Abignano & Anor v Sandtara

[1997] HCATrans 33

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S99 of 1996

B e t w e e n -

GENNARO ABIGNANO and GENALLCO PTY LIMITED

Applicants

and

SANDTARA PTY LIMITED

First Respondent

ABIGROUP LIMITED

Second Respondent

Application for special leave to appeal

BRENNAN CJ
McHUGH J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON THURSDAY, 13 FEBRUARY 1997, AT 10.12 AM

Copyright in the High Court of Australia

MR C.A. PORTER, QC:   If your Honours please, I appear with MR G.F. COHEN, for the applicants.  (instructed by Lenehan & Co)

MR M.L.D. EINFELD, QC:   May it please the Court, I appear with MR F.P. DONOHOE for the first respondent.  (instructed by Verekers)

MR B.W. WALKER, SC:   If it please the Court, I appear with MR I. JACKMAN and MR A.J. GRANT for the second respondent in support of the application.  (instructed by Clayton Utz)

BRENNAN CJ:   Yes, Mr Porter.

MR PORTER:   Your Honour, this case raises a point of law in what we would submit is, to say the least, a very convenient form.  It is a convenient vehicle for deciding a question which was thought to have been decided for 90 years odd.  The question raised before Mr Justice Bainton who decided in favour of the applicants and before the Court of Appeal who decided against the applicants is a simple question which had been decided by the old case of Stacey v Hill which had stood for 90-odd years.

GUMMOW J:   That is not the point, Mr Porter.  The fact that Stacey v Hill  was there led good draftsmen or just ordinary competent draftsmen to put in provisions like 18.06 which created principal obligations.

McHUGH J:   And that is your problem, far from this being a suitable case, the existence of clause 18.02 in your lease does create - your guarantee creates very considerable problems, does it not?

MR PORTER:   On that point, if your Honours please, we rely upon Mr Justice Bainton’s reasoning on that.  We say that if Stacey v Hill is good law and if in fact the disclaimer operated so as to, in effect, destroy the lease, without destroying the tenant’s obligation to indemnify the surety, then 18.02 did not apply to the situation.  That is how we would answer the situation.  We would say that on the reasoning of Stacey v Hill the terms of the lease, as Mr Justice Bainton decided, are not such as to take the matter outside Stacey v Hill.  It would appear that the Court of Appeal went the same way because the leading judgment of Mr Justice Cole went to considerable pains to overrule Stacey v Hill. 

Now, your Honours, it is obviously, we would submit, a special leave question for the following reasons.  It is a question that will arise again and again in all cases of disclaimer where there is a guarantee.

GUMMOW J:   It will not, will it, because 568(3) is repealed?

MR PORTER:   Yes, 568D of the new legislation which came in - it was the 1992 amendment which came in effect in 1993.  It is sometimes called the 1993 amendment although the Act is 1992.  But as we see it, the new legislation raises exactly the same problem.  It does not solve it.  It does not in any way overrule Stacey v Hill.

GUMMOW J:   The text is different, is it not?

MR PORTER:   The text is different but not materially.

GUMMOW J:   Well, that is a question.

MR PORTER:   If I may come to that and I can, if you like, your Honour Justice Gummow, I can take it from 568D as it now is.  Section 568D(1) says:

A disclaimer is taken to have terminated, as from the day on which it is taken because of subsection 568C(3) to take effect - - -

McHUGH J:   It is at 105 in the book. 

MR PORTER:   In our submission, that wording has no different effect to the Bankruptcy Act which we have attached or to the old 563(3).  In all the legislation, whether the Bankruptcy Act, the previous Corporation Law, the Uniform Companies Act or, for that matter, the 1936 Companies Act, it all depends upon a right of the Liquidator to disclaim the property, whatever that may be.  The question usually arises, as here, in the case of a lease.

McHUGH J:   But the problem as I see it is that clause 18.02 is an indemnity.  It is a separate contract between the indemnifier and the landlord.  I just have real problems at the moment to see what the section has really got to do with it or how it can affect those contractual rights ‑ ‑ ‑

MR PORTER:   In our submission, there is no real difference in this case between indemnity or surety or guarantee in the strict sense because in each case you are idemnifying or guaranteeing against the performance of certain obligations.  If those obligations have ceased to exist, it does not matter whether it is a guarantee or a surety, there is nothing to either guarantee or indemnify.

McHUGH J:   Yes, but it is based on - the indemnities provide notwithstanding that the tenant may be wound up.

