Commonwealth Bank of Australia v Carotino
[2011] SASCFC 110
•14 October 2011
Supreme Court of South Australia
(Full Court)
COMMONWEALTH BANK OF AUSTRALIA v CAROTINO
[2011] SASCFC 110
Judgment of The Full Court
(The Honourable Chief Justice Doyle, The Honourable Justice David and The Honourable Justice Peek)
14 October 2011
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - FORMATION OF CONTRACTUAL RELATIONS - GENERAL OFFERS AND THEIR ACCEPTANCE
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - FORMATION OF CONTRACTUAL RELATIONS - AGREEMENTS CONTEMPLATING EXECUTION OF FORMAL DOCUMENT
Two fuel companies had loan facilities with the plaintiff bank which required the plaintiff's consent to the defendant becoming a majority shareholder of the companies - the parties signed a letter wherein the plaintiff gave its consent to the share transfer and the defendant gave an undertaking to execute a "Shareholders Guarantee, in a standard form to be provided by the bank within 7 days of receipt" in favour of the plaintiff - no such formal guarantee was ever executed - the fuel companies now in voluntary administration - whether parties intended to enter an immediately binding contract of guarantee constituted by the letter itself - whether the terms of such a contract would have been sufficiently certain.
Held: the parties did not intend to enter an immediately binding contract of guarantee.
Held: any obligation by the respondent to be bound by a guarantee was conditional upon the proposed guarantee being first provided to it by the appellant
Held: the primary purpose of the letter was to manifest the appellant’s consent to the share transaction - the letter specifically referred to the later execution of a formal contract of guarantee - the trial judge correctly concluded that there was no "Shareholders Guarantee, in a standard form" in existence but rather that the bank used a template from which terms appropriate to particular transacations would be selected.
Held: it was in the circumstances unnecessary to consider Ground 9 of appeal concerning the trial judge's alternative finding that even if the parties had intended that the letter was to constitute an immediately binding guarantee such a contract would be void for uncertainty.
Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106; Stirnemann v Kaza Investments Pty Ltd [2011] SASCFC 77, applied.
Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502, distinguished.
Australian European Finance Corporation Ltd v Sheahan (1993) 60 SASR 187; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; Gate Gourmet Australia Pty Limited (In Liq) v Gate Gourmet Holding AG [2004] NSWSC; Niesmann v Collingridge (1921) 29 CLR 177; Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2009] NSWCA 386, discussed.
Kleinwort Benson Ltd v Malaysia Mining Corporation [1989] 1 WLR 379; Commonwealth Bank of Australia v TLI Management [1990] VLR 510; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, considered.
COMMONWEALTH BANK OF AUSTRALIA v CAROTINO
[2011] SASCFC 110Full Court: Doyle CJ, David and Peek JJ
DOYLE CJ: I would dismiss the appeal. I agree with the reasons given by Peek J. There is nothing that I wish to add.
DAVID J: I would dismiss the appeal. I agree with the reasons of Peek J
PEEK J: This is an appeal against a decision to dismiss a claim on what is contended to be a guarantee.
Introduction
In 2007, the respondent Carotino (Australia) Pty Ltd (Carotino) acquired a majority interest in Australian Farmers Fuel Pty Ltd, the holding company of both AF Fuels Pty Ltd and South Australian Farmers Fuel Pty Ltd (the latter two being together the SAFF Companies). The equitable mortgage deeds signed by the SAFF Companies in favour of the appellant, Commonwealth Bank of Australia (CBA) contained a provision whereby a purchase of more than 50 per cent of the shares in the ultimate ownership of either of the SAFF Companies without the prior consent of the bank rendered the secured monies previously advanced by the bank payable, without demand or notice, at the option of CBA.
CBA agreed to the change in ownership, but required Carotino to agree to guarantee the debts of the SAFF Companies. On 4 May 2007, a letter was prepared by CBA and signed by the directors of Carotino, confirming CBA’s consent to the change in ownership. In the same letter, Carotino undertook to execute a “Shareholders Guarantee, in a standard form to be provided by the bank within 7 days of receipt”. No such formal guarantee was subsequently provided by CBA or executed.
CBA claimed to be entitled to the sum of $4,770,982.60, being the amount outstanding as at 22 May 2009 under banking facilities provided to the SAFF Companies which by then were in voluntary administration. CBA sought at trial to enforce the letter as an immediately effective contract of guarantee in its own right. It claimed in the alternative that Carotino was prevented by an estoppel from denying that the letter of 4 May 2007 constituted an immediately effective guarantee.
The trial Judge dismissed CBA’s claim. Her Honour held that the parties did not have an intention to be immediately bound by a contract of guarantee constituted by the 4 May 2007 letter. In relation to the estoppel claim, her Honour held that although CBA had made an assumption that there was a contract of guarantee in existence, it was not based on the letter of 4 May 2007, nor induced by actions of Carotino.
CBA now appeals against her Honour’s dismissal of the primary claim but does not appeal in relation to the estoppel claim. For the reasons that follow I would dismiss the appeal.
The factual background
As at early 2007, Australian Farmers Fuel Pty Ltd (Australian Farmers Fuel), was the holding company of AF Fuels Pty Ltd and South Australian Farmers Fuel Pty Ltd, which latter two companies will be referred to as “the SAFF Companies”. Silver City Petroleum Pty Ltd was a subsidiary of Australian Farmers Fuel.
The Australian Farmers Fuel group was based in Adelaide. The principal business of the group was the distribution and wholesaling of bio-fuels and lubricants. Mr Andrew Fischer, who was a director of both the SAFF Companies and Australian Farmers Fuel, had effective control of the group.
The relationship between CBA and the SAFF Companies
In early February 2006, the SAFF Companies obtained receivables finance facilities from CBA with a limit of $8,500,000.00. In simple terms, the SAFF Companies borrowed money against their accounts receivable and were in effect “factoring” their accounts. Those facilities were secured by unlimited guarantees given by Australian Farmers Fuel and Silver City Petroleum Pty Ltd as well as a limited guarantee given by Mr Fischer personally. The SAFF Companies also entered into Deeds of Subordination with CBA. The Receivables Finance Agreement, the guarantees and the Deeds of Subordination were all entered into on 3 February 2006.
On 22 February 2006, equitable mortgages were executed by the SAFF Companies in favour of CBA, for all moneys owed to CBA by the respective companies. A clause in both mortgages had the effect that in the event of a change in ultimate ownership of the SAFF Companies without the consent of CBA, the secured monies, at the option of CBA, would become immediately payable without demand or notice. Relevantly, the clause was as follows:
9.1 Events giving Mortgagee Right to Immediate Payment
The secured moneys shall at the option of the Mortgagee and notwithstanding any delay or previous waiver of the right to exercise such option immediately become payable without any demand or notice in each or any of the following events:-
…
(m) If any person (which expression shall include collectively two or more related bodies corporate as defined in the Corporations Act and their nominees) who is not at the date hereof entitled to more than fifty per centum of the voting power in the Mortgagor shall, without the consent in writing of the Mortgagee, directly or through a nominee, become so entitled.
CBA increased the receivables facilities’ limits to $9,500,000.00 by accepted letters of offer on 6 September 2006 and confirmed the permanency of those increases by accepted letters of offer on 14 March 2007.
Mr Giovanni Migheli (Migheli), who was based in Sydney, was the “Relationship Manager” at CBA in charge of the dealings between CBA and the SAFF Companies. He was responsible for the various letters of offer referred to above.
