Behan v Obelon Pty Ltd

[1985] HCA 51

HIGH COURT OF AUSTRALIA

Mason A.C.J., Wilson, Brennan, Deane and Dawson JJ.

BEHAN v. OBELON PROPRIETARY LIMITED

(1985) 157 CLR 326

21 August 1985

Guarantee

Guarantee—Duty of creditor to surety—Co-sureties—Knowledge by creditor that one surety without assets—Whether under duty to tell other surety.

Decision

MASON A.C.J., WILSON, BRENNAN, DEANE, DAWSON JJ.: By a guarantee dated 16 December 1981 signed by the appellant and one Freeburn as co-sureties, they jointly and severally guaranteed to the respondent ("Obelon") the payment of all moneys at any time owing to it by Gulfstar Corporation Pty Ltd ("Gulfstar"), in consideration of Obelon granting credit facilities and forbearing to sue Gulfstar for moneys then owing. Gulfstar wished to buy marine engines from Obelon for the purpose of Gulfstar's business and the guarantee was given to enable it to make these purchases on credit. Within a matter of months the course of trading between the two companies resulted in an increase in the amount owing by Gulfstar to Obelon and a failure on the part of Gulfstar to discharge that liability. Obelon then sued the co-sureties in the Supreme Court of New South Wales on the guarantee. Although Mr Freeburn did not appear at the trial, the appellant defended the action on the ground that Obelon was in breach of its duty as a creditor to disclose to the appellant as a co-surety unusual or unexpected features of the transaction which was the subject of the guarantee, namely that Mr Freeburn was without assets, that his guarantee was therefore worthless and that he would be unable to contribute in any significant way to the liability which the appellant had assumed by her guarantee.

2. The primary judge (Rogers J.) found that there was no breach of duty on the part of Obelon and gave judgment for Obelon in the sum of $31,971.27 with costs and ordered Mr Freeburn to pay to the appelland $15,985.63. An appeal by the appelant to the Court of Appeal was dismissed. The appellant now appeals to this Court.

3. In the Court of Appeal Samuels J.A. (with whom Glass J.A. agreed) held that the creditor's duty of disclosure does not govern disclosure by the creditor to one proposed co-surety of information which the creditor has oncerning the other proposed co-surety's capacity to meet the debt to be guaranteed. Priestley J.A. considered that, although the duty might extend to disclosure of such information, the facts of the present case did not give rise to such a duty.

4. The facts on which the defence was based may be shortly stated. The appellant signed the guarantee t the request of Mr Freeburn, who was a director of Gulfstar and the moving spirit in that company. Mr Freeburn told her that Gulfstar intended to obtain a credit facility with Obelon which would enable Gulfstar to buy marine engines on credit for the purposes of its business. The obtaining of this facility would require a guarantee for $50,000. He proposed that the appellant become a guarantor with him, each being liable for half that sum. He told her that he had assets of $25,000 and that $25,000 was the most she could lose. She did not appreiate that the guarantee was joint and several and that it was not limited in amount. Freeburn had in fact told a director and another officer of Obelon that he was without assets, or virutally so, but that he would sign a guarantee as an act of god faith. It seems to have been common knowledge between Obelon and Freeburn that Gulfstar had "a slight liquidity problem". In this situation it was important for Obelon to obtain a guarantee from a person of substance, such as the appellant.

5. These facts, on which the appellant heavily relies, do not constitute a complete account of the relationship which existed between the appellant, Mr Freeburn and Gulfstar. The appellant had previously been an employee of Gulfstar and she was in the process of acquiring an interest in that company. Although she had not been appointed a director of Gulfstar, she was described in the guarantee as a director of the company. No doubt the expectation of Mr Freeburn and the officers of Obelon who prepared the form of guarantee, was that she would become a director. It is therefore not surprising that she was so described in the guarantee.

6. What is important for present purposes is that she was induced to give the guarantee because, intending to become a shareholder in the company, she desired to facilitate the company's purchase of marine engines on credit for the purpose of carrying on its business. As an intending shareholder in the company, she relied on the information given to her by Mr Freeburn, and acquiesced in his negotiating on behalf of them both in making arrangements for the credit facility and for the giving of the guarantee in connexion with that facility. In this respect the primary judge made the following finding:

"The first defendant and the second defendant were co-venturers in the application made to the plaintiff for credit to be granted. They were offering their joint and several guarantees. In all relevant respects the first defendant was the agent of the second defendant to conduct the negotiations on their behalf with the plaintiff."

7. The appellant's case is that the creditor's duty to disclose to the surety unusual and unexpected features of the transaction between the creditor and the debtor extends, in circumstances such as those which existed in the present case, to the disclosure to one co-surety of adverse information acquired by the creditor concerning the financial worth or credit-worthiness of another co-surety. On the other hand the respondent submits that the duty does not go so far and that it is limited to the disclosure of unusual and unexpected features in the transaction which is the subject of the guarantee or in the relationship between the creditor and the debtor. The duty has been the subject of discussion in the judgments of this Court in Goodwin v. National Bank of Australiasia Ltd. (1968) 117 CLR 173, at pp 175-176, and Commercial Bank of Australia Ltd. v. Amadio (1983) 151 CLR 447, at pp 454-457. There are statements in these judgments which may tend to suggest that the duty does not extend to requiring discosure to one co-surety by a creditor of information concerning the financial worth or credit-worthiness of another co-surety. However, this case does not call for an examination of this proposition. Even if the appellant's submission as to the scope of the duty be accepted, the facts, as we have outlined them, did not impose any duty on Obelon to disclose to the appellant information concerning the financial worth of Mr Freeburn.

8. In the light of the primary judge's finding, supported by the evidence, that the appellant and Mr Freeburn were negotiating as co-venturers and that Mr Freeburn was authorized to negotiate on behalf of the two of them, Obelon was entitled to assume that the appellant was aware of Freeburn's financial position and that, being aware of it, she was prepared to enter into the guarantee. And, quite apart from the finding made by the primary judge, there is the circumstance that, generally speaking, a co-surety as well as the creditor may reasonably be expected to make his or her own inquiries about the financial worth or standing of another co-surety and to form an opinion on the basis of those inquiries. In this situation information possessed by the creditor concerning the financial worth or standing of one co-surety could not ordinarily be regarded as information about an unusual and unexpected feature aof the transaction which would require disclosure by the creditor to the other co-surety.

9. In the result the appellant's case, to the extent to which it is based on breach of the creditor's duty to disclose, fails. The appellant also sought to invoke the equitable doctrine governing unconscionable conduct which was applied in Amadio. As a case for relief based on this doctrine was neither pleaded nor argued in the courts below we refused the appellant leave to raise the point.

10. The appeal is dismissed with costs.

Orders

Appeal dismissed with costs.