Cao v Baccello Pty Ltd as trustee for the Mondello Family Trust - [2020] WASCA 82

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT :   THE COURT OF APPEAL (WA)
CITATION:   CAO -v- BACCELLO PTY LTD as trustee for THE MONDELLO FAMILY TRUST [2020] WASCA 82
CORAM:   MURPHY JA
BEECH JA
VAUGHAN JA

HEARD:   4 MAY 2020
DELIVERED          :   28 MAY 2020
FILE NO/S:   CACV 115 of 2018
BETWEEN:   WEI DONG CAO
Appellant
AND
BACCELLO PTY LTD as trustee for THE MONDELLO FAMILY TRUST
First Respondent
QIN CHEN as trustee for THE CAO FAMILY TRUST
Second Respondent

ON APPEAL FROM:
Jurisdiction              :   DISTRICT COURT OF WESTERN AUSTRALIA
Coram:   DAVIS DCJ
Citation: BACCELLO PTY LTD as Trustee for MONDELLO FAMILY TRUST -v- QIN CHEN as Trustee for THE CAO FAMILY TRUST [2018] WADC 138
File Number            :   CIV 980 of 2014

Catchwords:

Contract - Guarantee and indemnity of lease obligations - Construction of guarantee - Effect of subsequent lease agreement on guarantor's obligations - Whether the guarantee under the previous lease agreement extended to the subsequent lease agreement - Appellant's contention that lease was unenforceable as contrary to public policy - Whether the judge of the trial of preliminary issues erred in finding that the appellant had not proven the landlord's knowledge as to the use of the premises as a brothel - Turns on own facts

Legislation:

Nil

Result:

Appeal allowed in part

Category: B

Representation:

Counsel:

Appellant	:	In person
First Respondent	:	No appearance
Second Respondent	:	No appearance

Solicitors:

Appellant	:	In person
First Respondent	:	Arns & Associates
Second Respondent	:	In person

Case(s) referred to in decision(s):

Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549
Australia and New Zealand Banking Group Ltd v Manasseh [2016] WASCA 41
Baccello Pty Ltd as trustee for Mondello Family Trust v Qin Chen as trustee for the Cao Family Trust [2018] WADC 138
Baccello Pty Ltd as trustee for the Mondello Family Trust v Qin Chen as trustee for the Cao Family Trust [2017] WADC 45
Black Box Control Pty Ltd v TerraVision Pty Ltd [2016] WASCA 219
Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269
Brett v Barr Smith [1919] HCA 4; (1919) 26 CLR 87
Burnes v Trade Credits Ltd [1981] 1 NSWLR 93
Chan Macchia v The Public Trustee [2008] WASCA 241; (2008) 251 ALR 385
Chan v Cresdon [1989] HCA 63; (1989) 168 CLR 242
Cherry v Steele‑Park [2017] NSWCA 295; (2017) 96 NSWLR 548
Clark Boyce v Mouat [1994] 1 AC 428
Dockrill v Cavanagh (1944) 45 SR (NSW) 78
Duncan Properties Pty Ltd v Hunter [1991] 1 Qd R 101
Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue [2011] WASCA 228; (2011) 43 WAR 186
George 218 Pty Ltd v Bank of Queensland Limited [No 2] [2016] WASCA 182; (2016) 313 FLR 287
Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122
Gutheil v Ballarat Trustees, Executors & Agency Co Ltd [1922] HCA 19; (1922) 30 CLR 293
Joyce v Anderson [2020] WASCA 48
Kuligowski v Metrobus [2004] HCA 34; (2004) 220 CLR 363
Moore v Dimond [1929] HCA 43; (1929) 43 CLR 105
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104
Nocton v Lord Ashburton [1914] AC 932
Owen & Gutch v Homan (1853) 4 HL Cas 997
Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 82 ALR 217
Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17
Sheraz Pty Ltd v Vegas Enterprises Pty Ltd [2015] WASCA 4; (2015) 48 WAR 93
Smart v Power [2019] WASCA 106
Spalla v St George Motor Finance Ltd (No 6) [2004] FCA 1699
Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164; (2014) 48 WAR 261
The English and Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700
Trade Credits Ltd v Burnes [1979] 1 NSWLR 630
Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 328 ALR 564
Voulis v Kozary [1975] HCA 44; (1975) 180 CLR 177
XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215

JUDGMENT OF THE COURT:

Introduction

The appellant (Mr Cao) appeals against the decision of Davis DCJ in Baccello Pty Ltd as trusteefor Mondello Family Trust v Qin Chen as trustee for the Cao Family Trust[1] (primary decision). The primary decision concerned a claim by the first respondent, Baccello Pty Ltd as trustee for the Mondello Family Trust (Baccello), against the second respondent, Ms Chen in her capacity as trustee for the Cao Family Trust (Ms Chen), and Mr Cao, in relation to the lease of certain premises in Inglewood, Western Australia. The premises were the subject of a five‑year lease agreement between Baccello and Ms Chen which was entered into in 2006 (the 2006 lease agreement). Baccello also alleged that there was a further agreement for lease entered into in 2011 (the 2011 lease agreement). Baccello alleged that the 2011 lease agreement was on the same terms as the 2006 lease agreement. Mr Cao had given a guarantee and indemnity with respect to the 2006 lease agreement (guarantee). Mr Cao and Ms Chen were married, but separated in 2009.
[1] Baccello Pty Ltd as trusteefor Mondello Family Trust v Qin Chen as trustee for the Cao Family Trust [2018] WADC 138.
In the primary proceedings, Baccello claimed amounts totalling in excess of $294,000, the overwhelming part of which related to the (alleged) 2011 lease agreement. A small sum of $687.50 related to a notice given under the 2006 lease agreement.[2] Davis DCJ found Ms Chen liable for breaches of the 2011 lease agreement and the 2006 lease agreement, as alleged. Her Honour also found Mr Cao liable on the basis that the guarantee applied not only to the 2006 lease agreement, but also to the 2011 lease agreement.
[2] Primary decision [66], [158].
Mr Cao now appeals against the orders made by the primary judge. In substance, Mr Cao contends that he had no liability under the guarantee on the bases that (1) the guarantee, on its proper construction, does not extend to the 2011 lease agreement, and (2) in any event, the judge should have found that both the 2006 lease agreement and 2011 lease agreement were contrary to public policy and hence unenforceable, as Baccello knew that the premises were being used as a brothel. Mr Cao does not allege that, if the relevant lease agreement was not unenforceable as contrary to public policy, and if the guarantee extended to cover Ms Chen's liability under the 2011 lease agreement, the particular amounts in question are not caught by the guarantee.
Baccello has filed an amended notice of intention, stating that it does not intend to take part in the appeal and will accept any order in the appeal other than as to costs.[3] Ms Chen has not filed a notice of intention.
[3] WB 2.
For the reasons which follow the appeal should be upheld in part. The guarantee, on its proper construction, does not extend to Ms Chen's liabilities under the 2011 lease agreement. However, the guarantee does apply to the 2006 lease agreement. Further, Mr Cao has not shown any error in the finding that he had not established knowledge on the part of Baccello as to the use of the premises as a brothel prior to the execution of the 2006 lease agreement.