Carotino (Australia) Pty Ltd (the respondent)
Carotino was involved in the production of crude palm oil, which is an additive to bio-diesel. Carotino’s two parent companies were PharmaCare Laboratories Pty Ltd (PharmaCare) (49.2 per cent) and Carotino SDN BHD (Carotino Malaysia) (50.8 per cent). Carotino Malaysia’s business background was in the cultivation and manufacture of palm oil. Crude palm oil is an additive to diesel in the production of bio-diesel and it was this connection with the production of bio-diesel that led to the possibility of synergies common to Carotino and the Australian Farmers Fuel group. Mr Michael Halter (Halter) was Group Operations Manager of PharmaCare and a director of Carotino.
The agreement between the SAFF Companies and Carotino
In early 2007, Mr Andrew Fischer (Fischer), who held all of the shares in Australian Farmers Fuel and controlled the group, had discussions with Mr Rex Wallace (Wallace), who was a General Manager of the Australian Farmers Fuel group, about obtaining a new equity partner for Australian Farmers Fuel for the purposes of an injection of capital to permit expansion of their business. This led to negotiations in March 2007 with Carotino as a potential candidate.
Wallace and Fischer met with Mr Les Galbraith (Galbraith), who was Carotino’s representative in the environmentally friendly fuels division. He reported to Carotino, even though he was not formally employed by the company. He became the conduit between Carotino and the Australian Farmers Fuel group.
As a result of the negotiations between the Australian Farmers Fuel group and Carotino, a memorandum of understanding setting out the terms of the purchase by Carotino of 51 per cent of the shares in Australian Farmers Fuel was entered into on 30 March 2007.
The obtaining of CBA’s consent to the transaction
In the period from about late April 2007 to 4 May 2007, Fischer and Wallace had various discussions with Migheli regarding CBA’s consent to the proposed change in the ultimate ownership of AF Fuels.
Migheli gave evidence that he made known to Fischer and Wallace “from the outset” that if someone was going to purchase 51 per cent of Australian Farmers Fuel then CBA would require a guarantee from that person over debts held by the SAFF Companies.
However, the evidence as to what discussions took place, and what agreement was come to, between the respective companies concerning Carotino giving a guarantee is remarkably sparse.
Wallace gave evidence that he was involved in discussions with Carotino regarding its willingness to give a guarantee and that he discussed this at some stage with Galbraith. On 30 April 2007, Wallace sent an email to Migheli at CBA stating “Carotino (Australia) has agreed in principle to a company guarantee if absolutely necessary to enable the transaction to proceed”. Wallace gave evidence that the source of the information in that email would most likely have been Galbraith.
This was an important communication in that it demonstrated that both sides, CBA and Carotino, were aware that Carotino’s acquiescence in the request for a guarantee was a reluctant one and indeed couched in the significant words “in principle.”[1] That phraseology sits well with the evidence that Halter gave at trial and which was accepted by her Honour. Her Honour outlined his evidence thus:[2]
[73] Mr Halter was the only witness called by Carotino. He was one of the directors of Carotino and after 7 May 2007 when Carotino acquired majority shareholding of the SAFF Companies he, together with Mr Fischer and Mr Brown became the directors of the SAFF Companies. Mr Halter said that he would not have purchased the shares in the SAFF Companies if CBA had not first provided its consent.
[74] Mr Halter was also the Group Operations Manager of PharmaCare Laboratories Pty Ltd which owned 49 per cent of the shares in Carotino. As the Operations Manager of Carotino in Australia he appointed Mr Galbraith, an employee of PharmaCare, as the conduit between Carotino and the SAFF group of companies. After Carotino acquired its shareholding Mr Wallace continued to report to Mr Fischer in Adelaide but also on occasion to Mr Galbraith. As Mr Galbraith was based in Sydney the reporting relationship between Mr Wallace and Mr Fischer remained essentially unchanged, however Mr Halter made it clear that the responsibility on the dotted line was ultimately through Mr Galbraith in the Sydney office.
[75] Mr Halter himself did not have any day to day contact with Mr Wallace. Mr Halter said he had never heard of Mr Migheli prior to the commencement of these proceedings, nor did he have any dealings with any other employee of CBA either in Adelaide or in Sydney about this matter. He was never privy to any internal CBA reviews conducted by CBA in relation to the finance facilities offered by them to the SAFF group of companies. In short he had no contact with anyone from CBA prior to the acquisition of a majority shareholding in the SAFF group.
[76] Mr Halter said he signed the letter of 4 May 2007 and expected that in due course he would receive a guarantee document from CBA. He said his usual practice with regard to legal documentation was to share that with the financial controller of Carotino, with their lawyers and with the managing director of Carotino at that time, Mr Toby Browne. No document was ever received from CBA and as he is a busy man he did not turn his mind at any stage as to why the bank had not produced the guarantee for execution.
[77] Mr Halter was cross-examined about his reasons for signing the letter of 4 May 2007. He explained that he knew the letter of 4 May 2007 was an important document. He understood that the bank’s consent was given in that letter and that Carotino had given an undertaking to execute a guarantee to be produced by the bank. He went on to say that had such a document been produced, Carotino would have reviewed that document and if suitable it would have been signed. One of the matters he expected to have some discussion about when he sighted the formal guarantee document was the extent of Carotino’s liability under the guarantee, for example whether it was to have been limited to 51 per cent equivalent to its shareholding and how it engaged Mr Fischer and his companies in relation to the 49 per cent equivalent to their shareholding. This was a matter he expected to have some discussion about. At no time did any person in the bank ever suggest to him that the letter of 4 May 2007 operated as an immediately effective guarantee from Carotino.
[1] There was another email dated 30 April 2007 sent by Wallace to a solicitor at Kelly & Co, then solicitors for Australian Farmers Fuel, in which Wallace stated that he had had a discussion with Halter who had indicated that Carotino would “execute a company guarantee for CBA for the debt facility in order to allow the deal to complete”. Wallace said that he could not specifically remember the conversation with Halter but that he would not have sent such an email to the company solicitors unless he had had such a conversation. Quite apart from its fragile nature as to exactly what was said and in what terms, that email has little significance in relation to the present issue because it was an internal email unknown to the CBA at the relevant time.
[2] Commonwealth Bank of Australia v Carotino (Australia) Pty Ltd [2011] SASC 42.
Her Honour found Halter to be a truthful witness and accepted his evidence. Her Honour stated:[3]
[79] …In the circumstances I see no reason to disbelieve Mr Halter’s evidence that he never received a guarantee. His evidence although brief was quite straight-forward and I have no difficulty in accepting him as a truthful witness.
…
[116] There was no evidence produced of any resolution or minute by the Carotino directors where the issue of the guarantee was discussed. There appears to be no evidence at all of any discussion either within Carotino or between Carotino and CBA about the terms of the guarantee which had been agreed “in principle”. In my view the evidence supports Mr Halter’s expectation that he intended in due course to see a document in respect of which he would obtain advice from his solicitors before executing. Moreover in light of the fact that CBA already held a number of existing securities including guarantees from Mr Fischer and his associated companies to support the receivables facility, I do not consider Mr Halter’s evidence that he expected there would be some negotiations about the precise extent of Carotino’s liability under the guarantee before it was asked to execute the formal guarantee, to be at all unrealistic. It is significant that the guarantee given by Mr Fischer, the previous ultimate owner and later 49 per cent shareholder of the SAFF companies, was limited. In those circumstances I do not accept that it is so plainly obvious that the incoming shareholder’s liability would necessarily need to be unlimited.
[3] Ibid.
