Lissa v Browne

[2009] NSWSC 1050

CITATION:	Lissa v Browne [2009] NSWSC 1050
HEARING DATE(S):	28 September 2009
JUDGMENT DATE :	2 October 2009
JUDGMENT OF:	Davies J
DECISION:	(1) The appeal is upheld. (2) Set aside that part of the judgment of the Local Court of 14 December 2008 that found a verdict in favour of Zonie against Mr Lissa in the amount of $19,919 plus costs. (3) In lieu of the judgment of the Local Court direct a judgment in favour of Mr Lissa with Zonie to pay Mr Lissa’s costs of the final hearing before the Local Court. (4) The Plaintiff is to pay the First Defendant’s costs of these proceedings. (5) The Plaintiff is to pay 50% of the Second Defendant’s costs of these proceedings. (6) Liberty to apply on 3 days notice.
CATCHWORDS:	GUARANTEE AND INDEMNITY - discharge of surety - departure from terms of contract with surety - whether arrangement was guarantee or indemnity - whether the principle in Ankar Pty Ltd v National Westminster Finance applies to indemnities - whether obligation a condition or essential term - whether the condition breached by the party indemnified. COSTS - appeal from Local Court - appeal succeeds on ground not argued in court below - abandonment by appellant of original grounds of appeal - appropriate costs order.
LEGISLATION CITED:	Legal Profession Act 1987 Local Court Act 2007 Uniform Civil Procedure Rules
CATEGORY:	Principal judgment
CASES CITED:	Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 Ex parte Hauxwell (1888) 23 Ch.D 626 Heald v O’Connor [1971] 1 WLR 497 Hussey v Horne-Payne (1878) 23 Ch.D 670 Re Perkins [1898] 2 Ch 182 Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889 Taylor v Sanders [1937] VLR 62 Total Oil Products (Australia) Pty Ltd v Robinson [1970] 1 NSWR 701 Yeoman Credit Limited v Latter [1961] 1 WLR 828
TEXTS CITED:	O’Donovan & Phillips, The Modern Contract of Guarantee, 3rd ed (1996) LBC
PARTIES:	Gary Lissa (Plaintiff) Patrick Browne (First Defendant) Zonie Constructions Pty Ltd (Second Defendant)
FILE NUMBER(S):	SC 10049/09
COUNSEL:	E White (Plaintiff) N Allan (First Defendant) R Gambi (Second Defendant)
SOLICITORS:	John Byrnes & Associates (Plaintiff) Ziman and Ziman Solicitors (First Defendant) Barwick Boitano Lawyers (Second Defendant)
LOWER COURT JURISDICTION:	Local Court
LOWER COURT FILE NUMBER(S):	2399/07
LOWER COURT JUDICIAL OFFICER :	Acting Magistrate Price
LOWER COURT DATE OF DECISION:	14 December 2008

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

DAVIES J

FRIDAY, 2 OCTOBER 2009

JUDGMENT

Mr Lissa gives an indemnity

1 Gary Lissa (the Plaintiff) engaged Zonie Constructions Pty Ltd (the 2^nd Defendant) to carry out building work at his house in 1996. Part of the work involved the replacement of an air conditioning system. Zonie chose a company called Central Air Conditioning.

2 Problems arose in relation to the work carried out by Central Air and that ultimately resulted in Central Air commencing proceedings against Zonie in the Local Court for unpaid invoices. Zonie intended to defend the claim by alleging faulty workmanship and cross-claiming for the costs of rectifying the problems.

3 Mr Lissa retained Patrick Browne (the 1^st Defendant) as the solicitor for Zonie by a lengthy retainer letter dated 25 October 1999 because, it would seem, Zonie was a longstanding client of Mr Lissa’s accountancy practice and the dispute arose from work being carried out by Zonie at Mr Lissa’s property.

4 On 11 December 2000 Mr Browne wrote Zonie a letter that seemed to assume that Zonie was aware Mr Browne had been retained to act for that company by Mr Lissa. Having advised them that their only defence against the claim by Central Air was faulty workmanship and perhaps overcharging, he pointed out that:

“you (and/or Lissa) may have a counterclaim against Central for the costs of rectifying the problems which they caused, and such counterclaim might possibly exceed the amount of Central’s present claim”.

5 The letter then went on to say this:

“However, in the present intervening course of formal pleadings, it is our duty to advise you that, in a normal case, Zonie should perhaps be seeking to sue Gary Lissa for ‘backup’ recompense by joining him as a ‘third party’ defendant in the present Central v Zonie proceedings. We have discussed this problem with Gary Lissa.

Formally speaking, we cannot act for your company and for Gary Lissa at the same time. However, a practical solution to this dilemma is very probable.

Gary Lissa very clearly tells us the following:

1. He has an understanding with you and your company (his clients) that he will ‘wear & bear’ the end results of this dispute with Central;

2. He will indemnify Zonie fully in respect of the outcomes (including legal costs) of the dispute with Central; and

(3) In the meantime, he is fully authorised to give us instructions on your behalf in relation to the future conduct and possible settlement or court trial of the matter.

…

On the assumption that you are in agreement with the above, we have prepared a letter of indemnity to be signed by Gary Lissa in favour of your company, and a copy of same (2 pages) is attached for your information.”

