Bankrupt Estate of Piccolo v National Australia Bank Ltd
[1999] FCA 386
•8 APRIL 1999
FEDERAL COURT OF AUSTRALIA
Bankrupt Estate of Piccolo v National Australia Bank Ltd
[1999] FCA 386MORTGAGE – Bank loan to company – Repayment guaranteed by directors ‑ Mortgage by guarantors to support guarantee – Construction of mortgage – Charging clause apt to pick up advances made to company whether or not at request of mortgagors – Consideration clause requiring request of mortgagors – Whether consideration clause conclusive.
GUARANTEE – Circumstances in which guarantors discharged – Guarantee granted to secure bill facility and overdraft – Overdraft cancelled – Fresh facilities granted later – Whether guarantors discharged – Whether fresh facilities a “variation, extension or replacement” of original facilities.
Scholefield Goodman & Sons Ltd v Gange (unreported, Supreme Court of New South Wales, 4 December 1979) not followed
National Bank of Nigeria Ltd v Awolesi [1964] 1 WLR 1311 applied
Bank of India v Patel [1981] 1 Lloyd’s Rep 507 applied
National Bank of New Zealand Ltd v West [1978] 2 NZLR 451 considered
Geelong Building Society v Encel [1966] 1 VR 594 considered
Inland Revenue Commissioners v Raphael [1935] AC 96 cited
Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 applied
Corumo Holdings Pty Ltd v Itoh Ltd (1991) 24 NSWLR 370 applied
Morris v Baron & Company [1918] AC 1 applied
Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vict) Pty Ltd (1957) 98 CLR 93 cited
United Dominions Trust (Jamaica) Ltd v Shoucair [1969] 1 AC 340 cited
Scarf v Jardine (1882) LR 7 HL 345 citedRE: JOHN PETER PICCOLO, EX PARTE: DEAN ROYSTON MCVEIGH (Trustee of the Bankrupt Estate of John Peter Piccolo) and NATIONAL AUSTRALIA BANK LIMITED
VG 7566 OF 1997SUNDBERG J
8 APRIL 1999
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 7566 OF 1997
BETWEEN:
RE: JOHN PETER PICCOLO
A BankruptEX PARTE: DEAN ROYSTON MCVEIGH
(Trustee of the Bankrupt Estate of John Peter Piccolo)
ApplicantNATIONAL AUSTRALIA BANK LIMITED
(ACN 004 044 937)
Respondent
JUDGE:
SUNDBERG J
DATE:
8 APRIL 1999
PLACE:
MELBOURNE
THE COURT ORDERS THAT:
1.The application be dismissed.
2.The applicant pay the respondent’s taxed costs of the application.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 7566 OF 1997
BETWEEN:
RE: JOHN PETER PICCOLO
A BankruptEX PARTE: DEAN ROYSTON MCVEIGH
(Trustee of the Bankrupt Estate of John Peter Piccolo)
ApplicantNATIONAL AUSTRALIA BANK LIMITED
(ACN 004 044 937)
Respondent
JUDGE:
SUNDBERG J
DATE:
8 APRIL 1999
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
THE FACTS
The August 1995 facility
John Peter Piccolo (“Piccolo”) and his wife Sharon Denise Piccolo were registered as joint proprietors of the land situated at 20 Kooyongkoot Road, Hawthorn in the State of Victoria (“the property”). Piccolo was a director of Poole Levy and Appel Pty Ltd (“the company”), which carried on business as a real estate agent. By letter dated 29 August 1995 the respondent (“the Bank”) offered the company a bill facility of $1,000,000 and an overdraft facility of $50,000. Security for both facilities was to be a debenture over the assets of the company, and a guarantee and indemnity for $1,050,000 given by Piccolo and his wife, supported by a mortgage over the property. The expiry date of both facilities was 31 August 1996. The facilities were offered subject to normal banking terms and conditions, together with those specifically detailed in the letter, which were said to be in addition to any terms and conditions contained in supporting loan security documentation. The overdraft facility was available at the discretion of the bank. The bill facility was expressed to be provided for the purpose of repaying money due by the company to the Commonwealth Bank. That facility was subject to the terms and conditions contained in the accompanying bill facility letter of offer. In the events that have happened the following terms and conditions of that letter are relevant:
“2.Bills drawn by the Drawer during the Availability Period shall be accepted by the Bank for the accommodation of the Drawer provided that the face value of all Bills so accepted by the Bank shall not exceed the Limit at any time.
3.No Bills shall be drawn by the Drawer and the Bank shall have no obligation to accept any Bills pursuant to this Letter having a Maturity Date later than the Expiry Date.
…
6.Within the Availability Period and subject to the provisions of this Letter upon the maturity of each Bill drawn and accepted pursuant to this Letter the Drawer may draw a replacement Bill having a face value equal to the face value of the maturing Bill which shall be accepted by the Bank ….
