Darling v Credit Lyonnais Australia Limited; Stacey v Credit Lyonnais Australia Limited

[1992] HCATrans 116

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IN THE HIGH COURT OF AUSTRALIA	-
Office of the Registry

Sydney No Sl29 of 1991

B e t w e e n -

JOHN DARLING

Applicant

and

CREDIT LYONNAIS AUSTRALIA

LIMITED

Respondent

Office of the Registry

Sydney No Sl30 of 1991

B e t w e e n -

VICTOR THOMAS STACEY

Applicant

and

CREDIT LYONNAIS AUSTRALIA

LIMITED

Respondent

Darling 1 10/4/92

Applications for special

leave to appeal

MASON CJ TOOHEY J GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 10 APRIL 1992, AT 2.25 PM

Copyright in the High Court of Australia

MR C.J. STEVENS, QC: If Your Honours please, in the matter

of Stacey, I appear with my learned friend,

MR P.G.W. STITZ. (instructed by Rockliffs)

MR A.W. STREET:  May it please the Court, in the matter of

Darling, I appear with my learned friend,

MR R.N. GYE. (instructed by Berne Murray & Tout)

MR A.R. EMMETT, QC: If it please Your Honours, in both

appeals I appear with my friend, MR P.H. GREENWOOD,
for the respondent. (instructed by Corrs Chambers

Westgarth)

MASON CJ:	Mr Stevens?
MR STEVENS:	Your Honours, the central issue in relation to

the application for leave to appeal in this matter is to whether or not it is appropriate to consider

a term can be drafted in such a way that regardless

of what might happen in the future, the guarantors will be giving up prospective rights regardless of the basis that they may ever have in relation to

asserting those rights. That, as a matter of

general principle and general application, in our

submission, is a matter which is appropriate to be

able to be ventilated and the subject of a full

appeal to the High Court.

If one looks at it in relation to the history

of this matter to date, the trial judge was content

to find that there had been the significant and

substantial prejudice and also found that there was

a subsequent variation of agreement between the

parties, such that the variation excluded a

contractual provision within the guarantee that

might otherwise have given the credit provider the

rights to be able to disentitle the guarantor from

their rights.

In the Court of Appeal the minority judgment

of Mr Justice Handley, with greater refinement than

had been followed by the trial judge, followed the

same analysis and found there was a subsequent

variation of the contractual arrangements between
the parties and that by reason of that variation

there was also able to be a variation of one of the

contractual provisions that might otherwise have

disentitled the guarantors to rely on that

provision.

The majority judgment of both the learned

President and Mr Justice Mahoney were of the view that there had been a variation but that the variation was within the realm of contemplation of the original documentation and, accordingly, were unwilling to read down or imply within the

Darling 2 10/4/92

necessary provisions any such restraint such that

it was within the general contemplation of the

parties when they entered into the guarantee.

MASON CJ: But does not the decision turn on the particular

provisions, the facts and circumstances of this

case?

MR STEVENS:  Your Honour, it is tempting to think that at

first blush it does but if one considers the same

sorts of - - -

MASON CJ:	You mean, tempting to us?
MR STEVENS:	Your Honour, with respect, if one considers -

there are a variety of other guarantees which have

been included within the appeal books, each of
which has not precisely the same clause, but each

of which has clauses of a similar thrust so that one sees, in relation to - if one accepts as the sequence of events there is an initial guarantee

obligation, that at a time after the original

guarantee obligation there is subsequent collateral

security provided and then there is a question of a

default or omission and, with respect - - -

MASON CJ:  But to the extent to which your case depends upon

the existence of a variation of the agreement for a

guarantee or an indemnity, those provisions do not

have general application in a way that would result

in guidance, if we were disposed to decide the

question of variation.

MR STEVENS: With respect to the learned Chief Justice, each

of those clauses does provide a similar ambit of

operation, albeit by slightly different pathways,

such that the interpretation of those clauses in

any similar factual situation will be the subject

of the benefit of the guidance that would be

provided from the full appeal.	Each of those
clauses will have a similar tenor.	Each seeks to
adopt a methodology of excluding the rights of the

guarantors in each instance and by a variety of

breadths of exclusions. If one looks to them by

comparison - they are reproduced in the appeal

books at page 62 point 9 and 67 point 5 - and each

of them, I think, has a cross beside the relevant

clause for ease of identification.

Clause 14 at page 62:

No assurance security or payment which

may be avoided under any law for the time being

in force relating to bankruptcy or to the

winding up or official management of companies
and no release settlement or discharge which

may have been given or made on the faith of any

Darling 3 10/4/92

such assurance security or payment shall

prejudice or affect the right of the Bank to

recover under this Guarantee -

similarly, at page 67 point 5, at about the middle

of the clause 4:

by any neglect omission or default of the Bank
whereby the whole or part of the liability of
the Guarantor to the Bank would but for this

provision have been affected suspended

postponed rendered unenforceable or discharged

or by the Bank failing or neglecting to

recover by the realization of any collateral
or other security or otherwise any of the
moneys hereby secured or by any other laches
acts or omissions or mistakes on the part of
the Bank or by the release discharge

abandonment or transfer either in whole or in

part and either with or without consideration

of any security now or hereafter held by the

Bank from the Debtor or from any other

person -

and similar provisions at page 77 point 5.

TOOHEY J: 

Mr Stevens, you spoke of the rights of the

guarantors. In truth, I suppose it is the
obligation of the guarantors under the guarantee,

but has it been suggested that any cause of action

that might otherwise be available to your client by

reason of breach of contract or in tort, the
actions that were remitted are excluded by reason
of this type of provision or in the particular
provision in this case?

MR STEVENS: 

The way in which the learned President expressed that which is remitted and that to be

ventilated is somewhat confusing as to whether or

not those rights have been excluded or not. But if

one looks at it in this context: the equitable

principle that existed in relation to guarantors

and the rights which they might otherwise lose by

reason of the neglect or omission or default on the

part of the credit provider, have normally not
necessarily been the subject of scrutiny. If the

guarantor has suffered a significant or substantial prejudice, without needing to go into the precision of the mathematical calculations of that, that

circumstance is enough or was enough in the past.