6 The attached letter, which was ultimately signed by Mr Lissa and Zonie, was a letter dated 19 December 2000 addressed to the Directors of Zonie. It read as follows:

“I have a copy of the letter dated 11/12/00 from Browne & Associates, solicitors, to your company regarding claims in respect of work at my residence at Lindfield.

I agree with the background and explanations as contained in the above letter from Browne & Associates.

Accordingly, I agree to fully indemnify you and Zonie in respect of the outcomes (from time to time and ultimately) of the present Court proceedings instituted by Central Air against Zonie, because of your company’s probable right to claim for recompense against me in any event.

At the same time, because I am the party in practical possession of nearly all the background information and material relating to the subject dispute with Central Air, your company needs to confirm my authority to instruct Browne & Associates on your behalf in relation to the subject Court proceedings and the course and resolution of the same.

This letter/agreement is intended to take effect as a deed, and accordingly, is hereby expressed to be signed, sealed and delivered by and between us.

…”

7 Thereafter, Mr Browne continued to act for Zonie in relation to its dispute with Central Air. From time to time he rendered tax invoices.

8 By the end of 2001 there were clear tensions arising between Mr Lissa and Zonie. These tensions included problems Mr Lissa was having with the approach he said Mr Browne was adopting to the litigation. In his letter of 28 November 2001 to Zonie Mr Lissa said he was losing faith in Mr Browne and then went on to say:

“I have paid out about $7000 between repairs and legal fees without a resolution. It doesn’t help that there was no written contract detailing the work and an estimate of costs. As you know the legal action is against Zonie and so it might be best if you take this matter over and use your own lawyer.”

9 There was no reply to that letter and Mr Lissa wrote again to Zonie on 3 January 2002 asking Zonie to address the issues that he had raised. The letter concluded by saying “we should appoint another lawyer as soon as possible”.

10 Zonie replied by letter of 4 January 2002 and, amongst other things, said this:

“The final matter with the ongoing dispute with Central Air is a matter you have taken to (sic) far for us to intervene now. You have taken it upon yourself to go along this route. Our agreement was to assist you only with works, this is why you have also indemnified us in respect to the outcome against Central Air.”

11 The problems between Mr Lissa and Zonie came to the attention of Mr Browne resulting in him writing a long letter on 11 January 2002 to Zonie. The thrust of the letter was that if Mr Lissa and Zonie were not able to resolve their problems Mr Browne would no longer be able to act for Zonie. The problems led to the engagement of Barwick Baitano for Zonie by Mr Lissa on 17 April 2002.

12 Ultimately, the proceedings were settled on about 9 September 2002 with a verdict and judgment for Central Air against Zonie in the sum of $7000 and a verdict for Central Air on the cross-claim by Zonie. Each party was to pay its own costs. It appears this settlement was effected without reference to Mr Lissa but it is to be noted that Mr Browne was no longer the solicitor acting.

Mr Browne sues Zonie

13 The present dispute originated from a tax invoice, undated but sent under cover of a letter dated 17 April 2002 by Mr Browne, that is said to represent the period 10 October 2001 to 17 April 2002. The amount claimed in the tax invoice was $19,919. The relevance of 17 April 2002 is that on that day Mr Lissa retained Barwick Boitano.

14 The covering letter of 17 April 2002 said that Mr Browne was prepared to negotiate with respect to the bill because of the past relationship. It appears that nothing further was heard about it prompting a letter from Mr Browne to Mr Boitano dated 12 June 2002 asking (inter alia) what Zonie’s response to the bill was. Barwick Boitano wrote on 14 June 2002 to Mr Browne advising that they had attended to filing a Notice of Change of Solicitor in the Local Court and saying:

“In addition, we advise that our client has rejected your bill”.

15 When the tax invoice forwarded by Mr Browne remained unpaid he commenced proceedings in the Local Court on about 31 January 2007 although there is no explanation for why it took 4½ years to do this. He claimed for the amount of the tax invoice together with the interest thereon and various costs totalling $28,979.05.

16 In its defence Zonie denied that it ever instructed Mr Browne to act on its behalf, raised defences concerned with costs disclosure requirements in the Legal Profession Act 1987 and concluded by saying in paragraph 4(h):

“The Plaintiff is and was aware that at all material times G A Lissa was the instigator of the proceedings number 4067/2001 and had provided a Deed of Indemnity to the Defendant in this regard.”

17 Zonie also filed a cross-claim against Mr Lissa which relevantly said:

“3. The Cross Claimant claims against the Cross Defendant a complete indemnity and/or contribution in the event of it being liable to the Plaintiff in the amount claimed to the extent of such amount as may be found by the Court to be just and equitable.
4. The Cross Claimant relies on the following facts and assertions:

a. Deed of Indemnity executed by G A Lissa dated 19 December 2000.
b. Copy of letter attaching Deed of Indemnity dated 11 December 2000.”

