McIntosh v Linke Nominees Pty Ltd
[2008] QCA 275
•12 September 2008
SUPREME COURT OF QUEENSLAND
CITATION:
McIntosh & Anor as T’ees of the Estate of Camm (A Bankrupt) v Linke Nominees P/L & Anor [2008] QCA 275
PARTIES:
LACHLAN MCINTOSH AND JOHN PARK as trustees
of the Estate of GARY STIRLING CAMM(A BANKRUPT)
(plaintiff/respondents)
v
LINKE NOMINEES PTY LTD ACN 005 860 944
(first defendant/not a party to the appeal)
ROBERT CLIVE LINKE
(second defendant/appellant)FILE NO/S:
Appeal No 4043 of 2008
Appeal No 4629 of 2008
SC No 4537 of 2007DIVISION:
Court of Appeal
PROCEEDING:
General Civil Appeal
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
12 September 2008
DELIVERED AT:
Brisbane
HEARING DATE:
4 September 2008
JUDGES:
Muir JA, Cullinane and Douglas JJ
Separate reasons for judgment of each member of the Court, each concurring as to the orders madeORDERS:
(a)the appeals be allowed;
(b)the orders made on 7 and 22 April 2008 be set aside; and
(c)the respondents pay the appellants' costs of the proceedings, including reserved costs, if any, and the costs of the appeal
CATCHWORDS:
CONTRACTS – PARTICULAR PARTIES – PRINCIPAL AND AGENT – RELATIONS BETWEEN AGENT AND THIRD PERSONS – LIABILITIES OF AGENT – IN RESPECT OF CONTRACTS – LIABILITY FOR BREACH OF WARRANTY OF AUTHORITY – where the appellant was the director of the company, Linke Nominees Pty Ltd – where a deed was negotiated between the respondents and the appellant by which the respondents agreed to give up their rights to bring proceedings against the company in relation to a parcel of land in exchange for the payment of a settlement sum – where the respondents were successful in obtaining judgment against the appellant for $500,000 together with interest for breach of warranty of authority – where the respondents’ rights to bring proceedings against the company remain intact – where the respondents’ remedies in relation to the land were not brought into account in the assessment of damages – whether there was sufficient evidence before the court to allow the court to make an assessment of damages in regards to the respondents’ prospects of success and the value of the land
GUARANTEE AND INDEMNITY – INDEMNITIES – CONSTRUCTION OF CONTRACT – where the deed provided that the appellant agrees to hold the respondents harmless against failure by the company to pay the “settlement sum or any part thereof” – where the settlement sum was defined as the “sum equal to 50 per cent of the value of the property as determined by the registered valuer” – where the settlement sum was not determined – where the company was not a party to the deed – whether the obligation of the appellant depended upon the existence of the obligation on the part of the company to pay the settlement sum
British Russian Gazette and Trade Outlook Ltd v Associated Newspapers [1933] 2 KB 616, cited
Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1, considered
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54, considered
Godwin v Francis (1870) LR 5 CP 295, cited
Heskell v Continental Express Ltd (1950) 1 All ER 1033, cited
Hughes v Graeme (1864) 22 LJ(QB) 3335, cited
In Re National Coffee Palace Company; ex parte Panmure (1883) 24 Ch D 367, considered
In Re Perkins; Poyser v Beyfus [1898] 2 Ch D 182, considered
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; [1933] HCA 25, cited
Meek v Wendt (1888) 21 QBD 126, cited
Ray Teese Pty Ltd v Syntex Australia Ltd [1998] 1 Qd R 104; [1996] QCA 259, considered
Taylor v Sanders [1937] VLR 62, cited
Total Oil Products (OST) Pty Ltd v Robinson [1970] 1 NSWLR 701, cited
Yeoman Credit Ltd v Latter [1961] 1 WLR 828, citedCOUNSEL:
W Sofronoff QC, with M P Amerena, for the appellant
G Bigmore QC, with J Ribbands, for the respondents
SOLICITORS:
Broadley Rees Hogan for the appellant
McKays Solicitors for the respondents
MUIR JA: Introduction
The respondents, who are the trustees in bankruptcy of the estate of one Gary Camm, commenced proceedings in the Supreme Court against Linke Nominees Pty Ltd ("the Company") and the appellant Robert Linke, claiming against the Company and the appellant the sum of $500,000 allegedly owing by the Company and the appellant to the respondents under a deed entered into between them dated 16 May 2007. The respondents claimed the same sum against the appellant for breach of warranty of authority. The respondents succeeded in their claims against the appellant who was ordered to pay $500,000 together with interest under the Deed in the sum of $52,438.35 up to and including 7 April 2008 (the date of the judgment). The claim against the Company was dismissed and the appellant was ordered to pay the respondents' costs of the action to be assessed on an indemnity basis.
