Miwa Pty Ltd v Siantan Properties Pty Ltd

[2010] NSWSC 1203

CITATION:	Miwa Pty Ltd v Siantan Properties Pty Ltd [2010] NSWSC 1203
HEARING DATE(S):	29 September 2010
JUDGMENT DATE :	21 October 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Windeyer AJ
DECISION:	1. That the injunctions granted on 6 May 2010 and continued on 7 May 2010 be dissolved. 2. That the summons be dismissed. 3. The plaintiff pay the costs of the first defendant.
CATCHWORDS:	REAL PROPERTY - Lease with option containing clause that lessor would contribute $45,000 to lessee's cost of fit out - option exercised - when that provision included in new lease. - LEASE - covenant to pay rent without deduction - whether right of set off excluded. - GUARANTEE BONDS - action to restrain beneficiary from calling on bond - whether fact claim for unpaid rent by lessor statute barred prevented claim on bond payable upon demand. - LIMITATION OF ACTIONS - whether claim under bond barred when claim for breach which bond to secure was extinguished by Limitation Act 1969. - DEEDS - construction - whether literal meaning of words absurd so that words intended could be added.
LEGISLATION CITED:	Limitation Act 1969 Limitation Act 1980 (UK)
CATEGORY:	Principal judgment
CASES CITED:	Batiste v Lenin [2002] NSWSC 233 Batiste v Lenin [2002] NSWCA 316 Carter v White (1884) 24 Ch D 666 Connaught Restaurants Limited v Indoor Leisure Centre Limited [1994] 1 WLR 501 Grant v NZMC Limited [1989] 1 NZLR 8 Moraitis Fresh Packaging (NSW) Pty Ltd v Fresh Express (Australia) Pty Limited [2008] NSWCA 327 Pearson & Bridge (NSW) Pty Ltd v State Railway Authority of NSW (1982) BC8200005 R & J Lyons Family Settlement Pty Limited v 155 Macquarie Street Pty Limited [2008] NSWSC 310 Romain & another v Scuba T.V. Ltd [1997] QB 887 Saratoga v Canjs [2010] NSWSC 654 Westpac Banking Corporation v Tanzone Pty Limited [2000] NSWCA 25 Wood Hall Limited v The Pipeline Authority & anor (1979) 141 CLR 433
TEXTS CITED:	Andrews & Millett, Law of Guarantee 4th ed
PARTIES:	Miwa Pty Ltd (Plaintiff) Siantan Properties Pty Ltd (First Defendant) Macquarie Bank Limited (Second Defendant)
FILE NUMBER(S):	SC 112909 of 2010
COUNSEL:	P Taylor (Plaintiff) P Newton (First Defendant) No appearance (Second Defendant)
SOLICITORS:	Swaab Attorneys (Plaintiff) Heidtman & Co (First Defendant) No appearance (Second Defendant)

- 22 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER AJ

THURSDAY 21 OCTOBER 2010

10/112909 MIWA PTY LIMITED V SIANTAN PROPERTIES PTE LTD

JUDGMENT

Outline

1 The question for decision is whether the plaintiff is entitled to a permanent injunction restraining the first defendant from calling on or dealing with the proceeds of a guarantee bond issued in its favour by the second defendant. The amount in issue is $45,000 but difficult questions are involved.

Facts

2 The plaintiff, MIWA Pty Limited (MIWA) as lessee entered into a lease with Siantan Properties Pte Ltd (Siantan) as lessor of premises, Level 5 12-14 O’Connell Street Sydney. The lease was for a period of five years commencing on 16 April 1996 and ending on 15 April 2001. The lease contained an option for a lease for a further period of three years. The lease was registered.