18 In his rather discursive defence to the cross-claim, Mr Lissa did a number of things. First, he recited something of a potted history of the matter in paragraph 2. He then acknowledged the Deed of Indemnity and the covering letter of 11 December 2000 in paragraph 3. In paragraph 4 he provided what was said to be his answer to the claim made by Mr Browne against Zonie in respect of which Zonie sought indemnity from him. That included the following:

“(a) In accordance with the Deed of Indemnity signed by the Cross Claimant and the Cross Defendant on 19 December 2000, such Deed of Indemnity was to be applicable only for such time as the Cross Defendant continued to instruct the Plaintiff, under the authority of the Cross Claimant, in relation to the carriage and finalisation of the Local Court proceedings in respect of which the current claim for professional work said to have been provided by the Plaintiff to the Defendant/ Cross Claimant arises.

(b) The Cross Defendant’s authority to instruct the Plaintiff in relation to those previous Local Court proceedings was withdrawn during or about January 2002.”

19 Paragraphs 4(c) and (d) pleaded defences concerning lack of proper disclosure under the Legal Profession Act, and sub-para (e) then said:

“The Cross Defendant says in those circumstances that the Plaintiff is not entitled to proceed further with these proceedings and that these proceedings have in fact been unlawfully commenced by the Plaintiff”.

I think the better view is that that paragraph was a reference to the defences concerning the Legal Profession Act in 4(c) and 4(d) and did not relate to what appeared in para 4(a) and (b).

20 Sub-para 4(f) appears to be a limitation defence and sub-para 4(g) raised some agreement that after a payment of $4,500 by Mr Lissa to Mr Browne there would be no further costs payable.

The proceedings in the Local Court

21 The proceedings commenced by Mr Browne have had a reasonably tortuous history. There was a hearing before, and a judgment given by, Magistrate Dillon on 9 August 2007 on a motion by Mr Lissa to dismiss the Statement of Claim. The substance of the claim concerned Mr Lissa’s assertion that he was the client of Mr Browne and had not been provided with the necessary costs disclosures etc under the Legal Profession Act with the result, it was said, that the proceedings could not be maintained. Magistrate Dillon ruled against Mr Lissa and held that he was at all times acting as Zonie’s agent and that Zonie was the client.

22 There was then a further hearing before Magistrate Price that resulted in a judgment of his of 1 May 2008. Two issues appear to have been decided by him against Zonie and Mr Lissa. Those issues were that the bills of costs were not deficient for non-compliance with the Legal Profession Regulation. Secondly, the Plaintiff was not statute barred in making its claim.

23 There was then an application by Mr Lissa to amend his defence to the cross-claim. This was refused by Magistrate Price on 11 August 2008.

24 The proceedings were heard finally, and judgment was given by Magistrate Price on 14 December 2008. In his judgment the Magistrate said this (inter alia):

“Mr Lissa was, at all material times, acting as the agent of the Defendant Zonie Constructions and Zonie Constructions were the ‘client’ of the Plaintiff.

The Plaintiff was paid $4,500 on account of professional costs.

This Court does not, and cannot, come to a conclusion that this Indemnity document was in some way conditional upon Mr Lissa continuing to give instructions nor that it was conditional upon Zonie and Lissa remaining on good terms. The client was Zonie and it could proceed in the matter as it saw fit.

The client Zonie was served with a Tax Invoice/Statement for Professional costs under cover of letter of 17 ^th April 2002. That bill was not sought to be assessed. It may not have been accepted but nevertheless the client, Zonie did not seek to proceed to assessment, despite engaging new solicitors.

…

The Court is satisfied that the professional works were undertaken. They were undertaken in the context of the fees agreement. At all material times there was in existence of this Indemnity Areement respecting costs. There was never an implied or understood term in that Deed that it ceased to be effective when and if matters touching Mr Lissa eventuated. Certainly Mr Lissa did not in any way seek to inform the Plaintiff of any changed circumstances.”

25 His Honour then directed a verdict in favour of Mr Browne against Zonie in the amount of $19,919 plus costs and a verdict in favour of Zonie against Mr Lissa in the same amount plus costs. The Magistrate also expressed some reservations about the interest component being backdated to 2002 (it is not clear what the concern was since Mr Browne had been kept out of his money all that time) but ultimately no award of interest was made.

The appeal to this Court

26 The Summons in this Court was filed on 8 January 2009 and contained 5 grounds on questions of law and 5 grounds on questions of fact. The grounds on questions of law were as follows:

“1. His Honour Magistrate Dillon erred in finding that the Plaintiff was not at all relevant times a client of the First Defendant thus requiring that the First Defendant be provided with Disclosure Documents and Costs Agreements as required by the Legal Profession Act 1987 and the regulations thereto.

2. His Honour Acting Magistrate Price on 1 May 2008 erred in finding that the First Defendant had complied with the requirements of the Legal ProfessionAct 1987 and the Regulations thereto in that he was required to render a Disclosure Document and Costs Agreement to the Second Defendant and/or the Plaintiff prior to commencing proceedings based upon a claim of unpaid Bill of Costs.

3. His Honour Acting Magistrate Price on 1 May 2008 erred in finding that the First Defendant has provided to the Second Defendant Bills of Costs which complied with the requirements of the Legal Profession Act 1987 and the Regulations thereto prior to commencement of the proceedings.

4. His Honour Acting Magistrate Price on 11 August 2008 erred in rejecting an application by way of Motion filed by the Plaintiff to amend his Defence to the Cross Claim alleging it was an implied term of the Letter of Indemnity relied on by the Second Defendant, that the Second Defendant would provide any tax invoices from the First Defendant to the Plaintiff.

