National Foods Milk Limited v Freeth - [2004] SADC 192

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
NATIONAL FOODS MILK LIMITED v FREETH
Judgment of His Honour Chief Judge Worthington
22 December 2004
GUARANTEE AND INDEMNITY - THE CONTRACT OF GUARANTEE - MISREPRESENTATION OR NON-DISCLOSURE
Defendant completed an application for a credit account with plaintiff on behalf of a company of which she was the sole director - application included a personal guarantee of company's debt to plaintiff - default by company - claim on guarantee - defendant says guarantee unenforceable because induced to give it by misrepresentation and/or misleading/deceptive conduct of plaintiff's employee.
Held: On facts, no misrepresentation or misleading/deceptive conduct - judgment for plaintiff for $378,125.

NATIONAL FOODS MILK LIMITED v FREETH
[2004] SADC 192

The plaintiff, National Foods Milk Limited (“National Foods”) brings this action against the defendant, Bernadette Freeth, as guarantor of a debt owed by Cinnamon Way Pty Ltd (“Cinnamon Way”). The amount claimed is $342,245 (rounded off) and National Foods relies on a guarantee dated 7 September 1999. There is no dispute that Cinnamon Way owes that money but Mrs Freeth denies that she is responsible for it.
OUTLINE
National Foods is a large national corporation involved in the production and distribution of dairy products. Some of its marketing operations are conducted through independent licensed distributors.
In early 1992 the defendant and her husband, Noel William Freeth, purchased part of a milk round in the Murray Bridge area and they applied to a predecessor of the plaintiff, Farmers Union Foods Ltd (“Farmers Union”) to set up a credit account. They completed a credit application and were required to provide a modest bond as security. It was the practice then for Farmers Union to ask for a bond equal to two weekly accounts and, although the papers do not make it completely clear, it looks like the bond would have been in that order. Trading terms were that payment was to be made within seven days, and the arrangement was that in the event of an account holder falling behind in payment, Farmers Union could have recourse to the bond. No other form of security was required to establish an account.
Mr and Mrs Freeth traded as a partnership under the name “Murray Mallee Milk” until 1997. On 6 August 1997 Cinnamon Way was registered as a company and Mrs Freeth was appointed sole director on 12 September 1997. On 13 October 1997 the partnership was dissolved and ceased trading. The business was taken over by Cinnamon Way and it traded as Murray Mallee Milk.
I shall come to the events of 1999 shortly, but first I will complete the outline.
It appears from the plaintiff’s records that Murray Mallee Milk never complied with the trading terms and was always behind in payments. At the time Cinnamon Way took over the business National Foods was owed some $60,000 and thereafter the situation continued to deteriorate. Although payments were made from time to time, by September 2001 the amount owing by Cinnamon Way was more than $300,000 and National Foods closed the account.
It became apparent that Cinnamon Way could not meet the debt and on 18 September 2001 the defendant placed Cinnamon Way into administration. On 15 October 2001 its creditors resolved to wind it up and appointed a liquidator. In May 2002 National Foods demanded that Mrs Freeth pay the amount owed by Cinnamon Way pursuant to the terms of the guarantee. She denied liability and this action was commenced on 2 August 2002, at which time the amount owed by Cinnamon Way was $342,245.
DEALINGS BETWEEN THE DEFENDANT AND THE PLAINTIFF
Mrs Freeth gave evidence about the history of her dealings with the plaintiff. Evidence was also given by Mr John Orr, Credit Supervisor for National Foods in South Australia, and Mr Warren Laube, now retired, who for many years was its business manager. His primary role was dealing with the network of distributors, such as Murray Mallee Milk. The sorts of matters he would deal with on a day to day basis were varied and were related to distributors’ day to day operations. However, as a general rule, he was not involved in credit arrangements between distributors and the company.
Mrs Freeth said that she regarded Mr Laube as the first point of contact. She described him as friendly, open and frank, and someone with whom she could speak about a problem. She said that if she rang about a matter and it was something that came within his expertise, i.e. the daily operations of a distributorship, he would deal with it himself, but if it was outside his sphere, e.g. credit or financial arrangements, he would help either by putting her through to someone who would be able to help her, or by making a note of the problem and referring it on with a request that the relevant person get back to her. Mr Laube confirmed in evidence that he often spoke with her, and it was clear from his evidence that he also considered they had a good working relationship. I formed the impression that Mr Laube was an obliging man. He was accessible to distributors and, within his expertise, would help them as much as he could. If he did not know the answer he would refer it on to someone who would.