7.(a) …
(ii)when the Bank –
…
(b)has agreed to accept a replacement Bill (pursuant to clause 6)
the obligation of the Drawer to pay to the Bank the face value of a maturing Bill on its Maturity Date may at the discretion of the Bank be satisfied by the Bank ….
…
16.In the event that the Drawer should fail to pay to the Bank the face value of any Bill … the Bank may debit an account in the name of the Drawer … with the face value of each such Bill …. The overdrawn balance of such account shall bear interest at the rate calculated in accordance with item 11 of the Schedule from time to time.
The “Availability Period” is defined as the period during which the Drawer may draw bills and require the Bank to accept them, commencing on the “Commencement Date” and ending on the date set out in the schedule “or such later date as the parties thereto shall agree upon in writing”. The schedule names the company as drawer, and specifies “the Limit” as $1,000,000, the Commencement Date as 30 August 1995, the end of the Availability Period as 31 August 1996, the facility fee as 2.25% per annum, and the interest rate as 4.5% per annum above the Bank’s base lending rate. The company’s acceptance of the offer contained in the 29 August letter could be indicated by the provision of minutes of a directors’ meeting acknowledging acceptance. On 8 September the directors resolved to accept the offer. I will call the contract resulting from that acceptance “the initial agreement”. Pursuant thereto bills were drawn down monthly between 19 October 1995 and 21 June 1996, in each case for $1,000,000.
The guarantee
On 18 September Piccolo and his wife signed a guarantee and indemnity (“the guarantee”) and a mortgage. By clause 6.1 of the guarantee the guarantors agree to pay the Bank “any amounts which the customer owes us up to the basic liability as at the time we demand that you pay them to us”. The expression “amounts which the customer owes us” is defined in clause 6.2. The amounts include
(a)all amounts which at that time we have advanced or paid, or have become liable to advance or pay, for any reason:
(i) to or on behalf of the customer; or
…(iii)because of any act or omission of ours at the express or implied request of the customer; and
(b)all amounts for which at that time the customer is or may become actually or contingently liable to us for any reason, including all amounts for which the customer is or may become liable to us in respect of any … bills of exchange … which:
(i) have been accepted … by us ….
…(c)all amounts which at that time are owing and unpaid, or owing but not presently payable, or owing upon a contingency by the customer to us for any reason; and
(d)all amounts which at that time we are entitled to recover or claim from the customer for any reason ….”
Clause 13.2 is in part as follows:
“Your obligations under this guarantee and indemnity are not affected by anything that might otherwise affect them under the law relating to sureties, including:
…(f)a variation or extension to, or a stopping, replacement or refusal of any credit, banking facilities or other arrangement (including our granting or increasing any credit or banking facilities above the basic liability) given to the customer … whether with or without your consent or knowledge; or
(g)the fact that we transact any business with or on account of the customer alone or with any other person whether with or without your consent or knowledge ….”
By clause 10.1 the guarantors agree to indemnify the Bank against any loss it might suffer as a result of the company failing to pay any amounts which it owes the Bank. By clause 10.3 the indemnity is expressed to be an additional obligation of the guarantors which the Bank can enforce against them “as a principal debtor separately from your guarantee under 6.1”.
The mortgage
The mortgage, which was registered on 24 October 1995, is a single page document with information on both sides. At the top of the front page the mortgagors mortgage their estate and interest in the property with the payment of the “Secured Amounts”. The parties are then identified, and the provisions contained in a Memorandum of Common Provisions are incorporated in the mortgage. At the foot of the front page
“The Mortgagor agrees with the Bank as Follows:
…2.The Mortgagor acknowledges giving this Mortgage and incurring obligations and giving rights under this Mortgage in consideration of the Bank providing or agreeing to provide loans, advances and other banking accommodation to or at the request of the Mortgagor.”
On the reverse side
“The Mortgagor agrees with the Bank as follows:
1.‘the Secured Amounts’ when used in the preamble to this cover sheet means ‘the moneys hereby secured’ as defined in the Memorandum for the purposes of this mortgage; and
2.on demand in writing made to the Mortgagor by the Bank the Mortgagor will pay the moneys hereby secured ….”
The definition in the Memorandum of “the moneys hereby secured” is in part as follows:
“all moneys and amounts at the date of the mortgage or at any time hereafter falling within one or more of the following descriptions:
(a)moneys owing or remaining unpaid to the Bank in any manner or on any account whatsoever by the Mortgagor … whether as principal or surety;
…
(f)moneys and amounts which –
…
(iii) are owing upon a contingency …”The July to October facilities
On 9 May 1996 Piccolo became bankrupt, and the Official Trustee became the trustee of his estate. On 20 May the Bank cancelled the company’s overdraft upon learning of the bankruptcy. About a month later the company’s accountant attended upon Mr Stephen Reid of the Bank and expressed concern about the cancellation of the overdraft. He also requested further facilities for the company. The Bank’s Credit Bureau approved a submission by Mr Reid which reflected the accountant’s request, and on 11 July 1996 he forwarded another letter of offer to the company. It was in substantially the same form as the August 1995 letter save for the following:
·the overdraft limit was described as “Reinstatement of limit”
·the guarantee and the mortgage were to be security only for the bill facility
·there was to be a Mastercard facility of $10,000
·there was to be a Flexilink facility of $200,000
·it was a condition precedent that the guarantors sign a letter acknowledging that the guarantee continued to secure the bill facility.