3 The following clauses were included in the lease:

Part 3 - Rent

Rent
3.1 The Lessee will during the Term pay to the Lessor free of all deductions in each year the rent and other payments (if any) specified calculated and payable in the manner provided in Schedule Two here.
Further Lessor’s Rights
11.5 In regard to the payment of the moneys referred to in Clause 3.1 hereof and any other moneys payable by the Lessee hereunder the time for payment shall be of the essence and in addition to any rights of action or remedies of the Lessor referred to in Clauses 11.1 or 11.3 hereof the Lessor shall be entitled in any case where the Lessor has re-entered the Demised Premises as a result of non-payment of the moneys aforesaid or any part thereof or any other failure on the part of the Lessee to perform or observe the terms covenants conditions or provisions of this Lease, to recover as damages from the Lessee the difference between the amount of the moneys aforesaid for such part of the term of this Lease as he had expired at the date of such re-entry, and the amount of such moneys (if any) it may reasonably be anticipated the Lessor will receive for such period from another or other tenants.
PART 5 – MAINTENANCE REPAIRS AND ALTERATIONS
To redecorate, etc.
5.2 (a) Without prejudice to the provisions of Clauses 5.1 and 11.4 hereof, the Lessee will in the last year of the Term and at intervals of not less than five (5) years and from time to time if necessary or reasonably required by the Lessor redecorate the Demised Premises throughout to the satisfaction of the Lessor. For the purposes of this Clause the term “redecorate” includes the cleaning of the whole of the interior of the Demised Premises including all partitions or additions made to the Demised Premises and the treatment as previously treated of all internal surfaces of the Demised Premises by painting staining polishing or otherwise, to a specification approved by the Lessor and also the replacing of all carpets and floor tiles which in the reasonable opinion of the Lessor are worn or damaged otherwise than by fair wear and tear and in need of replacement.
(b) Should the Lessee fail to redecorate the Demised Premises at the times required under this Clause the Lessor may undertake redecoration at the Lessee’s expense and the Lessee shall repay amounts so expended by the Lessor on demand.
PART 15 BANK GUARANTEE
15.1 Prior to the commencement of this Lease the Lessee shall cause a bank guarantee irrevocable up until and including the date of expiry of the Term for the sum stated in Item 15 of the Reference Schedule in favour of the Lessor to be provided to the Lessor to secure the Lessor against any failure by the Lessee to comply with the conditions of this Lease relating to the care or repair of the Demised Premises or the payment of rent charges or any other moneys payable by the Lessee under this Lease.
15.2 In the event of such failure the Lessors shall be entitled without further notice to the Lessee to forthwith call up such guarantee wholly or in part and to apply any moneys paid thereunder to any loss or damage sustained by the Lessor or the Demised Premises or the property of which they form part without prejudice to the Lessor’s right to full reimbursement from the Lessee for such loss or damage sustained and the Lessors right to claim payment for any deficiency.
PART 16 – OPTION OF RENEWAL
16.1 If the Lessee shall desire to take a renewed lease of the demised premises for a further term of years as set out in Item 8 of the Reference Schedule from the expiration of this Lease the Lessee shall give to the Lessor not less than three (3) months nor more than six (6) months previous notice in writing thereof (time in both cases being of the essence) and shall neither at the date of such exercise of option nor at the date of expiry of the immediately preceding term be in default in respect of the performance of the terms, covenants and conditions by and on the part of the Lessee herein contained. The Lessor shall grant to the Lessee a lease of the demised premises for such further term of years commencing on the day following the date of expiry of the immediately preceding term and otherwise on the same terms as herein, provided that:-
(a) this Clause 16.1 Clause 17.6 and paragraphs 1 of Schedule A shall be excluded; and
(b) the commencing annual rent shall be calculated in accordance with the provisions of Clause 16.2 hereto, mutatis mutandis.

PART 17 SPECIAL CONDITIONS

17.6 The Lessor covenants with the Lessee to undertake the following works in relation to the Premises:-
(a) Carpets to be installed within the Premises of a similar quality to that laid on Level 1 of the Building. The Lessee shall also have the right to lay more expensive carpet. PROVIDED HOWEVER the Lessor will make a maximum contribution for carpeting of $22,000.00;
(b) The Lessor will repaint all previously painted surfaces to a colour and standard approved by the Lessee.
17.7 The Lessor covenants with the Lessee that immediately upon receipt of the Lease duly executed by the Lessee and the Bank Guarantee it will pay to the Lessee the sum of $45,000.00 being the Lessor’s contribution to the Lessee’s fitout of the Premises.

4 Clause 17.7 is in a typeface different from that of the rest of the document but it accords with a provision in what was called a “Confirmation of Lease and Details” letter from the lessor’s agents to Messrs Swaab & Associates, Solicitors for the lessee. $45,000.00 was paid in accordance with the terms upon the lease being signed and a bank guarantee provided. The bank guarantee was given by the second defendant Macquarie Bank Limited (the Bank) in favour of Siantan as beneficiary. It is in the following terms:

