Asset Flooring v North
[2016] VSC 31
•11 FEBRUARY 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
JUDICIAL REVIEW AND APPEALS LIST
S CI 2015 0661
| ASSET FLOORING PTY LTD | Plaintiff |
| v | |
| WILLIAM JOHN NORTH | Defendant |
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JUDGE: | JOHN DIXON J |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 3 FEBRUARY 2016 |
DATE OF JUDGMENT: | 11 FEBRUARY 2016 |
CASE MAY BE CITED AS: | ASSET FLOORING v NORTH |
MEDIUM NEUTRAL CITATION: | [2016] VSC 31 |
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GUARANTEE AND INDEMNITY – Construction of terms of guarantee – Whether the creditor was required to exhaust its remedies against the principal debtor before seeking to enforce the guarantee – Whether a clause governing the treatment of later receipts by the creditor from a liquidator after the guarantee obligation had crystallised affected the sum due and owing when an insolvency event occurred.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J Evans | Muir Legal |
| For the Defendant | Mr LEP Magowan | Davies Lawyers |
HIS HONOUR:
On 16 January 2015, a magistrate dismissed the appellant creditor’s claim to enforce a guarantee given to it by the respondent guarantor of the debts of Rahan Constructions Pty Ltd, a company that was in liquidation.
The magistrate determined as a preliminary question that, by reason of the proper construction of the guarantee, the creditor’s action was premature and the creditor was required, in effect, to exhaust its remedies against the principal debtor before seeking to enforce the guarantee.
The appeal is brought on a single question of law that is stated to be:
Whether, on its proper construction, clause 8 of the guarantee and indemnity dated 23 April 2012 and signed by the respondent in favour of the appellant (“guarantee”) operated as at the date of the hearing so as to prevent the appellant from obtaining judgment against the respondent under the guarantee in respect of unpaid debts of the principal debtor Rahan Constructions Pty Ltd until after the conclusion of the liquidation of Rahan.
Rahan contracted to undertake commercial construction and other works at the Hume Valley School in about April 2012. On 23 April 2012, Rahan applied for a credit account with the appellant, which application was accepted. By the guarantee, dated 23 April 2012, the respondent personally guaranteed payment of all moneys owing by Rahan to the appellant under the credit account. Under the credit account, the appellant supplied and fitted flooring for Rahan at its request from April 2012 until July 2013 with part payments being made. On 30 July 2013, a court ordered that Rahan be wound up. In the proceeding below, the appellant claimed the sum of $109,677.16 as the outstanding balance owing on the credit account.[1]
[1]The appellant abandoned so much of its claim as was in excess of $100,000.
In the court below, although a number of other defences were raised by the guarantor, relevantly the guarantor contended that the creditor’s claim was premature. He so contended on the basis that because the liquidation of the principal debtor had not been finalised, the quantum of the dividend that the creditor might receive in the liquidation was not known. Clause 8 of the guarantee provided that the guarantor was only liable for the ultimate balance that could not, as at the date of trial, be determined.
The appellant’s claim before the primary court was straightforward. The appellant proved the entry by Rahan into the credit account and the respondent's guarantee of Rahan’s indebtedness pursuant to that account. The appellant alleged that it provided work and labour and supplied material to Rahan, which went into liquidation on 30 July 2013. The appellant contended that the respondent was obliged to indemnify it in respect of the total sum outstanding on the credit account pursuant to the guarantee.
During final submissions, the primary court identified the preliminary issue concerning the proper construction of the guarantee arising from the guarantor’s contentions about cl 8. The primary court received submissions in respect of that issue and on 30 January 2015 upheld the construction of the guarantee contended for by the respondent.
The magistrate reasoned that she was obliged to construe the guarantee and indemnity according to its language and if ambiguity was found, to construe the document in favour of the guarantor. The magistrate identified the operative provision of the guarantee and indemnity, which she referred to as the charging provision, to be cl 8, by which the quantum of the guarantee obligation was limited by the use of the phrase ‘ultimate balance’. Because the ultimate balance could not be identified as a sum certain until the completion of the liquidation after any dividend paid was brought to account, the guarantor’s obligation to indemnify the creditor was not, and would not be, enlivened until the ‘ultimate balance’ could be determined.
Accordingly, the magistrate concluded that the appellant's proceeding to enforce the guarantee was premature. The magistrate did not express any finding in relation to the other issues raised between the parties by the pleadings, notwithstanding that she took all the evidence in respect of all issues in the proceeding. The magistrate rejected the appellant’s application for a stay of the proceeding and made orders that it be dismissed with costs.
