Hickory Developments Pty Ltd v Brunswick Retail Investment Pty Ltd
[2012] VSC 224
•22 MAY 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
TECHNOLOGY ENGINEERING AND CONSTRUCTIONS LIST
No. S CI 5368 of 2010
| HICKORY DEVELOPMENTS PTY LTD (ACN 091 236 912) | Plaintiff |
| v | |
| BRUNSWICK RETAIL INVESTMENT PTY LTD (ACN 097 885 811) | First Defendant |
| and | |
| WARREN ALFRED THOMPSON | Second Defendant |
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JUDGE: | VICKERY J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 21–22 MAY 2012 | |
DATE OF JUDGMENT: | 22 MAY 2012 | |
CASE MAY BE CITED AS: | HICKORY DEVELOPMENTS v BRUNCWICK RETAIL & ORS | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 224 | |
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GUARANTEE AND SURETY – Deed of guarantee and indemnity – Variation of principal contract – Whether guarantor discharged - Ankar Pty Ltd v National Westminster Finance Australia Ltd (1986) 162 CLR 549 applied – Substantial alteration of surety’s rights – Surety impliedly consented to guarantee continuing to apply – Clause in guarantee exempting the application of Ankar Pty Ltd v National Westminster Finance Australia Ltd (1986) 162 CLR 549.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr. J.L. Evans | Piper Alderman |
| For the First Defendant | Mr P.T. Nugent | Champion Lawyers |
| For the Second Defendant | No appearance | Champion Lawyers |
HIS HONOUR:
This matter concerns the liability of the Second Defendant, Mr Warren Thompson (“Mr Thompson”), under a deed of guarantee and indemnity dated 24 December 2008 and whether he was discharged from that liability in the events that have happened.
The circumstance which gives rise to this question was a variation of an obligation contained in a construction contract, the performance of which Mr Thompson at least in its original form, expressly agreed to guarantee and indemnify.
The question is whether his guarantee and indemnity survived the variation of the obligation in the construction contract so that he remained bound to guarantee and indemnify in respect of the obligation as it was varied.
The case centres upon the application of the principle in Ankar Pty Ltd v National Westminster Finance Australia Ltd (“Ankar”).[1] As a general proposition a surety’s obligation will be discharged when conduct on the part of the creditor without the consent of the surety has the effect of altering the surety’s rights, unless the alteration is unsubstantial and not prejudicial to the surety.[2]
[1]Ankar Pty Ltd v National Westminster Finance Australia Ltd (1986) 162 CLR 549, 558.
[2]See Ankar Pty Ltd v National Westminster Finance Australia Ltd (1986) 162 CLR 558.
On 24 December 2008 a contract was entered into between the Plaintiff, Hickory Group Pty Ltd, formerly Hickory Developments Pty Ltd (“Hickory”), as the builder and Brunswick Retail Investment Pty Ltd (“BRI”), the First Defendant as principal.
Hickory agreed to construct for BRI a large mixed use development at 597-605 Sydney Road, Brunswick (“the Construction Contract”).
On 30 November 2011 BRI was placed into liquidation by order of the Court on the ground of insolvency and it took no further part in these proceedings.
The Construction Contract was in writing, contained in part in a standard form General Conditions of Contract for Design and Construct AS4300 1995 with Annexures Part A and Part B. The price for the works was $26.4 million plus GST.
Clauses 5.1 to 5.11 of the Construction Contract provided for security, retention moneys and performance undertakings to be provided by Hickory for the due and proper performance of the contract.
Annexure Part B of the Construction Contract provided for a number of the clauses of the General Conditions of Contract in AS4300 1995 to be deleted, added to or amended.
Clause 5.3 was substituted for the following in relation to the form of security:
The form of security to be provided by the Contractor is cash retention up to an amount equal to 5% of the Contract Sum at the rate of 10% of each certified progress payment until the limit of 5% of the Contract Sum is reached.
Clause 5.8 was deleted and in clause 5.9 the following was substituted in relation to the release of retention moneys:
Within 30 calendar days of issue of the certificate of Practical Completion, the Principal must release to the Contractor the remaining cash retention less any allowance for defects which have been identified but not then rectified.
