MICHAEL CHRISTOPHER VADASZ v PIONEER CONCRETE (SA) PTY LTD No. SCGRG 93/2342 Judgment No. 4530 Number of Pages - 9 Equity - Guarantee and Indemnity (1994) ATPR 41-316 (1994) 62 SASR 150

[1994] SASC 4530

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA OLSSON(1), MOHR(2) AND NYLAND(3) JJ

CWDS
Equity - general principles and maxims of equity - remedies and procedure - cancellation and recission

Guarantee and indemnity - the contract of guarantee misrepresentation or non-disclosure - Appellant entered a personal guarantee for past and future liabilities of a company to the respondent - prior to signing the instrument of guarantee an agent of the respondent misrepresented to the appellant that the guarantee related only to future liabilities - trial judge held appellant entitled to avoid liability under the guarantee as to past indebtedness but found appellant liable as to future indebtedness - recission, being an equitable remedy, it is open to a court granting it to impose conditions upon the party seeking relief to ensure equity is done - approach of trial judge justified. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 481; Taylor v Johnson (1983) 151 CLR 422 and The Bank of Victoria Ltd v Mueller (1925) VLR 642, applied.

HRNG ADELAIDE, 6 April 1994 #DATE 6:5:1994

Counsel for appellant:     Mr S Walsh QC with Ms J Choate

Solicitors for appellant:    Elston and Gilchrist

Counsel for respondent:     Mr D Smith

Solicitors for respondent: Gun and Davey

ORDER
Appeal and cross-appeal dismissed.

JUDGE1 OLSSON J These are an appeal and cross appeal respectively in relation to a judgment entered by Lee DCJ in the District Court, whereby he adjudged the appellant liable to pay the respondent $170,929.32. That judgment was the outcome of an action in which the respondent had sued to recover $357,005 plus interest, said to be due by the appellant to it, pursuant to the terms of an instrument of guarantee dated 7 August 1992.

2. In reasons for judgment published by him, the learned trial judge carefully analysed the evidence led at trial and made detailed findings of primary fact. Neither the appeal nor the cross appeal, as prosecuted, seek to challenge those findings. Rather, they focus upon what are said to be the proper inferences and legal consequences which flow from them.

3. The facts, as found, may simply be summarized. The appellant was, at all material times, one of two directors of Vadipile Drilling Pty Ltd ("Vadipile"), which carried on business as a foundation piling contractor. The respondent was a manufacturer of readymixed concrete and, from time to time, supplied that commodity to Vadipile, for the purposes of its operations.

4. In January 1992 Vadipile experienced some operational problems which, in turn, gave rise to cashflow problems. It asked the respondent for and was granted an extension of trading credit from 45 to 60 days, for a period concluding on 30 June 1992. Far from improving, Vadipile's operational problems actually escalated, due, in part, to continuing excessively wet weather, with a result that, by 30 July 1992, its indebtedness to the respondent exceeded $200,000.

5. The appellant and his co-director Storer entered into negotiations with the respondent, through one Miller, the respondent's credit manager in this State. Various discussions ensued with regard to a proposal by the appellant that the then existing liability of Vadipile be frozen and repaid by monthly instalments of $30,000; and that future supplies be subject to payment within 45 days. Almost at the outset Miller raised the topic of the giving by the plaintiff of some form of personal guarantee, but he was resistant to such a suggestion.

6. The learned trial judge found that, on 4 August 1992, the appellant was told by Miller that the above proposal would not be acceptable without a personal guarantee from him. This statement was made against the background of an earlier discussion that any guarantee required would relate only to future debts incurred by Vadipile.

7. Lee DCJ further accepted that, on 4 August 1992, the express arrangement then come to between the appellant and Miller was to the effect that the account of Vadipile would be frozen as at 31 July 1992; and that all future deliveries would be guaranteed by the appellant personally.

