Longdale Pty Ltd v Vence Pty Ltd
[2009] VSC 471
•27 October 2009
| Do Not Send for Reporting | ||
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMON LAW DIVISION
No. 9338 of 2006
| LONGDALE PTY LTD (ACN 005 778 218) and RICHARD GUSCOTT | Plaintiffs |
| v | |
| VENCE PTY LTD (ACN 062 950 663) and TERESA FAHEY | Firstnamed Defendant Secondnamed Defendant |
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JUDGE: | J. FORREST J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 19, 20, 21 & 27 August 2009 | |
DATE OF JUDGMENT: | 27 October 2009 | |
CASE MAY BE CITED AS: | Longdale Pty Ltd & Anor v Vence Pty Ltd & Anor | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 471 | |
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CONTRACT – Principles relevant to construction – Contents of agreement – Guarantee contained in recital but not in body of agreement – Recital held to form part of the agreement – Guarantee enforceable.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Ms S. Bingham | Andrew Gray & Associates |
| For the Firstnamed Defendant | No appearance | |
| For the Secondnamed Defendant | In person |
HIS HONOUR:
Introduction
In approximately 1989, John and Teresa Fahey purchased the Waverley Woollen Mills (“Waverley”) in Tasmania, operating the business through a company they controlled, Blockmack Pty Ltd. Subsequently, Richard Guscott became, in effect, a partner in the business (owning half the shares in Blockmack). For a period of nearly 13 years, through their corporate entities, the Faheys and Mr Guscott ran the enterprise. In September 2004, the business came under considerable financial pressure and the Faheys agreed to buy out Mr Guscott’s share.
Central to the case is an agreement signed in September 2004 by Mr Guscott and his company, Longdale Pty Ltd (the plaintiffs in this claim), and the Faheys on their own behalves and on behalf of Vence Pty Ltd, their trustee company. In essence, the purchase price for Mr Guscott’s interest in the business was $400,000 (paid as a purchase of Blockmack shares and a termination/redundancy package) plus a release from any ongoing obligations that he may have in respect of its operations.
Blockmack succumbed to the financial pressures and was placed under administration in May 2005. Mr Fahey was subsequently declared bankrupt. Longdale has only been paid the sum of $110,000 pursuant to the agreement and Mr Guscott has received nothing.
The plaintiffs seek to enforce a guarantee against Mrs Fahey, said to be contained in the agreement. Alternatively, because of what may be legitimate doubts about the terms of the agreement, the plaintiffs seek its rectification to reflect the provision of such a guarantee by Mrs Fahey. Finally, they contend that Mrs Fahey is estopped from denying the effect of the guarantee said to be contained in the agreement.
Mrs Fahey contends that the agreement does not contain a personal guarantee and it was never intended that she provide such a guarantee for the obligations of Blockmack or Vence. Further, she says that she did not do anything which could amount to an estoppel by conduct.
I have concluded that, contrary to Mrs Fahey’s submission, the agreement does contain a guarantee by her of the performance of Blockmack and Vence’s obligations.
The trial
Mr Guscott gave evidence and was cross-examined. Mr Burdon-Smith, his solicitor, also gave evidence relating to a meeting at Tullamarine Airport on 23 September and the process by which the executed agreement was arrived at.
Mrs Fahey gave evidence and was cross-examined. Neither Mr Fahey nor the Fahey’s solicitor, Mr Tony Caillard, were called. For the bulk of the trial, Mrs Fahey represented herself. The case was stood down on the morning of 20 August when counsel appeared on her behalf. However, counsel subsequently withdrew and all evidence was led whilst Mrs Fahey was unrepresented.
Background
Mr Guscott met the Faheys in 1990 when he worked as a general manager for Country Road.[1] In September 1991, he effectively became their partner in running the Waverley business. Subsequently, through Longdale (of which Mr Guscott is the sole director and shareholder), he acquired the ownership of half the issued shares in Blockmack. The remaining issued shares in Blockmack were held by the Faheys through their company, the first defendant, Vence, the trustee of the Fahey Family Trust.[2]
[1]Transcript 61.