The expiry date of all facilities was 31 August 1996, the same as that specified in the earlier letter. Although the Commonwealth Bank had by then been repaid, the purpose of the bill facility was still expressed to be the repayment of that bank. On 12 July Piccolo and his wife signed a letter acknowledging that the guarantee continued to secure the bill facility. On the same day the company’s directors resolved to accept the Bank’s offer. I will call the contract resulting from this acceptance “the July agreement”. On 22 July a bill for $1,000,000 was drawn down with an expiry date of 21 August. I will call this transaction “the July facility”.
On 29 July Piccolo signed a document headed “Accommodation Bills – Floating Rate Instructions and Input” by which the company instructed the Bank to draw down on 21 August a bill in the amount of $1,000,000 with a maturity date of 20 September. Although the bill facility referred to in the letter of 11 July was to expire on 31 August, a further bill was drawn down on 21 August with a maturity date of 20 September. I will call this transaction “the August facility”. Another undated instruction form signed by Piccolo on behalf of the company instructed the Bank to draw down on 20 September a bill in the amount of $1,000,000 with a maturity date of 21 October. Other dates appearing on the form indicate that it was given to the Bank on or before 5 September. On 20 September a bill for $1,000,000 was drawn down with an expiry date of 21 October. I will call this transaction “the September facility”. On 30 September the applicant became trustee of Piccolo’s bankrupt estate. On 29 October the Bank wrote a further letter of offer to the company. It is in the same form as that of 11 July, save that instead of a bill facility it offers a fully drawn advance of $1,000,000, and the guarantee and supporting mortgage are to be security only for that advance. The expiry date of the facilities was 31 August 1997. On 21 November 1996 the company’s directors resolved to accept the Bank’s offer. I will call the contract resulting from that acceptance “the October agreement”. I will call the facilities provided pursuant to this agreement “the October facility”.
RELIEF SOUGHT
On the basis of the facts set out above, which were not disputed, the applicant seeks declarations and injunctions pursuant to s 30(1) of the Bankruptcy Act 1966 (“the Act”). The declarations are that the mortgage is null and void to the extent that it secures the guarantee and the July, August and September facilities. Further and in the alternative the applicant seeks a declaration that the mortgage is null and void to the extent that it secures the guarantee and the October facility. The applicant also seeks a declaration that the Bank is not a secured creditor within s 58(5) of the Act. Injunctions are sought restraining the Bank from acting upon or realising the mortgage to the extent that it secures the facilities referred to in the declarations.
THE ISSUES
Five issues were canvassed.
·The first concerns the status of clause 2 on the front of the mortgage. The applicant contends that it is an operative provision which means what it says – that the mortgage secures only banking accommodation provided to the mortgagor or provided to someone else at the mortgagor’s request. Since the accommodation had been provided to the company without a request by the applicant, the security does not cover that accommodation. The request had to be made by the applicant, because on Piccolo’s bankruptcy his estate vested in his trustee by reason of s 58 of the Act, so that the applicant was “the Mortgagor” for the purposes of the phrase “at the request of the Mortgagor”. (Although the applicant did not become trustee until 30 September 1996, that is to say after the September facility, no point was taken that he was a relevant party only in relation to the October facility.) The Bank accepts that the applicant had not requested it to provide any accommodation to the company, but contends that the charging clause of the mortgage, which picks up the definition of “the moneys hereby secured” in the Memorandum of Common Provisions, extends to accommodation provided to the company whether or not at the mortgagor’s request, and that this clause prevails over clause 2.
·The second issue arises if the status of clause 2 is that advanced by the applicant. In that event the Bank contends that the July, August, September and October facilities were not new transactions but were implemented pursuant to the initial agreement. On this view, these transactions were not “loans, advances and other banking accommodation” provided by the Bank within clause 2 of the mortgage, so that the absence of any request by the applicant does not signify.
·The third issue is whether any of the four transactions constituted an alteration by the Bank and the company of the terms of the principal agreement which prima facie discharged the guarantors. I say “prima facie discharged” because of the fourth and fifth issues.
·The fourth issue is whether the guarantee is protected from discharge, if that would otherwise be its fate, by clause 13.2(f) or (g) of the guarantee.
·The fifth issue is whether the fact that the guarantee is an indemnity as well (clause 10) protects the guarantee from discharge if that would otherwise be its fate.
