Island State Credit Union Co-operative Society Ltd v Mol

[1989] TASSC 119

Serial No B41/1989
List “B”

COURT:  SUPREME COURT OF TASMANIA

CITATION:              Island State Credit Union Co-operative Society Ltd v Mol [1989] TASSC 119; B41/1989

PARTIES:  ISLAND STATE CREDIT UNION CO-OPERATIVE SOCIETY LTD
  v
  MOL

FILE NO:  3295/1982
DELIVERED ON:     9 October 1989
JUDGMENT OF:      Wright J

Judgment Number:  B41/1989
Number of paragraphs:  20

Serial No B41/1989
File No 3295/1982

ISLAND STATE CREDIT UNION CO-OPERATIVE SOCIETY LTD v MOL

REASONS FOR JUDGMENT  WRIGHT J

9 October 1989

1. On 18 June 1980, Geoffrey Charles Beer applied to the plaintiff company for a loan of $4,000 for the purpose of carrying out home improvements to his property at 1 Whitford Street, Upper Burnie. At that time the defendant had been engaged by Beer to carry out renovations and alterations to the residence on that property. The defendant and Beer had known each other for several years and belonged to the same church. They were good friends.

1. Upon receiving Beer's application for a loan, the plaintiff company made it known to him that it would provide the loan on condition that a suitable guarantor was provided. Beer advised the plaintiff company that the defendant was prepared to act as guarantor and accordingly a "loan repayment agreement" and a "guarantee and indemnity" form were sent by the plaintiff company to Beer. Relevant details in each document had been filled in by an officer of the plaintiff company before the documents were sent to Beer. The loan repayment agreement was signed by Beer in the presence of the defendant and the guarantee and indemnity form was signed by the defendant in the presence of Mr John Cahill, a justice of the peace and proprietor of a newsagency business near Beer's home. Both documents were returned by Beer to the plaintiff company and the $4,000 loan was paid to Beer shortly thereafter. Beer made only one scheduled repayment pursuant to the terms of the loan before falling into arrears and eventually, as a result of increasing financial difficulties, becoming bankrupt. Most of the above facts were not in dispute and insofar as they were, my foregoing narrative represents my findings.

1. The plaintiff company sued the defendant as guarantor of the loan on 4 November 1982. The sum then claimed, including interest, was $5,065.96. However, it is now claimed that in accordance with the provisions of the loan repayment agreement the amount due, up to and including the 1 September 1989, is $21,094.10.

1. The defendant does not dispute that Beer has failed to honour his commitments under the loan repayment agreement, however he says that his signature was procured to the guarantee and indemnity agreement by fraud. He says that this is a case of non est factum and consequently he is not obliged to pay the amount claimed. The defendant also joined Beer as a third party in these proceedings claiming an indemnity from him in the event of his being found liable to the plaintiff company. The trial of the third party proceedings took place at the same time as the trial of the action. It was conceded that in accordance with the provisions of the Bankruptcy Act 1966 (Cth), Beer could not be held liable to indemnify the defendant unless the defendant could establish that the guarantee had been procured by the third party's fraud.

1. Evidence as to the time, place and circumstances in which the guarantee and indemnity agreement was signed was given by Mr John Cahill, the defendant and Beer. The evidence given by Mr Cahill and Beer was consistent and essentially the same in all material respects, although it was plain that Mr Cahill's memory of the finer details of the transaction had dimmed or disappeared with time. This is scarcely surprising when it is remembered that over nine years have passed since the document was executed. The defendant alleged that the guarantee and indemnity agreement was signed by him at Mr Cahill's shop and that at the time it was signed, a substantial portion of the document was obscured by Beer's hand. The defendant said that he did not realize that it was a document in which he was acknowledging potential responsibility for Beer's debt and thought that it was simply a document representing that he was doing repair and renovation work at Beer's home which would facilitate Beer's application for loan or some kind of approval. Beer and Mr Cahill on the other hand, claim that the document was signed by the defendant at 1 Whitford Street on the kitchen table, that it was fully visible to him at the time and that no attempt was made to hide the contents. Beer said that well prior to his receipt of the relevant documents the defendant had agreed to guarantee the proposed loan and gave every indication of understanding the transaction. It is plain enough that Mr Cahill and Beer enjoyed a friendly relationship at the time and for this reason, Mr Cahill cannot be regarded as a completely independent witness. With these considerations in mind I have scrutinised the evidence of Cahill and Beer with particular care and, having done so, I have nonetheless reached the conclusion that their evidence is to be preferred to that of the defendant upon all important matters.

