Benson-Brown v Smith

SUPREME COURT OF VICTORIA

CAUSES JURISDICTION Do not Send for Reporting

Not Restricted

No. 4753 of 1996

CLIVE BENSON-BROWN	Plaintiff
v
GRANTLEY GORDON SMITH	Defendant

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JUDGE:	Ashley J
WHERE HELD:	Melbourne
DATE OF HEARING:	22, 23, 24, 25 February 1999
DATE OF JUDGMENT:	10 June 1999
CASE MAY BE CITED AS:	Benson-Brown v. Smith
MEDIA NEUTRAL CITATION:	[1999] VSC 208

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Guarantee – Disputed effect of execution provision – Whether rectification necessary, and available – Delay, laches and acquiescence – Whether principal debtor clause effective – Whether need for demand before commencement of suit – Certificate of indebtedness – Prima facie evidence of quantum – Operation of certificate in light of all the evidence.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M. Robins	Sam Holt & Co
For the Defendant	Ms C.H. Sparke	Nicholas O’Donohue & Co

HIS HONOUR:

Background and initial chronology

The plaintiff sues the defendant on a deed of guarantee and indemnity (the guarantee) dated 6 March 1997.

He claims $102,244.30 plus statutory interest (which he calculates to be $39,092.88).

It is not in dispute that Chiri Shelf Company No. 60 Pty Ltd (Chiri), a special purpose vehicle of which the defendant and a man named Wayne Spencer were in early 1997 directors and shareholders, at that time agreed to purchase from the plaintiff certain nightclub businesses, a hairdressing salon and a home unit in Perth. The purchase of the nightclub businesses was to involve the acquisition of shares in the operating entity - a company named Leisure Corporation of Australia Pty Ltd (Leisure Corp). The various businesses and Leisure Corporation operated in leased premises. The purchase agreement contemplated assignment of the leases.

The agreed purchase price was, or was in the vicinity of, $1,430,000. I do not imply, and it was not the case, that there was any lack of certainty as to the purchase price. The plaintiff agreed to provide $300,000 vendor finance. A loan agreement was drawn up by the plaintiff's then solicitors on the instructions of the plaintiff. Those instructions were, at least for the most part, given by the plaintiff to his accountant, Mr Towell; and relayed by Mr Towell to the solicitors - specifically, Mr Barry Woods. I note that at an earlier time the plaintiff said on affidavit that he had given instructions directly to Mr Woods. I am satisfied by the viva voce evidence I heard from the plaintiff, Mr Towell and Mr Woods that the plaintiff’s earlier account was not accurate.

The loan agreement was made between the plaintiff as lender and Chiri as borrower. It recited that the plaintiff had made $300,000 available to the borrower, interest free. The loan was to be repaid by instalments of $50,000 commencing on 30 June 1988 and thereafter six monthly until 31 December 1990.

The agreement contained a default clause. It also provided that the borrower was to pay costs, stamp duty, fees and expenses; and that the agreement was to be governed by Western Australian law.

The agreement was 'signed, sealed and delivered' by the plaintiff. The common seal of Chiri was attached in the presence of the defendant and Spencer as a director and secretary respectively. The document is dated 6 March 1987. On that day the defendant and Spencer attended a settlement in Western Australia and signed various documents. The plaintiff was not then present. It is not certain whether his signature, witnessed by his solicitor, Mr Woods, was affixed before or after 6 March. Since the document was to be governed by Western Australian law, and as the borrower was to pay stamp duty, it seems more likely than not that the plaintiff signed the document before it arrived in Western Australia for execution by Chiri Shelf. Had an original document been produced at trial uncertainties may have been removed. But neither party did produce an original.

The plaintiff gave evidence that he had required personal guarantees from each of the defendant and Spencer to support the provision of vendor finance to their corporate vehicle. He gave evidence that they agreed to give guarantees. He gave evidence also that in the past he had always himself been required to give personal guarantees to support company borrowings.

Spencer prepared a letter which set out the structure of the proposed transaction. It was dated 5 February 1997. It adverted to the giving of personal guarantees by the defendant and Spencer. It was sent on behalf of both of them to the plaintiff. It represented the outcome of weeks (if not months) of negotiation. No document, save the guarantee itself, suggests that the particular feature of the overall agreement was thereafter abandoned.

Mr Woods, the solicitor, prepared the guarantee.

·The instrument identified the plaintiff as "the lender" and Chiri as "the borrower".
·It identified the defendant and Spencer as "the guarantor" (by Schedule 2).
·It guaranteed due payment of moneys payable by the borrower (there was reference to $300,000 advanced by the lender to the borrower).
·It contained a principal debtor clause.
·It provided that the guarantee and indemnity be given jointly and severally.
·Provision was made that it be governed by and construed in accordance with Victoria law.
·Provision was made that the guarantor pay moneys guaranteed on default by the borrower and demand by the lender, the form of the demand being prescribed.
·It provided for the giving of a certificate, which was to be conclusive evidence of the liability of the guarantor at the date of the certificate, and prima facie evidence of the amount of the liability.
·It recited that it was "executed by the guarantors in the State of Western Australia this day of March 1987". But provision was then made for attestation by Leisure Corp and Chiri. The latter had, of course, been identified in the instrument as the borrower. Of Leisure Corp there was no mention at all until its name popped up in the execution provision.

As in the case of the loan agreement, no original of the guarantee was produced at trial. An executed copy was, however, produced. The seals of Leisure Corp and Chiri had been affixed. According to the attestation, the seal of Leisure Corp was affixed in the presence of the plaintiff as secretary and a Mr Blair as director; whilst the seal of Chiri Shelf was affixed in the presence of the defendant as a director and Spencer as secretary. The document is dated 6 March 1987.

The evidence leaves me in no doubt that the seal of Chiri was affixed at the settlement held in Perth on 6 March 1987. That settlement was attended, as I have said earlier, by the defendant and Spencer; but not by the plaintiff. The defendant and Spencer signed a number of documents at that settlement. They included the loan agreement and the guarantee, to each of which the seal of Chiri was affixed, and each of which was signed by the defendant and Spencer (on the face of the documents) in the capacities, respectively, of company director and secretary.

The evidence showed, broadly, that some payments were made by Chiri to the plaintiff. The last payment must have been made before September 1990, for at that time a receiver was appointed, and it is clear that no payments were made during the period of receivership, or thereafter.

The ways in which the plaintiff puts his claim

The plaintiff claims that the guarantee is enforceable without rectification. Mr Robins of counsel for the plaintiff put three submissions in that connection. First, that the guarantee was in fact executed by the defendant (and Spencer) personally. Second, that in signing the document the defendant (and Spencer) were “persons who so execute this guarantee” for the purposes of clause 3(b), and so were to be taken to be guarantors notwithstanding the basis upon which (on the face of it) they signed. Third, an objective evaluation of relevant evidence showed agreement by the defendant and Spencer to give a primary indemnity; in which circumstances it was unnecessary that they sign the document at all. The plaintiff could simply sue on the indemnity, unaffected by the admitted requirement that, for the purposes of s.126 of the Instruments Act 1958, he could not sue on the guarantee strictly so described except if the defendant had signed the document.

The plaintiff further asserts that, suing on the indemnity, there is no requirement that he make any demand before suit. He concedes that clause (1) of Schedule 1 would oblige the making of a demand before he could sue on the guarantee strictly so described. He concedes also that no demand was made by him on the defendant before this proceeding was commenced.

If, contrary to the preferred case, the guarantee should be considered not to be enforceable as it stands, the plaintiff contends that it does not reflect the agreement reached between the parties, and should be rectified. His counsel submitted in this connection that the intention of the parties at all times up to and including the time of execution of the guarantee was that guarantees be given personally by the defendant and Spencer; and that the (assumed) failure of the guarantee to achieve that outcome is by reason of common mistake; or alternatively is by reason of mistake known to the defendant (and Spencer) and left uncorrected by them. See, as to rectification generally, Maralinga Pty Limited v. Major Enterprises Pty Ltd (1973) 128 CLR 336 at 350-351 per Mason J and Commerce Consolidated Pty Ltd v. Johnstone [1976] VR 724 at 730-731 (FC). Counsel rightly accepted an obligation of establishing “very strong” or “convincing” proof of the continuing asserted common intention.

Counsel’s concession that a demand must have been made before his client could sue upon the guarantee strictly so described meant, he submitted, that if his client was obliged or wished to rely upon that obligation, time had not yet begun to run for limitation purposes. For that reason alone rectification (if it was necessary) would serve a practical purpose - although it would condemn the parties to a further proceeding.

The Claim not dependent upon rectification

In my opinion the second and third arguments advanced in support of Mr Robins’ submission that the guarantee is enforceable without rectification should be rejected. The second depends upon the phrase “persons who so execute this guarantee”. The phrase sits within a clause the relevant purpose of which is definitional. It seems far-fetched to me to read the phrase to mean that it should constitute as a guarantor a person who (let it be assumed) was unequivocally no more than a witness attesting a company seal. The fact that, on the evidence, that was not this case does not justify a different reading.