MR PORTER:   That may be so.  Your Honour, the draftsman of that indemnifier may have put that in for more abundant caution.

McHUGH J:   No, Parliament put it in so that there is a primary liability.

MR PORTER:   That is so.

GUMMOW J:   They knew about Stacey v Hill very well and that is why they set about drafting these - - -

MR PORTER:   If your Honour pleases, whether they knew about Stacey v Hill or not, they have not succeeded in getting out of Stacey v Hill, that is the problem.  If Stacey v Hill is correct and the obligations of the tenant have come to an end, then there is nothing to guarantee and there is nothing to indemnify.  Now, may I illustrate that by precisely what happened here.  There was a disclaimer and the rent up to the date of the disclaimer has been paid in other proceedings.  These proceedings concern a purported right for damages for, in effect, the repudiation of the lease.  That is based upon this ‑ ‑ ‑

BRENNAN CJ:   Why do you put it that way?  Because, obviously, there was no breach.  So, it cannot be damages for repudiation.  It can only be, surely, on the bases of an indemnity for non-performance.

MR PORTER:   We would not disagree with that.  We would say - - -

BRENNAN CJ:   If you do not disagree with that, the sole question is was it performed?

MR PORTER:   In our submission, because of the termination of the - if your Honour says, and if I may respectfully say so, we would adopt it, that there could not be a repudiation because of the disclaimer, then there was nothing to be caught up by the indemnity provisions that we were supposed to indemnify them for.  There was no future obligation.

BRENNAN CJ:   I hear you say so but the question is not perhaps whether there were future obligations which were the subject of indemnity but whether the obligation of the guarantor was an obligation that was expressed in relation to full performance by the lessee of its obligations.  In other words, if they did not perform for whatever reason, breach or no breach, then is the guarantee applicable?

MR PORTER:   In our submission, as Mr Justice Bainton found, the question is was there an obligation on the lessor - may I call him “the tenant”, it is easier.  Was there an obligation on the tenant after disclaimer?
If there was in fact no obligation on the tenant after disclaimer, then there was nothing for us to guarantee or indemnify as the case may be.

McHUGH J:   Your argument comes to this, that there cannot be a failure to comply with covenants because you have no duty.  It is like those old landlord and tenant cases.

MR PORTER:   Yes.  The effect of the disclaimer having been to, in effect, terminate the obligations of the tenant, there was nothing for us to guarantee or indemnify.

BRENNAN CJ:   What meaning do you give to the words “or non‑observance” in 18.02 where those words follow the word “breach”?

MR PORTER:   There is no question of non-observance arises here because there was nothing to observe.

GUMMOW J:   The case then turns into one of construction of this instrument.

MR PORTER:   If your Honours please, we would submit not, we would submit that the construction side of the matter is only a side issue.  The whole question of construction depends upon whether the Court of Appeal was right in saying that not only were the tenants’ obligations destroyed so far as complying with the lease is concerned but the Court of Appeal went further and said that the tenants’ obligation to indemnify the surety was destroyed also.

McHUGH J:   It comes down to this, does it not:  the attempt to get around Stacey v Hill has been unsuccessful because they have used the words “breach or non-observance”?  If they had said you are liable for the rent in some other way, that would be one thing.

MR PORTER:   That is assuming there was an attempt to get around Stacey v Hill but, your Honour, it may well be said that the landlord’s draftsman might have been trying to get around Stacey v Hill and the surety’s or the indemnifier’s adviser might have said, “If this happens, you’re safe under Stacey v Hill”.  But what the Court of Appeal has done, we would say, they have overruled a 100-year-old decision, or nearly a 100‑year-old decision but in such a way as to raise some very difficult questions.  What they have said, in effect, is this, that the words in 568 - I am now coming back to the section as it was then which are the same as, in effect, they are now.  If the words “in or in respect of the property disclaimed” - we would say the trustee or the liquidator, as the case may be, depending on whether it is bankruptcy or company, he has a power to disclaim the property.  That will destroy the tenants’ rights in respect to the property.  That will destroy the tenants’ obligations in respect to the property.

It is a long step to go from there to say that that will nevertheless maintain the lease figuratively for the purpose of a guarantee or indemnity but, at the same time, will destroy the tenant’s obligation to indemnify.  Let us say, if your Honours please, that in this particular case the tenant had given the indemnity and the indemnifier or surety had taken out security from the tenant to protect him against being called upon under the guarantee or indemnity, would that security have been destroyed also, because on the Court of Appeal’s reasoning that is what would have happened?

