Argyle Lending Pty Ltd v Lantouris

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2021 0059

ARGYLE LENDING PTY LTD (ACN 142 250 057)	First applicant
and
NICOLA MAZZEO and PATRICK LENNON trading as LENNON MAZZEO LAWYERS (A FIRM)	Second applicant
v
MARIA LANTOURIS	Respondent

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JUDGES:	NIALL, WALKER and MACAULAY JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	7 March 2022
DATE OF JUDGMENT:	12 April 2022
MEDIUM NEUTRAL CITATION:	[2022] VSCA 60
JUDGMENT APPEALED FROM:	Argyle Lending Pty Ltd & Ors v Lantouris [2021] VCC 259 (Judge A Ryan)

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CONTRACT – Application for leave to appeal – Enforceability of agreement – Whether respondent’s obligation to repay had arisen – Whether document a deed or agreement – Whether it was supported by consideration – Recovery of amount under guarantee and indemnity – Whether respondent had indemnified second applicant in circumstances where party to other agreement a bankrupt – Bankruptcy Act 1966 s 58 – Leave to appeal granted – Appeal dismissed.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr D J Williams QC	Lennon Lawyers
For the Respondent	Mr J Ribbands	Melbourne Legal Chambers

NIALL JA
WALKER JA
MACAULAY JA:

Introduction

By orders made on 30 April 2021, a judge of the County Court dismissed two claims made in a single proceeding, seeking to recover money from the respondent, Maria Lantouris (‘Lantouris’).[1]
[1]Argyle Lending Pty Ltd & Ors v Lantouris [2021] VCC 259 (‘Reasons’).

In brief compass, the second applicant Lennon Mazzeo Lawyers (‘LM’) was, at the relevant time, a firm of solicitors.[2] The first applicant, Argyle Lending Pty Ltd (‘Argyle’), a company associated with LM, was in the business of providing finance.
[2]The second and third applicants are Nicola Mazzeo and Patrick Lennon trading as Lennon Mazzeo Lawyers.

Dr Nicholas Sevdalis (‘Sevdalis’) was a client of LM and the brother of Lantouris. Sevdalis owed LM a substantial amount of money for legal fees. LM had, in 2016, secured payment for its fees by a charge over property owned by Sevdalis, and subsequently had placed a caveat over one property at 242 Station Street, Fairfield (‘Station Street’). In December 2016, upon filing a debtor’s petition, Sevdalis became a bankrupt.

On 25 July 2017, that is after Sevdalis was made bankrupt, a series of documents were executed variously by LM, Argyle, Sevdalis, Lantouris and 22 Park Street Pty Ltd, a company associated with Lantouris, the legal effect of which were in dispute at trial but which, on their terms, related to the payment of Sevdalis’ outstanding legal fees.

The documents included a loan and charge agreement between Argyle and Lantouris and 22 Park Street Pty Ltd. Argyle alleged that, under the loan and charge agreement, Lantouris agreed to pay Argyle $500,000 on various terms in return for LM removing its caveat over Station Street, but that she failed to pay. The loan and charge agreement is the subject of the first claim, by Argyle, which seeks to recover money said to be owing under it.

The judge found against Argyle on the basis that the loan and charge agreement provided for Argyle to lend Lantouris the money to pay the outstanding legal fees and, in return, for Lantouris to repay the loan on various conditions. The judge found that Lantouris’ obligation to repay only arose after Argyle had first advanced the money under the loan and charge agreement and that, as was common ground, it had not advanced any money, there was no obligation on Lantouris to repay. Argyle’s claim was dismissed.

In this application for leave to appeal, Argyle seeks to overturn the judge’s construction of the loan and charge agreement by repeating its construction of the agreement as one that involved a promise by Lantouris to pay Argyle $500,000 in return for it procuring LM to remove a caveat over Station Street. In addition to that question of construction, there are some additional points concerning the enforceability of the loan and charge agreement, more specifically whether it was a deed and, if not, whether it was supported by consideration. These issues are the subject of proposed grounds 1 to 3 in the applicants’ notice of appeal.

The second claim, by LM, seeks to recover an amount under a guarantee and indemnity made between LM and Lantouris and 22 Park Street Pty Ltd. LM claimed that, under the guarantee and indemnity, Lantouris agreed to guarantee the performance by Sevdalis of another agreement also made on 25 July 2017, called the LML agreement, which purportedly compromised the amount of legal fees owed by Sevdalis and provided for their payment in two instalments. LM sued Lantouris under the guarantee and indemnity. In short, LM contended that Lantouris indemnified them against any failure in the payment of the amounts owing under the LML agreement.

Lantouris answered LM’s claim in several ways. Firstly, she argued that the LML agreement and the guarantee and indemnity were void because the partnership had been dissolved before the date of the LML agreement. Secondly, she argued that the LML agreement was not attached to the guarantee, rendering the guarantee uncertain or incomplete. Thirdly, she contended that because Sevdalis was a bankrupt at the time the LML agreement was made, there was no amount owing under that agreement and therefore no obligation to indemnify under the guarantee and indemnity. LM sought to defend the validity of the LML agreement by arguing it constituted a dealing by a securing creditor with their security, and was authorised by s 58(5) of the Bankruptcy Act 1966 (Cth) (‘the Act’). Lantouris responded that the LML agreement contravened s 58(3) of the Act and that in any event, the applicants could not rely on s 58(5).

In relation to the guarantee and indemnity, the judge said:

(a)LM was entitled to enter into the guarantee as the partnership had not been dissolved as at 25 July 2017;
(b)the fact that the LML agreement was not attached to the guarantee did not render it uncertain or incomplete in circumstances where the LML agreement was incorporated by reference;
(c)the guarantee was ineffective to guarantee the obligations of Sevdalis as the LML agreement was not competent pursuant to s 58(3) of the Act. Insofar as the indemnity provisions are relied upon, clause 2 is ineffective as it is expressed to be dependent upon an act of default of the covenantee, Sevdalis. He could not be in default when he was under no obligation to pay because the LML agreement was unenforceable against him as a bankrupt. The indemnity provision under clause 6 also fails as the indemnity so construed is the indemnity created under clause 2, which can only come into effect if there is a ‘default’. Further, s 58(3) of the Act operates as statutory bar to recovery, with the result that there was no ‘loss’ suffered by LM for which it could seek to be indemnified under the indemnity clauses in the guarantee.[3]

[3]Reasons, [177].

By proposed grounds 4 to 6, LM seeks to overturn the judge’s conclusions on its guarantee and indemnity claim.

For the reasons that follow, the judge was correct to dismiss both claims, largely for the reasons she gave. Leave to appeal should be granted, but the appeal must be dismissed.

We pause to note that both Argyle and LM sought to recover an amount representing Sevdalis’ outstanding legal fees although on two different legal bases. The applicants did not explain how the two claims were to be reconciled. Given our conclusions, it is not necessary to consider this further. We also note that although the two claims were independent, both LM and Argyle were represented by the same counsel and it is convenient to refer to them collectively as the applicants.

The facts

LM was, at the relevant time, a firm of solicitors comprising the second and third applicants (Nicola Mazzeo (‘Mazzeo’) and Patrick Lennon (‘Lennon’) respectively). Sevdalis retained LM to act for him and incurred substantial legal fees which were unpaid.

On 13 October 2016, Sevdalis and a company associated with him,[4] executed a written charge in favour of LM over two identified properties, one in Yan Yean Road, Doreen and the other in Riversdale Road, Hawthorn and agreed to execute a mortgage over the properties if asked to do so (‘the 2016 charge’). The 2016 charge stated that LM would register a caveat over the two properties. Under the 2016 charge, Sevdalis and the company also granted a charge to LM over their title in any other property whether real or personal.
[4]Native Bond Pty Ltd (ACN 006 589 055).

On 23 December 2016, Sevdalis was made a bankrupt on a debtor’s petition. His trustee in bankruptcy lodged a caveat over Station Street, being a property owned by Sevdalis since 1984 and from where Sevdalis conducted his medical practice.

On 10 May 2017, Sevdalis, Mazzeo, Lennon and two associates of Sevdalis met to discuss the outstanding fees, and on 12 May, LM sent a statement of account with the amount owing, being a little over $760,000. Sevdalis’ two associates who were present at the meeting were a second cousin of Sevdalis, Dimitrios James Podaridis (‘Podaridis’), who is a barrister at the Victorian Bar, and Nick Bochrinis (‘Bochrinis’), a friend of the Sevdalis family.

On 2 June 2017, Mazzeo and Lennon lodged a caveat over Station Street claiming an interest in the property arising from the 2016 charge.

Notwithstanding that Sevdalis was a bankrupt, in June and July 2017, there were a series of written communications between Sevdalis and LM and between Podaridis and LM seeking to make arrangements for the quantification and payment of outstanding fees said to be owed by Sevdalis. Before turning to those exchanges, which culminated in a critical document dated 25 July 2017, it is necessary to refer to some detail about Station Street.

By a contract of sale dated 28 July 2016, Sevdalis sold Station Street to NB Services Pty Ltd, a company associated with Bochrinis at a price of $1,950,000. A deposit of $1,250,000 was paid on 30 September 2016 with the balance of $700,000 payable at settlement. Settlement was due on 30 June 2017.

On 26 July 2017, LM signed a withdrawal of caveat over Station Street. On around 2 August 2017,[5] the withdrawal of the LM caveat and the trustee in bankruptcy’s caveat were registered, as was a transfer of the property to NB Services Pty Ltd. This transfer was subsequently declared void in Sevdalis’ bankruptcy, pursuant to consent orders made by Middleton J in the Federal Court of Australia on 7 December 2018.
[5]We note that the Reasons at [37] refer to the date of the withdrawal of the caveat as being 2 July 2017. Given LM signed a withdrawal of caveat over the property on 26 July 2017, this is clearly in error. In oral argument before this Court, counsel for the applicants conceded so and accepted that it presumably meant 2 August 2017 but in any event was some date after 26 July.