[2]Vence is the first defendant. It has not entered an appearance. Judgment has not been entered against it. It took no part in the hearing. Apart from reference to the terms of the agreement, no issue arose concerning Vence at the trial.
Mrs Fahey was the secretary of Blockmack from 14 August 1990 to 21 August 1999 when her husband became the secretary. She was a director of Blockmack during the same period and was reappointed as a director on 26 August 2004. Mrs Fahey had also been a director of six other companies, including Vence, in the years preceding September 2004.
Shortly after the purchase of Waverley, the Faheys moved to Launceston.[3] The Waverley Woollen Mill employed about 80 staff and is about 10 minutes’ drive from the centre of Launceston. Its prime business was to make pure wool blankets and throws for the retail market in Australia.[4] Mr Fahey controlled the Tasmanian manufacturing side of the business whilst Mr Guscott managed sales and marketing.[5]
[3]Transcript 210.
[4]Transcript 62.
[5]Transcript 62.
Up to February 2004, Mrs Fahey handled some of the financial aspects of the business and assisted in the operations of the manufacturing division.[6] The joint managing directors, Mr Guscott in Melbourne and Mr Fahey in Launceston, communicated daily.[7] Mr Guscott agreed that, “largely”, the business was conducted by himself and Mr Fahey.[8]
[6]Transcript 211-212.
[7]Transcript 64.
[8]Transcript 120.
From 1 February 2004, Mrs Fahey ran a bed and breakfast in Launceston. I accept her evidence that she did not return to the Waverley business at the commencement of 2004 and devoted her time to running the bed and breakfast business.[9]
[9]Transcript 213.
The Faheys and Mr Guscott had a harmonious business relationship throughout the years leading up to 2004. Blockmack occasionally encountered difficulties with funding and finances, particularly in spring, following the winter sales. In September 2004, the problems with finance became acute when Westpac declined a request by Mr Fahey for further funding. At this point, the question of the business’s viability and the provision of further funds became a real issue.[10] Westpac had in fact written to Blockmack’s accountant, Mr Davey, of Davey Accounting, suggesting that it required additional equity and that directors and shareholders should inject additional funds.[11]
[10]Transcript 66.
[11]Transcript 67.
At the time Westpac refused the loan facility, Blockmack had fallen behind in its payments of group tax and directors’ penalty notices (which rendered each of the Faheys and Mr Guscott liable) had been issued by the ATO.[12] Although Mr Guscott was inclined to downplay the problems as a seasonal issue, I think it is clear that the business was struggling. The advice of both Westpac and the independent accountant demonstrate this.
[12]Transcript 86, 142-144.
Mr Fahey arranged to meet Mr Guscott in Melbourne to discuss the business’s position, in light of Westpac declining the provision of additional funding. That meeting was held during the week commencing 13 September.[13] At the meeting, Mr Fahey told Mr Guscott that action needed to be taken urgently; he proposed that he and Mrs Fahey would inject between $500,000 and $1,000,000 into Blockmack for the purchase of additional shares in the company. The inevitable result being that Mr Guscott’s shareholding would be significantly diluted.[14] Other forms of injection of cash were apparently discussed at the meeting, but Mr Fahey was adamant that “the money would only go in as equity”.[15] I accept Mr Guscott’s account of this meeting.
[13]Transcript 68.
[14]Transcript 68.
[15]Transcript 67.
On 20 September, in the course of a phone conversation, Mr Fahey suggested to Mr Guscott that he purchase Mr Guscott’s interest on a time payment basis.[16]
[16]Transcript 70.
On 21 September, Mr Fahey sent an email to Mr Guscott stating:
“We will need to hold a formal meeting of directors to consider the allotment of ordinary shares in Blockmack Pty Ltd with a total value of $1,000,000. As discussed, Longdale Pty Ltd is of course invited to put up $500,000 towards this allotment and receive half the shares. If this is not possible, Teresa and I would have raise the money ourselves and would therefore receive all of the shares”.[17]
Subsequent to a chain of email correspondence, a meeting of the directors of Blockmack was arranged at Melbourne Airport on 23 September 2004 at 12.30pm.
[17]Exhibit P1.
