Farrow Mortgage Services Pty Ltd (in liq) v Collins

[1994] QCA 111

IN THE COURT OF APPEAL	[1994] QCA 111
SUPREME COURT OF QUEENSLAND

Appeal No. 191 of 1993

Before Fitzgerald P. McPherson JA. Pincus JA.

[Farrow Mortgage Services Pty. Ltd. v. Collins]

BETWEEN:

FARROW MORTGAGE SERVICES PTY. LTD.
(IN LIQUIDATION)

Plaintiff (Respondent)

v.

NOEL LESLIE COLLINS and LORNA JUNE COLLINS

Defendant (Appellants)

REASONS FOR JUDGMENT - THE COURT

Judgment delivered 05/05/94

This is an appeal from a judgment delivered in the Trial Division on 7 September 1993. Judgment was given against the appellants for $509,515.00, and they were ordered to pay the respondent's taxed costs of the action, including any reserved costs. The judgment related to loans made by the respondent to a company which the appellants controlled, together with interest. The appellants were sued as guarantors of the company's indebtedness to the respondent. The amount of the judgment is the agreed shortfall from the respondent's recovery against the company.

In 1988 and 1989, the company had two blocks of land. One block was at Wishart, which it proposed to subdivide and sell. The other was at Tewantin, upon which it proposed to erect units which were then to be sold. It was arranged that, for these purposes, the respondent would lend the company $1.72 million, including an "Application Fee" of $200,000.00 and "Capitalised Interest" of $120,000.00. The loan was to be repaid with interest within one year. The two projects were intended to produce the necessary funds for this purpose. Repayment was secured by a Bill of Mortgage over the company's land, and collateral securities including a Bill of Mortgage over land owned by the appellants, a further Bill of Mortgage over land owned by the male appellant and a Deed of Guarantee. All the documents were dated 6 January 1989.

The respondent relied principally upon the personal covenant by the appellants in the Bill of Mortgage which they gave over their jointly owned land. In that instrument, the appellants were referred to as the "Mortgagor", their company was referred to as the "Debtor" and the respondent was referred to as the "Mortgagee". The schedule to the Bill of Mortgage provided:

"The Mortgagor ... in consideration of the Mortgagee ... at the request of the Mortgagor and the Debtor ... lending or agreeing to lend and advance the sum of ONE MILLION SEVEN HUNDRED AND TWENTY THOUSAND DOLLARS ($1,720,000) to the Debtor (which monies are hereinafter called 'the Advance') as the Mortgagor and the Debtor hereby acknowledge ... DO HEREBY COVENANT with the Mortgagee as follows:-
...

Repay Monies Hereby Secured

1.   The Mortgagor will pay to the Mortgagee ... the whole of the monies hereby secured as shall remain owing hereunder.

Interest

2.1 The Mortgagor will pay to the Mortgagee ... so long as the monies hereby secured or any part thereof shall remain unpaid interest on the monies hereby secured or such amount thereof as shall for the time being remain unpaid. ..."

It was accepted for the appellants that there was a variation of the transaction between the respondent and the appellants' company in January 1990 or, as it was put for the appellants in another context, a new loan was made by the respondent to the company at that time. It was conceded by the appellants that the provisions of their Bill of Mortgage are wide enough in their operation to oblige the appellants to pay the respondent notwithstanding this alteration in the transaction between the respondent and the company, but it was contended that that was immaterial since, in the events which occurred, the appellants were under their promise of payment in no obligation under the Bill of Mortgage. A number of reasons were advanced by the appellants for this contention. One was that the respondent repudiated its obligation under the Bill of Mortgage to lend $1.72 million by its refusal to lend more than a portion of that sum, a refusal which was communicated by the respondent to the appellants in April 1989. An alternate submission was that the respondent's omission to lend that sum in accordance with the Bill of Mortgage was a breach of an essential condition and thus a repudiation of the Bill of Mortgage. Finally, it was submitted that, by reason of the respondent's omission to lend the $1.72 million, the consideration for the appellants' obligations under the Bill of Mortgage failed and/or a condition precedent to the appellants' obligations was not fulfilled. On the appellants' case, under their Bill of Mortgage the respondent was required to advance the full amount of $1.72 million within the year originally provided for its repayment and, once that had not occurred, the appellants' obligation to make payment to the respondent came to an end or perhaps failed to arise.