McHUGH J:   Have you read Warnford Investments v Duckworth?  Does that throw any lights on - - -

MR PORTER:   I am sorry, your Honour, I am not good remembering cases by their names.  I sometimes remember cases by what they decided but infrequently by their names.

McHUGH J:   Do not worry about it.

MR PORTER:   So, your Honour, on a special leave application we can hardly be expected in 20 minutes to elucidate all the difficulties that may be raised against Stacey v Hill and all the matters that may be raised in favour of Stacey v Hill.  Mr Justice Cole said it had an attractive simplicity and it has been acted on for many years.  The question is, in our submission - - -

BRENNAN CJ:   What do you say as to its being acted for many years about the citation of Stacey v Hill by Justice Dixon in McDonald v Dennys Lascelles?

MR PORTER:   What do I say about it?

BRENNAN CJ:   Yes.  The sentence which follows that citation.

MR PORTER:   If your Honour pleases, for ourselves - and I know there are other submissions on this - we would simply say that his Honour Mr Justice Dixon cited the case as an apparently correctly decided case but we could not go further and say that he went in to all the intricacies of Stacey v Hill.

BRENNAN CJ:   But do you have anything to say as to whether or not the sentence which follows, relevantly to the proposition that you are putting forward on Stacey v Hill, destroys its authority?

MR PORTER:   No, if your Honour pleases, we would say that Mr Justice Dixon was dealing with a somewhat different proposition.

BRENNAN CJ:   What is the difference between the proposition and the sentence which starts, “It does not extend to the discharge of the principal debtor’s personal liability”?

MR PORTER:   If your Honour pleases, the fact that a debtor goes bankrupt or a company goes into liquidation and so on has never been thought to destroy the surety’s obligations and I think, as I recall it, that is what Mr Justice Dixon was dealing with.

BRENNAN CJ:   He was dealing with the discharge of the principal debtor’s personal liability by operation of law.

MR PORTER:   That is right; in the case of bankruptcy or liquidation.  But the question that is raised by Stacey v Hill was a completely different question.  No one has ever suggested, as I understand it, that the mere liquidation of the tenant would have destroyed the surety.  It is the disclaimer that - - -

BRENNAN CJ:   Yes.

MR PORTER:   That is a very peculiar situation.  Now, all we can say about McDonald v Dennys Lascelles is that his Honour Mr Justice Dixon cited the authority with apparent approval.  It was not essential to his decision in that case any more than it was essential to the decision where Sir Frederick Jordan cited it.  In our submission, the construction point the Court has raised against me on section 18.02, that in itself depends very much upon Stacey v Hill.  If Stacey v Hill was correctly decided then the construction point is not in our way in any way as Mr Justice Bainton held.

McHUGH J:   Is that because there is no breach of non-observance by the tenant?

MR PORTER:   That is right, there is no breach, no non-observance, no anything.  You cannot not observe and you cannot breach something that

does not exist.  But, on the other hand, the Court of Appeal in its judgement and for that matter the House of Lords has introduced a sort of fictitious maintenance of the lease for the purpose of the guarantee and then introduced a special operation of the disclaimer which we would say just simply cannot be matched with the words of the Companies Act or the Bankruptcy Act as the case may be.  You have only got to test it by imagining that the surety has received security to support his right to indemnity to see what an extraordinary result would be achieved by the House of Lord’s interpretation of the section and by the Court of Appeal’s construction.

It does raise another question, of course, of public importance and that is this:  to what extent should a case which has stood for so long and have been acted upon by commercial men for so long be overruled after 90 years?  Now, Parliament has re-enacted this section again and again, both in the Bankruptcy Act and in the Companies Act, Uniform Companies Act, Corporations Law, recent amendment of the Corporations Law and the way Parliament has dealt with - - -

McHUGH J:   Who are the commercial people who have relied on it?  Guarantors?

MR PORTER:   That is right.  But the way Parliament has dealt with the problem, and we would submit this is because of Stacey v Hill, is that they have limited the right of disclaimer and given the court a very wide power either to stop disclaimer before it occurs or taking the most recent amendment, to set aside disclaimer.  In other words, if you are going to disclaim a lease now you have to give notice to everyone and the disclaimer will not take effect - I think the old one was it would not take effect until the time elapsed.  Now, it can be set aside.  In neither case the question of the release of the guarantor has been the main question to be considered by the courts as in Teller’s Case in Victoria by Mr Justice Gowans.  The main question on the granting of leave to disclaim has been its effect on guarantors.