CLAUSE 2 OF THE MORTGAGE
The charging clause of the mortgage, with which the front page opens, covers any money owing to the Bank by the mortgagor as guarantor. See par (a) of the definition of “the moneys hereby secured” – “moneys owing … by the Mortgagor … whether as principal or surety”, and par (f)(iii) – “moneys … owing upon a contingency”. Unless required by clause 2, there is no reason to restrict par (a) to money owing to the Bank as a result of advances made by the Bank at the request of the mortgagor. The definition contains a number of indications which reinforce the unqualified words of par (a). Thus pars (c) and (f)(iv) speak of acts done by the Bank at the express or implied request of the mortgagor. Paragraph (d) speaks of accommodation provided to or at the request of the mortgagor. On the reverse side of the mortgage, the mortgagor agrees to pay on demand “the moneys hereby secured”. Again that obligation extends to any money owing by the mortgagor as surety, and there is no reason to read down the extent of the obligation by reference to any request by the mortgagor. But by clause 2 the mortgagor “acknowledges” giving the mortgage in consideration of the Bank providing banking accommodation “to or at the request of the Mortgagor”. In Scholefield Goodman & Sons Ltd v Gange (unreported, Supreme Court of New South Wales, 4 December 1979) the guarantee was in part as follows:
“In consideration of Scholefield Goodman & Sons Limited … (hereinafter called ‘the Shipper’) at our request hereby made supplying goods to and otherwise incurring liabilities for and at the request of Parramatta Hardware Store Pty Limited … (‘the Company’) … we the undersigned do jointly and each of us doth severally hereby guarantee the due payment by the Company to the Shipper of all such moneys as are now or shall or may at any time hereafter be or become due owing or payable to the Shipper by the Company whether upon the balance of the Company’s account with the Shipper or in respect of any bill of exchange promissory note cheque draft or letter of credit or any other liability or transaction direct or contingent or upon any other account or in any other manner whatsoever ….”
Sheppard J accepted the guarantors’ submission that the words “supplying goods to and otherwise incurring liabilities for” meant that the transaction into which the creditor entered must, if liability under the guarantee were to be triggered, have been one connected with the acquisition of goods by Parramatta; in other words, one entered into by the creditor in its capacity as, and in the course of its business as, a confirming house or shipper. The liabilities of Parramatta in respect of which the creditor had sued on the guarantee were its liabilities as acceptor of bills of exchange. None of the bills had been drawn by the creditor or accepted by Parramatta in respect of the importation of any goods or expenditure incurred by the creditor in connection therewith. His Honour said:
“Firstly, it is my opinion that [the guarantee] contains no recitals. The opening words are a statement of the consideration for the execution of the guarantee moving from the plaintiff. They are therefore an integral part of the document and are to be taken into account in the construction of it. Indeed, they control its construction because unless the liability for which the guarantors are said to be liable is of a kind which falls within the consideration for the instrument, it will not be one for which they are responsible. That is the position notwithstanding the wide and unambiguous words which are used in the operative part of the document.”
His Honour held that the bills were not within the consideration for the guarantee, and the amount sued for was not recoverable thereunder. When his Honour said that the consideration clause was not a recital, he was referring to the rule of construction that the recitals in an instrument will not control the meaning of the operative part thereof if that part is expressed in clear and unambiguous terms. See, for example, Lewison, The Interpretation of Contracts (1989) par 9.11 and the cases there referred to.
In National Bank of Nigeria Ltd v Awolesi [1964] 1 WLR 1311 the guarantee was expressed to be given “in consideration of the bank … continuing the existing account … or otherwise giving credit or accommodation …”. The bank opened a new account for its customers without notice to the guarantor. The Privy Council held that the new account was not covered by the guarantee. Their Lordships said (at 1315):
“The guarantee refers to ‘the continuing of the existing account’ as consideration for the guarantee which suggests that the parties had agreed that the account of the principal debtor existing on December 30, 1955, should be continued in an unbroken state and that they did not contemplate the opening of a second account. It is true that the way in which consideration for a contractual obligation is expressed is not conclusive but it is relevant in construing the terms of the contract itself. It would appear also that the words ‘ultimate balance’ in clause 3 and ‘account’ in clause 6 can most naturally be read, in the light of clause 1, as relating to the existing account and that the words ‘or otherwise giving credit or accommodation or granting time’ in clause 1 prima facie refer to the existing account. Their Lordships agree [with the court below] in construing the guarantee in the narrow sense of a guarantee of the account as it existed at the date when the guarantee was given.”