It is unnecessary to consider in detail the appellants' allegation that the respondent repudiated its obligation under the Bill of Mortgage in April 1989. The allegation, as pleaded, was limited to that time and was based solely on testimony from the male appellant, whose evidence the trial judge considered "seriously unreliable". Other evidence, including correspondence, file notes and other documentation during 1989, did not support either a conclusion that the respondent repudiated its obligation in April 1989 by a refusal to advance the agreed sum or a conclusion that the appellants had accepted such a repudiation.

Before proceeding to consider the appellants' other contentions, it is desirable to say something more of the circumstances which have given rise to the dispute between the parties.

The original proposal between the parties, which may not have been fully reflected in the documents, envisaged that the two projects, one at Wishart and one at Tewantin, would proceed contemporaneously, and that the respondent would make advances to meet progress payments on the construction of improvements as the work was carried out. The total amount agreed to be advanced was based on the assessed requirement for each project.

However, no funding, except perhaps for the payment of rates, was provided in respect of the Tewantin project after mid-1989. By then, it had been ascertained that the cost of the Wishart project would be higher than anticipated and that the loan limit would not provide sufficient funds to complete the Tewantin project. The respondent did not wish to continue lending money on the Tewantin project if it could not be funded within the limit of the agreed advance.
Further, at that time, the appellants' company wished to postpone the Tewantin project until it had sufficient "pre- sales", or sales "off the plan" of the units to be constructed. It was arranged that the Wishart project would be pursued and the Tewantin project delayed, although the extent of the intended delay does not seem to have been clearly established. File notes of the respondent in July and August 1989 proceed on the basis that the appellants' company was unwilling to proceed with the Tewantin project until sufficient unit sales had been effected and wished to concentrate on the Wishart project, and there was even discussion concerning the sale of the Tewantin land. The respondent seemed to favour that course, but in any event its concern was less with the "presales" of the units and more with the company's inability to finish the units as well as the Wishart project within the agreed limit of the loan.

By 12 September 1989, the company (or the male appellant) wrote to the respondent asserting a "total commitment to the success of both ... ventures". The letter is very optimistic with respect to the "saleability" and "profitability" of the Tewantin units. A forecast was made that the construction work at Wishart would take approximately 12 weeks, and it was said:

"It is my wish to see the foundations of Tewantin in place prior to Christmas 1989 to give credibility to getting sales "off-plan" during the peak holiday period".

The letter enclosed information and reports with respect to both projects which are not included in the material available on this appeal. However, it is a fair inference that it was apparent that the agreed loan would not extend to the completion of both projects. It is also plain that the Tewantin project could not be completed and the units sold and the loan repaid by the due date.

Two days later, the appellants' company was informed that the respondent would not "fund at this moment" the construction of the Tewantin units "as our exposure is too high". The internal memorandum which records that fact, which was approved by the respondent's Manager Corporate Finance, recommended that it "proceed with the development of Wishart and put on hold the construction of units at Tewantin." However, it was recognised that "in order to pay the debt, the borrower will need to develop the unit site at Tewantin, at a latter date, but should we proceed with Wishart our exposure will decrease substantially. Full net proceeds from the sale of residential lots will be retained ...
Upon the sale of lots at Wishart, our exposure will be 76%, with security remaining being the unit site at Tewantin and the clients home. ... we are adequately secured and should continue to fund the project in order to reduce our exposure."

It is reasonable to infer that that course was acceptable to the appellants' company. It must have been obvious to all concerned by mid-September 1989 that there was no purpose in proceeding with funding of Tewantin up to a partially completed stage with insufficient funding to complete it and certain default by the appellants' company because the units could not be sold in time to repay the loan when it fell due in January 1990.

Matters seem to have stood like that until the respondent wrote to the appellants' company on 22nd November 1989, pointing out that the loan was due to expire on 12 January 1990 and asking the male appellant to contact the respondent "to arrange a mutually convenient time to discuss your future requirements."