BRENNAN CJ:   Yes, thank you, Mr Porter.  Mr Walker.

MR WALKER:   If it please your Honours.  Your Honours, can I address first some obstacles which might be thought to stand in the way of this being special leave before turning to the principle that would make it interesting were special leave otherwise attractive because of the vehicle the case presents.  The first issue is the nature of the notional survival to adopt an image put by my learned friend, Mr Porter, of the lease.  It is, in our submission, significant that Mr Justice Handley at 95 of the application book seems to recognise some of the problems posed by the terms of 18.02 and 18.06, that is the draftsman’s response to Stacey v Hill, by insisting as it were that the case must also be seen as either actually one or possibly one of damages for loss of bargain upon repudiation.  In our submission, first, that is wrong.  There is nothing to have lifted this case, being a case of disclaimer, taking effect according to a statute into the category of contractual repudiation and, second, the mere fact that his Honour recognises that, in our submission, focuses attention on the difficulties which do arise under 18.02 and 18.06 because of their precise drafting, and we would reverse one way in which it has been put by the Bench this morning.

Rather than saying because of the well-established law about guarantees and the attraction draftsman have therefore long had for making sure that they are indemnities as well, we would say the question is whether in this case the draftsman has achieved that in a way which answers the problem raised by us in the question we have posed for special leave.

The first point we make is that in 18.02, “breach or non‑observance” is not a phrase which was apt to catch up the statutory effect of the provisions considered in Stacey v Hill and which are before this Court and which are still live because the amendments have not altered that part of them.  They do not do so because, to adopt what my learned friend, Mr Porter, has said, it defies language and juristic analysis to describe what will happen in the future when there is no.....as a breach or non‑observance.  In our submission, with great respect, Mr Justice Handley recognised that when he turned to consider something which could be considered an accrued cause of action eo instanti with the disclaimer or by reason of the disclaimer.  That is an indication, in our submission, that 18.02 and 18.06 cannot be seen as a complete answer and do have real problems. 

Clause 18.02 starts with as plain language as you could chose to say it is an “indemnity”, and that is dead against me.              But it then goes on to describe what that means and the label will not achieve what the description of obligation, the naming of the obligation does not do, and the label, “indemnity” is here entirely subject to the description of the obligations undertaken and those obligations undertaken plainly do not include an extension into a time when there can be no thought of breach or non‑observance because there is no obligation.  That is the first point.  Clause 18.06 is also superficially against me and it is against - - -

BRENNAN CJ:   I do not follow the 18.02 argument.  The obligation is the obligation prescribed by the lease, is it not?

MR WALKER:   Yes, your Honour.

BRENNAN CJ:   Which is expressed to extend during a period of time.

MR WALKER:   Yes, your Honour.

BRENNAN CJ:   And here is a situation where, halfway through the lease, there is a disclaimer so that no longer, as a matter of law as between the lessor and lessee, does the obligation bind.

MR WALKER:   Or, as we would put it, no longer anything to be observed or breached.

BRENNAN CJ:   You can put it that way but as a matter of description from that point onwards, there will be no observance of that which was prescribed by the instrument.

MR WALKER:   Your Honour, that is one way of putting it but it is a less complete description of the nature of the tripartite relation that, in our submission, is appropriate because to say that something is not observed immediately raises the necessary question, “What is it that had to be observed?”

BRENNAN CJ:   Why?

MR WALKER:   Because to talk of observance is to assume something to be observed, otherwise it could simply be said of anyone of us today that we are not observing something in respect of somebody else, a nonsensical statement unless there be an assumed obligation.

McHUGH J:   That is so, and I was attracted to what Mr Porter had said but when you read 18.02 as a whole and you see those two clauses that commence with the words “notwithstanding”, I do not know that you can read “breach or non‑observance” in the sense that you seek to raise it.  They seem to contemplate that breach or non-observance may arise even when the landlord is being wound up.

MR WALKER:   That is perhaps giving to the word “and” before the second “notwithstanding” a meaning that it may not bear, your Honour.  We accept that is a possible reading, as I all accept by having - - -

GUMMOW J:   It is not a very generous concession, Mr Walker, if I may say so.