On the following day, 22 September, Mr Fahey sent an email to Mr Guscott noting what he perceived to be Mr Guscott’s concerns in respect of the share issue, stating: [18]
[18]Exhibit P2; transcript 72.
“… However, it seems you have made perfectly clear to both myself and Ken Davey, the company accountant, that you have no interest, wish, desire or intention of continuing with a lesser shareholding.
The only thing that has crossed my mind is that if this is the case, then an idea you have been pushing very heavily … might apply to you. That is to convert your shares at a fixed price with the company or myself buying them back at a fixed monthly amount of say $20,000 per month until they are fully purchased.”
The email then went on to deal with proposals for releasing Mr Guscott from any ongoing liabilities in the company’s business. It concluded in the following terms:
“I must reiterate at this point that the money put in by Teresa and I [would] only be as full payment for ordinary shares.”
On the following day, Thursday 23rd, the meeting was held in a conference room at Melbourne Airport. I shall refer in more detail to this meeting shortly. The upshot was that Longdale would sell its interest, in the form of shares controlled by it in Blockmack, to the Faheys for $400,000. No formal heads of agreement were drawn up and the manner in which the final written agreement would be concluded was left to the two solicitors, present at the meeting. In particular, questions of redundancy, priority over potential payments to Blockmack and the most effective manner of executing the agreement were left to the lawyers.
Over the following week, the two solicitors exchanged a number of drafts of the share sale agreement before agreeing on the final version.[19] Under the agreement, executed by Mr Guscott on about 30 September 2004, Vence paid $279,400 for the Blockmack shares held by Longdale and $120,600 was to be paid by Blockmack to Mr Guscott for termination of his employment.[20]
[19]Exhibit P5.
[20]Exhibit P5, clauses 3(a) and 6(d); transcript 88.
The agreement set out the terms of the sale, the purchase of the Blockmack shares and details of Mr Guscott’s termination of employment. In addition, Mr Guscott was required to execute a transfer of Longdale’s shares to Vence and complete a resignation of director form. He was also provided with a termination of employment letter making him redundant as of 30 November 2004.
The agreement was subsequently executed by the Faheys. Pursuant to its terms, payments totalling $110,000[21] were made by or on behalf of Vence until February 2005. No payments were made by Blockmack for the agreed redundancy amounts. The amount of $169,400 remains outstanding from Vence and $120,600 from Blockmack.[22]
[21]Transcript 107.
[22]Exhibit P7.
The plaintiffs issued their writ in October 2006. No appearance or defence was filed on behalf of Vence. Default judgment has not been entered against it. Mrs Fahey appeared by solicitors and, up until the time shortly prior to the trial, was represented by solicitors and counsel.
The agreement - Did Mrs Fahey provide a guarantee of Vence and Blockmack’s obligations?
The meeting at Melbourne Airport
Prior to the 23 September meeting at Melbourne Airport, Mr Guscott’s discussions and email correspondence were solely with Mr Fahey. Prior to the meeting nothing was said by Mr Guscott to either of the Faheys concerning the provision of personal guarantees in respect of the obligations of Blockmack or Vence.
The attendees at the meeting were Mr and Mrs Fahey, Mr Guscott and the company accountant, Mr Davey, the Faheys’ solicitor, Mr Tony Caillard, and Mr Guscott’s solicitor, Mr Bruce Burdon-Smith.
Three witnesses gave evidence concerning the meeting – Mr Guscott, Mr Burdon-Smith, and Mrs Fahey. There was no substantial difference in the accounts given by the principal actors, Mr Guscott and Mrs Fahey, regarding the extent of discussions and, in particular, those concerning the provision of a guarantee by Mrs Fahey. Mr Burdon-Smith gave a different account, which I do not accept. Indeed, counsel for the plaintiffs did not rely upon his evidence in closing submissions.
According to Mr Guscott, Mr Fahey did most of the talking, discussing two options as he saw it, namely, a further issue of shares or the sale by Mr Guscott of his shares.[23] The first part of the meeting concerned reaching agreement about the buyout of Mr Guscott’s interest in Blockmack. Eventually, it was settled at $400,000. The parties then discussed the payment terms and the most tax effective means of structuring the payments. An issue arose as to whether particular payments due to Longdale could be assigned to Mr Guscott in part payment for his interest, particularly a Federal Government payment referred to as “SIP” (apparently an acronym for Strategic Investment Plan).[24]
[23]Transcript 81.