The events leading up to the 4 May 2007 letter
Over 3 and 4 May 2007, Migheli prepared an internal CBA document for his superiors in connection with the proposed transaction entitled “Application Report” in which he wrote (on 3 May 2007):
A change in security is sought by way of adding a Guarantee from Carotino Australia Pty Ltd. At first they did not want to supply but have agreed after we insisted.[4]
[4] Again, this is an internal message within CBA and is from a then employee no doubt eager to impress his superiors as to his diligence in negotiations.
In a later section of the application Migheli wrote:
“CONDITIONS PRIOR TO FUNDING”:
A letter of undertaking is to be signed acknowledging that clients will execute the banks security documentation including a new Unlimited Guarantee from Carotino Australia Pty Ltd.
Migheli included a “Security Summary” being a computer maintained document which records the status of all security held by CBA in relation to various facilities. In relation to the SAFF Companies’ receivables finance facilities, the document records one of the security items as “G/U by Carotino Australia Pty Ltd”. Migheli agreed in evidence that this entry was made in expectation of the guarantee being given in the future and that he inserted it even though he had had no direct contact with any person from Carotino about the guarantee.
The events of 4 May 2007
At about 6:00am on the morning of 4 May 2007, there was an exchange of emails between Migheli and Fischer. In the first email from Fischer, he made it clear that he required Migheli’s “URGENT attention” with regard to the issue of CBA’s consent to the transaction; he explained that everything else had been in place for the merger since 1 May and that he did not want his new partners getting nervous. Migheli sent two emails in response, the first giving reassurance that he was working to obtain consent and the second indicating that CBA had all of the information required to complete the request. At the hearing when asked why he was working at the bank at 6:00am Migheli said:
There was quite a lot happening with this connection and there was a lot of pressure to get all the information out so they [the Australian Famers Fuel group] wouldn’t lose this opportunity.
Both parties accept that on 4 May 2007 CBA received a copy of the share sale and subscription agreement which Fischer, Carotino and Australian Farmers Fuel proposed to sign subject to receiving the consent of CBA.
The 4 May 2007 letter
On 4 May 2007 the bank’s consent to the proposed transfer of shares was given in a letter sent to Kelly & Co, then the solicitors for AF Fuels Pty Ltd and SA Farmers Pty Ltd. The letter was prepared by CBA with provision for Carotino to sign the letter and return it to the bank. The critical words were as follows:
Carotino (Australia) Pty Ltd undertakes to execute and return a Shareholders Guarantee, in a standard form to be provided by the bank within 7 days of receipt …
The 4 May 2007 letter appeared in full as follows:
Both parties agree that there was some urgency in the creation and sending of the letter of 4 May 2007 by facsimile. From the point of view of Fischer, it was obviously urgent to ensure that the share sale went ahead as planned. Migheli stated that it was due to this sense of urgency that the letter of undertaking was forwarded rather than a formal guarantee actually being executed.
Was Carotino ever presented with a formal guarantee for signing?
It is clear that as at 4 May 2007, no formal guarantee had been prepared by CBA for execution by Carotino. CBA did send Carotino a guarantee for execution in December 2009, but by then the relevant companies were already in liquidation and CBA now places no reliance on that proffer.
Her Honour considered the evidence in considerable detail and found that it could not be established that Carotino had received a guarantee for execution from CBA prior to December 2009. There is no ground of appeal complaining of these factual findings and senior counsel confirmed on the hearing of the appeal that no issue was taken in that regard. I therefore consider it is sufficient simply to refer to her Honour’s salient findings:[5]
[79] In the circumstances I see no reason to disbelieve Mr Halter’s evidence that he never received a guarantee. His evidence although brief was quite straight-forward and I have no difficulty in accepting him as a truthful witness.
…
[85] I am satisfied that Carotino did not receive a guarantee for execution from CBA until December 2009.
[5] Commonwealth Bank of Australia v Carotino (Australia) Pty Ltd [2011] SASC 42.
This somewhat embarrassing omission may be partly explained by the fact that Migheli ceased employment with CBA, it would seem at short notice, in late September or early October 2007. There was no formal handover process by which he gave any other person in the bank instructions in relation to the matter of the guarantee and her Honour found that there was no follow up on this matter after his departure. It would appear that bank staff may have acted on the assumption that a formal guarantee had been executed and lodged with the security packet as appeared from the computer entry “G/U by Carotino Australia Pty Ltd” that had been wrongly made by Migheli in the circumstances recounted above. In November 2007, the SAFF company file was transferred from Sydney to CBA’s office in Adelaide, but as her Honour found, the Adelaide staff assumed that the guarantee documents were in the bank’s security packet which remained either in Melbourne or Sydney.
CBA’s case at trial
It is clear from both the pleadings and the transcript of the trial that the plaintiff’s case at trial had two aspects, with a belated attempt to add a third.
The first and major aspect was that the 4 May 2007 letter constituted per se an effective guarantee. I will return to this aspect after outlining the second and third aspects.
The second aspect was that Carotino was prevented by operation of the doctrine of estoppel from denying that the 4 May 2007 letter constituted an effective guarantee. Her Honour found against the plaintiff on this aspect. It is important to note that there was no ground of appeal complaining of this decision.
There was an attempt at trial to add a third aspect by a very late application to amend the pleadings so as to plead an alternative claim which her Honour summarised thus:[6]
[6] Ibid.
[158]On 2 November 2010 counsel for CBA made an oral application to amend the statement of claim. Specifically CBA sought to amend paragraph 9 of the statement of claim by adding a further sub‑clause 3 to paragraph 9 as follows:
9.In the premises, and by reason of the matters pleaded in paragraphs [6], [7] and [8] above, the Plaintiff and the Defendant made a contract in writing, by which the Defendant agreed:
…
9.3 …in the alternative to paragraphs 9.1 and 9.2 above, to execute, within 7 days of receipt of same from the Plaintiff, a contract of guarantee for the amount of the Receivables Facility ($9,500,000) in a standard form used by the Plaintiff for shareholder’s guarantees.
[159]An additional amendment to part 2 of the statement of claim was also sought by amending paragraph 2 of part 2 to seek the following remedy:
or, in the alternative, an order that, within 7 days of the date of this Order, the Defendant do execute a contract of guarantee for the amount of the Receivables Facility ($9,500,000) in the standard form used by the Plaintiff for shareholder’s guarantees as at May 2007, with such guarantee not containing the Plaintiff’s standard clause 24 concerning “negative pledges”.
[160]The amendment was sought at the eleventh hour on the fourth day of the trial. The trial had previously been adjourned from 28 May 2010 at the request of CBA and recommenced on 1 November 2010. Carotino opposed the application.
(Emphasis added)
Her Honour considered this application in detail at [158] to [175] of her reasons and declined to allow the amendment. Again, it is important to note that there was no ground of appeal complaining of this decision. Accordingly, it is only the first aspect of the claim that is the subject of this appeal.
CBA’s contention that the 4 May 2007 letter constituted a guarantee per se
It was CBA’s contention that the 4 May 2007 letter constituted per se an effective guarantee, the terms of which were to be taken to be the terms of “the plaintiff’s standard form shareholder guarantee”. In the amended statement of claim, CBA pleaded at paragraphs 6 and 7 the content of the 4 May 2007 letter and that the defendant signed it. Paragraphs 8 and 9 then appeared as follows:
8.As at 4 May 2007, it was a term of the Plaintiff’s standard form shareholders guarantee that:
8.1 the guarantor guaranteed that the debtor would pay all moneys then or in the future owing or payable by the debtor to the Plaintiff;
8.2 the guarantor would, on demand by the Plaintiff, pay to the Plaintiff:
(a)all moneys then or in the future owing or payable by the debtor to the Plaintiff;
(b)all costs, charges and expenses (including legal costs) which the Plaintiff incurred in connection with the guarantee; and
(c)compound interest on those amounts, at a rate agreed in writing or the prevalent rate charged by the Plaintiff from time to time to its other customers on similar accounts.