I pointed out to Mr Robins in the course of his final submissions that the Amended Statement of Claim (the Statement of Claim) did not appear to raise the issue to which the thrust of his third argument related. I doubt if he demurred. He made, however, no application to amend. Having re‑read, particularly, paragraphs 5, 6, and 7 of the Statement of Claim I remain of the view I expressed at trial; see also paragraph 6 of the Reply. The issue was not opened up by the pleading. I should not deal with it.

I turn to the first argument in support of the submission now under discussion. The prima facie inference which should be drawn from the affixing of the company seal and the signatures of the defendant and Spencer as, on the face of it, attesting witnesses is that they signed the document in that qualified capacity and none other. But that is not an end to the matter. The reasoning of the majority in Scottish Amicable Life Assurance Society v. Reg Austin Insurances Pty Ltd & Ors (1985) 9 ACLR 909 (Court of Appeal, New South Wales) was not the same; compare per McHugh JA at 923-925 and Mahoney JA at 920-922. It appears to me, with respect, that the analysis of McHugh JA is in accord with modern authorities dealing with analogous problems. Thus, his Honour said, at 923-924 –

“The present case, therefore, depends on what the parties did and not on what they intended to do when they signed the Indemnity and the Agency Agreement. And what they did depends on the construction to be placed on the documents which they signed. A commercial document, however, must be construed in its commercial setting – in accordance with the surrounding circumstances known to the parties: Codelfa Constructions Pty Ltd v. SRA of NSW (1982) 149 CLR 337 at 352-353. This is so whether the issue concerns construction in the strict sense or whether, as here, the issue concerns the capacity in which a person signs a document.”
…
“In some cases the contents of a document may indicate that the signatory is bound even though a qualification attaches to his signature. Expressly or by implication the body of the document may make it plain that the signatory is a party to the contract.”
…
“In the end the decision must depend upon the terms of the document including the qualification attaching to the signature together with the surrounding circumstances. This is a question of fact, not of law.”

Later, in a passage pertinent to the present case, his Honour added, at 925:

“… no one could rationally think that Reg Austin Insurances Pty Ltd was binding itself to indemnify itself. It is not merely the absurdity of that proposition which makes it untenable; the very terms of the indemnity make it plain that it is Reginald and Lynette Austin who are indemnifying the appellant. The insertion of the type written words, to adopt the words of the appellant’s counsel, was ‘a foolish mistake’. By placing their signatures on the document, although in the context of the reference to the company, Mr and Mrs Austin gave effect to an intention to bind themselves.”

McHugh JA was in fact satisfied – though on his analysis it did not matter – that the objectively ascertained intention of the signatories was their subjective intention also.

In my opinion it is permissible to consider the guarantee itself, the loan agreement and the letter of offer dated 5 February 1987 in order to ascertain the basis, objectively ascertained, upon which the two men signed the guarantee on 6 March 1987. I do not agree with the submission of Ms Sparke of counsel for the defendant that the letter of offer must be put to one side because (this was her contention) there were many changes to the proposed arrangements in the period between 5 February 1987 and 6 March 1987. For the most part her submission depended upon acceptance of evidence given by the defendant and Spencer which I reject.

The letter of offer, as I have said earlier, specifically contemplated that Spencer and the defendant would give personal guarantees to the plaintiff to secure the provision by him of vendor finance. The loan agreement executed on 6 March 1987 shows that substantial vendor finance was provided by the plaintiff to Chiri. The body of the guarantee is entirely consistent with the provision of personal guarantees. The execution provisions stand in stark contrast to Schedule 2; and in stark contrast to the guarantees proposed by the letter of offer. It is perfectly clear, in my opinion, that the execution provisions, as prepared by the solicitor, were a mistake.

The defendant and Spencer gave evidence that, whatever had been the initial intention, it was supplanted by a determination not to give personal guarantees – a determination communicated to and accepted by the plaintiff by telephone on 6 March 1987 (and according to some evidence, prior to that date). For a number of reasons I consider that this evidence was fanciful in the extreme. In any event, for present purposes I should, and I do, put it to one side.

In my opinion any reasonable person looking at the guarantee in its commercial setting, in accordance with the surrounding circumstances known to the parties, would conclude that by signing it the defendant and Spencer assumed personal obligations, even though, on the face of it, a qualification attached to their signatures. Apart from matters to which I have already referred, the reasonable person would, in my opinion, consider it to be absurd that, on the face of it, Chiri was guaranteeing, and assuming a primary liability to pay, its own debt. The position of Leisure Corp as an executing party might, I think, be accounted less plainly absurd - despite the fact that its name first appears in the execution provisions. But that matter need not be explored. Whatever be the plaintiff’s subjective misunderstanding when he attested the affixing of Leisure Corp’s seal, the reasonable person would not, in my opinion, be distracted by Leisure Corp’s appearance as an executing party from a conclusion that the defendant and Spencer were by their signatures assuming personal obligations. I am not persuaded against the conclusion I have reached by the fact that the plaintiff’s then solicitors prepared the document. Any ambiguity, objectively considered, was more apparent than real.

The conclusion I have reached makes it unnecessary for me to consider the issue of rectification. But caution dictates I should do so.

The claim for rectification

In my opinion the plaintiff, unequivocally, discharged the onus upon him of establishing “very strong”, “convincing” proof of the continuing common intention that he asserted. In explaining why that is so I must traverse old ground.

The intention of the parties in early February 1987, revealed by the letter of offer of 5 February 1987, was that personal guarantees, joint and general, would be given by each of the defendant and Spencer to support the provision of vendor finance. Despite Ms Sparke’s submission, the letter of offer contained the essence of matters later the subject of formal documentation. It was not in dispute that the intention of the parties, in early February 1987, was that personal guarantees be given.

There was in fact provision of vendor finance, as the letter of offer had contemplated. The loan agreement was executed on 6 March 1987 by Chiri.

The guarantee was prepared by the plaintiff's then solicitors, in Victoria, probably early in the week ending 6 March 1987. Thereafter it was taken, very probably by the plaintiff, to Western Australia. It seems to me very improbable that the plaintiff would have given instructions to his accountant, relayed by his accountant to his solicitors, that a guarantee be prepared:

·by which there were to be two corporate guarantors, one of which was the borrower;
·which was internally inconsistent - that is, the description of the guarantors and the execution provision not matching up.

That the plaintiff did not in fact give such instructions is supported by the frank evidence given by Mr Woods that he had made a mistake in preparing the guarantee; the mistake being in the provision which was made for execution. He told me that his instructions in respect of the guarantee derived from the letter of offer of 5 February 1987, fleshed out by discussions with Mr Towell. Neither Mr Towell nor the plaintiff instructed him that anyone other than the defendant and Spencer were to be the guarantors. This evidence concerning the guarantee was not the subject of cross-examination.

Had the plaintiff given instructions to his accountant that the solicitors were to prepare a guarantee having the characteristics to which I referred a moment ago, I cannot believe that Mr Towell would not have both remembered the matter, and counselled against that course. Mr Towell's evidence was opposed to any such instructions having been given. He told me that he had gone to Western Australia to assist with the negotiations. He had met representatives of the purchaser, as well as the plaintiff. His visit took place between 24 and 27 February 1987. The provision of vendor finance had been discussed with the purchaser's representatives. He recalled that there was to be such provision. He had given instructions to Mr Woods to prepare the documents - by telephone, and by sending Mr Woods a copy of the letter of offer of 5 February, and most probably in a meeting with Mr Woods on Monday 2 March 1987.

Ms Sparke relied upon the absence of any reference to personal guarantees in a transaction sheet which the witness prepared whilst he was in Western Australia. The witness convincingly answered that point. The document made no reference to securities at all. Its purpose was “to work out the overall transaction”.

Mr Towell told me that he saw the documents prepared by Mr Woods in draft form. It is the fact that he did not demur to their contents. Probably he did not so do because, as he said, he was interested in the body of the documents rather than "the sealing clauses and a lot of the paraphernalia that goes into these documents".

I next refer to the evidence given by the defendant and Spencer in connection with the guarantee. It was unsatisfactory and contradictory.

The defendant told me that on the afternoon of Friday 6 March 1987 he attended a settlement at the National Australia Bank head office in Perth. Spencer was there, and bank officers; but not the plaintiff, who was in Melbourne.

"All the documents" were there. They included the loan agreement and the guarantee. The witness could not recall whether he had seen the guarantee before that day; or discussed it with the plaintiff before the settlement date.

The witness said that the purchase price was being funded almost entirely by borrowings. Spencer's company was borrowing $1M from National Australia Bank and on-lending to Chiri. Then there was the vendor finance of $300,000. The bank, he said, required and obtained security from himself and Spencer for the loan made to Spencer's company.

The witness said that he signed the guarantee that day. But before doing so a conversation was instigated by Spencer, who said that he was not signing any more personal guarantees, and that the witness should let the plaintiff know that was the situation.

So, said the witness, he rang the plaintiff, in Melbourne, and told him that Spencer was not going to settle "if we have to sign the guarantee, the personal guarantee". The conversation was definitely "we are both not signing because Wayne had decided we are both not signing". The plaintiff did not seem that concerned, he agreed they could settle without giving personal guarantees.

