Hallmark Cards v O'Malley

[2011] VCC 347

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IN THE COUNTY COURT OF VICTORIA Revised

Not Restricted

AT MELBOURNE
COMMERCIAL LIST

GENERAL DIVISION

Case No.CI-10-03497

HALLMARK CARDS AUSTRALIA LTD	Plaintiff
ACN: 004 058 646
v
BRIAN GEOFFREY O’MALLEY	Defendant

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JUDGE:	HER HONOUR JUDGE KENNEDY
WHERE HELD:	Melbourne
DATE OF HEARING:	30 March 2011
DATE OF JUDGMENT:	12 April 2011
CASE MAY BE CITED AS:	Hallmark Cards v O’Malley
MEDIUM NEUTRAL CITATION:	[2011] VCC 347

REASONS FOR JUDGMENT

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Catchwords: Commercial- construction of guarantees- whether defendant liable given new supply agreement subsequently entered into with primary debtor- whether defendant liable for all components of primary debt- whether part of amount sought constitutes a penalty

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Bromley	Geoffrey Mendelson Lawyers Pty Ltd
For the Defendant	Mr L Watts	D.E Phillips

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HER HONOUR:

1          Between 15 October 1998 and July 2010, Hallmark Cards Australia Limited supplied greeting cards to a retailer, Wrappings Pty Ltd. Wrapping was subsequently placed into voluntary liquidation on 5 August 2010.

2          The plaintiff seeks various amounts totalling $470,367.44 pursuant to a series of guarantees signed by the defendant, who was a director of Wrappings.

3          The defendant accepted that Wrappings owed the amounts alleged, but submitted that the defendant was not liable on the guarantees as properly construed. He further submitted that, insofar as Wrappings had agreed to pay an amount of $145,850.65 under a supply agreement of 1 January 2009, that agreement was unenforceable as a penalty.

4          There were therefore only two issues in dispute:

(a) whether the defendant was liable on the guarantees for the
amounts sought;

(b) whether the claim for $145,850.65 was sustainable.

Evidence

5          The facts were not generally disputed and no oral evidence was adduced.

6          Instead, the matter proceeded on the basis of a document entitled “Admitted Facts” dated 30 March 2011, which will be referred to below.

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Components of claim

7          As indicated already, the amount claimed was constituted by various components.

8          Firstly, the plaintiff claims (pursuant to paragraph 4 of the Amended Statement of Claim dated 30 March 2011) (ASOC) in respect of its running account for goods supplied to Wrappings between 15 October 1998 and July 2010 for the amount of $272,511.98 (the goods supplied component).

9          Secondly, the plaintiff claims (pursuant to paragraph 5 ASOC) for an amount outstanding in respect of an interest free loan given “to assist Wrappings in its business endeavours” in an amount of $31,858.96 (the interest free loan component).

10        Thirdly, the plaintiff claims (pursuant to paragraph 6 ASOC) that it supplied fixtures used by Wrappings in its retail outlets and that Wrappings agreed to pay the plaintiff the written down value of those fixtures if it ceased trading. As at 1 August 2010 the written down value of the fixtures was $20,145.85 (the fixtures component).

11        Finally, the plaintiff claims (pursuant to paragraph 7 ASOC) that, pursuant to clause 7.2 of a supply agreement entered into on 1 January 2009, Wrappings had agreed to refund $145,850.65 in return for the payment of a special allowance (the supply agreement allowance component).

12        The total claimed was therefore $470,367.44.

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Agreements in Evidence

Applications for credit

13        In terms of the good supplied, there was one “Application for Credit” document dated 15 October 1998 and three “Applications for Credit Accounts” dated 18 January 2006, 26 July 2006, and 27 March 2008, which incorporated the guarantees the subject of this proceeding.

14        Little evidence was adduced as to the circumstances in which these credit applications and guarantees were completed, although Counsel for the plaintiff explained that in order for the internal accounting system of Hallmark to work properly, it needed to be able to identify a store. Therefore, whenever a new store opened, a new account was opened. (No objection was made to this explanation by the defendant).

15        In each case, the corporate customer was said to be Wrappings Pty Ltd although the trading name was specific to a particular store (being Wrappings of Melton; Highpoint; Rosebud and Southland).

16        The first agreement contained short standard terms of 30 days for payment for all products. The next three contained more detailed terms and conditions “relating to any products or services” which provided, inter alia, that payment of all goods and services was to be made within thirty days from the end of the month in which the invoice is dated (clause 3(b)).