MR WALKER:   No.  As I also accept and must that the clause as a whole, 18.02 and 18.06, they together stand four square in the way of suggesting that this is a case that raises a guarantee issue for the High Court.  A problem for me, obviously, is that it says it is an indemnity as well.  Now, I have to confront that as a special leave issue and, in our submission, the short point is that to do the draftsman of this lease or this guarantee - provision in the lease - the honour of saying that they have taken into account fully Stacey v Hill is, in our submission, to be overgenerous because the words chosen have been too specific and rather than words of comprehensive indemnity, they have used a label, just the label, up front, and then they have gone on to describe it in terms which I cannot elaborate beyond what has already been put, particularly in answer to the Chief Justice, no longer falls to be described fairly as a breach or non-observance.

The only way in which that can be made good, if at all, is to utter what, in our submission, is axiomatically correct, that you cannot fail to observe something which you are not bound to observe.  That is the first thing.  In 18.06, again it starts with very plain language which is dead against me described as “Principal Obligations” but, again, in our submission, the attitude of this draftsman is to go on and to have words of specific description in apposition to that label which then subject the content that might otherwise have belonged to that label and be pulled up by it to a narrowing.  The narrowing in this case, in our submission, is that the prohibition on the obligations being treated as merely ancillary or collateral, et cetera, et cetera, is then glossed and we say limited by the expression “to the intent that”, a phrase which, in our submission, makes it impossible to read what precedes those words as not limited by what follows.

For some reason or other, the draftsman has focused on just one of the possible difficulties normally grappled with by these terms and the only one he has chosen is that it shall be fully enforceable without the landlord taking any steps whatsoever against the tenant and, in our submission, the effect of that delimitation is that it simply does not cut into or address the problem, if that be the right word for it, imposed by Stacey v Hill.

Now, for those reasons, in our submission, your Honours should not be trouble by the proposition that to entertain an issue about guarantee law would be idle in a case which is to be determined as on an indemnity. 

So far as concerns then the importance of the issue, the textual differences between the present form of the corresponding provision and the form construed by the Court of Appeal do not make any difference.  The one phrasing change that might evoke interest is the insertion of the

expression “in order to” in place of the word “for” in the very important proviso which is at the heart of the argument, we say, should attract this Court’s interest.  If anything, in our submission, those words make a determination of the issue we have raised in our written submissions all the more important and stresses that the Court needs to look at the whole of the bundled up rights and obligations between the three parties in a way which, we submit, the Court of Appeal has failed to do.

The height to which the Court of Appeal’s reasons in Mr Justice Coles’ judgment attain is, in our submission, a highly significant one for this Court to look at because what his Honour has said in terms is that those words of the proviso which are words which have been included for a long time, “to protect as well as to affect third parties in a statutory scheme otherwise disturbing contractual rights” are words which Mr Justice Cole has said, “need not be attended to”.  In our submission, that is precisely the kind of statement from an intermediate Court of Appeal which deserves the attention of this Court, particularly when the doctrine at stake is one which remains as the constant point of departure for the way in which people draw commercial contracts.

I am not going to say, because we cannot point to individuals or classes who have relied on Stacey v Hill in a way that might give rise to some sentiment akin to conscience in an estoppel argument but we can say that Stacey v Hill has provided part of the foundational doctrine by which these contracts have been drawn and it cannot be said that the importance of the guarantor’s right of indemnity or the importance of the debtor being preserved from that right of indemnity in certain cases has fallen away because of the constant practice of draftsmen.  The practice of draftsmen is not consistent, in our submission.  The ruling of the Court of Appeal in this case has introduced doubt where there may not have been doubt in the past.  May it please your Honours.

BRENNAN CJ:   We need not trouble you, Mr Einfeld.

The conclusion arrived at by the Court of Appeal is correct.  For that reason, special leave will be refused.

Mr Einfeld, you do not have any other application to make in the matter.

MR EINFELD:   Your Honour, we would ask for an order that costs of the first respondent be payable by both the applicant and the second respondent.  We had not anticipated originally an appearance by the second respondent but it has appeared following preparation of our written submissions to oppose the application.  In our respectful submission, the appropriate order for costs would be against the applicant and the second respondent.

BRENNAN CJ:   What do you say, Mr Porter?

MR PORTER:   There is nothing for me to say.  It does not affect me.  Obviously an order has to be made against my client.

BRENNAN CJ:   What do you say, Mr Walker?

MR WALKER:   Your Honour, we have not put the first respondent to any more expense than would otherwise be the case.  I have nothing further I can say.

BRENNAN CJ:   There will be an order against the applicant and the second respondent.

AT 10.47 THE MATTER WAS CONCLUDED