Before going to the grounds of appeal, it is desirable to explain the factual background to the proceedings. The respondents formed the view that they had prospects of having set aside an agreement between the bankrupt and the Company under which the former had purported to sell a parcel of land to the latter. The appellant, at relevant times, was the holder of the majority of shares in the Company, and one of three directors. The record does not disclose whether the Deed was negotiated between the appellant and the respondents but it is common ground that it was executed by the appellant on his own behalf and, purportedly, on behalf of the Company. Its purpose was to compromise the respondents' claims in respect of the land in consideration of the payment of a "settlement sum" to be determined pursuant to the terms of the Deed. The circumstances leading up to the execution of the Deed are recorded in some detail in the recitals to the Deed. The recitals provide[1]:
[1]Record p 68, 69
"RECITALS:
…
J.In the course of conducting the section 81 examinations the Trustees have obtained a number of written Communications and an affidavit sworn by the Bankrupt on 10 May 2004 in a proceeding in the Magistrates Court of Queensland which are to the effect that the Bankrupt and Mr Linke entered into a side agreement, arrangement or understanding pursuant to which the Company was able to purchase the property of the undervalue price of $400,000, the Company or Mr Linke would pay $150,000 to the Bankrupt and the Bankrupt would have an option to repurchase the property for either $550,000 or a fair and equitable price ('the side agreement').
K.In the course of a section 81 examination of the Company Mr Linke has denied the allegations made by the Bankrupt about the side agreement.
L.The Trustees are of the opinion that there is sufficient evidence, in oral and documentary form, about the alleged side agreement to justify them commencing an action against the Company to obtain orders pursuant to section 121 of the Bankruptcy Act that the transfer of the property to the Company be set aside.
M.The Trustees, by their solicitor, have informed Mr Link, for himself and as agent of the Company, that, as presently advised, they consider that they are duty bound to commence a proceeding against Mr Linke and the Company where appropriate relief will be sought pursuant to sections 120 and/or 121 of the Bankruptcy Act.
N.Mr Linke has informed the solicitor to the Trustees that he denies that he and the Company have engaged in any improper or unlawful conduct in relation to the property or the affairs of the Bankrupt and that may proceeding commenced by the Trustees will be vigorously defended by him and the Company.
…
R.Mr Linke and the Company wish to avoid the expense and inconvenience of the legal proceedings threatened by the trustees and solely for that reason they acknowledge that the Company holds an interest in, the property, on a constructive trust for the Bankrupt and, by reason of section 58 of the Bankruptcy Act, that interest vests in the Trustee.
S.The Trustees, Mr Linke and the Company are desirous of resolving all differences between them on the terms set out hereunder AND Mr Linke and the Company will execute this Deed solely for the purpose of avoiding the considerable cost, inconvenience and distress of the proposed legal proceedings and they do so with an express denial of any wrong doing by them and on the condition that the Trustees join with them in making an application to the Federal Magistrates Court of Australia for orders the effect of which will be to cause the Bankrupt and all other occupants of the property to vacate the property and deliver up exclusive possession of the property to the Company."
The relevant operative provisions of the Deed are:
"NOW THIS DEED WITNESSES AS FOLLOWS:
1.The Company shall pay to the Trustees the sum of money provided for in clause 4 of this Deed.
…
4.The Company shall pay to the trustees the sum equal to fifty per cent of the value of the property as determined the registered valuer ('the settlement sum').
5. The settlement sum shall be paid by the Company:
(a)as to $500,000 by bank cheque by 4pm on 23 May 2007;
(b)as to the balance by bank cheque on 16 May 2008 ('the due date').
…
8.Mr Linke hereby guarantees the due and purchase payment of each instalment of the settlement sum by the Company AND hereby holds the trustees harmless against any failure by the Company to pay the settlement sum or any part thereof.