17        The attached guarantees were in substantially identical form and

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were treated as identical by Counsel. They each recited that if a company owns/controls the business, then the directors are required to complete the following guarantee. The guarantee then read that in consideration of Hallmark granting credit to Wrappings (hereinafter called the Customer)… we the directors of Wrappings (hereinafter called the Guarantors)…hereby unconditionally and irrevocably guarantee to Hallmark, payment of any amount which hereafter becomes due or owing by the

said Customer to Hallmark..

18        The guarantee also contains a clause 1 which states that this Guarantee shall be a continuing Guarantee and shall not be determined by the death or discharge of the Guarantors.

19        Clause 4(b) also states that the liability of the Guarantors shall not be affected by any variation of the Credit Terms offered or granted to the customer.

Supply Agreement 1 January 2009

20        A formal Supply Agreement entered into on 1 January 2009 between Hallmark Cards and Wrappings was also adduced into evidence (the 2009 Agreement).

21        This agreement recited that there had been in place several supply agreements and addendums between the parties (recital C). Further, it recited that “this Agreement replaces and supersedes all other agreements and addendums previously entered into between Hallmark and Wrappings” (recital D). Pursuant to clause 22 the parties also acknowledged that the Agreement “embodies the whole of the Agreement between

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them relating to the subject matter of this Agreement and supersedes any and all oral and written negotiations and communications by or on behalf of either of them.”

22        In terms of the goods supplied component, the 2009 agreement provided that Wrappings was to pay all accounts invoiced by the end of the month following the date of invoice (clause 11(c)).

23        In terms of the interest free loan, this was defined in clause (1)(d) as “the consolidated balance of the interest free loans advanced by Hallmark to you under the previous supply agreements being $86,000 as at 31 December 2008.”

24        In terms of the fixtures, clause 18.4 provided that if the agreement was terminated, “Wrappings will ensure that all fixtures owned by Hallmark will be purchased by Wrappings at their written down value calculated on a straight line basis over five years.”

25        Finally, clause 7.1 provided that in return for payment of a “Special Allowance” Wrappings agreed to achieve certain minimum values of “Total Net Purchases” (defined in clause (1)(j)). The “Special Allowance” was defined as the sum of $430,000 which Hallmark paid to you “under the previous supply agreement.” (clause 1(h)). The minimum value of Total Net Purchases to be achieved was $5.6 million for the period 1 January 2010 to 31 December 2010.

26        Wrappings further agreed (in clause 7.2) that if it did not achieve the minimum value of Total Net Purchases, Hallmark was entitled to receive an amount specified ( $5.6 million less the

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Value of Total Net Purchases for the year ended 31 December 2010) x 2.75%). This amount would be deducted from the Volume Incentive Discount allowable to Wrappings under clause 5 (clause 7.3).

Admitted facts

27        The statement of Admitted facts read as follows:

1 As per paragraph 4 of the Statement of Claim-Amounts owed by Wrappings Pty Ltd to Hallmark for goods supplied, as at 1 August 2010 (which have not been paid by Wrappings Pty Ltd or anyone else to date) are…..[ a table then follows which provides a total at the end of ] $272, 511.98.

2.The amounts owing by Wrappings Pty Ltd to the plaintiff as at today’s date are accurately set out in the invoices contained on pages 135 to 154 of the court book. All debts referred to in paragraphs 1 and 2 were incurred between May 2010 and 5 August 2010.

3. In the periods [set out below] Wrappings Pty Ltd traded under
several business names including:

• Wrappings of Broadmeadows from about Nov 1995 to August 2010

• Wrappings of Chadstone from about Aug 2005 to August 2010

•  Wrappings of Eastland from about Apr 1995 to August 2010

•  Wrappings of Fountain Gate from about Oct 2000 to August 2010

•  Wrappings of Highpoint from about Dec 2005 to August 2010

•  Wrappings of Melton from about Oct 1998 to August 2010

•  Wrappings of Rosebud from about Aug 2006 to August 2010

• Wrappings of Southland from about Mar 2008 to August 2010

4. The ABN of Wrappings Pty Ltd is 63 167 908 011

5. As at 1 January 2009, the balance of the interest free loans

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advanced by Hallmark to Wrappings Pty Ltd was $86,000.00 (see clause 1(d) of the Supply Agreement dated 1 January 2009- page 50 court book)

6. The balance outstanding on the interest free loan at present is $31,858.96 (See 151 and 152 of court book and paragraph 5 of statement of claim)

7. As per paragraph 7 of the statement of claim

• Gross Sales 2010- $ 1,178, 719 less returns $400,277 = Net Sales $778,491.

• $5.6M less $778,491 = $4,821,509 shortfall multiplied by 2.75% = $132,591.50 plus GST $13,259.15 = $145,850.65.