In Bank of India v Patel [1982] 1 Lloyd’s Rep 507 the consideration clause of a guarantee referred to the provision of “banking facilities”. It was argued for the guarantor that the wide words of the operative part of the document, which were apt to cover money due on foreign exchange transactions, should be restricted to “banking facilities”. For the purpose of dealing with the argument Bingham J assumed that “banking facilities” did not include foreign exchange facilities. His Lordship said (at 512):
“It is also plain that the whole document must be construed, and if the meaning of the substantive provisions is unclear regard may be paid to the way in which the consideration is expressed …. I am, however, of opinion, that the language of this guarantee was deliberately drawn in the widest possible language so as to cover any liability of the company to the Bank arising out of their mutual relations as banker and customer, however that liability might arise and whether it arose out of what may be called a pure banking activity or not. I consider the language of the substantive clause so clear as to obviate the need for reference to the introductory recital, but even if regard is paid to that recital and ‘banking facilities’ were assumed not to include foreign exchange facilities I could not read the recital as cutting down in any way the deliberately wide language which follows.”
The Court of Appeal approved Bingham J’s reasoning: [1983] 2 Lloyd’s Rep 298. Robert Goff LJ, with whom O’Connor and Stephenson LJJ agreed, said at 301 that “there is no ambiguity in the body of the guarantee justifying recourse to the introductory words to resolve any such ambiguity”.
In National Bank of New Zealand Ltd v West [1978] 2 NZLR 451 West and other directors of Allied Wools Ltd signed a guarantee limited to $30,000 in consideration of “advances and other banking accommodation … made or given by the Bank” to the company. At the time the guarantee was given the only banking accommodation then in the contemplation of the parties was an overdraft of $30,000 and a term loan of $20,000. Subsequently there was a merger between Allied Wools and International Wool Ltd, and without the knowledge of West two directors caused Allied Wools’ common seal to be affixed to a guarantee, unlimited in amount, of International’s obligations to the bank. The money demanded of West prima facie fell within the words in that part of the guarantee which enumerated the payments guaranteed ‑ “all moneys … which may be owing or unpaid to the bank by the principal on any account whatsoever”. However, the Court of Appeal held that the guarantor’s liability was limited by the words used to describe the consideration for which it had been given. Thus advances to International were not within the guarantee as they were not advances or banking accommodation made or given to Allied Wools. Somers J referred to the consideration clause, and said (at 458):
“In the context of this guarantee the undertaking of the respondents, and in particular the width of the words ‘on any account whatsoever’, is controlled by the nature of that which the bank would proffer as a consideration …. In the present case, unusually, it is the provision as to consideration that affords the principal guide to the parties’ intentions. The promise to guarantee is given in return for a forbearance to sue for past advances (of which there were none) and in consideration of the giving of future advances and banking accommodation by the bank to Allied. It is in relation to the type of consideration to be afforded in the future by the bank that the guarantors entered into their undertaking and for which the bank required surety. To import a limitation of liability by reference to such matters is not new.”
His Honour then referred to the facts of and decision in National Bank of Nigeria Ltd v Awolesi. Richmond P and Richardson J agreed with Somers J. The President referred to Awolesi, and quoted with approval Lord Hodson’s words – “the way in which consideration for a contractual obligation is expressed is not itself conclusive but is relevant in construing the terms of the contract itself”: at 461.
In Geelong Building Society v Encel [1996] 1 VR 594 at 601 a loan by the Society was secured by a mortgage over property supported by Encel’s guarantee. The guarantee was expressed to be in consideration of the Society “having agreed to make the advance referred to in the Mortgage”. The “agreement” referred to could not be wholly contained in the instrument of mortgage, as that instrument imposed no obligation on the lender to make any advance. The court therefore examined the Society’s letter of offer, which had subsequently been accepted, which set out the terms on which advances would be made. The letter provided that after the initial advance, further advances would only be made upon an architect's certificate. On this basis, the court found that advances made by the Society when it had not received an architect's certificate did not fall within the guarantee. Tadgell J, with whom Ormiston and Ashley JJ agreed, quoted with apparent approval the passage from Sheppard J’s judgment in Scholefield Goodman set out above. However his Honour also said:
“The manner in which the consideration for a guarantee is expressed is not conclusive, but is relevant in construing the terms of the surety’s obligation: National Bank of Nigeria Ltd v Awolesi ….
…
Wide and unambiguous words of guarantee which otherwise clearly create a substantive liability will not necessarily, however, be treated as cut down by a statement of consideration, any more than they will be necessarily controlled by a recital in a deed: Bank of India v … Patel …. The whole of the circumstances and the context of the language used are to be considered: see Phillips & O’Donovan, The Modern Contract of Guarantee, 2nd ed, p 179.”In the current edition of the text cited, after noting the different views expressed by Sheppard J in Scholefield Goodman and Bingham J in Patel, the authors conclude that “as in the case of the recital to the guarantee, there is probably no firm rule of construction and the court is left to decide which part of the guarantee best reflects the parties’ intentions in the light of the surrounding circumstances”: Modern Contract of Guarantee 3rd ed (1996) at 221‑222. See also New York Jurisprudence 2d (1998), “Guaranty and Suretyship” par 88.