At the end of the day, said the witness, copies of what had been signed were faxed to the plaintiff "so that they could be accepted verbally, so the bank would settle". There must have been some acknowledgment of the receipt of the documents, and that they were satisfactory, because settlement was completed.

The witness's explanation of why he signed the guarantee was: "To execute the document and finish the deal".

He told me that it was his belief that on the original of the document the names of himself and Spencer in Schedule 2 had been lined out. He believed that the document exhibited was a copy of the document faxed to the plaintiff on 6 March 1987. The copy document, I note, does not show the presence of a fax streamer.

Cross-examined, the defendant said that at the time he signed the guarantee he did not believe it to be a personal guarantee.

The alleged conversation with the plaintiff on 6 March 1987 was adverted to in answers to interrogatories sworn by the witness on 17 September 1997; but he could not say if he had told his legal advisers about the conversation at any earlier time (the writ was filed on 12 March 1996). His recollection in May 1996 was such as enabled him to deny in an affidavit "that any of the negotiations took place by telephone from Melbourne". He had then forgotten about the alleged conversation of 6 March 1987.

The witness's recollection that he had lined out his name in the second schedule was, he conceded, not referred to in any of a number of affidavits he had sworn in connection with this proceeding. He qualified his expressed belief that he had lined out his name this way: "I have never said that I actually definitely believed I crossed it out".

The witness conceded, as was obviously the case, that Chiri, at the end of the transaction, had debts of $1.3M ($1M owed to Spencer's company and $300,000 vendor finance) and a liability of $135,000 under a mortgage of the plaintiff's house property in Perth. The company’s liabilities far exceeded its assets. Yet he said that he did not know that, without personal guarantees, the plaintiff would not provide Chiri with the $300,000 vendor finance.

His explanation why the guarantee was executed and sent to the plaintiff, notwithstanding the alleged telephone discussion of 6 March 1987, was that "There is a guarantee on there that I feel may have been accepted - the major asset we were purchasing was owned by Leisure Corporation, that is why Leisure Corporation's seal is on that guarantee". But he was not saying that it was always a deliberate decision to have that company's seal on the document.

Later in cross‑examination, however, he said that he did believe it to be intentional that the guarantee provided for execution by Chiri and Leisure Corp.

He agreed that there was no commercial purpose whatsoever in Chiri guaranteeing its own undertaking; but he had seen a company guaranteeing its own debts "hundreds of times" in lease finance documents.

Despite seeing point in a guarantee being given at least by Leisure Corp the witness told me that he did not say, in the alleged telephone conversation with the plaintiff on 6 March 1987, that he and Spencer would not give guarantees, but that the two companies would do so.

In summary, the defendant signed the letter of offer. It referred to personal guarantees. Nothing happened between 5 February 1987 and 6 March 1987, to the defendant's knowledge, which relevantly altered the situation. Certainly he knew of no reason why, prior to 6 March 1987, the plaintiff's solicitor would have drawn up a document which substituted Chiri and Leisure Corp as guarantors; still less of any reason why the solicitor would have drawn up a document in which Schedule 2 and the execution provisions were at odds. According to the witness, Spencer said on 6 March 1987 that he would not sign any more personal guarantees; and he, the defendant, told the plaintiff by telephone that there would be no settlement if he and Spencer had to sign “the guarantee, the personal guarantee”. Yet according to the witness he did not believe the document to be a personal guarantee, but rather a document by which, intentionally, the borrower and Chiri were to be guarantors. His less than certain belief that his name and that of Spencer were lined out on the original of the guarantee could not be correct. The document in evidence is a photocopy of the document after execution by both companies.

Further in summary, the defendant's evidence as to the making of and content of the alleged telephone call on 6 March 1987 was unsatisfactory. If he believed , as he said, that the document was not a personal guarantee, there was no need to make the alleged call. If he believed that the document was a personal guarantee then, after the alleged call, there was no reason to execute it. It might have been expected that, if an agreement had been orally reached on 6 March 1987 that personal guarantees be not required from either the defendant or Spencer, some written confirmation of that agreement would have been sent to the plaintiff's then solicitors. No copy of any such confirmation was produced by the defendant. It seems to me improbable that the plaintiff, having made substantial use of the advice of Mr Towell, would have abandoned the requirement of personal guarantees without seeking the latter's advice. Had that matter been taken up with Mr Towell, it is the sort of thing that I would have expected the accountant to recall. But Mr Towell's evidence did not suggest that the matter had been taken up with him, although apparently he did some work on the plaintiff's affairs on 6 March 1987.

Spencer gave evidence of having been subpoenaed by the defendant. His stated position was that he had no time for either the plaintiff or the defendant, had a fear that one or other of them might inflict violence upon him if his current whereabouts were disclosed, and generally wished to put behind him the part of his life to which these distasteful events related. In fact, the defendant or his solicitors had considerable knowledge of Spencer's present whereabouts; the manner in which he gave his evidence was peculiar – the transcript does not do that observation justice; and the content of his evidence was partisan - and that for the defendant.

The witness described the letter of offer as "the beginning of the formal process" . In the ensuing weeks he met with the plaintiff more than once. He could not recall meeting Mr Towell. In discussion with the plaintiff "we started to discuss, in general terms, the fact that there would be $300,000 worth of vendor finance". But then he said that he could not recall whether this discussion took place before or after the letter of offer.

Shown the reference to personal guarantees in the letter of offer, the witness said that this changed. "The basic agreement was that the $300,000 would be secured by a mortgage over Leisure Corp". When documents were received from the plaintiff's solicitors he took them to his solicitors. That was on the Monday or Tuesday before they were signed. The solicitors explained the realities, and he had refused to put a personal guarantee to it. That was also his banker's advice. His refusal "would have been put before", but "continued through to the date of signing". The final documents (he thought there would have been several drafts) "again had reference to personal guarantees in it". On 6 March 1987 he had told the defendant to contact the plaintiff and tell him it was "not on". He did not personally witness a call being made. He said "we signed the document without the personal guarantees; and "we sealed the document because it was agreed not to do the personal guarantee". He had signed, he said, as secretary of Chiri. After documents including the guarantee had been sealed, the sealing pages were faxed to the plaintiff.

The witness said that it made sense to him that Leisure Corp was to seal the guarantee, because it was the asset-holding company. It made sense that provision was made for Chiri to seal the document, because it was the borrower. But later he gave evidence that the reference to Chiri was strange.

The witness told me that Chiri went into receivership in October 1990 (in fact it was in September). By that time the plaintiff had taken over the defendant's shareholding in the company, had in fact raised his shareholding to 51%, and had been running operations since late 1989. This last matter, I interpolate, was not the subject of any cross‑examination of the plaintiff. The assertions were, moreover, considerably watered‑down in cross‑examination; and at odds with documentation provided by ASIC.

The witness told me that he was made bankrupt in December 1990. The plaintiff had made no claim in the bankruptcy.

Cross-examined, the witness said of the guarantee that "the actual signing clauses for personal guarantee are not correct ... there is no provision for signature ... therefore it is a mistake and that is what basically we went to (the plaintiff) about prior to settlement". He agreed that, sealing and signatures apart, no marks upon the guarantee were made in his presence.

In answer to my questions Spencer said that drafts of the guarantee provided for guarantees to be given by Leisure Corp, himself and the defendant. He believed that the defendant, not himself, contacted the plaintiff to say that this was wrong.

In answer to my further questions, Spencer said that when the offer was made on 5 February 1987 he knew that he would need to make substantial borrowings apart from vendor finance; and that he would have to give a personal guarantee to the lender of the substantial amount.

Spencer's evidence, in a number of respects, differed from that of the defendant. He gave evidence of discussions had and agreement reached before 6 March 1987 that Leisure Corp give a mortgage, or guarantee; and that he, at least, be not required to give a personal guarantee. Of these alleged discussions the defendant was unaware. Then Spencer said that, having received a draft guarantee that showed Leisure Corp, the defendant and himself as guarantors, that not according with the agreement reached, he had not contacted the plaintiff about the matter; but believed the defendant did so at his instigation. Of such an event the defendant gave no evidence. Again, Spencer's evidence was opposed to the (variable) belief of the defendant that their names where appearing in Schedule 2 had been lined‑out on 6 March 1987. Further again Spencer ultimately did not attempt to justify the provision made for the document to be sealed by Chiri.

Spencer gave support to the evidence of the defendant that a telephone call was made to the plaintiff on 6 March 1987. But just why the call was made, was not made clear by Spencer’s evidence. At one point he said that it was because the guarantee "had reference to personal guarantees in it". This was "not on". But later he said that the "actual signing clauses" for the personal guarantee were not correct. There was a mistake. That was why the call was made to the plaintiff.

Of the discussions allegedly had by the witness with the plaintiff in the period between 5 February 1987 and 6 March 1987 there was not a hint in cross‑examination of the plaintiff; nor of the agreed insertion of Leisure Corp as a guarantor. Nor was it put to Mr Towell, who gave instructions to Mr Woods, that the plaintiff had ever given him instructions that Leisure Corp was to become a guarantor in place of the intended personal guarantors.