That must have been done and, on 15 January 1990, the respondent wrote to the appellants' company confirming that it was "prepared to extend the ... loan" on specified terms and conditions. The "Loan Amount" was stated to be "1,720,000 (Plus Capitalised Interest of $86,300.00)", and the "Extended Term" was stated to be "One Year - expiry date 12/1/91.". It was a special condition that "Consideration for funding of Tewantin project will not be given until all lots in Wishart development have been sold and settled with Farrow Corporation receiving full nett sale proceeds.
Funding for the unit development will depend upon a satisfactory Loan to Valuation Ratio at the time." There was no reference to the Deed of Guarantee in the letter, but, from the description of the "Security Property", it was apparent that the appellants' Bills of Mortgage were to continue to provide security for the loan.
The "extension" was accepted by the appellants' company. The acceptance was signed by the male appellant, who gave evidence to the effect that the steps which he took in his dealings with the respondent were known to the female appellant and supported by her. There is, in these circumstances, an air of unreality in approaching this matter on the footing that the appellants' guarantee is ineffective, but they are entitled to defend on any basis, however technical, which is available to them. It is convenient to deal first with the alleged failure of consideration.

1. Failure of Consideration
This argument for the appellants depends on the

erroneous premise that the loan and advance of the entire sum of $1.72 million provided the only agreed consideration for the appellants' covenants in their Bill of Mortgage. The alternative consideration stated in that instrument was the respondent's promise to lend and advance that sum. The rule that mutual promises can amount to consideration for each other has long been settled: se Chitty on Contracts, 26th Ed., Vol.1, "General Principles", para.161; Carter and Harland "Contract Law in Australia", 2nd Ed. para. 313.

There may also be other answers which favour the respondent; for example, the Bill of Mortgage was registered in the Office of the Registrar of Titles and hence took effect as if sealed and delivered: Real Property Act 1861 as amended,
section 35; cf. Associated Securities Ltd. v. Perry (1978)
Qd.R 13.

2.   Breach of Essential Condition/Failure of Condition

Precedent

In Ankar Pty. Ltd. v. National Westminster Finance
(Australia) Limited (1987) 162 CLR 549, a surety guaranteed
the performance of a hirer under a contract for the hire
of machinery. By cl. 8 of the guarantee, the owner of the
machinery agreed to notify the surety if the hirer proposed
to sell or assign its interest in the machinery. By cl.9,
the owner agreed to notify the surety if the hirer was in
default under the contract, whereupon the surety and the
owner would confer about the course of action the owner
would take pursuant to the default. The owner committed

breaches of both clauses. It was held that the surety was

discharged from liability.

Mason ACJ, Wilson, Brennan and Dawson JJ. delivered a joint judgment which discussed the possibility that a term of a contact of guarantee might be (i) a non-essential term or warranty (ii) an intermediate or innominate term (iii) an essential term or condition of the contract and/or (iv) a condition precedent to the surety's obligation to perform the contract, i.e., by indemnifying the creditor. At pp.555- 6, their Honour' said:

"A condition precedent may be unfulfilled without any breach of contract, but when performance by the creditor of a contractual promise is a condition precedent to the liability of the surety under a contract of suretyship, ... the creditor's promise is necessarily an essential term of the contract ...

Conversely, when a contractual promise is a condition, performance of the promise, if the promise so elects, is ... a condition precedent to the promisee's executory obligations."

Later, at p.557, their Honours spoke of the need "to take into account ... the special character of a suretyship contract and ... the relationship which it creates between the parties " in determining whether or not a term of such a contract is a condition of the contract and/or a condition precedent to the surety's executory obligations. They then continued: "As a preliminary to a consideration of this matter, it is necessary to examine the special principle, said to apply to a suretyship contract, that a surety is discharged from its obligations by the creditor's breach of that contract, so long at any rate as the breach materially prejudices the interests of the surety."

Having considered that "special principle", their Honours said at p.561:

"If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety's obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred. ... in construing the contract the court is entitled to look to the general setting in which the contract has come into existence ... ."

In the present matter, neither party submitted that the
respondent's promise to the appellants to lend money to
their company was either a warranty or an innominate term.
The promise was a condition of the contract of suretyship
constituted by the appellants' Bill of Mortgage and
performance of that promise was a condition precedent to the
appellants' obligation under the Bill of Mortgage to make
payment to the respondent. The dispute between the parties
centred upon the content of the respondent's promise to the
appellants and whether it had been breached. The appellants
argued that the respondent's obligation was to lend their
company $1.72 million in the period of a year initially
contemplated by the transaction. The respondent's submission
was that their promise to lend that amount was modified and
qualified by other terms of the Bill of Mortgage.
Attention was drawn to the definition of "Advance" in clause 44.1.2 of the appellants' Bill of Mortgage and to clauses 23.1.8, 41.3.2.6., 41.3.2.9 and 41.9. Those provisions are as follows:

" ...

