Gablepath Pty Ltd v Murdoch

[2001] NSWSC 871

CITATION:	GABLEPATH PTY LTD v. MURDOCH [2001] NSWSC 871
CURRENT JURISDICTION:	EQUITY
FILE NUMBER(S):	SC 3379/1997
HEARING DATE(S):	10, 11 & 14 May 2001
JUDGMENT DATE:	8 October 2001
PARTIES :	Gablepath Pty Limited - Plaintiff Paul Murdoch - Defendant Michael Hill, Brian Doyle, John Teague and David Fox t/as Turnbull Hill Solicitors - Cross Defendants to Second Cross-claim
JUDGMENT OF:	Bryson J at 1

COUNSEL :	Ms S. Higgins for Plaintiff T. Howard for Defendant and Cross-claimant C. Birch SC for Cross-defendants to Second Cross-claim
SOLICITORS:	Harris Wheeler Lawyers - Plaintiff Cantle Carmichael Lawyers - Defendants Phillips Fox Lawyers - Cross-defendants to Second Cross-claim
CATCHWORDS:	EQUITY - unconscionable dealing - special disadvantage - CONTRACTS - unjust contracts - Contracts Reveiw Act 1980 - Gablepath sued Murdoch on guarantee given by 3 Directors of Auto One Repairs for balance of purchase price of business secured by Bill of Sale over plant - Murdoch cross-claimed (1) against Gablepath for equitable relief and Contracts Review Act relief claiming he did not understand concept of guarantee (2) against Turbull Hill Solicitors who acted for him claiming guarantee was not adequately explained and he was not properly advised whether to enter into transaction. On the facts, Murdoch's claim not to have understood the transaction was rejected and numerous circumstances relied on as unfair to him were held not to be unfair - it was found that the Guarantee was adequately explained by solicitor - judgment for plaintiff, cross-claims dismissed.
LEGISLATION CITED:	Contracts Review Act 1980 Corporations Law
DECISION:	Plaintiff recovers on guarantee, cross-claims dismissed. See [49]

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

3379 OF 1997

BRYSON J.

MONDAY 8 OCTOBER 2001

GABLEPATH PTY LTD v. PAUL MURDOCH; MICHAEL HILL & ORS practising as TURNBULL HILL SOLICITORS Third Parties

Judgment

: These proceedings were commenced in the District Court at Newcastle on 8 February 1994 and later transferred to this Court. The plaintiff Gablepath Pty Ltd claims to enforce liability of the defendant Mr Murdoch under a Deed of Guarantee supporting debt owed by Auto One Repairs Pty Ltd for part of the purchase money on the sale of a business. By the Third Party Notice the defendant claimed indemnity, damages and other remedies against the partners of Turnbull Hill Solicitors, the firm which acted for the principals of Auto One Repairs Pty Ltd. Mr David Fox, the fourth-named third party, was the only partner who took a significant part in the events. Mr Fox later left Turnbull Hill Solicitors and started his own firm.

2 The principal figure in Gablepath was and is Mr Maxwell Nichols. After a career with the BHP Company he took a redundancy offer in 1990, looked for business opportunities and purchased a franchise for the Newcastle area from Thermotec Auto Spraying. The Thermotec system is a production-line process for repairing and respraying motor vehicles; Thermotec Auto Spraying set up and franchised businesses, and their service included advice on setting up the work station and obtaining equipment. The most expensive piece of equipment and central to the operation was a Spray-Booth-Bake Oven through which vehicles under work could be moved in a production-line process. Other significant equipment was a Dust Extractor, a Paint Mixing Room and a Compressor. Spray painting presents work-safety, technical and management problems, and spray booth operators required to be licensed. Gablepath operated the business at Pendlebury Road Cardiff from November 1990. Mr Nichols ran the business as Managing Director, attending to management tasks and also participating in operations. Mrs Nichols was the only other director. At first there were seven or eight employees but the number fell. Mr Nichols did not feel that the business was as successful as he had hoped, and he listed it for sale with Wilsons Business Brokers Pty Ltd on 26 November 1991.