Spencer's evidence shows that when the letter of offer was compiled he knew of the circumstances which later caused him, as he says, to refuse to give the plaintiff a personal guarantee. That letter was compiled and signed by a man who was able to borrow a million dollars from a bank, and became bankrupt because (as he claimed) someone embezzled $2.8M from him (or his companies). One might imagine that such a man had turned his mind to the question whether he should or should not give a personal guarantee before he offered in writing to do so. I was not at all impressed by his evidence that, in effect, it required his solicitor's advice as to the realities, and the advice of his banker, to cause him to conclude that he should not give a personal guarantee. Of that alleged advice, I should say, there was not a word of direct evidence.

Spencer's evidence as to the reason why the guarantee was sealed by Chiri, in light of the alleged telephone call made to the plaintiff, was as unsatisfactory as that of the defendant.

I should briefly refer to the Amended Defence (the Defence) filed pursuant to my order of 22 February 1999. The particulars to paragraph 12 show that, as late as the first day of the trial, the defendant’s account of discussions had by he and Spencer with the plaintiff concerning the two of them not giving personal guarantees remained uncertain; thus: “prior to 6 March 1987 or on or about 6 March 1987 … “

I have no doubt that I should reject the evidence of Spencer that a new arrangement with respect to the guarantee had been struck before 6 March 1987; and likewise reject the evidence that the defendant made a telephone call to the plaintiff on 6 March 1987 in which he said that he and Spencer would not give personal guarantees of the vendor finance provided to Chiri. I consider it to be overwhelmingly likely that what the defendant and Spencer intended to do on 6 March 1987 was to give personal guarantees, this according with the continuing intention of the parties. Probably they did not direct their minds to the form of the execution provision, there being a number of documents to sign. It is possible that the defendant and Spencer realised that the execution provision was erroneous, and sought to take advantage of a mistake which they alone appreciated. I consider that to be a much less likely situation.

I should refer to the plaintiff’s evidence about the matter. There were parts of his evidence which showed him to have a lesser grasp of matters of commercial law than I might have expected. That said, I could not conclude from his evidence that the offer made on 5 February 1987 that the defendant and Spencer would give personal guarantees ever changed.

The plaintiff said that as an entrepreneur he was very weak on accountancy and the law. He knew things had to be done correctly. That was why he instructed Mr Towell. I accept the truthfulness and accuracy of the witness's critical self‑assessment.

The plaintiff said that the letter of offer reflected a protracted period of negotiations that he had conducted with the defendant and Spencer. In the course of those negotiations he had told them that he required personal guarantees from both of them. Spencer had said that was normal practice. I accept that evidence. The letter of offer was strongly suggestive of considerable prior negotiations; and it offered personal guarantees.

The plaintiff agreed that he had witnessed the affixing of the seal of Leisure Group to the guarantee as secretary of the company. The director's signature was that of a Mr Blair, an employee of the plaintiff, who had then been resident in Victoria. The plaintiff ventured a guess, no more, that he and Blair had executed the document in Victoria. He said he had not discussed with any person, before executing the document, why, in substance, Leisure Corp and Chiri were to do so. The document had been prepared by his solicitors and he assumed it would have been correct.

It seems probable to me, in light of Blair's whereabouts, and in light of the probability that the loan agreement was signed by the plaintiff before it was taken to Western Australia for execution and stamping, that the guarantee was executed by Leisure Corp in Victoria before the document was transported to Western Australia.

The plaintiff inaptly described the document as "a guarantee incorporating two companies and two individuals". Ms Sparke relied upon that characterisation. But I consider that it reveals the plaintiff's weakness in legal matters. I have reached that conclusion notwithstanding that the plaintiff was not, in a number of ways, an impressive witness. But it is one thing as an entrepreneur to understand the need for, and require, personal guarantees for a company's debt. It is another thing to understand whether a document has that effect. The plaintiff's characterisation of the guarantee was no more than a man would read.

The plaintiff's evidence was that he took the documents to Western Australia and there met with Spencer. He next saw the documents a few days later, after they had been executed. That evidence broadly fitted Spencer's evidence as to when he first saw the documents. But it was otherwise at odds with Spencer's evidence. In particular, it plainly implied that neither the defendant nor Spencer sought changes to the documents which were presented for execution some days before that event. I accept so much of the plaintiff’s evidence as carries that implication.

The plaintiff said, more than once, that he "brought" originals of the executed documents "back to Melbourne". That is consistent with the import of paragraph 5 of his affidavit sworn 11 May 1994 in the proceeding he brought against his former solicitors' – as to which, see later in these reasons. I doubt that his recollection is correct, at least if it be thought to imply that he was in Perth on 6 March 1987. Had he been in Perth he could have been expected, as an interested party, to attend the settlement. It is idle, however, to speculate where he was on 6 March 1987. For I simply do not accept that the defendant contacted him in the course of settlement.

It may be that, wherever the plaintiff was on 6 March 1987, copies of the execution pages of documents were faxed through to him for approval. If that happened, the plaintiff’s failure to address and object to the execution page of the guarantee takes the defendant nowhere. The plaintiff had not recognised it to be inappropriate when, as seems likely, he and Mr Blair had witnessed the affixing of Leisure Corp’s seal before 6 March 1987.

Counsel for the defendant submitted that:

· The plaintiff had agreed with the defendant, when they made a share-swap arrangement in 1989, that the effect of the arrangement was that “it was to be final between them”; and his conduct thereafter revealed that to be the case; and
· The plaintiff by his conduct admitted that no personal guarantees had been given by the defendant and Spencer.

The first of these submissions did not address the question whether there was a common, continuing intention of the parties up to the time of execution of the guarantee. Its potential relevance was as to another issue raised by the defence – see paragraph 21 of the Defence and paragraph 2(f) of Further and Better Particulars of Defence (the Particulars) dated 4 September 1997 – and as to the plaintiff’s ability to recover on the guarantee if it was rectified. The second of the submissions, on the other hand, challenged the existence of the common, continuing intention contended for by the plaintiff.

It is the fact that in 1989 the plaintiff and the defendant agreed to a share-swap, the effect of which was that the plaintiff acquired the defendant’s shares in Chiri (and perhaps in Leisure Corp), whilst the defendant acquired the plaintiff’s shares in a company which was operating a nightclub in Melbourne.

Ms Sparke did not contend that as part of the share-swap agreement there was any formal agreement discharging a guarantee given by her client in favour of the plaintiff. She could hardly have so contended when her client denied giving any such guarantee. That “it was to be final between them” was variously described by counsel as an agreement, an understanding, and her client’s belief.

Putting to one side the question whether paragraph 21 of the Defence, as particularised, provided a basis upon which the defendant could pursue the first of the submissions now under discussion, I am satisfied that neither the plaintiff or the defendant had any understanding or belief that the effect of the share-swap agreement was that “it was to be final between them”. I consider it certain that the plaintiff did not give any consideration to the guarantee at the time when the share-swap agreement was made. Why would he have done so? Presumably he believed that, by the share-swap, he was acquiring an interest in a thriving business. So far as the defendant is concerned, it is not at all apparent that when he effected the share-swap he believed he was disposing of shares in a failing enterprise which could not meet its indebtedness. It seems to me improbable that he gave the guarantee any thought at the time. Simply to conclude that neither party addressed the guarantee when entering into the agreement gives no support for a conclusion that they had an understanding, or a belief, that the agreement, in effect, put an end to, or supplanted, all prior rights and obligations between them.

Ms Sparke sought to support the alleged understanding by pressing the plaintiff to concede that, when he found Chiri to be in financial trouble, he looked to Spencer to sort out the debt owed to him. I do not doubt that the plaintiff did first look to Spencer, whom he believed to be wealthy; a belief which disappeared when Spencer was made bankrupt. But the plaintiff's understandable hope that Spencer would pay the moneys owing cannot be extrapolated to support an inference that the plaintiff believed that, by reason of an understanding as alleged, he had no claim on the defendant.

Ms Sparke also relied upon later conduct of the plaintiff to support her submission that an effect of the share-swap agreement was that “it was to be final” between the two men. I shall refer to that conduct, and what is to be derived from it, a little later.

Counsel for the defendant raised a variant of the argument founded upon the share-swap transaction. It was this: that by the transaction between the two of them all dealings relating to the loan were "effectively finished". Thus was explained the fact that the plaintiff, when working in Chiri's business, did not write himself cheques for moneys owing under the loan agreement. This submission lacked substance. The company was struggling to survive and the defendant had director's duties. I put to one side whether, in a practical as opposed to a theoretical sense, the plaintiff could have drawn and negotiated any such cheque.

The submission that the plaintiff by his conduct had admitted that no personal guarantees had been given by either the defendant or Spencer rested upon, in Spencer’s case, the plaintiff’s failure to participate in Spencer’s bankruptcy; and, in the case of the defendant, the plaintiff’s conduct in relation to matters which developed out of the share-swap agreement.

I am not at all persuaded that the plaintiff’s failure to make a claim in Spencer’s bankruptcy evidenced an admission that he did not believe Spencer had given a personal guarantee – as bearing upon the intention and understanding of the parties when the guarantee was executed. Spencer went bankrupt on a grand scale. Even before that time it had become apparent that this man of apparent wealth was unable to support Chiri. The plaintiff had no reason to suppose that to prove in the bankruptcy would be anything but a waste of time. Counsel for the defendant did not, I note, seek to make much of the plaintiff not doing so.