The guarantee recites that the principal debtor, referred to as the customer, had, at the request of the guarantors,[2] entered into the commercial relationship described as the credit account and stated that:
[2]Douglas Allan Hargrave was also a guarantor.
The guarantors hereby jointly and severally guarantee to the company as follows:
1.To be answerable and responsible to the company and guarantee to the company as a continuing obligation the due payment by the customer of all amounts and other moneys of any nature whatsoever that the customer may owe or for which it may be liable to the company whether now or in the future under [the credit account].
…
4.That all moneys owing or which may become owing by the customer to the company shall become immediately owing and due and payable by the guarantors without notice or demand … upon the appointment of … a liquidator to the customer …
The guarantors further agree with the company that:
8.All dividends, compositions and payments received by the company from the customer whether in liquidation or otherwise, shall be taken and applied by the company as payments in gross and any guarantor’s rights to be subrogated to the company in respect thereof shall not arise until the company has received the full amount of the company’s claim against the customer and this guarantee and indemnity shall be a security to the company for the payment of any ultimate balance which shall remain due to the company.
The appellant submitted that the magistrate erred in accepting the respondent’s submission that cl 4 was in the nature of a ‘recital’ and that it was subordinate to cl 8. The proper construction of the guarantee was that cl 4 identified precisely the obligation of the guarantor - to pay all moneys owing or which may become owing by the customer to the company - and the time at which that obligation arose, such moneys were immediately due and payable by the guarantor upon the customer going into liquidation. The appellant submitted that cl 4 was a clear and explicit statement of the primary obligation of the guarantor when the principal debtor is wound up.
The magistrate’s acceptance of the respondent’s interpretation of cl 8 denied cl 4 its plain meaning offending a cannon of contractual interpretation that in construing a contract a construction which gives each and every part of the document work to do is to be preferred over a construction which does not do this and leaves provisions or parts of provisions redundant.[3]
[3]Citing Shepparton Projects Pty Ltd v Cave Investments Pty Ltd [2010] VSC 504, [42]; Chapmans Ltd v Australian Stock Exchange Ltd (1996) 67 FCR 402, 411.
The appellant submitted that, on its proper construction, cl 8 did not have the effect of deferring the guarantor’s obligation to pay the guarantee debt until the conclusion of the liquidation. Clause 8 affected the circumstance where, after the guarantee obligation had crystallised, the creditor received payments. Where the principal debtor is wound up, its purpose was to ensure that the guarantee covered the amount remaining due after payment of dividends. The appellant contended that cl 8 did not in any way relevantly qualify cl 4 and there was no remnant ambiguity. The principle in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd,[4] that ambiguous provisions in a guarantee should be resolved in favour of the guarantor, was not called into play.
[4](1987) 162 CLR 549. See also Rava v Logan Wines & Anor [2007] NSWCA 62, [56].
The respondent advanced two submissions in support of the primary judgment.
First, he submitted that reliance on cl 4 of the guarantee to read down the plain words of cl 8, in particular the words ‘and this guarantee and indemnity shall be security to the company for the payment of any ultimate balance which shall remain due to the company’ (respondent’s emphasis) was a new argument that was not made to the primary court and should not be permitted on appeal.
Secondly, the magistrate correctly identified the applicable principle, which was that the court was required to construe the meaning of cl 8 according to its language and if ambiguity is found, to construe the document in favour of the guarantor. The magistrate correctly identified that cl 8 was the charging provision, as she described it, and the scope of it was limited by the use of the phrase ‘ultimate balance’. As the ultimate balance could not be identified as a sum certain until the completion of the liquidation, the obligations of the guarantor under the guarantee were not enlivened. The respondent submitted that the construction of the guarantee contended for by the appellant does damage to the plain and express words of cl 8, in particular the final part of the clause referring to the concept of an ultimate balance. The form of cl 8 was determined by the appellant and to accept the appellant’s construction would mean that cl 8 serves no purpose and would otherwise be rendered nugatory.
The respondent further contended that clauses 4 and 8 can easily and coherently be read together as cl 4 expresses a more general statement of the guarantor’s obligation that is limited by the specific obligation identified in cl 8. The respondent identified the fact that the appellant had lodged a proof of debt as the conduct that suspended its immediate entitlement to enforce the guarantee for the full debt without deduction under cl 4. Lodging a proof of debt deferred the guarantor’s obligation - to answer and be responsible to and guarantee to the creditor as a continuing obligation the due payment by the customer of all amounts and other moneys of any nature whatsoever that the customer may owe or for which it may be liable to the company whether now or in the future under the credit account - until the determination under cl 8 of the ultimate balance (debt less dividend).