In this instance, of course, the question of

remittance then entails in the future an element of
a reconstruction in trying to determine what the
respective rights of the parties might have been.

The prior decisions which have given the guarantors that equitable right to be subrogated to

Darling 4 10/4/92

the benefits of the security which were previously

existing therefore did not need any consideration

as to what the worth of that security was if it was

lost to them. In this instance, of course, the

very circumstance needs to be canvassed and needs

to be then more broadly ventilated. In our

submission, the appropriate approach is if this -

within the different category, what one would be

inclined to call "disentitling conduct" as

therefore makes it inequitable or inappropriate on

the part of the bank to be able to rely upon the
guarantee and the guarantee obligations. It is a
case of being able, as it were, to wipe the slate

clean because of this breach or default without

needing to go into the precise mathematics of the

calculations.

In answer to the second part of Your Honour

Mr Justice Toohey's query, His Honour the learned

President did suggest that these matters were able

to be still ventilated when the matter was remitted

but, with respect, there appears to be some

attendant uncertainty as to precisely what

His Honour means in relation to that. At page 21,

the learned President, from line 20, dealt with:

It is possible that the respondents may

have some remedy against the appellant for the

consequences of its failure promptly to

register the charge. It is possible that the
appellant is liable in damages to the
respondents for breach of an implied
term ..... or for breach of a duty which it then

undertook to take reasonable care that the

benefit of the security, to which it agreed,

would not be lost to the respondents. These

are issues which have not been determined at

first instance. They cannot be decided,

justly and for the first time, on appeal.

And His Honour, then at page 23, remitted the

matter for further trial but, with respect, the

proposition will undoubtedly be argued on the part

of the Bank that the effect and ambit of relevant

clause 8 will still be available there as a
contractual right which would erode the equitable

rights that otherwise exist between the parties.

The tort of negligence, to the extent that it

has been considered as an adjunct or an ancillary

remedy to the equitable rights of guarantors in

relation to the most recent judgment of the Privy unavailable in relation to the rights that the

sureties might otherwise have and, accordingly, in

those circumstances, the tortious remedy is lost.

Darling 10/4/92

Now, the question of negligence is yet to be determined in relation to the nature of a duty of care owed by a creditor to the guarantors. Perhaps

that is a matter which, after remittance, may lead
to the matter coming back for further

consideration but, in our submission, the whole

thrust of the prior rights has always been that

clauses of this nature must be construed

strictissimi juris and therefore if one adopts such

a construction, unless the clause has within its

terms specific regard to the particular future

event and thereby excludes it, then any later

variation of the agreement between the parties will

therefore be outside the ambit or the operation of

such a clause.

That is an approach which found favour with

both the learned trial judge and also with

Mr Justice Handley, but so far as the other members

of the Court of Appeal, their construction was that
a clause of this nature is such as to be able to

contemplate future events and therefore be able to

exclude the rights that might otherwise exist.

There were different pathways taken in

relation to that approach. The learned President

adopted the view that the best evidence as to what

the terms of the prospective contractual

arrangement would be was to look at an internal minute of the respondent Bank. The President's

judgment dealing with that aspect is at page 15 at

line 20.	The learned President said:
At the outset it is worth recalling that

the most reliable objective evidence of the

terms of the contractual arrangement of

December 1987 is the memorandum of

21 December. From that memorandum, it could

not have been made clearer but that the
appellant was reserving all of its rights on

the personal guarantees. In the first

paragraph this was stressed by underlining

that the mortgage debenture was in addition to

the existing guarantees.

And then refers:

In the second paragraph, the addition of the

company to the "security package" was

explained as having the object to "offset (the

guarantors') liability".

That minute appears at page 12. But if one

considers, it reflects, in our submission, part of

the error of the learned President in that he was

not adopting a mode of construction of the clause

in the way as would be most beneficial to the

Darling 6 10/4/92

guarantors in terms of the strictissimi juris

approach but, rather, was looking at an internal

minute of the Bank, the contents of which had not

been made known or ever conveyed as to determine

how one construes a future liability between the

parties. In that sense, we submit that the learned

President was in error in relation to the approach

that he adopted as to how one construes the

relevant clause 8 and, additionally, that it also

reflects the range of injustice that can otherwise

arise.

There has been suggestions, in part, perhaps, picking up the issue being left open by

Mr Justice Deane in Ankar v National Westminster

Bank where the learned President has adopted a view

that in relation to the construction of guarantee

obligations, that if there is to be a commercial

corporate surety situation as distinct from a

stranger to a guarantee, that that calls in some

way for a different mode of construction. In our

submission, that would be contrary to the

principles.

It is touched upon in the learned President's

judgment at pages 18 and 19 where he is considering

the approach to the construction. At page 18,

line 21:

I also approach the construction of the clause as an exclusion clause. It is for the appellant, seeking to take benefit of it, to bring itself clearly within its terms.

And relies on Darlington, and then says:

But, in the end, courts must give effect to the agreement of the parties as expressed in

their written document, read in context. They

must avoid a priori notions, recalling the

recent warnings of the High Court of Australia

in Nissho Iwai Australia Limited v Malaysian

International Shipping Corp. Courts should not seek to twist the words of an agreement

which the parties have executed in such a way

as to frustrate the achievement of the purpose

of their agreement as expressed in those

words.

In our submission, that passage reflects an

approach by the learned President that so far as

the way in which one then construes clause 8, if

there has been, as all the members of the Court of

Appeal and as the trial judge found, a variation of

the original terms, the question then comes to be considered whether, if there is ever a variation,

can that impact upon a future collateral security

Darling 10/4/92

not then specifically within the contemplation of
the parties and not at that point of time within
the contemplation of the parties as to the breach

of their respective obligations, which has not been

excluded.