15 April 1996
BANK GUARANTEE
At the request of MIWA Pty Ltd ACN 065 043 405 as trustee for the MIWA Trust (the “Customer”) and in consideration of Siantan Properties Pte Limited (the “Beneficiary”) accepting this Guarantee in relation to a rental bond in respect of the property situated at Level 5, 12 O’Connell Street, Sydney (the “Transaction”) between the Customer and the Beneficiary Macquarie Bank Limited ACN 008 583 542 (the “Bank”) unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded in accordance with this Guarantee by the Beneficiary to a maximum aggregate sum of $45,000 (forty five thousand dollars).
This Guarantee is to continue until the earlier of:
i) this Guarantee is returned to the Bank at its offices at 20 Bond Street, Sydney; or
ii) payment to the Beneficiary by the Bank of the whole of such sum or such part as the Beneficiary may require.
Should the Bank be notified in writing at its office at 20 Bond Street, Sydney such notice purporting to be signed for and on behalf of the Beneficiary, that the Beneficiary desires payment to be made of the whole or any part or parts of that sum, the Bank will make such payment of payments to the Beneficiary forthwith without further reference to the Customer and notwithstanding any notice given by the Customer to the Bank not to pay the same.
Provided always that the Bank may at any time without being required to do so pay to the Beneficiary the sum less any amount or amounts it may previously have paid under this undertaking or such lessor sum as may be required and specified by the Beneficiary and thereupon the liability of the Bank hereunder shall immediately cease and determine.

5 By letter dated 15 January 2001 the lessee gave notice of exercise of option of a new lease. There was some correspondence about the rent which presumably caused delay but on 11 December 2001 Messrs Heidtman & Co, solicitors for Siantan forwarded a form of new lease of Level 5. It is accepted that this was in accordance with the option provision, except that clause 17.7 was not included. Clause 15 relating to the furnishing of a guarantee bond was included. It is accepted by the parties that the original bank guarantee remained in force to satisfy that provision.

6 The lessee’s solicitors wrote to say that clause 17.7 should be included. The lessor’s solicitors replied saying that this was not agreed – “this clause relates to a one off payment upon the signing of the initial lease”. There then followed a stream of correspondence between the solicitors as to construction, one argument against the one off payment put forward being that this was supported by the requirement to redecorate under clause 5.2. That could not be correct. No agreement was reached. Messrs Swaab wrote on 14 November 2002 reiterating the rights of the Lessee under the lease wording and saying:

If your client persists in refusing to recognise its responsibilities, our client may have no alternative but to set off the amount due from the rent. We hereby give you notice that our client will take start to set off the amount owed by your client against the rent if the engrossed option lease containing clause 17.7 is not provided within 21 days.

7 On 10 February 2003, Messrs Swaab wrote again saying it proposed to set off the right to $45,000.00 against the rent by reducing the monthly rent that would be paid for the months of February, March and April by $14,850 dollars for each month and by reducing May rent by $450 making a total set off of $45,000. They forwarded a lease executed by the lessee which included the clause which had been 17.7 in the earlier lease.

8 Messrs Heidtman & Co responded by two letters which appear to be the same dated 31 March 2003 and 10 April 2003. Those letters included the following paragraph:

When the original Lease was drafted, the provision for the Fit-out Contribution was never included in the Lease and was not ever inserted by the Lessor or this office, rather your office typed it in itself. As is evident from the original Lease, Clause 17.6 was inserted as a special condition and was also removed from the option Lease pursuant to Clause 16.1. When your office, unilaterally inserted 17.7 into the original Lease (which was never a special condition), you failed to similarly insert its removal in Clause 16.1.
Furthermore, we contend that payment of $45,000.00 by the lessor under the original Lease was equivalent to the moneys provided by the Bank Guarantee. No Bank Guarantee is being supplied to the Lessors under the new Lease and for this reason, by setting off the rent against clause 17.6, the Tenant will receive a benefit, at the Lessor’s expense creating an injustice and rendering it inequitable for the Tenant to retain the benefit.

No reliance is placed on the second of those paragraphs. In fact Siantan has called on the original guarantee. As to the first paragraph the final sentence does not seem to accord with the facts.

9 The reductions or rent claimed as set offs were made. As no new lease was executed the position was that upon exercise of the option there came into existence in equity an agreement to lease. The parties operated on that basis, the argument being as to its terms. It was agreed between them that the term would be extended until 17 July 2004 and the plaintiff gave possession on that date.

10 On 25 June 2007, Messrs Swaab sought return of the bank guarantee. On the evidence before me nothing happened until 4 May 2010 on which date Messrs. Heidtman & Co under authority of Siantan called on the guarantee. This came to the notice of MIWA. That company commenced these proceedings on 6 May 2010 and obtained an interim injunction restraining Siantan from taking the action under the guarantee and from calling for or collecting the sum demanded and restraining the bank from making payment under the call. Those injunctions were continued on 7 May 2010 until the determination of the proceedings or further order.

