Gibbons v Pozzan
[2007] SASC 99
•22 March 2007
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
GIBBONS v POZZAN
[2007] SASC 99
Judgment of The Full Court
(The Honourable Justice Duggan, The Honourable Justice Gray and The Honourable Justice White)
22 March 2007
CORPORATIONS - LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS - EXECUTION OF DOCUMENTS - GENERALLY
Where document executed by Kangaroo Island Ferries Pty Ltd ("KIF") and two natural persons was described in the body of the document as a "deed" - where KIF's execution clause did not contain the words "executed as a deed" - whether deed validly executed pursuant to s 127 of the Corporations Act 2001 (Cth).
Law of Property Act 1936 s 41; Corporations Act 2001 (Cth) s 127, referred to.
Dean and Westham Holdings Pty Ltd v Lloyd (1990) 3 WAR 235, applied.
Meredith Projects v Fletcher Construction [2000] NSWSC 493, discussed.
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
The respondent, the appellant and Kangaroo Island Ferries Pty Ltd ("KIF") entered into a "Deed of Loan Agreement" whereby the appellant purported to provide security for a loan of $300,000 from the respondent to KIF - a memorandum of mortgage was executed by the respondent and the appellant pursuant to the Deed of Loan Agreement - argued on appeal that the mortgage was inconsistent with the terms of the loan agreement - held: that the mortgage was not inconsistent with the loan agreement and that the appellant incurred primary liability under the mortgage.
GUARANTEE AND INDEMNITY - DISCHARGE OF SURETY - GIVING TIME
KIF defaulted on repayments pursuant to loan agreement - appellant instrumental in getting the parties together to arrange for extra time within which to pay - whether appellant 's obligations as guarantor discharged due to lack of consent to variation - held: that the trial judge correctly found that any variation was with the consent of the appellant.
Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549, applied.
Rose v Commissioner of Stamps (1979) 22 SASR 84, discussed.
CONSTITUTIONAL LAW - OPERATION AND EFFECT OF THE COMMONWEALTH CONSTITUTION - INCONSISTENCY OF LAWS
Appellant argued that Law of Property Act 1936 (SA) s 41(4) is inconsisent with Corporations Act 2001 (Cth) s 127 and thus rendered invalid by operation of s 109 of the Constitution - held: that there is no such inconsistency and the South Australian provision is a valid enactment.
The State of Victoria and Others v The Commonwealth of Australia and Others (1937) 58 CLR 618, applied.
MORTGAGES - MORTGAGES AND CHARGES GENERALLY - REMEDIES OF THE MORTGAGEE
Appellant argued that default interest rate under mortgage was a penalty - held: the provision relating to interest provided an incentive to punctual payment and was not a provision which increased the interest to be paid in the event of default - accordingly, the default interest clause was not a penalty. Appeal dismissed.
David Securities Pty Ltd & Ors v Commonwealth Bank of Australia & Ors (1990) 170 CLR 70, applied.
GIBBONS v POZZAN
[2007] SASC 99Full Court. Duggan, Gray and White JJ
DUGGAN J. The respondent, in his capacity as trustee of a family trust, commenced an action against the appellant seeking payment of the sum of $300,000 and interest thereon, together with an order for possession of three properties mortgaged by the appellant to the respondent. The properties were mortgaged by the appellant as security for a loan by the respondent to a company associated with the appellant.
The trial judge gave judgment for the respondent against the appellant in the sum of $390,837.61 inclusive of interest to the date of judgment. He also ordered that the claim for possession of the properties, the subject of the mortgage, be referred to a master for further hearing and determination in accordance with the reasons for judgment. He dismissed the appellant’s counterclaim which sought rectification of the mortgage.
On appeal, it was argued that the trial judge should have found that the loan agreement was ineffective and that the memorandum of mortgage was unenforceable.
The litigation arose out of a failed business venture to establish a new ferry service between Sunset Cove Resort (formerly Wirrina Cove Resort) and Kangaroo Island. The service was conducted by Kangaroo Island Ferries Pty Ltd (“KIF”), which is now in liquidation.
KIF purchased a vessel and the service commenced operating on 24 September 2004. It ceased operating at about the time of the appointment of an administrator of the company on 3 February 2005. A liquidator for the company was appointed as from 28 April 2005.
