Padstow Corporation Pty Ltd v Fleming (No 2)
[2011] NSWSC 1572
•16 December 2011
Supreme Court
New South Wales
Medium Neutral Citation: Padstow Corporation Pty Ltd v Fleming (No 2) [2011] NSWSC 1572 Hearing dates: 31 October 2011, 1, 2, 3 & 4 November 2011 Decision date: 16 December 2011 Jurisdiction: Equity Division Before: Gzell J Decision: Plaintiff entitled to damages on claim. First cross-claim succeeds. Second cross-claim fails. Third cross-claim discontinued on settlement. Fourth cross-claim fails. Damages to be assessed.
Catchwords: GUARANTEE AND INDEMNITY - Actions Against Surety - defence that not bound as signed as director of company and not in personal capacity - defence that guarantee unjust in terms of the Contracts Review Act 1980 - first cross-claim for breach of share sale agreement in failing to ensure transferor removed from guarantee - second cross-claim for misleading or deceptive statement in contravention of the Fair Trading Act 1987, s 42; negligence and equitable contribution from co-guarantor - third cross-claim discontinued - fourth cross-claim for negligence or breach of duty of care by solicitor Legislation Cited: Corporations Act 2001 (Cth)
Contracts Review Act 1980
Fair Trading Act 1987
Fair Trading Amendment (Australian Consumer Law) Act 2010
Law Reform (Miscellaneous Provisions) Act 1946
Trade Practices Act 1974 (Cth)Cases Cited: Padstow Corporation Pty Ltd v Fleming [2011] NSWSC 1337
Delaney v Purves [1930] QWN 6
National Commercial Banking Corporation of Australia Ltd v Cheung & Anor (1983) 1 ACLC 1,326
Ariadne Steamship Co v James McKelvie & Co [1922] 1 KB 518
NEC Information Systems Australia Pty Ltd v Linton (1985) NSW ConvR 55-240
Scottish Amicable Life Assurance Society v Reg Austin Insurances Pty Ltd (1985) 9 ACLR 909
Clark Equipment Credit of Australia Ltd v Kiyose Holdings Pty Ltd (1989) 21 NSWLR 160
Follacchio v Harvard Securities (Aust) Pty Ltd [2002] FCA 1067
St George Bank Ltd v Trimarchi & Anor [2004] NSWCA 120
Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260
CIT Credit Pty Ltd v Blayn Norman Keable [2006] NSWCA 130
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR
Fitzgerald v Watson [2011] NSWSC 736 San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 [1986] HCA 68; (1986) 162 CLR 340
Tepko Pty Ltd v Water Board [2001] HCA 19; (2001) 206 CLR 1
Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129
Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242Category: Principal judgment Parties: Padstow Corporation Pty Ltd (Plaintiff)
Thomas John Fleming (Second Defendant)
Harold O'Brien (Third Defendant)
Thomas Maurice Fleming (First Cross-Claimant)
Alan Sher (Third Cross-Claimant)
Robert Minter (Cross-Defendant to Fourth Cross-Claim)Representation: Counsel
J Sleight/C Mulvey (Plaintiff)
R Angyal SC/L Doust (Second Defendant)
J Sheller (Third Defendant)
G Rich/L Thomas (First Cross-Claimant)
J Merkel (Third Cross-Claimant)
G Curtin SC (Cross-Defendant to Fourth Cross-Claim)
Solicitor
Neville & Hourn Legal (Plaintiff)
Cordato Partners (Second Defendant)
Gilchrist Connell (Third Defendant)
Addisons Lawyers (First Cross-Claimant)
Smith Lawyers (Third Cross-Claimant)
Middletons Lawyers (Cross-Defendant to Fourth Cross-Claim)
File Number(s): 2008/279166
Judgment
The Padstow claim
The plaintiff, Padstow Corporation Pty Limited, leased a property at Padstow in New South Wales to Hamola Crochet Pty Limited. It defaulted in the payment of rent and Padstow sued its directors under a guarantee in the lease for the outstanding rent, accrued interest, costs of repairs and maintenance and legal costs. The directors were Thomas Maurice Fleming, the first defendant, and his son, Thomas John Fleming, the second defendant.
