John McInnes Agencies Pty Ltd and John Dean McInnes v Pegasus Leasing Ltd No. SCGRG 93/274 Judgment No. 4140 Number of Pages 5 Contracts

[1993] SASC 4140

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA KING CJ(1), OLSSON(2) AND DEBELLE(3) JJ

CWDS
Contracts - general contractual principles - discharge, breach and defences to action for breach - Racehorses leased by respondent to appellants - respondent sought to recover rent owed under lease - defence to claim was that horses were never delivered to appellants - management responsibility for horses delegated to managers - impossible to deliver part share of horses to appellants - purported repudiation of contract by appellants entitled respondent to rescind and prosecute its claim.

HRNG ADELAIDE, 8 July 1993 #DATE 1:9:1993
Counsel for appellants:     Mr B Beazley
Solicitors for appellants:    Home Taylor and Co
Counsel for respondent:     Mr P McNamara
Solicitors for respondent:    Kelly and Co.

ORDER
Appeal dismissed.

JUDGE1 OLSSON J This is an appeal by the defendants in an action in the District Court, in which Lunn DCJ entered judgment against them in favour of the plaintiff in the sum of $118,255.84 (inclusive of interest) together with costs of action to be taxed. 2. When the action was called on for trial the proceedings took a somewhat unusual course, which, has, in large measure, precipitated much of the debate which arose on this appeal. It is therefore necessary, first, to analyse that aspect of the case. In doing so I shall, for the sake of brevity, refer to the plaintiff as "Pegasus", the first defendant was "McInnes Agencies" and the second defendant as "McInnes". 3. By its statement of claim, Pegasus sought to recover a sum of $84,195.68, together with interest from 4 October 1991 to date of payment. It sued McInnes Agencies for that sum as being balance lease rental alleged to be due pursuant to the terms of a leasing agreement dated 29 June 1989 ("the leasing agreement") entered into between it and that defendant, in relation to a one-twentieth interest in some twelve thoroughbred horses ("the subject horses"). It also sued McInnes, as guarantor of the due payment of the amount claimed, pursuant to an instrument of guarantee, also dated 29 June 1989 ("the guarantee"). The interest was claimed pursuant to what were said to be relevant default provisions contained in the leasing agreement. 4. The defendants filed a defence and counterclaim in the action. In it they:-
     - admitted the entry into the leasing agreement;
     - averred that any execution by McInnes of the guarantee was
    not binding on him, because his wife had not executed it as
    co-guarantor, as envisaged by the document;
     - admitted receipt of a notice from Pegasus dated 4 October 1991
    purporting to terminate the leasing agreement and making demand
    upon McInnes under the guarantee;
     - pleaded that, at the time of receipt of the lastmentioned
    notice, Pegasus was, itself, in breach of its obligations under
    the leasing agreement and not entitled to terminate it as against
    the defendants or claim interest under it;
     - asserted that, pursuant to the leasing agreement, Pegasus had
    agreed to lease to the defendants a one-twentieth interest in the
    subject horses for the primary objective of enabling them to race
    and breed the horses;
     - contended that, in breach of its obligations under the leasing
    agreement, Pegasus had never made six of the subject horses
    available to the relevant defendant. In elaboration of that plea
    it was asserted that three specified horses had never been
    registered and thus could not be raced or entered into the stud
    book, and that three others had, at all relevant times, been
    agisted on a property owned by one Krongold who, at all relevant
    times, had refused to release them to the relevant defendant. It
    was also alleged that none of the six horses had ever been
    registered;
     - alleged that the defendants had, for the above reasons, been
    denied the opportunity of utilising, or fully utilising, the
    subject horses in the manner provided by the leasing agreement, as
    a result of which they had sustained loss;
     - expressly contended that, by letter dated 20 September 1991,
    written by their solicitors on its behalf, McInnes Agencies had
    rescinded the leasing agreement, by reason of the failure by
    Pegasus to perform its obligations under it. The defendants
    claimed $100,000 damages. In its finally amended reply and defence
    to counterclaim, Pegasus denied the positive averments in
    the defence and, as to the counterclaim, pleaded, in effect, that,
    contemporaneously with the entry into the leasing agreement, a
    so-called management agreement was entered into by the defendants
    with a company known as Arbaya Pty Ltd ("Arbaya") to manage the
    subject horses, on terms which were particularised. Pegasus