The respondent is the trustee of the Pozzan Family Trust. At a time when the ferry service venture was under consideration, he agreed with the appellant to provide part of the funding necessary for the venture. At all relevant times, he was acting in his capacity as trustee. In the course of the negotiations, the appellant offered the three properties as security for the loan.
A document described as a “deed of loan agreement” (“the loan agreement”) was executed on 28 November 2003. Then, on 16 July 2004, the appellant executed a memorandum of mortgage (“the mortgage”), whereby the appellant mortgaged the three properties in favour of the respondent in consideration of the loan by the respondent to KIF in the sum of $300,000. Importantly for present purposes, the mortgage included the following covenant:
The Mortgagor shall repay the principal sum to the Mortgagee on the 30th November 2004 being the loan termination date.
A receipt at the foot of the mortgage acknowledges that the mortgagee provided the mortgagor with a copy of the standard terms and conditions of the mortgage prior to the execution of the mortgage. The signature on the receipt appears to be the same as the signature of the mortgagor. The appellant agreed that he signed as mortgagor and that the signature on the receipt looked similar to his signature. He said he could not recall receiving a copy of the standard terms and conditions.
The trial judge found that the appellant signed the receipt and that he received a copy of the standard terms and conditions. The first clause of the terms and conditions under the heading “To repay the principal sum” states:
The Mortgagor shall pay the principal sum and all other monies hereby secured to the Mortgagee at the time provided for the repayment of the principal sum in the terms of repayment in the schedule.
The trial judge’s finding that the appellant received a copy of the standard terms and conditions is not challenged. It is clear from the wording of the mortgage, including the standard terms and conditions, that the appellant undertook a primary obligation to repay the principal sum.
There is an issue as to whether the loan agreement was a properly executed deed. However, before dealing with that matter, it is appropriate to address the argument of the appellant that the terms of the mortgage are inconsistent with the terms of the loan agreement and that, as a result, the mortgage is unenforceable.
The loan agreement provides for a loan of $300,000 by the respondent to KIF. The appellant is referred to in the agreement as the “guarantor”.
The recital states:
WHEREAS:
A.The Borrower has approached the Lenders for the provision of finance.
B.The Lenders have agreed to advance to the Borrower the sum of THREE HUNDRED THOUSAND DOLLARS ($300,000.00) as and from the date of advance upon certain terms and conditions agreed between the parties.
C.In consideration of the Lenders making the advance the Guarantor has agreed to guarantee the Borrower’s obligations and performance under this agreement by providing security acceptable to the Lenders.
The parties wish to record the terms of their agreement in this Deed.
The agreement then provides for the loan to KIF and requires KIF to repay the principal sum and interest on or before the termination date of the loan.
Clause 4 provides as follows:
The secured monies shall be secured by:-
(a) the terms of this Loan Agreement;
(b) a registered second Bills of Mortgage over the Guarantors properties located at
Allotment 11 Deposited Plan 3245 Hundred of Mount Muirhead
Allotment 32 Deposited Plan 43705 in the area named Wirrina Cove Hundred of Yankalilla
Allotment 35 Deposited Plan 43705 in the area named Wirrina Cove Hundred of Yankalilla
(“Bill or Mortgages”); and
(c)A caveat to be lodged over the properties identified in clause 4(b) until the registration of the Bill of Mortgage has been completed. The Guarantor undertakes to execute simultaneously with the execution of this Loan Agreement all such documents necessary to give effect to the terms of this Agreement;
collectively known as “security”.
Clause 10 provides that “security” means “this agreement and the Guarantee and Indemnity and Bill of Sale referred to in Clause 4 of this agreement”.
Clause 9.1 of the Loan Agreement states, in part,
If there is any inconsistency between the provisions of this Agreement and those contained in any security or collateral agreement the provisions of this agreement shall prevail.
Mr Manetta, for the appellant, relies on this clause. He argues that the loan agreement contemplates that the appellant is under a secondary obligation which would not be activated unless there was a default by KIF, whereas the mortgage imposes a primary liability on the appellant as mortgagor to repay the principal sum on the date of the termination of the loan. According to the argument, this gives rise to an inconsistency between the two documents with the result that the principal obligation provided for in the mortgage is of no effect. In order to deal with this argument, it is necessary to have further regard to the terms of the loan agreement.
The recital in the loan agreement does no more than record past events and expresses an intention to record the terms of the agreement in the document. In the nature of a recital, it does not impose any obligation.