9.If the Company and/or Mr Linke fail to pay any instalment of the settlement sum by the due date for the payment of the relevant instalment the Trustees may commence a proceeding in a court of competent jurisdiction against the Company and/or Mr Linke and obtain judgment for the amount of the settlement sum then outstanding together with interest at the rate of 12% per annum and full indemnity costs of and incidental to the entry of such judgment AND the trustees may produce this Deed of Settlement as conclusive evidence of the irrevocable consent of the Company and Mr Linke to the entry of such judgement and the making of such order for full indemnity costs.
10. The Company hereby charges of all its right, title and interest in the property with the obligation to pay the settlement sum and any other sum that may become due and payable hereunder AND the Trustees shall not lodge a caveat on the title to the property in respect of the equitable charge created herein unless the Company and Mr Linke are in breach of their respective obligations under this Deed.
11.The Trustees shall forthwith issue an application in the Federal Magistrates Court of Australia wherein the Applicants shall be the Company and the Trustees (“the application”).
…
15. The Trustees shall forthwith do all tings and take all steps necessary to procure a discharge of Caveat 710461400 lodged by them on the title to the property.
16.Mr Linke, for and on behalf of himself and the Company, hereby, warrants that:
(a)he has read and he understands all of the provisions of this Deed;
(b) he has freely and voluntarily executed this Deed; and
(e)he is authorised by the Company to execute this Deed;
(d) he has informed the solicitor to the Trustees that he
does not require independent legal advice prior to the
execution of this Deed.
17.Subject to the terms of this Deed, the Trustees hereby forever release and discharge the Company and Mr Linke from all claims, demands, liabilities and causes of action of any kind whatsoever or howsoever arising out of or in connection with the affairs of the Bankrupt including, but not limited to, the property.
18.The Company and Mr Linke hereby forever release and discharge the Trustees from all claims, demands, liabilities and causes of action of any kind whatsoever or howsoever arising out of or in connection with the affairs of the Bankrupt including, but not limited to, the property.
19.The Trustees shall be responsible for referring the valuation issue to the President of the Real Estate of Queensland.
…
21.The Trustees shall not refer the valuation issue to the valuer until the application has been heard and determined." (emphasis added)
Presumably the "application" is that referred to in Recital S.
The findings at first instance
The Company claimed that the appellant had no authority to enter into the Deed on its behalf and the primary judge so concluded. He found, however, that the obligations of the appellant under the second limb of Clause 8 and under Clause 9 of the Deed were those of an indemnifier rather than of a guarantor and that his obligation existed despite the fact that the Company was not bound by the Deed. It was found also that the appellant was in breach of the warranty of his authority contained in Clause 16(c) of the Deed and liable in damages for that breach in a sum which "would equate to the amount that could be actually recovered against the Company if the warranty was not breached."[2] It was found that as the Company had the capability "of paying in full the amount … claimed," damages equated to the $500,000 claimed under Clauses 5(a) and 8 of the Deed.
[2]InreNational Coffee Palace Company; ex parte Panmure (1883) 24 Ch D 367 at 371 per Brett MR, at 373 per Cotton LJ and R 375 per Bowen LJ
The appellant's contentions
The primary judge erred in finding that there was any obligation against which the respondents were to be indemnified. Under Clause 8, the appellant's obligation was to guarantee the "payment of each instalment of the settlement sum by the Company". The obligation under Clause 9 was also in respect of "any instalment of the settlement sum". The settlement sum was defined in Clause 4 as "the sum equal to 50% of the value of the property as determined [sic] the registered valuer …". As no determination was made by the registered valuer, there was no settlement sum and thus no obligation to pay any monies under Clause 5. Moreover, the Company was never bound by the Deed. There was no promise by the Company to pay any money and no failure by the Company to pay the settlement sum.
The correct measure of damages was what the respondents would have gained by the contract which the appellant warranted should be made. Had the appellant acted with the Company's authority, the respondents would have received $500,000 on 23 May 2007 and the balance later, but in return they would have given up their rights to bring proceedings against the Company. The respondents still have those rights and they must be brought into account in assessing damages.[3]
[3]British Russian Gazette andTrade Outlook Ltd v Associated Newspapers Ltd [1933] 2 KB 616 at 616, 646 and Meek v Wendt (1888) 21 QBD 126
Additionally, the Company still has the land, which is worth more than the $500,000, as that was merely the first instalment of the total sum to be paid in the compromise. The respondents, however, remain free to proceed against the Company, which is not bound by the Deed, to obtain full title to and interest in the land.