I have already noted that in the latter half of 1989 the plaintiff and the defendant effected a share-swap, by which the plaintiff took the defendant's interest in Chiri and the defendant acquired the plaintiff's interest in the company which was the plaintiff’s vehicle for operating a nightclub in Melbourne. The latter company was Twenty Fifth Klin Pty Ltd (Klin).

In time the defendant discovered that, at the time of the sale, Klin owed its solicitors a substantial amount in legal costs. Eventually Klin paid the costs. Thereafter Klin and the plaintiff agreed that the plaintiff pay it the moneys which it had paid the solicitors, plus interest. The plaintiff did not carry out that agreement. In 1991, Klin sued the plaintiff in the District Court of Western Australia. The plaintiff acknowledged the debt, and in substance agreed to make payment in full not later than 12 August 1991. He agreed that, failing payment, Klin could take judgment.

The plaintiff did not make payment as he had agreed. Klin apparently obtained judgment against the plaintiff for about $70,000. In 1995 Klin obtained a warrant for the arrest of the debtor plaintiff. It was executed against him whilst he was in Western Australia attending a wedding. He was imprisoned overnight.

I am satisfied that, throughout the period that Klin was pursuing the plaintiff, the plaintiff either knew or believed that the defendant was the personification of Klin. By his own admission, in all that time - it stretched from 1989 to late 1995 - the plaintiff at no stage raised in argument the proposition that the personification of Klin was liable to him for a very substantial sum under the guarantee. In the end, the judgment debt was paid without any such issue being raised – this bringing to an end an episode which reflected badly on the plaintiff.

Ms Sparke directed my attention to the undoubted facts that the plaintiff was arrested and imprisoned in October 1995 and that he commenced this proceeding in March 1996 - many years after he became (as he would say) entitled to sue the defendant. Adding those facts to the plaintiff’s failure to raise the matter of the guarantee in the course of the Klin episode, she submitted that the evidence showed that the plaintiff had brought this proceeding out of embarrassment and fury which he felt by reason of his being arrested and imprisoned; that he believed that the defendant had never given him a personal guarantee; that the loan agreement had come to an end when the share-swap transaction took place; and that any possible liability of the defendant on the guarantee had come to an end when that transaction took place.

I have already considered, by reference to the circumstances existing when the share-swap agreement was made, the defendant’s submission that there was an “understanding” that one consequence of the share-swap transaction was that “it was to be final between them”. The plaintiff’s conduct at later times vis a vis the defendant, about which I shall say a little more in a moment, does not cause me to doubt the conclusions I earlier expressed – that neither the plaintiff nor the defendant gave the guarantee a moment’s thought when the share-swap agreement was made; this giving no support to the existence of the postulated “understanding”.

I have also given earlier consideration to the defendant’s argument that the effect of the share-swap transaction was that all dealings relating to the loan were “effectively finished”. Focussing upon certain matters highlighted by Ms Sparke I considered that it should be rejected. Consideration of the plaintiff’s later conduct and reconsideration of the matters to which Ms Sparke adverted has not caused me to reach a different conclusion.

The defendant’s submission that the plaintiff’s conduct with respect to the Klin affair showed that the plaintiff believed that the defendant had never given him a personal guarantee does not sit quite comfortably with the defendant’s submission that the share-swap agreement was understood by them to bring finality to their dealings. Unless the defendant had given a personal guarantee he, as distinct from Chiri, had no liability actual or contingent to the plaintiff. As a corollary, a question arises as to the bona fides of the defendant’s instructions to counsel. Surely the particular submissions were based on instructions and were not simply the product of counsel’s imagination.

I put the bona fides or otherwise of the defendant’s instructions to one side. I reject the submissions that the plaintiff’s conduct with respect to the Klin affair revealed his belief that a personal guarantee had not been given. I consider, for reasons outlined earlier, that the converse was undoubtedly his belief. It may be accounted strange that at some time between late 1989 and the time of commencement of this proceeding the plaintiff did not raise with the defendant the latter’s liability on the guarantee - in pragmatic connection with the Klin episode. The entirety of the period cannot be viewed, however, in the same light. I think that the failure which I have mentioned was not odd in respect of the years 1994 and 1995. In that period the plaintiff, on legal advice, was suing his former solicitors for negligently drawing up (as he alleged) a guarantee that was unenforceable. I would put to one side also the period between the making of the share-swap agreement and the collapse of Chiri and bankruptcy of Spencer. But certainly one might have expected him to have taken the matter up with the defendant in the years 1991 to 1993 inclusive. That said, the evidence in favour of there being a common understanding of the parties that personal guarantees be given, an understanding unaffected by the making of the share-swap agreement, is in my opinion overwhelmingly strong.

I reject also the submission that the plaintiff commenced this proceeding because he was embarrassed by and was furious with the defendant because he had been arrested and imprisoned. I consider it probable that the proceeding was commenced when it was because the proceeding brought by the plaintiff against his former solicitors had only been settled in August 1995; and that for a discounted sum in light of defences proposing that the guarantee was capable of being enforced.

The defendant contends that equitable relief should be refused

Ms Sparke submitted that, if the circumstances otherwise justified rectification, it ought be refused on the grounds (see paragraph 21 of the Defence) of “laches, acquiescence and delay”.

This allegation was expanded upon by the Particulars. Thus:

“(a)The cause of action for rectification accrued at the time the guarantee was executed namely on or about the 6^th day of March 1987.
(b)The present proceeding was not commenced until the 12^th day of March 1996, a period in excess of six years after the date upon which the cause of action accrued.
(c)The Amended Statement of Claim, in which the claim for rectification was first brought before the court, was not amended to raise a claim for rectification until the 12^th day of July 1996, a date well in excess of six years after the date upon which the cause of action accrued.
(d)No mention of any possible claim for rectification of the guarantee was made by or on behalf of the plaintiff until same was made by counsel appearing for the plaintiff in the course of an application to Master Wheeler in this proceeding on the 28^th June 1996.
(e)Proceedings in County Court Action No. MC9400298 were commenced on the basis that –

(i) the guarantee was not executed by the defendant other than in his capacity as director and secretary of Chiri Shelf No. 60 Pty. Ltd.;

(ii) the guarantee was unenforceable as the defendant did not sign the guarantee as guarantor, such allegations being made in the affidavit of the plaintiff sworn the 11^th May 1994 in the said proceeding and in the Statement of Claim in the said proceeding respectively.

(f)The defendant and/or Chiri Shelf No. 60 Pty. Ltd. has resold the interest in Leisure Corporation Australia Pty. Ltd. referred to in part 12 of the Amended Statement of Claim to the plaintiff or the Grantley Gordon Smith Family Trust.
(g)By reason of the matters referred to in items (a) to (f) above and in reliance on the belief that the plaintiff would not seek to enforce the guarantee the defendant altered his position accordingly.
(h)By reason of the matters referred to in items (a) to (g) above (and each of them) it is now no longer possible to have a fair trial of this proceeding.”

It was conceded by Ms Sparke that paragraph (f), so far as it referred to the Grantley Gordon Smith Family Trust, had no foundation in the evidence.

Before dealing with the matters advanced in argument for the defendant I should refer to the County Court proceeding referred to in paragraph (e) of the Particulars.

In early 1994 the plaintiff gave his present solicitor instructions that he wished to sue on the guarantee. His solicitor obtained a copy of the guarantee. He noted the manner of execution, and gave the plaintiff certain advice. The upshot was that the plaintiff brought a proceeding against his former solicitors by which he alleged that negligently and in breach of duty they had prepared a guarantee which was only executed by the defendant and Spencer in their capacity as director and secretary, and not (as it should have been) by them as guarantors personally. Damages were claimed, being the balance due under the loan agreement, plus interest.

By their defence the defendants denied, inter alia, that the guarantee was defective and incapable of enforcement. They alleged failure by the plaintiff to take reasonable steps to mitigate his loss by not seeking to enforce the guarantee. They pleaded also a Limitation of Actions Act defence.

The defence in the County Court proceeding was dated 6 April 1994. The plaintiff did not thereafter seek to join the defendant as a defendant. The proceeding was eventually settled, in July 1995. The settlement required payment of an all in figure of $45,000 by 18 August 1995. By the deed of release and indemnity the defendants maintained their denial of liability. The settlement sum represented a very large discount on the amount of the claim and costs.

Just why the plaintiff’s claim was settled at so large a discount was not made clear. Having regard to matters in evidence before me, and the defences pleaded in the County Court proceeding, I think that the debate about enforceability of the guarantee, and alleged failure to mitigate, must have been of key importance. But the matter need not be further considered. In this proceeding the plaintiff conceded that credit should be given for the settlement sum less his own costs. Paragraph 7 of the Defence, which alleged that the plaintiff had been compensated in respect of any cause of action arising in favour of the plaintiff under the guarantee was not pressed. The defendant did not argue that the settlement sum was inappropriately low, or that the plaintiff’s costs were inappropriately high.