8. The written down value of fixtures supplied by Hallmark to Wrappings for the purposes of clause 18.4 of the supply agreement dated 1 January 2009 is accurately set out in attachment 1 of the Further and Better Particulars of claim dated 18 October 2010 (page 19 of court book) as $20,145.85.

9. Wrappings Pty Ltd was placed into voluntary liquidation on 5

August 2010.

10. The defendants signed the Directors’ Guarantees at pages
33,39,42, and 47 of the court book.

11. Save for the issue of whether the amount referred to in paragraph 7 is a penalty, there is no dispute that Wrappings Pty Ltd owes the monies referred to in paragraph 1, 2, 6, 7 and 8 above to the plaintiff.

28        It therefore remains to determine the two outstanding issues in the light of the admitted facts and the documentary evidence before this court.

Construction of guarantee

29        Although the plaintiff relied on all of the guarantees, his

submission was that, pursuant to each guarantee, the defendant

had guaranteed the payment of “any amount” which thereafter

became due or owing. It followed that any one of the

guarantees was sufficient to cover each of the components

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being the subject of the claim.

30        The defendant submitted:

• That the guarantees were executed in the context of the purchase of stock from Hallmark and did not, properly construed, cover the interest free loan; the fixtures; or the supply agreement allowance components;

• That the guarantees did not apply to any of the components in any event as they only covered commercial arrangements which had come to an end given the effect of the 2009 agreement. In so saying, the defendant cited the special principle in Ankar Pty Ltd v

National Westminster Finance (Aust) Ltd;[1]

• That the 2009 agreement effected an estoppel by convention so that the plaintiff was “estopped from asserting the currency of the [earlier] supply arrangements” which contained the guarantees.[2] [1] (1987) 162 CLR 549 at 557 [2] Defence dated 22 September 2010 para 2D

construction of guarantees

31        Although the words of the guarantee refer to “any amount,” the consideration for the guarantee is expressed to be “in consideration of Hallmark granting credit to Wrappings.”

32        In a decision of Re Piccolo (A Bankrupt); Mc Veigh (Trustee of the Bankrupt Estate of Piccolo) v National Australia Bank Ltd,[3] Justice Sundberg of the Federal Court of Australia summarises the applicable principles concerning consideration clauses (at [17]):

[3] [1999] FCA 386

• The manner in which the consideration for a guarantee is expressed is relevant, but not conclusive;

• Wide and unambiguous words of a guarantee which clearly create a substantive liability will not necessarily be cut down by a statement of consideration;

• The consideration clause does not “control” the construction of the operative parts of the guarantee;

• The question is one of intention and depends upon a reading of the whole of the document in the light of the genesis of the transaction and the surrounding circumstances.

33        In my view, the following matters suggest that each guarantee was concerned with guaranteeing the indebtedness of Wrappings in respect of any products or services supplied on credit:

• The guarantees were given in the context of applications for credit / credit accounts relating to the supply of products or services to Wrappings stores;

• The guarantees were given simultaneously with the entry into terms and conditions of sale relating to products or services;

• Clause 4(b) of each guarantee specifically contemplates the guarantee applying in relation to the advance of credit. It states that the liability of the guarantors shall not be affected

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by any variation “of the Credit Terms offered or granted to

the Customer by Hallmark;”

• Although I accept that there is no “magic formula” (as the plaintiff submitted) in the context of providing guarantees, there are no clear words to suggest that indebtedness “on any account whatsoever” is contemplated.

34        In my view then, upon a reading of the whole document in the light of the genesis of the transaction and the surrounding circumstances, the plaintiff has not established that the parties intended to do more than provide a guarantee in respect of the provision of goods and services on credit. At the very least, the whole of the circumstances raise an ambiguity, in which case I should adopt a construction which favours the defendant.[4]

[4] Ankar Pty Ltd v Westminster Finance (Australia) Limited (1987) 162 CLR 549 at 561

35        It follows that the guarantees apply to the “goods supplied” component on the basis of the above construction.

36        In terms of the interest free loan, although this would appear to involve the provision of credit, there is no material before the court so as to be able to determine for what purpose the credit was advanced. In particular, there is no evidence to suggest that any loan was advanced in respect of the ongoing provision of goods and services. In these circumstances, the plaintiff has not discharged its onus in showing that the guarantees were intended to extend to the interest free loan.

37        The monies owing for fixtures arose out of the obligation on Wrappings to ensure that all fixtures owned by Hallmarks would be purchased at their written down value on the termination of the 2009 agreement (in clause 18.4). This was not related to the provision of credit on the supply of goods or services and is also outside the terms of the guarantees.

38        Finally, the obligation to pay money in respect of the supply agreement allowance arose because Wrappings had failed to achieve a certain value of total net purchases in return for the payment of a special allowance (under clause 7 of the 2009 agreement). Wrappings agreed to make a specified payment to Hallmark in the event it did not achieve the requisite value. Again, then, the indebtedness of Wrappings in this respect did not relate to the provision of credit on the supply of goods or services and would not be covered by the guarantees.