The primary proceedings - overview

Mr Cao, but not Ms Chen, appeared in defence of the primary proceedings. They involved two hearings - a trial of preliminary issues before Wager DCJ (as her Honour then was), and a subsequent final hearing before Davis DCJ. Whilst Mr Cao appeared in person with the assistance of an interpreter in the hearing before Davis DCJ, her Honour noted that it was clear from Mr Cao's written submissions and from what he told her Honour, that Mr Cao had legal assistance.[4]
[4] Primary decision [18]. (The same may be said of this appeal.)
The preliminary issues hearing concerned a defence raised by Mr Cao that Mr Mondello (on behalf of Baccello) knew that the premises were being used as a brothel, and that the 2006 lease agreement and (if entered into) the 2011 lease agreement, were, consequently, unenforceable as contrary to public policy. Wager DCJ determined that issue adversely to Mr Cao: Baccello Pty Ltd as trustee for the Mondello Family Trust v Qin Chen as trustee for the Cao Family Trust[5] (preliminary issues decision).
[5] Baccello Pty Ltd as trustee for the Mondello Family Trust v Qin Chen as trustee for the Cao Family Trust [2017] WADC 45.
Davis DCJ, in the primary decision, applied the findings of Wager DCJ in relation to the trial of the preliminary issues. Davis DCJ also found that (1) the 2011 lease agreement had been entered into, (2) Ms Chen was liable for breaches as alleged, and (3) Mr Cao was liable as guarantor.
The breaches were found to include a breach of the relevant lease agreement in using the premises as a brothel. There was a term of the lease agreement (cl 7.1) to the effect that the premises could only be used for a specified 'Use', namely Chinese oriental relaxation massage, acupuncture, physiotherapy and/or chiropracty.[6]
[6] Primary decision [48].

The trial of the preliminary issues

Wager DCJ said, in effect, that the trial of the preliminary issues was conducted for the purpose of determining:[7]
1.Whether Mr Mondello was or became aware of the use of the premises as a brothel, and if so, when Mr Mondello became aware of that use.
2.Whether the lease agreement in question was void in whole or in part as a consequence.
[7] Preliminary issues decision [6].
Wager DCJ summarised the legal principles in a manner not in dispute in this appeal. Wager DCJ also noted that, whilst it was not the subject of pleadings, if the relevant lease agreement was made to effect a purpose contrary to s 190(1)(c) of the Criminal Code (WA), namely, receipt of rent by a landlord knowing that the premises are used for prostitution, this could also render the contract invalid and unenforceable.[8]
[8] Preliminary issues decision [47] - [50].
Her Honour approached the determination of the relevant issues by asking the following questions:[9]
1.What was Mr Mondello's knowledge and intention at the time of signing the 2006 lease agreement?
2.Did Mr Mondello know that the premises were being used for the purposes of prostitution 'after' 2006? Did Mr Mondello collect rent from Mr Cao and Ms Chen knowing the use of the premises was contrary to s 190(1)(c) Criminal Code?
[9] Preliminary issues decision [54].
Her Honour considered these questions having regard to the evidence up to and including 2013.[10]
[10] Preliminary issues decision [21] - [26], [93] - [126].
Her Honour made the following findings as to the two preliminary issues:[11]
1.Mr Mondello was not aware, and did not become aware, of the use of the premises as a brothel; and
2.the relevant lease agreement was not void in whole or in part.
[11] Preliminary issues decision [4] - [6], [127], 'Answers to specific questions'.

Primary decision

Following the preliminary issues decision, the trial before Davis DCJ was conducted in relation to Baccello's claims for damages against Mr Cao and Ms Chen.[12]
[12] Primary decision [4].
Davis DCJ said that the findings of fact made by Wager DCJ in the preliminary issues decision applied in the primary decision pursuant to the principles of res judicata, issue estoppel and generally, the power of the court to prevent an abuse of process.[13]
[13] Primary decision [23], citing Chan Macchia v The Public Trustee [2008] WASCA 241; (2008) 251 ALR 385 [32] (res judicata); Kuligowski v Metrobus [2004] HCA 34; (2004) 220 CLR 363 [21] (issue estoppel); Sheraz Pty Ltd v Vegas Enterprises Pty Ltd [2015] WASCA 4; (2015) 48 WAR 93 [4] ‑ [11]; Spalla v St George Motor Finance Ltd (No 6) [2004] FCA 1699 [58] ‑ [70] (abuse of process).
Her Honour found, in effect, that:
1.Ms Chen had not exercised the option under the 2006 lease agreement within time, and there was no valid renewal of the 2006 lease agreement.[14]
2.Nevertheless, on 3 May 2011, Ms Chen made a written counter‑offer to enter into a lease agreement on the same terms as the 2006 lease agreement, which was accepted by Baccello by letter dated 16 June 2016.[15]
3.Accordingly, the 2011 lease agreement was entered into on or about 16 June 2011, on the same terms as if the option had been exercised, for a period of five years commencing 1 July 2011.[16]
[14] Primary decision [109] - [131].
[15] Primary decision [76], [78], [132] - [133].
[16] Primary decision [134].
Her Honour also made findings in relation to the three default notices sent by Baccello to Ms Chen. The first was served on 21 January 2011, for which Baccello claimed $687.50. The first default notice alleged, following communications with the City about the premises being used as a brothel, that Ms Chen was in breach of cl 7.1 of the relevant lease agreement by using the premises as a brothel.[17]
[17] Primary decision [66], [158].
The second default notice was served by Baccello on 5 April 2012. Again, it alleged a breach of the authorised use of the premises, as well as alleging failures to keep the premises in good repair. The second default notice followed further correspondence from the City, in which the City said, in effect, that it was not satisfied that its earlier complaints (about the use of the premises as a brothel) had been addressed.[18]
[18] Primary decision [97] - [98].
The third default notice was dated 8 July 2013, and was sent in the context that the City had prosecuted, and obtained convictions against, Mr Cao and Ms Chen for contravening s 218 of the Planning and Development Act 2005 (WA) (concerning contravention of a planning scheme).[19]
[19] Primary decision [99] - [102].
Following the third default notice, Baccello took steps to terminate the 2011 lease agreement, and on 25 July 2013, the 2011 lease agreement was terminated and Baccello re‑entered possession of the premises.[20]
[20] Primary decision [103].

The terms of the 2006 lease agreement and the guarantee

The 2006 lease agreement was executed by Baccello, Ms Chen and Mr Cao. Although expressed to be a lease, it was not in registrable form and was not registered. Consequently, it took effect as an agreement for lease. (See [66] below).

The 2006 lease agreement[21]

[21] It has been necessary to consider the original exhibit of the 2006 lease agreement. The Green Appeal Book only contained an incomplete extract of the 2006 lease agreement.