During the hearing Mr Hall, for the defendant, explored various aspects of how the plaintiff conducted its business in relation to the defendant and her alter ego, Cinnamon Way; especially what was done, or not done, in relation to the growing debt. The relevance of much of that material was questionable, but I allowed it to be explored because there was a possibility that some of it might be relevant to the circumstances in which the guarantee was signed. However, ultimately that proved not to be so, and it need not be canvassed. The evidence relevant to the ultimate issue is fairly confined.
THE GUARANTEE
The case for National Foods is that, in consideration of it supplying products on credit to Cinnamon Way, Mrs Freeth agreed that she would be personally responsible for the cost of those goods and that National Foods could enforce the guarantee as though she were the principal debtor. Mrs Freeth says that the guarantee is not enforceable because of a misrepresentation made by Mr Laube on behalf of National Foods, upon which she relied, to the effect that she would not incur any personal liability by signing it.
The guarantee is part of a six page document entitled “Application for a Credit Account – Distributor/Vendor”. The application consists of three A4 pages joined together, printed on both sides, that fold over each other. The front page is for National Foods to complete. Two pages seek information about the applicant. In that part Mrs Freeth has set out some details about Cinnamon Way and some about herself as the director. The fourth page is headed “Request to supply goods on credit”. This has been executed by Cinnamon Way under Seal and it bears the date 5 September 1999. The next page is headed: “Privacy Act acknowledgment and consent”. This has been signed by Mrs Freeth and dated 7 September 1999. The final page is headed: “Guarantee”. This has been signed by Mrs Freeth, witnessed by D.O. Richardson, and bears the date 7 September 1999. Ms Richardson, who gave evidence, has known the defendant for some 20 years and at all material times has been her accountant. At that time she held the Common Seal for Cinnamon Way.
It is Mrs Freeth’s case that Mr Laube told her, in answer to her enquiry, that in signing the guarantee she was doing so only in her capacity as sole director of Cinnamon Way and only on behalf of that company. She says that as a result of that representation she believed that, because she was executing the guarantee only in that capacity, she was not thereby exposing herself to any personal liability. She alleges that what Mr Laube told her amounted to a misrepresentation under the Misrepresentation Act 1972 (SA) and was misleading or deceptive conduct under s52 of the Trade Practices Act 1974 (Cwth) and s56 of the Fair Trading Act 1986 (SA), and that as Mr Laube was acting on behalf of his employer, National Foods cannot enforce the guarantee against her.
It seems that the request for the application to be completed arose as follows.
On 8 June 1999, Mrs Freeth wrote to National Foods referring to an earlier telephone discussion with Mr Gulmeno who worked in the credit section. In the letter she stated that there was a change of ownership of the business, from the partnership to Cinnamon Way, on 13 October 1997. She also requested permission to vary her arrangements with National Foods so that she could conduct a distributorship for Nippy’s Fruit Juices which she had commenced on 8 April 1999. In the letter she also confirmed that she was the sole director of Cinnamon Way.
Mr Orr said in evidence that this was the first he knew of the change in ownership of Murray Mallee Milk from the partnership to Cinnamon Way. Mrs Freer disputed this saying that she told National Foods about that change at the time it happened. Nothing turns on that but what is relevant is that once he became aware of it, Mr Orr sent her an application for a new credit account for Cinnamon Way. That was on or about 30 August 1999. Mr Orr said that he sent the application to Mrs Freeth with a “With Compliments” slip. There was no letter of explanation. As far as he could recall it was returned to him by post. At that time there was about $145,000 owing on the account.
Mrs Freeth said that she received the application via an internal mail system whereby documents from head office at Mile End would be brought to Murray Bridge with other deliveries and be put in the relevant person’s pigeon hole. Mrs Freeth confirmed that there was no covering letter with it, just a “With Compliments” slip which she thought was signed by Mr Orr. She said that she was puzzled because she thought the credit account had already been established. So she put the application in an internal mailbox for return to Mile End. She said that when it came back to her by ordinary post she rang Mr Laube, that day or the next day, to talk to him about it. She said in evidence-in-chief that she had two telephone conversations with him. She called him first to ask why it was necessary to fill out the application when there was already a trading account. She said that he replied that he thought a new application for credit would be needed because of the change from the partnership to Cinnamon Way.
She said that she filled out the application and then went to Ms Richardson’s office in Murray Bridge to have the Common Seal of Cinnamon Way affixed to that part of the application where it was required, namely, the “Request to supply goods on credit”. On that part of the form, Mrs Freeth has written the date: 5 September 1999. At that stage, she said, she did not realize there was a guarantee to be completed because it was on the back of the folded form and she had not seen it. She said that when she did see it, she rang Mr Laube again. The evidence on that is as follows (Tx152-153):
"QThen did you have another conversation with Warren Laube.