I return to the matters argued in support of the allegation of “laches, acquiescence and delay”.

Counsel first submitted that the provisions of Limitations statutes are to be applied by analogy when the effect of a grant of equitable relief would be to circumvent the effect of a limitation period. She conceded that, insofar as the plaintiff sought to claim upon the guarantee strictly so described that submission did not assist her. That is so: see s.5(3) of the Limitation of Actions Act 1958. But, counsel contended, a claim under clause 2 of the guarantee was a different thing. It was a claim in debt. The principal fell due when there was default. That happened before March 1990. A six year limitation period applied. The effect of rectification would be to facilitate a statute-barred claim.

That submission cannot be accepted. The effect of clause 3 of the loan agreement was unlike the situation which arose in Ogilvie v. Adams [1981] VR 1041, which counsel cited. Clause 3 of the loan agreement prescribed a regime which went beyond a mere requirement that the loan be repaid on demand – in which case the debt falls due when the loan is made.

Moreover, evidence showed that, despite defaults which occurred before 6 March 1990, payments were made in the period between that date and Chiri going into receivership on 11 September 1990 - most importantly in the period commencing 1 July 1990. The writ was filed on 12 March 1996. Contrary to paragraph (d) of the Particulars, the claim for rectification was made from the outset. It appears to me that s.24(3) of the Limitation of Actions Act is in point, notwithstanding that the payments were made by Chiri and that this claim is brought against the defendant. Counsel for the plaintiff referred to s.26(6) of the Act in this connection.

Counsel for the defendant next submitted that the plaintiff refrained from exercising his rights for a long period of time, though fully knowing them. So, it was said, he had brought and pursued the County Court proceeding though knowing his rights. He had not joined the defendant and amended his claim. He had accepted a settlement. What he did was something akin to waiving his rights against the defendant. Counsel went further, and submitted that there was prejudice to a third party. The defendants in the County Court proceeding had paid the plaintiff a settlement sum.

The range of subject-matter addressed by this submission was extensive. For the most part it was not raised by the Defence or the Particulars. Plainly the Particulars did not raise the allegation of third party prejudice. There was no application to amend when the matter was raised in counsel’s final address (a different point had been made in opening). I do not consider that I should address this aspect of the submission, although I am clear that had I done so it would not have been decisive in the defendant’s favour.

The balance of the subject-matter of counsel’s submission, whether or not raised by the Defence and the Particulars, cannot be accepted. Its starting point was that the plaintiff fully knew of his rights – importantly his right to seek rectification – for a long time before he commenced this action. I do not accept that this was so. In early 1994 he instructed his solicitors to sue on the guarantee. They advised that it was flawed. On advice the plaintiff brought a proceeding against his former solicitors. The defendants squarely raised the issue of enforceability of the guarantee; and obliquely the issue of rectification.

The commencement of the County Court proceeding strongly suggests that, on advice, the plaintiff then believed that the guarantee was unenforceable. The first time that the possible availability of rectification was raised, on the evidence before me, was obliquely by the defence in that proceeding. The mere flagging of the issue does not mean that the plaintiff suddenly became fully aware of his rights against the present defendant. The most that can be said, I think, is that the plaintiff’s ultimate acceptance of a heavily discounted settlement suggests that by then he recognised there was merit to the issues of enforceability and rectification raised by the defendants.

It is, of course, the fact that the plaintiff asserted in the County Court proceeding the obverse of his contention in this case. But that was not the focus of Ms Sparke’s submission that what the plaintiff did was akin to waiving his rights against the present defendant. Rather she focussed upon the plaintiff’s failure to join the defendant in that proceeding after the defence had been filed. Whatever, in retrospect, may have been the desirability of joinder, I cannot discern anything akin to waiver in the plaintiff not taking that course.

It is further the fact that the elapse of time between the plaintiff becoming appraised of the problem with the guarantee and the commencement of this proceeding was not great; and between the time of compromise and such commencement was much shorter again. That leads into another submission advanced by Ms Sparke, that is, that the plaintiff’s long delay in seeking to assert his rights against the defendant, despite his full knowledge of the situation, meant that the plaintiff could not produce original documents at trial; and that the memory of witnesses was blunted. These matters were said to have worked to the defendant’s prejudice.

I consider, again, that this submission was not squarely raised by the Defence and the Particulars. It should not, in any event, succeed on the merits. That is because, first, the plaintiff’s “full knowledge” came into existence only, at earliest, when advice he received in early 1994 that there was a problem with the guarantee was put in issue by the Defence filed in the County Court proceeding. It is secondly the case because, on Mr Holt’s evidence, the original documents relevant to the transaction could not be found in 1994. It is thirdly the case because it cannot be said that the defendant, particularly, was disadvantaged by unavailability of the originals of those documents. If the matter was important to the defendant, I add, he could have made enquiries from at least two possible sources of original documents: the receiver and Spencer’s solicitors.

It is the fact that the evidence of Ms Towell and Ms Mackie was somewhat uncertain, neither of them having access to contemporary files. I do not consider that this created unfairness. The plaintiff carried the burden of proof. The defendant was the more likely to be advantaged by any uncertainty in the evidence of those witnesses.

Ms Sparke submitted that the plaintiff, knowing of his rights against Chiri, stood by and allowed it to go into receivership. He took no steps to extract from it moneys owed to him; nor did he take steps to obtain payment from Spencer. This was to the defendant’s prejudice. It appears to me that this submission, also, was not raised by the Defence and Particulars. Again I consider that, in any event, it ought be rejected. Assuming but not deciding that the particular conduct could constitute acquiescence, it is entirely unreal to imagine that the plaintiff could have extracted the moneys owing to him from Chiri in the period of his renewed involvement with that company. The prospects of his obtaining recompense in the receivership were likewise hopeless. Spencer could not support Chiri, and was made bankrupt on a large scale.

Another submission made by Ms Sparke was that when the share-swap was done “both the plaintiff and the defendant were silent on the question of guarantees”. The plaintiff had permitted the defendant to relinquish control of Chiri, to go off in his own direction; and yet was later seeking to enforce a guarantee dependent on Chiri’s failure to pay its debt to the plaintiff. This caused a prejudice to the defendant.

There was no evidence that the defendant changed his position adversely in consequence of the silence to which Ms Sparke adverted. His exiting Chiri was unlikely to have been financially disadvantageous. The disadvantage may well have been that of the plaintiff. I add that the silence asserted in connection with this submission is not readily compatible with the several understandings about the effect of the share-swap agreement which were relied upon by counsel in a different connection. I consider, in short, that the submission lacked merit.

Ms Sparke raised a more general contention against grant of equitable relief. The plaintiff, she submitted, had not come to the court with clean hands. He had delayed in bringing his claim against the defendant; had not acted in good faith by accepting settlement moneys from his former solicitors and not disclosing them at the outset of this proceeding; and had sworn an affidavit in the County Court proceeding which was at odds with is evidence at that of the present proceeding.

Each of these matters was, at least for the most part, raised by the defendant in other connections. Nothing more need be said about the first of them in the present connection. As to the second, it is true that the proceeds of the County Court proceeding were not disclosed at the outset. Certainly they were later disclosed. I am not able to conclude that the initial non‑disclosure was the work of the plaintiff, as distinct from the work of his legal adviser. But if it was the plaintiff’s work, and if it was a matter that could operate to deny him an equitable remedy, it must be balanced out against other considerations tending in favour of such relief. It would not prevail. As for the third matter raised, it shows variance in recollection; no more.

Having now addressed the various matters raised by Ms Sparke in opposition to a grant of equitable relief, I consider it clear that they provide no cause against such a grant. If it was necessary I would declare that the plaintiff is entitled to rectification of the guarantee in the terms set out in paragraph B of the statement of claim; and I would make orders accordingly.

Was a demand before suit necessary?

I have said that the plaintiff is able to enforce the guarantee as it presently stands against the defendant. The plaintiff relies upon clause 2, the principal debtor clause, to do so – acknowledging that he made no demand as would entitle him to rely upon clause 1. It is his case that so much of clause 2 as provides that “such of the provisions as are set out in the schedule as are capable of applying to this instrument construed as an indemnity shall apply to the indemnity given by this clause” does not call into play the requirement of a demand imposed by clause (1) of Schedule 1. The defendant asserts to the contrary.

In support of his overall submission counsel for the plaintiff submitted that, because clause 2 sets up an obligation of the guarantor “as a principal debtor’, the guarantor should be treated as if he was the borrower. So treated, clause 1 of Schedule 1 would become meaningless. I do not accept that submission. The effect of clause 2 is not to constitute the guarantor the borrower. The clause continues to draw a distinction between guarantor and borrower.