Clause 4 states that the monies will be secured by the terms of the loan agreement and registered mortgages over the three properties.
There is no reference in the loan agreement to the terms upon which the properties are to be mortgaged. The emphasis in clause 4 is on the provision of security, not the precise terms upon which it is to be given.
Although the appellant is referred to as the “guarantor”, there are no terms in the loan agreement which amount to a contract of guarantee. The only obligation placed upon the appellant is to execute documents so as to ensure that the loan is secured by the mortgage over the properties.
The documentation is far from satisfactory, but in my view the subsequent imposition of a principal obligation on the appellant in the mortgage was not inconsistent with the terms of the loan agreement. The mortgaging of the properties was in accordance with the loan agreement. The imposition of a primary obligation on the mortgagor to pay the loan ensured the effectiveness of the security which had been given, albeit that it did not do so by way of a secondary obligation. The respondent’s undertaking in the mortgage is in the nature of an indemnity which imposes an original and not a collateral obligation. However, as has been pointed out, the loan agreement did not create or require the creation of a guarantee. It is not without relevance that the definition of “security” in the loan agreement includes an indemnity.
Although the appellant is described as a “guarantor” in the loan agreement, there is no provision in that agreement which would require the subsequent mortgage to provide for a secondary as opposed to a primary obligation on the mortgagor in relation to the loan monies.
It follows that the mortgage is not inconsistent in any relevant respect with the loan agreement.
The appellant puts forward an alternative argument based on the assumption that the only way in which the appellant could be made liable is as a guarantor. According to the argument, the loan agreement is ineffective because it was not properly executed by KIF as a deed. It follows, so it is argued, that if KIF is not bound by the loan agreement, no liability by way of a guarantee could arise.
I have expressed the view that the trial judge was correct in concluding that a primary liability arises under the mortgage. If that is so, then this liability is independent of the continuing obligation of KIF under the loan agreement.[1] However, as the argument based on ineffectiveness of the deed has been raised, it is appropriate to deal with it.
[1] O’Donovan & Phillips, Modern Law of Guarantee 1.1100.
The argument asserts that the loan agreement was not worded and executed in the manner required in order to render it effectual as a deed. The court’s attention was drawn to s 127 of the Corporations Act 2001 (Cth) which deals with the execution of documents, including deeds, by a company. The section provides as follows:
Execution of documents (including deeds) by the company itself
(1)A company may execute a document without using a common seal if the document is signed by:
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company secretary – that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company.
(2)A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by:
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company secretary – that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company.
(3)A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).
(4)This section does not limit the way in which a company may execute a document (including a deed).
No seal was fixed to the document so that the method of execution provided for in s 127(2) was not followed. However, the respondent relied on s 127(3). The document was signed on behalf of KIF by Mr Prakash Dhupelia who was the sole director and company secretary at the time he signed. This satisfied the requirements of s 127(1). However, the appellant argues that the further requirement under s 127(3) was not complied with in that the document was not expressed to be executed as a deed. According to the argument, s 127(3) contemplates that the words “executed as a deed” are to be stated in the document.
I cannot agree that the precise phrase used in the legislation must be incorporated into the document before s 127(3) can take effect. The section dispenses with certain common law formalities which were required for the execution of a deed. The purpose of s 127 is to move away from these formalities and look to substance and intention.
Some assistance is to be found in the judgments of the Full Court of the Supreme Court of Western Australia in Dean and Westham Holdings Pty Ltd v Lloyd[2]. Section 9 of the Property Law Act 1969(WA) provides:
[2] (1990) 3 WAR 235.
9. (1) Every deed, whether or not affecting property –
(a)shall be signed by the party to be bound thereby; and
(b)shall be attested by at least one witness not being a party to the deed but no particular form or words is required for the attestation.
(2) It is not necessary to seal any deed except in the case of a deed executed by a corporation under its common or official seal.
(3) Formal delivery and indenting are not necessary in any case.
(4) Every instrument expressed or purporting to be an indenture or a deed or an agreement under seal or otherwise purporting to be a document executed under seal and which is executed as required by this section has the same effect as a deed duly executed in accordance with the law in force immediately prior to the coming into operation of this Act.