    further averred that, under the relevant agreement, the defendants
    specifically agreed to pay all relevant registration fees and
    acknowledged that Arbaya would attend to all management aspects.
    It was further said that, at all material times, the subject
    horses were in the possession of Arbaya, as their agent. Pegasus
    also alleged that it was always the obligation of the defendants,
    through Arbaya to register the subject horses; and that Krongold's
    dealings were with Arbaya and not Pegasus. 5. Against that pleading background the action was listed for hearing before Lunn DCJ on 14 December 1992. 6. At trial Pegasus merely proved the leasing agreement and the guarantee and called brief oral evidence to prove the quantum of the debt alleged. It was conceded that two other potential witnesses, who could have been called by Pegasus, had died prior to trial. Various documents, a number of which came from the possession of the defendants, were also tendered, by virtue of the service upon the defendants of a notice to admit which had not been responded to. By operation of the District Court rules, they were deemed to have been admitted. 7. At the close of the plaintiff's case a submission of no case to answer was made on behalf of McInnes. The learned trial judge thereupon called on that defendant to elect whether or not to call evidence, whereupon all defendants did elect not to tender or call evidence. 8. In those circumstances the learned trial judge was left in the situation that he had no alternative but to address the issues before him on the footing of the evidence adduced by Pegasus, the documentary material tendered and those inferences which naturally arose from all of that material. All in all it was a most unsatisfactory situation from his point of view. 9. Lunn DCJ proceeded to make these basic findings of fact on the whole of the material before him:-
     (1) In about February 1989 one Coles, who was associated
    with a company known in the proceedings as "Hyperion" (which
    specialised in promoting and managing syndicates of persons who
    had interests in thoroughbred racehorses), purchased the subject
    horses from a vendor in New Zealand. They were apparently
    acquired on behalf of Hyperion.
     (2) At some time prior to June 1989, Hyperion issued a
    prospectus inviting parties to take up a total of 20 shares at
    $95,000 each in the subject horses, as a syndicate to be known as
    "International". It was represented that significant taxation
    benefits would accrue to investors.
     (3) On 23 May 1989 Pegasus entered into a livestock lease
    agreement with Arbaya, whereby it purported to lease twelve of the
    horses for six months. This was said to have been done so that
    Arbaya could do whatever was necessary for the Hyperion
    partnership.
     (4) Towards the end of June 1989, McInnes sought out the witness
    Gore, who was operations manager for Pegasus, seeking to take up
    one of the shares in the proposed syndicate. He wished to
    consummate the arrangement by 30 June 1989 to avail himself of
    certain taxation benefits arising from the investment.
     (5) It was arranged that Gore would meet with McInnes and his
    wife at 5.00 pm on 30 June to sign the necessary documentation.
    Gore had made it clear to McInnes that, as the proposed member of
    the syndicate was to be McInnes Agencies, a company controlled by
    McInnes and his wife, both of them would be required to execute a
    guarantee of its obligations under the leasing agreement, which
    was the vehicle for taking up the share.
     (6) McInnes duly attended at the appointed time but, for some
    reason, his wife was unable to do so. McInnes needed to
    consummate the transaction that day for taxation purposes. Gore
    demurred, because Mrs McInnes was not available to execute the
    guarantee, but, after some debate, a compromise was reached.
    McInnes executed the leasing agreement for and on behalf of
    McInnes Agencies and signed the guarantee, which was expressed as
    a joint and several guarantee. He undertook to arrange for his
    wife to call and sign it a day or so later. In point of fact she
    never did so. The documents were backdated to 29 June 1989.
     (7) The leasing agreement was a lengthy document but, in
    essence, it provided that Pegasus would lease a one-twentieth
    interest in the subject horses to McInnes Agencies for a term of 4
    years, commencing on 29 June 1989, for an annual rental of
    $26,364, payable in advance by annual instalments. He also
    executed, on behalf of McInnes Agencies, a bloodstock agreement,
    taken from the Hyperion prospectus, which appointed Hyperion to be
    the manager of the horses and to be responsible for their care.
     (8) There is no evidence that Hyperion ever executed that
    document, but it was conceded that it was binding on McInnes