3 In November 1991 Mr Daryl Harmes was employed in the business; he had practical skills as a panel beater and spray painter, but to Mr Nichols’ knowledge Mr Harmes did not own a house or have other significant assets. Mr Harmes told Mr Nichols he was considering going out on his own and he approached Mr Cheu Lan Yap, an architect practicing at Hamilton, for financial backing. Mr Lan Yap looked over the premises several times and was given financial figures by Mr Nichols. After some discussions Wilsons the business brokers reported on 4 February 1992 that Thermotec Auto Spraying (referring to Gablepath) had agreed for the sale of the business to Mr Lan Yap and Mr Harmes for $55,000. By that time Mr Lan Yap had paid Wilsons $5,000 deposit which was held in their trust account. Although Wilsons reported a number of matters as agreed particulars of sale, no sale took place in the terms they reported, and conversations and negotiations continued until April. A large difficulty was that the Spray-Booth was subject to a financing arrangement in a form of a lease from a bank, so that if Gablepath was to pass ownership of the Spray-Booth to purchasers the bank would have to be paid out, and to do this the purchasers would have to raise and pay enough of the price in cash to enable this to happen. Mr Lan Yap and Mr Harmes were not, it seems, in a position to raise or pay enough money to do this. The purchase needed to be financed. Mr Lan Yap had paid $5,000 deposit and was able to raise some more money. Mr Harmes was treated as having brought $5,000 into the transaction when in fact he had been lent that money by Mr Lan Yap. Mr Harmes’ participation was important because of his practical skills.

4 Mr Murdoch became involved in discussions with Mr Lan Yap and Mr Harmes about participation by Mr Murdoch in purchasing the business. However Mr Murdoch and his participation were not made known to Mr Nichols until April 1992 at a very late stage. Several different possible financing schemes were considered in the period from February to April, including the possibility that Mr Lan Yap and Mr Harmes would provide Gablepath security over property including their motor cars. There were communications between Mr McDonald of Harris Wheeler solicitors representing Gablepath and Mr Nichols, and Mr Fox representing Mr Lan Yap and Mr Harmes. A meeting took place at the Cardiff premises early in April, probably on Monday 6 April, attended by Mr Nichols for Gablepath and Mr Lan Yap, Mr Harmes and Mr Murdoch. This was the first knowledge Mr Nichols had of Mr Murdoch’s involvement. The principal terms relating to price and to vendor finance were agreed at this meeting and the parties decided to go ahead. Some significant matters were not established at this meeting. One was that as the premises were leasehold it was necessary to make arrangements with the landlord to assign the lease and to accept the incoming purchasers. Another was the identity of the purchaser. So far as was then known to Mr Nichols the purchasers were to be Mr Lan Yap and Mr Harmes, and some documents for the proposed sale were drafted on this basis. At the meeting on 6 April it emerged that Mr Murdoch was also involved in some way. It later emerged that the purchasers wished to use Auto One Repairs Pty Ltd as their vehicle.

5 Auto One Repairs was a newly formed company which had no other business. Its incorporation was handled by Mr Lan Yap’s accountant. According to a statutory declaration which Mr Yap made on 8 April 1992 its directors were Mr Harmes, Mr Lan Yap and Mr Murdoch and its shareholders were:

Paul Murdoch Building Services Pty Ltd 5,000
Cheu Lan Yap 10,000
Bemog Pty Ltd 5,000
Daryl Harmes 2,500

Paul Murdoch Building Services Pty Ltd was a company the only shareholders in which were Mr Murdoch and his wife. Bemog Pty Ltd was in some way controlled by or associated with Mr Lan Yap.

6 On 7 April Mr McDonald sent Mr Fox forms of Agreement for Sale, Deed of Assignment of Lease and Bill of Sale. On the same day Mr Fox told Mr McDonald by a fax message that the purchaser would be Auto One Repairs Pty Ltd; this was the first time that company was introduced into dealings with Gablepath. Mr Fox also made some statements about the purchase price, which was to reflect the payout figure on the spray booth at $66,397 together with a sale price of $45,000 with several adjustments. Mr Fox pointed out amendments required in the documents. On 8 April Mr McDonald sent Mr Fox what he called Mark III documentation for execution. These became the principal documents constituting the transaction.

7 The Agreement for Sale of Business bears date 10 April 1992. The parties were Gablepath as vendor and Auto One Repairs as purchaser. Execution by Auto One Repairs was attested by the signatures of Mr Murdoch, Mr Lan Yap and Mr Harmes. The price was shown to be $109,987 together with stock in trade $5,700. It appears that each party executed one counterpart under seal and the counterparts were exchanged on settlement. Special Condition 30 provided for payment of the balance of purchase moneys $38,500 on completion and as to $66,397 together with interest from completion until payment in the manner provided in the form of Bill of Sale annexed.

8 A Bill of Sale was taken in connection with settlement of the purchase. Obviously there were irregularities in preparing the Bill of Sale. Mr Lan Yap made a statutory declaration on 8 April 1992 dealing with the Bill of Sale; the statutory declaration said among other things that the document had been duly executed by the company although it is clear that its execution was not complete when the statutory declaration was made. Eventually the date 1 June 1992 was written in the Bill of Sale although it had been executed in April and used at settlement to secure most of the purchase price; internal references show this and interest was calculated from 8 April 1992. It was registered as a Charge under the Corporations Law on 3 June 1992. The seal is attested by the signatures of Mr Lan Yap and Mr Harmes. The Bill of Sale provided for repayment by instalments of $1579.85 on the 8th day of each month commencing 8 May 1992 until 8 April 1997 on account of principal; and also interest at 15% per annum also payable on the 8th of each month.