The respondents' contentions
Clause 9 of the Deed is capable of standing alone, both as an indemnity and as a general pre-estimate of the measure of the respondents' loss and damage. Clause 9 might also be construed in conjunction with Clause 8, in which event Clause 9 operates both as the agreed procedure for procuring judgment for a certain sum and as the agreed quantification of the amount or amounts in respect of which the appellant was to hold the respondents harmless. The accuracy of paragraph [45] of the primary judge's reasons should be accepted.
A commercially realistic construction of Clauses 1 and 4 of the Deed requires that
the definition "the settlement sum" refer only to the expression immediately before it: "a sum equal to 50% of the value of the property as determined by the registered valuer". There is no logical basis for treating the definition as involving a concept that could only take form as a sum of money if it were payable by the Company.
The authorities relied on by the appellant with a view to showing that no obligation to indemnify arose were inapplicable as "this is a straightforward case of unenforceability and no release, extinguishment or penalties are involved." Ratification of the Deed was always available to the Company. In the same way a contract entered into with a minor, whilst unenforceable, could nevertheless be adhered to by the minor. The subsequent failure of the minor left intact the obligation of the indemnifier.[4]
[4]Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 830 - 833
The failure of the Company to pay the "settlement sum" results from the unenforceability of the Deed as against the Company. The covenant of the appellant to hold the respondents harmless "for any failure" includes a failure to pay by reason of the unenforceability of the Deed as against the Company.
Damages for breach of warranty of authority – consideration
It is not in dispute that the appellant was in breach of the warranty of authority contained in Clause 16(c) of the Deed. The measure of damages for breach of warranty of authority is the amount that the plaintiff has lost by being unable, by reason of the falsity of the warranty, to sue the alleged principal.[5] The extent of the loss is not the amount of any award of damages for breach of contract but the amount which could have been recovered from the principal had the contract been binding on it.[6]
[5]Heskell v Continental ExpressLtd (1950) 1 All ER 1033, 1043 per Devlin J; InreNational Coffee Palace Company; ex parte Panmure (1883) 24 Ch D 364 at 371, 373 and 375; and McGregor on Damages 15th ed. Paras 1229, 1230, 1231, referred to with approval in Rummery v Dorsman (1996) NSW ConvR 55 - 780
[6]Inre National Coffee Palace Company; ex parte Panmure (1883) 24 Ch D 364
The learned authors of Bowstead & Reynolds on Agency 16th ed.,[7] propound the following similar test:
"(2)Where a contract is repudiated by the person on whose behalf it was made on the ground that it was made without his authority, such loss is prima facie the amount of damages that could have been recovered from him in an action if he had duly authorised and subsequently refused to perform the contract, together with the costs and expenses (if any) incurred in respect of any legal proceedings reasonably taken against him on the contract."
[7]In Article 108
The principle underlying this measure of damages was explained by Brett MR in InRe National Coffee Palace Company; ex parte Panmure as follows:[8]
"If the action were brought against the principal because he had broken the Contract, the amount actually recovered would be quite different if he were solvent and if he were insolvent; if he were solvent the plaintiff would recover the whole loss, if he were insolvent he might not recover a shilling. Therefore it is what the plaintiff actually lost, not what the verdict of a jury would have given him, for the execution might have produced nothing. Again, the defendant might be in such a position that you would not have to consider the question of breach of contract at all. In the present case Messrs Panmure are probably people who would never break their contracts, and therefore you must come back to consider what the plaintiff has actually lost by losing this particular contract. What then did the Company lose?"
[8]Supra At 372
The true measure of damages, being the actual extent of the plaintiff's loss, requires that regard be had to more than the amount of money which the Company would have been obliged to pay the respondents had the Company been bound by the Deed. Thus, in a case of a contract of purchase of goods by the plaintiff, the plaintiff is able to recover the value of the goods less the contract price.[9] In the case of a contract of purchase of land by the plaintiff it was held that the plaintiff could recover the market value of the land less the contract price.[10] In In re National Coffee Palace Company; ex parte Panmure, a case in which a company had sold allotted shares to the principal of a broker, the liquidator of the company claimed against the broker for breach of his warranty of authority to purchase the shares for the principal. As the shares had no market value the liquidator recovered the full contract price of the shares.