Issues

11 These proceedings were commenced by summons to restrain the calling up, receipt of or payment or moneys under the guarantee. There are no pleadings. That is regrettable as it is an action where the issues needed to be carefully defined. In my view legal representatives have an obligation to ensure there are pleadings when it is obvious they are needed. I adjourned the hearing for a short time to enable counsel to provide a list of issues. A document called “Plaintiff’s List of Issues” which was accepted by the defendant was handed up and which I now set out:

1. Was clause 17.7 included in the equitable lease (arising from the exercise of the Option and part performance – hereinafter “New Lease”)?
2. (If answer to 1 is “Yes”) was the plaintiff entitled to be paid $45,000 on receipt by the lessor of
(a) the New Lease duly executed by the lessee, and
(b) the Bank Guarantee?
3. (If the answer to 2 is “Yes”), as at 16 February 2003, had the First Defendant received
(a) the New Lease duly executed by the lessee, and
(b) the Bank Guarantee?
4. (If answer to 3 is “Yes”) was the Plaintiff entitled to set-off the entitlement to be paid $45,000 (under clause 17.7) against the obligation to pay rent? (as it purported to do on 16/2/2003)?
5. (If the answer to 4 is “Yes”) was the First Defendant nevertheless entitled to call upon a Bank Guarantee notwithstanding no monies were owing and no default had occurred?
6. (If the answer to 4 is “No”) was the First Defendant nevertheless entitled to call upon a Bank Guarantee notwithstanding on a balance of accounts no monies were owing?
7. (If the answer to 2, or 3 is “No”) is the Plaintiff entitled from the Lessor to money spent on fit out under or pursuant to the New lease to a maximum of $45,000 on proof of expenditure of $45,000 or more, and is the Plaintiff entitled to set-off that amount against the rent.
8. (If the answers to 1 is “No” or 6 is “Yes”) Is the First Defendant’s claim for $45,000 rent statute-barred, and if so, does that preclude the First Defendant from calling upon a Bank Guarantee in respect of the statute-barred rent.
9. Was the First Defendant precluded from calling upon the Bank Guarantee on 4 May 2010 because by reason of the terms of Part 15 of the New Lease:
(a) the Bank Guarantee, or the entitlement of the First Defendant in respect of the Bank Guarantee, had expired, or
(b) and the conduct of the Plaintiff on or about 25 June 2007, the Bank Guarantee, or the entitlement of the First Defendant in respect of the Bank Guarantee, had been revoked.
10. Whether the claim by the First Defendant on 4 May 2010 under the Bank Guarantee was statute-barred.
11. Whether the Plaintiff’s claims for damages for alleged breach of the New Lease is statute-barred.
12. Whether the First Defendant should return the Bank Guarantee to the Plaintiff.

12 This document is somewhat complicated. It is perhaps convenient to reduce the list to four main issues which should determine the matter:

A. On the true construction of the lease, was the lease, to which the plaintiff was entitled on exercise of the option, to include clause 17.7?

B. If the answer to A is “Yes” so that the clause was included, was the plaintiff entitled to set off its claim for $45,000 against rent payable under the lease?

C. If the plaintiff was entitled to set off, can the defendant call upon the bond?

D. If there was no right of set off or if clause 17.7 was not to be included in the new lease and the claim for unpaid rent of $45,000 is statute-barred, does this preclude the defendant from calling on the bond?

13 I will deal with these matters in turn. Before dealing with the construction point it is important to state that there is no claim for rectification nor any evidence of mistake other than the documentary evidence to which I have referred.

CONSTRUCTION

14 There is no doubt that on the ordinary meaning of the words in the first lease the terms of the lease agreed to be given upon exercise of the option included clause 17.7.

15 When dealing solely with construction the question is whether the literal meaning of the words leads to an absurd result. A result which is unreasonable is not the same as one which is absurd. Two cases in the Court of Appeal with which I am for obvious reasons familiar deal with this question and the authorities supporting the principle. Those cases are Westpac Banking Corporation v Tanzone Pty Limited [2000] NSWCA 25 and Moraitis Fresh Packaging (NSW) Pty Ltd v Fresh Express (Australia) Pty Limited [2008] NSWCA 327. Those two cases state the principles of construction of commercial agreements and discuss the relevant authorities that I have considered but which there is little purpose in discussing again. It seems to be accepted it is not necessary to find ambiguity before taking into account the commercial circumstances in which the agreement was reached. There was in evidence correspondence in 1996 between the lessor’s agents and Messrs. Swaab & Associates including a document dated 8 March 1996 with confirmation of lease details (“but stated to be subject to contract”) which included the following:

Fitout contribution: The lessor will contribute an amount of $45,000 towards the lessee’s fitout. These sums will be made available to the lessee by cheque following completion of the necessary lease documentation and the supply of bank guarantee.