5. His Honour Acting Magistrate Price erred in disallowing the Plaintiff the right to cross examine the First Defendant on the reasonableness or quantum of the tax invoices.”

27 On 14 August 2009, the solicitors for Mr Lissa wrote to the solicitors for Mr Browne and for Zonie seeking consent to the filing of an amended summons. Consent was not forthcoming and on 14 September 2009 Mr Lissa filed a Notice of Motion seeking leave to amend the summons. That Motion was dealt with at the outset of the hearing before me. Mr White of counsel who appeared for Mr Lissa accepted that he could not proceed on the grounds involving questions of fact and he did not seek further to press for the amendments concerning those grounds: see in this regard ss 39 and 40 Local Court Act 2007. Neither Zonie nor Mr Browne objected to proposed grounds of law 6, 7 and 8. In relation to ground 9, Mr White at first suggested that he desired to amend ground 9 to incorporate part of factual ground 7 but ultimately he sought simply to proceed on ground 9 as drafted in the proposed amended summons.

28 Grounds 6 to 9 in the amended summons were in the following terms:

“6. His Honour Magistrate Price erred in finding that the Letter of Indemnity, (the Indemnity), was not conditional upon the Plaintiff ceasing to instruct the First Defendant given the Indemnity specifically refers to the requirement of the Second Defendant to confirm the authority of the Plaintiff to instruct the First Defendant on behalf of the Second Defendant.

7. His Honour Magistrate Price erred in finding that the Indemnity would continue to operate in circumstances where the Plaintiff and the Second Defendant did not remain on good terms given that the letter of 11 December 2000 specifically refers to the fact that the Second Defendant should be seeking to sue the Plaintiff for back-up recompense by joining the Plaintiff as a third party.

8. His Honour Magistrate Price erred in finding that the Indemnity would never cease to be effective when and if matters touching the Plaintiff eventuated, and failed to find that the Indemnity was never expressed to be unconditional given the Deed was expressed to be in consideration of the Second Defendant giving the Plaintiff authority to instruct the First Defendant with respect to the proceedings against Central Air Pty Ltd and the course and resolution of those proceedings.

9. His Honour Magistrate Price erred in finding that at all material times there was in force the existence of the Indemnity respecting costs and failed to consider that the conduct of the Second Defendant would never be such as might actually or necessarily terminate the operation of the Indemnity.”

29 Mr White also indicated by his written submissions that he no longer pressed grounds of law 1, 2, 3 and 5 and, in response to a question from me towards the end of his submissions indicated that he did not any longer press ground 4. The result was, therefore, that all that was argued were grounds 6 to 9, all of which were new grounds in the Amended Summons.

30 Mr White further indicated in answer to a question from me that, as a result of arguing only grounds 6 to 9, no orders were sought that affected Mr Browne because the issue on those grounds concerned only legal issues in relation to the cross-claim itself. I shall return to these procedural matters in connection with the question of costs at the end of this judgment.

The issues on the appeal

31 As is clear from grounds 6 to 9 the particular determination that Mr Lissa challenges in the Magistrate’s decision concerns the conclusion that the indemnity given by Mr Lissa to Zonie continued to operate notwithstanding what happened, particularly from the time relations between Zonie and Mr Lissa began to break down.

32 Mr Lissa submits that the Magistrate erred in not applying general contractual principles of construction to the Deed of Indemnity and that he ought to have found that a number of particular actions amounted to a breach of the requirement of good faith which terminated Mr Lissa’s obligations to indemnify Zonie. These matters are said to be:

(a) Withdrawing the authority of Mr Lissa to instruct Mr Browne on or about 15 January 2002;

(b) Terminating the services of Mr Browne on or about that date;

(c) Receiving the tax invoice for $19,919 and failing to advise Mr Lissa;

(d) Receiving the letter Mr Lissa wrote to Barwick Boitano of 17 April 2002 and failing to prosecute the cross-claim against Central Air;

(e) Receiving the letter from Mr Browne to Barwick Boitano of 12 June 2002 (para 14 above) and failing to advise Mr Lissa;

(f) Rejecting the tax invoice and failing to have it assessed;

(g) Settling the Central Air proceedings without recourse to Mr Lissa.

33 To support these submissions Mr Lissa draws attention to the principle discussed in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549. Mr Lissa says that what is contained in paragraph 4 of the letter of Indemnity concerning his authority to instruct Browne & Associates was a condition or essential term of the Indemnity which was breached by Zonie.

34 The principle derived from Ankar is to be found in the judgment of Deane J at [12] where he said:

“If the breach by the creditor is of an essential or fundamental term or constitutes repudiation of the contract between the surety and himself, the surety will, of course, be entitled to rescind the contract in accordance with general principle. That is not, however, the special rule which is here under discussion. That special rule is that, in the ordinary case where a surety agrees to be liable for the default of another upon the terms of the contract of suretyship, a significant departure by the creditor from the terms of that contract will, in the absence of agreement to the contrary, operate to preclude the existence or continued existence of the circumstances in which the surety has agreed to be bound. That being so, there is no need for the surety to rescind the contract for repudiation or breach of an essential or fundamental term. In the absence of any question of waiver or estoppel, the situation is simply that the circumstances of his liability as surety do not exist.”