The 2006 lease agreement provides that it is between Baccello as the 'Landlord', Ms Chen as the 'Tenant' and Mr Cao as the 'Guarantor'.
Clause 3 provides that the Landlord leases the premises to the Tenant 'for the Term at the Rent commencing from the Commencement Date for the Use and subject to the covenants and powers implied in every memorandum of lease by virtue of the Transfer of Land Act 1893 [unless otherwise negatived or modified by the terms of this Lease]'.
As noted earlier, the specified Use is Chinese oriental relaxation massage, acupuncture, physiotherapy and chiropracty (cl 1.1.20, cl 7.1, item 6 of the schedule).
By cl 4.1, the Tenant is obliged to pay the 'Rent' during the 'Term'. The definition of 'Term' is referred to in [30] below.
By cl 1.1.13, the term 'Rent' is defined to mean the Rent in item 4 of the schedule or as varied from time to time 'in accordance with the terms of this lease'. Item 4 refers to the payment of $52,800 per annum by monthly instalments 'during the Term'. Clause 4 provides, in effect, for rent reviews on 'Rent Review Dates', being 'each anniversary date of the Commencement Date of the Term' (cl 1.1.14, item 5 of the schedule).
In addition to the payment of Rent during the Term, the Tenant is obliged to pay (amongst other things):
1.All charges for utilities and services (cl 5.1).
2.From the commencement of the Term, all rates, taxes, charges, duties, assessments and impositions of any kind (cl 5.2).
3.All costs, charges and expenses incurred in the preparation and service of any notice arising from any breach of the lease (cl 5.5).
4.Other costs, charges and expenses for which the Landlord is liable in consequence of, or in connection with, the exercise (or attempted exercise) of any power, right or remedy of the Landlord under the lease arising from any default by the Tenant (cl 5.7).
5.On demand, the costs of specified insurance (cl 5.8, item 7(1) of the schedule).
6.Interest at the rate of 18% per annum on any amounts payable by the Tenant if payment is not made within seven days of the due date (cl 5.6).
In addition to such financial obligations, the Tenant is also obliged (amongst other things) to:
1.Maintain, replace, repair and keep the premises in good and substantial tenantable repair during the 'Term or period of occupation' (cl 6.1.1).
2.Promptly replace broken or damaged glass (cl 6.2.1) and pay the costs of repairing and making good any damage to the premises caused through the act, neglect, default or omission of the Tenant (cl 6.2.1, cl 6.2.2).
3.At its own expense, keep the premises and immediate surrounds properly cleaned and drained at all times 'during the Term' (cl 6.3.1).
4.Paint the premises (1) at least once every three years 'during the Term', and (2) during the last six months of the 'Term' or immediately upon any sooner determination of the 'Term' (cl 6.4).
By cl 1.1.19, the word 'Term' is defined to mean the period specified in item 3 of the schedule, namely five years from 1 July 2006 ‑ 30 June 2011, including 'any extension or renewal of it'.
By cl 18.2, read with item 8 of the schedule, the Tenant is given a right to 'renew' the Term for a further five years commencing on 1 July 2011 (defined as the 'First Renewed Term') and a further five‑year term commencing on 1 July 2016 (defined as the 'Second Renewed Term'). A written notice of intention to renew has to be given in writing no earlier than six months, and not later than three months, before the date of the expiration of the Term (cl 18.2.2.1). By cl 18.2.2, the same terms and conditions apply during the First Renewed Term and the Second Renewed Term (as the case may be) as applied during the initial Term, save for, in effect, (1) cl 18 itself (except insofar as it continues to apply to the Second Renewed Term following renewal for the First Renewed Term), and (2) any incentive or inducement given by the Landlord to the Tenant for entry into the 2006 lease agreement. By cl 18.2.2.3, the commencing 'Rent' payable during the First Renewed Term and the Second Renewed Term (as the case may be) is 'the Rent payable immediately before the commencement of the further term reviewed in the manner provided in this Lease on the further term Rent Review Dates'.
By cl 9.5, if the Tenant, with the express or implied consent of the Landlord, remains in occupation after the expiration of the Term, then the Tenant will do so as a monthly tenant, the tenancy of which may be determined by either party on one month's written notice.
Clause 15.1 provides for termination by the Landlord where (amongst other things) Rent is in arrears and unpaid for 14 days and, in the case of breach or non‑observance of other covenants, conditions or stipulations, where the Tenant fails to comply within 14 days of any notice served by the Landlord on the Tenant requiring the Tenant to remedy the breach.

The guarantee

Clause 19 of the 2006 lease agreement is in the following terms:
19.GUARANTEE
19.1.Guarantee and Indemnity
19.1.1.In consideration of the Landlord entering into this lease at the request of the Guarantor (which request is testified by the Guarantor's execution of this lease) the Guarantor JOINTLY AND SEVERALLY:
19.1.1.1.GUARANTEES to the Landlord the due performance and observance by the Tenant of all singular terms, covenants, agreements and stipulations contained or implied in this Lease on the part of the Tenant to be performed and or observed ('the Secured Obligations') including the due payment on demand of the whole of all Rent costs and other moneys payable by the Tenant to the Landlord under this lease ('the Secured Moneys') and the Guarantor acknowledges that no time credit, forbearance or indulgence or concession which may at any time be granted by the Landlord to the Tenant and no variation of the terms, covenants, agreements and or conditions contained or implied in this Lease and no assignment of the whole or any part of the Leased Premises and or of the Tenant's estate rights and or interests and no sub-lease of the whole or part of the Leased Premises no extension or renewal of the Term of this Lease and no termination or expiration of this Lease (whether by re-entry, forfeiture, surrender, effluxion or time, or otherwise) will be irrevocable and continuing and will extend to cover all obligations of the Tenant to the Landlord; AND
19.1.1.2.as an independent liability INDEMNIFIES AND AGREES TO KEEP INDEMNIFIED the Landlord against all losses[,] costs, damages and expenses sustained or incurred by the Landlord arising out of respect of any breach or default by the Tenant in payment of the Secured Moneys or in duly performing and observing the Secured Obligations.
19.1.2.In the event that the Tenant goes into compulsory or voluntary liquidation or become bankrupt or enter into any composition arrangement with or assignment for the benefit of the Tenant's creditors of has appointed under any Act or instrument or by order of any Court a manager or administrator or a trustee or receive or a receiver and manager or liquidator in relation to any part of the Tenant's undertakings or assets or property the Guarantor must not prove or claim in any such liquidation bankruptcy composition arrangement or assignment or in respect of such appointment until the Landlord has received one hundred cents in the dollar in respect of the moneys owing by the Tenant to the Landlord and the Guarantor must not hold in trust for the Landlord such proof and claim.
19.1.3.A reference in this Clause to 'this Lease' means a reference to any tenancy or other rights whether legal equitable or otherwise under which the Tenant occupies or is entitled to occupy the Leased Premises including a tenancy for a fixed term, a periodic tenancy, a tenancy at will as a tenancy at sufferance or whilst holding an equitable interest over the Leased Premises under an agreement for lease. (emphasis added)