[24]Transcript 82.
Mr Guscott then gave the following evidence concerning guarantees:
“I think, if I can take you back to before I interrupted you to get you to explain what the SIP payment was, you were talking about two issues of securities. What was the second issue of security?---Well, the other issue of security was guarantees. At that point there was no – we hadn’t determined from the share sale point of view as to who the precise purchaser would have been. It may have been Teresa Fahey, it may have been John and Teresa Fahey jointly, it may have been John Fahey, it may have been another company that they may have wished to incorporate for that specific purpose.
HIS HONOUR: So tell me who said what about guarantees? Who said what about guarantees at this meeting?---My solicitor Bruce Burdon-Smith.
Yes?---When John suggested that in terms of the detail the solicitors could sort that out I recall Bruce saying to Tony, and Tony of course we would want all the normal guarantees, cross-guarantees, releases.
Slowly please?---Sorry.
We would want all?---All guarantees, cross-guarantees and releases included.
All right. That was all said by your solicitor, was there anything else said about guarantees?---No, other than as I said earlier that given that it was a time payment I wouldn’t have been selling those shares simply to a corporate entity, everybody would have understood that.
I am not sure I follow that. Are you telling me what your thought processes were as opposed to what was said. My question was, was anything else said?---What I said was in terms of what I had raised from a security point of view, the ability to take a charge over the SIP payment and then Bruce had mentioned to Tony Caillard that obviously in any agreement it would be required to contain guarantees, cross-guarantees and all the normal or necessary releases. At that point, as I said earlier, we had not determined who the purchaser of the shares would be. John in his email from a couple of days said he – I’ll start again. We hadn’t determined who if they had been sold to an individual or obviously an individual’s wife, then obviously that person is personally liable for that payment anyway.”
During the course of the meeting, Mr Guscott made some notes which were tendered.[25] There is no specific reference to guarantees, however the words “security for SIP” with a question mark and “security” alone appear in the notes. In my view, neither assist in determining what was said, particularly about any guarantee to be provided by Mrs Fahey.
[25]Exhibit P4.
In cross-examination and in answer to questions posed by me, Mr Guscott agreed that the meeting was largely conducted by himself, Mr Fahey, the accountant and the solicitors. He could not recall whether Mrs Fahey said anything about the agreement.[26] The statement made by Mr Burdon-Smith, referring to guarantees, was made “in full earshot in a meeting that everyone was participating in”.[27] Mr Guscott agreed with Mrs Fahey’s proposition that she only said two sentences in the course of the whole meeting, and he could not recall what she said.[28] There was no suggestion in his evidence that Mrs Fahey assented to the giving of a guarantee.
[26]Transcript 121.
[27]Transcript 122.
[28]Transcript 122-123.
Mrs Fahey did not dispute that she was present at the meeting.[29] However, consistent with Mr Guscott’s evidence, she said, and I accept, that she played little if any part in it. I also accept that her only real contribution was to point out to Mr Guscott that the problems with refinance and Westpac had been going on for some time.[30] She gave the following evidence in relation to the provision of a guarantee:
“I certainly dispute that Vence was ever mentioned at the meeting. I was never asked for any personal guarantees that day and certainly didn’t give any personal guarantees that day. I basically left discussions to the men at the table and, as I said, I really was there because I was a director and had been asked to attend by my husband. … My understanding was that Mr Guscott was going to sell his shares and somehow it was going to be worked out between the solicitors and my husband, I guess.”[31]
[29]Transcript 215.
[30]Transcript 215.
[31]Transcript 216.
In evidence-in-chief, Mr Burdon-Smith referred to the provision of guarantees in a different context to that of providing security for the agreement. He said that the discussion with Mr Caillard related to guarantees given by Mr Guscott to Longdale’s creditors, including the bank. According to Mr Burdon-Smith, he and Mr Caillard discussed the question of an indemnity being given to Mr Guscott for personal guarantees and releases.[32] Mr Burdon-Smith made no mention of any specific discussion concerning guarantees to be given by the Faheys or, particularly, Mrs Fahey.[33] However, he did say that at the conclusion of the meeting he and Mr Caillard discussed drafting a document which “would include all the normal bits and pieces, releases, guarantees, restraint of trade doc…”[34]
[32]Transcript 150-151.