The Construction Contract by clause 5.6 provided for the circumstances in which a party may have recourse to the retention money or may convert into money that which does not consist of money. Clause 5.6 provided as follows:
A party may have recourse to security, retention moneys or both and may convert into money security that does not consist of money where –
(a)the party has become entitled to exercise a right under the Contract in respect of the security, retention money or both;
(b)the party has given the other party notice in writing for the period stated in Annexure Part A or, if no period is stated, 5 days, of the party’s intention to have recourse to the security, retention moneys or both; and
(c)the period stated in Annexure Part A or, if no period is stated, 5 days, has or have elapsed since the notice was given.
Clause 5.10 provided two alternatives for the payment of interest on cash security and retention moneys. However no step was taken to delete one or other of the alternatives. Accordingly clause 5.10 of the Building Contract provided as follows:
Alternative 1:
A party holding cash security, retention moneys or both shall forthwith deposit the moneys in an interest bearing account in a bank. That party shall nominate the bank and the type of account. The account shall be in the joint names of the Principal and the Contractor and shall be one from which moneys can only be drawn with the signatures of two persons, one appointed by each of the Principal and the Contractor. The moneys shall be held until the Principal or the Contractor is entitled to receive them.
Interest earned on cash security provided by the Contractor and on retention moneys belongs to the Contractor. Interest earned on cash security provided by the Principal belongs to the Principal.
Upon a party becoming entitled to receive any moneys, including interest in the account, the other party shall forthwith have that other party’s appointee sign all documentation necessary to withdraw the moneys and shall promptly give the signed documentation to the party entitled to receive such moneys.
Alternative 2:
A party holding cash security or retention moneys shall own any interest earned on the cash security or retention moneys. Except where cash security or retention moneys are held by a government department or agency or a municipal, public or statutory authority, cash security or retention moneys shall be held in trust by the party holding them for the other party until the Principal or the Contractor is entitled to receive them.
In Fluor Australia Pty Ltd v ASC Engineering Pty Ltd,[3] Bongiorno J considered whether the Plaintiff, Fluor, was the beneficiary of an express trust created by the Second Defendant in the benefit of a contract thereby entitling the Plaintiff to enforce that contract against the other party to the agreement. His Honour cited with approval Jacob’s Law of Trusts in Australia:
The overall question is whether in the circumstances of the case, and on the true construction of what was said and written, a sufficient intention to create a trust has been manifested. It is not necessary that the creator of the trust should know that the particular relationship intended to be created is in law a trust. A trust will be created, whether or not the creator thereof is precisely aware of so doing, provided that in substance the creator intends that his or her actions should have the legal effect of creating the relationship which is known in law as a trust. If the language is such that an intention to create such a legal effect is manifested, then a trust will be created whether the words “trust” or “trustee” are used, or not. On the other hand the use of those words will not necessarily manifest an intention to create a trust if it appears that there was no intention to create a relationship properly so described.[4]
[3] Fluor Australia Pty Ltd v ASC Engineering Pty Ltd (2007) VR 458.
[4]Fluor Australia Pty Ltd v ASC Engineering Pty Ltd (2007) VR 458 [19].
His Honour then observed:
The question as to whether or not a trust exists in this case will be determined by the application of these principles to the facts as they are found to be.[5]
[5]Fluor Australia Pty Ltd v ASC Engineering Pty Ltd (2007) VR 458 [20].
In applying these principles to the case at hand I am driven to the conclusion that on the true construction of the text of clause 10 of the Construction Contract in its two alternatives, manifested an intention to create a trust in the retention moneys and the interest accrued thereof.
At the same time as entering the Construction Contract on 24 December 2008 Mr Michael Argaru (“Mr Argaru”), a director of the Plaintiff, provided a deed of indemnity (“the Argaru Indemnity”) and Mr Thompson provided a deed of indemnity (“the Thompson Indemnity”).
Hickory provided cash retention to secure Hickory’s performance under the Construction Contract during the defects liability period. The cash retention that Hickory provided was to be returned by BRI to Hickory 30 days after practical completion.
Mr Argaru required Mr Thompson to provide the Thompson Indemnity, because BRI used the cash retention as equity to fund the project and he was concerned that BRI may not return the cash retention 30 days after practical completion. Clause 1 of the Thompson Indemnity provided as follows:
Thompson covenants with Hickory that if at any time any part of the retention money is deducted pursuant to the Construction Contract shall remain due but unpaid to Hickory to forfeit on demand by Hickory pay to Hickory the whole of such retention money which shall they will then be due and payable to Hickory by Brunswick and will further keep Hickory indemnified against all loss of such monies and all losses, damages, costs, charges and expenses whatsoever Hickory may incur by reason of any default on the part of Brunswick in payment of such retention moneys.