The approach of the learned President is

similar to that which was adopted by His Honour

Mr Justice Mahoney, summed up at page 27, as to the

balancing point in relation to His Honour's

determination of it, and that was having found that

there had been a fault, at line 8:

the issue which is here to be determined is

whether the general terms of cl 8 should be

qualified to exclude a case where, though the
defect in the Collateral Security falls
literally within cl 8, that defect arises

because of the default of the Bank.

His Honour there has not dealt, of course, with the

mode of construction. And then at line 17:

If the case of such a default is to be

seen to be outside the protective provisions

of cl 8, that must flow either from an

implication from the intention of the parties

that the generality of cl 8 should be
qualified to that effect or from some other

principle of law.

His Honour's reasoning ultimately was that you

are able to have the implied consequence of that

being within the contemplation of the parties to

cover such a future circumstance and hence, on his

interpretation summed up at the top of page 28:

I do not think that that implication can be

made in the present case. It was, I think,

the purpose of cl 8 to protect against the

kind of negligent act or omission which, as

experience shows, is apt to render a security

document "void defective or informal".

So that the divergence of opinion so far as the majority is concerned is whether or not the

variation can then have within it this implied

element or not. Again, if one considers the nature

of such series of clauses, it is submitted that the
construction to be placed upon those clauses is a

matter of general importance and significance.

Also, as to whether or not those clauses, by

their nature, are able to exclude the concept of

negligence in relation to default, a matter which

has not been determined but which, in our

submission, is appropriate to be determined,

Darling 8 10/4/92

otherwise one faces the uncertainty in relation to

the future litigation consequent upon it being

remitted. All that is being determined by the

present judgment of the Court of Appeal by majority

is that the trial judge was wrong in seeking to

apply Ankar and that the trial judge was wrong in

finding that a subsequent variation of the deed of
guarantee was able to oust the effect of a clause

of the nature that we have discussed, the

particular clause 8.

It therefore still leaves uncertain as to

whether or not the breadth or application of that

clause, in such a general class of cases, as to be

able to exclude negligence or default or exclude

contractual provisions in respect of the implied

terms of the contract as have been found by all of

Their Honours arising as a consequence of a deed of

variation. All of those matters, in our

submission, are matters of general application of

general principle as to how one goes about

construing clauses of this nature.

With respect, bearing in mind the nature of the present economy and bearing in mind the

circumstances as are featured quite prominently in
recent times as to calling on guarantees, they
continue to be matters of general application and
of questions appropriate to be resolved for the

benefit of the commercial community within

Australia.

The actual language of the clause is

separately the subject of attack but, again, if
leave be granted then, in our submission, such a

clause is an appropriate vehicle to be able to

interpret this class of clauses which are of

general application in relation to the provision of

guarantees.

MASON CJ:  Now, what do you say about the particular

clauses? What are the arguments that you deploy in
relation to them?	You have an overall argument

that something that arises through the negligence

of the Bank should be excluded by implication.

MR STEVENS:  Yes, Your Honour.

MASON CJ: That would apply to each of the relevant

subparagraphs.

MR STEVENS:	Yes.
MASON CJ:	Now, in addition to that you say, in relation to (a), that it is not a matter of completion. It
does not fall within the word "complete"?

Darling 9 10/4/92

MR STEVENS: Yes. There has been allowed a circumstance

that the - if I might go back half a step. It

calls in a different sense again for consideration of competing equitable and contractual obligations without unduly muddying the waters which, I

understand, my learned friend, Mr Street, will be

seeking to put to Your Honours, and without taking

all of his thunder - - -

MASON CJ:  You may be clarifying him.

MR STEVENS - - - the position is that as far as the

equitable rights that can be available in

determining whether or not there has been an

agreement, regardless of registration, one draws a

distinction as to - if a provision is to be treated

as being void, is it to be treated as void against

the world at large or void only against a more

limited class of persons in relation to the

omission to be able to register a security and, in

that instance, therefore, the parties might have an
agreement which would be enforceable at equity but
not on the basis of a statutory omission to have

registered a charge which there, in our submission, draws a distinction as to how the word ttvoidtt is to

be construed in those circumstances.

TOOHEY J:	Mr Stevens, so far as the construction point is concerned, in isolating that, do your submissions
extend to the sort of situation that arose here, had it arisen in respect of the original guarantee, in other words, a failure to register a document at
the time the guarantee was entered into?
MR STEVENS:	Yes.
TOOHEY J:	Do you say that is outside the terms of the

exempting provision?

MR STEVENS:  Yes, we would seek to do so in relation to the

way that the individual clauses would be applied,	which adds to the general application in terms of
the construction, taking it outside the more limited class of factual cases akin to the present
one but to a wider application in relation to all
matters without there being a subsequent variation.
But that we say that the present circumstances, as
are referred to in the affidavits, show that this
either offering of collateral security or
subsequent taking of collateral security is not an unusual circumstance that arises and, hence, gives
it a separate application as well.

So that there will be many instances where,

either by revaluation of security or by reason of
guarantors being anxious to make sure that they are

providing sufficient alternative security which

Darling 10 10/4/92

they, in due course, would be able to get the

subrogated rights to, if called upon on their

guarantees, they will be anxious to make sure that

the obligations are otherwise covered and, hence,
that will be an ongoing circumstance that makes the

construction of these clauses of general

application. So, it is both classes of case.

We acknowledge that the second, where there

have been variations, are a more limited class than
the first but the issues of construction would be

of general application.

MASON CJ: What about (n)? What additional submission do

you have about (n)? (n) was not relied upon in the

Court of Appeal, was it, because the majority came

to the conclusion that it fell within either (b) or

(g)?