[33]Transcript 150-151.
[34]Transcript 152, 193.
When asked in cross-examination about whether there was a discussion about personal guarantees being provided by the Faheys, Mr Burdon-Smith asserted that there was a discussion about Mrs Fahey “specifically giving a personal guarantee in respect of this agreement”, to which, according to Mr Burdon-Smith, she did not either agree or disagree.[35]
[35]Transcript 194.
I do not accept Mr Burdon-Smith’s evidence, in cross-examination, that there was a specific discussion concerning Mrs Fahey providing a personal guarantee. Mr Guscott did not suggest that such a specific statement had been made, and Mrs Fahey denied it. Mr Burdon-Smith, an experienced solicitor, made no mention of the matter in his evidence-in-chief. It was apparent from the submissions made by counsel and the absence of cross-examination of Mrs Fahey regarding the Burdon-Smith account that counsel for Mr Guscott did not seek to rely upon that part of his evidence.
I think the true position, consistent with the evidence-in-chief of Mr Burdon-Smith and Mr Guscott, is that toward the conclusion of the meeting there was a discussion between the two solicitors, regarding the provision of guarantees, as part and parcel of the working up of a final agreement.
Not only do I reject the proposition that there was an oral agreement as to the provision of a guarantee, I am also satisfied that any discussion concerning guarantees primarily related to a different topic, namely, that of Mr Guscott’s potential liability for his own guarantees of Blockmack’s indebtedness, which was ultimately the subject of a specific provision in the agreement (clause 4).
I do not accept that any representation (be it explicit or implicit) was made by Mrs Fahey in relation to the provision of a guarantee. Moreover, I do not accept that the question of the provision of a guarantee played any part in Mr Guscott’s decision to enter into the agreement with the Faheys and their companies. The deal was done well before there was any mention of a guarantee in any context.
The drafts of the agreement
Six draft agreements were exchanged between the solicitors prior to the final agreement.[36] The first draft, prepared by Mr Caillard, the Faheys’ solicitor, made no mention of the Faheys as guarantors of Blockmack and Vence’s obligations.[37] Mr Burdon-Smith then prepared and forwarded an amended document to Mr Caillard. I have set out the terms of the agreement at [42]. In the second, and all other subsequent drafts, the Faheys were identified as the guarantors: in particular, paragraphs (D) and (E) of the recital were added in the second draft. Mr and Mrs Fahey were also added as signatories to the agreement.[38] Those terms did not change. In a subsequent draft,[39] the indemnities contained in the final agreement were inserted.
[36]Exhibit P8, P9, P10, P11, P12, P13 and P14.
[37]Exhibit P8.
[38]Exhibit P9.
[39]Exhibit P12.
Terms of the agreement
Attached to these reasons and marked “Annexure” is the signed agreement in its entirety. [40]
[40]Exhibit P5.
Each of the Faheys are named in the agreement and have signed it. In the title “John Bernard Fahey” and “Teresa Mary Fahey” are described as “the guarantors”. There are references to “the guarantors” in several parts of the agreement. The integral part of the agreement, in relation to the sale of the business, is contained in clause 3. Vence agreed to purchase from Longdale its shares in Blockmack for the price of $279,400. The purchase price was payable by monthly instalments of not less than $20,000, to commence on 6 October 2004. In addition Blockmack, by clause 6(d), was to make a payment on or before 30 September 2005 of $120,600 to Mr Guscott as a consequence of the termination of his employment with Blockmack.
The following parts of the agreement are relevant to the question of the provision of a guarantee by Mrs Fahey of Vence and Blockmack’s obligations.
In the recital:
“D. The Guarantors who are beneficially entitled to the Shares believe they will derive a commercial benefit from this Agreement and have agreed to guarantee the performance of the Purchaser and the Company hereunder. (Emphasis added.)