1. I am also satisfied that the defendant is, and was, significantly more astute in matters of business than he attempted to convey by his performance in the witness box. If he had been a stranger working as a tradesman in Beer's house, the unlikelihood of his readiness to act as guarantor would have been striking. However, not only was he a friend, confidant and a member of the same church as Beer, it was clearly established by the evidence that he lent $3,000 of his own money to Beer for the purpose of enabling him to maintain liquidity whilst the renovations progressed. Accordingly, there is nothing remarkable in the notion that he would be prepared to guarantee Beer's loan from the plaintiff company, assuming as both Beer and he did, that the loan would be of relatively short duration because of Beer's then current intention to restructure his financial commitments by obtaining a large loan from his employer, the City Mutual Life Assurance Society. The defendant in my assessment is intelligent, articulate and appears to be a generally competent businessman.

1. I am satisfied that the defendant signed the guarantee and indemnity agreement with an awareness of the obligation which he was undertaking. His plea of non est factum is not established and his claim for indemnity against the third party cannot succeed.

1. In addition to the central issue of disputed fact with which I have just dealt, the defendant raised a number of issues which he alleges constitute insuperable barriers to the plaintiff company's prospects of success. I turn now to examine those issues.

1. It was submitted by defence counsel that for a number of reasons there was no consideration supplied by the plaintiff company for the execution by the defendant of the guarantee and indemnity and that consequently the same was not binding upon him as a contractual obligation. This submission was based firstly on the proposition that the consideration recited in the guarantee and indemnity was non–existent because notwithstanding a recital to the contrary in the document, the defendant denied having made any request to the plaintiff company to lend the money to Beer and there was no challenge to this claim or any acceptable evidence to the contrary. However, in my opinion, this is not an argument open to the defendant upon the pleadings. Had it been properly pleaded and raised as an issue it almost certainly would have been met with a plea of estoppel. However, it is not upon this ground that I reject the defence argument. A recitation of untrue facts in this way in a document of this kind does not vitiate it. See Reid Murray Holdings Limited in Liquidation v David Murray Holdings Pty Ltd (1972) 3 SASR 386 at p396 per Mitchell J That the point is without substance is also demonstrated by the three cases cited in the two following paragraphs.

1. It was next contended that the consideration expressed in the document was a past consideration in that it consisted of a pre–existing agreement to lend money entered into between the plaintiff company and Beer. Similar arguments to those advanced by the defence in this case have been firmly rejected in a number of previous decisions. See for example, S H Locke Discounts and Credits Pty Ltd v Myles [1963] VR p656 and Coghlan v S H Locke (Australia) Ltd (1987) 70 ALR p1.

1. The argument can also be seen to be unsustainable if one analyses the nature of the contract upon which the plaintiff company relies. This is best explained in the following passage from the joint judgment of the High Court in Australian Woollen Mills Pty Ltd v The Commonwealth (1953–1954) 92 CLR 424 at p456:

"The contract put forward by the plaintiff is thus seen to be of that type which is commonly said to be constituted by an offer of a promise for an act, the offer being accepted by the doing of the act. Such contracts are sometimes described as 'unilateral' contracts, but the term is open to criticism on the ground that it is unscientific and misleading. There must of necessity be two parties to a contractual obligation. The position in such cases is simply that the consideration on the part of the offeree is completely executed by the doing of the very thing which constitutes acceptance of the offer. A well– known example in which a contract was held to have been made is to be found in Carlill v Carbolic Smokeball Co (1893) 1 QB 256, which has been recently referred to as 'that immortal case on unilateral contract' (J C Smith, Law Quarterly Review, vol69, p107) ...

In cases of this class it is necessary, in order that a contract may be established, that it should be made to appear that the statement or announcement which is relied on as a promise was really offered as consideration for the doing of the act, and that the act was really done in consideration of a potential promise inherent in the statement or announcement. Between the statement or announcement, which is put forward as an offer capable of acceptance by the doing of an act, and the act which is put forward as the executed consideration for the alleged promise, there must subsist, so to speak, the relation of a quid pro quo."

By signing the guarantee and indemnity the defendant was plainly representing to the plaintiff company that upon their payment of the loan funds to Beer, he would be responsible as guarantor. In making the payment on the faith of this offer by the defendant (as I infer it did) the plaintiff company accepted the guarantee and the defendant became bound.

1. It was next submitted by the defence that there was no note or memorandum in writing of the guarantee sufficient to satisfy s6 of the Mercantile Law Act 1935. This submission was coupled with a further submission that the guarantee and indemnity could not be shown to relate to the loan repayment agreement and that accordingly, the defendant's obligations pursuant to the guarantee could not be ascertained with certainty. It was submitted that clear principles of construction apply in relation to guarantees. These principles were referred to by the Privy Council in Coghlan v S H Locke (Australia) Ltd (supra) in the following terms:

"Such a document falls to be construed strictly; it is to be read contra proferentem; and, in case of ambiguity, it is to be construed in favour of the surety."