39        It follows that, properly construed, the guarantees would cover the goods supplied component only.

effect of January 2009 agreement

40         The defendant also submitted that, whatever the construction of the guarantees, they had been discharged by virtue of the 2009 agreement. In so saying, he relied on Ankar Pty Ltd v National

Westminster Finance (Australia) Limited.[5]

[5] (1987) 162 CLR 549

41        In Ankar, the High Court (Mason ACJ, Wilson, Brennan and Dawson JJ) described a special principle said to apply to a surety contract as follows:[6]

[6] (1987) 162 CLR 549 at 559-560

"According to the English cases, the principle applies so
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, eg, 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.”

42        The special principle has application in cases where a particular liability is guaranteed, but it is altered or varied without consent, or the surety has certain contractual rights which are disregarded.[7]

[7] Commonwealth Bank of Australia v McArthur [2003] VSC 31 at [194]

43        However, one of the limitations on this principle is that it does not apply to obligations arising from a future course of dealings. Accordingly, if there is a guarantee in respect of all loans without reference to any particular contract, the creditor and principal could conclude a new loan and proceed to vary its terms without that variation operating to discharge the guarantor. Further, the principle has no application to a subsequent independent agreement as distinct from the variation of the terms of an original agreement in which case the guarantor will remain liable provided the agreement is within the scope of the guarantee.[8]

[8] Commonwealth Bank of Australia v McArthur [2003] VSC 31 at [195]-[197] adopted and

44        It was generally accepted by both parties that the 2009 agreement constituted a fresh independent agreement. In the light of the provisions cited, above, at paragraph 21, this was a correct approach. Moreover, in my view, the guarantees contemplated the making of future new contracts for the provision of credit. This is apparent from the specific terms of clause 1 which provides that each guarantee shall be a “continuing guarantee”, and also from the fact that there was a guarantee of “any amount” which “hereafter” becomes due and payable wherein an ongoing course of dealing was contemplated.

45        In these circumstances, the guarantees remain operative in relation to goods supplied under the subsequent 2009 agreement and that agreement does not discharge the guarantor’s liability as alleged by the defendant.

46        Moreover, if, contrary to the approach of both parties, the 2009 agreement was a variation, then the guarantees specifically provided for such a variation in clause 4(b) in each case.[9]

[9]

47        It follows that the 2009 agreement did not effect a discharge of the guarantees.

estoppel

48        The facts raised do not constitute an estoppel by convention. In order to establish such an estoppel, both the plaintiff and the defendant must have adopted an assumption as to the terms of the plaintiff’s legal relationship with the defendant.[10] Here, any assumption set out in the recitals to the 2009 agreement was made by Wrappings and Hallmark and not by the defendant. Accordingly no estoppel by convention arises.

Penalty

[10] Ryledar Pty Ltd v Euphoric Pty Ltd [2007] 69 NSWLR 603 at [200]

49        Given my findings, above, it is unnecessary to consider the defendant’s alternative submission that the supply agreement allowance constitutes a penalty, since the guarantees do not cover the supply agreement allowance.

50        However, in my view this submission was misconceived.

51        The question of whether a sum fixed by a contract is a penalty is concerned with whether there is a genuine pre-estimate of loss for a breach of contract.[11]

[11]

52        In this case, clause 7 is not concerned with the pre-estimation of damages for breach of contract but, rather, is concerned with imposing certain obligations on Wrappings in return for the payment of the Special Allowance in an amount of $430,000.

53        The principles relating to penalties do not therefore arise.

Conclusion

54        The plaintiff is entitled to judgment in respect of the “goods supplied” component of the indebtedness of Wrappings.

55        It follows that the plaintiff is entitled to the sum of $272,511.98 together with interest pursuant to statute.

56        I will hear from the parties on the question of costs.

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Certificate

I certify that these 16 pages are a true copy of the reasons for decision of Her

Honour Judge Kennedy, delivered on 12 April 2011.

Dated: 12 April 2011

Sonja Mileska

Associate to Her Honour Judge Kennedy

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12

approved in Allan John Bakarich and Anthony George Bakarich As Executors of the Estate of the Late Mary Patricia Bakarich and Ors v Commonwealth Bank of Australia [2004] NSWSC 283 at [280]-[285]

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9 And see Commonwealth Bank of Australia v McArthur [2003] VSC 31 at [196] and [203]

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11 See cases and discussion generally in Zachariadis v Allforks Australia Pty Ltd [2009] VSCA

258 at [102]-[103]

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