E. The Guarantors have agreed to inject new equity into the Company in the sum of one million dollars ($1,000,000.00).”
The following provision appears in the text under the heading “Interpretation” (clause 1):
“(c) Where a party comprises two or more persons an agreement or obligation to be performed or observed by that party binds those persons jointly and each of them severally and a reference to that party shall be deemed to include a reference to any one or more of all of those persons.
…”
Text under the heading “Warranties” (clause 5):
1. “XII. The guarantors warrant and agree that they have or will prior to 31 October 2004 arrange for an injection of equity in the sum of $1 million to the company”.
Under the heading “Default” (clause 8):
“(a) If any of the payments provided for in cl 3 and 6 hereof are not received in accordance with the provisions set out, then the Vendor/Guscott shall after first having given the Purchaser/Company/Guarantors 21 days notice in writing be entitled to obtain judgement for the outstanding sum, plus costs of issuing the action and obtaining judgement (to be fixed by the Court), plus any statutory interest which has accrued between the date of default and the date of the judgement; and
(b) For the purpose of obtaining a judgement pursuant to the provisions of the preceding paragraph, the Purchaser/Company/Guarantors hereby agree that:
(i) This Agreement may be produced to the Court as the Purchaser/Company/Guarantor’s consent to such a judgement; and
(ii) That an affidavit by a Solicitor acting for the Vendor/Guscott will be sufficient evidence of:
(a) a failure to receive all or any of the payments provided for by clause 3 and 6 hereof in accordance with the provisions set out in that clause;
(b) any amounts which might have been received in respect of the reduced sum and any amount which remain [sic] outstanding in respect to the full sum.”
Indemnities are provided in the following terms (clause 10):
“10.1 The Company, the Purchaser and the Guarantors hereby release and forever discharge and agree to indemnify and keep indemnified the Vendor and Guscott from and against all actions, suits, causes of action, claims and demands whatsoever which the Company, the Purchaser or the Guarantors now have or at any time hereafter may have or but for the execution of this Agreement might have had against the other arising from or connected with their involvement in the Company or by reason of any matter or thing in any way relating thereto other than in respect of:
(a) material matters relating to the operation of the business of the Company that have not been disclosed by the Vendor or Guscott; or
(b) any fraudulent, criminal or unlawful action or omission of the Vendor and Guscott.
10.2 The Vendor and Guscott hereby release and forever discharge and agree to indemnify and keep indemnified the Company, the Purchaser and the Guarantors from and against all actions, suits, causes of action, claim sand demands whatsoever which the Vendor and Guscott now has or at any time hereafter may have or but for the execution of this Agreement might have had against the Company, the Purchaser and the Guarantors arising from or connected with their involvement in the Company or by reason of any matter or thing in any way relating thereto other than in respect of:
(a) material matters relating to the operation of the business of the Company that have not been disclosed by the Company, the Purchaser or the Guarantors; or
(b) any fraudulent, criminal or unlawful action or omission of the Company, Purchaser and the Guarantors.
…”
Finally, there are the “entire understanding” and “no merger” provisions (clause 14):
“14(c) This Agreement contains the entire understanding of the parties with reference to the subject matter.
14(i) No provision of this agreement:
(i) merges on or by virtue of completion; or
(ii) is in any way modified, discharged or prejudiced by reason of any investigations made or information acquired by or on behalf of the purchaser.”
The agreement was executed by Mrs Fahey, as a director of both Blockmack and Vence, and in her own personal capacity.
Mrs Fahey played no part in the giving of instructions for the terms of the agreement and did not speak to Mr Caillard or Mr Burdon-Smith.[41] She did not see any of the drafts of the agreement prior to signing it. However, when her husband brought home a document that he described as being the final one, she said:
“So at that time I read the agreement to the best of my ability and questioned my husband as to why Vence was on the agreement. I had – I was a bit distressed to find that Vence was on the agreement.”[42]
[41]Transcript 217.
[42]Transcript 217.
Mrs Fahey agreed in cross-examination that she read paragraph D of the recital.[43] However, she denied understanding that she was guaranteeing the obligations of Vence and Blockmack under the agreement.[44]
[43]Transcript 241.
[44]Transcript 241.