In the Thompson Indemnity Brunswick was defined to mean Brunswick Retail Investment Pty Ltd or BRI.
As to the variation which is the event which gave rise to this proceeding, in or about March 2009 Mr Argaru said to Mr Thompson in a telephone conversation words to the effect that Hickory wished to swap half the cash retention for a bank guarantee in order to improve the project’s cash flow. Mr Thompson said words to the effect that that was “OK”. Mr Argaru did not recall the exact words of the conversation.
In the same discussion Mr Thompson and Mr Argaru also agreed the following amendment to the Construction Contract. First, the remaining cash retention of 2.5 per cent would be repaid to Hickory by BRI in accordance with the Construction Contract and the bank guarantee held for the defects liability period; and second Mr Argaru’s personal guarantee was no longer required because the bank guarantee would be used to secure Hickory’s performance under the Construction Contract during the defects liability period.
There was then an email exchange of some significance which occurred on 13 March 2009.
By an email of 13 March 2009 sent by Mr Thompson to Mr Argaru at 9.58 am Mr Thompson wrote:
Further to our telephone conversation of yesterday we confirm the following amendment to the Brunswick Construction Agreement.
1.The cash retention be reduced to 2 ½% of the contract amount and is to be provided by crediting the amount against the first progress claims on the job.
2.The balance of the retention be provided by way of bank guarantee.
3.The cash retention be repaid to you in accordance with the contract and the bank guarantee be held for the warranty period.
4.Your personal guarantee is no longer required.
A further email was sent by Mr Thompson a short time later on the same day at 10 am where Mr Thompson wrote to Mr Argaru the following:
The total retention is $1,320,000 bwing (sic) $660,000 cash and $660,000 bank guarantee.
This was responded to a short time later on the same day by Mr Argaru at 10.20 am where Mr Argaru wrote to Mr Thompson “[t]he revised arrangement is acceptable to us”.
Mr Argaru said in his evidence that at no time during these discussions in relation to the changes did Mr Thompson say to him that the Thompson Indemnity which had been earlier provided would no longer apply, and Mr Argaru did not tell Mr Thompson that he no longer required this indemnity. Mr Argaru also said in his evidence, which was unchallenged, that it would not have made sense for him to do so as Hickory still required the Thompson Indemnity because BRI was entitled to hold the cash retention until 30 days after practical completion.
As to practical completion, Hickory achieved this on 4 October 2010 when it was issued by the superintendent under the Construction Contract with a certificate of practical completion. Following practical completion, but contrary to the Construction Contract as varied by the discussions and agreement of March 2009, BRI failed to return either the bank guarantee or the cash retention money within 30 calendar days of the issue of the certificate of practical completion as required under clause 5.9 of the Construction Contract.
The security in the form of the bank guarantee was ultimately returned to Hickory on or about 9 November 2010. However the cash retention was not repaid.
By a letter dated 3 May 2011 Hickory issued a demand to Mr Thompson under the Thompson Indemnity for the return of the retention moneys in the amount of $660,000 plus GST.
Hickory’s solicitors also sent a copy of the demand to Mr Thompson’s solicitors. In response to the demand by email dated 5 May 2011 Mr Thompson responded that there were matters, “still outstanding for the refinance”, and it “could take some weeks to turn into cash”. However, at no time between the making of the demand under the guarantee and receiving Mr Thompson’s affidavit dated 5 August 2011 and filed in this proceeding was it ever said or even intimated to Mr Argaru by Mr Thompson that the Thompson Indemnity no longer applied as a result of the agreement which was confirmed by the email exchange on 13 March 2009. Further, there were never any discussions to which Mr Argaru was a party to the effect that the Thompson Indemnity was no longer required and indeed the evidence, which is unchallenged, is that for so long as BRI had Hickory’s cash retention Hickory required the Thompson Indemnity to apply.
On 29 August 2011 Hickory served a creditor’s statutory demand on BRI for part of the moneys owed by BRI pursuant to the Construction Contract, however BRI did not comply with that demand and on 30 November 2011 BRI was ordered by the Court to be wound up in insolvency.
Mr Argaru confirmed in his evidence that Hickory has not received the outstanding retention or any part of those moneys from BRI and said further that based on a report provided by the official liquidator of BRI, ““it appears unlikely that there will be a return to the Company [meaning BRI] from sales of the properties [owned by BRI]”. Mr Thompson has failed and refused to pay to Hickory the outstanding retention sum of $660,000 plus GST, in all the sum of $726,000.