35 In Ankar the guarantee contained terms that required the creditor to use its best endeavours to ensure that the machinery, payment for which was guaranteed by the guarantor, would remain in the possession of the lessee and that the guarantor would be notified if there was any proposal to sell or assign the lessor’s interest in the machinery. The notification was expressed to be for the purpose of the guarantor being consulted with a view to determining what course of action would be taken by the lessor if there was default. One of the issues in that case was whether those conditions (clauses 8 and 9) could be said to be conditions or essential terms.

36 In the joint judgment of Mason ACJ, Wilson, Brennan and Dawson JJ it was said at [12], CLR at 557

“Three factors favouring an interpretation of cll.8 and 9 that gives them the status of conditions may be mentioned. First, in the event of breach, neither clause is readily enforceable by way of an action for damages. Damages for breach would be difficult to prove. Secondly, the two clauses impose an obligation to give the surety notice and the purpose of imposing an obligation to give that notice is to enable the surety to take such action as it can to safeguard its position and its interests. Notice of default would alert the [surety] to the immediacy of its risk, enable it to persuade the debtor to remedy the default and put possible alternative proposals to [the lessor] for its consideration. Notice of a proposed assignment would possibly enable the [surety] to make suggestions for the disposition of the debtor's interest in the machinery to the best advantage. Thirdly, as Deane J. explains in his judgment, it was clearly disadvantageous to the surety to be faced with a situation in which it would be liable as surety for a lessee of equipment who no longer enjoyed possession of that equipment, notwithstanding that it remained liable to pay the rent.”

37 The issues for determination on the appeal are these:

(a) Is the 4 ^th paragraph of the letter of Indemnity a condition or essential term?

(b) If so, has it been breached in any of the ways submitted by Mr Lissa?

(c) Is the letter of Indemnity a true indemnity or is it a guarantee?

(d) If it is an indemnity, does the principle derived from Ankar apply to indemnities?

38 For the purpose of determining these issues it is convenient to set out the 4^th paragraph of the letter again. It provides:

“At the same time, because I am the party in practical possession of nearly all the background information and material relating to the subject dispute with Central Air, your company needs to confirm my authority to instruct Browne & Associates on your behalf in relation to the subject Court proceedings and the course and resolution of the same.”

(a) Is the paragraph a condition or essential term?

39 Mr Browne, in his written submissions, argued that an examination of the letter of 11 December as well as the letter of Indemnity demonstrated that Mr Lissa wished to undertake a full indemnity of Zonie and did not make that wish to indemnify conditional upon any matters. As best I can understand it, the argument appears to be that although Mr Lissa would give the instructions to Mr Browne that was not seen as any condition or restriction on the promise to indemnify fully Zonie in the litigation.

40 Zonie, in its written submissions, said that it relied upon the submissions of Mr Browne. In oral submissions, Mr Gambi of counsel who appeared for Zonie also submitted that a reading of the Indemnity given by Mr Lissa showed that it was not in any way conditional. He submitted that there was no need to imply any terms into the arrangement when its terms were clear.

41 In my opinion, that paragraph when properly construed, and particularly in the light of the letter of 11 December 2000 which was not only the covering letter sent to Zonie enclosing the letter of Indemnity but is, in effect, incorporated into that letter of Indemnity, is a condition or essential term of the Indemnity. As both documents make clear, indemnity is being provided on the basis that Mr Lissa was the person to provide the instructions to Mr Browne not only for the conduct of those proceedings but for any resolution of them. Not only does it appear (expressly) that he is the person who has all the necessary information to give those instructions, it is clear from the surrounding circumstances, including the letter of 11 December 2000 and the retainer letter of 25 October 1999, that he desired the control to give the instructions because he was providing the indemnity.

42 If one applies the approach in the joint judgment in Ankar set out above, the term of the Indemnity is more likely to be a condition or essential term because damages for the breach of that term would be difficult to prove. Further, one can perceive the purpose of the authorisation of Mr Lissa to give the instructions as being one to enable him to take any appropriate action to safeguard his position and interests when he is the person ultimately paying for any liability that Zonie is found to have in the proceedings. Further, the 3^rd aspect referred to in that passage amounts to the question of control. All of those matters point strongly to the fact that the 4^th paragraph of the letter of Indemnity is a condition or essential term. Accordingly, the learned Magistrate was incorrect in construing the letter of Indemnity as not being conditional upon Mr Lissa continuing to give instructions.

(b) Was there a breach of the condition?

43 The next matter to be determined is whether there has been a breach of that condition which has the effect of discharging Mr Lissa from his Indemnity. In Deane J’s words in Ankar, has there been ‘a significant departure’ from the terms of the contract that will operate to preclude the continued existence of the circumstances in which the surety has agreed to be bound?

44 It is not necessary to consider each of the matters in para 32 above separately in any detail as Mr White ultimately accepted that the 2 significant acts of rejecting the tax invoice and not having it assessed, and settling the Central Air proceedings were the 2 matters on which it could rely to say that there had been a discharge of Mr Lissa’s obligations under the letter of Indemnity.