9 The Deed of Guarantee was given the date 10 April 1992. It was executed under the seal of Auto One Repairs attested by Mr Lan Yap as Director and Mr Murdoch as Secretary. It was also executed by Mr Lan Yap, Mr Harmes and Mr Murdoch as Guarantors. The Guarantee extended to (cl.2(a)) “Any loan agreement from time to time between the debtor and the creditor” which clearly caught up liability under the Bill of Sale. It extended much further and in effect was a “all moneys” guarantee for any obligation of Auto One Repairs to Gablepath. However this extension has not had any practical effect as the only claims Gablepath have made have related to principal and interest payable under the Bill of Sale as security for $66,400 which was treated as a loan or vendor finance on sale of the business. On the face of the documents the liability of Auto One Repairs and its guarantors to pay the instalments of principal and interest is clear. Instalments were only paid for a few months.

10 Mr Murdoch intended to become involved in running the business of Auto One Repairs. In fact he did so and within a few months became dissatisfied, on the basis of knowledge he gained from his active involvement. Mr Murdoch ceased to be involved in the affairs of Auto One Repairs and sold his shares to one Simon Ball in October 1992. At a later time the business of Auto One Repairs failed and Mr Murdoch does not know the whereabouts of Mr Lan Yap or of Mr Harmes. Gablepath has sued only Mr Murdoch for guarantee liability; Gablepath has not sued either the principal debtor Auto One Repairs or the other two guarantors. Gablepath has no obligation to sue the others and there is no reason on the evidence to think that any good purpose could be served by doing so. Each guarantor is, according to the terms of the Guarantee cl.1(3)(a), severally liable, the plaintiff is entitled to sue any one of them and is not obliged to sue the others, and as Mr Murdoch is not aware of where the others are the probable reason for the plaintiff’s choice appears fairly readily.

11 There was cross-examination of Mr Murdoch about his understanding and about the arrangements he made about meeting obligations when he left Auto One Repairs and sold his shares to Simon Ball. This evidence showed that Mr Murdoch was aware that he had some potential liability as a director, but was not conclusive or clear about what he understood about guarantee liability. Certainly he saw the need to get himself some protection on this occasion.

12 The plaintiff has claimed the balance of principal and interest. The matters in issue at the hearing did not relate to the operation of the documents according to their terms, but to claims by Mr Murdoch that he should be relieved against their operation. Except as to the amount of payments in default and matters of calculation the plaintiff’s claim was not disputed by Mr Murdoch in the form of his Notice of Grounds of Defence as amended at the hearing. The position Mr Murdoch took in his Notice of Grounds of Defence and in his Cross-claim against Gablepath is that he should be relieved in Equity against the Guarantee, or that it should be declared void under the Contracts Review Act 1980, on grounds stated in paras.6-12 of his Notice of Grounds of Defence.

13 Many allegations were made in support of Mr Murdoch’s position but the most significant are:

6(a) At the time of the execution of the said Guarantee the Defendant was unaware that he would be personally liable for any or all of the amounts secured by the Guarantee in the event that Auto One Repairs Pty Limited (the “Debtor”) would make default in the repayment of the loan monies.
(b) The implications of the Guarantee for the Defendant’s well being and financial security would not or not adequately explain to the Defendant nor understood by him.
(f) The Defendant is a man of limited education and with no relevant commercial business or financial experience.

14 At the time of the significant events Mr Murdoch was 25 years of age and had been married for over 2 years. He attended New Lambton High School until Year 10 and obtained the School Certificate. He undertook a pre-apprenticeship course in Carpentry at the Tighes Hill TAFE for 12 months. He served an apprenticeship as carpenter for the Department of Main Roads, completed his apprenticeship in 1996 and worked as a tradesman carpenter for the Department of Main Roads until early 1990. He then started working as a subcontract carpenter. In 1990 his business was incorporated as Paul Murdoch Building Services Pty Ltd. He retained an accountant who set up the company. Mr Murdoch and his wife were the directors and his wife did the book work. Mrs Susan Bailey obtained a Commerce Certificate at Tighes Hill TAFE and was employed as a clerk with Energy Australia. In the accounts of Paul Murdoch Building Services the turnover for the financial year to 30 June 1992 was $102,703.38 and the net profit was $25,968.86. In 1992 Mr Murdoch started to work in co-operation with Mr Zain Arabelovic whom he had met at Tighes Hill TAFE while learning carpentry. They formed a new company Amcon Constructions Pty Ltd and the directors were Mr Arabelovic and Mr Murdoch. This company was also operating in the financial year 1992 when it had a turnover of $25,202.76 and in the following year it had a turnover of $470,963.36. In 1986 when he was about 19 years of age Mr Murdoch bought a cottage from his father and obtained mortgage finance to do so; the cottage was rented out as an investment property so as to pay off the mortgage. In 1988 Mr Murdoch and his future wife purchased a home unit and borrowed mortgage finance to do so. About May 1992 they purchased a house in Rankin Park and again borrowed money on a mortgage to finance it. They lived there and rented the unit out.