It is accepted that the quantum of money which Mr Thompson guaranteed was not increased as a consequence of the variation. However, it is also accepted that an increase in the quantum for which a guarantor may be liable is not the only basis on which a guarantee may be discharged.
It was put by Mr Nugent who appeared for Mr Thompson that the variation to the principal Building Contract was not an insubstantial variation.
It was submitted that prior to the variation the developer, BRI, had the benefit and the use of cash by way of retention in the sum of $1,320,000. After the variation BRI had the benefit and use of the smaller sum of $660,000. While Mr Thompson’s liability under the guarantee did not increase as a consequence of the reduction in cash being held by BRI from $1,320,000 to $660,000 the cash which was available to BRI was reduced significantly. It was further put that a significant reduction in the amount of cash which is available for use by the principal debtor can be material as to whether a person is prepared to give a guarantee and can affect the risk of a guarantee being called upon.
It is to be noted that Mr Argaru said in his evidence to which I have referred, that he required Mr Thompson to provide the Thompson Indemnity because BRI was using the cash retention as equity to fund the project and he was concerned that BRI may not return the cash retention 30 days after practical completion. A variation which has the effect of increasing the risk of the principal debtor in a significant way is not an insubstantial variation from the point of view of the surety.
In Geelong Building Society (in liq) v Encel & International Dynamics Pty Ltd,[6] Hayne J in considering the position where loan money advanced by a creditor before the creditor was contractually bound to do so, discharged the creditor in respect of that loan. His Honour arrived at this conclusion after assessing the increased risk to which the surety was exposed arising from the variation in the arrangements between the principal creditor and the principal debtor. His Honour observed in this respect:
Thus it was held in The General Steam Navigation Co v Rolt (1858) 6 CB(NS) 550; 141 ER 572 that payment to a building contractor before the due contractual date stipulated in the principal contract discharged the guarantor. The parallel to the present case, in which it is alleged that the creditor lent money to the principal debtor before it was contractually bound to do so, is apparent.
In my view permitting Ardenloch to draw against the facility before providing council approved plans and specifications and a building contract was not an unsubstantial variation of the agreement between Ardenloch and the Society. The loan was a short-term loan in which interest was to be capitalised. The sooner the project was begun and brought to an end by the completion of the work and subsequent sale of the finished units, the smaller the amount of interest that would accrue and therefore the smaller the amount for which the guarantor may become liable. Furthermore to advance funds without any certificate from an architect, valuer or quantity surveyor, and without regard to whether the amount undrawn would be sufficient to complete the project was no unsubstantial departure from the arrangements. If funds were retained undrawn in an amount sufficient to complete the works there would be a significantly improved chance, if the Society had to enforce its security, that the proceeds of sale would be sufficient to satisfy the mortgagor's debt to the Society.[7]
[6]Geelong Building Society (in liq) v Encel & International Dynamics Pty Ltd(Unreported, Supreme Court of Victoria, Hayne J, 31 August 1993).
[7]Geelong Building Society (in liq) v Encel & International Dynamics Pty Ltd(Unreported, Supreme Court of Victoria, Hayne J, 31 August 1993) [20].
In this case although there is no direct evidence on the point I infer that if more funds in cash were available to be BRI by using the cash retention as equity to fund the project as it had done previously, before the variation was in place, it was in a better position to continue to fund the project. This would render the completion of the project to the contractual standard more secure and the prospects of the principal debtor, in this case BRI, repaying the cash retention moneys to Hickory more likely.
Even though the moneys by way of cash retention were held on trust for the parties, being Hickory on the one hand and BRI on the other, I am satisfied on the evidence of Mr Argaru that Hickory permitted BRI to use those moneys to fund the project and this was the case prior to the variation.
There was no evidence to suggest that this arrangement did not continue after the variation. For these reasons in my opinion the variation did have the effect of altering the surety’s rights and did so in a not unsubstantial way.
For this reason, on that ground solely, the principle in Ankar does apply.
However, there are two further elements which Mr Thompson must satisfy in this case before he can be discharged from his guarantee under the Ankar principle. The first relates to whether or not he consented to the variation in the Construction Contract as reflected in the exchange of emails on 13 March 2009. It was put by Mr Evans who appeared for Hickory that even if the principle in Ankar was enlivened as a result of Mr Thompson’s exposure as a surety being altered in a not unsubstantial way, Mr Thompson having consented to the variation in his capacity as a sole director and shareholder of BRI, should also be taken to have impliedly consented to the continued application of his guarantee and indemnity to the Construction Contract as it was varied.