AYes, I did.
QThat was in relation to the guarantee part at the back.
AIn regard to the guarantee part at the back.
QWhat was your concern in speaking with him.
AI was concerned that this actually reads ‘Guarantee’ but doesn’t set out whether it’s a guarantee for a company, from a person, from whoever; it just says ‘Guarantee’. My question was ‘If I sign this, am I responsible for this company’s debts?’ and the response was this was standard procedure to get a director to sign a company guarantee.
QWhat was your understanding of that at that time.
AMy understanding was that the company’s assets were standing up (sic) and that the company would be responsible to pay the weekly debt that was incurred.
QSo when you signed that, you signed that on the basis of what, what you’ve just said.
AOn the basis that this was a company guarantee, as a director of a company, not a personal guarantee.
QIf it had been indicated to you that it was a personal guarantee, what would you have done.
AI would never have signed it.
QWhy is that.
ABecause I do not sign personal guarantees, have never and will never.”
Mrs Freeth said that, having spoken with Mr Laube, she was willing to sign the guarantee and that she went to Ms Richardson’s office so that she could witness her signature. After that she sent the document by post to National Foods at Mile End.
The guarantee is unexceptional and in a common form. There is no need to set it out in full but, because of some of Mrs Freeth’s evidence, it is necessary to set out the preamble and the first clause:
“In consideration of NATIONAL FOODS MILK LIMITED, South Australia (hereinafter called NATIONAL FOODS) having agreed at my/our request (which request is evidenced by my/our signing this guarantee) to supply goods to the business described on the Application for a Credit Account form, I/we hereby jointly and severally unconditionally and irrevocably agree:
1. To be answerable and responsible to NATIONAL FOODS for the due payment by the Applicant/s for all such goods as NATIONAL FOODS may from time to time supply to the Applicant/s notwithstanding that I/we shall not have notice of any neglect or omission on the Applicant/s part to make such payment to NATIONAL FOODS and I/we hereby agree to indemnify NATIONAL FOODS and to keep it indemnified in respect of any failure by the Applicant to make any payment or to perform any other obligation.”
Ms Richardson kept a record of when the Company Seal was used and this shows that it was affixed in her presence to what she noted as a new credit application with “National Dairies” on 7 September 1999. Her record of the dates it was used either side of that date shows 12 February 1999 and 2 February 2000. There is no record of the Seal being used on 5 September 1999, which was a Sunday. Ms Richardson had no independent recollection of seeing the fold-out document but she acknowledged that she was the person who witnessed Mrs Freeth’s signature on the guarantee.
Having regard to Ms Richardson’s evidence, I am confident that she would have been careful to note any use of the Seal and I am satisfied that, in addition to it being most unlikely that she would have been available on a Sunday, if the Seal had been used on 5 September she would have noted it. I therefore find that, although that part of the document headed “Request to supply goods on credit” bears the date 5 September 1999, the Seal was in fact affixed to that page on 7 September, the same day on which Ms Richardson witnessed the signature on the guarantee. In my opinion, Mrs Freeth is mistaken in her memory. The likelihood is that she began to fill out the documents over the weekend and inserted the date of 5 September on the page “Request to supply goods on credit” in the course of doing that, but did not see Ms Richardson until the Tuesday, 7 September.
Mrs Freeth said that she did not seek any advice from Ms Richardson about the guarantee, and Ms Richardson confirmed that she did not give any advice about it or any other part of the document. She said that her part in the accountancy practice was to do tax returns and that she did not advise on contractual matters.
Until September 1999 National Foods had never asked Mrs Freeth for a guarantee and the only security for the account was the arrangement for the bond that was made in 1992. She was asked to explain her understanding about personal liability for any money owed by Cinnamon Way to National Foods (Tx155):
"AI didn’t believe it was a personal guarantee. At no place in this does it say ‘personal guarantee’. This guarantee reads ‘I/we’, I took ‘I’ as meaning I as the director, ‘we’ as the company.
QAt no time did anyone explain that document to you.
ANo.
QOr point out what it meant.
ANo.
QWhen I say ‘At no time’ I mean anybody from National Foods.
ANo.”