Counsel referred to cases in which it has been held that prior service of a demand is unnecessary in principal debtor situations, by contrast with claims founded on a guarantee. In Esso Petroleum Co Ltd v. Alstonbridge Properties Ltd & Ors [1975] 1 WLR 1474 Walton J of the Chancery Division had to consider a mortgage which provided that if any monthly instalments remained unpaid “the company and/or the sureties will pay on demand” the unpaid capital and interest; and by which it was agreed and declared that as between the sureties and the mortgagees “the sureties shall be considered as principal debtors for all principal … hereby secured”. His Lordship did not have to decide whether that clause in fact constituted the sureties as principal debtors. He said this at 1483:

“ … where the character in which payment is required is that of surety, a demand is, in general, necessary; but I assume for present purposes (without finding it necessary so to decide) that the provisions of clause 5 of the mortgage, equating the liability of the sureties to that of principal debtor, is effective to obviate the necessity for a demand merely on this ground.
My difficulty is that the demand in the present case is a demand which of its own intrinsic nature changes the nature of the liability; it turns a liability to pay by instalments into a liability to pay the whole at once. Under these circumstances, in my judgment, even as against a principal debtor, a demand antecedent to the issue of proceedings is a necessary pre‑requisite of the whole cause of action. I would put it this way: that where the pre-existing obligation is to pay the debt by instalments, the demand that it be paid in one lump sum is an act which radically changes the nature of the debtor’s obligation, and so is an essential ingredient of any cause of action to recover the lump sum. I think the case is precisely equivalent to the type of case envisaged by Scrutton L.J. in Bradford Old Bank Ltd. V. Sutcliffe [1918] 2 K.B. 833, where he said, at p.848: ‘But it is otherwise where the debt is not present, but to accrue’; i.e., in such cases a demand is requisite. This appears to me to be the case here.”

In short, even if the claim was made upon a principal debtor, a demand might in particular circumstances be necessary.

The general issue was considered in MS Fashions Ltd & Ors v. Bank of Credit and Commerce International S.A. (in liquidation) & Ors [1993] Ch 425 (Hoffman LJ) and 439 (CA). There were three related actions. They had certain common facts. A bank advanced money to a company. Repayment was guaranteed by a director who had a deposit account with the bank. As between the director and the bank the director was expressed to be a principal debtor. On the bank's insolvency could the director set off his claim for a return of his deposit against his liability to pay the company’s debt?

The facts in the three actions were not identical. In one case a mortgage contained a covenant by the director, defined as principal debtor, to pay on demand all moneys owed. The director also agreed that the bank could apply his deposit towards the indebtedness of the company, and that his liabilities “shall be as that of principal debtor”. This latter type of agreement was present in the second case. In the third case a standard form contained both a guarantee and also “as a separate and independent obligation” a covenant to pay on demand the company’s liabilities “as principal debtor”.

Hoffman LJ concluded that the references to the liabilities of the depositor as being that of a principal debtor should be taken to have that effect. His Lordship relevantly said this, at 435-436:

“If the relationship between B.C.C.I. and the directors was governed only by the standard form guarantee I think that there would be no answer to the submission that the liability of the directors remains contingent. All the guarantees in the B.C.C.I. standard form require a demand in writing before any liability arises on the part of the guarantor. It is well established that in such a case, no cause of action arises until the demand is made: see Bradford Old Bank Ltd v. Sutcliffe [1918] 2 K.B. 833.”
and
“In fact, however, the directors are also liable to B.C.C.I. under the various instruments I have described and which deems them to be principal debtors. This liability is in my judgment not contingent at all. It is either a joint and several liability with the companies or at any rate a several liability for the same debt. In the M.S. Fashions case and the Impexbond case the letters of charge made no mention of the need for any demand. In the case of the mortgage deed in the M.S. Fashions case and the charge on the deposit in the High Street Fashions case the obligation was to pay on demand in writing. However, in the case of primary obligations as opposed to secondary ones like guarantees, a provision for demand in writing is not regarded as creating a contingency: see In re J. Brown’s Estate; Brown v. Brown [1893] 2 Ch. 300.”
and
“In my judgment the ‘principal debtor’ clauses have the effect of creating primary liability for the purpose of the rule that the debt is not contingent upon demand. This was the provisional view of Walton J. in Esso Petroleum Co. Ltd. V. Alstonbridge Properties Ltd. [1975] 1 W.L.R. 1474, 1483, and I think it was correct. It is true that for some purposes the courts will look to the underlying reality of the suretyship relationship rather than the formal agreement that liability is to be as principal debtor. But this is only for the purpose of protecting the surety’s equitable rights against the principal debtor and giving effect to such consequences as may affect the creditor, such as the surety’s right to take over securities and the rule against double proof. Otherwise there is no reason why creditor and surety should not make whatever terms they choose. The right to a demand before liability can accrue is not inherent in the nature of suretyship and will not be implied unless expressly provided. There seems accordingly no reason why the parties should not modify the effect of such a provision.”

On appeal, Dillon LJ said this at 447:

“ … it has been held in various contexts that to enforce liability against a mere surety there must be a demand before action brought: see the decision of Chitty J. in In re J. Brown’s Estate; Brown v. Brown [1893] 2 Ch. 300 and the decision of this court in Bradford Old Bank Ltd. V. Sutcliffe [1918] 2 K.B. 833.

Essentially, however, the question is one of the construction of the contract: see N. Joachimson v. Swiss Bank Corporation [1921] 3 K.B. 110, 129, where Atkin L.J. said:
     ‘The question appears to me to be in every case, did the parties in
     fact intend to make the demand a term of the contract? If they did,
     effect will be given to their contract, whether it be a direct promise
     to pay or a collateral promise, though in seeking to ascertain their
     intention the nature of the contract may be material.”

His Lordship shortly noted that the directors had “expressly agreed” or “accepted” liability as principal debtors.

Neither judgment, I think, explored whether, and why, the liability of the directors was a liability as principal debtors. It seems to have been accepted that the description by the parties of the nature of their relationship was at least important.

Burchett J, in Re Taylor; ex p. Century 21 Real Estate Corporation (1995) 130 ALR 723, considered the questions which were not fully explored in MS Fashions.

In Taylor there were three relevant clauses. The “guarantors”:

“1.Hereby jointly and severally, unconditionally guarantee to
Century 21 the payment, when demanded [emphasis added] from us or any one or more of us, as determined by Century 21, of any sum of money whatsoever that may become payable by South Pacific to Century 21 under or in accordance with the promissory note provided by South Pacific to Century 21 dated 19 January 1990, a copy of which is annexed hereto as Ex A (the promissory note).
2.As a separate and severable covenant, hereby jointly and
severally agree that, in the event of South Pacific in any respect failing to discharge its obligations under the promissory note, the guarantors shall jointly and severally indemnify and keep indemnified Century 21 from and against all costs, damages, expenses and losses of any nature whatsoever arising out of or in consequence of any such failure.”
3.The guarantees and indemnities contained in cll 1 and 2 of this
guarantee and indemnity shall be principal obligations and shall not be treated as ancillary or collateral to any other obligation howsoever created or arising to the intent that these guarantees and indemnities shall be fully enforceable without Century 21 taking any step whatsoever against South Pacific or otherwise [emphasis added], unless the same shall have been satisfied according to the terms hereof, and notwithstanding that all or any one or more of the obligations of South Pacific shall be or be declared to be in whole or in part unenforceable whether by reason of any statute (including without limitation any statute of limitation) or for any other reason.”

His Honour said this, at 728:

“There is no doubt that a true guarantee is a collateral contract, not only in the strict sense of an additional contract related to the principal contract, but also in the sense that it involves a secondary obligation. A true indemnity involves a primary obligation.”

Observing that clause 2 of the documents before him limited the obligation it expressed to the situation arising in the event of the borrower’s failure to discharge what the clause seemed to treat as a primary obligation, his Honour said this, at 727-728:

“ … cl 2 has been drafted as an obligation to indemnify against costs, damages, expenses and losses ‘arising out of or in consequence of’ a failure, and that failure is expressed by the words, ‘in the event of South Pacific in any respect failing to discharge its obligations under the promissory note’. The word ‘indemnify’ is used, but the obligation is only to attach in the event of a failure by South Pacific to discharge its obligations. This looks very like the language of a collateral contract to answer for the default of another, who is contemplated as liable in the first place to the promisee. It does not appear to express a primary obligation undertaken by the guarantors.”

His Honour found the answer to the particular problem in clause 3(d). He concluded that the provision that the lender need not take any step against the borrower “or otherwise” should be read to deny the requirement that a demand be made in a clause 2 situation in circumstances where that clause – contrast clause 1 – contained no requirement that a demand be made. Whether or not clause 2 was viewed as setting up a primary or collateral liability did not matter. For, his Honour concluded, even in the case of a guarantee the parties may agree that a demand is not required.

In the end, then, his Honour did not need to decide, and did not decide whether what was described as an indemnity was on proper analysis a guarantee.

Counsel for the plaintiff submitted that Re Taylor cannot stand with M.S. Fashions. He pointed out that Burchett J had referred to Esso Petroleum somewhat critically, but had not cited M.S. Fashions.

I doubt, in truth, that the decisions cannot stand together. For, despite what Burchett J said at 730, I think he went no further than to observe that the text of the particular document will determine whether a liability is primary or secondary, and may determine in the end whether a demand is necessary.