Mr Nugent pointed out however that the two capacities in which Mr Thompson acted at the relevant time were as follows: first, as the sole director and shareholder of BRI; and second and distinctly, in his personal capacity as the guarantor of the retention money obligation under the Construction Contract. The question thus exposed is whether Mr Thompson by his conduct in agreeing to the variation of the Construction Contract between BRI and Hickory on behalf of BRI also impliedly agreed to his guarantee continuing in respect of the revised arrangement.
In my opinion Mr Thompson did so impliedly agree. In Wren v Emmett Contractors Pty Ltd (“Wren”),[8] the High Court considered a case in which a guarantor as director of the developer had knowledge of certain changes to the works provided for in the building contract which was there under consideration.
[8]Wren v Emmett Contractors Pty Ltd (1969) 43 ALJR 213.
The majority of the High Court remitted the matter for a new trial but did so on the basis that the trial judge at first instance had failed to determine that the additional works were in truth covered by the building contract and therefore were covered by the guarantee or whether the works were done pursuant to a new and varied contract. Menzies J observed as a dissentient in the outcome as follows, and was the only judge to express a view on the point. His Honour stated:
It seems to me that if the defendant as controlling director of Celebrity Theatres Pty Ltd arranged an extension of time for the payment of what was due by the company under its contract with the plaintiff he cannot be heard to say, when sued upon the guarantee, that the extension was given without his consent. Mere knowledge of the variation of a contract or the giving of time does not of itself amount to consent, but for a guarantor on behalf of the principal debtor to bespeak time to pay what is owing betokens his concurrence with the giving of time to pay. Were this not so the law would be out of touch with reality.[9]
[9]Wren v Emmett Contractors Pty Ltd (1969) 43 ALJR 213, 220.
Although it was put that the observations of Menzies J in Wren were obiter dicta and should be disregarded, I find the observations and the reasoning to be persuasive.
The position of the guarantor in Wren, where there was a positive agreement on his part as the controlling director of the principal debtor to the variation of the principal contract in question, is some way from the position in a case cited by Mr Nugent, being Polak v Everett.[10] In that case Blackburn J considered the position of a surety who was merely aware of a change in the contractual arrangements under the principal contract between the principal debtor and the principal creditor, but did not consent to the change in any capacity. In this regard Blackburn J observed:
[w]e must take it to be the fact, that though the defendant was well aware of this release being executed, he was not an assenting party to it. Then it is argued that knowledge on the part of the surety that there is going to be a release of a part of that security is enough without assent. I cannot see any authority for that. In Pickard v Sears 6Ad & E 469, 474 it was held that he who stands by and sees another alter his position on the faith of fact which he can contradict, cannot afterwards take advantage of that alteration. But the rule was corrected in Freeman v Cook 2 Ex 654; 18 LJ (Ex) 114 where it was said that if a man stands by and allows another to act without objecting, when, from the usage of trade or otherwise, there is a duty to speak, his silence would preclude him as much as if he proposed the Act himself. But to say that a person, who, being a surety, becomes aware that the creditor is going to give a time or do something else which, if done without his assent, may discharge him, is bound to warn the creditor against doing it, is a thing for which no authority whatever has been cited.[11]
[10]Polak v Everett (1876) 1 QBD 669.
[11]Polak v Everett (1876) 1 QBD 669, 673.
The dictum of Menzies J in Wren has been applied directly in New South Wales in Clyde Industries Ltd v Dittes,[12] where Cole J considered whether a guarantor who arranged for the change to the obligations of the principal debtor can avoid liability under a guarantee the change would otherwise effect. His Honour cited the dictum of Menzies J in Wren and continued:
Here the agreement incorporated in the April 1991 documents was arranged by Mr Dittes and the documents were executed by Mr and Mrs Dittes. If there be a “change in relationship”, and I do not think that there was, as they arranged and agreed to it, they cannot now be heard to rely on that circumstance to escape liability under the guarantees.[13]
[12]Clyde Industries v Dittes (Unreported, Supreme Court of New South Wales, Cole J, 5 June 1991).
[13]Clyde Industries v Dittes (Unreported, Supreme Court of New South Wales, Cole J, 5 June 1991) 10.
A similar approach has been taken in New Zealand in Winstone Limited v Bourne (“Winstone”).[14] In that case the court concluded that because the relevant directors knew that reducing the value of the Plaintiff’s debenture would increase or potentially increase their liability under their guarantee they were taken to have impliedly consented to variation of their own liability.