Mr Laube could remember having some conversations with Mrs Freeth during 2000 when, because of corporate changes in National Foods, new distributorship agreements were entered into by distributors, including Cinnamon Way. Just when that occurred is not known but, although it was executed at some later date, the new distributorship agreement for Cinnamon Way states that it runs from 12 May 2000. Although Mr Laube could not remember precise details, he recalled discussing a couple of clauses with her, as he had with a number of other distributors. However, he regarded those matters as being within his area of operation, i.e. the day to day running of a distributor’s business. He could not remember any conversation with Mrs Freeth about any part of the credit application executed in September 1999. He believed that if there had been he would be likely to remember it because it would have been out of the ordinary: “it was not in my brief to handle the – those sorts of matters, in connection with credit.” (Tx100) He said that occasionally he would be involved in the credit aspect of a distributor’s business as part of an in-house meeting concerning distributors who were behind in their payments, but in the main, these were meetings to determine how the problem might be rectified.
Mr Laube, as I have said, was quite frank about the fact that it would not have been unusual for him to be discussing matters with Mrs Freeth about her business and that it would not have been unusual for her to phone him. However, he was sure that if she had telephoned him with questions about the credit application or the guarantee, he would have referred that on to the credit department, because it was outside his expertise. But as far as he was concerned, there was no such conversation at all.
In evidence-in-chief Mrs Freeth made it very clear that not only was Mr Laube the person to whom she spoke but that there had been two conversations, the second being a follow up to the first. However, in cross-examination she said that when she received the documents for the second time it was Mr Orr that she rang. She said that she asked him what the document was for and that he said it was a credit application. Mrs Freeth was reminded of her evidence-in-chief earlier that day, namely that she had spoken twice with Mr Laube about them. She said that this had been a mistake; she only spoke to Mr Laube about them once and the first conversation was with Mr Orr.
There is no possibility that what Mrs Freeth said in evidence-in-chief was a slip of the tongue. She was quite clear in her description of the two conversations and emphatic that they were both with Mr Laube. Mr Orr’s evidence was that he had spoken to Mrs Freeth before he sent the documents out, and it was not put to him by Mr Hall that there had been any conversation with her after she received them. That also tends to confirm that at that stage of the trial, i.e., before she gave evidence, she was not suggesting that there had been a conversation with Mr Orr after she received the application.
The change in her evidence could not have resulted from anything said by Mr Laube or Mr Orr in evidence; they had completed their evidence before she commenced. She appeared to believe that she had made an error in her evidence-in-chief. It is puzzling that in her evidence-in-chief she spoke of what had occurred some five years before as if that was what she had always believed it to be, and then, while she was still in the witness box, her recollection changed. In the context of her version of what occurred this is a significant change, bringing into question the reliability of her evidence about the principal issue in the defence: whether there was a conversation with Mr Laube as she claims and, if so, what was said.

If her evidence about speaking to Mr Orr first is correct, it is strange that when she had a further question about the document, which she knew had come from Mr Orr and about which she had already spoken to him, she did not try to talk to him again but, instead, rang Mr Laube. She did not suggest that she spoke to Mr Laube because she could not get Mr Orr. She said that she rang Mr Laube. That must also be seen against her earlier evidence that if she had a question about credit or finance she would speak to someone in the credit department, such as Mr Orr, or at least try to do so.
Looking at the evidence as a whole, I cannot be satisfied about the reliability of Mrs Freeth’s evidence that there was a conversation with Mr Laube (the only one to which she still adhered at the end of her evidence) between the time she got the application and when it was executed on 7 September. However, even if such a conversation had occurred, it would not support her claim of a misrepresentation.
If Mrs Freeth’s account of the conversation were to be accepted at face value, she asked him whether in signing the guarantee she would be responsible for the company’s debts. Her account of his response is somewhat tortuous because of the reference to getting a director to sign a “company guarantee”. But on any reasonable understanding, it cannot be construed as a reassurance that any responsibility would be that of the company alone. Even on her evidence of the conversation, such a response is not saying anything more than that it is standard practice to ask directors to give a guarantee if the applicant is a company. It says nothing about personal liability.
CONCLUSION
I am not satisfied that there was a conversation between the defendant and Mr Laube in early September 1999 during which he made representations about the guarantee in the credit application. It follows that the defendant has not established any factual basis on which to found her claims for relief and it is therefore unnecessary to consider them further.
For these reasons, the plaintiff has made good its claim against the defendant for $342,245. Interest is to run from the date of issue of the summons, 2 August 2002. During that time it would be reasonable to take an average rate of 4.5% and the period is a little over 2 1/3 years. In lieu of interest I fix a figure of $35,880.
The plaintiff will have judgment for $378,125.