If Padstow fails against Mr Fleming junior, it seeks an amount equal to the rent due on the remainder of the lease, less any net income received on reletting, from Harold Thomas O'Brien, the solicitor retained by Padstow to act on its behalf in the negotiation, drafting and execution of the lease. Padstow claims a breach of the contractual obligation to use due skill and care or a breach of the general law duty to use such skill and care. If Mr Fleming junior was not bound by the guarantee in the lease, Padstow alleges a breach of Mr O'Brien's contractual obligation or duty of care or both.
The Fleming junior defence that he was not a guarantor
Padstow settled with Mr Fleming senior and, with the leave of court, discontinued its claims against him.
As an initial issue, Mr Fleming junior claimed he was released from the guarantee because the terms of the settlement amounted to a release of his co-guarantor, Mr Fleming senior.
In Padstow Corporation Pty Ltd v Fleming [2011] NSWSC 1337 I ruled against Mr Fleming junior, holding the terms of settlement to be a covenant not to sue.
Mr Fleming junior submits that he is not bound by the guarantee in the lease because he did not sign it in his personal capacity but in his capacity as a director of Hamola.
Item 10 in the Schedule to the lease contained subparts A and B. Subpart A contained a reference to cl 2.3 and cl 13.1. Clause 13.1 provided that cl 13 applied if a guarantor of the tenant was named in Item 10A and had signed or executed the lease. Item 10A contained the names of Mr Fleming senior and Mr Fleming junior.
Clause 2.3 of the lease provided that the parties to the lease included the guarantor if the guarantor was named in Item 10 in the Schedule. Clause 13.2 provided that the guarantor guaranteed to the landlord the performance by the tenant of all the tenant's obligations including any obligation to pay rent, outgoings or damages under the lease.
The provision for signature of the lease that Mr Fleming senior and Mr Fleming junior signed was in these terms:
"Certified correct for the purposes of the Real Property Act 1900 and executed on behalf of the corporation named below by the authorised person(s) whose signature(s) appear(s) below pursuant to the authority specified.
Corporation: Hamola Crochet Pty Ltd ACN 001 756 190
Authority: section 127 of the Corporations Act 2001
Signature of authorised person:
Name of authorised person:"
The front page of the lease named lessor and lessee. It did not name Mr Fleming senior or Mr Fleming junior as guarantors. There was no separate provision for the signatures of the guarantors and there was no reference to cl 13.1 of the lease at the point of execution. That was contained on the next page. There was no evidence of any negotiations with Mr Fleming junior with respect to a guarantee and there was no evidence that Mr Fleming junior was aware that he was being asked to sign a personal guarantee prior to his attending the settlement on 1 September 2004.
But Mr Fleming junior agreed in cross-examination that he thought he might be asked to provide a personal guarantee.
The authorities make clear that the question whether a person has signed in a personal capacity is to be determined in accordance with the construction of the document as a whole and on the basis of admissible surrounding circumstances known to the parties.
In Delaney v Purves [1930] QWN 6 directors signed a lease document as directors of the lessee. The document contained provision for execution by the directors as sureties but they did not execute that part of the document. It was argued that there were two separate agreements, an agreement for lease and a guarantee agreement. Macrossan SPJ dismissed this argument and held the directors to be sureties. His Honour said:
"I am of opinion that the document is one single and indivisible whole, and that the signatures of the defendants, even as directors merely, would be sufficient to bind them as sureties."