MR STEVENS: That, Your Honour, is the linchpin in relation

to the general equitable contractual situation and

it depends, within the context of (n), as to

whether or not the future events are specifically

considered and specifically dealt with. In our

submission, the construction to be attached to (n)

is to be construed as a consequence of a contract

of guarantee which is, in our submission, even more

beneficial than in relation to the general class of

exclusion clause and, accordingly, a distinction

should be drawn there and that it is a matter

appropriate to be further explored as to whether or

not that is still the case or, whether, in relation

to commercial contracts, some lesser provision,

such as exists in the United States, is now

appropriate to be imported. It was a matter which

was specifically not touched upon in Ankar at all

save as to the passing reference, and that, of

course, is in the final page, I think, of

Mr Justice Deane's. But that is a circumstance

which is quite unrelated to any issue of conduct on

the part of the creditor and is focusing upon the

equitable rights as distinct from the contractual rights.

If Your Honours please, they are the

submissions on behalf of Mr Stacey.

MASON CJ: Yes. Yes, Mr Street?

MR STREET: Could I hand up to Your Honours a brief outline

of propositions which summarizes the propositions

that the applicant, Mr Darling, seeks to advance, and I will seek to do so without duplicating what

has already fallen from my learned friend. If

Your Honours could read this.

MASON CJ: Yes.

Darling 11 10/4/92

MR STREET: Could I take Your Honours briefly to page 42 of

the application book in relation to the first

proposition that is identified. At about line 2 in

the judgment of His Honour Mr Justice Handley he

identifies the principles that are applied by him

in relation to the construction of clause 8:

as a matter of construction, has no

application to a breach of the contract of

December 1987. The appellant having

undertaken a contractual obligation to

register the charge, was not entitled to

release it or to refuse to complete it.

Can we just pause there. The fundamental

distinction which we say is of general importance

and has general application is between clauses such

as clause 7 and 8 which affect equitable rights,

and a clause designed to catch contractual rights.

The significance of the guarantees that are annexed in the application book is this, that each of the

clauses is of the same type in that what it seeks

to catch is equitable rights.	None of the clauses
are addressed to contractual rights.	The

contractual rights, such as dealt with in Ankar and

Arnick, for breach of which, if there be substantial prejudice and the effect not being

insubstantial, will give rise to discharge for

breach of contract.

That breach of contract is exactly what His Honour Mr Justice Handley was saying is not

caught. The application of that has general

ramification and general application. Indeed, the President in his judgment at page 19 point 20 made the observation that:

The provision of new and different collateral

security in credit arrangements is not

unusual.

A trite observation it may be, but none the less it

picks up what we say is the significance of the

general application of clauses of this nature, in

so far as they presently exist, have application
relating to equitable rights, be it the equitable

right that flows in respect of interference, with

the right of indemnification that the surety may

have of the debtor; be it interference with the

right of contribution that the surety may have from co-sureties, or be it interference with the chattel

or security whereby the benefit of an equitable

right of subrogation is lost. They are the

equities to which this clause is addressed. On its

face, on its plain language, it does not seek to

catch such conduct.

Darling 12 10/4/92

Your Honours, the proposition that we advance

in proposition 1 is recognized in O'Donovan

Phillips and, Your Honours, I do have the passages

extracted to hand up to Your Honours, but the

principles that breach of contract give rise to

discharge are sufficiently identified in Ankar and
Arnick not to require further adumbration. But the

distinction between the reasoning that Your Honours have been taken to in the judgment of the President

contains no analysis explaining why contractual

breach is caught by the clause. The only analysis

that one finds in relation to contractual breach is
that found in the judgment of Mr Justice Mahoney.

Mr Justice Mahoney's judgment suffers this problem,

namely that he focuses on a concept of, at page 27

point 20 to which Your Honours have been taken,

construction;

of cl 8, that must flow either from an

implication from the intention of the parties

that the generality of cl 8 should be

qualified -

Your Honours, there is an unstated assumption that

implication is necessary. We say, on its plain
language, it does not seek to catch contractual

rights. The proposition, indeed, that Your Honour

the Chief Justice put to my learned friend,

Mr Stevens, in relation to implication in respect

of construction is not one we seek to embrace in

that on its ordinary reading and its natural terms,

it does not seek to apply to a breach of contract.

So one starts, in analysing what His Honour

Mr Justice Mahoney has said in relation to the

question of application to contract, with a problem

in that regard. As my learned friend has

indicated, it suffers in Mr Justice Mahoney's

analysis of the failure to give effect, or any

content, to the principles of strictissimi juris

and construction in favour of the surety. Those

principles in relation to a clause of this nature,

in our respectful submission, do have general

application.

Your Honours, the second proposition has been developed by my learned friend and I do not wish to

address it beyond saying this: the application, as

the President does, of Darlington, in our

respectful submission, unqualified is not

appropriate. The principles identified in

Darlington require qualification in respect of

contracts of suretyship. That qualification,

although the President, in fairness, does seek to

refer to what principles should be applied at

page 18 in the judgment in respect of strict

construction, are given no content. In other

words, what His Honour has done at page 18 is made

Darling 13 10/4/92

reference to strict construction and then has

picked up verbatim and applied principles under

Darlington Futures v Delco which we say are

principles not applicable, without qualification,

to contracts of suretyship. And that error flows

in relation to the reasoning in respect of Nissho

Iwai and the balance of His Honour's approach in

respect of construction.

The third proposition picks up perhaps more

precisely what Your Honour the Chief Justice was referring to in relation to the actual language.

Again, as is apparent from the other types of

clauses that have been referred to, language of

this nature referring to negligence is not used.

As a matter of general principle, one has a series

of cases starting with Davis v Pearce Parking

Station, 92 CLR, where the High Court referred to the need for clear words to exclude negligence.

Bearing in mind that this is a contract of suretyship, there are no clear words here that

could possibly catch negligence and its general

application is shown to be one which would have

significance in that the use of the term negligence

is not found in the other similar types of clauses,

although one or two, I think, in fairness do have -

one of them an observation relating to a default.