In his judgment, Ipp J considered the meaning of the phrase “expressed or purporting to be an indenture or a deed”. He said [3]:
Before considering that material it is necessary to determine whether the instrument is expressed or purports to be a deed, as required by s 9(4) of the Property Law Act. Unless this requirement is fulfilled, the document will not have effect as a deed, irrespective of the parties’ intention.
As the learned trial judge pointed out:
“The meaning of ‘expressed’ is obvious enough. It means, clearly indicated or distinctly stated, rather than implied.”
“Purport” according to the Macquarie Dictionary means “to profess or claim … to convey to the mind as the meaning or thing intended; express, imply, … tenor, import or meaning, … purpose or object …”. In the context of s 9(4) of the Property Law Act “purporting” is used in contra-distinction to “expressed”. Thus, in my view, an instrument which is not clearly indicated or distinctly stated to be a deed, but which otherwise conveys to the mind, by implication, through its tenor and the words used therein, that it is intended to be a deed, is an instrument purporting to be a deed.
Where an instrument is clearly indicated or distinctly stated to be a deed, absent any extrinsic evidence to the contrary, it would ordinarily be inferred that the parties intended that it should have effect as a deed. The question whether an instrument purports to be a deed is closely bound up with the question whether it appears from the words used in the instrument that the parties intended it to be a deed. Thus the resolution of the questions whether there has been compliance with s 9(4) of the Property Law Act and whether the parties intended the instrument to be a deed depend, in the circumstances of this case, upon a construction of the instrument itself.
[3] Ibid at 252.
The use of the expression “purporting” in the Western Australian legislation may give the section a wider operation. However, I respectfully agree with the view that “expressed” means “clearly indicated or distinctly stated, rather than implied”.
Although, speaking generally, “a document is not necessarily a deed merely because it is described as such” Meredith Projects v Fletcher Construction[4], s 127 of the Corporations Act attaches significance to the use of the word “deed” in a document. The phrase “expressed to be executed as a deed” is wide enough to refer not only to the title of the document, but to the wording of other parts of the document such as the testatum, the testimonium and the attestation clauses.
[4] [2000] NSWSC 493.
The loan agreement commences with the words:
THIS DEED OF LOAN AGREEMENT is made this 28th day of November 2003.
I have already referred to the recital, which refers to the wish of the parties to record the terms of their agreement in “this Deed”.
The testatum states:
NOW THIS DEED WITNESSES AS FOLLOWS:
The testimonium states:
IN WITNESS WHEREOF the parties hereunto (sic) have hereunto set their hands and seals the day and year first herein before written.
The attestation clauses are worded as follows:
SIGNED by the said DORIAN JUSTIN POZZAN
As trustee of the POZZAN FAMILY TRUST
In the presence of:-
…………………………………..
Witness
D POZZAN (Signed)
EXECUTED by KANGAROO ISLAND PTY LTD
(ACN 096 751 567) in accordance with the Corporations Act 2001
PRAKASH
DHUPELIA (Signed)
SIGNED by the said KIRK GIBBONS
In the presence of:-
…………………….
Witness
K GIBBONS (Signed)
In the body of the document it is described as both a “deed” and an “agreement”, although the word “agreement” dominates.
In my view it is apparent that, when the loan agreement is read as a whole, it supports the trial judge’s conclusion that it was expressed to be executed as a deed. When to this is added the fact that the document was executed in accordance with s 127(1) it can be said that the requirements for a valid execution by the company were fulfilled.
The trial judge gave a further reason as to why, in his view, the loan agreement took effect as a valid deed. His Honour referred to s 41(4) of the Law of Property Act 1936 which provides:
Notwithstanding the defective execution of a deed by or on behalf of a party to the deed, the execution will be taken to be valid if it appears from evidence external to the deed that the party intended to be bound by it.
After referring to this provision his Honour said:
Section 41(4) identifies one of the “ways in which a company may execute a document (including a deed)” within the meaning of s 127(4) of the Corporations Act.
There is ample evidence external to the loan agreement to indicate that KIF intended to be bound by it. It circulated the unexecuted document to the other parties for execution by them; it received the advance of $300,000; it paid three quarterly instalments of interest and another instalment of interest in December 2004; and it subsequently negotiated an agreement for an extension of time within which to repay the monies.
However the matter is approached, the loan agreement takes effect as a deed binding on all three parties to it.