[14]Winstone Limited v Bourne (1978) 1 NZLR 94, 96.
The analysis of Mahon J in Winstone is, in my view compelling, where he said:
That case (Polak v Everett) is the forerunner of other authorities to like effect, that the surety is under no obligation to intervene and to warn the other party to the contract of suretyship that a pending step by that party may release the surety from his obligations. But that was not, as I see it, the present case. Here the defendants as directors of the company desired to implement the proposed overdraft arrangements with the Commercial Bank of Australia. They could only do so by concurring as directors in the deed of modification, otherwise the increased overdraft facilities could no doubt not be obtained. It is true to say, as Mr Saunders points out, that the functions of the defendants as directors and their functions as sureties for the company's debt must, as a matter of law, be kept distinct. But this is not a conceptual question as to personal legal status. This is a question as to the existence of factual knowledge and consent of a variation in the principal contract in respect of which the defendants were sureties. On the facts, bearing in mind the clear knowledge of the defendants of their liabilities as guarantors, I cannot hold that their informed and endorsed assent as directors of that company to the alteration in the debenture was not also an informed though unrecorded assent as guarantors of the plaintiff's debt to that same part-surrender of priority which would inevitably increase their personal liability. Knowledge is, of course, a different thing from consent, but for the reasons which I have indicated I find it impossible to say that knowledge of the reduction in the value of the plaintiff's debenture was not also knowledge of the increase or potential increase in the defendant's liability under the contract of guarantee, and both those species of knowledge being present I think it inevitable that on the facts the defendants did not only know but also impliedly assented on or about 1 October 1971 to the effect of the modification executed on that date which brought about the ultimate result of potential variation in their own liability. For those reasons I must hold that the defence fails, and the plaintiff is entitled to succeed, the plaintiff having established consent to the variation.[15]
[15]Winstone Limited v Bourne (1978) 1 NZLR 94.
The Winstone analysis was also applied by Dodds-Streeton J in Paradise Constructors Pty Ltd and Anor v Lofts Quarries Pty Ltd (“Paradise”).[16] This was a case involving a guarantee by a director of his company. A question arose as to whether the separate legal entity principle precluded effective notice and consent by the director in his capacity as a guarantor in relation to a relevant matter. Her Honour observed as to these questions as follows:
It was also submitted that it was irrelevant that Strangio (as the sole director and shareholder of the corporate customer) had notice of, and consented to, its placement and acceptance of orders to an amount in excess of the original credit limit, due to the application of the separate legal entity principle. [17]
[16]Paradise Constructors Pty Ltd and Another v Lofts Quarries Pty Ltd (2003) VSC 370.
[17]Paradise Constructors Pty Ltd and Another v Lofts Quarries Pty Ltd (2003) VSC 370 [26].
Her Honour cited Saloman v Saloman & Co Ltd[18] in respect of the separate legal entity principle. Her Honour then proceeded:
The separate legal entity principle does not preclude the attribution of notice to, or informed consent by, a company director personally.[19]
[18]Saloman v Saloman & Co Ltd (1897) AC 22.
[19]Paradise Constructors Pty Ltd and Another v Lofts Quarries Pty Ltd (2003) VSC 370 [26].
Her Honour Paradise then proceeded to refer and cite with approval Winstone in the following passage:
In Winstone v Bourn Mahon J rejected the defendant directors’ contention that they had not assented to the variation of a debenture in their capacity as guarantors, but only in their capacity as directors of the debtor company. The separate legal entity principle should not operate to vitiate the effect of notice to, and consent by, corporate controllers, in order to relieve them of liability for obligations to which they assented and from which they benefited.[20]
[20]Paradise Constructors Pty Ltd and Another v Lofts Quarries Pty Ltd (2003) VSC 370 [26].
The approach in Winstone was also adopted by Nettle JA in McMahon v National Foods (“McMahon”).[21] In that case the Court of Appeal was dealing with the question as to whether it was open to infer the existence of a novation agreement which included the novation of a guarantee. Nettle JA observed:
So far as the law is concerned, I have dealt already with the principles which determine whether it is open to infer the existence of a novation agreement (including the novation of a guarantee), and I have noticed that no narrow or pedantic approach to the drawing of inferences of that kind is warranted when one is dealing with commercial novation arrangements. As has also been observed, where a surety instigates or is otherwise involved in the novation of an underlying obligation, it may more readily be inferred that the surety thereby agrees that his or her guarantee of the old arrangement will stand as a guarantee of the new.[22]
[21]McMahon v National Foods (2009) 25 VR 251.