23.1.8 The Advance shall be made to the Mortgagor and/or the Debtor by the Mortgagee in such instalments as the Mortgagee may in its absolute discretion from time to time determine, having regard to the progress of the construction of the building or improvements towards completion and to the work remaining to be done, ...

41.3 Provisions where Mortgagor is Surety for Debtor (whether named or unnamed)

When the Mortgagor is or becomes a surety to the Mortgagee for any person the following paragraphs shall apply ...

41.3.2 This Mortgage and Obligations of the Mortgagor to the Mortgagee under this Mortgage ... shall not be diminished, affected or discharged by any of the following:-

...

41.3.2.6 any laches, act, neglect, omission, mistake or default of the Mortgagee ... whereby the whole or part of the liability of the Mortgagor to the Mortgagee as a surety would but for this provision have been affected or discharged.

...

42.3.2.9 any act or omission on the part of the Mortgagee ... contrary to the interests of the Debtor;

...
41.9. Right to Vary the Limit of the Advance

The Mortgagee may from time to time increase or otherwise vary the limit (if any) and types of advances and accommodation to the Debtor otherwise amend or vary or add to or agree to any amendment or variation of or addition to the contracts or other arrangements now or from time to time hereafter in force between the Mortgagee and the Debtor or replace the same with new contracts or arrangements and may transact any business with for or on account of the Debtor as its absolute discretion and without any notice to, knowledge or consent by the Mortgagor being necessary to the intent that this Mortgage shall extend to cover the contracts agreements from time to time in force between the Mortgagee and the Debtor irrespective of the nature and scope of the contracts agreements and arrangements between the Mortgagee and the Debtor contemplated or in existence at the time of execution of this Mortgage. Notwithstanding any variation in the repayment arrangements from time to time between the Debtor and the Mortgagee and irrespective of the effect upon the Mortgagor and/or the Debtor's liability under this Mortgage it shall not be necessary for the Mortgagee to obtain the Mortgagor and/or the Debtor's consent to any of the foregoing or to notify the Mortgagor of the same.

...

44.1.2 "Advance" means the amount specified in Item 4 of the Schedule as the Advance or if the context requires any part thereof."

These clauses provide ample support for the respondent's argument. Shortly stated, although the section of the schedule to the Bill of Mortgage set out earlier, if taken by itself, would have obliged the respondent to lend to the appellants' company the entire $1.72 million, the other clauses quoted above significantly limited that obligation. For example, under clause 23.1.8, the respondent had a wide discretion concerning the sums which it provided, and, in particular, it was under no obligation to the appellants to provide funds to their company in advance of the performance of work to which the payment in question would be related. More particularly, the respondent was under no obligation to the appellants to make loans to their company in respect of its Tewantin project unless and until work for which the payment was required had been carried out.

It is unnecessary to discuss further the ambit of clause 23.1.8 or to consider the other clauses relied on by the respondent. The foundation of the appellants' contention is not made out and their appeal must therefore fail.

The appeal is dismissed, with costs to be taxed.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 191 of 1993

Brisbane
[Farrow Mortgage Services Pty. Ltd. v. Collins]

BETWEEN:

FARROW MORTGAGE SERVICES PTY. LTD.
(IN LIQUIDATION)

Plaintiff (Respondent)

v.

NOEL LESLIE COLLINS and LORNA JUNE COLLINS

Defendant (Appellants)

Fitzgerald P. McPherson JA. Pincus JA.

Judgment delivered 05/05/94

Separate reasons of The President, Pincus JA. and McPherson

JA.. All concurring as to the orders made.

APPEAL DISMISSED. Costs to be taxed.

CATCHWORDS:	MORTGAGES - construction and interpretation - consideration - mortgagor agreed to lend and advance sum to mortgagee to purchase and develop two blocks of land - mortgagor agreed to make advances to meet progress payments on construction - construction not undertaken on second block within loan period - whether to advance entire loan sum was failure of consideration - whether breach of essential condition or failure of condition precedent.
Counsel:	Mr J. Douglas Q.C. with him, Mr P.J. Flanagan for the appellants
Mr J. Bell Q.C. for the respondent
Solicitors:	McIvor and Coghlan for the appellants Carter Newell for the respondents
Hearing Date:	17/03/94

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 191 of 1993.