The provision was satisfied by clause 17.7 of the lease. The question is, whether the result of a construction requiring clause 17.7 to be in the renewed lease is absurd, so as to require the words and figures “Clause 17.7” to be added to clause 16.1(a) of the original lease so that it is properly construed to read “This clause 16.1 clause 17.6 clause 17.7 and paragraph 1 of Schedule A shall be excluded; and”. This really requires a finding that it is not possible that the parties agreed that the words should bear their ordinary meaning and that their intention was otherwise.

16 The difficulty with this type of construction case is that opinions can differ as to what is absurd: Moraitis shows that. For that reason I consider it is necessary to tread carefully before deciding without rectification that a problem can be solved by construction alone, although I accept that if the mistake is obvious and simple, rectification is not required. There are some matters which go to indicate mistake in words. They are (a) a fit out usually takes place when premises are new or a new lessee takes possession; (b) clause 17.7 was added after the lease was originally prepared as it is in a different typeface; (c) the $45,000 is a fixed sum. Counsel for the plaintiff made it clear that he was claiming entitlement to that full amount as a debt and the claim was not a claim for damages for breach of covenant to pay $45,000 as argued by Mr Newton, Counsel for Siantan. I will have to come back to that but in those circumstances of a debt claim it is difficult to imagine the parties intended that $45,000 would be paid irrespective of whether there was a fit out or paid in full in a case where the cost of fit out was less than $45,000 but that is the claim of the plaintiff.

17 I have found this question quite difficult. Literal meaning is an indication of intention. However, I conclude that the consideration under (c) in the preceding paragraph makes the absurdity clear so that the rights of the lessee upon exercising the option did not include a right to a fit out or payment of $45,000. In other words I conclude that on the proper construction of the original lease clause 16.1 should be construed so as to read in the way I set out in the preceding paragraph.

Set off

18 If I am right as to the construction issue then this question does not arise but nevertheless I think I should deal with it. The question is whether a right of set off is excluded by clause 3.1 of the lease. In other words does the requirement to pay rent “free of all deductions in each year” exclude the right of set off. It has been held by the Court of Appeal in England that it does not of itself: Connaught Restaurants Limited v Indoor Leisure Centre Limited [1994] 1 WLR 501. In that case the principal judgment was that of Waite LJ the words in question being a covenant “to pay: the rents at the time and in manner aforesaid without any deduction (except as aforesaid) and if so required by banker’s standing order”. His Lordship held that on the proper interpretation of the lease in question those words did not exclude a tenant’s equitable right to set off. In coming to that decision Waite LJ followed a decision of the New Zealand Court of Appeal in Grant v NZMC Limited [1989] 1 NZLR 8 where it was held that a covenant to pay rent free and clear of exchange or any deduction whatsoever did not amount to a contract to exclude an equitable right of set off. He held that the word “deduction” does not in its natural sense embrace a set off. The following passage commences at page 509 of the judgment of Waite LJ:

I can now turn, after that account of the authorities and the arguments, to the considerations to be applied in construing the provision in this underlease prohibiting “any deduction” from rent. They should in my judgment be the following. (1) Clear words are needed to exclude a tenant's remedy of an equitable right of set-off. (2) The word “deduction” has never achieved the status of a term of art, but is an expression employed, both in everyday speech and in the language of the courts, at one moment in its strict sense to describe the ordinary process of subtraction with which it is grammatically associated, and at other moments in a broader sense to describe the result which follows when one claim is set against another and a balance is struck. It is thus a useful and a flexible word, but heavily dependent upon the context in which it is used for an accurate understanding of the sense in which it is being employed. If the context happens to be one that affords no guidance as to its intended meaning, it becomes an expression that necessarily suffers from ambiguity. It cannot, in short, be accurately described as a “clear” word. (3) It follows that the simple expression “without any deduction” is insufficient by itself, in the absence of any context suggesting the contrary, to operate by implication as an exclusion of the lessee's equitable right to set-off. (4) Added words of exception or qualification are relevant to the construction of such a phrase, but they too are subject to the general requirement of clarity and will only be effective to displace the lessee's right of equitable set-off if their effect is to create a clear context for exclusion.
Issues of construction are seldom easy, and are bound to depend in the last analysis upon the impression left in the mind of the judge when the language used by the parties is examined in the light of authority. When the considerations I have just mentioned are applied to the wording used in the present case, the impression left on my mind is that the parties to this lease used language that was insufficiently clear to carry the implication of an intention to exclude the tenant's equitable right of set-off.