9.In the premises, and by reason of the matters pleaded in paragraphs [6], [7] and [8] above, the Plaintiff and the Defendant made a contract in writing, by which the Defendant agreed:
9.1 to guarantee, in accordance with the terms of the Plaintiff’s standard form shareholder guarantee, that AF Fuels and/or South Australian Farmers Fuel would pay the Plaintiff all moneys owing under the Receivables Agreement; and
9.2 to pay to the Plaintiff, on demand by the Plaintiff:
(a)all moneys then or in the future owing or payable by AF Fuels and/or South Australian Farmers Fuel under the Receivables Facility to the Plaintiff;
(b)all costs, charges and expenses (including legal costs) which the Plaintiff incurred in connection with the contract (including but not limited to its enforcement); and
(c)compound interest on those amounts, at the prevalent rate charged by the Plaintiff from time to time to its other customers on similar accounts.
It was CBA’s case that the 4 May 2007 letter constituted per se an effective guarantee is further confirmed by the recitation of the remedies sought as follows:
1. Judgment against the Defendant for the sum of:
1.1 $4,770,982.60, together with compound interest thereon since 22 May 2009; and
1.2 all costs, charges and expenses (including legal costs on a full indemnity basis) which the Plaintiff has incurred in connection with the contract pleaded in paragraph 9 above; and
1.3 compound interest payable on those sums referred to in paragraph 1.2 above.
2.If and to the extent that the Court directs that issues of liability be heard and determined before issues of quantum, then the Plaintiff seeks a declaration that the facsimile pleaded at paragraph 6 [the 4 May 2007 letter] constitutes an enforceable contract of guarantee by the Defendant in favour of the Plaintiff as alleged in paragraph 9.
It can thus be seen that the plaintiff itself recognised that its case stood or fell on its ability to prove that the 4 May 2007 letter in fact amounted to the entry into a contract in the terms of “the Plaintiff’s standard form shareholder guarantee”.
The trial Judge’s reasons for judgment
Her Honour’s judgment is effectively in four parts.
In the first part, her Honour found that the parties did not intend to be immediately bound by a guarantee and did so having regard to the cumulative effect of a number of considerations.[7] Those considerations in short form were:
·First, an examination of the plain wording of the letter itself;
·Second, the letter’s failure to refer to several important matters concerning the terms of the guarantee alleged to be constituted by it;[8]
·Third, the fact that the parties did not subsequently treat the letter as an immediately binding guarantee;[9] and
·Fourth, the evidence did not establish that there was only one document in common usage within CBA at the relevant time which could be described as “a Shareholders Guarantee, in a standard form”.[10]
[7] Ibid [108].
[8] Ibid [113]-[117].
[9] Ibid [118].
[10] Ibid [119]-[123].
In the second part, her Honour found that if, contrary to her first finding, the letter did evidence an intention to be immediately bound by a contract of guarantee, the failure of the letter to state whether the guarantee was limited or unlimited rendered “the contract” so uncertain as to be unenforceable.[11]
[11] Ibid [124]-[129].
In the third part, her Honour found that the plaintiff’s alternative case that the defendant was prevented by an estoppel from denying that the letter of 4 May 2007 constituted an immediately effective guarantee failed.[12] As stated above, since there is no appeal against this finding, there is no need to examine her Honour’s reasons.
[12] Ibid [133]-[157].
In the fourth part, her Honour dealt with the very late application by the plaintiff to amend the pleadings which has already been referred to above. Again, there is no ground of appeal complaining of this aspect of her decision. Accordingly, it is only the first part of the claim that is the subject of this appeal.
The grounds of appeal
The grounds of appeal refer only to what I have termed the first and second parts of her Honour’s judgment and are as follows:
1.The learned trial judge erred in holding that the facsimile dated 4 May 2007 executed by the parties (“the 4 May 2007” letter) did not evince an intention by the parties that the respondent would be immediately bound by a contract of guarantee to the appellant, the terms of which were contained in the appellant’s standard form.
2.The learned trial judge erred in finding that the parties did not intend on 4 May 2007 that the respondent would be immediately bound by a contract of guarantee.
3.The learned trial judge erred in holding that the parties did not intend to conclude an immediately binding contract of guarantee on 4 May 2007 because the plain wording of the letter itself, when read in the light of the circumstances in which it came into existence, indicates that lack of intention.
4.The learned trial judge erred in holding that the parties did not intend to conclude an immediately binding contract of guarantee on 4 May 2007 because the letter was silent about whether the guarantee was to be limited or unlimited.
5.The learned trial judge erred in holding that the parties did not intend to conclude an immediately binding contract of guarantee on 4 May 2007 because the letter was silent about whether the guarantee was to be supported or unsupported.
6.The learned trial judge erred in holding that the parties did not intend to conclude an immediately binding contract of guarantee on 4 May 2007 because nobody in the appellant appears to have ever treated the 4 May 2007 letter as an immediately binding guarantee.
7.The learned trial judge erred in holding that the parties did not intend to conclude an immediately binding contract of guarantee on 4 May 2007 [because] there was not one document in common usage within the appellant which could be described as a “Shareholders Guarantee, in a standard form”.
8.The learned trial judge erred in holding that, as at 4 May 2007, there was not one document in common usage within the appellant which could be described as a “Shareholders Guarantee, in a standard form”.
9.The learned trial judge erred in holding that, under the contract of guarantee embodied in the 4 May 2007 letter, there was uncertainty due to the issue of whether the guarantee was to be limited or unlimited.
In my view, some of the grounds are somewhat unfortunately drafted. Thus, grounds 3 to 7 inclusive each commence with the common phraseology “The learned trial judge erred in holding that the parties did not intend to conclude an immediately binding contract of guarantee on 4 May 2007 because …” and then proceed to assert the reason said to have been adopted by her Honour for so holding.
The correct position is, of course, that her Honour came to her decision that the parties did not intend to conclude an immediately binding contract of guarantee on 4 May 2007 after taking into account a range of relevant considerations and their cumulative effect. It follows that even if her Honour were shown to be incorrect as to the effect of, or the weight to be given to, one particular factor, that would not necessarily mean that her Honour’s decision would be rendered incorrect. If error of the above nature were to be demonstrated, it would become the task of this Court to assess whether her Honour’s decision was nevertheless justified by the cumulative effect of the remaining factors in favour of her decision.
That having been said, the complaints raised by the grounds of appeal can be conveniently dealt with by reference to the parts of her Honour’s judgment as delineated above.
Grounds 1 and 2 of appeal
Grounds 1 and 2 essentially express the conclusion contended for by CBA, namely that the parties intended that Carotino would be immediately bound by a contract of guarantee. However, CBA’s justification for such a conclusion is to be found in the context of the arguments presented on appeal in relation to the succeeding grounds of appeal which individually deal with the considerations relied upon by her Honour in coming to the conclusion that the parties did not so intend.
Ground 3 of appeal - the plain words of the 4 May 2007 letter
When considering the meaning of the words in the 4 May 2007 letter, one must once again emphasise the stark nature of the case with which CBA was left on appeal. Carotino correctly formulates the position thus:[13]
The effect of the forensic approach taken by the bank is that its case at trial, and in this appeal, depends squarely on the proposition that by signing the 4 May facsimile and returning that document to the bank, Carotino thereby immediately became liable, without having to do anything further or sign any other document, as guarantor for the subject debts on terms to be found in the Bank’s standard form shareholders guarantee.