Brisbane

[Farrow v. Collins]

Before	Fitzgerald P. Pincus J.A. McPherson J.A.
BETWEEN:

FARROW MORTGAGE SERVICES PTY LTD

(in Liquidation)

Plaintiff (Respondent)

AND:

NOEL LESLIE COLLINS and

LORNA JUNE COLLINS

Defendant (Appellants)

REASONS FOR JUDGMENT - PINCUS J.A.

Judgment delivered 05/05/1994

The facts relating to this appeal are set out in detail in the reasons of the President, whose explanation of them I gratefully adopt.

The appellants were sued as guarantors of moneys lent to a company. It was not disputed that moneys were lent, nor that the company was obliged to repay those moneys with interest and some other charges. The substantial argument for the appellants was, as explained in the reasons of the President, that since not so much had been lent as was contemplated or promised, their obligation as guarantors has been discharged.

Amongst other provisions, the respondent's argument relied upon cl. 8 of the guarantee, a document executed on 6 January 1989:

"In order to give full effect to the provisions of this Guarantee the Guarantor declares that the Lender shall be at liberty to act as though the Guarantor is the principal debtor and not a surety and the Guarantor waives all rights either at law or equity or under any statute that the Guarantor might otherwise be entitled to claim or enforce".

If one takes literally the statement that the lender is to be at liberty to act as though the guarantor were the principal debtor, any argument which reaches the conclusion that the appellants as guarantors have a lesser obligation than has the company, as principal debtor, cannot be accepted. The argument put forward by Mr James Douglas Q.C. who led for the appellants is of that kind: if accepted, it would involve the Court in differentiating between the obligation of the appellants to the respondent and that of the principal debtor.

The authority principally relied on by Mr Douglas,

Ankar Pty Ltd v. National Westminster Finance (Australia)

Ltd (1987) 162 C.L.R. 549, illustrates the possibility of so differentiating; the guarantor was held not liable because of breaches of express terms of the guarantee. Here, the breach alleged against the respondent does not appear to be based on such an express term; the argument is, in essence, that there was a breach of an implicit condition of the guarantee, namely that the money proposed to be advanced would be advanced in full.

If this was a condition it was one operating "at law" within the meaning of cl. 8 of the guarantee; no doctrine of equity appears to be involved, so that the efficacy of a clause such as cl. 8 to displace the operation of equitable doctrines is not a question which arises here.

In The Fletcher Organisation Pty Ltd v. Crocus Investments Pty Ltd [1988] 2 Qd.R. 517, the effect of a "principal debtor" clause similar to the one in the present case was discussed; decisions dealing with the effect of such clauses were dealt with. The judges were all inclined to give the clause there in issue (clause 6) full effect:

see at p. 527 line 12, p. 537 line 32, p. 543 line 46.

I can find no reason in principle why the parties to an agreement described as a guarantee should not be free to agree that the so-called guarantor may be treated as the principal debtor, at least so far as to achieve the result that breaches of contract on the part of the creditor which do not affect the principal debtor's obligations cannot be relied on by the guarantor either. The possibility arises that a document headed "guarantee" and thought by the obligor under it to have that character may be ineffective if it in truth simply makes the "guarantor" a principal debtor, if there has been fraud or misleading conduct; but nothing of that kind is relied on here. That is, the appellants do not contend that cl. 8 should not be enforced against them because they did not expect the guarantee document to contain such a clause.

It follows, in my opinion, that assuming there was a breach of contract on the part of the respondent in that it lent only part of the sum of $1.72M mentioned in the documents, that breach cannot discharge the appellants' liability because that result would be inconsistent with the stipulation in cl. 8 that the respondent may act as though the appellants were principal debtors.

I should add that the assumption that there was in truth a breach of contract is a dubious one, but it is unnecessary to determine its correctness.

I agree that the appeal should be dismissed.

THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 191 of 1993

Brisbane

Before Fitzgerald P.
McPherson J.A.
Pincus J.A.

[Collins v. Farrow Mortgage Services]

BETWEEN

FARROW MORTGAGE SERVICES PTY LTD.
(In Liquidation)

(Plaintiff) Respondent

v.

NOEL LESLIE COLLINS and LORN JUNE COLLINS

(Defendants) Appellants

REASONS FOR JUDGMENT - McPHERSON J.A.

Judgment delivered the Fifth day of May 1994

This appeal should be dismissed. I agree with the opinions of Fitzgerald P. and Pincus J.A.