8. The appellant attended Miller's office on 7 August 1992, when he was presented with a form of guarantee which he then signed, but did not read. This was tendered to him by Miller as a document purporting to implement the substance of the agreement come to.

9. The learned trial judge accepted the evidence of the appellant that, on that occasion, it was specifically stated that "the personal guarantee was for future trading" and did "not include past payments". This evidence was supported by a contemporaneous diary note then made by the appellant, which read "PG for future trading. Does not include past payments".

10. It was also accepted that, at the time, Miller stated that, when the arrears had been paid off, the personal guarantee would be vacated as to further purchases. This was, of course, consistent with the appellant's original attitude.

11. In point of fact, the instrument of guarantee, as tendered and signed, purported to be an unqualified guarantee in respect both of accrued and future liabilities. In part it read as follows:-
    "IN CONSIDERATION of you having agreed or agreeing to sell
    goods or to provide services granting or giving credit to
    VADIPILE DRILLING PTY LTD hereinafter called "The Company"
    ... at my request and forbearing for the time being to sue
    the Company for the recovery of monies owing by it to you,
    I, and where more than one, and each of us HEREBY jointly
    and severally for ourselves and our respective Executors and
    Administrators UNCONDITIONALLY AND IRREVOCABLY GUARANTEE to
    you the due and punctual payment of all monies which are now
    or may at any time until we are released be owing to you by
    the Company including all costs, charges and expenses of
    every description which may be incurred by you in the
    exercise or attempted exercise of any power or remedy AND
    UNDERTAKE as a separate and additional obligation under this
    instrument and as a principal Debtor to indemnify and to
    keep you indemnified against any loss that you incur as a
    consequence of the failure for whatever reason of the due
    and punctual payment by the Company of any monies due to you
    as aforesaid ..."

12. It also purported to charge any liability of the guarantee on any freehold or leasehold interests which the appellant had.

13. The agreed arrangement was duly implemented. Two instalments, each of $30,000 were subsequently paid in respect of the "frozen" account. However, matters did not go well with Vadipile and, at the end of September 1992, Miller was informed that the company was struggling to keep up with its commitments. Further supplies of readymixed concrete were eventually stopped on 15 October 1992, when default was made on the then current trading account.

14. On 11 November 1992 the appellant received a formal notice of demand under the guarantee for a total sum of $357,005, being $180,968 in respect of the current trading account and $176,037 in respect of the frozen account. Vadipile ultimately went into liquidation. Action was initiated by the respondent in the District Court to enforce the guarantee.

15. I do not tarry to examine the detailed process of reasoning whereby the learned trial judge arrived at the above findings; and as to how he came to prefer the version of events narrated by the appellant, rather than Miller, to the extent that conflict arose between the evidence of each of them. I merely content myself with saying that the reasoning expressed appears to me to be compelling.

16. Against that factual background, and on the basis of the conceptual approach illustrated by Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 481, the learned trial judge held that, although the appellant was entitled to equitable relief by way of rescission of the guarantee on the ground of misrepresentation, nevertheless, on the basis that he who seeks equity must do equity, the appellant ought to be held to his bargain that he would personally be liable for concrete supplied as from the date of the guarantee. Lee DCJ further held, that, in any event, the respondent's conduct in tendering an instrument of guarantee covering both past and future debts, having induced in the appellant a belief that he was only guaranteeing future indebtedness, was misleading and deceptive within the meaning of section 52 of the Trade Practices Act and that, in pursuance of that section, it was appropriate to make an order preventing or reducing the loss or damage suffered by the appellant. He likened the situation to that addressed in Money v Westpac Banking Corporation (1988) ATPR 46-034.

17. In those circumstances he finally expressed himself as under:-
    "I hold that the defendant is entitled to avoid liability
    under the guarantee, at least to the extent of Vadipile's
    past indebtedness to the plaintiff. I hold that the
    plaintiff is entitled, both in equity and under s87(2)(b) of
    the Trade Practices Act, to such order as would preserve and
    enforce the defendant's liability under the guarantee with
    respect to Vadipile's indebtedness to the plaintiff after 7
    August 1992."