[13] Respondent outline of argument [7].
Carotino’s position is, of course, that “there is no ambiguity and the meaning of this letter is readily apparent from a consideration of its terms”.
Her Honour held that a reasonable commercial person would have concluded from the plain words of the letter of 4 May 2007 that the parties’ common intention as to the 4 May 2007 letter was first, to record CBA’s consent to the change in ultimate ownership of the SAFF Companies, and second, to record Carotino’s undertaking to execute a guarantee in an appropriate form, if and when required to do so by the bank. Her Honour held that the terms of the letter were plain and stated:
[110]I regard it as significant that the letter of 4 May 2007 was drafted in an atmosphere of urgency after Mr Migheli had been subjected to some pressure by Mr Fischer. It was plainly Mr Fischer who was the driving force behind the securing of CBA’s approval, so that the sale agreement between his companies and Carotino could be completed on the following Monday 7 May 2007. Mr Migheli’s main concern, it seems to me, was to satisfy Mr Fischer’s demand that the sale be completed on the following Monday. CBA chose to proceed in the way it did because Mr Migheli formed the view that he did not have time to prepare the necessary documentation to prepare a formal guarantee.
…
[112]The terms of the letter of 4 May 2007 are instructive. “The bank hereby consents” is plain enough to convey that CBA was giving its immediate consent. On the other hand Carotino “undertakes to execute and return a Shareholders Guarantee, in a standard form to be provided by the bank within 7 days of receipt”. It seems plain enough that Carotino was undertaking to do something in the future. It was not as one might think would be the usual case, a precondition to the grant of approval that Carotino sign a guarantee that day and deliver it to CBA prior to the sale. One might think if the bank did intend to bind Carotino to an immediately enforceable guarantee that, to borrow the language of J G Starke QC, writing in the Australian Law Journal about a not dissimilar case, that a leading commercial bank such as CBA would have demanded a document in the stringent terms normally deemed desirable for a guarantee to a bank.
On appeal, CBA argued that the language used in the letter, particularly the word “undertakes”, constituted a clear promise to do something and that the fact that such promise was formally recorded by an act of the company indicated that it was intended that it was to have contractual force. Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd[14] was cited by the appellant as support of this proposition but, in my view, their Honours words at the paragraph relied upon are at best not inconsistent with the appellant’s position and quite possibly somewhat supportive of the respondent’s position. Sackville AJA, with whom Hodgson JA and Campbell JA concurred, stated:
[140]The very issue in the present case, however, is whether the Lord Dudley document was intended to create legal relations. The fact that all three participants at the meeting signed the document (then or later) is a factor to take into account in determining whether they intended to be contractually bound by its terms. But it is far from conclusive. All relevant circumstances must be taken into account.
[14] [2009] NSWCA 386.
The appellant also contended that where the words used in a commercial transaction are clearly promissory, there is a presumption that there is an intention to create contractual relations and that the onus of proving the absence of such intention rests with the party asserting that matter and particularly relied upon the approach of Rogers J in Banque Brussels Lambert SA v Australian National Industries Ltd[15] in support of this proposition.
[15] (1989) 21 NSWLR 502, 521.
However, that decision has not been without its subsequent critics. In Australian European Finance Corporation Ltd v Sheahan,[16] Matheson J appeared to doubt the correctness of Rogers J’s approach, preferring the approach of the English Court of Appeal in Kleinwort Benson Ltd v Malaysia Mining Corporation[17] and that of Tadgell J in Commonwealth Bank of Australia v TLI Management.[18] Later, in Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd, Tadgell J restated his views:[19]
I should not doubt that if, as in that case, there was conduct (including the use of words) appropriately to be classed as involving a promise, the appellants could not be heard to say that they did not intend their promise to have legal effect. In my opinion, however, there can be no presumption of an intention to make a promise. No intention to make a promise can be imputed to a person whose words and conduct, objectively considered, do not lead to the inference that he intended to make one. Negotiations, no matter how heavily commercial in character, are no substitute for such an intention. I remain of the view I expressed in Commonwealth Bank of Australia v TLI Management Pty Ltd [1990] VicRp 45; [1990] VR 510 that, when the question is whether the legal effect of a transaction is promissory there is no presumption that it is: see the discussion contrasting this decision and that in Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 in Greig and Davis, The Law of Contract, (1987), 5th cumulative supplement (1993), at 57-58. I note the animadversions of Rogers CJ Comm D in the Banque Brussels Case, at 523-525, upon the decision of the Court of Appeal in Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1988] 1 WLR 799, to both of which decisions we were referred. I do not derive from what his Honour said anything that absolves a party who alleges an agreement from proving it. Indeed his Honour decided the Banque Brussels Case, as I understand it, by determining that the relevant parts of the letter of comfort in question were expressed in language of promise or undertaking or obligation and were contractual. He seems to have regarded the language of the letter of comfort in question in the Kleinwort Benson Case also as promissory. As I have indicated that is in my opinion not the proper characterisation of exhibit G.
[16] (1993) 60 SASR 187.
[17] [1989] 1 WLR 379.
[18] [1990] VLR 510.
[19] [1994] 2 VR 106, 178.
In Toyota Motor Corporation, the decision of Tadgell J, as well as that of Brooking J, was that the respondents did not prove the agreement which they alleged and that in the circumstances the appellants bore no onus to disprove the making of any such agreement but, if they did, they discharged it.
Subsequently, in Ermogenous v Greek Orthodox Community of SA Inc[20] Gaudron, McHugh, Hayne and Callinan JJ criticised the use of presumptions when considering the question of intention to create legal relations. Their Honours stated in relation to the language of presumptions:[21]
At best, the use of that language does no more than invite attention to identifying the party who bears the onus of proof. In this case, where issue was joined about the existence of a legally binding contract between the parties, there could be no doubt that it was for the appellant to demonstrate that there was such a contract. Reference to presumptions may serve only to distract attention from that more basic and important proposition.
[20] (2002) 209 CLR 95.
[21] Ibid 106.
More recently, in Gate Gourmet Australia Pty Limited (In Liq) v Gate Gourmet Holding AG[22] Einstein J rejected the suggestion that intention to create legal relations was a matter for presumption and stated:
Rather, the court is simply looking in terms of the objective approach, to identify whether or not there was the requisite intent to contract in any given context. The context in a matter of a commercial communication is materially different to the context, for example, in a matter of a domestic communication. Applying the objective approach the high probability is that a commercial communication will generally be seen to have been intended to be regarded as a relatively formal matter both by the sender as well as by the recipient.
[22] [2004] NSWSC 149, [213].
I consider that the learned trial Judge was correct in her approach. Even accepting the promissory nature of the term “undertakes”, any promise was not to act as guarantor forthwith, but rather to sign “a Shareholders Guarantee, in a standard form”. Putting aside for the moment the broader arguments as to the meaning of that term, the letter plainly envisaged an obligation to sign a guarantee as arising only after CBA initiated a process of supplying a proposed document. As Rich and Starke JJ observed in Niesmann v Collingridge:[23]
The provision for payment of the purchase money on the signing of the contract was not, however, in our opinion, a mere expression of the desire of the parties as to the manner in which the transaction already agreed to would in fact go through (Von Hatzfeldt-Wildenburg v Alexander) nor was it a condition of agreement. It was a “term of the bargain.” Thus, the purchaser could not be compelled to pay the purchase money unless the contract was signed. It was a condition of the obligation to pay.
[23] (1921) 29 CLR 177, 185.