[9]Hughes v Graeme (1864) 33 LJ (QB) 3335
[10]Godwin v Francis (1870) LR 5 CP 295
Here, the respondents' actual loss resulting from their inability to pursue a contractual claim against the Company is not $500,000. The respondents are left with their remedies against the Company under s 120 or s 121 of the Bankruptcy Act 1966 (Cth). Those remedies, which would have been lost had the Company been bound by the Deed, are plainly valuable: the appellant considered that the Company would be prepared to pay in excess of $500,000 in order to ensure that they were never exercised. The quantification of their value requires an evaluation of the respondents' prospects of success in the proceedings referred to in recitals L and M of the Deed and the quantification of monetary benefit to the respondents of succeeding in obtaining title to the land. If successful in proceedings against the Company and the appellant, the respondents would obtain title to the land but may have to account to the Company for the $400,000 it paid to the bankrupt. Consequently, the value of the remedy remaining to the respondents as a result of the Company's not being bound by the Deed, is the value of the land less $400,000, discounted by reference to the respondents' prospects of success in the prospective proceedings against the Company and the appellant.
There was no evidence before the primary judge and no evidence before this court which would enable the respondents' prospects of success or the value of the land to be determined. The consequence of this, according to the appellant, is that no damages can be awarded.
Where liability is established and a loss has been shown to exist, a court's ability to make an assessment of damages is extensive. For example, in The Commonwealth v Amann Aviation Pty Ltd Mason CJ and Dawson J, in their joint reasons, observed[11]:
"The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it canhttp://thomsonnxt4/links/Handler.aspx?tag=62c7ad55b719fc143d365e046475cacd&product=clhttp://thomsonnxt4/links/Handler.aspx?tag=f278436e175ab338d582d7dff581fb82&product=cl. Indeed, in Jones v Schiffmann J went so far as to say that the 'assessment of damages ... does sometimes, of necessity involve what is guess work rather than estimation'. Where precise evidence is not available the court must do the best it can. And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages." (footnotes deleted)
[11] (1991) 174 CLR 64 at 83 - 84
But as Pincus JA, with whose reasons Thomas J agreed, noted in Ray Teese Pty Ltd v Syntex Australia Limited :[12]
"It does not appear likely that the Court intended it to be understood by these remarks that where a plaintiff is entitled to damages, whether in respect of loss of profits or otherwise, the Court must always make an assessment whatever the state of the evidence (see also 118, 137–138). Such a view would be contrary to the decision of the High Court in Ted Brown Quarries Pty Ltd v. General Quarries (Gilston) Pty Ltd (1977) 16 A.L.R. 23. That concerned a claim for damages in deceit in respect of the sale of a quarry; the Court holding that the proper measure of damages was the difference between the price paid and the fair value. There was evidence before the primary judge as to value, but it was rejected. Barwick C.J., who dissented, pointed out that the value could not be precisely calculated and went on:
'At best it must be a matter of opinion. If no opinions are offered to the tribunal of fact, perforce it must do the best it can. This is not a case where some estimate by the court is beyond its competence. The Chief Justice [the trial judge] did not take the view that it was. Certainly the court cannot be justified in rejecting the claim to damages where undoubtedly a loss has been sustained because it has no material on which a precise calculation or assessment can be made'.
Gibbs J. decided the case on the basis that there was not 'sufficient evidentiary material to enable the court' to assess the value, the case not being 'one in which the matter had necessarily to be left to the opinion and judgment of the court, acting at large … It was possible, in the circumstances, to prove, with some degree of certainty and precision, the value of the property purchased, and it was not unreasonable to expect [the claimant] to call acceptable evidence as to the value of the 'resource'. ' Aickin J. at 38 took a similar view." (footnotes deleted)
[12][1998] 1 Qd R 104 at 109 - 110
Pincus JA, after considering other authorities, concluded that the better view remained that stated by Bowen LJ in Ratcliffe v Evans,[13] namely, that in proof of damages "as much certainty and particularity must be insisted on … as is reasonable …"
[13][1892] 2 QB 524 at 532 - 533
For present purposes it is sufficient to conclude that the respondents have not established that the value of their claims against the Company, had it been bound by the Deed, would have exceeded the value of their unextinguished claims against the Company. The only evidence of the value of those claims is provided by the Deed. Recital J evidences that the Company paid $400,000 for the land and that the Company or the appellant made, or was obliged to make, an additional covert payment of $150,000 to the bankrupt. Also, it may be inferred from the recitals and operative provisions of the Deed that the appellant and the respondents considered that the respondents had reasonable prospects of establishing that the land was sold to the Company at an undervalue and of having the sale set aside.