(i) Rejecting the tax invoice and not having it assessed

45 The letter of 17 April 2002 that attached the tax invoice was said on the bottom of the letter to have been copied to Mr Lissa at fax [phone] which is the fax number appearing on Mr Lissa’s letterhead. In his statement of 11 February 2008 filed in the Local Court, Mr Lissa said that he received no further written communications from the Plaintiff or from Zonie’ solicitors between approximately January 2002 and the end of March 2007 when he was served with the cross-claim. The Magistrate made no finding of fact concerning whether Mr Lissa in fact received the tax invoice and the letter of 17 April 2002. Mr White accepts that I cannot determine that matter. The result is that there is simply no factual finding about whether or not Mr Lissa ever saw the tax invoice.

46 Mr Lissa now argues that by rejecting the tax invoice and not having it assessed that was a breach of the condition contained in the letter of Indemnity. Mr Lissa argues that if the tax invoice had been assessed it would have been assessed at a lesser amount. He argues that it was negligent of Zonie not to have either had it assessed or to have had it referred it to Mr Lissa.

47 I do not consider that the rejection of the bill and the failure to have it assessed amounts to a breach of the condition in paragraph 4 of the letter of Indemnity. There is no evidence and certainly no factual finding by the Magistrate that if the bill had been assessed it would have been assessed at a lesser amount. More particularly, all that the condition in the letter of Indemnity deals with is the right of Mr Lissa to provide the instructions to Mr Browne for the conduct and resolution of the proceedings. It would be necessary to imply into that paragraph a term that involved Zonie acting in a particular way with regard to tax invoices sent by Mr Browne. If that was to be the arrangement the matter could have been specified in the letter of Indemnity which, in the first instance, was drawn up for Mr Lissa to present to Zonie for its agreement. The implication of such a term does not satisfy any of the tests set out in the authorities, which tests are usefully collected in the judgment of Lindgren J in Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889 at [67].

(ii) Settling the proceedings

48 The main argument put by Zonie in relation to breach generally is that Mr Lissa did nothing to rescind the indemnity. Zonie relies in this regard on what appears in the joint judgment in Ankar at [8], CLR at 555 where it is said:

“Breach of an essential term or a breach going to the root of the contract will of course discharge the surety from future liability if the surety elects to rescind for breach.”

49 However, that was a statement more particularly directed to ordinary contractual principles and does not deal with the special rule relating to guarantees more particularly articulated by Deane J in para [12], CLR at 570 of his judgment and which is also adverted to in para [24], CLR at 562 of the joint judgment. If there has been a breach of an essential term the liability of the surety simply does not exist.

50 In my opinion, by Zonie settling the proceedings without recourse to Mr Liss, it has breached the condition or essential term contained in the 4^th paragraph of the letter of Indemnity. Zonie had agreed that it was Mr Lissa who would instruct the solicitors not only for the conduct of the proceedings but for their resolution also. It was on that basis that Mr Lissa provided the indemnity to Zonie.

(iii) Other suggested breaches

51 The conclusions expressed above deal with the breaches enumerated in para 32(c), (d), (e), (f) and (g). Sub-paragraph (a) and (b) really concern Mr Browne’s ceasing to be involved in the matter after January 2002.

52 The evidence suggests that Mr Lissa was involved with this change. The lengthy letter of 11 January 2002 written by Mr Browne to Zonie and copied to Mr Lissa details the ongoing negotiations amongst the 3 parties leading to the cessation of Mr Browne’s role. Moreover, paragraph 7 of Mr Lissa’s statement of 11 February 2008 says this:

“Ultimately it was agreed between myself and Zonie that instructions to the Plaintiff’s firm would be discontinued and Zonie would engage its own new solicitors to take over carriage of the litigation proceedings on its behalf.”

53 In those circumstances it is difficult to see how the withdrawal of Mr Lissa’s authority to instruct Mr Browne for the termination of Mr Browne’s services can amount to breaches at all when they were effectively agreed by Mr Lissa.

54 The other finding of the Magistrate complained of by Mr Lissa is his finding that the indemnity was not conditional “upon Zonie and Lissa remaining on good terms”. It does not seem to me that there was any error in this regard. Nothing was said in the letter of Indemnity suggesting in any way that there was a necessity for Zonie and Mr Lissa to continue on good terms. Moreover, it is difficult to see how such a stipulation, even if it had been made, could be enforceable. What does “good terms” mean precisely? When in the course of a disagreement or dispute does the matter reach the stage where it can be said with any precision that the parties are no longer on “good terms”? In that regard, ground 7 of the appeal must be rejected.

(c) Is the letter a guarantee or an indemnity?

55 Although the use of the words “guarantee” or “indemnity” in the document may be an indication of the intention of the parties they are not decisive and the essential nature of the agreement must always be considered: Yeoman Credit Limited v Latter [1961] 1 WLR 828 at 831, 833 and 835-6.

56 In Total Oil Products (Australia) Pty Ltd v Robinson [1970] 1 NSWR 701 Asprey JA (with whom Sugarman and Holmes JJA agreed) said (at 703):

“A guarantee of a debt is a contract whereby the promisor (the guarantor) undertakes to the promisee (the present or prospective creditor of the guarantor) to be answerable to the promisee for the debt of a third person (the debtor) who is or is contemplated to be primarily liable in respect of that debt to the promisee… . An indemnity is a contract whereby the promisor (the person giving the indemnity) undertakes to the promisee (the person indemnified) to save the promisee harmless from such loss as the promisee might suffer as the result of entering into a transaction with a third party at the request of the promisor… .” (citations omitted)

57 It seems to me that the promise contained in this document means that the document itself is an indemnity rather than a guarantee. There is no promise to a creditor to be answerable for the debt of Zonie. Rather the promise is to save Zonie harmless from such loss as it might suffer as a result of the proceedings brought against it. The fact that the word “indemnify” is used in both the document and the letter of 11 December 2000 provides some further support for that conclusion: Heald v O’Connor [1971] 1 WLR 497 at 503.