18. Having heard counsel as to the form of the judgment to be entered, he then pronounced judgment in favour of the respondent for $170,929.32. That amount excluded $10,460.24 which became due after 31 July 1992, but before the date on which the guarantee was signed. He made no order as to costs, predominantly on the basis that
    "on the issues of fact which occupied a large part of the
    trial, the defendant was the winner and the plaintiff was
    the loser".

19. The grounds of appeal relied upon by the appellant are that:-
    "1. The Learned Trial Judge having found that the respondent
    through its servant and agent Miller:-
    (a) misrepresented the extent of the subject guarantee to
    the appellant;
    (b) thereby inducing the appellant to enter into the said
    guarantee;
    (c) knowing that the appellant intended to give a guarantee
    with respect to future indebtedness only;
    erred in law in failing to rescind the guarantee in its
    entirety.

2. The Learned Trial Judge having found the respondent
    through its servant and agent Miller guilty of the conduct
    referred to aforesaid, erred in law in finding that the
    respondent was entitled in equity and under Section 87(2)(b)
    of the Trade Practices Act to such order as would enforce
    the appellant's liability with respect to future
    indebtedness pursuant to the aforesaid guarantee.

20. For its part, the respondent, as cross appellant, asserted, in its notice, that:-
    "1. The learned trial judge erred in not finding that the
    appellant was bound to the guarantee to the full extent of
    its terms as there was not sufficient evidence to support a
    finding that the respondent by its servant or agent
    misrepresented the extent of the guarantee.

2. In the alternative to ground 1 above the learned trial
    judge erred in enforcing the guarantee for indebtedness of
    Vadipile Drilling Pty Ltd, 'after the 7th August 1992'
    because: 2.1 the guarantee was represented to extend to
    'future indebtedness' (accepting learned trial judge's
    findings as to the representation); and 2.2 'future
    indebtedness' on the evidence was indebtedness incurred by
    Vadipile Drilling Pty Ltd on and from the 1st of August
    1992;

Accordingly as a matter of equity the learned trial judge
    given his findings ought to have enforced the guarantee in
    respect of the indebtedness of Vadipile Drilling Pty Ltd on
    and after the 1st of August 1992.

3. In the alternative to ground 1 above the learned trial
    judgment (sic) erred in making no order as to costs in that
    the proper exercise of the discretion required that the
    plaintiff recover costs from the defendant."

21. Ground 1 of the cross appeal was, however, abandoned before the Full Court.

22. One aspect of these appeals may immediately be dealt with.

23. It is beyond question that the primary thrust of the appellant's case, as developed at trial, was to seek equitable relief on the ground of the respondent's misrepresentation of the nature and effect of the instrument of guarantee, as presented and signed. The Trade Practices Act ground was essentially pleaded as an alternate, fall back position.

24. It seems to me that the lastmentioned ground only arose for consideration in the event that the appellant failed on his primary point. Thus such ground and any conclusion in relation to it was irrelevant to a proper determination of the primary ground. It could not be relied upon, in some fashion, to bolster the decision come to on the equity point - as the learned trial judge appears to have sought to do. It may well be that his conclusion on the section 52 aspect was correct, but it was unhelpful to infuse that reasoning as a support for an order based on the general equitable jurisdiction. I therefore put it to one side for present purposes.

25. In essence the contention of the appellant was both simple and basic. It was pressed upon the Full Court that, the learned trial judge having held that the appellant was, in the circumstances, entitled to the remedy of rescission of the guarantee on the ground of the respondent's fraudulent misrepresentation, then the right to rescission was absolute. There was, it was declaimed, no power to attach conditions to the rescission or, alternatively, it was inappropriate to do so.