No direct evidence of value was led on the trial as the respondents' claim, in substance, was for the payment of the first instalment of the "settlement sum" of $500,000. The primary judge remarked that "it appeared all parties were of the opinion that [the land] was worth somewhere between $2 million and $3 million by May 2007." But as counsel for the appellant submitted, that hardly constituted evidence of value in the context of a hearing in which there was no issue about the value of the land. The respondents elected to call no such evidence despite a pleading by the appellant that the respondents "failed to plead and particularise a case that the compromise constituted by the … Deed … left the [respondents] more benefit than the pursuit of the rights, if any, compromised by them."
In the circumstances I have described, it is impossible to avoid the conclusion that there is insufficient evidence to permit this Court to make an assessment of damages. Nor is it appropriate, having regard to the issues litigated at first instance, to remit the matter to the primary judge for damages to be assessed on the correct basis. This deficiency in the evidence also would have caused the respondents difficulty in quantifying the extent of their loss if, contrary to my view, the appellant was liable to indemnify the respondents under clauses 8 or 9. The indemnity is against loss actually suffered.[14]
[14]Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1 at 21
The appellant's contractual obligations – consideration
Clause 8 has two limbs. The first uses the terminology of guarantee. In the second limb, the appellant agrees to hold "the Trustees harmless against any failure by the Company to pay the settlement sum or any part thereof." Those words are within the classical definition of a contract of indemnity, namely "a contract by one party to keep the other harmless against loss".[15] The contracting parties' description, whilst providing evidence of their contractual intention, is not decisive. The question ultimately is one of construction[16] but the appellant does not now dispute that the second limb of Clause 8 is an indemnity provision.
[15]Yeoman Credit Ltd v Latter (1961) 1 WLR 828 at 830 – 831 and Total Oil Products (OST) Pty Ltd v Robinson [1970] 1 NSWLR 701 at 703
[16]Total Oil Products (OST) Pty Ltd v Robinson [1970] 1 NSWLR 701
What is the subject of the guarantee or indemnity? Under Clause 8 the guarantee is in respect of "each instalment of the settlement sum". It is against failure by the Company to pay "the settlement sum or any part thereof" that the appellant agrees to hold the respondents "harmless". Clause 9 is also concerned with the failure to pay "any instalment of the settlement sum by the due date". The settlement sum is defined in Clause 4 as "…the sum equal to 50% of the value of the property as determined by the registered valuer." Absent a determination by the registered valuer there can be no "settlement sum".
The question then arises as to whether an obligation under Clause 5 to pay the sum of $500,000 by 23 May 2007 and an obligation to pay the balance by bank cheque on 16 May 2008 can arise in the absence of the determination of a settlement sum. Plainly, the obligation to pay "the balance" cannot arise until the balance is ascertained. The appellant argues that Clause 5(a) is not a provision which addresses merely the payment of a sum of $500,000: Clause 5 provides for the payment of a particular sum, "the settlement sum", to be arrived at in the way provided for in Clause 4. Until the settlement sum is so determined, there can be no obligation to pay any part of it.
The Deed is dated 16 May 2007. The valuation of the land was to be made by a valuer appointed by the "President of the Real Estate of Queensland" and "the valuation issues" were not to be referred until the application to the Federal Magistrates Court referred to in recital S was made, heard and determined. It is therefore apparent that the parties had in contemplation that the sum of $500,000, payable under Clause 5(a) on 23 May 2007, was to be paid irrespective of whether the settlement sum had been ascertained. Also, Clause 5 provided for payment of the settlement sum by only two instalments, one of which was the $500,000 instalment. It follows, necessarily, that the expression "instalment of the settlement sum" in Clauses 8 and 9 includes reference to the payment of $500,000 by 4 pm on 23 May 2007.