Your Honours, the next way in which we would

seek to develop the third proposition is this:

where damages would not be easily capable of

assessment, that is one of the principles

identified in Ankar warranting discharge, where the
prejudice is not insubstantial and real. In the

present case, it was held by Mr Justice Brownie

that there clearly was substantial prejudice. But

we say that His Honour also found a duty of care

and implicitly a breach. If Your Honours just go

very briefly to his judgment at page 8 in the

application book His Honour expressly refers to the

fact - and this is in the context of him saying

that there is a discharge:

the plaintiff owed a duty to the defendants to

take reasonable care that the benefit of the

security provided by the.debenture should not

be lost:

And in substance, where it appears in His Honour's

reasoning, it must follow that what His Honour was

saying was that there has been negligence, the

usual principle that should be applied in

circumstances of the present case such as

identified in Ankar, where damages are not readily

capable of assessment, is that equity gives rise to

Darling 14 10/4/92

discharge as a result of the breach of that

tortious duty.

Your Honours, the last proposition that we

have sought to develop is that of

Mr Justice Deane's which was delivered in Ankar and

Arnick
and has support identified in Rowlatt, which application of principle as to whether the

circumstances which exist give rise to liability is

one which we would say has greater content and

scope than the facts of this case. So,

Your Honours, this case, in our respectful

submission, does give rise to circumstances where

there has been a clear breach of a contractual

term. We say, picking up what His Honour

Justice Deane said, in the circumstances of the

present case the liability simply does not attach

where there has been a breach of that term. That

proposition, and the development of it, is one

which we would say has general application and is

wide of significance.

Before I depart the propositions I have

identified, can I just add this: one way of testing

the first proposition is to ask, bearing in mind

the contract found by His Honour

Mr Justice Brownie, which is perhaps best picked up

at the bottom of page 2, on to page 3, namely the

nature of the agreement was that:

there was an agreement between the plaintiff and the defendants that, in consideration of the defendants procuring further security for

the plaintiff in the form of the debenture,

the plaintiff would take the necessary steps

to register that debenture timeously, and the

plaintiff failed to do so, with the

consequence that the defendants were

prejudiced, in as much as if they were now to
pay the plaintiff, the rights which the

plaintiff would have had against the

liquidator under the debenture, had it been

registered promptly, and to which the

defendant would have been subrogated upon

payment, are void;

Your Honours, that agreement is what

His Honour picks up in his judgment at page 9 where he identifies that the application of clauses 7 and

8 would have defeated the purpose of the contract,

where he says, about line 17:

anq this necessarily involved -

this is the nature of the agreement -

Darling 15 10/4/92

the notion that the defendants would have the

protection of the debenture.

One postulates this question: could it have been

intended, in the light of this agreement, that, for

example, in breach of contract, the creditor could

release the security taken. Your Honours, we would

say, postulating that example as one in the

circumstances of there being an agreement found to

take the debenture, it could not possibly be the

case that the contractual right in the present case

to take the debenture was one which could have been

released under clauses 7 or 8, and for the very

reason that we earlier identified, namely that

those clauses are concerned with equitable rights.

We do wish to very briefly focus on the last

matter that my learned friend referred to, which is

the language used, which Your Honour the

Chief Justice sought to pick up. We would develop

it slightly further than my learned friend sought

to do. The use of the word "void" found in

clause 8(g) is concerned with void in respect of

preference, namely an occurrence that takes place

later on by reason of a security being held to be

void. Where it says, in (g) the "Collateral

Security held or taken", it means properly taken

and clearly, when it talks about being void, it is
referring to being held to be void by reason of

conduct by way of preference.

What it certainly does not identify is any

conduct of the creditor. It does not identify
conduct which His Honour Mr Justice Kirby

identifies as negligence. If Your Honours will

recall that at the foot of page 12 in the

application book, line 25, His Honour picks up:

apparently through negligence, the charge was

not promptly registered by the appellant.

does it identify breach of contract, and that is	It does not identify negligence, nor on any view
the primary proposition we put. The same flows in
relation to clause (n) that my learned friend referred to. It identifies "under the law relating to sureties". That law relating to sureties is the
equitable rights, not rights arising out of breach of contract. Nothing in (n) identifies conduct of the creditor or the conduct of the creditor in the present case.

We would respectfully submit that the approach

also adopted by the President when he came to look
at the question of construction did not take into

account, even if one were applying Darlington Futures without qualification, the nature and

Darling 16 10/4/92

object of the contract. What was sought to be

applied was the purpose of clause 8. In the

President's judgment what he focussed on was what

he perceived to be the purpose of clause 8 as

opposed to the nature and object of the contract,

which is what Mr Justice Brownie said was the

reason why clauses 7 and 8 did not apply.

Your Honours, in conclusion can I say this: in

so far as Your Honours are of the view that it is

not a matter that falls within the first limb - of
the basis for grant of special leave, if it is

perceived as not having general application, we say

that in the present case there would be real

injustice so far as the administration of justice

is concerned if the applicants are required to go

back to face a trial where there has been a clear

error of law, which we say is manifest from the

reasons of the majority, which would never have had

to take place. In other words, the applicants in
this particular case suffer the substantial injustice that will flow in being forced to

litigate further a trial which would never have

taken place and then have posed for it the

significant problems that I think my learned friend

touched upon but perhaps should have - if I could

take Your Honours back to one part of it - to

Mr Justice Kirby's reasons in the orders identified

at page 24. The issues to go back to be agitated

at this trial that should, in our respectful

submission, never take place if it be the case that

there is an error by the majority, is one to "be

amended consistently with the judgment of this

Court;"

The proposition of identifying the amendments

necessary to give effect to that principle, in

essence, involve incorporating the very error of

law which, in our respectful submission, warrants

the grant of special leave. If the Court pleases.

MASON CJ: Thank you, Mr Street. Yes, Mr Emmett,
MR EMMETT:	Your Honours, with the greatest respect, the

grounds of appeal and the submissions exhibit a

confusion of the very nature that is outlined by my
friend Mr Street's written document, that is the

confusion between the contractual rights, on the one hand, and the equitable rights on the other.

What the Court of Appeal was concerned with

was the operation of clause 8 in so far as it

negates the equitable right which a surety has to

be discharged if there is a loss of a security.