The appellant argues that there is inconsistency between s 41(4) of the Law of Property Act and s 127 of the Corporations Act and that, by operation of s 109 of the Constitution, the State Act is invalid to the extent of the inconsistency. Notices were issued to the Attorneys-General of the Commonwealth and of the States pursuant to s 78B of the Judiciary Act 1903, but there has been no application for intervention or removal of the case to the High Court.
Section 127 provides for the manner in which documents, including deeds, may be executed by a company. Subsection (4) expresses a clear intention that the section is not intended to cover the field by prescribing the only methods of execution by a company. The effect of an acknowledgement of this nature was summarised by Mason J in The Queen v The Credit Tribunal; Ex parte General Motors Acceptance Corporation, Australia[5]:
Equally a Commonwealth law may provide that it is not intended to make exhaustive or exclusive provision with respect to the subject with which it deals, thereby enabling State laws, not inconsistent with Commonwealth law, to have an operation. Here again the Commonwealth law does not of its own force give State law a valid operation. All that it does is to make it clear that the Commonwealth law is not intended to cover the field, thereby leaving room for the operation of such State laws as do not conflict with Commonwealth law.
It is of course by now well established that a provision in a Commonwealth statute evincing an intention that the statute is not intended to cover the field cannot avoid or eliminate a case of direct inconsistency or collision, of the kind which arises, for example, when Commonwealth and State laws make contradictory provision upon the same topic, making it impossible for both laws to be obeyed.
[5] (1977) 137 CLR 545 at 563.
It becomes necessary, therefore, to examine the provisions of the Commonwealth and State statutes respectively.
Section 41(1)(b) provides that:
A body corporate executes a deed by affixation of the common seal of the body corporate to the deed in accordance with the rules governing the use of the common seal.
It is clear that this is one of the ways in which a company may execute a deed which remains available for use in accordance with the terms of s 127(4).
However, s 41(4) does not provide for a method of execution of a deed. Rather, it addresses the situation where a deed has not been properly executed, but where the defective execution may be validated in the circumstances referred to in the subsection.
This is not to say that s 41(4) has no application to the present case. However, I do not agree that it constitutes one of the alternative methods of execution referred to in s 127(4).
The question remains whether s 41(4) is inconsistent with s 127 so as to require the application of s 109 of the Constitution.
In my view, there is no such inconsistency. Section 127 is concerned solely with defining methods of execution of documents by companies which may be adopted. Section 41(4) permits the validation of a defective execution in the event that there is evidence that the party who attempted to execute the document, but did so in an incorrect manner, intended to be bound by it. I do not think it can be said that s 41(4), if valid, “would alter, impair or detract from”[6] s 127. The prescription of the method by which a document is to be executed cannot be taken as precluding a remedy being made available in circumstances such as those referred to in s 41(4) or the application of general legal principles such as the law of estoppel.
[6] The Sate of Victoria and Others v The Commonwealth of Australia and Others (1937) 58 CLR 618 per Dixon J at 630.
There is no challenge to the factual conclusion arrived at by the trial judge that there was evidence external to the document which indicated that KIF intended to be bound by it. In my view, the trial judge’s further conclusion that this was an additional reason for finding that the loan agreement takes effect as a binding agreement on all three parties to it is correct.
I should add that I see no reason why the loan agreement cannot take effect even if it is not a deed. If the loan agreement is not a deed, it is an agreement under hand. There is no statutory requirement for it to be under seal; there is a clear intention to create a legal relationship; the parties have expressed the terms of their agreement in writing; and the requirement for consideration is met.
As the trial judge pointed out, the obligations of the appellant are not made clear under the loan agreement. However, there is no doubt that the agreement is effective in creating the obligation upon KIF to repay the principal sum and interest. This result is achieved whether the document is a deed or an agreement under hand.[7]
[7] Rose v Commissioner of Stamps (1979) 22 SASR 84 at 87; LK Bros Pty Ltd v Collins & Anor [2004] QSC 26 at [20].
Counsel for the appellant raised a further argument which again assumes that the only way in which the appellant could be held responsible is as a guarantor. Counsel referred to the principle whereby a guarantor may be discharged from liability because of a variation in the agreement between the principal and the creditor.
In the joint judgment of Mason ACJ, Wilson, Brennan and Dawson JJ in Ankar Pty Ltd v National Westminster Finance (Aust) Ltd their Honours said[8]:
According to the English cases, the principle applies as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety’s rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety’s risk, e.g., a reduction in the debtor’s debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety.