Davis DCJ's construction of the guarantee

The primary judge referred to the High Court's decision in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd[22] to the effect that a guarantor will be discharged from a specific guarantee of the due performance of the principal debtor's obligations under a particular contract, if the principal debtor and creditor vary that contract, unless the alteration is insubstantial or incapable of prejudicing the guarantor.[23]
[22] Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, 559 ‑ 561.
[23] Primary decision [182], citing Australia and New Zealand Banking Group Ltd v Manasseh [2016] WASCA 41 which referred to the 'Ankar principle'.
Her Honour said:[24]
The application of the Ankar principle can be excluded or modified by agreement; in other words it will not apply if the terms of the guarantee provide otherwise: Australia and New Zealand Banking Group Ltd v Manasseh [2016] WASCA 41 [29].
So, for example, if the guarantee extends to cover 'all moneys', or it expressly permits a variation, the guarantor will remain liable: Commonwealth Bank of Australia v McArthur [2003] VSC 31 [192] ‑ [199]; Bakarich v Commonwealth Bank of Australia [2004] NSWSC 283 [282] - [285].
Similarly, the Ankar principle has no application to a subsequent independent agreement, and the guarantor will remain liable in relation to that independent agreement, provided it is within the scope of the guarantee: Commonwealth Bank of Australia v McArthur [197].
The principle in Ankar will also not apply if the guarantor has consented to the variation or change: Holme v Brunskill (1877) 3 QBD 495 at 505 ‑ 506 (cited with approval in Ankar); Australia and New Zealand Banking Group Ltd v Manasseh [242]; Winstone Ltd v Bourne [1978] 1 NZLR 94; Fair Investments Ltd v Mahoe Buildings Ltd [1992] 3 NZLR 734.
[24] Primary decision [183] - [186].
In relation to cl 19.1.1.1, her Honour considered that there appeared to be words missing in the last part of that clause, ie, the part commencing 'and the guarantor acknowledges'. With reference to a version of the lease which preceded the 2006 lease agreement, her Honour concluded that the last part of cl 19.1.1.1 may have been intended to contain an agreement that the guarantee would apply notwithstanding a variation of the terms or conditions of the Lease or an extension or renewal of the term of the Lease. Her Honour found that the clause should have read:[25]
19.1.1.1.GUARANTEES to the Landlord the due performance and observation by the Tenant of all singular terms, covenants, agreements and stipulations contained or implied in this Lease on the part of the Tenant to be performed and or observed ('the Secured Obligations') including the due payment on demand of the whole of all Rents costs and other moneys payable by the Tenant to the Landlord under this lease ('the Secured Moneys') and the Guarantor acknowledges that no time credit, forbearance or indulgence or concession which may at any time be granted by the Landlord to the Tenant and no variation of the terms, covenants, agreements and or conditions contained or implied in this Lease and no assignment of the whole or any part of the Leased Premises and or of the Tenant's estate rights and or interests and no sub-lease of the whole or part of the Leased Premises no extension or renewal of the Term of this Lease and no termination or expiration of this Lease (whether by re-entry, forfeiture, surrender, effluxion or time, or otherwise) shall prejudice or affect the liability of the Covenantor hereunder and this guarantee will be irrevocable and continuing and will extend to cover all obligations of the Tenant to the Landlord[.] (original emphasis)
[25] Primary decision [191].
Davis DCJ said that without the missing words, the last part of cl 19.1.1.1 of the guarantee did not make sense. However, she also found that this part of the guarantee could be severed without affecting the remainder of cl 19.1.1.1 of the guarantee.[26] This conclusion was unchallenged for the purposes of the appeal.
[26] Primary decision [199] - [200].
Her Honour found that the first and second parts of cl 19.1.1.1 required Mr Cao to guarantee performance of Ms Chen's obligations under 'this Lease' (the Secured Obligations) and Ms Chen's payment of money due under 'this Lease' (the Secured Moneys).[27] Her Honour found the definition of 'this Lease' in cl 19.1.3 to be unambiguous, and that it was a wide definition intended to extend not just to a written lease document but 'to any other way' in which Ms Chen occupied the premises.[28]
[27] Primary decision [201].
[28] Primary decision [202].
Her Honour rejected Mr Cao's submission that the words 'in consideration of the Landlord entering into this lease at the request of the Guarantor' were determinative in construing the scope of the operation of the guarantee.[29] Her Honour also referred to Mr Cao's submission that, in the case of ambiguity, the guarantee should be construed in favour of the surety. Her Honour said that this did not mean that the wide wording of cl 19.1.3 could be ignored.[30]
[29] Primary decision [203].
[30] Primary decision [204].
Davis DCJ said:[31]
In my view, the plain words of cl 19.1.3 mean, and a reasonable person would have understood them to mean, that Mr Cao was to guarantee the first defendant's obligations during the original term of the lease, and any arrangements which might in the future be made between the first defendant and the plaintiff concerning the first defendant's occupation of the premises. Such other arrangements were clearly contemplated and provided for in cl 19.1.3 as it specifically referred to 'any tenancy' as well as other rights, 'whether legal equitable or otherwise under which the tenant occupies or is entitled to occupy the premises'. Thus the guarantee applied to any form of tenancy or right of occupation of the premises by the first defendant, and that included (but was not limited to) a tenancy for a fixed term or an agreement for lease.
Accordingly, I find that Mr Cao's obligations under the guarantee continued after the expiry of the original five year term of the lease, and included and extended to the agreement made between the first defendant and the plaintiff for the extended lease.
Clause 19.1.3 also applies to the indemnity, cl 19.1.1.2, which adopts the definitions of 'Secured Obligations' and 'Secured Moneys' set out in cl 19.1.1.1. (emphasis added)
[31] Primary decision [205] ‑ [207].
Her Honour also distinguished the guarantee in this case from that considered in Chan v Cresdon,[32] in which a guarantee which referred to obligations under 'this lease' was held not to apply to an unregistered lease. Her Honour noted that, in the present case, there was a definition of 'this Lease' in cl 19.1.3, which was not present in Chan v Cresdon.[33]
[32] Chan v Cresdon [1989] HCA 63; (1989) 168 CLR 242.
[33] Primary decision [208] - [209].
Davis DCJ also referred to the decision of Edelman J (as his Honour then was) in Alonso v SRS Investments (WA) Pty Ltd[34] and said that Edelman J's analysis supported her approach to the construction cl 19.1.3.[35]
[34] Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168.
[35] Primary decision [210] - [214].
Her Honour concluded:[36]
I am thus satisfied that because of the terms of the guarantee and indemnity to which Mr Cao agreed in 2006, the Ankar principle does not apply. By the wide definition in cl 19.1.3, Mr Cao's guarantee and indemnity extended to cover 'all moneys' owed by the first defendant and also all of the first defendant's obligations, whether during the term of the lease or subsequently, in whatever way the first defendant occupied the premises. In this case, Mr Cao's guarantee and indemnity extends to the first defendant's obligations under the terms of the extended lease. (emphasis added)
[36] Primary decision [215].
Accordingly, the primary judge found that Mr Cao's obligations under the guarantee continued after the expiry of the first lease, and included Ms Chen's obligations under the 2011 lease agreement.[37]
[37] Primary decision [206].

Grounds of appeal

The grounds of appeal effectively fall into two groups. Grounds 1, 2 and 7 involve, in substance, criticisms of the preliminary issues decision. Grounds 3 ‑ 6 concern particular aspects of Davis DCJ's reasoning in the primary decision.

Grounds 1, 2 and 7

Ground 1 alleges, in effect, that Wager DCJ erred in fact and/or law in finding that Ms Chen was not aware of the usage of the premises as a brothel.
Ground 2 alleges, in effect, that Wager DCJ erred in law by applying the wrong standard of proof in respect of s 190 of the Criminal Code in relation to the period after the execution of the 2006 lease agreement.[38]
[38] See preliminary issues decision [53].
Ground 7 alleges, in effect, that Wager DCJ erred in fact in finding that an email sent by Mr Mondello to Mr Cao in 2012 was inconsistent with him 'taking cash'.

Grounds 3 - 6

Ground 3 alleges in effect that Davis DCJ erred in fact and/or law by failing to consider that Mr Mondello either knew, or was wilfully blind to, the fact that the premises were being used for an illegal purpose prior to his entry into the 2011 lease agreement.
Ground 4 effectively alleges that Davis DCJ erred in her construction of cl 19.1.3 insofar as it is applied in cl 19.1.1.1 of the guarantee. Mr Cao submitted that the guarantee in the 2006 lease agreement did not extend to the 2011 lease agreement.[39] In particular, Mr Cao submitted that cl 19.1.1.1, read with cl 19.1.3, should not be construed as binding the guarantor to a subsequent independent agreement without the guarantor's consent.[40]
[39] Appellant's written submissions, par 51; WB 14.
[40] Appellant's written submissions, par 48; WB 14.
Ground 5 alleges, in effect, that Davis DCJ erred in fact and/or law by failing to give consideration to the possibility that Mr Cao 'may have revoked' the guarantee. Ground 5 also asserts that the primary judge should have considered that Mr Mondello acted unconscionably by making a misrepresentation to Mr Cao.
Ground 6 alleges that Davis DCJ erred in law by failing to consider Baccello's claim as an abuse of process, effectively on the basis that Baccello knew that the premises were being used as a brothel.