They held that clause 8 was sufficient to exclude

the operation of that equitable principle. Now,

there is nothing new about that, there is nothing

Darling 17 10/4/92

special about that. Clause 8 certainly is a clause

of the sort which one usually finds in commercial
guarantees these days, although one could not

suggest that the language of it is the same as that

found elsewhere.

But what the majority did was clearly reserve

for another day the question of whether or not
there was a breach of some contractual right which
the guarantors had by reason of the contract which

they found had been made. Now, that appears in the

passage from the President to which my learned

friend, Mr Stevens, referred at page 20, half-way

down the page there is a heading "Alternative

claims in contract and negligence require trial".

At the hearing of the appeal, the second

respondent relied upon a notice of contention.
This asserted that Brownie J's orders should

be affirmed on a number of additional grounds.

Including various allegations of implied terms and the like.

These issues were not determined by Brownie J

in the approach which he took.

Mr Justice Mahoney took the same view, as appears from page 29:

This does not mean that, if and insofar

as they have contractual rights against the
Bank for its failure to secure registration of
the security, those rights are not
enforceable. They may be. But that is not a
matter which arises for determination on this

appeal.

My friend, Mr Street, took Your Honours to the

order proposed by the President. Page 48 is a copy

of the order that was actually made or the judgment

that was actually entered by the Court of Appeal,

namely: 

That there be returned to the Commercial

Division for trial the Cross-Claims of the

First and Second Defendants as they may be

amended consistently with the judgement of

this Court.

That is not to say that there had to be a

restrictive amendment. The court found that there

was a contract made in December 1989 between the

plaintiff and the defendants and found that there

was a breach - or there may well have been a breach

of that contract on the face of it. In the terms

found, there was a breach of the contract, namely

Darling 18 10/4/92

the failure to register. Now, that question has

not yet been determined. That is something

preserved for trial before the commercial division.

Your Honour Mr Justice Toohey referred to the fact

that those causes of action, whatever they are, are

yet to be resolved.

TOOHEY J:	But what the applicants say - at least Mr Street said was that, in effect, why should be be put
through another trial if in fact the Court of Appeal has gone wrong in its construction. There
is a circularity, of course, in the proposition.

MR EMMETT:  That is right. You assume that the Court of

Appeal is wrong - our contention, of course, is

that the Court of Appeal is quite right - and if

need be, I will take Your Honours to the way in

which the argument proceeded to show that there are

two steps in the argument. Both the President and

Mr Justice Mahoney were prepared to assume, without deciding, that the effect of the contract made in

December was to vary the original contract, because all three judges held that if there was no

variation, then there was certainly no discharge.

That appears from what the President says at

page 19, line 6:

The exempting provisions of clause 8

expressly relieve the appellant from the

consequences of its omission to complete the

steps contemplated in the collateral security,

viz registration of the debenture.

Going over to the next page, the second line:

Accordingly, upon the assumption that the

agreement of December 1987 represented an

informal but effective variation of the deed

of guarantee, it required ..... that it be read subject to the continuing obligations of that

deed. These included clause 8. That clause

was thereafter to be read as referring to the

guarantee as varied.

So the President did not decide that question.

Mr Justice Mahoney, in the beginning of his

judgment says:

I agree with the conclusions of the other

members of the Court which lead to the

essential issue for decision, namely, the

effect of cl 8 of the Deed of Guarantee.

At page 28 he says, at line 19:

Darling 19 10/4/92

I accept for this purpose that the Bank

accepted a contractual obligation of this

kind -

in other words, without deciding -

as part of the agreement made by the parties

for the grant of the Collateral Security. For

myself, I do not think that that contractual

obligation was, properly understood, a

variation of cl 8 of the guarantee. I do not think that, for example, the effect of it was to provide, by way of qualification to cl 8,

that the clause should not operate in respect

of a Collateral Security, the defects in

which resulted from a breach of that contract.

Mr Justice Handley dealt with the question at

page 42, having dealt with what his view of the

construction of clause 8 was, said, at line 21:

If the later contract took effect as a

variation of the Deed of Guarantee the

appellant's breach would operate in accordance

with Ankar v National Westminster Finance to

discharge the respondents from their

guarantee.

It therefore becomes necessary to consider

whether the contract of December 1987 was a
separate contract or a variation of the Deed

of 22 May.

So two judges assume, without deciding, that there

is a variation in order to determine whether or not

the principle applies. Mr Justice Handley did make

a decision - that is he decided that there was a

variation but, with respect, His Honour's reasoning

is defective - and I will come back to that in a

moment - but one has a situation then that, on the

way the Court of Appeal decided the matter, one

only gets to the question of the effect of clause 8

in relation to this arrangement if one finds that
in these particular circumstances there was a

variation, rather than a new contract.

Now, that involves looking at the facts of

this case. One has to consider the terms of the

contract that were found by Mr Justice Brownie and
then determine whether that new contract
constituted a variation or simply a separate

contract though, in our submission, that issue of

itself cannot be of any importance but Your Honours

will have to decide that without any assistance

from the court below before getting to any further

question.

Darling 20 10/4/92

MASON CJ:  How is it suggested that the agreement

constituted a variation of the deed of guarantee?

I have some difficulty in understanding that,

Mr Emmett. I realize I should not be asking that

question of you, because all you will do is say you

share my difficulty.

MR EMMETT:  With respect, yes. But Mr Justice Handley deals

with it at page 44. With the greatest respect to

His Honour, there does appear to be a non sequitur

in his reasoning. Line 19 he refers to the notion

of:

"a collateral contract, which may be either

antecedent or contemporaneous ... being

supplementary only to the main contract,

cannot impinge on it, or alter its

provisions" -

he refers to Maybury and Hoyt's v Spencer.

In my opinion these principles are not

relevant in the present case.

But then, having cited a slab from

Mr Justice Isaacs in Hoyt's v Spencer, at line 20

His Honour says:

In the present case the later contract

necessarily "alters ... the contractual

relations of the parties".