Returning then to the correspondence in June 2017, on 21 June, LM wrote to Sevdalis confirming an agreement by which the fees would be reduced to $400,000 payable in two equal instalments. The first $200,000 would be payable by 30 June 2017 in consideration of LM withdrawing its caveat over Station Street. The second instalment of $200,000 would be paid from the settlement of the property at Doreen, or the settlement of any other property owned by Sevdalis, or by 31 December 2017, whichever was earlier. It was noted the 2016 charge would remain in full force and effect until the entire settlement sum was paid.

On 20 July 2017, LM sent a further letter addressed to Sevdalis which slightly modified the earlier proposal. Omitting formal parts, the letter said:

We refer to our letter dated 21 June 2017 and to our telephone attendance upon you on even date. We confirm our agreement to accept your offer to pay the sum of $400,000 (‘the Settlement Sum’) in full and final settlement of an outstanding accounts owed to Lennon Mazzeo Lawyers, the details of which are summarised in our letter to you dated 12 May 2017, on the following conditions:
1. Payment of the settlement sum is to be made by way of the following instalments:
a. $100,000 payable in consideration for our firm providing a Withdrawal of Caveat in respect to the property at 242 Station Street, Fairfield (‘the Station Street property’) at settlement due to take place tomorrow, 21 July 2017;

b. $100,000 payable on or before 4 September 2017;
c. the balance of the sum of $200,000 is payable upon either settlement of 895 Yan Yean Road, Doreen or any other property legally or beneficially owned by you, or by 31 December 2017, whichever is the earlier.

2. The payment of the second and third instalments is to be guaranteed by Nick Bochrinis and N.B. Services (Aust.) Pty Ltd. We attach the proposed Deed of Guarantee for execution by the proposed guarantors.
3. The Charge Agreement dated 3 October 2016 shall remain in full force and effect until the entire settlement sum is paid.

Please provide written confirmation that the above accords with your understanding of our agreement, return to us the duly executed Deed of Guarantee and notify us of the date, time and venue for settlement of the Station Street property so that we may arrange for our Withdrawal of Caveat to be supplied in exchange for the first instalment referred to above.

A signed version of the guarantee was in evidence with a handwritten alteration recording the parties agreement that the caveat over Station Street would be withdrawn and that a further caveat, over an unspecified property, would be lodged.[6]
[6]Reasons, [15].

The settlement scheduled for 21 July, referred to in the letter, did not proceed on that date. On 22, 23 and 24 July, Podaridis was involved in further communications with LM over the payment of the debt. On 22 July, Podaridis forwarded a valuation of Station Street to LM. On 24 July 2017, after speaking with him on 23 July, Lennon forwarded to Podaridis an email indicating a willingness to take a mortgage over Station Street in the sum of $500,000 and asking that Podaridis arrange for Bochrinis to execute the documents.

On 24 July, Podaridis replied by email to Lennon proposing a mortgage over a different property, namely 22 Park Street, Abbottsford (‘Park Street’), a property owned by 22 Park Street Pty Ltd, a company associated with Lantouris who was its sole director.

Lantouris becomes involved

As noted, Lantouris is the sister of Sevdalis. As recorded by the judge, Lantouris was living at 17 Green Street, Northcote with her elderly mother, her brother and a family friend. She had limited formal education. Lantouris had worked on occasion as a receptionist at Sevdalis’ medical practice. She was in receipt of a carer’s pension. Park Street was originally owned by the parents of Sevdalis and Lantouris, and on the death of their father, their mother became the sole proprietor.[7] On 8 May 2017, the property was transferred to 22 Park Street Pty Ltd which became the sole owner.
[7]It was later transferred to the mother and Sevdalis as tenants in common in 2011. The mother held 19 equal undivided shares and Sevdalis held one share of a total of 20 undivided shares.

On 24 July 2017, after speaking earlier with both Sevdalis and Podaridis, Lennon spoke to Lantouris. He had not dealt with her before. They discussed a caveat being placed over Park Street and the fees owing to LM by Sevdalis being fixed at $400,000. When asked if she knew that meant if her brother did not pay the legal fees she would have to, she replied:

That meant I had a caveat on Park Street so if it wasn’t paid, if I sold my unit. That’s what a caveat I thought meant, was like just once if it’s ever sold and Mr Lennon didn’t get his money, he’d get his $400,000 back whenever I sold the unit.

The LML agreement

On 25 July 2017, LM sent a letter to Sevdalis in the following terms:

We refer to our letter of 20 July 2017 which is enclosed with this letter.
We confirm that we have now agreed to accept the sum of $400,000 (‘the settlement sum’) on the following conditions:
1.Payment of the settlement sum is to be made by way of the following instalments:
(a)$200,000 payable on or before 20 October 2017;
(b)The balance of $200,000 payable upon either settlement of 895 Yan Yean Road, Doreen or any other property legally or beneficially owned by you, or by 31 December 2017 whichever is the earlier;
(c)In the event of any non-compliance with (a) and (b) above, the amount payable will be $500,000 with interest accruing at 20% per annum, compounding monthly.

2.The payment of the settlement sum is to be guaranteed and secured by Maria Lantouris and 22 Park Street Pty Ltd. A deed of guarantee together with mortgage documents is being prepared and will be executed by Maria Lantouris and 22 Park Street Pty Ltd in the course of the day.
3.The Charge Agreement dated 3 October 2016 is to remain in full force and effect until the entire settlement sum is paid.

This letter will be annexed to the Loan & Charge Agreement and/or recited in the Loan & Charge Agreement being prepared contemporaneously with the sending of this letter.

Also on 25 July 2017, Lantouris was provided with, and signed, a series of documents prepared by Lennon at the offices of LM. Another lawyer, Morry Blumenthal (‘Blumenthal’), was present at the meeting, ostensibly to provide legal advice to Lantouris. It is not in dispute that neither Lantouris nor Blumenthal read the documents before she signed them. The documents signed by Lantouris on that day were:

(a) a disbursement order;

(b) mortgage of land over Park Street and Northcote properties;

(c) acknowledgement of obligations under memorandum of common provisions;

(d) authority to settle;

(e) statutory declaration;

(f) loan and charge agreement;

(g) general security agreement; and

(h) deed of guarantee.

It is necessary to refer principally to the contents of the loan and charge agreement and the deed of guarantee (‘the Deed of Guarantee’). It is also relevant to refer to the terms of the disbursement order.

Loan and charge agreement

In the loan and charge agreement, Argyle is ‘the Lender’, 22 Park Street Pty Ltd is ‘the Borrower’ and Lantouris is ‘the Guarantor’. The recitals record:

A.Lennon Mazzeo Lawyers are owed in excess of $800,000 for legal services provided for and on behalf of Nicholas Sevdalis and/or his related entities.
B.The Borrower and/or the Guarantor have purchased a number of properties for and on behalf of Nicholas Sevdalis and more recently the property at 22 Park Street, Abbotsford (‘the Abbotsford property’). The Borrower and the Guarantor hold properties in trust for Nicholas Sevdalis.
C.In consideration for Lennon Mazzeo Lawyers providing withdrawal of caveat over the [property] at 242 Station Street, Fairfield (‘the Fairfield property’) the Borrower and the Guarantor have agreed to enter into a Loan & Charge Agreement with the Lender such that the Lender will pay to Lennon Mazzeo Lawyers an amount of $500,000 and the Borrower and the Guarantor enter into this agreement so as to enable the Lender to pay the amount of $500,000 to Lennon Mazzeo Lawyers.
D.The parties have otherwise entered into this agreement on the terms and conditions contained herein.

The operative clauses are as follows:

1.The Lender has agreed to provide to the Borrower and the Guarantor a loan in the sum of $500,000 (‘the Loan’) which together with interest and any other monies payable to the Lender by the Borrower and the Guarantor under this Deed shall be hereinafter referred to as the ‘Secured Monies’. The Borrower and the Guarantor accept and acknowledge that the Secured Monies, namely $500,000 is being advanced effectively to Lennon Mazzeo Lawyers to pay the debt owed by Nicholas Sevdalis to Lennon Mazzeo Lawyers.

2.The amount of $500,000 referred to in paragraph 1 will be due and payable in the event of either of the following occurring:
(i) That an amount of $200,000 is not paid by the Borrower and the Guarantor to the Lender or its nominee on or before 22 October 2017;
(ii) The balance of $200,000 is not paid by the Borrower and the Guarantor to the Lender or its nominee on or before 31 December 2017;

3. In the event of a breach and/or non-compliance to paragraph 2 hereof, the Secured Monies will be due and payable immediately. In the event the payments in paragraph 2 are made on or before the due dates, the amount payable by the Borrower and the Guarantor to the Lender will be $400,000 (less any payments made pursuant to this agreement).
4. Furthermore, in the event that the Borrower and the Guarantor fail to comply with paragraph 2 hereof, interest on the amount of $500,000 at a rate of 20% per annum will accrue from the date of the entering into this agreement, namely 25 July 2017, such interest to compound monthly from the date of such default until it is repaid in full.
5. The Borrower and the Guarantor hereby charge in favour of the Lender as security for the Secured Monies the following properties:
• 22 Park Street, Abbotsford
• 17 Green Street, Northcote
and any other property in relation to which the Borrower and the Guarantor have any interest.
6. In the event of any default by the Borrower and the Guarantor pursuant to this Deed, the Lender shall be entitled upon providing seven day’s notice in writing to demand repayment of the entire amount of the Secured Monies together with any costs associated with such demand.
7.The Guarantor in consideration of the Lender having provided the Secured Monies guarantees that the Borrower will perform all of its obligations pursuant to this Deed and must pay on demand any amount which the Lender is entitled to recover from the Borrower under this Deed. The liability of the Guarantor will not be affected by the Lender granting any time or indulgence pursuant to this Deed. In the event that the Borrower’s obligations are unenforceable against the Borrower then this clause shall operate as a separate indemnity and the Guarantor indemnifies the Lender against all loss resulting from the Borrower’s inability to enforce performance of such obligations. The Guarantor must pay the Lender the amount of the loss resulting from any unenforceability. Furthermore, in the event of there being more than one Guarantor, this guarantee binds them jointly and each of them individually.