[22]McMahon v National Foods (2009) 25 VR 251, 287 [93].
Nettle JA in McMahon drew upon the authorities of Williams v Frayne,[23] Swanson Bros v Stardown Investments Pty Ltd,[24] Wren,[25] Mytian v Williams[26] and ‘Modern Contract of Guarantee’.[27] His Honour then proceeded:
Consequently, as Mahon J observed in Winstone Ltd v Bourne, in circumstances where a guarantor argued that he had not assented to a variation in underlying obligation in his capacity as guarantor, but only in his capacity as director of the debtor company:
“On the facts, bearing in mind the clear knowledge of the defendants of their liabilities as guarantors, I cannot hold that their informed and endorsed assent as directors of that company to the alteration in the debenture was not also an informed though unrecorded assent as guarantors of the plaintiff’s debt”.[28]
[23]Williams v Frayne (1937) 58 CLR 710, 729.
[24]Swanson Bros v Stardown Investments Pty Ltd (Unreported, Newton J, 8 May 1967).
[25]Wren v Emett Contractors Pty Ltd (1969) 43 ALJR 213, 220 (Menzies J, in diss but not in point of principle).
[26]Mytian v Williams [2001] NSWSC 47 [13].
[27]O’Donovan & Phillips, Modern Contract of Guarantee (4th ed, 2004) [7.650].
[28]McMahon v National Foods (2009) 25 VR 251, 287 [93].
Nettle JA said further in McMahon:
Tested against those principles, I am unable to perceive any error in the judge’s legal analysis. I agree with his Honour that it was open to infer from the conduct of the parties that, in consideration of National Foods agreeing to the substitution of McMahon’s Dairy for M P McMahon as the licensed distributor, Mr McMahon agreed that he would go guarantor of McMahon’s Dairy on the terms mutatis mutandis of the licensed distributor agreement guarantee. In particular, given that Mr McMahon was the sole director and executive officer of each of M P McMahon and McMahon’s Dairy, and instigated and arranged for the second novation, I agree with the judge that it was properly to be inferred that Mr McMahon implicitly agreed with National Foods that his licensed distributor agreement guarantee would apply as a new guarantee to the obligations of McMahon’s Dairy as licensed distributor.[29]
[29]McMahon v National Foods (2009) 25 VR 251, 287 [94].
In my opinion the approach in the cases which I have cited is applicable to determining whether or not the inference contended for is to be drawn in this case. I see no error in the reasoning of the judges in the cases already cited. The question here is whether Mr Thompson not only had knowledge of the variation, which he clearly did, but also whether as a matter of fact he also gave his consent to his existing obligation by way of guarantee applying to the arrangement as varied.
The answer to this, in my opinion, does not turn on any conceptual analysis as to his personal legal status.
I find that Mr Thompson’s consent to the variation in this case also amounted to him giving his consent to his guarantee continuing to apply to the Construction Contract regarding the retention moneys. A short analysis of his conduct so far as the facts permit leads to this conclusion.
The email exchange of 13 March 2009 indicates that Mr Thompson, who was the sole negotiator of the varied arrangement on behalf of his company BRI, took no exception to the varied arrangement on the basis that he was also the guarantor, nor did he raise this reservation at any time subsequently. He had the opportunity to do so on 13 March 2009 and the opportunity to raise the issue subsequently.
The first time the question arose was in the course of these proceedings. Although it may follow as a matter of strict logic, as argued by Mr Nugent, that because a person engages in particular conduct the person does not impliedly consent to all of the consequences that follow from that conduct, it is a matter in each case to determine whether on the balance of probabilities the conduct of a party in a case such as this amounted to the party impliedly giving consent to the guarantee extending to the arrangement as varied.
In this case I find that it did. On this ground the principle in Ankar does not apply and Mr Thompson is not discharged from his guarantee. I turn now to the second element which in my opinion renders the principle in Ankar not applicable.
The terms of the guarantee and indemnity in any event, in my opinion, had this effect. I refer to the clause 2(f) of the Thompson Indemnity. In that clause it was agreed by Mr Thompson as follows:
Thompson shall not be released nor shall any liability under this Deed be effected or discharged by:
(f)as a result of any breach, default or other event or occurrence which under the law relating to sureties would but for this provision have the effect of releasing Thompson from the obligations under this Deed.