The foundation of the rule is that the creditor, by varying the principal contract or extending time, has altered the surety’s rights without consulting it though the surety has an interest in the principal contract, and that the creditor cannot be permitted to do: see Rees v Berrington (1795) 2 Ves Jun 540; 30 ER 765.
[8] (1987) 162 CLR 549 at 559.
However, liability will not be affected if the guarantor consents to the variation.[9] Mere knowledge of the variation is insufficient.[10]:
[9] Wren v Emmett Contractors Pty Ltd (1969) 43 ALJR 213.
[10] Ibid at 220.
The respondent said in evidence that the principal amount of $300,000 was not paid by the due date in November 2004. He said that he had a meeting with three directors of KIF in Queensland in early December 2004, and that the appellant was at the meeting. One of the directors of KIF, Neil Hermes, said that the company did not have sufficient funds to repay the loan and that more time was needed. The respondent said that he agreed to an arrangement whereby the money would be paid back in three instalments in December 2004, January and February 2005.
The instalments were not paid.
When considering this issue in his reasons for judgment, the trial judge quoted the following passage from the evidence of the appellant:
QWere you aware of any arrangement that had been made by Kangaroo Island Ferries and the Pozzans for an extension of time?
AI was not aware of any arrangement that was made, but I was asked to become instrumental in getting the parties together.
QFirst of all, when did this occur?
AThis occurred when Neil Hermes realised that the money wasn’t paid after I said to him “Everybody is exposed here”, and that was around about the end of November.
QWhat was your involvement at that point?
AI was currently in Darwin – sorry, in Queensland. I was notified by Neil Hermes and Michael Kosky whether I could divert to Melany. I meet[sic] them in Queensland and actually drove up to see Dorian and to try and get the group together to extend this loan period, or to sort some agreement out.
QAs a consequence of that, was a meeting arranged between Dorian Pozzan and the directors of Kangaroo Island Ferries?
AYes, it was.
QWhen was that?
ASome time in the early December period – sorry, about mid-December I think.
QWere you present at that meeting?
AI was, but not as a director. Just merely to get the parties together and it was held at Rick Gould’s place.
QWho was Rick Gould?
ARick Gould was a gentleman who was working for myself prior to that, he was also very good friends of Dorian’s and Ed’s.
QSo it was neutral ground?
AYes.
QFrom your observations at that meeting was an agreement struck between Mr Dorian Pozzan and the directors?
AYes, there was.
QAs best you can recall, what were the terms of that agreement?
AThere was a late payment fee that had to be paid with a large interest component and there was some money paid to take the loan forward, I believe until about February, $30,000 – something I believe.
QDid you have any input in framing that agreement?
ANo.
QWere you asked to consent to that agreement?
ANo.
The trial judge then made the following findings:
Returning to the passage which I have quoted from Mr Gibbons’ own evidence, when he maintains that he said to Mr Hermes, “Everybody’s exposed here”, that expression, applied to himself, made it clear, if it was necessary to do so, that he was acutely aware of his exposure under the guarantee.
When he makes the further statement that he “actually drove up to see Dorian [the plaintiff] and to try and get the group together to extend this loan period, or sort some agreement out”, this makes it clear that he organised a meeting with the directors and with the plaintiff expressly with the view of trying to gain more time or to reach some sort of accommodation with the plaintiff.
When he answered later questions to the effect that he did not have any input in framing the agreement and was not asked to consent to it, I regard that as nothing more than an attempt on his part to distance himself from what was eventually agreed.
He was much more of an active party than he is prepared to admit.
I have no doubt at all that he was vitally concerned to see to it that some relief was given from what he regarded as his own personal exposure, not by the entry into an agreement that would extinguish his liability on the guarantee, as it is clear from his subsequent actions that he did not believe that that had occurred. Rather, his object was to try to gain further time for KIF to pay, in the hope that with further time, KIF might be able to repay the debt and reduce or limit his exposure.
Those circumstances take the case out of a situation where there is nothing more than mere knowledge of a variation.
In my view, it is proper to conclude that he consented to the variation, namely an extension of time to pay, in the belief that it was in his interests as guarantor to do so.
This ground of defence fails.