The proper construction of the guarantee

The principal issue in the appeal (ground 4) concerns the proper construction of the guarantee and whether it applied to Ms Chen's obligations under the 2011 lease agreement. The guarantee is contained in cl 19 of the 2006 lease agreement. The construction of a contract involves a determination of the meaning of the words of the contract by reference to its text, context and purpose. Ascertaining the meaning of terms in an instrument requires a determination of what a reasonable person would have understood those terms to mean. The instrument must be read as a whole.[41] Further, if there is a doubt as to the proper construction of a provision in a guarantee or an indemnity, it should be resolved in favour of the surety or indemnifier. A doubt may arise not only from the uncertain meaning of a particular expression, but from its apparent width of possible application.[42] However, it remains necessary for the contractual language to present a constructional choice that is fairly open by reason of the application of the other rules of construction.[43]
[41] See generally Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 [46] ‑ [51], [59]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 328 ALR 564 [51]; Black Box Control Pty Ltd v TerraVision Pty Ltd [2016] WASCA 219 [42].
[42] Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; [2004] HCA 28 [17] - [23]; Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 [53], [65].
[43] CSR Ltd v Adecco (Aust) Pty Ltd [2017] NSWCA 121 [163]; Cherry v Steele-Park [2017] NSWCA 295; (2017) 96 NSWLR 548 [112].
Similarly, general words may be read down in light of the balance of the contract of guarantee.[44]

The structure of the guarantee and preliminary observations

[44] Cherry v Steele‑Park [2017] NSWCA 295; (2017) 96 NSWLR 548 [114].

In outline, cl 19 has the following features:
1.By cl 19.1.1.1, the guarantor guarantees to the landlord the due performance of (in effect) all terms 'contained or implied in this Lease' (the Secured Obligations), including those for the payment of all 'Rent' and other moneys payable by the 'Tenant' to the 'Landlord' (the Secured Moneys).[45]
[45] The words 'Tenant' and 'Landlord' are both defined in cl 1.1.19 to include, in effect, permitted assigns. Clause 9 of the 2006 lease agreement sets out a regime for permitted assignments by the Tenant.
2.By cl 19.1.3, the words 'this Lease' in cl 19 refer to 'any tenancy or other rights whether legal, equitable or otherwise under which the Tenant occupies or is entitled to occupy the Leased Premises including a tenancy for a fixed term, a periodic tenancy, a tenancy at will as [sic - 'or'] a tenancy at sufferance, or whilst holding an equitable lease over the Leased Premises under an agreement for lease'.
3.Clause 19.1.1.1, albeit inconclusively and with no operative effect, given the apparent drafting omissions, also refers to an 'acknowledgement' by the guarantor in relation to the following matters:
(a)time, credit, forbearance, indulgence or concession given by the Landlord to the Tenant at any time;
(b)a 'variation' of the terms 'contained or implied in this Lease';
(c)the assignment of whole or part of the leased premises and/or the Tenant's estate, rights and/or interests in the premises, and the sublease of the whole or part of the premises;
(d)any 'extension or renewal of the Term of this Lease'; and
(e)the termination or expiration of 'this Lease', whether by re‑entry, forfeiture, surrender, effluxion of time, or otherwise.
4.By cl 19.1.2, the guarantor has an independent liability to indemnify the Landlord against all losses, costs, damages and expenses sustained or incurred by the Landlord arising out of, or in respect of, any breach or default by the Tenant in the payment of the Secured Moneys or in the due performance of the Secured Obligations.
Six preliminary observations may be made about the operation of cl 19. First, cl 19, on its face, distinguishes between 'this lease' in cl 19.1.1, namely the executed 2006 lease agreement, and the phrase 'this Lease' in cl 19.1.1.1 (incorporating the definition in cl 19.1.3). The consideration for the guarantee in cl 19.1.1 is expressed to be the Landlord entering into the executed 2006 lease agreement with the Tenant. Although cl 19.1.1.1 uses the phrase 'this lease' immediately before the reference to the 'Secured Moneys', in that particular context, it may be inferred that the phrase is to be read as 'this Lease' with its extended definition in cl 19.1.3.
Secondly, as Davis DCJ observed, the 'acknowledgement' part of cl 19.1.1.1 evidently has words omitted from it, and the effect of the acknowledgement cannot be discerned from the incomplete wording of that part of the clause. Also, there is no notice of contention to the effect that the missing words identified by Davis DCJ (see [37] ‑ [38] above) could somehow be read into cl 19.1.1.1.
Thirdly, the reference to all 'Rent' in cl 19.1.1.1 is evidently a reference to the defined term 'Rent' in the 2006 lease agreement, which includes, by reference to 'Term', the payment of Rent during the original term 'and any extension or renewal of it'. That matter is discussed in [64] ‑ [65] below.
Fourthly, the context in which the terms of the contract fall to be construed may include the legal context in which the contract operates.[46] The legal context is discussed in [66] ‑ [72] below.
[46] See Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164; (2014) 48 WAR 261 [154] and the cases cited therein.
Fifthly, the words following the word 'including' in cl 19.1.3 (see [56.2] above) are, as technical words, to be understood by reference to their technical legal meaning.[47] In summary, leases are of three types - leases for fixed terms, leases at will and leases creating periodic tenancies. A lease for a fixed term terminates at the expiration of the term. A lease at will is terminable by either party at any time, and no period of notice is necessary unless the conditions of the lease require it.[48] A lease for a periodic tenancy, such as a lease from year to year, quarter to quarter, month to month, or week to week, continues indefinitely until either party terminates it by giving notice equal to the length of the period and terminating at the end of a complete period (unless some special provision is made as to notice).[49]
[47] Brett v Barr Smith [1919] HCA 4; (1919) 26 CLR 87, 93; Gutheil v Ballarat Trustees, Executors & Agency Co Ltd [1922] HCA 19; (1922) 30 CLR 293, 299, 302 ‑ 305; Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue [2011] WASCA 228; (2011) 43 WAR 186 [226].
[48] In this case, the 2006 lease agreement had an express holding over clause - see [32] above.
[49] Dockrill v Cavanagh (1944) 45 SR (NSW) 78, 82.
Further, the law also implies a 'tenancy at sufferance', where a person who entered into possession under a lawful right remains in possession after that right ceases, but without either the assent or dissent of the person entitled to the property. The most common example is where a tenant has entered into possession under a valid tenancy, and remains in possession after the tenancy has come to an end, without the landlord's assent or dissent.[50] A tenancy at sufferance can only arise by operation of law. As there is no agreement between the landlord and tenant, a tenancy at sufferance does not create an obligation to pay 'rent', although a tenant at sufferance is liable to a claim for 'use and occupation'. Nor can the tenancy be assigned or subleased.[51]
[50] If the landlord later gives consent, a tenancy at will arises, and if rent is then paid and accepted, the law will generally imply a periodic lease: Australian Real Property Law (7th ed) [2.170], [2.85].
[51] Butt's Land Law (7th ed) [7.230].
Sixthly, for present purposes, the scope of the indemnity in cl 19.1.1.2 is dependent upon a proper understanding of the operation of the 'Secured Obligations' and 'Secured Moneys' in cl 19.1.1.1.