In the present case, it seems quite obvious to me that any obligation by Carotino to be bound by a guarantee was conditional upon the proposed guarantee being first provided by CBA. Indeed, the letter clearly stipulated that after CBA had supplied a proposed document, Carotino was to have up to seven days after receipt before signing. It would seem to be an inevitable inference that, at the very least, Carotino was to have the ability to consider whether the document proffered did in fact answer the description of “a Shareholders Guarantee, in a standard form”. Obviously, if it did not, it would not fall within the undertaking.
In coming to her view, her Honour was entitled to consider “the surrounding circumstances known to the parties”.[24] Amongst these were the following matters that are to be gleaned from the various tendered affidavits, exhibits and transcript of oral evidence:
·No one was asking the CBA to advance any funds in relation to the transaction sought to be approved or to raise any borrowing limits;
·CBA retained the security and guarantees it already had over all monies advanced, and to be advanced, to the Australian Farmers Fuel companies;
·CBA were in fact keen to retain and expand its business with the Australian Farmers Fuel companies;
·CBA were also keen to do new business with Carotino;
·Carotino had clearly exhibited reluctance to sign a guarantee and one could understand that attitude having regard to the above matters and also that such guarantees obviously have the consequence of reduced flexibility and increased corporate reporting obligations. However, they had subsequently orally agreed to do so, at least “in principle”; and
·The subsequent preparedness of Carotino to undertake in writing (by signing the letter of 4 May) to execute a guarantee would have given some comfort to CBA.
[24] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179: “This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction”.
In those circumstances, her Honour considered that the agreement arrived at was that Carotino would execute a suitable guarantee if and when CBA decided to send one. Naturally, Carotino would have preferred that CBA decide that it was not necessary to do so or simply not get around to it. There was certainly no obligation upon Carotino to take the initiative in the matter.
I reject ground 3 of appeal.
Grounds 4 and 5 – the letter’s omission to refer to particular terms
Grounds of appeal 4 and 5 challenge her Honour’s reliance on the letter’s omission to refer to several important terms of the guarantee alleged to be constituted by the letter itself; these included whether the guarantee was limited or unlimited, whether it was supported or unsupported by security and whether it contained a negative pledge (not to further encumber its assets without the consent of the bank). Thus, her Honour stated:[25]
[115]Prior to the execution of the letter of 4 May 2007 the only record of any communication between the bank and Carotino was the communication from either Mr Wallace or Mr Fischer to Mr Migheli advising CBA that Carotino had agreed in principle to give a guarantee. One other internal bank document records the position of Carotino that in due course they intended to meet and have further discussions but were anxious to have the transaction (that is the sale by Mr Fischer of his 51 per cent in the SAFF Companies) proceed on 7 May 2007.
[116]There was no evidence produced of any resolution or minute by the Carotino directors where the issue of the guarantee was discussed. There appears to be no evidence at all of any discussion either within Carotino or between Carotino and CBA about the terms of the guarantee which had been agreed “in principle”. In my view the evidence supports Mr Halter’s expectation that he intended in due course to see a document in respect of which he would obtain advice from his solicitors before executing. Moreover in light of the fact that CBA already held a number of existing securities including guarantees from Mr Fischer and his associated companies to support the receivables facility, I do not consider Mr Halter’s evidence that he expected there would be some negotiations about the precise extent of Carotino’s liability under the guarantee before it was asked to execute the formal guarantee, to be at all unrealistic. It is significant that the guarantee given by Mr Fischer, the previous ultimate owner and later 49 per cent shareholder of the SAFF companies, was limited. In those circumstances I do not accept that it is so plainly obvious that the incoming shareholder’s liability would necessarily need to be unlimited.
[25] Commonwealth Bank of Australia v Carotino (Australia) Pty Ltd [2011] SASC 42.
CBA’s argument as to extent of liability (ground 4)
CBA submitted that the absence of any express statement as to the extent of liability could not affect the conclusion as to whether the letter constituted a contract of guarantee. CBA’s submission continued that in the absence of any express limitation, such a promise is construed as being to secure the whole of the obligation and is unlimited in amount.
In my view, this argument suffered from a high degree of circularity. It may be that, in a case where one is dealing with a document that does purport to be a formal guarantee, the correct construction of the document may be that unlimited liability is intended even though not explicitly stated. However, here the position was quite different. The letter was very short and, as her Honour found, its primary purpose was to manifest CBA’s consent to the share transaction. Given that it specifically referred to the later execution of a formal contract of guarantee, CBA’s position that the letter itself was a guarantee was a surprising and bold one. In such a context, matters such as the absence of important terms dealing with matters of substance were, in my view, legitimate and important cumulative factors to be taken into account as against that bold submission.
CBA’s argument as to security and a negative pledge clause (ground 5)
The 4 May 2007 letter did not refer to the questions of whether the guarantee was to be supported or unsupported by other security and whether there was to be a negative pledge clause in the contract of guarantee.
CBA submitted that there was no evidence before the Court that the matters of security or a negative pledge clause were important terms for discussion and that the absence of reference to the topics indicated that the matters would be governed by whether they were contained in “a Shareholders Guarantee, in a standard form”.
In my view, her Honour was entitled to accept that the evidence of Mr Russell, Manager in Business Lending Support at CBA, established that this was an area that would have been expected to have been covered by a contract of guarantee. Thus her Honour stated:[26]
[117]Contrary to CBA’s submission and in light of Mr Russell’s explanation about the effect of the negative pledge, I am not persuaded that its inclusion or otherwise is a mere minor matter. Such a clause would have effectively restricted Carotino’s ability to deal with its own assets other than in the ordinary course of business. Whether there was to be a requirement that Carotino obtain the bank’s consent whenever it sought to deal in its assets as such was another significant matter on which the letter of 4 May 2007 is silent.
[26] Ibid.
The evidence to which her Honour referred had been summarised by her earlier in her judgment when she stated:
[70]Mr Russell identified a template used by the bank in the creation of a guarantee document. He said this form had been in use by the bank since 2003. The template contains a number of variables. One of the variables relates to the amount of the guarantee, that is whether it is to be limited or unlimited. Another variable is whether the guarantee is supported or unsupported by other security. If the guarantee is unsupported a further variable in relation to the negative pledge clause is also available. Mr Russell acknowledged that on occasions the template used can be varied depending on the particular negotiations between the bank and its client. However, as far as he was aware, the negative pledge was required as a standard clause in all guarantees given by corporations where the guarantee is unsupported. When it was drawn to Mr Russell’s attention that neither the unsupported guarantee sent to Carotino in December 2009, nor a previous unsupported guarantee given by Silver City Petroleum Pty Ltd included a negative pledge clause, Mr Russell said that such a clause should have been included in both guarantees and was unable to explain its absence.
(Emphasis added)
Her Honour was correct in treating Mr Russell’s evidence as evidence of “the subject which the parties regard, or would ordinarily be expected to regard, as matters to be covered by their contract.”[27]It was also quite possibly evidence within the rubric of “the surrounding circumstances”[28] of the transaction but it is unnecessary to determine that.
[27] See: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548 (Gleeson CJ): “In a case where a court is required to make a judgment concerning the intention of the parties in relation to what might broadly be described as a Masters v Cameron ((1954) 91 CLR 353) dispute, it will normally be of importance that the court have an understanding of the commercial context in which the dispute arises, and a most significant feature of that context will relate to the subject which the parties regard, or would ordinarily be expected to regard, as matters to be covered by their contract. In some cases, such as transactions involving the sale and purchase of land, or leases, courts may properly feel well equipped to form a view on such matters without the need for much evidence. In many cases, however, of which the present is a good example, there is a need for evidence in one form or another as to what subjects would be regarded as requiring agreement between parties. In this case the best evidence on that subject is to be found in the actual communications between the parties and, in particular, in the issues which they in fact addressed when they set about drafting their detailed contract.”