Issue is taken by the appellant with the primary judge's finding that in the case of an indemnity "the obligation of the indemnified survives the release of the debtor".[17] It is submitted, and I accept, that whether the indemnity survives the extinguishment of the debtor's obligations or the failure of the debtor to be bound at all, depends on the construction of the contract of indemnity.[18]
[17]Reasons para [40]
[18]Taylor v Sanders (1937) VLR 62 at 65
The findings of the primary judge, relevant for present purposes, are as follows[19]:
[19]Reasons p 10, 11
"[37]Mr Linke argues that as guarantor of the obligations of the company he is discharged from any liability to the trustees by reason of the company not being bound by the deed or any underlying agreement.
[38]For their part, the trustees submit that Mr Linke has indemnified them against the company’s failure to perform and that the obligations of an indemnifier survive the discharge of the company from any liability.
[39]The distinction between a guarantee and an indemnity is well-known. In one, the liability of the guarantor is co-extensive with that of the principal debtor. The guarantor will be discharged if the principal debtor is not liable.
[40]In the case of an indemnity, the obligation of the indemnifier and the debtor are separate and the obligation of the indemnifier survives the release of the debtor.
[41]Whether a particular arrangement is one or the other depends on the construction of the instrument.
. . .
[43] In my view, the deed properly construed is one of indemnity rather than one purely of guarantee.
[44]Recitals J and M make it plain that the trustees considered there was sufficient evidence to bring proceedings against both the company and Mr Linke.
[45]While the deed requires the company to pay the settlement amount, clause 8 of the deed not only makes Mr Linke guarantor of the company's obligations but, in addition, by use of the conjunction "and", holds the trustees harmless from any failure of the company to perform in accordance with the deed. There is no obvious reason to limit this to a case where the trustees have a separate right to pursue the company for its failure to perform.
[46]Clause 9 of the deed also suggest an obligation on the part of Mr Linke to pay the amounts due under clause 4 irrespective of the liability of the company for such payment. I note further that clause 17 of the deed provides an independent discharge to Mr Linke for any claim the trustees might have outside the terms of the deed.
[47]The clauses suggestive of co-liability on the part of Mr Linke for the payments under the deed are reinforced by the fact that he is a co-beneficiary of the discharge given by the trustees.
[48]In my view Mr Linke is not only a guarantor but also an indemnifier and his obligation survives the discharge of the company."
The appellant's primary argument was that on the proper construction of Clause 8 the appellant's obligation was to indemnify the respondents only against a failure by the Company to pay the "settlement sum". If the Company had no obligation to pay the "settlement sum", there could be no obligation to indemnify.
Paragraphs [40] and [48] of the reasons were criticised by counsel for the appellant. Paragraph [48] was said to repeat the error exposed in relation to paragraph [40]. And it was submitted that the last sentence of paragraph [48] revealed that the primary judge had failed to give due consideration to the issue to be determined, namely, whether on the proper construction of the Deed the obligation to indemnify arose in the event of a default by the Company in paying the settlement sum or any part thereof.
The first limb of Clause 8 assumes an obligation on the part of the Company to pay the settlement sum. The assumption is well founded as the obligation would have arisen under Clauses 1, 4 and 5 of the Deed had the Company been bound by it. In my view it is reasonable to conclude that the indemnity provided in the same clause "against any failure by the Company to pay the settlement sum or any part thereof" also assumes that the Company was obliged to pay the settlement sum. These conclusions derive support from the matters about to be addressed.
The purpose of the Deed was to compromise the claims of the parties in respect of the land. The respondents were of the opinion that they had good claims against the Company and the appellant which they were "duty bound to commence." The recitals record that: the Company and the appellant expressly deny wrongdoing;[20] in order to avoid legal proceedings the Company and the appellant acknowledge that the Company holds an interest in the land on a constructive trust for the Bankrupt;[21] and that the Company and the appellant will execute the Deed "solely for the purpose of avoiding … cost, inconvenience and distress."[22]
[20]Recitals
[21]Recital R
[22]Recital S
The operative part of the Deed made provision for:
(a) the payment by the Company of "the settlement sum";[23]
[23]Clause 5
(b) the charging by the Company of its interest in the land with the obligation to pay "the settlement sum";[24]
[24]Clause 10
(c) the making by the respondents of an application to the Federal Magistrates Court for an order for delivery up of vacant possession of the land;[25]
[25]Clause 12
(d) the respondents to procure the release of a caveat over the land;[26] and
(e) mutual releases.[27]
[26]Clause 15
[27]Clauses 17 and 18
The appellant, as the Company's majority shareholder, had an interest in the covenants to be given by and in favour of the Company. He also had an interest, as surety, in respect of the charge to be given over the land, in the removal of the caveat and in the Federal Magistrates Court proceedings.