(d) Does the Ankar principle operate in respect of an indemnity?

58 In Total Oil Products it was held that the arrangement in that case whereby the Defendants agreed to indemnify the Plaintiff against losses from any default on the part of a third party was an indemnity (see at 703-704). The further issue in that case was whether an arrangement the Plaintiff entered into between the third party and others without the consent or approval of the indemnifiers effected such a material alteration in the relationship of the Plaintiff and the third party as to discharge the liability of the indemnifiers to the Plaintiff. It was found that it did not for 2 reasons. First, there was an express clause in the indemnity agreement that provided the indemnifiers would not be discharged or released from their obligations by any arrangement made between the Plaintiff and the third party without the indemnifier’s consent. Secondly, it was held that the arrangement that was entered into was a favourable one from the point of view of the indemnifiers and did not in the result affect the obligations of the indemnifiers under the Deed of Indemnity.

59 That case is said to be authority for the principle that where there is an indemnity as opposed to a guarantee, an indemnifier will be discharged only if the release prejudices the interests of the indemnifier: O’Donovan & Phillips, The Modern Contract of Guarantee, 3^rd ed (1996) LBC at 320. But there is some authority also that suggests an indemnifier will be discharged automatically by a release of the debtor in the same way as would happen with a guarantee: Re Perkins [1898] 2 Ch 182 at 189 and Taylor v Sanders [1937] VLR 62 at 65.

60 Whichever is the correct view it seems to me that, at the very least, the settlement of the proceedings by Zonie without reference to Mr Lissa was a sufficient breach (that is, one that is not “unsubstantial” – Ankar, joint judgment at [16]-[19], CLR at 558-559) of the condition to bring about a discharge of Mr Lissa’s obligations under the indemnity because Mr Lissa’s interests were prejudiced by that course.

Costs

61 In the result, Mr Lissa succeeds on ground 6 (in particular) and probably grounds 8 and 9 of the Amended Summons, grounds 8 and 9 being, it seems to me, a different expression of the same point.

62 Regrettably, the recording of the part of the hearing before the Magistrate dealing with submissions was not transcribed. None of the legal advisors on the appeal could clearly remember if the argument on which Mr Lissa has now succeeded was put to the Magistrate.

63 An examination of the material available points fairly strongly to the view that the argument was never put. Mr Gambi quite correctly draws attention to the defence to the cross-claim and the proposed Amended Defence to the cross-claim neither of which specifically identifies the Ankar principle. I have dealt with the defence to the cross-claim on which the matter actually proceeded before the Magistrate. It is suggested by Mr Lissa that paragraphs 4(a) and (b) raise the Ankar principle.

64 However, it does not seem to me that those paragraphs were directed to the Ankar principle but rather to the point that there was a condition, implied or otherwise, that if Mr Lissa did not continue to instruct Mr Browne the indemnity would be at an end. This would be brought about not by any breach of the condition (which is what the Ankar principle is concerned with) but because it is to be inferred that there was a term in the indemnity arrangement which would bring to an end that arrangement.

65 Mr Lissa also points to the submissions made by Mr Byrnes who appeared for Mr Lissa before the Magistrate on 11 August 2008 on the application to amend the Defence to the cross-claim. What Mr Byrnes said was this (at appeal book 276.28):

“Your Honour it’s a situation where there is a deed of indemnity, there’s no doubt about that but simply because it is a deed, that raises basic matters of contract law. All the cross-defendant seeks to do in relation to his amended defence is raise an issue which is pretty much basic to contract law. If you have a contract there are certain obligations which flow to both parties and if there’s more than two parties then to the number of parties who are involved in the contractual arrangement.”

This is a situation where the defendant in the current proceedings seeks to rely totally on the deed of indemnity signed between my client and the defendant back in December 2000. The defendant ultimately gets documents which include a document of 17 April 2002 addressed solely to the defendant company. Now one presumes as a matter of simply (sic) logic in contractual law that if the defendant expects my client to meet obligations under that particular document which is a tax invoice, as per a deed of indemnity, it might be nice for the defendant to tell us that that document exists and to pass it on to us for consideration for possible payment or possible dispute. That was never done.”

66 As is clear, that passage simply directs attention to principles of contract law which seem somewhat far removed from the question of discharge by breach and certainly from the principle espoused in Ankar.