In my view the last two sentences of the passage I have quoted from Sheppard J’s judgment in Scholefield Goodman overstate the significance of a consideration clause. In my opinion the true position is that
·the manner in which the consideration for a guarantee is expressed is relevant, but not conclusive, in construing the terms of the surety’s obligation
·wide and unambiguous words of guarantee which clearly create a substantive liability will not necessarily be cut down by a statement of consideration
·the consideration clause does not control the construction of the operative parts of the guarantee in the sense that “unless the liability for which the guarantors are said to be liable is of a kind which falls within the consideration for the instrument, it will not be one for which they are liable”
·the question is one of intention, and depends upon a reading of the whole of the document in the light of the genesis of the transaction and the surrounding circumstances.
The balance of authority favours the view that the consideration clause in a guarantee does not control the meaning of the operative part of the document. Awolesi and Patel are distinct on this point. Richmond P in West quoted with approval the relevant passage from Awolesi. And while Somers J considered that the width of the operative part of the guarantee there in question there was controlled by the consideration clause, his Honour propounded no general rule to that effect, as his discussion of Awolesi makes clear. Although Tadgell J in Encel did not expressly prefer the Awolesi/Patel approach to that in Scholefield Goodman, there is no doubt that he endorsed the proposition that wide and unambiguous words of guarantee which clearly create a substantive liability will not necessarily be cut down by a consideration clause, and that whether the clause has that effect will depend on the whole of the circumstances and the context of the language used. These cases and the textwriters’ opinion are against the view that a mortgage cannot impose on a surety an obligation that is more extensive than that contained in the statement of consideration. Each of the cases to which I have referred concerned a consideration clause in a guarantee. However, I see no reason why the approach adopted in Awolesi, Patel, West and Encel should not apply to such a clause in a mortgage.
Putting authority aside, there is in my view no reason in principle why the ambit of a guarantor’s liability or that of a mortgagor must necessarily be coterminous with the reason why the guarantee or mortgage was granted as expressed in the consideration clause. An approach which gives primacy to the consideration clause over the operative part of a document is inconsistent with the cardinal rule in the construction of a contract, that in determining the meaning of any part of it regard must be had to the whole of its terms in the light of the surrounding circumstances. See Chitty on Contracts 26th ed (1989) vol 1 par 809, vol 2 par 5035; Restatement of the Law 3d (1996) “Suretyship and Guaranty” ch 2 par 14; New York Jurisprudence 2d, “Guaranty and Suretyship” par 88.
Four considerations have led me to conclude that clause 2 does not cut down the ambit of the charging clause. The first is that the charging clause is clear: liability attaches to the mortgagor whether or not there has been a request. The natural meaning of par (a) of the definition of “the moneys hereby secured” is confirmed by references elsewhere in the definition to advances made and other things done at the request of the mortgagor. The second consideration is that the clause in which the extent of the obligation to pay is defined is unambiguous for the same reason that the charging clause is clear. The third is that while clause 2 is not strictly a recital, (it is expressed to be part of the agreement between the parties and appears towards the end of the document rather than at the beginning), it is in the nature of a narrative (see Inland Revenue Commissioners v Raphael [1935] AC 96 at 135, 144‑145) rather than an operative provision, and is capable of being read as explaining the genesis of the transaction, namely a request by the company’s directors that the Bank provide accommodation to the company. The fourth consideration derives from the terms of the guarantee. A document executed contemporaneously with or shortly after the primary document to be construed may be relied upon as an aid to construction if it forms part of the same transaction as the primary document. See Lewison, The Interpretation of Contracts par 2.03 and the cases there referred to. The Bank’s 1995 letter of offer required a guarantee from Piccolo and his wife supported by a mortgage over their property. The guarantee and the mortgage were executed on the same day. Although various parts of clause 6 of the guarantee refer to amounts advanced at the express or implied request of the customer (the company), there is no suggestion that amounts owing by the customer will be recoverable from the guarantors only if the advance was made at their request. Clause 13.2(g) of the guarantee, which has been set out earlier, provides that the guarantors’ obligations under the guarantee are not affected by the fact that the Bank transacts business with the customer without the guarantors’ knowledge or consent. It thus underlines what appears in clause 6, that a liability in the guarantors can arise as a result of an advance to or for the customer without a request by the guarantors. The relevant part of clause 13.2(g) would have no useful work to do if the guarantee did not cover that liability at a primary level. It is designed to prevent the escape of a liability that has already been captured. As I have said, the role of the mortgage was to support the guarantee. Where two constructions of the mortgage are in competition, one which would “support” the guarantee and one which would not, it would be strange if the latter construction were to prevail. For all those reasons I am of the view that the charging clause picks up amounts advanced to the company whether or not they have been requested by the mortgagor. It is accordingly unnecessary to deal with the second issue.
WHETHER GUARANTEE DISCHARGED
The third issue is whether any of the four transactions so varied the terms of the initial agreement between the Bank and the company that, subject to any exculpatory provisions in the guarantee, the guarantors were discharged from liability under it. There will be a discharge if the transactions had “the effect of altering the surety’s rights, unless the alteration is unsubstantial and not prejudicial to the surety”: Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 at 559.