Counsel for the appellant argues that these findings are not supported by the evidence. I do not agree with this submission.
The appellant was aware of the financial difficulties of KIF and, in early December, a demand was made of him to repay the principal amount. His interest in the matter was obvious. He commented to Hermes that everybody was exposed and it is clear that he arranged the meeting of the parties in mid-December. He said he wanted to get the group together to extend the loan period or to sort out an agreement. He attended the meeting at which the agreement to pay by the three instalments was reached. I think it would be artificial in these circumstances to say that he did not consent to the agreement; it was his purpose for bringing the parties together.
The trial judge found that the appellant was far more active in bringing about the arrangement than he was prepared to admit. It was open for the trial judge to conclude, on the balance of probabilities, that the appellant consented to the agreement.
I have referred to the fact that the trial judge dismissed the appellant’s counterclaim which sought rectification of the mortgage so as to accord with the provisions of the loan agreement. Although the trial judge found that the respondent believed the appellant was to act as guarantor for the loan, he also concluded that the appellant was aware of the primary obligation he undertook under the terms of the mortgage. These findings are not challenged. The mortgage was not inconsistent with the loan agreement and the trial judge did not err in finding that there was no mutual mistake by the parties which would justify rectification of the mortgage.
One of the grounds of appeal asserts that the trial judge ought to have found that the respondent’s alternative claim for misleading and deceptive conduct was not made out. The claim for misleading and deceptive conduct was based on the respondent’s assertion that the properties which were mortgaged afforded security to an amount of $800,000. The respondent made it clear in final submissions before the trial judge that this was an alternative claim. In these circumstances, it appears that the trial judge considered it unnecessary to make any finding on the claim in the light of his finding that the respondent’s case was made out on other grounds. The failure to rule on the alternative claim cannot advance the appellant’s case on this appeal.
The final ground of appeal asserts that the trial judge erred in refusing to hear argument on the question whether the default interest amounted to a penalty. Both the loan agreement and the mortgage provided that the interest rate (referred to as the normal rate) was to be 20 per cent. However, if the payments were made on time, the rate was to be reduced to 13 per cent.
The appellant’s counsel did not raise the argument that the interest rate was a penalty until the stage of the final addresses before the trial judge.
The trial judge pointed out that the issue was not pleaded and that the respondent may have wanted to call evidence in respect of it. He said it was too late to raise the issue.
The appellant argued on appeal that no evidence was required, as the fact that the default interest was a penalty was apparent by reference to the rate itself.
Regardless of whether the trial judge should have permitted the issue to be argued, it is my view that the argument could not succeed. There is a well-known distinction between a provision such as this and one which increases the interest to be paid in the event of default. In David Securities Pty Ltd & Ors v Commonwealth Bank of Australia & Ors[11], Lockhart, Beaumont and Gummow JJ, said in their joint judgment:
It is necessary first to distinguish cl 11.02 from other covenants concerning which there is a well-known, if not much praised, distinction. A proviso in a contract of loan or mortgage may stipulate a reduction of the rate of interest if interest be paid punctually. This provides an incentive to punctual payment, time being of the essence. On the other hand, a provision, that, if there be a failure in punctual payment, the rate of interest is increased with effect over the period in respect of which the interest is charged, has been regarded as a penalty. The historical evolution of the distinction is traced by Mr Meredith in his article “A Nicety in the Law of Mortgage” (1916) 32 LQR 420.
. . . . . .
However anomalous, the distinction between an increase in the rate of interest (which attracts the doctrine concerning penalties), and a covenant offering an incentive by reduction of the rate upon prompt payment (which does not attract the doctrine) is well established: O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 366-367; Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 518, 520; W Fisher and J Lightwood, Law of Mortgage (10th ed, 1988), pp 47-48, 654; E I Sykes, The Law of Securities (4th ed, 1986), pp 68-69. See also Brett v Barr Smith (1919) 26 CLR 87 at 94-95.
[11] (1990) 23 FCR 1 at 29.
See also Meagher, Gummow and Lehane, Equity, Doctrines and Remedies (4th ed) 18-080.
This ground of appeal must fail.
For the reasons I have given I am of the view that the appeal should be dismissed.
GRAY J. I would dismiss this appeal. I do not wish to add to the reasons of Duggan J.
WHITE J. In my opinion, the appeal should be dismissed. I agree with the reasons of Duggan J.
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