead to undertake future work for ASI or Mr Langbein. In particular, the email from Mr Mottershead stated “we cannot be a bottomless pit of time to get [the incomplete work] finalised”. However, also accompanying this email was an offer to give a further $10,000 of time without charge.

His Honour found that this offer was a clear declaration from Mr Mottershead of his availability to work. Furthermore, based on evidence from Mr Toda (whom had provided legal services to ASI and Mr Langbein), this availability to work was acknowledged by both parties, and that SVP had agreed to allow Mr Mottershead to do ASI’s business advisory and forensic accounting work. His Honour also found the fact that Mr Mottershead had not been called upon to work, nor his obligation to do so, to be irrelevant in the current circumstance.

As such, His Honour found that the agreement by SVP to make Mr Mottershead available by a partial release from his contractual restraint amounted to adequate consideration.

Therefore, this ground for appeal ultimately failed.

Assignment

The final ground of appeal concerned the primary judge’s decision regarding Mr Langbein’s promise to SVP being assigned to MI.

Mr Langbein claimed to have six pieces of evidence which prove that the promise to SVP was not in fact assigned to MI. He claims that the items do not refer to his warranty, nor were they directed at him, and as such the warranty could not be assigned. His Honour found that only one of the six items were relevant, which was the written assignment from 27 April 2018 between SVP (assignor) and MI (assignee). Mr Langbein raised that the amended statement of claim included both the deed of separation between SVP, MI and Mr Mottershead as well as the written assignment regarding the assignment of the debt and the warranty.

His Honour found that this would not detract from the overall assignment of the warranty, as it arises from the written assignment of 27 April 2018, and there is nothing to the contrary in the deed of separation which was concluded nine months prior.

Mr Langbein also contends that as the deed of assignment does not refer to his promise and limits the property to be assigned from SVP to MI to tax invoices issues by SVP to ASI and “all agreements … negotiated with ASI” in clauses 1 and 2 respectively, that the warranty does not arise from the tax invoices and is not an agreement that has been negotiated with ASI.

His Honour found that the text of the assignment, and in particular item 2 of the schedule, was broad enough to include a contractual promise by Mr Langbein as the one who owns and controls ASI to cause the debts to be paid. Furthermore, the initial negotiation took place between both Mr Mottershead and Mr Langbein on behalf of their respective entities. Item 2 of the Schedule is as follows:

All agreements, rights and entitlements relating directly or indirectly to such debts negotiated with [ASI] by Ross Phillip Mottershead on behalf of the Assignor.

His Honour also required the assignment to be viewed in context of the whole transaction and surrounding circumstances known to the parties. Both SVP and MI sought to completely part ways, and any future relationship with ASI was in the hands of MI, and the recovery of the debts of ASI would be the responsibility of MI, given that MI had paid SVP for ASI’s debt to SVP.

His Honour found that it would be impossible for the benefit of a guarantee to be assigned, whilst still retaining the benefit of the guarantee debt and thereby to convert the one debt owing by both principal debtor and guarantor to the one creditor into two debts, one owing by the principal debtor to the creditor and the other owing by the guarantor to the assignee (Hutchens v Deauville Investments Pty Ltd [1986] HCA 85; 68 ALR 367 at 373). As such, there must have been an intention to assign the warranty, and for SVP and MI to intend that the debt be assigned with the possibility of recovery of that debt from Mr Lanbein. For this to not occur would allow Mr Langbein to have his cake and eat it too.

His Honour found that the principle from Property Builders Pty Ltd v Adelaide Bank Ltd [2011] NSWCA 266; 15 BPR 29 whereby the assignment of the principal debt does not necessarily result in assignment of the guarantee does not provide assistance to Mr Langbein in the current case. This is due to the broad wording found in the present case to include the warranty, and as such can be distinguished from the narrow wording used in that case.

Finally, His Honour was able to determine that MI was able to rely on both a legal and equitable assignment in accordance with Shepherd v Commissioner of Taxation (Cth) [1965] HCA 70; 113 CLR 385 at 397, all that is required for an equitable assignment to be made out is an intention to assign, which His Honour found to be clearly evident in the current case.

Outcome

The appeal of Mr Langbein was dismissed with costs. His Honour found that there was no error by the primary judge, and as such both grounds for appeal failed.

Take-aways

This case illustrates the complexities that can arise regarding the separation of business interests, release of restraints and assignments of warranties.

It is important for all parties to know their obligations and their rights with regards to assigned warranties, especially given that this can occur in either a legal or equitable basis.

Clear language in one carefully thought through and drafted document rather than piecemeal documents prepared as things develop will enhance the ability to avoid disputes later in time.

If you have any queries about assignments of warranties or similar matters, please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au