The learned authors of Phillips and O’Donovan, the Modern Contract of Guarantee, 2^nd Ed, observe at p.30 that an analysis of common forms indicates that the distinction between a contract of guarantee and one of indemnity is often blurred; and at p.29 refer to a promise to indemnify that has sometimes been construed simply as a guarantee. They observe also, at p.28, in a passage criticised by Burchett J in Re Taylor, that a principal debtor clause “also obviates the necessity” for a demand to be made upon the guarantor before issuing proceedings” (see also at p.420).

The effect of principal debtor clauses in a variety of circumstances is discussed in the text to which I have just referred. Consideration of the effect of such clauses in different situations discloses the varied form that they take. This points to the need to consider the language used in the particular case.

The circumstances encountered in Re Taylor were not dissimilar to those which arise under the present guarantee. There is not, on the other hand, any present equivalent of clause 3(d); the provision for making a demand was there discretely attached to the equivalent of the present clause 1; and the present clause 2 specifically characterises the guarantor “as a principal debtor”, which clause 2 of the document considered by Burchett J did not do.

In my opinion there area number of reasons which lead to a conclusion that clause (1) of Schedule 1 should, as the plaintiffs contend, be held inapplicable to a claim raised by a creditor under clause 2. First, it was open to the lender and the surety to define the nature of their relationship. The fact that the document expressing their agreement was prepared by the lender’s solicitor does not gainsay the relevance or validity of the characterisation.

Second, clause 2 unequivocally describes the guarantor as a principal debtor, and the clause itself as setting up a separate and additional obligation. Those descriptions do not conclude the issue. But the courts have at times been influenced by the language freely chosen by men of business.

Third, the content of clause 2 is not resolutely opposed to the concept of an indemnity – which has been described as “a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party”: Sunbird Plaza Pty Ltd v. Maloney and Anor (1988) 166 CLR 245 at 254 per Mason CJ. The parties having chosen to characterise the guarantor’s separate and additional obligation in that way, I think that the clause should be read to facilitate, not destroy, that characterisation.

Fourth, there is a definite trend against treating a principal debtor arrangement as requiring, save in circumstances which plainly require it, an obligation to make demand before pursuing a claim. No such circumstances emerge in the present case.

Fifth, even if an attempt to create a principal debtor arrangement fails, so that the particular clause is to be read as guarantee, it does not mean inevitably that there must be demand before a claim is pursued. The fact that the parties have attempted to create such an arrangement may be thought to tell strongly against the need for a demand – it being a usual concomitant of such an arrangement that prior demand is not required.

Sixth, in the present case, even if clause 2 did not bring about the arrangement that the parties intended, it provides that the schedule provisions “that are capable of applying to this instrument construed as an indemnity” shall apply. That is, it invites consideration of the schedule provisions on the footing that an indemnity is created by clause 2. Looked at in such a way, the requirement for a demand is certainly unusual; and I would be prepared to say that in the circumstances clause (1) of the schedule should not be considered “capable of applying”.

Indebtedness

The plaintiff relied upon a certificate of indebtedness dated 22 February 1999. Paragraph 1 of that document contains an obvious error. But the gist of the certificate is clear enough: the full amount of $300,000 was not repaid by 31 December 1990, as the loan agreement required. By 23 January 1991 a total of $162,456.76 had been repaid, there being a balance of $138,543.24. Then, in the proceedings against the plaintiff's former solicitors, an amount of $36,298.94 net of legal costs was recovered. The balance owing by Chiri at the time of commencement of the proceeding, and currently, was thus $102,244.30; to which was added a claim for statutory interest calculated at $39,092.88.

The certificate was purportedly given under clause 11 of Schedule 1 of the guarantee. Such a certificate may state the amount due and payable by the solicitor "under this instrument". In my opinion such an amount does not include statutory interest.

Such a certificate "if demand is made on the guarantor", is conclusive evidence against the guarantor of his liability to the lender at the date of the certificate; and prima facie evidence of the amount of the liability. The necessary nature of a demand is prescribed by clause 12(a). No such demand was made upon the defendant.

At best for the plaintiff, the certificate is prima facie evidence of the amount of the guarantor's liability. The certificate is certainly wrong in one respect. A comparison of Exhibit E and paragraph 3(a) of the certificate shows that there was an initial payment of $50,000 which, after allowing for agreed contras, yielded a net payment of $35,496.42. The certificate allows only for payment of the net amount. But it does not necessarily follow that the overall indebtedness alleged by the certificate is incorrect.

Tendered in evidence was a statement of account prepared, as at 23 January 1991, by the plaintiff's then personal assistant and bookkeeper, Ms Mackie.. The document, as a matter of probability, was prepared from ledgers kept by the witness. The ledgers were not produced. Little evidence was given as to their whereabouts. The witness, referred to Exhibit E, said that her belief was that the normal practice would have been to credit the borrower with $50,000, not $35,496.42. Such a credit would have been involved in calculating the balance owing of $191,195.41 as at 6 March 1990.

Subject to that issue, there are two obvious arithmetical errors in the statement of account. Their consequence is that the asserted balance as at 23 January 1991 was $138,543.24, not $137,570.24.

The witness could not recall whether any payments had been made by the borrower after 23 January 1991. The plaintiff said that no such payments had been made. A receiver was appointed to Chiri in the period 11 September 1990 to 26 April 1991. Certainly (see Exhibit 8) no payments were made in the period of the receivership. I am satisfied that no payments were made at any later time.

The certificate gives a credit for moneys recovered by the plaintiff in the proceeding against his former solicitors – less the plaintiff’s own costs. I doubt whether a certificate given under clause 11 may permissibly deal with such a matter. But, for reasons appearing later, that need not be decided.

I have now referred to the entirety of the material relied upon by the plaintiff to support the claim. The certificate apart, there is, then, evidence of an initial payment of $50,000 on 29 June 1998, of a balance as at 6 March 1990, and of payments between the latter date and 23 January 1991 amounting to $52,652.17. What is not clear is whether the balance as at 6 March 1990 ($191,195.41) credited the borrower with $50,000 or $35,496.42 in respect of the first payment. The certificate does not solve that problem. As a matter of arithmetic it accepts the accuracy of the sum said to be owing on 6 March 1990, credits the borrower with the lesser amount out of the initial payment, and from that starting and finishing point calculates an amount paid in the interim period.

Counsel for the defendant referred to and relied upon the plaintiff's failure to make a claim in the receivership of Chiri as evidence that there was no indebtedness.

No such indebtedness, certainly, was referred to in the report as to affairs of
the company signed by Mr Renato Forlano, dated 23 October 1990. The only unsecured creditor, according to the report, was Spencer, in an admitted amount exceeding $500,000. Mr Forlano, an employee/accountant of Spencer, did not give evidence.

Counsel for the defendant also relied upon the plaintiff's failure to make a demand on Chiri when, resuming its management in late 1989 after the share-swap with the defendant, he concluded that it was not operating profitably, and that its income could not sustain its borrowings; and upon the plaintiff's failure, when made a director of Chiri, to ensure that its books showed its indebtedness to him. I am quite unpersuaded that these "failures" constituted an admission by him that there was no indebtedness. The loan agreement provided a schedule for repayment, which was not due for completion until the end of 1990. Further, I do not conclude that the plaintiff had any practical access to or control over the company's books. Again, the course taken by the plaintiff seems to me readily explicable by his knowledge that Chiri's business had performed badly, and that Spencer had withdrawn financial support from the company; or was unable to provide such support.

There is reason to doubt whether the plaintiff could rely upon the certificate. But if he was so entitled, then having account of the evidence of Ms Mackie, documents other than the certificate adduced in evidence by the plaintiff, and the body of the certificate itself, the prima facie evidentiary effect on the document was compromised. I would not determine the amount of the defendant’s liability to the plaintiff by reliance upon it.

The documentation generally is not very complete. The plaintiff carries the burden of proof of the existence and amount of any indebtedness. I have not ignored that matter. In the end, apart from the evidentiary effect of business records (there was evidence that the statement of account of January 1991 was such a record) I consider it more probable than not that Ms Mackie did allow for the full $50,000 first payment when calculating the balance as at 6 March 1990. She impressed me as a witness who did not overstate her recollection, but was clear in the business practice she adopted in a situation such as this.

I am satisfied also that the statement of account revealed all other payments made up to the time of its preparation; and that no payments were thereafter made.

The remaining question concerning indebtedness is whether the plaintiff should give credit for the entire amount received in the settlement of his proceeding against his former solicitors - rather than that amount less his legal costs.

The question was scarcely argued. Ms Sparke said nothing about it in her final address. Mr Robins submitted, by analogy with well known cases relating to non‑deductibility of insurance proceeds, that I should disregard the cost to the plaintiff of his securing the benefit of the settlement to the defendant. On the state of the argument before me, I accept that the analogy was properly made.

In the event, the plaintiff has made out an indebtedness (taking no account of statutory interest) of $102,244.30, that being the amount owing by the borrower when this proceeding was commenced, an amount still owing.

Judgment

Subject to anything that counsel may say as to form, it appears to me to be sufficient to enter judgment for the plaintiff against the defendant for $102,244.30.

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Citations

Benson-Brown v Smith [1999] VSC 208

Most Recent Citation

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SUPREME COURT OF VICTORIA
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[1999] VSC 208

10 June 1999