It was put by Mr Nugent that the term was ambiguous and ought to be construed strictissimi juris such that any ambiguity should be construed in favour of the surety, citing Ankar.
It is well established that clauses may be included in contracts of guarantee and indemnity which have the effect of excluding the application of the principles in Ankar.[30] An example is provided by Ausmezz Pty Ltd v Goldberger where Pagone J said:
The application of these principles to the facts requires consideration of the specific terms upon which the parties contracted. It has long been established that clauses in guarantees may successfully be designed to overcome the decision in Ankar. In Brighton v Australia and New Zealand Banking Group Ltd Campbell JA said:
“It is well established that an adequately drafted clause in a guarantee that provides that the guarantee will not be discharged by identified particular matters that would otherwise discharge the guarantor, can be effective to prevent a discharge that would otherwise arise under the general law”. [31]
[30]Ankar Pty Ltd v National Westminster Finance Australia Ltd (1986) 162 CLR 549, 561.
[31]Ausmezz Pty Ltd v Goldberger (2011) VSC 640 [38].
An example of such a clause was also considered by the New South Wales Court of Appeal in Credit Lyonnais Australia Ltd v Darling & Anor (“Credit Lyonnais”).[32] There was a clause in a guarantee to the following effect was held to exclude the Ankar principle. The clause provided:
This guarantee and indemnity shall be without prejudice to nor shall the guarantor be exonerated in whole or in part nor shall the rights and remedies of the creditors be in any way prejudiced or adversely affected by any of the matters following:
(b)any … omission by the creditor to … complete … any such … collateral security, …
(g)any collateral security held or taken at any time by the creditor being void …
(n)any matter or thing which under the law relating to securities would but for this provision have the effect of releasing the guarantor from this guarantee and indemnity or of discharging this guarantee and indemnity.[33]
[32]Credit Lyonnais Ltd v Darling (1991) 5 ACSR 703.
[33]Credit Lyonnais Ltd v Darling (1991) 5 ACSR 703, 703 [40].
The relevant clause in the present case was drafted in slightly different terms. It was submitted on behalf of Mr Thompson that the guarantee exclusion in the present case was narrower than that considered in Credit Lyonnais. It was submitted that in Credit Lyonnais clause (n) sought to preserve the guarantor’s liability in respect of any matter or thing which under the law relating to sureties would otherwise have discharged that liability.
In contrast it was submitted the general words in clause 2(f) of the Thompson Indemnity in the present case were prefaced by the words “as a result of any breach, default or other even or occurrence”. These words, it was submitted, are words of limitation. They limit, it was said, the nature or class of events in respect of which the guarantor’s liability will not be discharged. It was further submitted that the words which follow, “breach” and “default”, should be construed ejusdem generis.
I do not accept that the construction of clause 2(f) of the Thompson Indemnity had the effect as contended for on behalf of Mr Thompson. The general words in the clause “or other event or occurrence” which follow the words “breach” and “default” should not be construed as applying only to conduct which is conduct not permitted under the principal agreement.
Given that “breach” and “default” are defined as events which have the effect of releasing the surety from his obligations of guarantee, one is hard pressed, in my opinion, to find any other conduct in respect of the principal Building Contract which is not permitted under the agreement which would not also fall within one or other or both of these categories.
If that is the case the general words “or other event or occurrence” would in effect be orphaned with no work to do. I do not consider this to be a consequence which would be consistent with the intention of the parties as reflected in the text which they selected. A clear purpose of clause 2(f) amongst possibly others was to exclude the operation of the Ankar principle in circumstances such as these.
For these reasons clause 2(f) of the indemnity operates to preserve Mr Thompson’s liability under the guarantee. It follows that he is not, for this reason also, discharged from his liability.
Orders
I order that:
1.There be judgment to the Plaintiff against the Second Defendant in the sum of $726,000.
2.Pursuant to s 58 of the Supreme Court Act1986 (Vic) interest on the judgment sum of $726,000, payable by the Second Defendant, is awarded at the maximum rate to the date of judgment, 22 May 2012, fixed at $118,094.01.
3.From the date of judgment to the date of payment interest shall be payable by the Second Defendant pursuant to s 101 of the Supreme Court Act1986 (Vic).
4.The Plaintiff is ordered to be paid its costs of the proceeding by the Second Defendant from the date of his joinder to the proceeding. Such costs are to be paid on a party/party basis.
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