The meaning of 'Rent'

As previously noted, the term 'Rent' is defined in the 2006 lease agreement to include, by reference to 'Term', the payment of 'Rent' during the original term 'and any extension or renewal of it'. The phrase 'extension or renewal' also appears in the acknowledgement part of cl 19.1.1, and the original intention in that regard (which was not effectuated because the acknowledgement is incapable of operation) was presumably to complement or supplement the operation of the guarantee, insofar as it applied to 'Rent' as defined. The words 'extension or renewal' are not themselves defined in cl 19 or elsewhere.
Prima facie, the guarantee of the 'Secured Moneys' in relation to Rent under cl 19.1.1.1 is not confined to the Rent payable in the original term, but also applies in relation to Rent arising in any 'extension or renewal' of the original term. If the phrase 'extension or renewal' is read as a composite expression, referring to the exercise of the right to renew under cl 18 of the 2006 lease agreement, it would have no application to the 2011 lease agreement as that agreement did not arise from the operation of cl 18. If 'extension or renewal' is not a composite expression, and the word 'extension' is to be read in contradistinction to 'renewal', the reference to 'extension' in this context would still have no application. That is because the 2011 lease agreement was a fresh agreement for lease, and not merely an 'extension' of the term of the 2006 lease agreement. Similar observations apply to the guarantee in respect of other express obligations in the 2006 lease agreement which are imposed with respect to the 'Term' (as defined).[52]

The legal context

[52] See, eg, the clauses of the 2006 lease agreement referred to in [28.1], [29.1], [29.3], [29.4] above.

The general law position is well known. Under the general law, if a court of equity would decree specific performance of an agreement to lease by requiring the execution of a formal lease at law, each party could obtain against the other all the remedies which would be available to it had a proper lease had been executed, although the agreement to lease is not thereby converted into an actual lease.[53] The right of occupancy created by such an agreement may be described as an equitable estate or interest,[54] under an equitable lease[55] or an equitable tenancy.[56] Moreover, the rules of equity prevail over the common law so that in such a case[57] it is usually unnecessary to consider whether the circumstances are such that the common law, for its part, would impute or imply[58] a periodic tenancy.
[53] Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 26 ‑ 27, 38, 51, 56; Dockrill (83).
[54] Chan v Cresdon (257).
[55] Chan v Cresdon (248), (256).
[56] Moore v Dimond [1929] HCA 43; (1929) 43 CLR 105, 123 - 124.
[57] Moore (124).
[58] Chan v Cresdon (248 - 249).
Under the common law, if a party enters into occupation pursuant to an agreement to lease the premises and pays rent, a common law tenancy from year to year is brought into existence, providing that the payment of rent is referable to a yearly tenancy (as opposed to some shorter periodic tenancy, such as a weekly or monthly tenancy).[59] Such a yearly tenancy (1) terminates by effluxion of time on the date agreed to by the parties in their agreement, or earlier if the lessor gives a notice to quit, and (2) is on the terms of that agreement insofar as they are consistent with a tenancy for year to year.[60]
[59] Chan v Cresdon (248); Moore (112 - 113), (118 - 122).
[60] Chan v Cresdon (248); Moore (113).
A similar tenancy from year to year arises at common law from entering into occupation and payment of rent under an informal lease, including an unregistered instrument of lease.[61] It was the latter situation which the High Court considered in Chan v Cresdon.
[61] Chan v Cresdon (248).
In Chan v Cresdon, the parties had executed a registrable instrument of lease pursuant to an agreement for lease which was executed at or about the same time. The registrable instrument of lease was not registered.[62] The unregistered instrument of lease (and the agreement for lease) contained a guarantee of the lessee's obligations by a guarantor.[63] The guarantee relevantly provided, in effect, that 'in consideration of the [guarantor] entering into this lease', the guarantor guaranteed the performance of the lessee's obligations 'under this lease', and indemnified the lessor against damages and expenses arising from the failure by the tenant to pay any moneys arising 'under this lease' or from any breach by the tenant of the 'covenants and conditions contained or implied in the Lease'.[64] The lessee sued on the guarantee (but not the indemnity) and the essential question was whether the guarantee applied to the lessee's obligations under the unregistered lease.[65]
[62] Chan v Cresdon (243), (247 - 248).
[63] Chan v Cresdon (246).
[64] Chan v Cresdon (246).
[65] Chan v Cresdon (247).
The majority of the High Court held that the failure to register the lease did not render it void.[66] The majority also held that s 43 of the Real Property Act 1861 (Qld), which provided that, until registration, no instrument was 'effectual to pass any estate or interest' in land, was not a bar to the creation of a tenancy for a term of less than three years, and did not prevent a common law tenancy from coming into existence in accordance with the principles referred to in [67] ‑ [68] above.[67] However, the majority held that the effect of s 129(1) of the Real Property Act (Qld) was that, where conditions would previously have brought into existence a tenancy from year to year under the common law, a tenancy at will is instead brought into existence, terminable by a month's notice (expiring at any time). Such a tenancy at will, arising from entering into occupation and payment of rent, remains an implied or imputed tenancy.[68] (It may be interpolated here that the West Australian counterpart of s 43 of the Real Property Act (Qld) is s 58 of the Transfer of Land Act 1893 (WA),[69] and the West Australian counterpart of s 129(1) of the Real Property Act (Qld) is s 71 ‑ s 72 of the Property Law Act 1969 (WA)).[70]
[66] Chan v Cresdon (248).
[67] Chan v Cresdon (248 - 249).
[68] Chan v Cresdon (249).
[69] Alonso [102] - [103].
[70] See, eg, Australian Real Property Law (7th ed) [14.65].
In that context, the majority then considered the meaning of the word 'under' in the phrase 'under this lease' in the guarantee, and said:[71]
The word 'under', in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease. The obligation which arose under the common law tenancy at will does not answer this description. Nor, for that matter, would the obligation have been a covenant or condition 'contained or implied in the lease', to use the language of the indemnity.
[71] Chan v Cresdon (249).
Their Honours later considered whether the phrase 'under this lease' encompassed an equitable lease, and said:[72]
[72] Chan v Cresdon (256 - 258).
[I]f it be assumed that specific performance would be awarded in favour of the respondent, that is not enough, in our opinion, to establish liability on the part of the appellants as guarantors. What they guaranteed was the 'obligations [of the tenant] under this lease', that is, the instrument of lease in its character as a lease. In our view, only a lease at law would meet this description for the purposes of the guarantee. …
…
In any event, s 43 of the Act presents an insuperable obstacle to the [lessor's] success. …
…
[T]hough the unregistered instrument is itself ineffective to create a legal or equitable estate or interest in the land, before registration, [s 43] does not avoid contracts or render them inoperative. So an antecedent agreement will be effective, in accordance with the principles of equity, to bring into existence an equitable estate or interest in the land. But it is that antecedent agreement, evidenced by the unregistered instrument, not the instrument itself, which creates the equitable estate or interest. …
…
If we assume that the agreement for lease would have been specifically enforced in equity and that, as a result, an equitable lease for a term of five years came into existence between the [lessor and lessee], that equitable lease is a thing different from the unregistered form of lease executed by the parties. Although such an equitable lease would incorporate the terms of the unregistered lease, by virtue of s 43 it necessarily arises not from the instrument but from the agreement which lies behind it. On this score alone, it would be impossible to conclude that a liability to pay rent under the equitable lease was an obligation 'under this lease' within the meaning of [the relevant clause].