The attestation clauses stated that Argyle and 22 Park Street Pty Ltd executed the document by being signed by those persons authorised to sign in accordance with s 127(1) of the Corporations Act2001 (Cth). Lantouris signed the document next to the words ‘SIGNED, SEALED AND DELIVERED…in the presence of…’. Blumenthal signed as the witness.

The Deed of Guarantee

As will appear, the Deed of Guarantee contains both a guarantee and an indemnity. Lantouris and 22 Park Street Pty Ltd are described as the ‘guarantors’ and LM are the ‘covenantors’. The Deed of Guarantee contains a single recital stating that ‘[a]t the request of the guarantors the covenantors have agreed to enter into the attached agreement with the covenantee named in the schedule.’ The schedule defines Sevdalis as the covenantee, refers to the date of the attached agreement as 25 July 2017, and describes the security provided by the guarantors as being a charge over all of the right, title and interest of Lantouris and 22 Park Street Pty Ltd over Park Street and 17 Green Street, Northcote.

The operative terms of the Deed of Guarantee are in the following terms:

1.The guarantors warrant that before execution hereof they have sought such advice as they deem necessary to understand the full import of their responsibilities under this guarantee and in particular the financial impositions on them consequential on default by the covenantee in performance of their obligations and payment of any money due under the attached agreement. They have acquainted themselves with this documentation and sought such advice as they deem necessary. They have satisfied themselves as to the financial position of the covenantee and their capacity to comply with their obligations.
2.The guarantors hereby guarantee to the covenantors the due and punctual performance of all the obligations of the covenantee under the attached agreement and hereby indemnifies the covenantors against all losses, expenditures, costs and expenses of whatever nature suffered or incurred directly or indirectly by the covenantors in recovering any money owing as a result of default in such performance.
3.This guarantee and indemnity is continuing and irrevocable and the obligations of the guarantors are absolute and unconditional in all circumstances and must continue notwithstanding that there is any change in the name style constitution or otherwise of the covenantee.
4. This guarantee continues despite the payment of any part of the amount owing and despite any time or other concession or compromise extended by the covenantors to the covenantee or any other person.
5.This guarantee will not be affected by the neglect or omission of the covenantors to enforce any of its rights in whole or in part or if a covenantee dies or becomes of unsound mind or bankrupt or being a company goes into liquidation or any other obligation of the covenantee for any reason becoming unenforceable in whole or in part.
6.This guarantee and indemnity is a principal obligation and is not to be treated as ancillary or collateral to any obligation to the intent that this guarantee and indemnity will be enforceable notwithstanding that any of the agreements and other obligations arising between the covenantors and the covenantee are in whole or part unenforceable for any reason.
7.The covenantors need not first exercise its rights against the covenantee or against the covenantees security before exercising its rights hereunder against the guarantors.

Disbursement order

The disbursement order refers to Argyle as the mortgagee and 22 Park Street Pty Ltd as the mortgagor, and refers to the security by reference to the certificates of title of Park Street. It says:

BY SECOND MORTGAGE LOAN $500,000
TO 22 PARK STREET PTY LTD $500,000
(or as directed by Maria Lantouris)
I agree with the above Statement and hereby authorise the Mortgagee to disburse the monies in accordance therewith.

Proposed grounds of appeal

There are six proposed grounds of appeal. Proposed grounds 1 to 3 relate to Argyle’s claim and the balance relate to LM’s claim. The proposed grounds of appeal can be grouped to reflect the two principal claims in the proceeding.

THE CLAIM BY ARGYLE UNDER THE LOAN AND CHARGE AGREEMENT: PROPOSED GROUNDS 1 TO 3
Ground 1:
The Judge erred in finding that, on its proper construction, the loan and charge agreement was unenforceable as it required Argyle to have paid Lennon Mazzeo the sum of $500,000 (Reasons [57] – [58]).

Ground 1 turns on the construction of the loan and charge agreement. The issue before the judge was framed by reference to the competing pleadings. On the one hand, in paragraph 3A of its further amended statement of claim, Argyle pleaded that the agreement was an agreement whereby Lantouris agreed to pay the sum of $500,000 to Argyle on or before 31 December 2017, in consideration for Argyle procuring LM to withdraw a caveat over Station Street. By paragraph 3B, Argyle pleaded that it procured the withdrawal by LM of the latter’s caveat over Station Street on 2 August 2017.

In answer, Lantouris pleaded that, if the loan and charge agreement was otherwise enforceable, on its proper construction Lantouris was only liable to pay Argyle if Argyle had first paid LM the sum of $500,000 (or paid it at her direction). Argyle did not make any such payment and, as a result, Lantouris was not liable to pay Argyle.

The judge accepted Lantouris’ construction. The judge noted that the loan and charge agreement was expressed to be a loan agreement and that it was common ground that Argyle had not lent or advanced any funds. Although the judge referred to the agreement as a ‘flawed document’ and said that ‘Clause 7 does not work because Argyle did not provide any secured moneys which is said to be the consideration for Lantouris giving the guarantee’,[8] she did not find that the agreement was void or unenforceable or that there had been a total failure of consideration. Rather, she concluded that the fatal problem for Argyle was that, as a matter of construction, Lantouris had no obligation to repay Argyle unless and until Argyle had first advanced the funds it had promised to lend and this had not occurred. For that reason, Lantouris had no obligation to repay and the claim failed.[9]
[8]Ibid [56]–[57].
[9]Ibid [58].

The applicants’ arguments

The applicants accepted that the loan and charge agreement was an unusual agreement in that it sought to achieve the payment and satisfaction of outstanding legal fees owed to LM but LM was not a party to it. Despite acknowledging that the loan and charge agreement appeared to be a conventional loan agreement providing for a loan from Argyle to Lantouris, the context and commercial purpose revealed a different meaning.

The applicants said the context involved the following elements which were critical to an understanding of the agreement:

(i) Sevdalis owed substantial fees to LM which were secured by the 2016 charge over various properties held by the Sevdalis family, and which included Station Street, over which LM had lodged a caveat; and

(j) Sevdalis and Lantouris wished to obtain a release of the security over Station Street (to allow it to be transferred to a safe harbour), reduce and fix the amount owing on account of legal fees, and offer Lantouris and 22 Park Street Pty Ltd as an alternative source of payment and security.

To that end, they submitted the documents executed in July effected the following transaction:

(k) LM would accept $400,000 (‘settlement sum’) in respect of its outstanding legal fees in lieu of a sum in the vicinity of $800,000;

(l) LM would provide a withdrawal of the Station Street caveat;

(m) the settlement sum would be paid in two tranches of $200,000 each;

(n) in the event that the settlement sum was not paid as required then the sum payable would be $500,000 and interest would begin to accrue;

(o) Lantouris and 22 Park Street Pty Ltd would guarantee the payment of the settlement sum;

(p) once the settlement sum had been paid, LM would have no further rights pursuant to the 2016 charge; and

(q) there would be a ‘belt and braces’ transaction as Lantouris was both to guarantee the payment of the settlement sum and enter into the loan and charge agreement.

The applicants submitted that Argyle was a late and unimportant addition to this scheme. They said that there was never any commercial need or intention for Argyle to pay or advance anything to LM. Argyle and LM were a single camp for the purposes of the transaction and arrangements or steps taken between them were immaterial to the other parties. The loan and charge agreement was to be a means whereby LM exchanged certain rights for Lantouris (and her company) taking on an obligation to pay the relevant sum.

Decision

The starting point for the consideration of proposed ground 1 is the principles that the Court must apply in the construction of commercial agreements.

The general principles to be applied in the construction of commercial contracts were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[10] in the following terms:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. ...
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties ... intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[11]

[10](2015) 256 CLR 104; [2015] HCA 37.

[11]Ibid 116–7 [46]–[51] (citations omitted).

In Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd,[12] Kiefel, Bell and Gordon JJ said:

It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.
Clause 4 is to be construed by reference to the commercial purpose sought to be achieved by the terms of the lease. It follows, as was pointed out in the joint judgment in Electricity Generation Corporation v Woodside Energy Ltd, that the court is entitled to approach the task of construction of the clause on the basis that the parties intended to produce a commercial result, one which makes commercial sense. It goes without saying that this requires that the construction placed upon cl 4 be consistent with the commercial object of the agreement.[13]

[12](2017) 261 CLR 544; [2017] HCA 12.

[13]Ibid 551 [16]–[17] (citations omitted).

In addition, the Court must have regard to all of the words used in the agreement ‘so as to render them all harmonious one with another’[14] and to ensure the ‘congruent operation [of] the various components [as] a whole’.[15]
[14]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109 (Gibbs J); [1973] HCA 36.
[15]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529 [16] (Gleeson CJ, McHugh, Gummow and Kirby JJ); [2005] HCA 17 (citation omitted).