19 This decision was followed without discussion by Macready As J in Saratoga v Canjs [2010] NSWSC 654 at [40], but that case involved a claim to set aside a statutory demand where an offsetting claim includes a cross-claim. While I am not bound by the English or New Zealand decisions regard must be paid to their authority. I am bound to say that if it were not for them I would have the greatest difficulty in coming to a conclusion that a reduced payment for rent was not a deduction from rent at least in the case of a claimed set off for an unliquidated sum where there is no evidence of expenditure. Where the obligation is to pay the rent without deduction monthly in advance with time being of the essence I would have thought that deduction included claimed set off of sum uncertain.

20 Further research which I have had to undertake without assistance has brought to light authorities which support my view. The most important of these is the decision of Bryson J in Batiste v Lenin [2002] NSWSC 233. The following passages come from paragraphs 102 to 105 of his Honour’s judgment:

102 Recoupment as an answer to failure to pay rent . In answer to the lessor’s cross-claim for possession insofar as it was based on breaches of covenants to pay rent and outgoings the lessee relied upon the right of recoupment established by the judgment of Goff J in Lee-Parker v. Izzet [1971] 1WLR 1688. His Lordship referred to the history of recoupment at 1692G to 1693F and concluded “I do not think this is bound up with technical rules of set off. It is an ancient common law right. I therefore declare that so far as the repairs are within the express or implied covenants of the landlord, the third and fourth defendants are entitled to recoup themselves out of future rents and defend any action for payment thereof. It does not follow however that the full amount expended by the third and fourth defendants on such repairs can properly be treated as payment of rent. It is a question of facts in every case, whether or to what extent the expenditure was proper.” The subject was considered again, with further references to authority, in British Anzani (Felixstowe) Ltd v. International Marine Management (UK) Ltd [1980] 1 QB 137. Payments made by a lessee in situations of necessity which had the effect of meeting some obligation which by the terms of the lease the lessor was obliged to meet have been treated as payments to the use of the lessor and as discharging pro tanto the obligation to pay rent. The lessor’s obligations considered have usually but not invariably been obligations to repair. There is no reason in principle why the same rules should not be applied to recoup lessee’s expenditure against other moneys payable to the lessors, such as obligations to repay outgoings.

103 Plaintiffs’ counsel was not able to refer me to any case in which a right of recoupment has been upheld notwithstanding a provision to the effect that rent will be paid “without deduction”, as in Art.11. Counsel contended that recoupment by the lessee under this principle is not a deduction but that when the obligation to pay rent arises it is immediately discharged, so that there is no further obligation to make a payment, and withholding an amount paid to meet an obligation which the lessor should have met is not a deduction. Counsel pointed to the view expressed by Mr Andrew Waite in his article “Repairs and Deduction from Rent” in The Conveyancer and Property Lawyer , (1981) 45 Conv. (NS) 199; at p210 Mr Waite expressed the view that “Where the tenant has carried out repairs in accordance with the rules and deducted the cost from rent, the rent is deemed to have been paid. In other words the tenant has lawfully spent the rent on carrying out the repairs. The landlord has no claim for the rent. The tenant’s action does not merely provide a defence to a claim for rent (as in the case of set-off), it negates the landlord’s claim.” Mr Waite went on to refer to Sapsford v. Fletcher (1792) 4 T.R. 511, 100 ER 1147 which however does not directly deal with a covenant to pay rent without deduction.

104 In Debonair Nominees Pty Ltd v. J & K Berry Nominees Pty Ltd (2000) 77 SASR 261 at 271 Mullighan J decided to the effect that literal operation should be given to a provision that rent must be paid clear of all deduction. The authorities to which his Honour referred relate to the principle, which is well established, that the lessee’s obligation to pay rent is independent of any obligation of the lessor to effect repairs; the premises may be in disrepair or may have been destroyed but, subject to any provision of the lease, the obligation to pay rent continues. The operation of reference to payment without any deduction whatsoever in Pt.2 of Schd.4 of the Conveyancing Act 1919 was noted, without decision, by McLelland J in Lambert Pty Ltd v. Papadatos Pty Ltd (1991) 5 ACSR 468 at 471.