15 In my finding Mr Murdoch was, in 1992, better equipped by education and life experience for business dealings than most people of his age and at least as well equipped as the average member of the community. He had enough ability to deal with banks and raise mortgage loans, run businesses with private companies, make profits and own investment properties, and to handle business as a subcontract carpenter in the building industry, with turnovers in hundreds of thousands of dollars and associated use of credit. He had access to advice about his affairs from an accountant, and he acted on the accountant’s advice in operating through limited companies. One object of operating through limited companies is to limit the personal obligations of the principals. Mr Murdoch knew, because his accountant had advised him, that trading as a company provided protection of his personal assets. He was aware of the significance of the difference between making a credit arrangement on behalf of the company under the company seal and making the credit arrangement personally. Mr Murdoch consulted his own accountant Mr Webber on 21 February 1992 and obtained business advice from him about the proposed purchase.

16 One of the causes of delay from February to April in completion of the purchase was that there was a need for the purchasers to obtain finance to pay for the Spray-Booth. Mr Lan Yap told Mr Murdoch in March 1992 that he was having difficulty in obtaining finance to buy the Spray-Booth, and that he had tried but could not get a loan for the new company to finance the Spray-Booth from the Greater Newcastle Building Society. Mr Lan Yap told him that he had spoken to finance brokers at Charlestown who were looking at lending to the business and “They want to see each of our financials first. Can you arrange to go and see them?” After this Mr Murdoch and his wife attended the finance brokers, took their financial records and showed them to the brokers and answered questions about Mr and Mrs Murdoch’s assets and Mr Murdoch’s companies’ turnover. The broker raised the subject of personal finance and said “If you ever want to arrange personal finance we would have no problem lending to you.” Mr Murdoch said that they were not interested in personal finance – “We are only interested in a company loan for the spray painting business.” No loan through this finance broker was forthcoming.

17 Mr Murdoch was present at the meeting in April at the business premises at which Mr Nichols was present as well as Mr Lan Yap, Mr Harmes and Mr Murdoch. Mr Murdoch did not take a prominent part in the discussion, but took a sufficient part to indicate understanding and interest. At this discussion arrangements were made striking the final price and arranging for Gablepath as vendor to allow part of the purchase money to be outstanding. It is Mr Murdoch’s evidence that he attended at Mr Fox’s office in the company of Mr Lan Yap, and was present when Mr Lan Yap gave Mr Fox instructions about the problems arising out of not getting finance to buy the Spray-Booth, and arrangements were made for Mr Fox to speak to “the other side” meaning the vendor’s solicitor about vendor finance.

18 The documents used when the transaction was settled were prepared within a short time, apparently two or three days before settlement actually took place. Mr Fox notified Mr McDonald that Auto One Repairs was to be the purchaser by a fax message on 7 April. Mr McDonald forwarded redrafted documents on 8 April. Mr Murdoch signed the Guarantee and paid his part of the purchase moneys on 9 April. Settlement occurred on Friday 10 April. The exact date of each event is not critical.

19 Gablepath’s solicitor Mr McDonald prepared the Guarantee on the basis that there were to be two guarantors, Mr Lan Yap and Mr Harmes; Gablepath did not stipulate for Mr Murdoch to give a guarantee, and the vendor would probably have gone ahead with the transaction if Mr Murdoch had not done so. From the point of view of Gablepath and its solicitor Mr McDonald, at settlement the Guarantee was produced with handwritten alterations and signature showing Mr Murdoch as a guarantor in addition to Mr Lan Yap and Mr Harmes, and the advantage of an additional guarantor was accepted with no foreknowledge. Gablepath, Mr Nichols and Mr McDonald had little information about Mr Murdoch except that he was a shareholder and director of the purchaser and had attended the last meeting at which the terms of the sale were settled. They had no occasion to address or consider Mr Murdoch’s position or whether it was fair or appropriate for him to give a guarantee; if they had thought about it it would have seemed unremarkable that all the principals of Auto One Repairs joined in guaranteeing the company’s liability. If they had thought about it, it might have seemed strange if two of the shareholders and directors had given guarantees and the third did not; but they had no occasion to review what it was that it led Mr Murdoch to join in the Guarantee.