Starting with the text, under cl 1 the obligation on Argyle, defined as ‘the Lender’, was to provide a ‘loan’ of $500,000 (defined as the ‘secured monies’) to Lantouris and 22 Park Street Pty Ltd, with an acknowledgement that the money ‘is being advanced effectively to [LM]’ to pay the debt.

The primary obligation on Lantouris and 22 Park Street Pty Ltd was to repay $500,000, which would be due and payable in the events set out in cl 2. The circumstances in which the amount would be repayable are somewhat convoluted. It appears from cls 2 and 3 that the borrower and guarantor (ie Lantouris and 22 Park Street Pty Ltd) could avoid the obligation to repay if two instalments of $200,000 were paid by 22 October and 31 December 2017. In the event that either of those payments was not made on time, Lantouris and 22 Park St Pty Ltd were required to pay the secured monies in full ($500,000 as opposed to $400,000) and they incurred an additional interest obligation at a high rate of interest.

The applicants were correct to acknowledge that the loan and charge agreement appeared to record a conventional loan agreement with Argyle being the source of the funds.

In looking at the objective circumstances that existed at the time of entry into the loan and charge agreement, a number of matters stand out. First, before its entry into the loan and charge agreement Argyle had no involvement in any of the relevant transactions. It had no pre-existing interest in, liability, or entitlement in any of the transactions. It arrived on the scene late in the day at the initiative of LM. Second, its function was described by Lennon as being a ‘mezzanine lender’ and it was referred to in the agreement as the ‘Lender’. That is, it may be inferred its business was to lend money on terms. Third, the purpose of the arrangements that were being discussed in July 2017 was to settle the amount owing by Sevdalis for legal fees and to make an arrangement for payment and discharge of the debt.

With those matters in mind, the plain commercial purpose of the loan and charge agreement that emerges from its text was for Lantouris to obtain funds to pay out the debt owed to LM on secure terms. If Argyle was not to be the source of the funds there would appear to be no commercial reason for its involvement. Indeed, the applicants were unable to posit any reason for Argyle to be a party, and submitted that it was unimportant to the transactions. The applicants submitted that Argyle was known by all of the parties to be associated with LM and that in those circumstances its role was merely as a conduit. From the evidence, the judge noted that Lantouris had no recollection of Argyle being discussed and that Lennon agreed that he had not mentioned Argyle to Lantouris in his discussion with her on 24 July. There was no reason to infer that Lantouris had any understanding about the connection between Argyle and LM especially given that Argyle came into the picture very late at the initiation of LM. In any event, given the express obligations and entitlements conferred on Argyle under the loan and charge agreement, and the absence of any other counterparty to Lantouris’ interests, it is impossible to treat Argyle as a mere cipher or supernumerary.

Both the operative terms and the evident commercial purpose are reflected in, and consistent with, the recitals. Recital C recorded that 22 Park Street Pty Ltd and Lantouris agreed to enter into the agreement with Argyle ’such that’ Argyle, the Lender, will pay to LM an amount of $500,000, and that they had entered the agreement so ‘as to enable the Lender’, ie Argyle, to pay the amount of $500,000 to LM.

The applicants submitted that the reference in recital C to 22 Park Street Pty Ltd and Lantouris entering into the agreement ‘to enable the Lender to pay the amount of $500,000’ to LM, supported their construction that it was anticipated that Lantouris would provide the money in the first place, and, once put in funds, Argyle would pass the money on to LM. We reject that submission. First, the recital is not a source of obligation.[16] Second, the submission is inconsistent with the express terms of cl 1 which provides that Argyle has agreed to provide a loan to 22 Park Street Pty Ltd and imposes, in cl 2, obligations to repay the sum so lent. Third, the reference to Argyle being ‘enabled’ is equally apt to describe a situation in which Argyle is put into a position to provide a loan once it has obtained a promise to repay, and provision is made for interest in the event of default and for security.
[16]Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54, 72–3 (Mason J); [1977] HCA 71.

Read in that way, there is nothing particularly unusual about the agreement. It provides for a loan, the conditions on which it would be repaid, interest, and security. There is nothing in the applicants’ point that there was no evidence of Argyle undertaking any due diligence for the loan or Lantouris applying for it. The absence of evidence on those matters, in the circumstances of this case, sheds no light on the construction of the document.

The applicants’ recourse to the surrounding circumstances travels well beyond the legitimate use of such material and seeks to have the Court either ignore or rewrite the plain text of the agreement. It is impossible to discern from the text of the loan and charge agreement that the commercial purpose was to allow for the release of a security held by LM, settle the amount owing to LM, and provide for an alternative means to discharge the debt. Apart from the reference in the recitals to LM providing a withdrawal of a caveat over Station Street, the terms do not provide for the release of security, and without LM as a party, there is no means to achieve that end, nor the fixing and discharge of the debt owed to LM. In looking at the surrounding objective circumstances, it is, however, relevant to note the terms of the disbursement order and that a mortgage was apparently given in favour of Argyle over Park Street.

In our view, the judge was correct to conclude that Lantouris’ obligation to pay was conditioned on the making of a payment by Argyle. It would be a commercial nonsense for Argyle to be entitled to the payment of the secured monies and interest before it had advanced the funds that it had agreed to provide in circumstances where, to the extent it had any role in the transaction, it was that of lender.

It is not in dispute that Argyle had not advanced any funds to LM nor had it advanced any loan to 22 Park Street Pty Ltd. Indeed, not only was the money not advanced but LM maintains in its action that the money remains outstanding. It is plain that the purpose of the agreement with Argyle was for it to satisfy the LM debt (and to advance funds to do so) and then seek to recover the amount from 22 Park Street Pty Ltd. The obligation on 22 Park Street Pty Ltd was dependent on Argyle satisfying its obligation first.[17]
[17]Hillam v Iacullo (2015) 90 NSWLR 422 [93]–[98] (Leeming JA with Basten and Ward JJA agreeing); [2015] NSWCA 196.

It follows that the claim by Argyle was correctly dismissed on the basis that no obligation to pay had arisen. Ground 1 must be rejected.

Grounds 2 and 3

Grounds 2 and 3 are as follows:

Ground 2:
The Judge erred in finding that the loan and charge agreement was not a deed (Reasons [70]) in circumstances where, despite the use of both the words ‘deed’ and ‘agreement’:
(a)The word ‘agreement’ is not probative of a document not being a deed, given that a deed between parties is simply a type of agreement;
(b)The execution clause was headed ‘In WITNESS WHEREOF the parties hereto have hereunto set their hands and seals [date]’; and
(c)Lantouris’ execution clause provided the document was ‘SIGNED SEALED AND DELIVERED’ and she executed it in the presence of a witness.

Ground 3:
The Judge erred in finding the loan and charge agreement was not supported by consideration (Reasons [74]) in circumstances where:
(a)The loan and charge agreement set out at Recital C that the consideration was Argyle procuring Lennon Mazzeo to provide a withdrawal of the Station Street Caveat;
(b)Contemporaneously with the execution of the loan and charge agreement Lennon Mazzeo provided Lantouris with a withdrawal of the Station Street Caveat.

Given our conclusion that the judge was correct to hold that, on its proper construction, there was no obligation on the part of Lantouris or 22 Park Street Pty Ltd to pay the claimed amount, it is not necessary to determine whether the agreement was otherwise enforceable. However, we can deal with the grounds briefly.

Ground 2 is concerned with whether the loan and charge agreement was a deed or a simple agreement. If the latter, then it is necessary to decide whether it was supported by consideration, being the matter raised by ground 3.

The judge held that the loan and charge agreement was not made as a deed. She reached that conclusion by first observing that the document used both the words ‘agreement’ and ‘deed’ which gave rise to an ambiguity which should be resolved by applying the contra proferentem rule of construction.[18] The judge concluded that the document should be construed against the person who put it forward, in this case, LM.[19]
[18]Reasons, [67].
[19]Ibid [68].

In light of that conclusion, it was necessary for the judge to decide whether the loan and charge agreement was supported by consideration. In that respect, the judge framed the issue by reference to the consideration relied on by the applicants and as recorded in recital C, namely that LM would withdraw the caveat over Station Street. The judge noted the evidence of Lennon that the caveat had been withdrawn but said he did not give evidence that this had occurred at the direction of LM. For that reason, she said ‘there is no proof that consideration passed in the way it is pleaded’.[20]
[20]Ibid [74].

It is convenient to address ground 3 first. On the construction of the loan and charge agreement that we favour, Argyle promised to lend monies and in return Lantouris promised to repay them on certain conditions. No issue of want of consideration arises. Given we have rejected the applicants’ construction of the loan and charge agreement it would be artificial to assess the question of consideration on the basis of the applicants’ pleaded case, which contended that the consideration was either removing or procuring LM to remove the Station Street caveat. For these reasons, the loan and charge agreement was plainly supported by consideration.

It also follows that the question of whether the document was in the form of a deed does not matter to the result. We would only add the following observations.

Whether a document is a deed depends on whether it satisfies any formal requirements,[21] and whether it was intended by its parties that it would operate as a deed and that they would immediately be bound by its terms.[22] This question will usually turn on the text of the document. Here, the judge found an ambiguity because the document used the words ‘agreement’ and ‘deed’ as descriptors and this, the judge found, gave rise to an ambiguity. We do not agree. We accept the applicants’ submission that a deed may embody an agreement between parties and will commonly do so. For that reason, there is no ambiguity. Further, as explained in Nom de Plume, a repeated description of the instrument as an ’agreement’ is not a strong indication that the parties did not intend the instrument to operate upon execution.[23] And, in the same case, the fact that it contained a mutual exchange of promises and thereby evinced consideration by the parties is not inconsistent with it being a deed.[24]
[21]Eg Corporations Act2001 (Cth), s 127.
[22]Nom de Plume Nominees Pty Ltd v Fingal Developments Pty Ltd [2016] VSCA 159, [73] (McLeish JA) (‘Nom de Plume’).
[23]Ibid [77] (McLeish JA).
[24]Ibid.