Although the respondent referred to the principle identified in Ankar, the respondent did not in submissions identify any ambiguity or explain how that ambiguity was to be resolved in accordance with that principle. The respondent submitted that although a creditor is not obliged to take positive steps to obtain payment from the debtor or to realise any securities that it holds before proceeding against the guarantor, its position is affected by the particular provisions of the guarantee contract. In this case, cl 8 had the effect of limiting the guarantor’s obligation under the guarantee to indemnifying the creditor in respect of the debt less dividends received in the liquidation. The respondent contended that this construction was a necessary consequence of the use of the expression ‘ultimate balance’.
The respondent contended that the appellant’s alternative submission, which was put in the event that the court accepted the defendant’s contention as to the construction of the guarantee, supported its primary submission. Accordingly, it followed that when the appellant submitted that a stay of proceedings would have enabled any dividend to be received or the plaintiff to withdraw its proof, the appellant recognised that the guarantee would become immediately enforceable if the appellant withdrew its proof of debt because the machinery of cl 8 would cease to have effect. It is unnecessary to address this contention.
I reject the respondent’s first contention. The proper construction of the guarantee was plainly in issue and the guarantee was in evidence. Although in the primary court the appellant did not expressly direct the court to cl 4, the submissions had been shaped by the issues raised by the defendant. In any event, the question now is one of pure construction that does not involve any issue of fact. Further, the respondent conceded that the absence in final submissions and in the subsequent written submission of particular reference to cl 4 did not affect the conduct of the defence below in that the respondent would have called other or different evidence or approached the case in any other way. Further, the respondent was in a position to respond with submissions directed to the construction of cl 4.
I also reject the respondent’s second contention. I am satisfied that the respondent’s submissions led the primary court into error. In particular, the magistrate was wrong to conclude that cl 8 was the ‘charging provision’ in the guarantee and that the phrase ‘ultimate balance’ defined the quantum of the indemnity to be met by the guarantor following the appointment of a liquidator.
Recently, in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[5] French CJ, Nettle and Gordon JJ succinctly summarised the applicable principles of contractual interpretation in these terms:
[5][2015] HCA 37. Of course this decision post-dated the primary decision.
46. 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.
47. 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 enquiry 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.
48. 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.
49. 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. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
50. 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.
51. 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".
52. These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales and Electricity Generation Corporation v Woodside Energy Ltd. We agree with the observations of Kiefel and Keane JJ with respect to Western Export Services Inc v Jireh International Pty Ltd.[6]
(Citations omitted)
[6]Ibid, [46]-[52].
Bearing in mind the language used in the contract, the circumstances that it addresses and its commercial purpose or object, a reasonable business person would not have understood clauses 4 and 8 of this guarantee to operate in the manner articulated by the primary court, which did not correctly, or perhaps fully, identify the relevant test. By reason of that error, the guarantee was incorrectly construed.
There is no relevant ambiguity in the language. The two clauses are intended to apply in different circumstances. To construe cl 8 as the charging clause is plainly inconsistent with the express words of each of clauses 4 and 8 and the document read as a whole. Further, to construe cl 4 as limited by the reference to ultimate balance in the concluding part of cl 8 results in a construction of the guarantee that makes commercial nonsense or a working commercial inconvenience.
A reasonable business person would understand that the guarantee operated when a liquidator was appointed to the customer by crystallising the guarantor’s obligations so that all moneys owing or which may become owing by the customer to the creditor became immediately owing and due and payable by the guarantor without notice or demand. By its terms, that is what cl 4 expressly states.
Further, the reasonable business person would conclude that cl 8 had no application in the circumstance where the creditor was seeking to enforce the primary obligation of the guarantor under cl 4. That is because by its express terms, cl 8 is engaged when the company receives a dividend, composition or payment whether in a liquidation or otherwise. The evidence before the primary court established that the creditor had lodged a proof of debt with the liquidator, however, the liquidator had neither accepted the proof of debt nor declared a dividend. But the critical fact, which was common ground, was that no payment had been received by the appellant from the liquidator.