In circumstances where he is dealing, not with the

sort of collateral contract that was in issue in

Hoyt's v Spencer, which is one contemporaneous with or before the main contract, but one which is made

after it. Now, there is nothing startling about a

contract made after the main contract, varying it
or having some effect on it. Ordinarily one would
expect that if people are going to enter into new

terms, new arrangements, then it would impinge in some way on the first contract. He goes on to say:

However no rule of law prevents the later

agreement affecting "the independence and

legal effect" of the earlier or "the

contractual relations ... established by the

main contract".

We say that cannot be so.

Accordingly there is no reason for treating the later contract as independent of the

earlier. Once the later contract is treated

as interdependent with the earlier then it

must, so it seems to me, operate as a

variation of it. These conclusions are

Darling 21 10/4/92

supported by a further statement by Isaacs J

in the same case at 148 where he said:-

"If in any case the Court finds two

enforceable agreements executed in such

circumstances that one is intended to affect

the other, ... such effect will be given to
them as the superimposing operation of the

governing contract requires."

In the present case the later agreement is the

dominant one because in the event of any

inconsistency it will prevail -

we would not quarrel with that as an obvious

statement -

but the above analysis is helpful as it

demonstrates, if that is necessary, that the

question is simply one of contractual

intention.

A variation may operate by way of partial

rescission alone, partial rescission with new

terms substituted for those rescinded, or by

the addition of new terms without any partial

rescission ...... In the present case the

contractual relations between the parties

were, on any view, altered by the addition of

new terms without partial rescission of the

old. The "genesis" and "aim" of the variation

was to improve the position of the guarantors

in relation to their existing guarantee. The

further security offered related to the same

indebtedness.

Now, His Honour then seems to conclude without
anything further that because it could operate as a

variation, it should be treated as operating as a

variation.	He does not, in any way, analyse the
terms of the two contracts to see whether - - -

MASON CJ:  And see how the second agreement varies the terms

of the first agreement.

MR EMMETT: It does not, with the greatest respect. It just

has nothing to do with the terms of the first

contract. The first contract remains totally

unimpaired and unaffected. There is a new contract

the terms of which, as found by Mr Justice Mahoney, are set out I think at page 7 - the passage that my friend, Mr Street, read, I think, is the

contention, although I must say the contention and

what His Honour found are much the same, but I

think his finding perhaps starts at page 6, line 7.

I find that there was an agreement made:

Darling 22 10/4/92

Then going to line 18:

I find too that there was an express term

such as the defendants contend for; Mark

Darling's initial request was that the

plaintiff "make the necessary arrangements";

then, after the credit committee agreed in

principle ..... the letter to Mark Darling of 27

December said in plain terms that "All

documents should be returned to us so that

.... we can attend .... to the stamping and

subsequent registration of the Deeds of

Charge". I am concerned with the position as

between the plaintiff and the defendants, and

not with the position as between the plaintiff

and the principal debtor, ..... this passage in

the letter of 27 December ..... constituted an

offer by the plaintiff to the defendants:

in these terms:

if you procure execution of the documents

enclosed with the letter of 21 December, and

return them and a cheque for the amount of the

solicitors' fees, the plaintiff would register

the Deed -

Now, that is the contract that was found; the

breach was in failing to procure the registration

of the deed. That, with respect, has nothing to do

with the contract of guarantee. It may well be

that the existence of the contract of guarantee was

the rationale for the guarantor's entering into

such a contract, but it is in no way connected. It

is a totally different and separate obligation.

That is the confusion, with respect, that is

involved in the grounds that are relied on in the

draft notices of appeal.

Clause 8, so the majority held, and indeed so

did Mr Justice Handley - so would

Mr Justice Handley have held but for his conclusion

that there was a variation - clause 8 may or may

not have anything to do with the contractual

obligations. That is a matter for the cross-claim.

Clause 8 is concerned with the equitable principles

that protect a guarantor or a surety from loss of a

security by a discharging him. The court simply

said, those principles have been excluded by

clause 8, not only in relation to existing

securities but in relation to future securities.

And the wording of that is clear enough. express release of securities, a fortiori, it must include a negligent loss of securities.

Darling 23 10/4/92

Now, there is nothing startling about any of

that. Their Honours in the majority therefore held

that clause 8 operated to prevent a discharge on

Ankar v National Westminster type principles. They

said nothing about the case which was sent back for

trial. The only difference, in effect, between the

majority and Mr Justice Handley was

Mr Justice Handley's conclusion that this was a

variation and therefore you read back into the

guarantee a term which was not there in the first

place and then apply Ankar, namely that the failure

to perform the contract of guarantee as varied was

not an insubstantial failure to perform, therefore

it discharged. But that, with respect, involves

Your Honours having to make a finding which the majority certainly did not do before and which will

involve an analysis of the circumstances of the

particular case.

So far as the question of void or not is

concerned, which is not an issue that we understood

was argued at great length below - - -

MASON CJ:	No, that appears to be so.
MR EMMETT:	It does not seem to have been addressed by

Their Honours anyway. My recollection may be

faulty but I do not recall it being argued in this

way. I would not say that it was not. But that

really involves - I am told that it was, and I

accept that unreservedly in that case - but that is

simply a construction of the words of this clause

in this particular case and that is not a matter of

any great moment.

MASON CJ: Because it is obvious the clause speaks to the

future.

MR EMMETT:  Indeed.

MASON CJ:  So that it is necessary to confine the meaning of the word "void" in order to exclude what has

occurred.

MR EMMETT:  Yes. As we apprehend the argument. So that in

our submission, Your Honours, there is certainly no

miscarriage of justice. The guarantors, although a judgment has been entered into, the Court of Appeal granted a stay pending the resolution of the cross- claim and it is conceivable that they might

establish damages equal to the amount of the claim.

So that they will end up losing nothing, the costs

of the original trial have been reserved to await the outcome of the cross-claim, so that there is,

in our submission, no error of principle below and

that if the defendants are ultimately successful on

their cross-claim, then they will be indemnified at

Darling 24 10/4/92

least to the extent that an order for costs will

indemnify them.