The internal reference to the document as a deed and the manner of attestation is consistent with the document being a deed. In our view, having regard to the terms of the document, we are satisfied that it was the intention of the parties that it should be immediately binding. Of course, that did not mean that the performance of the obligations could not be dependent and sequential so as to require, in the first place, Argyle to advance the loan as provided for in the document. We are persuaded that the document was intended to be a deed. The judge erred in concluding otherwise.

It is also not necessary to determine whether the contra proferentem rule could be employed in the event that the document contained a relevant ambiguity. The point was not the subject of detailed argument. We doubt that the judge was correct to deploy the principle of construction in the way that she did, but in the circumstances it is unnecessary to say more.

Conclusion on Argyle’s claim

The judge was correct to reject the claim brought by Argyle. Ground 1 must be rejected. Grounds 2 and 3 are unnecessary to decide. However, had it been necessary to determine these grounds, we would have upheld ground 2: the loan and charge agreement was a deed. We would also have upheld ground 3, but on a different basis from those contended by the applicants: although consideration was not necessary for the enforceability of the deed, there was consideration.

THE CLAIM BY LM UNDER THE GUARANTEE AND INDEMNITY: PROPOSED GROUNDS 4 TO 6

Proposed grounds 4 to 6 are concerned with the judge’s rejection of LM’s claim under the Deed of Guarantee. As already observed, LM sought, pursuant to that deed, to recover amounts said to be owing to the firm by Sevdalis under the LML agreement.

The judge’s consideration of LM’s claim proceeded under the umbrella of the following three paragraphs of the statement of agreed issues:

(7) As a result of the LM legal practice ceasing at 30 June 2017, is the deed of guarantee dated 25 July 2017 enforceable by the second and third plaintiffs constituting the LM firm against the defendant?
(8) If the LML agreement is not enforceable by the second and third plaintiffs against Dr Sevdalis, is the deed of guarantee enforceable by the firm against the defendant?
(9) Given it is accepted that the guarantee did not attach the LML Agreement when it was executed by the defendant, is the guarantee void for uncertainty?

The judge found in favour of LM on issues 7 and 9 but against the firm on issue 8 which was sufficient to defeat the claim. On issue 7, the judge held that despite the firm ceasing to provide legal services after 30 June 2017, LM was capable of maintaining the claim under the Deed of Guarantee. That conclusion was not challenged on appeal. Her Honour also found that the Deed was not void for uncertainty. This latter finding is the subject of a notice of contention to which we shall return.

On issue 8, which is directed to the enforceability of the Deed of Guarantee against Lantouris, the judge started by setting out the competing arguments. Having done so, the judge commenced her analysis of the competing arguments by noting that the applicants accepted that the LML agreement was not enforceable against Sevdalis and that the relief sought by the applicants arose from the indemnity clauses in cls 2 and 6 of the guarantee.[25]
[25]Reasons, [133].

The judge noted the distinction between a guarantee and an indemnity. She observed that the former is a secondary or derivative liability that mirrors, and is dependent on, a liability of the guaranteed party. In contrast, an indemnity is a primary liability undertaken by the indemnifier or surety that does not depend on a valid and enforceable obligation of another party.[26]
[26]Ibid [136].

The judge went on to say that the extent of the primary liability of the indemnifier is to be ascertained by a process of construction that engages with three significant considerations: firstly, the specification of the trigger event; secondly, the way loss is defined within the scope of the indemnity; and thirdly, context.

The judge referred to The Modern Contract of Guarantee[27] as supporting the proposition that a reference to loss arising from the debtor’s ‘breach’ or ‘default’ is likely to carry with it the implication that the primary debtor must be under a legally enforceable obligation. The judge accepted, again by reference to the same text, that if the indemnity is provided in a situation where the parties may reasonably expect the principal transaction to be ineffective, this lends weight to a construction that the indemnity will operate in that eventuality.[28]
[27]John Phillips, James O’Donovan and Wayne Courtney, The Modern Contract of Guarantee (Sweet & Maxwell, 4^th ed, 2020) 5–175.
[28]Reasons, [137].

The judge concluded that the indemnity in cl 2 was only triggered where there was a loss ‘as a result of the default’ by Sevdalis and, as he was under no legally binding obligation under the LML agreement, it followed that he could not be in default and therefore there was no liability under the indemnity. For that reason the judge held that cl 2 was ‘not engaged’. The judge concluded that LM was not entitled to recover its ‘losses’ when there was no obligation upon Sevdalis to pay, and it therefore could not rely on the indemnity in cl 2.[29]
[29]Ibid [139].

The judge then addressed cl 6. Before the judge, LM had argued that the parties knew that Sevdalis was a bankrupt and it was for that reason that the guarantee and other security was sought by LM. It was in that context, so the argument went, that cl 6 operated to preserve the liability of the indemnifier notwithstanding that any of the obligations were unenforceable against Sevdalis.[30] The judge rejected that submission.
[30]Ibid [143].

Her Honour held that cl 6 had to be read subject to the scope of the indemnity as defined in cl 2. That being so, the applicants were required to show that there was a default in an obligation. The judge added that, if the matter were not free from doubt, then it is trite law that any ambiguity must be resolved in favour of the surety.[31]
[31]Ibid [144].

The judge then added an additional reason why cl 6 could not be relied on, namely that the LML agreement was a ‘purported agreement’ that was ‘incompetent’ because s 58(3) of the Act prohibited the making of the agreement. For that reason, the LML agreement was not merely unenforceable but had ‘never c[o]me into effect’.[32] The judge continued:

I find that no agreement came into being between LM and Sevdalis because of the application of the statutory bar contained in s 58(3) of the Bankruptcy Act. Consequently, there is no loss which LM can seek to be indemnified against because it never had a contractual entitlement to claim such a loss. Putting it another way, Lantouris has no liability to indemnify where there is no liability in existence because LM were barred from entering into any arrangements with Sevdalis to recover their fees once he became a bankrupt.[33]

[32]Ibid [145].

[33]Ibid.

It is convenient to note at this stage that, at an earlier point in her reasons,[34] the judge had also rejected a submission made by LM that the LML agreement constituted a dealing with a security and was thus authorised by s 58(5) of the Act. The judge rejected LM’s argument that by agreeing to withdraw the caveat and not insist upon its rights pursuant to the 2016 charge under the LML agreement, the making of that agreement therefore amounted to realising or dealing with its security as authorised by s 58(5).[35] The judge held that the steps taken by LM did not amount to realising or dealing with its security and constituted a different arrangement altogether, particularly, the taking of alternative security from other entities, namely Lantouris and 22 Park Street Pty, and so fell outside the steps permitted under s 58(5).[36]
[34]Ibid [85].
[35]Ibid [96].
[36]Ibid [97].

Ground 4

Proposed ground 4, which is directed to the judge’s finding that the LML agreement was ‘void’ and ‘incompetent’, is in the following terms:

Ground 4:
The Judge erred in finding that making the LML Agreement was outside the steps permitted under s.58(5) of the Bankruptcy Act 1966 (Reasons [97]) and hence that agreement was void (Reasons [130][132]) and incompetent (Reasons [145]), in circumstances where:
(a)The LML Agreement was not enforcing any remedy against the person or property of the bankrupt or a step in proceedings in respect to a provable debt and hence did not fall within the scope of s.58(3) of the Bankruptcy Act in the first place;
(b)further or alternatively, as the Judge found that Lennon Mazzeo had a valid security, including over 242 Station Street, the release of that part of the security in exchange for securities granted by Lantouris was a dealing with Lennon Mazzeo’s security within the meaning of s.58(5).

Submissions

The applicants accepted that the LML agreement was not enforceable against Sevdalis. However, they submitted that there is no prohibition in s 58 of the Act on the agreement being made. In that respect, the applicants said that the only relevant prohibition referred to by the judge, and which led her to regard the LML agreement as void, was s 58(3) of the Act. However, they said this section was irrelevant because the making of the LML agreement did not amount to enforcing a remedy against the person or property of a bankrupt.

Ultimately, the applicants submitted that there was no impediment to making an unenforceable agreement, and in using this as a vehicle on which to attach other liabilities by way of a guarantee or indemnity.

Putting their argument this way meant that it was unnecessary for the applicants to rely on s 58(5) of the Act as a foundation for the LML agreement. In relation to that provision, which recognises the right of a secured creditor to realise or deal with a security, the applicants submitted that the LML agreement dealt with their security by agreeing to release the 2016 charge in return for the rights under the LML agreement.

Following oral argument, the parties were directed to file submissions on the competency of the LML agreement, including whether it was void or voidable having regard to the provisions of the Act. The applicants submitted that there was no obvious reason why a bankrupt might not validly make an agreement with another person for ‘valuable consideration’. The respondent accepted that this was so but said, in this case, the LML agreement was void as there was no valuable consideration.

Analysis

There can be little doubt that the judge considered that s 58(3) of the Act had the effect that it was incompetent for LM to enter into the LML agreement and that, by dint of that section, ‘no agreement came into being between LM and Sevdalis’.[37] Before considering the correctness of that conclusion it is important to reiterate that the judge’s analysis of s 58(3), and her conclusion that no agreement had come into being, provided an additional reason why LM could not rely on cl 6 of the indemnity. By the time the judge came to that point in her reasons, she had already held that cl 6 did not expand the width of the indemnity in cl 2 and that the claim under cl 6 must fail ‘for the same insurmountable problem’ that beset the claim under cl 2, namely that there could be no default and therefore no obligation to indemnify in the absence of a binding obligation on Sevdalis.
[37]Reasons, [145].