20 Allegations in the Notice of Grounds of Defence and in the Cross-claim that Gablepath was guilty of unconscionable conduct in procuring Mr Murdoch to execute the Guarantee are completely without substance. Gablepath and its solicitor did nothing to procure Mr Murdoch to execute the Guarantee or to take any other part in the transaction, and did no more than accept his participation when it was proffered.

21 A guarantee is a common-place business arrangement and the meaning of the word must be very well known among people in the Australian community whose first language is English, particularly among those who have business experience, even of the most rudimentary kind. The concept of giving a commitment and becoming liable for the debt of another person to enable that other person to get credit is a very simple concept, which every ordinary person is likely to encounter as part of general life experience, and would have no difficulty understanding if in need of an explanation. In saying this I leave out of consideration persons with social or intellectual disadvantages and persons whose first language is not English; Mr Murdoch is not affected in any of these ways. Far from being isolated from business concepts and practices, Mr Murdoch had, by 1992, been at least as much exposed to them as the ordinary person.

22 Mr Murdoch specifically denied while being cross-examined that he knew, in 1992, the meaning of the word “guarantee”. He said that he thought that the company was guaranteeing to pay back the money. I disbelieve this evidence. He said too to the effect that he learnt “the full ramification of what a personal guarantee was” from an explanation given by his solicitor after he was served with the Summons. I do not believe that this was the first occasion on which he understood what was meant by a guarantee given by himself. He has not satisfied me that he had any difficulty in understanding that simple concept at any time relevant to his dealings with Gablepath.

23 I do not accept that Mr Murdoch had any difficulty understanding the concept of a guarantee in the context of Auto One Repairs, in which he (through one of his companies) had shares and was director and secretary, obtaining credit for a large unpaid part of the purchase price of the business. He can have had no difficulty in understanding what a guarantee was, and his evidence that he did not understand this is not credible. In my view on the facts it must have been obvious to Mr Murdoch that as one of the principals of Auto One Repairs he would have to guarantee its obligation to pay the unpaid purchase money when it was buying a business on credit, at a time when it had only just been formed, had no business and only small resources. It would have been a very strange transaction, so unbusinesslike as not to be believed, if Gablepath and its principal did not obtain guarantees from the principals of Auto One Repairs. A person dealing with Mr Murdoch in a business context would not have anything before him to indicate that Mr Murdoch had difficulty in understanding the word “guarantee” or in understanding the concept of what a guarantee was, and there would be nothing in the circumstances to indicate a need for any special care in the use of language or any special explanation of the concept. There was nothing to indicate such a need, and indeed there was no such need.

24 In the Notice of Grounds of Defence a number of matters are alleged as grounds upon which the transaction was unconscionable and these are repeated and adopted in the Cross-claim as grounds upon which there should be relief under the Contracts Review Act against the Guarantee. One respect is that it is alleged, with many particulars, that there was material inequality in bargaining power between the plaintiff and the defendant. Although many matters of particulars are alleged, there is no basis for consideration of material inequality in bargaining power between the plaintiff and the defendant, as there was no point in which the plaintiff brought any bargaining power to bear upon Mr Murdoch. Many matters of particulars are alleged under this head. It is alleged (a) that Mr Murdoch was unaware at the time of execution of the Guarantee that he would be personally liable for amounts secured; I do not accept that this was the fact. It is alleged (b) that the implications of the Guarantee for his wellbeing and financial security were not adequately explained to him nor understood by him. There was no person to whom it fell to give this explanation of the obvious, and in particular it did not fall to the plaintiff to do so, and in my view of his situation Mr Murdoch would not have been assisted by any explanation as he was quite able to understand the significance of joining in the Guarantee obligation.

25 A number of other particulars do not require special notice; the transaction was obviously although indirectly for Mr Murdoch’s benefit if he wished to participate in a company which bought assets beyond its resources, he had taken the decision to be involved in the purchase of the business on what he regarded as adequate investigation and consideration and had adhered to this position over several months, and it was not for the plaintiff to question him on his understanding of the transaction or on the advice he had sought or had received. There is no reason on the evidence to think that Mr Nichols had any advantage over Mr Murdoch in terms of business experience. Particulars (g) and (k) seem to turn on the view that there had been misrepresentation on the part of the plaintiff about the capacity of the business to carry on; there is no basis in the evidence for this. There was no haste in the transaction, and Mr Murdoch had every opportunity from February to April to consider his position fully and consult any advisor he wished to consult.