105 My view is that on the literal and true meaning of the covenant to pay rent without deduction, there is no room for reliance on the right of recoupment referred to in Lee-Parker v. Izzett . In my opinion the literal meaning of “without deduction” makes this clear, and looking further to the purpose of using those words, there is no other purpose available than to prevent the lessee from relying on rights or claims to be entitled to set off, recoup or otherwise withhold payment of part of the rent. In the ordinary use of language to recoup another obligation out of rent is to make a deduction from the rent, and if the use of the words “without deduction” did not achieve this result I cannot see what they would achieve, as the ordinary obligation of a debtor is to pay the whole debt.

21 This decision went on appeal to the Court of Appeal Batiste v Lenin [2002] NSWCA 316 where Sheller JA gave a judgment which was agreed in by Giles and Santow JJA. It was not necessary in that appeal to determine the question of recoupment but Sheller JA at paragraph 49 said:

No argument was otherwise advanced based on unjust enrichment. I should add that I am not persuaded that had the lessee been entitled to be recouped on the basis of the common law principle the claim could have been defeated by the provision in Art 11.01(a) requiring the lessee to pay rental “without deduction”; see Waite, “Repairs and Deduction from Rent” (1981) 45 Conv (NS) 199 at 210. But I do not need to consider this further.

22 The article in The Conveyancer is not really relevant here as it makes clear that the common law right of recoupment is limited to cases where a landlord is responsible for repairs but fails to carry them out and a tenant then spends money on those repairs thereby paying the rent. Whatever the principle it is not suggested in the article that it extends to an obligation to contribute to fit out costs so as to bring about a result that rent has been paid by the lessee carrying out the fit out. The common law recoupment principle is separate from set off.

23 In R & J Lyons Family Settlement Pty Limited v 155 Macquarie Street Pty Limited [2008] NSWSC 310 Bryson J referred to the passage which I have set out from the judgment of Sheller JA acknowledging and said:

At para [49] observations of Sheller JA show that he did not endorse my view at para [105] on the effect of a “without deduction” provision in a covenant to pay rent; Sheller JA did not express disapproval or dispose of the subject.

24 He then went on to say in para [73]:

I remain of the view which I expressed in that case. In the present case the lessees made no expenditure which could be treated as recoupment or equitable set off against rent. Even if they had done so the “without deduction” provision in the present lease would bar a claim of recoupment.

25 I am always reluctant to add another decision of a single judge to those already published on a contentious subject. If I am correct on the construction point it is unnecessary to do so but as it was an important issue I consider it proper to decide it. In my view the decision of Bryson J is convincing and should be followed. I refer in particular to paragraph 105. It is clear there could be no deduction relying upon some cross-claim unconnected with the subject matter of liability for rent. It follows that if the words are to be of use they must refer to recoupment or set off. It follows that I am of the view that a requirement to pay rent without deduction eliminated any entitlement to set off.

26 There is, however, another matter I should deal with under this heading which goes both to construction and set off. As I have stated Mr Newton argued that the claim of the plaintiff was not a claim in debt but a claim for damages for breach of the covenant in clause 17.7. His argument was that the lease could not be construed so as to entitle the lessee to a gift from the plaintiff if it did not have a new fit out at the commencement of the new term. There is no evidence of new fit out or cost of new fit out. In those circumstances the argument goes that even if set off were available there was no sum which could be set off against the claim for rent.

27 I consider that argument correct. A reasonable construction of clause 17.7 does not require any payment to be made if there is no fit out nor does it require a payment of $45,000 to be made if a fit out cost was less than $45,000. That would lead to an absurd result but that is the entitlement the plaintiff claims. The claim for entitlement to set off fails.

Was there a time limit to a call?

28 Before dealing with the Limitation Act question I should deal briefly with the argument of the plaintiff that liability under the guarantee bond came to an end when the lease came to an end. In my view there is no basis to support that argument. It would mean that if at the end of the lease there were some unremedied breach of the lease then the lessor would not be entitled to call upon the bond. That could not be correct. The wording of clause 15.1 of the lease cannot alter the wording of the guarantee bond as to its duration.