When no payment has been received, the clause is dormant. Where a payment has been received engaging cl. 8, the clause provides that first, such payments shall be taken and applied by the creditor as payments in gross. Secondly, the clause affirms that the guarantor’s rights to be subrogated to the creditor in respect of any dividends, compositions or payments received shall not arise until the creditor has received the full amount of its claim. Thirdly, the guarantee and indemnity stands as a security to the creditor for the payment of any ultimate balance which shall remain due to it. The ultimate balance that remains due to the creditor and payment of which is secured by the guarantee is the difference between the total debt immediately due and owing pursuant to cl 4 after accounting for all dividends, compositions and payments received by the creditor.
The use of the term ‘balance’ identifies the exercise of accounting for moneys received against moneys owing and the qualifier ‘ultimate’ is properly understood as a reference to the final position between the creditor and the principal debtor after dividends, compositions and payments have been accounted for. It does not refer to the extent of the guarantor’s obligation that arises upon the appointment of a liquidator, which is identified in express terms in cl 4. The final part of cl 8 would not be understood by a reasonable business person as qualifying, in any respect, the quantum of the sum owed under cl 4 at the time of the appointment of a liquidator.
To suggest that a clause that provides for a mechanism for accounting for payments received by the creditor after the guarantee obligation has crystallised, in a manner which has the effect of postponing a creditor’s immediate right to payment of the customer’s debt until the conclusion of the liquidation, makes no commercial sense.
The respondent submitted that parts of cl 8, which mirrored the right and obligations of the parties at common law, were otiose unless cl 8 worked in the manner contended for. This submission is misconceived. The rights of the parties are determined by the contract of guarantee, not common law rights that might otherwise be relevant.
In any event, the operative clause of the guarantee is consistent with the common law. It is well established at common law by Ewart v Latta[7] that a guarantor who has not paid the principal debt cannot require the creditor to proceed against the principal debtor or to enforce any securities held for the debt before having recourse to the guarantor. As the authors of The Modern Contract of Guarantee[8] have observed, the rationale of this principle is that it is the duty of the guarantor, not the creditor, to ensure that the debtor performs the principal obligation and that the creditor should have almost unbridled control over the remedies which the contract provides.
[7](1865) FC 36. See also Ex parte Turquand (1876) 3 Ch D 445.
[8]O’Donovan and Phillips, The Modern Contract of Guarantee (3rd ed, 1996), 537.
The rights of a guarantor to indemnity and/or contribution from the principal debtor or a co-guarantor lie in entitlements to contribution and subrogation not in any qualification of the ‘charging clause’ and unless there is an express provision in a guarantee for the benefit of the guarantor requiring a creditor to exhaust any particular remedy against the principal debtor before having recourse to the guarantee, a creditor is not obliged to take any positive step to obtain payment from the principal debtor. Here there is no such express provision and the terms of the guarantee, as I have noted, expressly provide for the guarantor’s immediate liability.
That, quite plainly, is what a reasonable business person would have understood the terms of this guarantee to mean and is the proper construction of cl 4 of this guarantee and that obligation is not in any way qualified by a machinery provision that deals with later receipts and their implications for the guarantor’s rights to indemnity, contribution and subrogation.
The primary court ought to have concluded that because there was no evidence of any dividend, composition or payment having been received by the company from the customer, cl 8 was not enlivened in any way in its operation on the obligation of the parties under the guarantee. The text of the guarantee does not assign any operative effect to the act of lodging proof of debt with a liquidator on the obligations that it creates. To the contrary, the relevant fact enlivening the operation of that provision is the receipt by the creditor of a payment, which has never occurred.
The only conclusion open to the primary court is that, properly construed, the guarantee provides that upon the appointment of a liquidator to Rahan, all of the moneys owing at the time (alleged to be $70,515.50) and which may become owing thereafter (alleged to be a further sum of $39,161.66) became immediately owing and due and payable by the guarantor to the creditor without notice or demand.
For these reasons, the orders made by the primary court, including the order as to costs, will be set aside.
The respondent submitted that the matter should be remitted while the appellant faintly submitted that on an appeal by way of a rehearing, with all of the evidence available before me, I could determine the remaining unresolved issues. However, as the magistrate did not receive submissions or make findings dealing with the other matters raised by way of defence or findings identifying the quantum of the debt properly claimable under the guarantee by the appellant and as the parties have not made submissions to me as to what those issues are or how they ought to be resolved, I am satisfied that remitter is the appropriate course.
I will further order that the proceeding will be remitted to the learned magistrate for further hearing and determination by her in accordance with these reasons. Subject to any submission from the parties on the question of costs, I propose to order that the respondent pay the costs of the appeal, including reserved costs, on a standard basis and I would grant to the respondent an indemnity certificate in respect of costs under s 4 of the Appeal Costs Act, 1998.
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