26. Mr Walsh QC, of senior counsel for the appellant, submitted that, because Commercial Bank of Australia Ltd v Amadio was a duress case, what was there said was of no relevance in the context of the case at bar. Moreover, he argued, authorities such as MacKenzie v Royal Bank of Canada (1934) AC 468 and O'Brien v Australia and New Zealand Bank Limited (1973) 5 SASR 347 render it clear that rescission is not precluded simply by reason of the fact that a representor may have acted on the contract made between the parties. Reference was also made to various other authorities, including Royal Bank of Canada v Oram and Ors (1978) 1 WWR 564.

27. However, these authorities do not purport to erect any new principle of general application. They stand as no more than illustrations of particular fact situations and the application of equitable principles to them. For example, the rationale in MacKenzie v Royal Bank of Canada is to be found in the comments of their Lordships to the effect that, on the facts there under consideration (at 476):-
    "... There is no difficulty as to restitutio in integrum.
    The mere fact that the party making the representation has
    treated the contract as binding and has acted on it does not
    preclude relief. Nor can it be said that the plaintiff
    received anything under the contract which she is unable to
    restore."

28. In my opinion there are two authorities which together form the necessary starting point for consideration in relation to these appeals. The first, in point of time, is the decision of the House of Lords in Spence v Crawford
(1939) 3 All ER 271. Lord Wright there had this to say (at 288-289):-
    "... On the basis that the fraud is established, I think
    that this is a case where the remedy of rescission,
    accompanied by restitutio in integrum, is proper to be
    given. The principles governing that form of relief are the
    same in Scotland as in England. The remedy is equitable. Its
    application is discretionary, and, where the remedy is
    applied, it must be moulded in accordance with the
    exigencies of the particular case. The general principal is
    authoritatively stated in a few words by Lord Blackburn in
    Erlanger v New Sombrero Phosphate Co., where, after
    referring to the common law remedy of damages, he went on to
    say, at p.1278: 'But a court of equity could not give
    damages, and, unless it can rescind the contract, can give
    no relief. And on the other hand, it can take accounts of
    profits, and make allowance for deterioration. And I think
    the practice has always been for a court of equity to give
    this relief whenever, by the exercise of its powers, it can
    do what is practically just, though it cannot restore the
    parties precisely to the state they were in before the
    contract.'

In that case, Lord Blackburn is careful not to seek to tie
    the hands of the court by attempting to form any rigid
    rules. The court must fix its eyes on the goal of doing
    'what is practically just'. How that goal may be reached
    must depend on the circumstances of the case, but the court
    will be more drastic in exercising its discretionary powers
    in a case of fraud than in a case of innocent
    misrepresentation. This is clearly recognised by Lindley,
    M.R., in the Lagunas case. There is no doubt good reason for
    the distinction. A case of innocent misrepresentation may be
    regarded rather as one of misfortune than as one of moral
    obliquity. There is no deceit or intention to defraud. The
    court will be less ready to pull a transaction to pieces
    where the defendant is innocent, whereas in the case of
    fraud the court will exercise its jurisdiction to the full
    in order, if possible, to prevent the defendant from
    enjoying the benefit of his fraud at the expense of the
    innocent plaintiff. Restoration, however, is essential to
    the idea of restitution. To take the simplest case, if a
    plaintiff who has been defrauded seeks to have the contract
    annulled and his money or property restored to him, it would
    be inequitable if he did not also restore what he had got
    under the contract from the defendant. Though the defendant
    has been fraudulent, he must not be robbed, nor must the
    plaintiff be unjustly enriched, as he would be if he both
    got back what he had parted with and kept what he had
    received in return."