In other words, the judge’s principal finding did not depend on the LML agreement being void, rather it reflected two things: firstly, that the LML agreement was not enforceable against Sevdalis and secondly, that on their proper construction cls 2 and 6 were not engaged. That reasoning is independent of the judge’s consideration of s 58(3) of the Act.[38] The applicants have sought to impugn that reasoning by proposed grounds 5 and 6, which are addressed below. It follows that ground 4 will not avail the applicants unless they also succeed on grounds 5 and 6.
[38]That emerges from her Honour’s detailed reasoning, and is not gainsaid by her reference, in her summary of her findings at Reasons [177(c)], to s 58(3) of the Act as the first matter there mentioned.

The Bankruptcy Act

Section 58 of the Act relevantly provides:

(1) Subject to this Act, where a debtor becomes a bankrupt:
(a)the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and
(b)after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
Note 1: …

...
(3)Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a)to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b)except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

…
(5)Nothing in this section affects the right of a secured creditor to realize or otherwise deal with his or her security.
…

With respect to the judge, the making of the LML agreement did not involve the enforcement of a remedy against the person or the property of Sevdalis and therefore s 58(3) had no application.

In Fraserv Deputy Commissioner of Taxation,[39] Beaumont J said:

As the High Court observed in Clyne at 595 a distinction should be drawn, for the purposes of s 58(3), between the ‘enforcement’ of a remedy against the property of the bankrupt, on the one hand, and the commencement or the taking of a fresh step in a ‘legal proceeding’, on the other. An obvious example of the former would be to levy execution against the lands or goods of the bankrupt. In this connection, the words ‘enforcement’ of a ‘remedy’ should, I think, be interpreted as having their settled meaning. In R v Bates (1982) 2 NSWLR 894, Samuels JA. said, of ‘enforce’ (at 895):
“... I would harbour considerable doubt, as a matter of grammar or syntax, whether the word ‘enforced’ extends to cover the institution of proceedings for breach of a provision of a statute. The relevant meaning assigned in The Shorter Oxford English Dictionary is that to enforce means ‘to compel observance of’. That is, I think, its ordinary meaning...”

With respect, I agree. Moreover, it will be recalled that the notion of ‘enforcement’ was not used in s 60(2) when considered by Clyne J in White. This may be a basis for distinguishing White. But, in any event, the doubts cast in Clyne upon the approach taken in White, when considered in the context of the settled meaning of the phrase ‘enforce a remedy’, lead, in my opinion, to the conclusion that the absolute bar imposed by s 58(3)(a) should be construed so as to apply only to the enforcement of remedies, including extra-curial remedies, as distinct from the institution of legal proceedings and their maintenance up to the point of recovery of judgment. The institution and maintenance of such proceedings will, of course, be subject to the different constraints imposed by s 58(3)(b), unless leave be granted under that provision.[40]

[39](1996) 69 FCR 99.

[40]Ibid 111–2.

The making of the LML agreement did not compel the observance of anything. Even allowing for the fact that the word ‘remedy’ within s 58(3) of the Act is wide enough to attach to a non-curial remedy, on no view did the making of the LML agreement provide a remedy to LM. Still less did it enforce any remedy. The disjunction between sub-ss 58(3)(a) and (b) is also relevant. Section 58(3)(a) imposes a complete bar to the enforcement of a remedy. Plainly, it reflects the organising principal of the bankruptcy legislation that divests a bankrupt from his or her property, releases him or her from her liabilities, and provides for the orderly and rateable distribution of the estate. Section 58(3)(b) recognises that it is just, in some circumstances, to allow a proceeding to proceed against a bankrupt with the leave of the court.[41] In order to maintain the distinction between enforcement and proceeding in an action against a bankrupt, taking steps in a proceeding (which might lead to enforcement) is not caught by s 58(3)(a). So, if taking a step in a proceeding (eg, to litigate a claim) is not caught by s 58(3)(a), it would be entirely anomalous if the making of an agreement to compromise a claim fell within the terms of that paragraph.
[41]Clyne v Deputy Commissioner of Taxation (No 3) (1984) 154 CLR 589; [1984] HCA 44; Cummings v Claremont Petroleum NL (1996) 185 CLR 124; [1996] HCA 19 (‘Cummings’); Commissioner of Taxation v Yeo (No 2) [2019] FCA 1188.

To the extent that the judge concluded that the LML agreement was void by reason of the operation of s 58(3) of the Act, that conclusion involved error. We would uphold ground 4(a) to that extent.

On the other hand, the judge was correct in her conclusion that the making of the LML agreement did not amount to a dealing with a security. In LM’s favour, the judge found that the firm was a secured creditor and held a security in the form of the 2016 charge. The applicants’ submission that the LML agreement dealt with the security by releasing or narrowing its operation cannot be sustained. Most obviously, it fails because the LML agreement does not have the effect attributed to it. Rather than releasing the security, the LML agreement expressly preserved the security by stating that ‘[t]he Charge Agreement dated 3 October 2016 shall remain in full force and effect until the entire settlement sum is paid.’

Before leaving this ground it is necessary to add a few observations about the legal status of the LML agreement which arise within the context of s 58 of the Act but independently of s 58(3). In Cummings, Brennan CJ, Gaudron and McHugh JJ observed that it was ‘fundamental to the law of bankruptcy that the bankrupt is divested of both his interest in his property and liability for his provable debts’.[42] It is equally fundamental that, in respect of a provable debt, the interest of the creditor becomes a right to prove in the bankruptcy. Any rights and powers in relation to property that would have been exercisable by the bankrupt if they had not become a bankrupt vest in the trustee. Accordingly, ‘a bankrupt has no right to bring or prosecute proceedings to protect, enhance or add to the property of which he has been divested on bankruptcy’.[43]
[42](1996) 185 CLR 124, 138; [1996] HCA 19 (citation omitted).
[43]Ibid 136 (Brennan CJ, Gaudron and McHugh JJ) (citation omitted).

As at July 2017, Sevdalis had been relieved of his liability to LM and had no property with which to satisfy the LML agreement. Equally, LM had no right to proceed against Sevdalis and the debt that had been owed by Sevdalis had been replaced by a right to prove. It is a logical corollary that Sevdalis was unable to compromise the debt, which was under the control of the trustee, and LM had no claim against Sevdalis. Whatever Sevdalis and LM purported to agree to was incapable of affecting the legal position ordained by the Act. It was not simply a matter of the debt being unenforceable against Sevdalis because, more fundamentally, he had no interest or capacity to deal with the provable debt outside of the Act. The LML agreement created no enforceable legal obligations or rights.

However, whether the LML agreement was, as against Sevdalis, void, or merely unenforceable against him, does not resolve the question whether the guarantee and indemnity imposed an independent and principal liability on Lantouris. Given that LM’s suit was one against Lantouris and relied on an indemnity, the liability of Sevdalis under the LML agreement was not necessarily the end of the matter. It does not follow that because a purported liability of a party is void that a third party might not indemnify against a failure to perform. Putting aside those cases where the indemnification of a void agreement might offend public policy and itself be void, the issue is to be resolved by reference to the text of the relevant indemnity. That is the subject of proposed grounds 5 and 6.

In summary then on ground 4, although there was an error in relation to the operation of s 58(3) of the Act, it will not avail the applicants unless they can also overturn the independent reasoning of the judge as to the construction and application of cls 2 and 6 of the guarantee.

Grounds 5 and 6

Grounds 5 and 6 are interrelated and can be dealt with together. They are as follows:

Ground 5:
The Judge erred in finding that, on its proper construction, the Guarantee was unenforceable (Reasons [136] – [146]) in circumstances where:
(a) All parties were aware of the fact that Sevdalis was bankrupt;
(b)The nature of the transaction was the surrender of rights by Lennon Mazzeo, in particular against 242 Station Street by the removal of the Station Street Caveat, in return for rights against Lantouris;
(c)The Judge correctly found that Lennon Mazzeo’s security over 242 Station Street and thus the Station Street Caveat were valid (Reasons [81] and [84]);
(d)The learned Judge’s interpretation of the Guarantee works a commercial nonsense.

Ground 6:
The Judge erred in failing to find that, on its proper construction the ‘principal obligation’ referred to in clause 6 of the Guarantee was the obligation to pay money to Lennon Mazzeo, not an obligation to guarantee the payment of money by Sevdalis, (Reasons [137] – [144]).

The applicants’ submissions

The applicants submitted that, properly construed, the indemnity was triggered when payments under the LML agreement were not made, irrespective of by whom or for what reason. They submitted that, according to the judge’s interpretation, the parties’ objectively determined intention was to enter into a document that was always incapable of creating any rights at all.

They submitted that the judge erred in construing cl 6 as if it were subject to cl 2 in circumstances where, in its terms, it imposed a principal obligation. They submitted that the purpose of cl 6 was to recognise the liability of the indemnifier to pay the amounts payable under the LML agreement notwithstanding that, as everyone knew, the obligations were unenforceable against Sevdalis. They submitted that to confine the indemnity to circumstances where Sevdalis failed to comply with an obligation to pay, when such an obligation could not have been imposed in the light of his bankruptcy, would be to produce a commercial nonsense.

Analysis

We have set out above the principles that apply to the construction of commercial contracts generally. There are particular precepts that apply to the construction of contracts of indemnity that need to be mentioned.