It was the parties' expectation that, in return for the payment by the Company of the instalments of the "settlement sum", the Company and the appellant would be released from all claims in respect of the land. It was also the parties' expectation that the terms of the Deed referred to in paragraph [35] above would be fulfilled.
Another relevant consideration is that the release by the respondents of the appellant and the Company provided for in Clause 17 was made "subject to the terms of this Deed." The release was thus conditional on the performance of contractual obligations. Clauses 8 and 9 of the Deed must be construed with regard to the structure and purpose of the Deed and to the fact that it was intended to operate as a tripartite agreement under which the parties each assumed obligations in consideration of promises made by the other parties. Consequently, it may be thought unlikely that the contractual intention was that the appellant be obliged to make the payments in Clause 5 if the Company was not bound by and obtained no benefit under the Deed. The result would be that the appellant would be obliged to indemnify the respondents against loss and would obtain a release from claims by the respondents. The respondents, however, would be free to pursue their claims in respect of the land; the company would not have given the security required by Clause 10; the caveat would not have been released and there would be no obligation on the respondents to bring the proceedings contemplated by Clauses 11 and 12.
It follows, in my view, that "failure by the Company to pay" in Clause 8 means non-compliance by the Company with an obligation to pay. Clause 8 assumes that the Company will be a party to the Deed with the rights and obligations provided for in it. That being the case, the guarantee in Clause 8 was unenforceable against the appellant. The obligation of the appellant depended on the existence of a primary obligation on the part of the Company which is not enforceable.[28] The indemnity did not operate either, as the Company had no obligation to pay the "settlement sum" and there was thus no "failure" to pay it.
[28]McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 471 – 472
The respondents argue that Clause 9, in itself, provides an indemnity and is a genuine pre-estimate of the respondents' loss and damage. Clause 9 must be read in the light of the other provisions of the Deed. As counsel for the appellant submitted, it imposes no obligation on the Company or the appellant to pay any money. That strongly suggests that it is a machinery provision in aid of obligations created elsewhere in the Deed: in the appellants' case, in Clause 8. The balance of the clause is consistent with this analysis. It permits judgment to be obtained "for the settlement sum then outstanding together with interest … and full indemnity costs." It concludes with an evidentiary provision.
There is no substance in the argument advanced on behalf of the respondents that the Deed operates to release the Company which is not a party to it or bound by its terms. The Deed was intended by the appellant and the respondents to be a tripartite agreement containing mutual covenants. Any release of the Company was dependent on the performance by it of its covenants in the Deed. As it declined to be bound by the Deed it has no obligations and acquires no rights under it. The Deed does not take effect as a deed poll.
The appellant, as a party to the Deed, could enforce against the respondents the covenants in Clause 17 of the Deed. However, the release is prefaced by the words "Subject to the terms of this Deed." That would seem to make the release conditional on, at least, the payment of the "settlement sum". The "settlement sum" has not been determined and may never be determined.
Conclusion
For the above reasons I would order that:
(a) the appeals be allowed;
(b) the orders made on 7 and 22 April 2008 be set aside; and
(c) the respondents pay the appellants' costs of the proceedings, including reserved costs, if any, and the costs of the appeal.
CULLINANE J: I have read the draft reasons of Muir JA in this matter and agree with those reasons and the orders proposed by him.
DOUGLAS J: I agree with the reasons for judgment of Muir JA and the order proposed by his Honour.
In addition I wish to say merely that the proposition that the proper construction of a contract of indemnity determines whether the indemnity survives the extinguishment of the debtor’s obligations or the failure of the debtor to be bound at all is supported by the approach adopted by Priestley JA in Citicorp Australia Ltd v Hendry[29]. The statement by Lord Lindley MR in In re Perkins; Poyser v Beyfus,[30] that a “liability to indemnify against a liability which has no existence, and which can never arise, is a contradiction in terms”, was also based on the true construction of the relevant deed. Those decisions, and the decision in Taylor v Sanders[31] referred to in this context by Muir JA, were not cited to his Honour the learned trial judge.
[29](1985) 4 NSWLR 1, 40-41.
[30][1898] 2 Ch D 182, 189-190.
[31][1937] VLR 62, 65.
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