67 In the proposed Amended Defence to the cross-claim a new paragraph 4(a) was inserted as follows:

(a) It was an essential term of any deed of indemnity signed by the cross claimant and the cross defendant on 19 December 2000 that the cross defendant could only be held liable to the cross claimant under the terms of such document, if such document is deemed to be enforceable, upon the provision by the cross claimant to the cross defendant of any document purporting to be an account, itemised account or bill of costs from the plaintiff in these proceedings seeking payment of legal costs and disbursements from the cross claimant in these proceedings within such a time frame as would allow the cross defendant to take issue and/or seek to have such document or documents assessed in the Supreme Court of NSW by an independently appointed Assessor if the cross defendant disputed any amount or amounts claimed by the plaintiff as against the cross claimant under the terms of such document or documents. In breach of such essential inferred condition of any such Deed of Indemnity, if enforceable, the cross claimant at no time provided to the cross defendant copies of any documents purporting to be accounts, itemised accounts or bills of costs from the plaintiff within the time frame which would have enabled the cross defendant to challenge and have assessed such document or documents. In those circumstances the cross defendant says that any such Deed of Indemnity is totally unenforceable by the cross claimant as against the cross defendant in these proceedings.”

68 This proposed new paragraph merely identified the complaint that the tax invoice given by Mr Browne to Zonie had not been passed on to Mr Lissa, nor was it sent for assessment by Zonie as would have been appropriate. Certainly, it purports to make a complaint about both failures but not terms of the Ankar principle. In any event, the amendment was not permitted and there is now no appeal from that ruling.

69 Further, and as Mr Gambi points out, the structure of the Magistrate’s judgment was that he set out the submissions that were made by the parties and then under the heading “Court’s Decision” expressed his conclusions.

70 There is nothing in that part of the judgment dealing with submissions that even approximates a submission based on the Ankar principle. Nor does the Magistrate come to his conclusions in language that suggests that the principle in Ankar had been put to him. Since the matter was so fundamental it would be surprising if he would have ignored it in both places in the judgment if Mr Lissa had argued the case on that basis.

71 Another matter suggesting that the Ankar principle was not in consideration until recent times is an examination of the grounds of appeal in the original summons, none of which is concerned with that principle. It was only with the proposed Amended Summons that added grounds 6 to 9 that the principle is articulated in any form at all.

72 In my opinion, the Ankar principle was not argued before the Magistrate and ultimately I took Mr White to accept that the case itself was never cited although his solicitor believed that he had raised the matter generally in his submissions.

73 In the circumstances where the ground upon which the Plaintiff now succeeds was never argued in the Court below, it is not appropriate that the Plaintiff receives his costs of the proceedings in this Court.

74 As far as Mr Browne is concerned, the appeal was ultimately abandoned against him entirely. In those circumstances Mr Lissa should pay Mr Browne’s costs of the present proceedings.

75 In relation to Zonie, where a point is not taken in a court below but is successfully argued on appeal the general rule is that the successful appellant should not be entitled to its costs on the appeal: Hussey v Horne-Payne (1878) 23 Ch.D 670 at 677 and 679; Ex parte Hauxwell (1888) 23 Ch.D 626 at 643.

76 But there are other relevant factors present in this case. From the point of the view of Zonie and its legal advisors, until they received the letter of 14 August 2009 from Mr Lissa’s solicitors enclosing the proposed Amended Summons together with Mr Lissa’s outline of submissions, it was clear that the appeal was proceeding on the grounds set out in the Summons filed on 8 January 2009. The written submissions abandoned grounds 1, 2, 3 and 5 in relation to the grounds of law but did not abandon any of the grounds relating to factual findings. Ultimately, as I have noted earlier, ground 4 of the legal grounds and all the factual grounds were abandoned at the hearing.

77 In the result the appeal that succeeded was a very different appeal to the one that was initially brought and prepared for by all parties until, at the earliest, 14 August 2009. The issues finally run on the appeal were not delineated until the day of the hearing and after the hearing started. Those matters require a further modification of the ordinary rule that costs follow the event (Rule 42.1 Uniform Civil Procedure Rules) and the rule that a successful appellant on a point not taken in the court below should not have its costs. In all the circumstances, Mr Lissa should be ordered to pay 50% of Zonie’s costs of the proceedings in this Court.

78 In relation to costs in the Local Court, it seems to me appropriate that Zonie should pay Mr Lissa’s costs of the final hearing before the Magistrate. I do not consider that Zonie should be required to pay any other costs of Mr Lissa’s in the Local Court. Mr Lissa was unsuccessful on the earlier applications that were the subject of the judgments given on 1 May 2008 and 11 August 2008. No costs order appears to have been made in relation to judgment on 1 May 2008. In relation to the judgment on 11 August 2008 refusing leave to amend the defence to the cross-claim the costs were reserved to the final hearing but nothing appears to have been said or decided about them. The earlier judgment of Magistrate Dillon on 11 September 2007 dealt with the costs of that Motion. No argument was addressed to me concerning the costs of 1 May 2008 and 11 August 2008 and I shall grant liberty to the parties to apply to vary the order that I propose in that regard.

79 I propose the following Orders:

(1) The appeal is upheld.

(2) Set aside that part of the judgment of the Local Court of 14 December 2008 that found a verdict in favour of Zonie against Mr Lissa in the amount of $19,919 plus costs.

(3) In lieu of the judgment of the Local Court direct a judgment in favour of Mr Lissa with Zonie to pay Mr Lissa’s costs of the final hearing before the Local Court.

(4) The Plaintiff is to pay the First Defendant’s costs of these proceedings.

(5) The Plaintiff is to pay 50% of the Second Defendant’s costs of these proceedings.

(6) Liberty to apply on 3 days notice.

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