1. In my opinion there is a clear nexus between the loan repayment agreement and the guarantee and indemnity. They both emanate from the plaintiff company and relate to a proposed loan by that company to Geoffrey Charles Beer of the sum of $4,000. The loan repayment agreement was signed by Beer on the 1 July 1980 and his signature was witnessed by the defendant on that date. On the same date, the defendant signed the guarantee and indemnity in the presence of Mr Cahill. These facts, whilst confirmed by oral evidence, are plain upon the face of the two relevant documents. I am in no doubt that the two documents have the necessary nexus with each other to enable them to be read together for the purpose of construing the defendant's obligations. See Luck v Ilka [1951] Qd SR 281. None of the ambiguities or uncertainties which deprived the guarantee then in question of effect in Mercantile Credits Ltd v Harry (1969) 2 NSWR p248, exist in this case.

1. It was submitted that the interest to be charged on the loan was not clearly ascertainable, but I cannot accept this. In the loan repayment agreement it said:

"Interest shall be charged at the rate determined by the Board of Directors from time to time, calculated on the opening balance each month. The current rate is   % per month at monthly rests."

1. It was suggested that the failure of the parties to complete the final sentence and thus the failure to specify the interest rate in operation at the inception of the agreement, robbed it of effect. I cannot accept this. The operative stipulation is contained in the first sentence. The second sentence, had it been completed, may well have been binding as to the initial rate so stated, both as between the borrower and lender and also as between the lender and the guarantor. However, although it was left blank, it is still possible by reference to the minutes of the meetings of the Board of Directors to ascertain the interest rate then in effect and applicable to loans of this kind made by the plaintiff company. The guarantee and indemnity form says:

"In consideration of the Credit Union having at my request agreed to lend my friend Geoffrey Charles Beer the sum of four thousand dollars $4,000 I Adrian Mol hereby guarantee and agree with you to be responsible to you for the payment in full of the said loan of four thousand dollars $4,000 together with interest and all other charges payable by my said friend under the terms of his agreement for loan. This guarantee shall not be affected by your granting time or any other indulgence to my said friend or by his death or bankruptcy. You shall be at liberty to act as though I were the principle debtor under your agreement for loan and I hereby waive all or any of my rights as surety to compete with you in obtaining payment of the monies due or to become due to you in respect of your said loan as against my said friend or his estate or any other surety for him." [My emphasis]

1. The defendant's penultimate submission was that the interest rates calculated and set forth in the amended statement of claim and exhibit P11 which was prepared by and explained by Keith John Burke, the Credit Manager of the plaintiff company, were not in accordance with the rates determined from time to time by the Board of Directors. I do not believe this to be so. I found Mr Burke's explanation of his calculations convincing and appropriate. Whilst the loan repayment agreement does not designate the subject loan a "housing" or "personal" loan, I have no difficulty in concluding on the evidence that this was a personal loan rather than a housing loan and that as a consequence the rates specified in the plaintiff company's records of Board Meetings for "personal" loans are the appropriate rates for present purposes. The mathematical accuracy of Mr Burke's calculations was not challenged, but in my opinion there has been an error in his figures because interest has been charged at 19.95% between May 1988 and May 1989. The rate for this period should have been 19.5%. (See Minutes of Board Meeting 18 April 1988). In my opinion, the amount claimed by the plaintiff company must be reassessed to compensate for this error.

1. The defendant also submitted, although somewhat tentatively, that there were unusual features relating to the loan to Beer which the plaintiff company as lender was bound to disclose to the defendant as prospective guarantor. This submission was based upon Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, but in my opinion, the principle expressed in that case has no application in the present circumstances. There is nothing at all unusual about the terms or effect of the agreement between the plaintiff company and Beer.

1. It follows therefore, that the plaintiff company is entitled to judgment against the defendant for the sum claimed but reassessed to compensate for the error mentioned above and brought up to date at the current interest rate of 20.5% to the 9th October 1989. I calculate this figure to be $21,476.06.

1. The defendant's unfortunate predicament must plainly excite considerable sympathy. He undertook what appeared to be a very short term obligation for a friend. The risk which is so frequently obvious in this type of transaction, did not seem of great significance to either the defendant or Beer in view of City Mutual's prior conditional agreement to provide a substantial loan to restructure Beer's financial commitments. Beer's subsequent failure to secure this loan from City Mutual, his bankruptcy and discharge without paying any dividend whatsoever in respect of his debts, and his acquittal by me of any fraud in relation to the present transaction, has deprived the defendant of any recourse against him for the sum which the defendant must pay to the plaintiff company. The original debt of $4,000 has escalated to the present frightening proportions due to the effluxion of time and the compounding effect of unpaid interest. It has not been suggested that the defendant is entitled to any relief on this account, nor, I think, could any such suggestion be made in the circumstances.

1. There will be judgment for the plaintiff company against the defendant in the sum of $21,476.06. There will be judgment for the third party against the defendant in the third party proceedings. The defendant will be ordered to pay the taxed costs of the plaintiff company and of the third party.