26 Although the language of the Guarantee is elaborate and technical, and it could extend very widely to all moneys which Auto One Repairs might come to owe to Gablepath, the plaintiff’s claim and the only liability which it is shown that Auto One Repairs incurred arises from the simple central core of the sale and the unpaid balance of the purchase money. No difficulties arising from the elaboration of the terms of the Guarantee have any real bearing on Mr Murdoch’s situation. Other matters alleged are that it was not reasonably practical for Mr Murdoch to negotiate for alteration or rejection of any of the provisions of the Guarantee; I do not regard this as significant because the liability which arose did not arise out of any unusual or obscure provision. In para. 9 of the Notice of Grounds of Defence it is alleged that Mr Murdoch was incapable of understanding the meaning of the Guarantee; I am satisfied that this allegation is wrong. In para. 10 it is alleged that Gablepath and its agents did not adequately explain the Guarantee; in the circumstances, they were not called upon to do so as they did not present the document for Mr Murdoch’s execution or solicit his execution of it, while Mr Murdoch had access to whatever advice or explanation he wished to obtain, if he had been in need of an explanation. In para 11 it is alleged that the language of the Guarantee was such that Mr Murdoch was incapable of understanding it; in my finding, he had no difficulty whatever in understanding, and fully understood, the substance of the obligation, and this is not affected by the elaboration and obscurity of some of its provisions.

27 The defendant’s counsel in submissions identified circumstances which were alleged to be relevant to the claims for equitable relief and relief under the Contracts Review Act and I will endeavour to state their substance and indicate the effect of the reasons why I have not accepted them.

(a) The defendant was an unsophisticated man of limited education and no commercial or financial experience outside the limited confines of pursuing his trade as a subcontractor carpenter.

As appears from findings elsewhere, I am of the view that the defendant had quite sufficient experience and understanding to decide whether or not to enter into the Guarantee.

As appears from my findings, Mr Murdoch had an adequate understanding of the effect of the Guarantee, and had an explanation from Mr Fox which was relevantly sufficient.

29 (c) It was submitted to the effect that Mr Murdoch had little part in the negotiations for the sale.

In my finding Mr Murdoch had adequate time to consider whether or not he should participate in the purchase and the basis on which he should do so, he obtained his accountant’s advice when he wanted to and he had altogether sufficient understanding to attend to his own interests. He took part in the last negotiation meeting, his behaviour did not indicate any adequacy on his part and there was no adequacy.

30 (d) It was submitted to the effect that Gablepath and Mr Nichols had no arrangement before settlement to take guarantees, apart from what was indicated by Gablepath’s solicitor forwarding a draft.

In my view the requirement for a guarantee was dealt with adequately and fairly by forwarding the draft guarantee, and a vendor in Gablepath’s circumstances could not reasonably be expected to require any less. The requirement can have caused no surprise to Mr Lan Yap or Mr Harmes, and the variation including Mr Murdoch in it can have caused no surprise to him either.

31 (e) It was submitted to the effect that it was a relevant circumstance of unfairness that Gablepath’s solicitor took the initiative in preparing a Deed of Guarantee when told that the identity of the purchaser had changed to Auto One Repairs. In my opinion this is not in any way an unfair circumstance.

32 (f) It was submitted to the effect that the Draft Guarantee showing Mr Yap and Mr Harmes as Guarantors showed that there was an agreement for them to be Guarantors without Mr Murdoch. In my view this is not correct; the requirement for a guarantee was originated by Gablepath’s solicitor, there is no indication in evidence that there had been prior discussion, it was an obvious requirement and further it was obvious, as among principals of Auto One Repairs, that all the principals should give guarantees. This submission did not reveal any unfair circumstances.

33 (g) It was submitted to the effect that Gablepath’s solicitor was surprised when he saw Mr Murdoch’s name and would have settled without Mr Murdoch’s participation. This is correct, but it is not in my judgment an unfair circumstance.

34 (h) It was submitted to the effect that it was an unfair circumstance that Gablepath’s solicitor did not make any inquiry to ascertain whether Mr Murdoch had agreed to being a guarantor or understood the effect of the guarantee. In my judgment this is not an unfair circumstance as there was nothing to indicate a need for inquiry into whether or not it was fair for Mr Murdoch to participate, and as a matter of objective fact that was something that he could well decide for himself and had decided.

35 I find that Mr Murdoch was under no special disadvantage or special disability in dealing with the plaintiff. There were no facts or circumstances which indicated to Gablepath, or to Mr Nichols or to Mr McDonald, that Mr Murdoch might be under any special disadvantage or special disability.