The meaning of cl 19.1.1.1 read with cl 19.1.3

The definition in cl 19.1.3 is to be read into cl 19.1.1.1, in order to construe the meaning of cl 19.1.1.1 as a whole.[73]
[73] Epic Energy [42], [150], [218]; Black Box [42(11)]; George 218 Pty Ltd v Bank of Queensland Limited [No 2] [2016] WASCA 182; (2016) 313 FLR 287 [82].
When read with the opening words of cl 19.1.3, cl 19.1.1.1 provides for the due performance by the guarantor of all the Tenant's terms, covenants, agreements and stipulations (the Secured Obligations) contained or implied (1) in 'any tenancy' of the premises, and (2) 'in [any] other rights [legal, equitable or otherwise] under which the Tenant occupies or is entitled to occupy' the premises, including a tenancy for a fixed term, a periodic tenancy, a tenancy at will, a tenancy at sufferance and (in effect) an equitable lease. The Secured Obligations are those 'including' the financial obligations for the payment of Rent under the 2006 lease agreement.
Clause 19.1.1.1, when read with cl 19.1.3, operates with respect to the Tenant's obligations under the 2006 lease agreement insofar as they fall within the definition of 'this Lease'. Yet, it may be inferred from a reading of the guarantee as a whole that the principal objective of the guarantee was to secure the performance of the Tenant's obligations under the 2006 lease agreement.
Moreover, prima facie, it would be an odd result if the guarantee were intended (objectively) to refer to the Tenant's obligations of any kind, including financial obligations to any degree, under any tenancy, occupation or rights of occupation at any point in the future whatsoever. That is particularly so given that (1) the language of cl 19.1.3 is expressed in the present tense and does not in terms refer to any tenancy whatsoever arising in the future, (2) the consideration for the guarantee is the Landlord's entry into a specific transaction, namely the 2006 lease agreement, and there is no indication that this extends to include future tenancies outside of the operation of the terms of that agreement, (3) the 2006 lease agreement has its own terms as to renewal, however, the renewals contemplated by the 2006 lease agreement spring from the exercise of existing rights under the 2006 lease agreement and the obligations thereunder are not obligations derived from future tenancies, unknown and unknowable at the date of the execution of the 2006 lease agreement, and (4) the guarantee of Rent, which is presumably one of the key obligations sought to be secured, does not apply to rent under a fresh agreement (see [65] above).
Further, it is of some significance that the guarantee is not expressed to be a 'continuing guarantee'. The words 'continuing guarantee' are frequently used to indicate that the guarantee is not limited to one transaction (in this case, the 2006 lease agreement) but may extend to a series of transactions.[74] Also, there are no express provisions (1) preserving the guarantee in the event of a variation between Landlord and Tenant - let alone in the event of a fresh agreement between Landlord and Tenant, or (2) providing for the guarantee to remain unaffected by the determination or expiration of the 2006 lease agreement or any renewals thereunder.
[74] Trade Credits Ltd v Burnes [1979] 1 NSWLR 630, 637 (overturned on other grounds: Burnes v Trade Credits Ltd [1981] 1 NSWLR 93).
For these reasons the construction of the guarantee pressed by Mr Cao is fairly open on the text of the 2011 lease agreement read in context and applying the rules of construction. On the other hand, the language is wide enough to include a tenancy in equity arising from the 2011 lease agreement. Also, in this particular case, the terms of the 2011 lease agreement are the same terms as would have applied had renewal been effectuated under cl 18 of the 2006 lease agreement, and, in that sense, the 2011 lease agreement does not build upon the obligations under the 2006 lease agreement.
Despite the matters referred to in the preceding paragraph, some real doubt about the intended scope of the guarantee arises in light of the matters referred to in [75] ‑ [77] above. That engages the principle, referred to in [54] above, that doubt should be resolved in favour of the guarantor. The better view is that the guarantee does not apply to obligations arising from fresh executory agreements for lease entered into at any time in the future. The possibility that such a future executory agreement may be made on the same terms as the 2006 lease agreement, or the fact that it transpires that the parties subsequently entered into a fresh executory agreement on those terms, do not bear upon the true meaning of cl 19.1.1.1, which is to be judged as at the date that the guarantee is given.
It is recognised that this conclusion involves a reading down of the literal wording of cl 19.1.3 in its application to cl 19.1.1.1. However, it may be inferred that the extensive language of cl 19.1.3 was adopted out of an 'abundance of caution'[75] to ensure that (unlike in Chan v Cresdon) the guarantee applied to the Tenant's obligations under any tenancy in equity or implied by law consequent upon the execution of the 2006 lease agreement or the Tenant's occupation of the Leased Premises pursuant to the 2006 lease agreement. In other words, the objective purpose and effect of cl 19.1.3 is to ensure that, if there is an imperfection in the 2006 lease agreement as a legal instrument, the guarantee in cl 19.1.1.1 nevertheless encompasses the Tenant's occupancy, whatever its legal or equitable foundation and character, consequent upon the execution of the 2006 lease agreement or the Tenant's occupation of the Leased Premises pursuant to the 2006 lease agreement. In our view, on its proper construction, cl 19.1.1.1 read with cl 19.1.3, operates and applies, relevantly for present purposes, during the term of the 2006 lease agreement; it does not encompass a subsequent occupation, after the expiry of the 2006 lease agreement, pursuant to a separate agreement for lease. Also, it is notorious that, generally speaking, options are to be exercised punctiliously.[76] One would expect more explicit wording if the intent were to guarantee obligations under a fresh executory agreement which resulted from the acceptance of a counter‑offer made in a purported, but ineffectual, attempt to renew under cl 18.
[75] Compare XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215 [72].
[76] Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122, 123; Duncan Properties Pty Ltd v Hunter [1991] 1 Qd R 101, 103.
The decision of Edelman J in Alonso does not point to a different conclusion. In that case, the question, insofar as is relevant for present purposes, was whether the guarantee applied to an equitable lease arising from an unregistered lease. Edelman J held that it did, as the guarantee provided, effectively in terms, that it did apply to an equitable lease.[77] No question arose in that case as to whether the guarantee also applied to future leases or tenancies or future rights of occupation. Also in that case, the guarantee applied to 'all Money' (a term which was itself broadly defined) and was expressed to be a 'continuing guarantee'.[78] The guarantee in this case, however, is not expressly an 'all moneys' guarantee, nor a 'continuing guarantee'.
[77] Alonso [106], [111] - [115].
[78] Alonso [108], [113].
For these reasons, Davis DCJ erred, with respect, in her findings as to the construction and operation of cl 19.1.1.1. The result is that the guarantee did not apply to Ms Chen's obligations under the 2011 lease agreement.
The effect of this conclusion is that ground 4 of the appeal succeeds. It is unnecessary to consider other grounds which effectively attack, in other ways, Davis DCJ's finding that Mr Cao is liable under the guarantee in respect of the 2011 lease agreement (ie, grounds 2, 3, 5 and 7).
Grounds 1 and 6 nevertheless remain to be considered insofar as they attack the finding of liability for $687.50 under the 2006 lease agreement, on the basis that Wager DCJ should have found that Mr Mondello knew of the operation of the premises as a brothel when the 2006 lease agreement was entered into.