    Agencies. The learned trial judge pointed out that it was by no
    means clear as to what arrangements existed as between Hyperion
    and Arbaya. However, what the documentation produced from the
    custody of the defendants clearly revealed was that, at all
    material times, Arbaya had possession of the subject horses and,
    in fact, managed them. It also disclosed the names of all members
    of the International Syndicate, one of which was Arbaya itself,
    which held 13 of the twenty shares. 10. It further emerged from the defendant's documentation that there was an ongoing relationship between them and Arbaya, which was clearly managing the subject horses and, from time to time, remitted shares of winnings of certain of the horses to McInnes. 11. True it is that, because of problems related to stud certificates there was some delay in the registration of the horses and that none of them actually raced until September 1990. It was also clear that any agistment dealings with Krongold were entered into by him with Arbaya, and not Pegasus. 12. McInnes Agencies duly paid Pegasus the second instalment of rent which fell due in June 1990, but it did not pay that due in June 1991. On 20 September 1991 McInnes Agencies purported to rescind the leasing agreement, because of the alleged failure of Pegasus to perform its obligations. This, in turn, led to the rescission by Pegasus and the demand by it under the guarantee. 13. As the learned trial judge pointed out, the crux of the arguments advanced on behalf of McInnes Agencies was that, by virtue of the leasing agreement, under which Pegasus agreed to lease the one-twentieth interest in the subject horses, it was an implied term that all horses would be "made available" by Pegasus to that defendant and it failed to do so. 14. As Lunn DCJ correctly pointed out, not only did the lease not say that, but, as a matter of plain common sense, possession of a one-twentieth share of the subject horses could not physically have been passed over to the relevant defendant. What was contemplated was a collective arrangement on behalf of the syndicate members, whereby the holders of the totality of the shares would have the horses managed on their behalves. 15. The learned trial judge was not prepared to find what specific management arrangements had been consummated by the syndicate but, for myself, it seems to me that the only rational and compelling inference arising on the documentation produced by the defendants themselves was that all syndicate members, including McInnes Agencies, delegated the overall management responsibility to Arbaya. This appears beyond question from the prize money accountings rendered by Arbaya to the defendants and the relevant income tax returns. 16. It was the conclusion of the learned trial judge that such a situation was fatal to the case of McInnes Agencies, as to both the defence and the counterclaim. With respect I entirely agree with him. There was simply no breach of the leasing agreement by Pegasus established; and the purported repudiation of it by McInnes Agencies entitled Pegasus, in turn, to rescind and prosecute its claim in the action. Quite apart from that situation it is to be noted that the purported rescission by the defendant McInnes Agencies was never preceded by any notice to rectify any alleged breach, nor were any complaints of the nature of those raised at trial ever raised with Pegasus prior to the purported rescission. 17. The judgment entered by Lunn DCJ against McInnes Agencies in its dual capacities was the inevitable outcome of any reasonable interpretation of the evidence as it stood, in the absence of any oral testimony led on behalf of the defendants. 18. As to the defence to the claim on the guarantee all that need be said is that, quite apart from the effect of the compromise arrangement come to between Gore and McInnes on 30 June 1989, the very guarantee itself contains an express covenant by McInnes that the guarantee given by him should not be considered as wholly or partially discharged or prejudiced (inter alia) by the failure of any guarantor to execute and deliver the guarantee. It was thus both a joint and several guarantee which attached liability to McInnes upon his execution of it, regardless of whether his wife ultimately signed the document. 19. The learned trial judge therefore had no option but to reject the defence of McInnes and to enter judgment against him pursuant to the guarantee. 20. Some other matters were nominally agitated in the notice of appeal filed by the defendants, but they were not argued before the Full Court. In my view they did not raise any tenable criticism in relation to what was done by Lunn DCJ. 21. In the above circumstances I would dismiss the appeals by the defendants.

JUDGE2 KING CJ In my opinion this appeal should be dismissed for the reasons given by Olsson J.

JUDGE3 DEBELLE J I agree that this appeal should be dismissed for the reasons given by Olsson J.