Mrs Fahey gave evidence that she had given two personal guarantees in relation to Blockmack’s liabilities prior to September 2004.[45] She said that she understood in those circumstances that if Blockmack did not make the payments, she would have to make the payments.[46]
[45]Transcript 223.
[46]Transcript 224.
Analysis: Construction of the agreement
The High Court has authoritatively stated the principles to be applied in a case such as this. In Pacific Carriers Ltd v BNP Paribas[47] the Court said:
“… The case provides a good example of the reason why the meaning of commercial documents is determined objectively: it was only the documents that spoke to Pacific - 5#5. The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean - 6#6. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction - 7#7. In Codelfa Construction Pty Ltd v State Rail Authority of NSW - 8#8, Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen:
In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”
[47][2004] 218 CLR 451, [22].
Subsequently, in Toll (FGCT) P/L v Alphapharm P/L[48] the High Court said:
“It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.” (Emphasis added).
[48][2004] 219 CLR 165, [40].
It follows that the evidence of the three witnesses is admissible to the extent that it relates to an understanding of the surrounding circumstances so as to determine the purpose and object of the agreement. However, the subjective intention of Mrs Fahey or, for that matter, Mr Guscott, is irrelevant on this issue.[49] In determining what a reasonable person would have understood by reference to the terms of the agreement, a Court looks at the whole of the agreement and not just one aspect of it.
[49]It may, of course, be relevant on the second issue – the claim made by the plaintiffs for rectification.
Mrs Fahey’s primary submission was that the operative part of the agreement does not provide any form of guarantee or undertaking of responsibility on her part in relation to the obligations of Blockmack or Vence. It is then said, absent such a provision within the text, there is no guarantee. Contrary to this submission I have concluded that clause D of the recital forms part of the agreement and by its terms, provides a guarantee of these obligations.
In Orr v Mitchell,[50] Lord Herschell said of the recital within a deed:
“No authority has been cited which establishes that according to the law of Scotland, where a provision contained in a deed has to be construed, it is not legitimate to look at the whole deed in order to determine what is the true construction of the provision in question. In the absence of such authority, I am of opinion that light may properly be sought from every part of the deed, though I do not of course, say that every part of it is of equal weight.”
[50][1893] AC 238.
In Lewison’s “The Interpretation of Contracts”[51] the following is said of the construction of a recital within an agreement:
“It appears, therefore, that recitals may be used to control the operative part of a contract in any case where the language of the operative part is not absolutely clear. Such a conclusion would be consistent with the general principle that any contract must be construed as a whole and in the light of the background knowledge available to both parties when the contract was made. Whether the recitals are regarded as being part of the contract itself or merely part of that background knowledge, the result is the same. It is submitted therefore that recitals may govern or qualify the operative part of a contract even where the contract is not ambiguous in the true sense, provided that there is some doubt about its true meaning, when read as a whole.” (Emphasis added)
[51]Sir Justice Kim Lewison, The Interpretation of Contracts (2007) [10.13].
This approach is consistent with the principles of contractual construction enunciated by the High Court, namely, the whole of the text is to be examined when determining what a reasonable person would consider to be the rights and obligations flowing from the contract.
By clause D of the recital the guarantors, Mr and Mrs Fahey (as defined in the title), agreed to “guarantee the performance of the purchaser [Vence] and the company [Blockmack] hereunder”. Whilst the wording could have been better expressed, the clear meaning is that “the performance” refers to performance of the obligations that Blockmack and Vence had contracted to perform pursuant to the agreement. I think it is equally as clear that the guarantee was being proffered to Mr Guscott and Longdale respectively, the two parties to whom sums of money were due under the agreement.
This interpretation is consistent with default clause 8, which entitles Longdale and Mr Guscott to give notice not only to Vence and Blockmack but, significantly, to the guarantors in the event of default. The clause then sets out a mechanism for Longdale and Mr Guscott to obtain judgment against the guarantors.
It may be accepted that a recital in an agreement cannot operate to defeat a clear provision within the operative part. However, where the meaning of the operative part is unclear or silent the recital, as part of the agreement, is necessarily a relevant part by which to determine the construction of the agreement.