July agreement
The applicant’s case for discharge as a result of the July agreement was put as follows. Immediately before 11 July 1996 the only facility was the bill facility of $1,000,000. The overdraft facility had been terminated. What was offered and accepted in July was a bill facility of $1,000,000, an overdraft of $50,000, a Mastercard facility of $10,000 and a Flexilink facility of $200,000. Before the July facility, the company’s assets were available to meet the bill facility alone. As a result of the July facility, however, the security was diluted in that those assets had become security for the overdraft, the Mastercard and Flexilink facilities as well. The guarantors were worse off as a result, because there was a greater likelihood that they would be called upon to meet their guarantee, since the security provided by the company was spread over more potential liabilities than before. Additionally, if they needed to exercise their rights of subrogation, the utility of the available security had been diminished since it secured the additional facilities.
The letter of offer of 11 July does not disclose the nature of the Flexilink facility. Unexplained, it would appear to be a facility under which the company could obtain access to a further $200,000. Counsel for the Bank, however, referred to an internal Bank memorandum of 8 July which disclosed that the facility was required “to electronically transfer landlord payments from the company’s trust account on a weekly basis rather than the cumbersome and time consuming process of writing cheques and making manual deposits at the various banks”. On that basis, it was submitted that the facility was to allow the company to transmit rental payments to its landlord clients in a more efficient manner. It was an administrative facility and not loan accommodation. Although the evidence is rather thin, that appears to be a correct characterisation of the facility. Accordingly it can be put aside. So too can the reinstated overdraft. Under the initial agreement it was available at the Bank’s discretion. It was cancelled in the exercise of that discretion, and was reinstated. When the guarantee was executed, it secured an overdraft of $50,000. The guarantors knew it could be withdrawn at the discretion of the Bank, and that it could be restored in its discretion. It was restored, and they were no worse off. However the Mastercard facility is clearly a new loan facility. A surety will be discharged by any variation in the principal agreement, unless the party seeking to enforce the guarantee can show either that the nature of the variation is beneficial to the surety or that it cannot in any circumstances increase the surety’s risk. See Corumo Holdings Pty Ltd v Itoh Ltd (1991) 24 NSWLR 370 at 404. The Bank has not satisfied me that the addition of the Mastercard facility was “unsubstantial” or could not in any circumstances increase the guarantors’ risk. The Bank did not, it seemed to me, seriously contest this. Counsel said “primary reliance is placed on” clause 13.2(f) and (g). Accordingly, unless these provisions preserve the guarantee, it will have been discharged upon the company’s acceptance of the July facility.
Clause 13.2(f) and (g)
Clause 13.2 opens with the quite general words that the guarantors’ obligations “are not affected by anything that might otherwise affect them under the law relating to sureties”. It then lists, in a non‑exhaustive way, various things that under that law might affect the guarantors’ obligations. The ambit of par (f) is not entirely clear. For convenience of exposition I will set it out again:
“a variation or extension to, or a stopping, replacement or refusal of any credit, banking facilities or other arrangement (including our granting or increasing any credit or banking facilities above the basic liability) given to the customer alone or with any other person, whether with or without your consent or knowledge.”
What is not clear is whether the words “other arrangements” form part of the list of things that are not to affect the guarantors’ obligations, or whether they form part of the expression “credit, banking facilities or other arrangement”. I think the true construction is that the matters that are not to affect the guarantors’ obligations are:
·a variation to
·an extension to
·a stopping of
·a replacement of
·a refusal of
any credit, banking facilities or other arrangement (including granting or increasing any credit or banking facilities above the basic liability). The three presently relevant changes are a variation of banking facilities, an extension to banking facilities and a replacement of banking facilities.
The applicant contended that the July agreement was a new agreement and not an extension or variation of the initial agreement for the purposes of clause 13.2(f). Reference was made to the observations of Lord Dunedin in Morris v Baron & Company [1918] AC 1 at 25‑26:
“The difference between variation and rescission is a real one, and is tested, to my thinking, by this: In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject matter as the first but in a different way, it is impossible that the two should be both performed. When I say you could sue on the second alone, that does not exclude cases where the first is used for mere reference, in the same way as you may fix a price by a price list, but where the contractual force is to be found in the second by itself.”
See also Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vict) Pty Ltd (1957) 98 CLR 93 at 124, 144. Whether there is a variation or a rescission depends on the intention of the parties, to be gathered from an examination of the terms of the subsequent agreement and from all the surrounding circumstances: United Dominions Trust (Jamaica) Ltd v Shoucair [1969] 1 AC 340.