In Bofingerv Kingsway Group Ltd,[44] the High Court restated as settled principle that a doubt as to the construction of a provision in a guarantee or indemnity should be resolved in favour of the surety or indemnifier. The Court emphasised that the doubt ‘may arise not only from the uncertain meaning of a particular expression but from its apparent width of possible application.’[45]
[44](2009) 239 CLR 269; [2009] HCA 44 (‘Bofinger’).
[45]Ibid 292 [53] (Gummow, Hayne, Heydon, Kiefel and Bell JJ); See also Andar Transport Pty v Brambles Ltd (2004) 217 CLR 424, 433–7 [17]–[23] (Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ); [2004] HCA 28.

Some general points of principle are also relevant. First, as the judge noted, there is a distinction between a guarantee and an indemnity with the latter imposing a primary liability that does not depend on the existence of an enforceable liability against the debtor. As a general rule, in the case of a guarantee, which is a collateral or accessory liability, if the liability of the debtor is unenforceable, or terminated, so too is the liability of any guarantor. One exception to that general rule is where the principal becomes a bankrupt and the primary debt becomes unenforceable against him or her. In such cases, bankruptcy does not discharge the liability of the guarantor.[46] Thus, in McDonald v Dennys Lascelles Ltd[47] Starke J said:

A surety, however, is not liable on his guarantee where the principal debt cannot be enforced, because the essence of the obligation is that there is an enforceable obligation of a principal debtor.
…
But the generality of the rule is subject to some modifications. A release in bankruptcy does not discharge a surety, for that is the act of the law. Again, a person who becomes surety for another under a known disability may be treated as the principal debtor, and a person who becomes surety for the repayment of money borrowed by a company beyond its powers has been held liable, either because ‘the obligation of a mere guarantee for a debt can be satisfied by payments by the surety, who may be considered as prepared to lose his right over against the corporation, if the law forbids it to pay’, or because the surety’s liability arises from the failure or omission of the company, from whatever cause, to meet its obligations.[48]

[46]Jowitt v Callaghan (1938) 38 SR (NSW) 512, 516 (Jordan CJ).

[47](1933) 48 CLR 457; [1933] HCA 25 (‘McDonald’).

[48]Ibid 471–2 (citations omitted).

In the same case, Dixon J described the general rule as ‘a leading principle’ based on the nature of the collateral liability that was subject to certain qualifications. In ascribing a rationale for the exceptions, he said:

It does not extend to a discharge of the principal debtor’s personal liability by operation of law when the discharge is for the purpose of liquidating his affairs or transforming the rights of the creditor against him into rights against or in respect of his assets. The doctrine should be understood to look rather to the continuance of a just claim in the creditor to receive payment in respect of the principal debtor’s obligation than to the latter's relief from actual personal liability.[49]

[49]Ibid 480.

In McDonald, the principal obligation was discharged, albeit through no fault of the creditor. It was held that the words of the guarantee did not require any departure from the usual position, with the result that the creditor could not look to the guarantor whose own liability ceased on the discharge of the primary liability. Dixon J explained that was because ‘the case is one in which at law and in equity the creditor became disentitled to the benefit or advantage the principal obligation was designed to give him.’[50]
[50]Ibid 481.

In Citicorp Australia Ltd v Hendry,[51] the New South Wales Supreme Court held that a guarantor was not liable to satisfy a primary obligation that was found to be an unenforceable penalty. At first instance, Clarke J held that to require the guarantor to make good an unenforceable penalty would be contrary to principle as it would allow for the indirect enforcement of a penalty. In addition, as a matter of construction of the guarantee, he held that an obligation to guarantee amounts that were ‘now owing or payable to the lessor’ did not extend to an unenforceable penalty that was never owing and payable by the primary debtor.[52]
[51](1985) 4 NSWLR 1.
[52]Ibid 21.

Although, as a general proposition, the liability of a debtor and a guarantor is co-extensive, there are exceptions to the general rule that are not always easy to reconcile.[53] For example, guarantees given by a director for ultra vires company debts have been upheld,[54] as have guarantees of liabilities incurred by minors.[55] In any event, the general proposition does not apply to a contract of indemnity which imposes a principal liability on the surety.
[53]J Steyn, ‘Guarantees: The Co-extensive Principle’ (1974) 90 Law Quarterly Review 246.
[54]Chambers v Manchester and Milford Rly Co 5 B & S 588, 610; Yorkshire Railway Waggon Co v MacLure and Cornwall Minerals Rly Co (1881) 19 Ch. D. 417.
[55]Wauthier v Wilson (1911) 27 TLR 582; (1912) 28 TLR 239.

It is a consequence of the general proposition that a guarantee will often be accompanied by an indemnity or contain provisions that seek to ensure that the liability of the guarantor survives notwithstanding that the obligations of the covenantee are, or become, unenforceable. It is no doubt for this reason that cl 2 contains an indemnity and cl 5 extends the guarantee so as to address the situation where the underlying obligation becomes unenforceable.

Second, the extent of an indemnity involves a question of construction. It is critical to construe the contract of indemnity, in order to understand precisely what obligation it is that the indemnifier has undertaken, towards the person to be indemnified.[56]
[56]Yeoman Credit Ltd v Latter [1961] 1 WLR 828, 831–3 (Lord Pearce); Cameo Motors Ltd v Portland Holdings Ltd [1965] NZLR 109, 113 (Richmond J); Moschi v Lep Air Services Ltd [1973] AC 331, 349 (Lord Diplock); Alfred McAlpine Construction Ltd v Unex Corporation Ltd (1994) 70 BLR 26, 32–3 (Evans LJ).

Although everything turns on the text of the guarantee and indemnity in question, it is convenient to refer to two types of guarantee and indemnity. In Wren v Mahoney,[57] Barwick CJ referred to two different forms of indemnity by which an indemnifier may be required to pay. He drew the distinction between a promise to indemnify the promisee in the event of non-payment by the third party and a promise given to the promisee for the payment by the promisor of the debt in question. He continued:

Both promises may be given by the same instrument. Further, a promise to pay the debt is a method of effecting an indemnity against a liability: but an indemnity against claims or demands though in a sense an indemnity against a liability does not necessarily, of itself, import a promise by the party giving the indemnity to the indemnified party, to pay the debt or demand direct to the creditor of the promisee. Whether or not there is such a promise to pay is of course a matter of construction of the language used in the circumstances in which it was used.[58]

[57](1972) 126 CLR 212; [1972] HCA 5.

[58]Ibid 227.

A similar line of analysis can be seen in the reasons for judgment of Mason CJ in Sunbird Plaza Pty Ltd v Maloney.[59] In Sunbird, Mason CJ started by observing that a contract of guarantee is, subject to any qualifications made by the particular instrument, a collateral contract to answer for the debt, default, or miscarriage of another who is or is contemplated to be or to become liable to the person to whom the guarantee is given.[60] He noted that guarantees are often, but not always, used to guarantee the payment of a debt. However, such a guarantee was just one instance of the wide range of obligations, the performance of which might be the subject of a guarantee. Another example was offered, being the performance of a contractual obligation which does not involve the payment of money.[61]
[59](1988) 166 CLR 245; [1988] HCA 11 (‘Sunbird’).
[60]Ibid 254.
[61]Ibid 254–5.

The distinction may be important when it comes to understanding the liability of a guarantor. As Mason CJ explained:

So it is that a creditor’s rights against a guarantor depend on the terms of the guarantee and the nature of the obligation, performance of which is guaranteed. If the subject of the guarantee is payment of a debt or a sum of money which has accrued due, the creditor may, on default by the principal debtor, sue the guarantor instead of the principal debtor for the debt or sum of money, his claim being for a liquidated amount. If, on the other hand, the subject of the guarantee is the performance of some other obligation, then the person having the benefit of the guarantee may, upon default, sue the guarantor for damages for breach of contract.[62]

[62]Ibid 255.

Third, in the context of a secured creditor, the indemnifier has a right of subrogation over the security.[63] That entitlement arises from the obligation of the principal debtor to indemnify the surety.[64] So, where the secured debt is paid out by the indemnity, a court of equity will place the surety in exactly the same situation as the creditor with respect to the securities. For that reason, the secured creditor is not entitled to release or undermine the security before claiming against the surety.
[63]Bogfinger (2009) 239 CLR 269, 280–1 [8] (Gummow, Hayne, Heydon, Kiefel and Bell JJ); [2009] HCA 44.
[64]Ibid.

The construction of clause 2

Without losing sight of the applicants’ submission that cl 2 and cl 6 have to be read together and in context, it is convenient to look first at the text of cl 2.

The first part of cl 2 guarantees the due and punctual performance of all the obligations of the covenantee under the LML agreement. When read with the letter of 20 July 2017, it is clear that the LML agreement records an agreement between Sevdalis and LM by which LM agreed to accept the sum of $400,000 in settlement of all outstanding accounts for the provision of legal services to Sevdalis. Although the first numbered paragraph is expressed in the passive voice (‘payment…is to be made…’), it is tolerably clear from the context that the LML agreement purports to impose an obligation on Sevdalis to pay the sum in two instalments.

The second numbered paragraph of the LML agreement provides that the payment of the settlement sum is to be ‘guaranteed and secured by’ Lantouris and 22 Park Street Pty Ltd.

The third numbered paragraph of the LML agreement is not unimportant. It records that the 2016 charge would remain in force until the entire settlement sum is paid.

The LML agreement also contemplated the preparation and execution of a guarantee by Lantouris and 22 Park Street Pty Ltd in respect of the payment of the settlement sum and stated that a deed would be prepared. In notable contrast to the language employed in the LML agreement, paragraph 2 of the indemnity was not expressed as a guarantee of payment, but guaranteed the performance of the obligations imposed on Sevdalis.