[28] See: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179.
I reject grounds 4 and 5 of appeal.
Grounds 7 and 8 – non-existence of a “standard form guarantee”
Grounds of appeal 7 and 8 sought to challenge her Honour’s reasoning that the absence of only one document in common usage within CBA’s business at the relevant time which could be described as a “Shareholders Guarantee, in a standard form” also led to the conclusion that the parties did not intend that the 4 May 2007 letter should be treated as a guarantee in itself.
Her Honour made a clear finding of fact on this issue. Her Honour stated:[29]
[86] As to the issue of CBA’s standard form of shareholder’s guarantee, I find that CBA during the relevant time used a template, which contained a number of variable terms. In effect the bank’s template functioned as a library from which the particular clauses might be extracted and inserted into guarantee documents prepared within the bank’s LPC according to the instructions received from the business unit after negotiations between the parties. The form varies depending on whether the guarantor is an individual or a corporation, whether the guarantee is to be limited or unlimited, whether it is to be supported or unsupported by other security. The evidence also supports the finding that the guarantee required by the bank from a company was not necessarily always an unlimited guarantee. Mr Russell’s evidence supports a finding that whether the guarantee was to be limited or unlimited is a matter for negotiation between the parties. Even though CBA’s standard practice was to insert a negative pledge clause in all unsupported guarantees, this did not always occur. It follows that there was no standard form in use by CBA at the relevant time for the preparation and dispatch of shareholder’s guarantees, and I so find.
(Emphasis added)
[29] Commonwealth Bank of Australia v Carotino (Australia) Pty Ltd [2011] SASC 42.
Further relevant passages in her Honour’s judgment are as follows:[30]
[119]The fourth consideration which has led me to the conclusion that the parties did not intend the letter of 4 May 2007 to operate as an immediately binding guarantee is that the evidence does not establish that there was only one document in common usage within CBA at the relevant time which could be described as “Shareholders Guarantee, in a standard form”. This matter is also relevant to the other issue of whether the agreement, however it is characterised, is sufficiently certain to be legally enforceable. A most important variation is whether the guarantee is to be limited or unlimited. Another important variation is whether the guarantee is to be supported or unsupported. Mr Russell frankly conceded that these matters were dependant on negotiations with the particular client. Curiously the guarantee document which was ultimately forwarded to Carotino for execution in December 2009 did not on its face purport to be in accordance with the standard form identified by Mr Russell in that it did not contain the negative pledge seen in clause 24.
[120]Further, at the close of evidence CBA made an application to amend its statement of claim in which there are notable inconsistencies in the language used to describe the obligations of Carotino pursuant to the alleged contract. I refused the amendment and have included written reasons for doing so later in this judgment. By the amendment, CBA sought to allege that Carotino was obliged to execute, within 7 days of receipt, a contract of guarantee “in a standard form”. On the other hand, CBA sought an order that Carotino execute, within 7 days, a contract of guarantee:
in the standard form used by the plaintiff for shareholder’s guarantees as at May 2007, with such guarantee not containing the plaintiff’s standard clause 24 concerning “negative pledges”.
[121]In other words, whilst the contract sued upon referred to “a standard form”, CBA found it necessary to refer to a more specific contract not including clause 24 when seeking relief from the court.
[122]Against this background, I draw the inference that the use of the word “a” in the letter of 4 May 2007, instead of “the” is significant. There was no standard form of a shareholder’s guarantee in use by the bank at the relevant time. In my view what the words “Shareholders Guarantee, in a standard form” would convey to a reasonable commercial person is that the shareholder’s guarantee which the bank would ask Carotino to execute would be in an appropriate form, after further negotiations between the bank and guarantor.
[123]For these reasons I have concluded that the letter of 4 May 2007 does not evidence an intention by the parties to be immediately bound by a contract of guarantee.
(Emphasis added)
[30] Ibid.
CBA submits that her Honour erred in that the evidence suggested that CBA did only have one form of guarantee which was tendered at trial as “TLS14” and that this was the “standard form” to which the letter of 4 May 2007 referred. However, I consider that her Honour was clearly correct in characterising that document as “a template” from which one started and in taking the view that there were a number of variables with the end product document likely to be the result of negotiation between the particular parties.
I reject grounds 7 and 8 of appeal.
Ground 6 – admissibility and effect of post-contractual conduct
CBA contends under ground of appeal 6 that the learned trial Judge erred in taking into account the fact that no person associated with CBA or Carotino appeared to have ever treated the letter as an immediately binding guarantee as a reason supporting her conclusion that the parties did not intend to be immediately bound by the letter as if it were of itself a guarantee. The relevant passage in the judgment is as follows:[31]
[118]The third consideration which militates against any intention of the parties to be bound to an immediate contract of guarantee on 4 May 2007 is that nobody in the bank or from Carotino appears to have ever treated the letter of 4 May 2007 as an immediately binding guarantee. Why else would Mr Migheli send out a letter of offer on 18 June 2007, which the parties needed to execute and return to the bank before a formal document of guarantee was drawn up and sent to Carotino? The evidence from CBA’s officers about the bank’s usual procedure in this regard was not disputed. There is nothing in the conduct of the bank after 4 May 2007 to suggest that the bank ever treated the letter of 4 May 2007 as anything other than an undertaking in the future to sign a guarantee and return it within 7 days if requested.
[31] Commonwealth Bank of Australia v Carotino (Australia) Pty Ltd [2011] SASC 42.
Mr Migheli’s conduct in sending out a letter of offer on 18 June 2007, referred to above, was dealt with in more detail later in her reasons when her Honour addressed CBA’s estoppel claim:[32]
[152]I have found that it is not possible to read the terms of the letter as an acceptance by Carotino of an immediately binding contract of guarantee. I consider that the return of the signed letter could not have reasonably induced any bank employee to make the assumption that there was in force a binding guarantee with identifiable terms. Indeed as I have already found there is no evidence that any officer of the bank ever did make that assumption. To the contrary efforts were made to follow up the return of the executed guarantee at a later stage. These included Mr Migheli’s sending of a letter of offer on 18 June 2007 which the parties needed to execute and return to the bank before a formal document of guarantee was drawn up and sent to Carotino. Mr Migheli himself said that the entry he made in the bank’s security register of “G/U by Carotino Australia Pty Ltd ... New” was made in the expectation of Carotino doing something in the future.
(Emphasis added)
[32] Ibid.
CBA submits, in effect, that her Honour here erred by conflating the two issues of intention and the terms of the contract and that Migheli, by sending out a further document for Carotino to execute, was merely seeking to perform the agreement in the 4 May 2007 letter.
In my view, that submission is not productive for CBA. No doubt Migheli was adhering to the procedure contemplated by the 4 May 2007 letter – but that is hardly demonstrative of the proposition for which CBA now must contend, namely that the 4 May 2008 letter of itself constitutes a guarantee.
Her Honour directed herself as to relevant authorities on this topic[33] and I consider that she was plainly correct in using this post-contractual conduct in the way that she did. In Stirnemann v Kaza Investments Pty Ltd[34] I took an approach which corresponds with that of her Honour when one is focussing on the question of whether the 4 May 2007 letter itself constituted a guarantee at all. I there said:
[33] Ibid [103-104].
[34] [2011] SASCFC 77.