In those circumstances, in our submission, both applications should be dismissed with costs.

MASON CJ: Yes, thank you, Mr Emmett. Yes, Mr Stevens.

MR STEVENS: If I can perhaps pick up the implied invitation

of the learned Chief Justice as to the approach of

Mr Justice Handley. It is to be found essentially

commencing at page 33, line 25, where His Honour

considered the approach of the trial judge that he:

found that the appellant's letter of 29

December and the enclosed documents

constituted an offer to the guarantors that if

they procured the execution -

and then that, in essence, has been picked up from

the learned trial judge, Mr Justice Brownie's,

judgment by my learned friend.	He then goes on to
say in line 10:

In my judgment the challenge by the appellant

to the relevant findings by the trial judge

fails.

Then at line 14:

The subject matter of the negotiation was of

great importance to the guarantors. The

"genesis" and "aim" of the transaction was to

improve the security position of the appellant
in order to reduce the ultimate liability of

the guarantors.

Line 25:

Once this letter is construed in the light of

the genesis and aim of the transaction (see	Codelfa Construction v State Rail Authority	(1982) 149 CLR 337 at 348) there is no
difficulty in finding, as the trial judge did,
that the offer it contained was made to the
respondents ...... Whilst there was no formal
amendment to the Deed of Guarantee, in my
opinion this alone does not demonstrate,
objectively, that the parties did not intend to enter into legal relationships.

Then that genesis and aim proposition is picked up

by His Honour at page 46 in the passage which

Your Honours have already been taken to at line 15,

the "variation may operate" and then at line 22:

Darling 25 10/4/92

the "genesis" and "aim" of the variation was to improve the position of the guarantors in

relation to their existing guarantee.

So it is within the concept of the later variation,

picking up the test which was laid down in Codelfa
Constructions, as to whether or not it would be

able to so do it, in the instance of there being an

offer sought by the guarantors from the creditor.

The other attack, in our submission, still is to

seek to confine this case to its peculiar facts.

In our submission, that does not arise and need not
arise, both in terms of the terms as were found by
the trial judge and as were accepted by

Mr Justice Handley. In our submission it provides

an appropriate factual matrix and an appropriate

leaping point in relation to the matters of general

application. The learned President also, at

page 17 at line 6, was able to say:

I am prepared for the purpose of this analysis

to assume, as Handley JA has concluded, that

the agreement of December 1987 operated as a

variation of the agreement evidenced by the

deed of 22 May 1987. I will accept that it

supplemented the deed with additional terms,
although the amending agreement was not itself
under seal.

With respect, that again highlights the divergence of approach as to whether or not - or the realm to

which other terms are appropriate to ever be

implied if there has been a subsequent variation,

His Honour the learned President being unwilling in his ultimate construction to import any other terms

as had to be implicit within the reasoning. But

that is not to put it on the facts. In our

submission, it still becomes considerations of

general application and that this is an appropriate

vehicle to be able to so explore them. If

Your Honours please.

MASON CJ: Yes, Mr Street.

MR STREET:  Your Honours, just very briefly, can I just add

to that at page 20 in His Honour the President's

judgment he picks up the proposition which my

learned friend, Mr Emmett, is now seeking to

advance as a challenge to meet the application

which is a question of fact, where he advances that

there was not a finding that the agreement was
varied. At page 20 point 5, the statement by the

President that:

That clause was thereafter to be read as

referring to the guarantee as varied -

Darling 26 10/4/92

is inconsistent with any other conclusion than that

the agreement was varied by the agreement entered

into in December 1987. Implicit in what my learned

friend again read from Mr Justice Mahoney, page 28,

in his judgment is that the agreement was

varied - - -

TOOHEY J: Just before you leave page 20, Mr Street, is not

that passage prefaced by the assumption that

appears in line 2?

MR STREET: It is, but none the less His Honour has then

made findings in accordance with that.

Your Honour, I cannot perhaps take it higher than

what I have sought to say. Could I then go,
though, to page 28 and say this, that again what is

picked up at the bottom of page 28, from line 20 to

the end, in relation to the variation of clause 8

is founded on the premise, (a) that clause 8 does

apply when we say, as a matter of construction, it

has no application to breach of contract; and (b)

it is implicit that again the agreement as varied

is accepted by His Honour Mr Justice Mahoney.

But, Your Honours, can we also say that the proposition my learned friend advances as to

whether or not there can be such a variation is in

itself a question of significance. We say that

nothing advanced by my learned friend overcomes the

prejudice - and we say very real prejudice - for
the administration of justice that the applicants
then face in this particular case in so far as they
are then forced to go back to litigate in respect

of matters which are to be determined, as

His Honour the President has ordered, in accordance

with the principles identified in this judgment

which picks up the error and gives effect to it.

If the Court pleases.

MASON CJ:  The Court will take a short adjournment in order

to consider the course it will take in this matter.

AT 3.30 PM SHORT ADJOURNMENT

UPON RESUMING AT 3.35 PM:

MASON CJ:  The question whether the subsequent agreement

between the guarantors and the creditor constituted

a variation of the deed of guarantee not having

been conclusively decided by the Court of Appeal,

Darling 27 10/4/92

we do not consider that this case is a suitable

vehicle for the determination of any question of

general principle.	The applications are therefore
refused.

MR EMMETT:	I ask for an order for costs.
MASON CJ:	Mr Stevens , Mr Street, you do not oppose an

order for costs?

MR STREET:	Your Honour, only to the extent that the question that remains as to whether there has been
a variation will be determined by a court at first
instance and that question would be appropriately
determined by the trial judge, if successful. The
issue on which special leave has been refused is
one on which the respondent loses it would have
been inappropriate for it to succeed on that ground. If the Court pleases.
MASON CJ:	The application is refused with costs.

AT 3.37 PM THE MATTER WAS ADJOURNED SINE DIE

Darling 28 10/4/92