As a matter of language, and given the nature of a guarantee as a collateral liability, one would more naturally read the word ‘obligations’ as comprehending legally enforceable obligations. Unless the context demanded it, or unless other parts of the document extended the liability, a guarantor would not usually be thought to have agreed to guarantee another person’s obligations which that person was under no legal compulsion to meet.

Clause 5, unlike cls 3 and 6, is confined to the guarantee and makes no mention of the indemnity. It is plainly designed to extend the operation of the guarantee and overcome the general rule that a discharge of the primary obligation also discharges the collateral obligation of the guarantor. It identifies a number of future contingencies that may arise after the commencement of the guarantee and which might render the obligations of the covenantee unenforceable.

The fact that the agreement in cl 5 addresses the situation in which the obligations under the LML agreement become unenforceable suggests that the premise of cl 2 was an understanding that the LML agreement imposed binding obligations on Sevdalis at the time it was made. It reinforces the construction that cl 2 refers to binding obligations.

Of course the weight to be given to cl 5 is affected by the consideration that it refers to a situation in which the covenantee ‘becomes bankrupt’. At the time the agreement was made, Sevdalis was already a bankrupt. This suggests the use of a boiler plate designed to preserve the guarantee and weakens the significance of cl 5 as relevant to the construction of cl 2. Nevertheless, its inclusion adds to the view that cl 2 was premised, rightly or wrongly, on the existence of enforceable obligations on the part of Sevdalis under the LML agreement.

The latter part of cl 2 is in the form of an indemnity and is expressly tied back to the ‘obligations’ of Sevdalis under the LML agreement. It indemnifies LM against all losses suffered or incurred in recovering any money owing as a result of ‘default in such performance’. The trigger for the indemnity is a ‘default’ in the performance by Sevdalis of his obligations under the LML agreement. The word ‘default’ carries with it the notion of a breach of the obligation due to some fault or dereliction by the covenantee. The word ‘default’ generally means a failure or neglect to act, and in a legal context, usually means a failure to perform that which is legally required.[65] The use of the word ‘default’, when used in its ordinary sense, may be contrasted with the mere fact of non-performance. Further, as already noted, the guarantee was not expressed, as it could have been, as a guarantee for the payment of a debt, rather, it referred to the performance of the obligations under the LML agreement.
[65]Macquarie Dictionary (online at 16 March 2022) ‘default’. See also Albert v Grosvenor Investment Co Ltd (1867) LR 3 QB 123.

There is an additional textual matter in cl 2 that is important. Clause 2 indemnifies LM against ‘all losses, expenditures, costs and expenses of whatever nature suffered or incurred directly or indirectly by the covenantors in recovering any money owing as a result of default’. LM seeks to recover the amounts payable under the LML agreement, rather than the costs of its recovery. To the extent the indemnity covered the principal, it could only do so through the use of the word ‘losses’.

Consistently with our view of the guarantee, the entitlement to be indemnified against losses must, in our view, be predicated on the existence of some entitlement in the part of LM to receive the money under the LML agreement. Thus, the reference to obligations on the one hand and losses on the other strongly points to the clause being founded upon legally enforceable obligations. Having regard to the analysis in Sunbird, it is significant that Lantouris and 22 Park Street Pty Ltd guaranteed the performance by Sevdalis of the obligations under the LML agreement and agreed to indemnify for any losses by reason of a default. If LM was never entitled to be paid under the LML agreement, for example because Sevdalis was under no legal obligation to pay, it could hardly be said that LM had suffered a loss against which it could seek payment under the indemnity.

Thus, in summary, cl 2 guarantees the performance of obligations under the LML agreement and provides LM with an indemnity against any losses by reason of the non-performance of those obligations. This is the construction adopted by the judge. It accords with the text of the relevant clauses.

The applicants invited the Court to depart from this textual construction on the basis of two aspects of context. The first is that Sevdalis was known by all of the relevant parties to be a bankrupt. The second is the context given by cl 6, which they contended casts light on the meaning of cl 2 and, also they said, extends the liability of the respondent.

The significance of the bankruptcy

It may be accepted that each of the parties knew that by July 2017 Sevdalis was a bankrupt. It does not follow that the legal significance of his status was known or understood by all of the parties and, in particular, Lantouris. The judge did not make a finding to that effect. We have already noted that cl 5 suggests that the obligations were understood to be enforceable and that provision was required to cater for the eventuality that they would later become unenforceable. The absence of a finding that the parties understood the legal effect of the bankruptcy undermines its significance to the construction of the Deed.

It is also correct that Lantouris gave evidence that she had told Lennon and Podaridis that she ‘agreed to pay the $400,000 and put 22 Park Street as caveat for Nick’s legal fees owing to Pat’ and that she had agreed to give a guarantee. On its face, that appears to be a stated willingness to pay the amount owing directly to LM or to guarantee payment. Although the subjective intention of Lantouris is not relevant to the construction of the contract, it is notable that Lantouris made an offer of direct payment and also to guarantee the debt.

However, the context supplied by the fact that Sevdalis was a known bankrupt and by Lantouris’ offer to pay the debt, does not call for any particular construction of the indemnity. In that context, what might be thought to be significant was not that everyone knew that Sevdalis was bankrupt but that LM, as a firm of solicitors who were well placed to appreciate the legal significance of bankruptcy, chose to draft the LML agreement the way that they did as one based on obligations and losses. The LML agreement might betray a misunderstanding about the capacity of Sevdalis to compromise his claims and make provision for payment, or be a device to disguise what was intended to be a direct and immediate obligation on 22 Park Street Pty Ltd or Lantouris to pay Sevdalis’ debts for him.

Ultimately, it is difficult to distil a rational commercial purpose common to the parties in circumstances where Sevdalis was a bankrupt and, rather than dealing with the trustee in bankruptcy as would be expected, LM chose to enter into a purported agreement directly with the bankrupt in order to compromise its claim and obtain repayment of its debt without proving in the bankruptcy. Equally, it is passing strange that a third party would provide a guarantee and indemnity in respect of obligations that apparently belonged to a person who was already bankrupt and therefore had no legal obligation to meet the underlying debt. Fundamentally, we do not consider that the contextual factual matters on which the applicants relied warrant any departure from the meaning conveyed by the text of the document.

Clause 6

As already outlined, the applicants also relied on cl 6 both as imposing a liability and as an aid to the construction of cl 2.

Clause 6 says that the indemnity ‘will be enforceable’ notwithstanding that any of the obligations subsisting between LM and Sevdalis are, in whole or in part, unenforceable for any reason. All parties accept that the obligations to pay under the LML agreement between LM and Sevdalis were unenforceable against Sevdalis. That was, at least, because even if the LML agreement was otherwise valid, s 58(3) of the Act provides that it is not ‘competent’ for a creditor to sue a bankrupt to recover the provable debt (without leave) or enforce any remedy (after suit, or otherwise) against the person or the property of the bankrupt in respect of a provable debt.

Clause 6 has the effect that the indemnity is enforceable despite the fact that the LML agreement is unenforceable. However, the construction of cl 2 adopted by the judge did not amount to a conclusion that the indemnity was unenforceable. Rather, the judge found that the triggering event of ‘default’ by Sevdalis had not arisen. Indeed, she found that it could never arise because he was under no legal obligation. That conclusion went to the value of the indemnity, not to its enforceability. In our view, both the language and purpose of cl 6 are clear: it is to preserve the indemnity in the event the underlying obligations are unenforceable. Its role is not to enlarge or alter the meaning to be given to the indemnity but to provide that it continue in the event of specified contingencies. To expand the meaning by such a process of implication would run counter to the binding principle of construction that an indemnity must be read strictly.

The argument that the guarantee and indemnity would be worthless on the construction adopted by the judge echoes an argument that was put and rejected by Mason CJ in Sunbird for reasons that apply here with equal force:

The appellant contends that this interpretation of the guarantee fails to give effect to the purpose which the guarantee must be taken to have served. The object of the guarantee was, so the argument runs, to enable the vendor to recover the price irrespective of the position between the vendor and the purchaser. The short answer is that the terms of the contract of sale, the guarantee and the matrix of circumstances in which the contract was entered into do not support this sweeping assertion. As we have seen, the terms of the guarantee are specific and clear upon this point.[66]

[66](1988) 166 CLR 245, 257–8; [1988] HCA 11.

It would be to invert the proper principle of construction to construe an indemnity broadly on the basis that its purpose is to avoid the indemnified party from bearing any loss. Settled principle requires that an indemnity be read strictly and not generously, notwithstanding that, from the perspective of the indemnified party, it is seeking to overcome the effect of a specified contingency. In all the circumstances, the safest guide to meaning is by reference to the words that were used. The narrow language of cl 2 of the indemnity must be taken to be deliberate and to reflect the bargain. An approach that favours the text is even more important given the well-established principle that doubt as to the apparent width of possible application must be resolved in favour of the indemnifier. Neither the context nor the language of cl 6 justify giving a strained construction to cl 2 so as to impose a liability to indemnify merely on the event of non-payment of the amounts payable under the LML agreement.

Grounds 5 and 6 must be rejected.

In the circumstances there is no occasion to consider the notice of contention.

Conclusion on the indemnity grounds

The judge was correct to reject LM’s claim under the Deed of Guarantee. The error made by the judge in relation to the operation of s 58(3) of the Act was immaterial to the result she reached.

Conclusion

We will grant leave to appeal but the appeal must be dismissed.

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[2022] VSCA 60

12 April 2022