[17]It appears to be clear that a court may use “post-contractual conduct” as an aid in determining whether a contract has been entered into at all whereas the distinct question of using such conduct as an aid to interpreting the meaning of terms is much more debateable.[35] Thus in Pethybridge v Stedikas Holdings Pty Ltd,[36] Campbell JA (Beazley JA agreeing) stated:
[35] See Barbara McDonald and Jane Swanton, ‘Subsequent conduct as an aid to interpretation of a contract – “the refuge of the desperate”?’ (1993) 67 Australian Law Journal 864. See also J W Carter, LexisNexis, Carter on Contract (at July 2010) [13-100].
[36] [2007] NSWCA 154.
[59]…The present state of the law throughout Australia on whether and if so when it is possible to use post-contractual conduct as an aid to construction of the contract is not yet settled: see the authorities cited in Cheshire and Fifoot’s Law of Contract, 8th Australian edition, p 392-393; Cross on Evidence, 7th Australian edition, para [39290]; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 318 [109], per Kirby J. The more restrictive view, favoured in this Court, is that subsequent communications cannot be looked to as an aid to construction of a contract, but can be looked to as an aid to deciding whether a contract has been entered into at all: Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 163-164, [2001] NSWCA 61 at [25]-[26]; Magill v National Australia Bank Ltd (2001) Aust Contract R 90-131 at 91,609-91,610, [2001] NSWCA 221 at [50]-[53] per Ipp AJA (with whom Meagher and Heydon JJA agreed); Walker v Andrew (2002) 20 ACLC 1476 at 1483-1484, 116 IR 380 at 388, [2002] NSWCA 214 at [39]; Independent Timber Importers v Mercantile Mutual Insurance (2002) 12 ANZ Ins Cas 61-543 at 76,367, [2002] NSWCA 304 at [17]; El-Mir v Risk [2005] NSWCA 215 at [66]. …
In Brambles Holdings Ltd v Bathurst City Council,[37] Heydon JA (as he then was) stated:[38]
[37] (2001) 53 NSWLR 153.
[38] Ibid 163.
The second relevant principle is that post-contractual conduct is admissible on the question of whether a contract was formed: Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 77; Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 668, 669, 672; B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9,147 at 9,149, 9,154–9,156; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9,251 at 9,255.
The two leading early High Court decisions cited,[39] both involved later conduct inconsistent with a binding contract. In the first of these, Howard Smith & Co Ltd v Varawa, Griffith CJ held:[40]
Having regard to the subsequent conduct of the parties, to which I will directly call attention, I have no doubt that the message of 4pm was not intended to have a contractual operation at all, but was merely a notification to Miles of the intention of Moller’s principals.
The case of Hussey v Horne-Payne was referred to and relied upon by the learned Judges of the Full Court. In that case it was held that, although two letters of a correspondence seemed on their face to constitute a complete contract, it was open to show by other documents and oral evidence that no complete and concluded contract had in fact been made. In the present case we have nothing but written documents, to which I will now refer. It is plain that, the question being whether the parties had in fact concluded an agreement on 1st December, any statements or conduct on their part after that date inconsistent with the existence of a concluded contract are relevant for this purpose.
In the second decision, Barrier Wharfs Ltd v W Schott Fell & Co Ltd,[41] Higgins J, in considering whether a binding agreement existed, examined the subsequent conduct of the parties and again held that there was no concluded contract. On appeal to the Full Court of the High Court, Griffith CJ, in dismissing the appeal, stated:[42]
I agree, therefore, with the conclusion of the learned Judge below that up to that time there was no concluded contract. It appears to me that what the defendants did was to intimate their willingness to enter into a contract upon the basis of the terms as to which there had been a provisional agreement, but that a formal contract must be drawn up, which was to be approved by them, and that that approval was to be given before a concluded contract should come into existence.
It is said for the plaintiffs that, even if that were so primâ facie, yet the subsequent correspondence showed that in fact there was a contract entered into on 6th February; and that, if there was any ambiguity in the terms of that contract, the subsequent correspondence showed what the real intention of the parties was. For the defendants it is said that, even if the documents up to 6th February on their face disclosed primâ facie a concluded contract, the subsequent correspondence was in the nature of continued negotiation, and showed that a concluded contract had not been entered into. I do not think it is necessary to refer in detail to that correspondence. It is sufficient to refer to one or two of the letters. …
In my judgment the learned Judge below was right in his conclusion that there was no concluded contract in fact; that the letters did not on their face disclose a contract. I think further that, if primâ facie they disclosed a contract, the subsequent correspondence shows that it was not in the contemplation of either party that they were to be bound until all the essential preliminaries had been agreed to, nor until a formal contract had been drawn up embodying all the matters incidental to a transaction of such a nature.
[39] The proposition is also supported by the more recent High Court case of Allen v Carbone (1975) 132 CLR 528.
[40] (1907) 5 CLR 68, 77-78.
[41] (1908) 5 CLR 647.
[42] Ibid 668-669.
I consider that her Honour correctly used the evidence of Mr Migheli as showing that the parties did not intend to be immediately bound by the letter of 4 May 2007 as if it were, of itself, a binding contract of guarantee.
I reject ground 6 of appeal.
Ground 9 of appeal
Ground 9 of appeal challenges her Honour’s alternative finding that even if (contrary to her finding) the parties had intended that the 4 May 2007 letter was to constitute an immediately binding guarantee, such a contract would in any event have been void for uncertainty due to the limit (if any) of the guarantee not being stated. Her Honour stated:[43]
[126]Courts have considered the situation where a guarantee is entered into between parties, with the extent of liability left blank. In some cases it has been held that the parties intended such guarantees to be unlimited. In others cases, including where it is clear that the credit limit is to be agreed between the parties and where the entire clause referring to liability has been omitted, contracts have been held unenforceable. The case of further negotiations is more accurately described as a lack of intention to be legally bound and is dealt with earlier in these reasons. That case aside, these examples may be distinguished from the present case because there the parties entered into formal, yet incomplete contracts of guarantee. If the parties in this case had executed the document said to be a “Shareholders Guarantee in a standard form” leaving the extent of liability blank, there still would have been a case to make that agreement was uncertain. But here the parties have not even reached that stage, having not executed such a document. Having found that CBA did not at that stage have a single form of standard shareholder’s guarantee, the court is left with the bare terms of the letter of 4 May 2007 and prior surrounding circumstances.
[127]For these reasons, even if the parties did intend to be legally bound by the letter of 4 May 2007 as a contract of guarantee, I find that it is unenforceable due to uncertainty.
(Emphasis added)
[43] Commonwealth Bank of Australia v Carotino (Australia) Pty Ltd [2011] SASC 42.
As stated above, I consider that when one is dealing with the question as to whether the parties intended that the 4 May 2007 letter should itself constitute a guarantee, the absence of various important terms is an important cumulative factor to be taken into account. However, I am conscious of the fact that if one predicates a very different situation where one is dealing with a formal document of guarantee, the authorities are rather divided as to the extent to which a Court can, or should, enforce such a contract in the absence of particular stated terms.
Given that I agree with her Honour’s decision in what I have called the first part of her judgment, and with her treatment of each of the various factors referred to therein, I find ground 9 to be hypothetical and unnecessary to decide.
Conclusion as to the disposition of the appeal
I have rejected each of the grounds 3 to 8 of appeal. I have considered all matters advanced in support of grounds 1 and 2 of appeal being those matters advanced under the other grounds and generally at the hearing of the appeal. I reject each of grounds 1 and 2 of appeal.
Accordingly, it is my view that the appeal should be dismissed.
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