36 Overall, a view that the transaction in which a newly-formed company acquired assets worth several times its own capital and was allowed credit for the balance and its directors gave their personal guarantees was in some way unfair to Mr Murdoch is entirely incorrect. Far from being unfair or unusual the transaction is of a kind which is made very frequently and is beneficial to participants who are able to get credit for their business vehicle for more money than they contribute themselves. Among principals such as Mr Lan Yap, Mr Harmes and Mr Murdoch it would be odd and strange if two of the principals joined in giving a guarantee and the third did not; there is nothing in the circumstances which would indicate why Mr Lan Yap and Mr Harmes would be prepared to undertake this liability without Mr Murdoch joining in it. It was not unusually onerous, and it was not unusual at all for each director to give a joint and several guarantee for the company to obtain credit for a large amount. It was hardly possible for the company to obtain vendor finance on the purchase of business without directors’ guarantees.

37 Although there is nothing in the evidence to explain where the proposal for Mr Murdoch to give a guarantee came from it is inherently very improbable that Mr Murdoch first learnt of it when he attended at Mr Fox’s office to sign documents. Mr Murdoch said to the effect that there never were any discussions with Mr Lan Yap that Mr Murdoch was putting his personal assets up in connection with the purchase. I regard this as extremely improbable; the subject of how repayment of the balance purchase money was to be supported can hardly fail to have been discussed after the approach to the finance broker had not produced any finance.

38 My conclusion is that there is no basis on which Mr Murdoch should be granted any relief either on equitable grounds or under the Contracts Review Act.

39 Eight payments on account of the loan secured by the Bill of Sale were made by or on behalf of Auto One Repairs; there were delays, the first of the payments was made on 13 May 1992 and the last on 29 March 1993, and they total $12,557.55. The plaintiff is entitled to recover the balance of principal and also interest at 15% p.a. calculated in accordance with the Bill of Sale; the Guarantee extends in terms to both principal and interest. I adopt the calculations of principal and interest outstanding set out in written submissions by the plaintiff’s counsel, which I will leave with the papers.

40 The evidence given by Mr David Fox, one of the Third Parties, and the evidence of Mr Murdoch about events at their interview on 9 April at which Mr Murdoch signed documents including the Guarantee differ in many respects. Mr Fox gave a detailed and circumstantial account of the interview which he said was based on actual recollection, and not on simply resorting to his usual practice. Mr Fox had no significant diary note or other note recording the event, or establishing that any significant time was spent on it. A body of evidence about the times and manner in which documents including settlement cheques were transmitted to Mr Fox’s office does not present a clear picture and was of no real value to me in assessing the probabilities of what Mr Murdoch was told by Mr Fox. I find that Mr Yap and Mr Harmes had signed documents including the Guarantee earlier, on a visit made by Mr Fox to the business premises on 8 April 1992, and Mr Yap returned the documents to Mr Fox on 9 April after the company seal of Auto One Repairs had been placed on documents. Mr Fox’s evidence was that at the interview on 9 April he sat next to Mr Murdoch at a round table in an interview room and they both looked at the documents together; Mr Fox paraphrased the Agreement for Sale including the special conditions and the particulars about the purchase price. He then gave an explanation of the Bill of Sale and of its being security for repayment of the balance of $66,400, and compared the Bill of Sale to a house mortgage. It was Mr Fox’s evidence that he spoke of the Guarantee document as a guarantee when he gave an explanation of it to Mr Murdoch. Among other things he told Mr Murdoch that $66,400 was not the limit of the Guarantee and he pointed out other matters which might accrue. He says that he told Mr Murdoch to the following effect: “The effect of this guarantee is that each of you, Yap and Harmes is fully responsible for the total debt. Nichols could decide to chase whoever he thought he would have most success with for the full amount.” He says that he also pointed out that Mr Nichols could rely on the personal guarantees without first selling the Spray-Booth, and that he was not obliged to take action against the business before taking action against Mr Murdoch. According to Mr Fox’s evidence, Mr Murdoch made several observations which showed that he had addressed whether the transaction was appropriate in a business sense including saying to the effect that he had looked at the figures and it looked like a good investment, that he was aware of the cash flow and had made a decision that it was a viable investment and the business was not going to fail, that he was aware that Mr Harmes was not a man of substance and that Mr Yap had assets although they were encumbered by the ANZ Bank, and saying to the effect that “I am putting my own money in, I have made that decision, and I realised the risks involved. I think the business will be a goer.”

41 Mr Murdoch’s account of the interview is altogether different. In Mr Murdoch’s evidence Mr Yap was also present. The documents had not then been signed by Mr Yap and Mr Harmes. There was no significant explanation; Mr Fox showed Mr Murdoch some documents and pointed to where he was to sign and referred to one as a guarantee. Mr Murdoch did not seek an explanation of what it was. He said: “He did not say anything about the content of these documents or what obligations are imposed on me by signing the documents. He did not ask me if I understood the documents and he did not tell me that I should obtain legal advice before signing the documents. He said nothing to me about any other form of security or about a Bill of Sale.” In Mr Murdoch’s evidence, he did not understand the effect of signing the Guarantee. He believed he was signing documents in his capacity as a director and he did not understand that he was taking on any liability in excess of the contribution he made for a 25% shareholding. He brought with him a bank cheque for $13,000 for that purpose and the cheque was paid into Turnbull Hill’s Trust Account.