Whilst I accept that the recitals cannot be described as “operative parts” of the agreement, I reject the submission of Mrs Fahey that they are, in effect, to be ignored in determining the object and purpose of the agreement. That submission was said to be based on the decision of Walsh v Trevanion[52] where it was held that the operative part of a deed, which is clear and unambiguous, cannot be controlled or defeated by the recitals or other parts of the deed. That however is not the situation here. There is no inconsistency with the operative parts of the agreement. Rather the operative parts are silent and the recital enables the ”true construction” of the agreement. There is no ambiguity in relation to the terms of recital D. The guarantor’s obligations are joint and several, as spelt out by clause 1(c) of the agreement. The guarantee was clearly owed to Longdale and Mr Guscott, defined as “the vendor/Guscott” in the default clause. The default provisions must be given some meaning, as must the other references to the guarantors.
[52](1850) 15 QB 733 (Pattison J).
Mrs Fahey also relied upon what was said by the High Court in Andar Transport Pty Ltd v Brambles[53] for the principle that it is necessary for a Court in determining the terms of a guarantee to “strictly interpret” the document. Such a rule is applicable where there is a genuine ambiguity apparent in the terms of the guarantee. There is no such ambiguity here: the obligation of Mrs Fahey is spelt out in the recital, rather than in the text, but as I have said, there is no other internal inconsistency in the agreement.
[53](2004) 217 CLR 424, 433 and 437.
Reliance by Mrs Fahey upon clause 14(c) – the whole agreement clause[54] is also misplaced if it is sought to oust consideration of the recital provisions. The clause provides that the agreement contains the entire understanding of the parties. That agreement includes the recitals.
[54]See [42].
In my view, it is clear that the obligation contained in paragraph D of the recital was part and parcel of the agreement. Otherwise, why make any reference to guarantors in the title or the default or indemnity provisions? Why have the Faheys sign the agreement in their own right, as they did? In circumstances where the recital, when read with the operative part of the agreement, makes the intention of the parties, as objectively ascertained, clear then it is appropriate to treat the recital as forming part of the obligations undertaken by the Faheys pursuant to the agreement.
As I have noted, Mrs Fahey’s own beliefs are irrelevant on this issue. Whether she did or did not understand the terms of the agreement, and particularly the guarantee, does not need to be resolved. A reasonable person, in the position of Longdale or Mr Guscott, was entitled to believe that the Faheys had provided guarantees of Vence and Blockmack’s performance of their obligations under the contract.
Finally, I note that this is not a case involving the implication of a term to give business efficacy to the contract, as is suggested in Mrs Fahey’s submissions.[55] Rather, it is by the construction of the text of the agreement that I have arrived at my conclusion.
[55]See Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 346.
In summary, the proper construction of the contract is that Mrs Fahey guaranteed the performance of Blockmack and Vence’s obligations to Mr Guscott and Longdale respectively. Blockmack and Vence have failed to make payments pursuant to the agreement and Mr Guscott and Longdale are entitled to have recourse to the guarantee. Mrs Fahey is now bound to pay the outstanding sums owed by the two companies to the plaintiffs.
Should the agreement be rectified to provide for a guarantee?
Given the conclusion I have reached in relation to the construction of the agreement, there is no cause to consider any question of rectification.
Is Mrs Fahey estopped from denying the existence of a guarantee over the moneys promised in the agreement?
Given the conclusion I have reached, it is not necessary to consider this question. However I should, in light of my analysis of the facts, make the following findings which may assist the parties. No promise was made at the meeting on 23 September as to the provision of a guarantee by Mrs Fahey. There was no conduct on her part at the meeting which would have led Mr Guscott to conclude that she was prepared to guarantee the obligations of Vence and Blockmack. Mr Guscott did not enter into the agreement in reliance on any representations or conduct on the part of Mrs Fahey at the meeting. Rather, his agent, Mr Burdon-Smith, drew up the agreement with the guarantee provisions, which was ultimately signed by Mrs Fahey.
Conclusion
The agreement provided for a guarantee of the obligations of Vence and Blockmack by Mrs Fahey and she is bound by that agreement. Blockmack and Vence have failed to pay $290,000 pursuant to the agreement and separate judgments should be entered against Mrs Fahey in relation to the specific amounts owing, plus interest.
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