Mr Mondello's knowledge as at the date of the 2006 lease agreement

Mr Cao's submissions

Mr Cao's submissions on ground 1, insofar as they relate to Mr Mondello's knowledge upon entering into the 2006 lease agreement, were to the following effect:
1.Mr Cao's evidence was that the property was used as a brothel for at least 12 years (from 2000 until around 2013).[79]
2.Mr Mondello had daily management of the property, which included inspecting the property, arranging maintenance and repairs and collecting rent.[80]
3.Mr Mondello personally attended the leased premises on an almost monthly basis for at least 11 years (from at least 2000 until around 2012 or 2013) and he would either go to the reception area or directly to the office staff room to collect the rent.[81]
4.Mr Mondello and Mr Cao developed a friendship and socialised together with their wives.[82]
5.Mr Mondello oversaw the relocation of the kitchen from the front of the premises to another area in late 2000 or early 2001, and back to its original location in 2005 or 2006.[83]
6.Mr Mondello acknowledged in evidence, in relation to the period prior to 2006, '[o]bviously I saw the beds inside and I saw couples sleeping inside those rooms. That's where I actually should have taken more care'.[84]

Disposition

[79] Transcript of hearing, pages 38, 41.

[80] Mr Cao referred to preliminary issues decision [11], [82], [114].

[81] Mr Cao referred to preliminary issues decision [82], [114], [127].

[82] Mr Cao referred to primary decision [35].

[83] Mr Cao referred to preliminary issues decision [86] and [16] ‑ [17].

[84] Mr Cao referred to preliminary issues decision [85].

The essential task before Wager DCJ was to determine whether Mr Mondello knew that the premises were being used as a brothel (1) at the time of entering into the 2006 lease agreement, and (2) at the time of the (alleged) entering into of the 2011 lease agreement. Perhaps, on one view of it, her Honour did not squarely address the second issue in that way, but it is of no moment for present purposes. For the reasons given above, it is only her Honour's consideration of the position prior to the execution of the 2006 lease agreement which falls for consideration under grounds 1 and 6.
With respect, at least one aspect of Wager DCJ's reasons is not immediately easy to follow, namely, her Honour's observation that Mr Mondello 'may have been wilfully blind to activities' in the premises in the period prior to 2006.[85] A possible implication of this observation is that, had Mr Mondello been wilfully blind to the operation of the premises as a brothel, this would not bear upon the question of his knowledge. If that is the implication, it is incorrect, as wilful blindness to a fact is commonly relevant to drawing an inference of knowledge of that fact.[86]
[85] Preliminary issues decision [88].
[86] Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 82 ALR 217, 219 ‑ 220; The English and Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700, 707 ‑ 708; Owen & Gutch v Homan (1853) 4 HL Cas 997, 1034 ‑ 1035.
Nevertheless, that observation is to be read in the context of her Honour's reasons as a whole. Her Honour did not make a positive finding of wilful blindness. Rather her Honour seems to have made the observation in the context of (1) an acceptance of Mr Mondello's evidence to the effect that, insofar as the rooms at the premises were used for sleeping, Mr Mondello understood that to have occurred as a result of the family of Ms Chen and Mr Cao staying at the premises when they visited from Sydney, and (2) a finding that Mr Cao and Ms Chen had not led evidence as to the identity or length of the stay of the people staying at the premises.[87]
[87] Preliminary issues decision [85] - [88].
Further, in relation to Mr Mondello's knowledge, the unchallenged findings of Wager DCJ include the following matters:
1.The only witnesses for the defence who gave evidence potentially relevant to the period up to July 2006 were Mr Cao, Ms LH Zhang and Mr Basley.[88]
2.Mr Cao was a witness of limited credibility, whose evidence on the topic of Mr Mondello's alleged use of sexual services and on the topic of the conversations with Mr Mondello prior to 2006, could not be accepted.[89]
3.Ms LH Zhang was unclear about the dates the subject of her evidence, her evidence was vague in nature, and she was of no assistance in determining whether Mr Mondello knew that the business was a brothel before 2006.[90]
4.Mr Basley's evidence was inconsistent on the question of whether Mr Mondello knew of the brothel prior to 2006.[91]
[88] Preliminary issues decision [55].
[89] Preliminary issues decision [64] - [66].
[90] Preliminary issues decision [74].
[91] Preliminary issues decision [80].

Her Honour summarised her review of the evidence relating to the period prior to 2006 as follows:[92]
Accordingly, the only evidence specifically in relation to the operation of the business prior to 2006 is the evidence of Mr Cao. Given the very limited weight I give to Mr Cao's evidence, I do not accept that Mr Mondello knew that the business was operating as a brothel at the time when the lease was signed in 2006.
[92] Preliminary issues decision [92].
It follows that Wager DCJ's findings to the effect that Mr Cao had not proved the requisite knowledge on the part of Mr Mondello were, to a substantial degree, based on her Honour's assessment of the credibility of Mr Cao as a witness and the reliability of other witnesses called by Mr Cao. Appellate interference is not permissible unless the finding is shown to be glaringly improbable, contrary to compelling inferences or inconsistent with incontrovertible facts.[93] A finding by a judge as to the state of mind of a witness is moreover particularly difficult to disturb on appeal.[94]
[93] Smart v Power [2019] WASCA 106 [104] and the cases there cited; Joyce v Anderson [2020] WASCA 48 [205] ‑ [208].
[94] Nocton v Lord Ashburton [1914] AC 932, 957; Clark Boyce v Mouat [1994] 1 AC 428, 436 ‑ 437; J D Heydon, Cross On Evidence (11th ed) [11150].
The matters relevant to the period prior to the 2006 lease agreement (referred to by Mr Cao and summarised in [85.1] ‑ [85.6] above) do not individually or collectively meet those criteria. The matters in [85.1] ‑ [85.5] above may well raise a suspicion of knowledge, but are insufficient for this court to draw a positive inference of fact contrary to the trial judge's finding. The matter raised in [85.6] relates to the matters discussed in [87] ‑ [88] above. Her Honour evidently did not treat that evidence as, in effect, a clear admission by Mr Mondello that he wilfully turned a blind eye to the activities at the premises. Nor is this court in a position to regard this aspect of Mr Mondello's evidence as an unequivocal admission of 'overwhelming persuasiveness'.[95]
[95] Compare Voulis v Kozary [1975] HCA 44; (1975) 180 CLR 177, 193.
Accordingly, ground 1 and ground 6 (which depends upon ground 1) should be dismissed. The judgment of Davis DCJ, insofar as it relates to the sum of $687.50, should not be disturbed.

Conclusion

Mr Cao has sought, relevantly, orders to the effect that:[96]
1.The judgment against Mr Cao in the sum of $294,372.73 plus interest be set aside.
2.Each party pay their own costs.
[96] WB 18.
The result of the appeal is that order 1 of Davis DCJ orders dated 26 October 2018 should be amended insofar as it applies to the second defendant to refer to the sum of $687.50.
Further, order 3 should be amended so that the interest payable by Mr Cao is calculated by reference to the sum of $687.50 (and not $294,372.73). Using the same number of days for calculating interest up to the date of Davis DCJ's orders as her Honour used, interest would be in the sum of $233.75.[97]
[97] 18% per annum - $0.34 per day multiplied by 1874 days.
Save to the extent referred to in [94] above, Mr Cao in his 'orders wanted' does not seek to disturb the orders of Davis DCJ.
Accordingly, subject to hearing from the parties, the following orders should be made:
1.The appeal is allowed in part.
2.Orders 1 and 3 of Davis DCJ dated 26 October 2018 are set aside and substituted with the following orders:
(1)(a) the first defendant pay the plaintiff the sum of $294,372.73;
(b)the second defendant pay the plaintiff the sum of $687.50.
(3)(a) the first defendant pay interest at the rate of 18% per annum on the amounts and from the dates in the schedule being a total of $179,609.04;
(b)the second defendant pay interest on the amount in order (1)(b) in the sum of $233.75.
3There is no order as to costs.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DM
Associate to the Honourable Justice Murphy
28 MAY 2020