42 Many facts and circumstances were referred to and explored in cross-examination for implications on the credibility of one or the other. I did not find them of much assistance. I do not find it possible to make a confident finding of how much time the interview took; Mr Fox’s estimate is significantly longer than Mr Murdoch’s, and Mr Fox’s estimate is not supported by any record of the time spent such as it would have been in Mr Fox’s interest to record; Mr Fox made no record of the interview, let alone of the advice given. The things which Mr Fox says he explained to Mr Murdoch would not in truth take very long to explain to a person of understanding who was acquainted with the business in hand, such as Mr Murdoch in fact was. There was a difference between the two as to the time of day when the interview happened; I do not regard this as of much significance in relation to findings about what happened during the interview. I do not find anything useful in the evidence about the shape of the table. Other circumstances relating to anomalies in the completion and dating of the Bill of Sale, delays in its registration and matters of detail about processing payments into the Turnbull Hill Trust Account and records relating thereto were also of no real assistance. There is no possible motivation for manipulating Trust Account records which could have operated at the time. I was not assisted either by attempts to establish precisely when and in what circumstances Mr Fox wrote Mr Murdoch’s name and (imperfectly) Mr Murdoch’s address in the document; plainly they were written there before Mr Murdoch signed the Guarantee, and that is the significant matter.

43 There were two executed counterparts to the Deed of Guarantee. One was defective; some words on one page are not properly reproduced. This however does not indicate whether or not the terms of the document were explained by reference to the other counterpart. It is unlikely that Mr Fox or Mr Murdoch noticed this defect in one counterpart. Mr Murdoch had some diary notes, some made contemporaneously, some made later, about events on 9 April 1992 but these do not establish in a clear way either when the interview occurred or what happened.

44 For a solicitor of Mr Fox’s then 13 years’ experience in practice it is improbable that he would have acted as Mr Murdoch says he acted, and it is improbable that he would have omitted any explanation of the nature and substantial effect of documents constituting a commercial transaction including a guarantee document. On the other hand it is unlikely that he spent a great deal of time explaining the transaction to Mr Murdoch, who was a principal in the transaction, and who had as I find no difficulty in understanding the transaction in which he was entering or the substance of the documents which were to give effect to it.

45 Overall I have a poor view of Mr Murdoch’s credibility, based on his endeavour to depict himself as a person under significant business disadvantages notwithstanding the experience which he had had, and on his behaviour and responses when he was under challenge in cross-examination. Mr Murdoch bears the onus of proof in his claim against Mr Fox and his firm and has not satisfied me, on the probabilities, that Mr Fox failed to inform him of the substantial nature of the documents which Mr Murdoch signed including the Guarantee. In my view the probabilities strongly favour finding that Mr Fox gave an explanation of the Guarantee much in the form as it appears in Mr Fox’s affidavit. Mr Fox provided an adequate explanation of the legal effect of the documents and saw to it that they were properly executed. In the circumstances, this was an adequate discharge of Mr Fox’s duty. The expert evidence of Mr Boyle suggesting that Mr Fox had a fuller responsibility was not in accordance with the legal duty of a solicitor. Mr Fox did not give any commitment to do more and did not embark on doing more.

46 The alleged liability of Mr Fox was put on several different grounds, including an alleged breach of fiduciary duty. As it should be found that Mr Fox gave what was, in the circumstances, an adequate explanation of the Deed of Guarantee, and that Mr Murdoch understood the nature of the commitment he was making and was not induced to make it by any disloyalty or misconduct of Mr Fox, it should not be found that there was a breach of fiduciary duty, or any breach of any contractual duty or duty under the law of tort by Mr Fox. Mr Fox did not say or do anything by which he undertook responsibility for any business decision of Mr Murdoch.

47 In these circumstances the plaintiff is entitled to judgment and the Third Party Notice fails.

48 I adopt calculations of principal outstanding and of interest by plaintiff’s counsel. The calculations show balance of principal as $53,842.45 and interest $74,346.01 to 10 May 2001. I add interest at 15% p.a. on $53,842.45 for 151 days from 11 May to 8 October 2001 inclusive, namely $3341.18. I will give judgment for $131,529.64.

49 Orders:

(1) On the plaintiff’s claim I give judgment for the plaintiff for $131,529.64 with costs.

(2) On the Cross-claim I give judgment for the Cross-defendant with costs.

(3) On the Third Party Notice I give judgment for the Third Parties with costs.
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Last Modified: 01/03/2002