Immediately before 11 July 1996 the initial agreement was limited to the bill facility, the overdraft having been terminated. The applicant relied on the following matters to demonstrate that the July agreement was a new contract which entirely replaced the initial agreement –
·the July agreement was instituted by a letter of offer which in terms required an acceptance in the form of a directors’ resolution
·the letter of offer made no reference to the initial agreement
·the facilities offered were significantly different from that available immediately before the letter (ie bill facility alone) – the overdraft of $50,000, Mastercard facility and Flexibank facility
·the agreement constituted by the acceptance of the July offer was complete on its face and was intended to have contractual force
·the bill facility component of the initial agreement was granted on different terms from that in the July agreement in that the conditions precedent differed
·the debenture security under the initial agreement as it stood at the beginning of July secured only the bill facility, whereas under the July agreement it secured the overdraft, the Mastercard and Flexibank facilities as well.
In my view the July agreement was a new agreement rather than a variation or extension of the initial agreement. To use Lord Dunedin’s language, the enforcement of the Bank’s obligations under the July agreement would depend on that agreement alone and not in any way on the preceding agreement. Thus it was not a variation. However I am satisfied that the July agreement was a “replacement” of banking facilities within clause 13.2(f). To use Lord Dunedin’s language again – the July agreement got rid of the first one and substituted another for it. It is what Lord Selborne LC in Scarf v Jardine (1882) LR 7 HL 345 at 351 called a novation – “there being a contract in existence, some new contract is substituted for it, either between the same parties (for that might be) …”. A replacement of banking facilities is exactly that – parties to a contract for the provision of banking facilities bring it to an end and replace it with another contract for the provision of such facilities.
I conclude, therefore, that the discharge of the guarantors that would have resulted from the July agreement is obviated by clause 13.2(f). If, contrary to my view, the restoration of the overdraft and the provisions of the Flexilink facility would prima facie have discharged the guarantors, they too were part of a replacement facility within clause 13.2(f). In view of my conclusion on this point, I need not deal with the clause 13(g) or the indemnity issues.
Later events
The applicant contended that each of the August, September and October facilities was provided pursuant to a new agreement. In the case of the August facility, it was said that this was so because it could not have been provided under the initial agreement or the July agreement since the bill issued on 21 August was to mature on 20 September, which was after the expiry date under both (31 August). The September facility could not have been provided under the initial agreement or the July agreement because the bill was drawn after the expiry date of both. It was submitted that the October agreement was a new facility because it was a fully drawn advance rather than a bill facility. The Bank contested this in reliance on clause 16 of the bill facility terms and conditions which accompanied the August 1995 letter of offer. This clause enabled the Bank to debit an interest bearing account in the name of the company with the face value of any bill which the company failed to pay the Bank. The 11 July 1996 letter of offer said that the terms and conditions of the bill facility were contained in an attached Bill Facility Letter of Offer. The letter that was in evidence did not contain an attachment. Nevertheless, I find that the bill facility was offered on the same terms and conditions as those attached to the August 1995 letter of offer, either because the Bank’s standard bill facility terms and conditions were in fact attached to the July 1996 letter, or because, although they were not, it was the intention of the parties that those terms and conditions were to apply. In response to the Bank’s reliance on clause 16 the applicant claimed that the fully drawn advance could not have been established pursuant to that clause because of what it claimed were four differences between the terms of the October fully drawn advance and those attaching to a clause 16 advance –
·under clause 16 the interest rate is 4.5% above the Bank’s base lending rate, while under the advance it is 1.25% above the base rate
·there is no service fee under clause 16, while under the advance a fee of $200 per half year is payable
·under clause 16 the money is repayable at call, while the expiry/review date under the advance is 31 August 1997
·under the advance there is an amortisation of $50,000 per annum which does not apply under clause 16.
If any of the later events would prima facie have discharged the guarantors, their liability is, in my view, preserved by clause 13.2(f) of the guarantee. As at the date of the August and September facilities the relations between the parties were governed by the July agreement. Clause 3 of the bill facility terms and conditions provided that the Bank had no obligation to accept bills having a maturity date later than the expiry date. Clause 6 enabled the company to draw a replacement bill with a face value equal to that of a maturing bill, and obliged the Bank to accept it, so long as the bill was drawn within the Availability Period and in compliance with the terms and conditions. In relation to the August facility, the Bank accepted a bill which under the terms and conditions it was not obliged to accept. That constituted a variation of the terms of the July agreement for the purposes of clause 13.2(f). The position is the same with the September facility. The Bank accepted a replacement bill notwithstanding that it was drawn outside the Availability Period. If the October facility was provided pursuant to clause 16, it was a facility provided pursuant to the July agreement and was not a new facility. If it was not so provided, it constituted a replacement facility within clause 13.2(f).
CONCLUSION
The applicant is not entitled to the relief it seeks, and the application is dismissed.
I certify that the preceding thirty‑one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg. Associate:
Dated: 8 April 1999
Counsel for the Applicant: R McK Robson QC and K Baker Solicitors for the Applicant: Cannizo Lau & Associates Counsel for the Respondent: A C Archibald QC and T J North Solicitors for the Respondent: Russell Kennedy Date of Hearing: 3 February 1999
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