29. This is to be read in conjunction with what fell from a joint judgment of three members of the High Court in Taylor v Johnson (1983) 151 CLR 422 at 432-3, where their Honours said:-
    "The particular proposition of law which we see as
    appropriate and adequate for disposing of the present appeal
    may be narrowly stated. It is that a party who has entered
    into a written contract under a serious mistake about its
    contents in relation to a fundamental term will be entitled
    in equity to an order rescinding the contract if the other
    party is aware that circumstances exist which indicate that
    the first party is entering the contract under some serious
    mistake or misapprehension about either the content or
    subject matter of that term and deliberately sets out to
    ensure that the first party does not become aware of the
    existence of his mistake or misapprehension. What we have
    said is sufficient to demonstrate the broad basis of support
    which the authorities provide for that proposition.
    Moreover, and perhaps more importantly, it is a principle
    which is best calculated to do justice between the parties
    to a contract in the situation which it contemplates. In
    such a situation it is unfair that the mistaken party should
    be held to the written contract by the other party whose
    lack of precise knowledge of the first party's actual
    mistake proceeds from wilful ignorance because, knowing or
    having reason to know that there is some mistake or
    misapprehension, he engages deliberately in a course of
    conduct which is designed to inhibit discovery of it. Our
    comment can, for present purposes, be limited in its
    application to the case where the second party has not
    materially altered his position and the rights of strangers
    have not intervened."

30. The concept of moulding the remedy in accordance with the exigencies of the particular case has found further expression in other authorities.

31. As was pointed out by Cussen J in The Bank of Victoria Ltd v Mueller
(1925) VLR 642, rescission being an equitable remedy, it is open to the court, as a condition of granting equitable relief, to insist that equity shall be done, by imposing such conditions upon the person seeking the relief as are considered fair and appropriate to the circumstances. This is so regardless of whether the relief stems from misrepresentation, mistake, duress or unconscionable dealing. So it was that, in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 481, Deane J referred, with approval, to Mueller's Case and said, apropos the facts then under consideration, "Where an order is made setting aside the whole of a transaction ..., the order will, in an appropriate case, be made conditional upon the party obtaining relief doing equity". Given that he was there dealing with an unconscionable dealing case, the concept expressed by him is undoubtedly of general application. So much was recognised by White J in Koutsonicolis and Anor v Principe and Ors (No 2)
(1987) 48 SASR 328 at 330-1.

32. Applying such a concept to the instant case, it immediately becomes apparent that the practical approach adopted by the learned trial judge was clearly justified, if not demanded, by the situation revealed by the evidence.

33. The bargain made by the appellant with the respondent was that, in return for his personal guarantee of the due payment for future supplies, the respondent would make those supplies available and thereby enable the appellant to continue the business operations of Vadipile. The appellant availed himself of that benefit, without which his company's business would, forthwith, have foundered. It would be unconscionable to permit the appellant to retain the benefit, but unconditionally eschew the financial responsibility which he personally accepted as the consideration for receiving it. If it were otherwise he would, in the equitable sense, have been unjustly enriched by virtue of the benefits conferred on him via his company.

34. As to the quantum of liability it seems to me that the approach adopted by Lee DCJ was entirely appropriate to the situation. Despite earlier discussions between the parties the guarantee was not actually produced, agreed to and entered into until 7 August 1992. It seems to me that a fair, practical condition to attach to rescission was that he meet liabilities for supplies accruing from that time onwards. This is what the learned trial judge ordered and I see no reason to disagree with his conclusion.

35. It only remains to note that the respondent sought to complain about the approach of the learned trial judge to the question of costs. All that need be said about this is that the order eventually made was the expression of an exercise of discretion, having regard to the issues debated and their final resolution. There is no doubt that the respondent failed as to the aspect which arose as the major issue on the trial and, whilst various minds might reasonably differ as to the order proper to be made, the fact is that it was open to the learned trial judge to conclude that, at the end of the day, the honours were more or less evenly divided between the parties. I cannot see any basis upon which this court can reasonably interfere with that assessment.

36. For the reasons above expressed I would dismiss both the appeal and the cross appeal.

JUDGE2 MOHR J I agree.

JUDGE3 NYLAND J I agree.