Limitation Act 1969

29 During the hearing I said I considered this an important question but it is fair to say that little was said about it in submissions and I have been left to look into it myself. I was reluctant to call the parties back in view of the small amount of the claim. The question is whether Siantan, as beneficiary, can call on the bond notwithstanding that a claim by it against the plaintiff for arrears of rent is barred by the Limitation Act 1969. The limitation period for action is six years as the claim for arrears of rent arises under the agreement consequent upon exercise of the option: Limitation Act s 24. As between a creditor and a guarantor where an action by the creditor against a debtor is barred by time but a claim under the guarantee is not for any reason including time not running until demand is made as is the case here, then were it not for the provisions of s 24 of the Limitation Act a claim under the guarantee would remain in existence. Carter v White (1884) 24 Ch D 666. The explanation for that decision as explained by Lord Justice Lindley at page 672 in the report is “that the omission of the creditors to sue does not discharge the surety, because the surety can himself set the law in operation against the debtor”. The surety can do this, according to the authors of Andrews & Millett, Law of Guarantee 4^th ed 6-026 by compelling the debtor to pay or by paying the creditor and claiming an indemnity from the debtor.

30 Section 24 of the Limitation Act provides that an action on a cause of action to recover arrears of income is not maintainable if brought after the expiration of six years from the date on which the cause of action accrues to the plaintiff. Income under the definition s 11 of that Act includes rent. Section 24(4) provides that a cause of action to recover arrears of income includes a cause of action to recover arrears of income from any person whether principal, surety or otherwise. If this were a claim against a guarantor of the obligations of the lessee I consider that it might be barred by s 24. It might possibly be argued in particular cases that the claim was for damages for breach of a covenant to pay rent rather than for arrears of rent in which case the reasoning in Romain & another v Scuba T.V. Ltd [1997] QB 887 based upon s 19 of the Limitation Act 1980 (UK) would not apply.

31 The position under a guarantee in the form in question here is however different. The bondsman or obligor under such a bond is not a party to the contract between debtor and creditor or in this case lessor and lessee and does not guarantee obligations under that contract. Thus the obligor cannot take action against the debtor to force the debtor to comply with its obligation and neither can the obligor pay out the creditor’s claim and then seek to recover direct from the debtor. In other words the circumstances where the principles set forth in Carter v White would apply, do not apply in the case of this guarantee. That does not lead to the result that in the case of a bond payable unconditionally upon demand the fact a claim by lessor against lessee is defeated by the Limitation Act s 24 means that an action on the bond is barred. The Bank is not a surety within the meaning of s 24 of the Limitation Act as a claim for payment under the bond is not “a cause of action to recover arrears of income”. While s 63 of the Act provides that after six years the right in this case of the lessor to recover arrears of rent is as against the lessee extinguished in my view that does not extinguish the right of the bond beneficiary to claim on the bond.

32 The law as to the enforceability of a bond on its terms has emphasised the importance of this for commerce. There was considerable argument addressed to this question and the law as established by Wood Hall Limited v The Pipeline Authority & anor (1979) 141 CLR 433; Pearson & Bridge (NSW) Pty Ltd v State Railway Authority of NSW (1982) BC8200005 and many other cases. As a general proposition and subject to exceptions which do not apply here then unless terms of an underlying contract are incorporated into the performance bond or guarantee a bond beneficiary or obligee ought to be able to call on it holding the proceeds as security until any underlying dispute between obligee and other contracting parties is determined. In the circumstances of this case where it is accepted that the underlying issues are those of construction, set off and limitation which I am determining it would be wrong to hold that the lessor could call upon the bond leaving it to the lessee to bring some claim based upon unjust enrichment or implied contractual terms to recover money in the circumstances where I have already decided entitlement. I therefore conclude that if I am correct on the either the question of construction or that of set off then Siantan was entitled to call upon the bond.

33 The foregoing reasons provide answers to all matters arising under the list of issues. For completion those issues can be determined or answered as follows:

1. No.

2. Not applicable.

3. Not applicable.

4. Not applicable. But if the answer to 1 were “Yes” then set off was not available.

5. Not applicable. If set off were allowed and determined in this action the first defendant was not entitled to call on the bond.

6. Does not arise.

7. Not applicable but in any event there is no evidence of expenditure.

8. As to 1 “Yes”, as to 2 “No”.

9. No.

10. No.

11. Yes.

12. No.

Consideration of orders

34 The Bank has never appeared. There is no evidence that it was served with the summons or with the injunctive orders made on 6 May 2010. As I have said those orders have remained in force. While it is correct to say that if the proceedings are dismissed the injunctions will be dissolved it is desirable in this case to make a particular order for dissolution to ensure the Bank understands it can make payment under the bond. The orders are therefore as follows:

ORDERS

1. That the injunctions granted on 6 May 2010 and continued on 7 May 2010 be dissolved.

2. That the summons be dismissed.

3. The plaintiff pay the costs of the first defendant.

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