In National Commercial Banking Corporation of Australia Ltd v Cheung & Anor (1983) 1 ACLC 1,326 the document was in terms a guarantee by the defendant directors of their company. It was not a party to the document. It was signed by each of the directors and the common seal of the company was affixed to it. The second defendant's interest had been bought by the first defendant and he played no further part in the proceedings. The bank manager crossed out the seal of the company and had the first defendant initial the amendment. Clarke J held that each defendant signed in order to validate the affixation of the company seal and the only intention that could be imputed to the second defendant was that of participating in the execution of the document by the company.
In Ariadne Steamship Co v James McKelvie & Co [1922] 1 KB 518 at 535-536, Atkin LJ had said:
"Signature unconditionally appended is proof of unconditional assent to the terms recorded in the body of the contract. If the body of the contract records that the signer is a party, or leaves the name of the party to be inferred from the signature, the signature will be proof that the signer has assented to a contract made with him. The contract may, however, record that the contract is made between A. and B. acting by his agent C. and may be signed by C., in which case C. has assented to a contract between A. and not C. but C.'s principal B. But the assent signified by the signature may be qualified so as to show that the signer is not assenting unconditionally to the contract, but is assenting in a representative capacity on behalf of a principal. "B. by C. his attorney" written by C. is plainly an assent only by B. "C. on behalf of B." is, I think, equally plainly an assent of C. to the contract not so as to bind himself but bind B. If the assent to the contract clearly appears from the form of the signature to be qualified, it appears to me to be impossible to charge the signer on the footing that there is an unqualified assent by him."
In Cheung at 1,330, Clarke J followed this dictum and concluded that the question with which he was confronted was not one of construction of a document but whether a person who placed his name on the document together with a common seal or an endorsement indicating a qualification of the capacity in which he signed the document, should be taken to have signed it personally so as to become bound thereby, or merely to have signed either in the qualified capacity or as witness to the affixing of the common seal.
In NEC Information Systems Australia Pty Ltd v Linton (1985) NSW ConvR 55-240 the facts were similar to those in Cheung but it was held that the execution was intended to be as a personal guarantee and the addition of the common seal and the signatures of the defendant's co-directors were meaningless.
In Scottish Amicable Life Assurance Society v Reg Austin Insurances Pty Ltd (1985) 9 ACLR 909 the appellant agreed to the appointment of a company as agent but said that it would require personal guarantees from the directors. The directors attested the affixation of the common seal of the company to the agency agreement. The common seal was again affixed in the presence of the directors to the indemnity provision.
Mahoney JA cited the passage from Delaney with approval and said that what the directors did was an authentication of the document as their document and although they took part in the execution of the document by the company, their signatures provided sufficient authentication.
McHugh JA rejected the dictum of Atkin LJ in Ariadne Steamship that one could not go beyond the qualification to a signature as, for example, "on behalf of". His Honour took the view that the contents of a document and surrounding circumstances might indicate that a signatory was bound even though a qualification attached to his signature. At 923-924 his Honour said:
"But if that dictum is correct I think it should be confined to the special case of the agent who signs for an undisclosed principal. It cannot be accepted as applicable in all cases. In some cases the contents of a document may indicate that the signatory is bound even though a qualification attaches to his signature. Expressly or by implication the body of the document may make it plain that the signatory is a party to the contract. In the examples given by Atkin LJ, it would usually follow that there was no liability on the part of the person signing. But this is because the express disavowal of responsibility in those examples is so strong that no other consideration, based on the terms of the document, can overcome it. In other cases, however, the qualification to the signature may be overcome by the terms of the document and the surrounding circumstances. In the end the decision must depend upon the terms of the document including the qualification attaching to the signature together with the surrounding circumstances."
The decision in Cheung was doubted and not followed in Clark Equipment Credit of Australia Ltd v Kiyose Holdings Pty Ltd (1989) 21 NSWLR 160. In that case it was held that signatures to a factoring agreement did not bind the signatories as guarantors. Giles J rejected the dictum of Atkin LJ in Ariadne Steamship at 174 and said:
" In the result, I conclude that the proper approach is to inquire whether there is to be found an intention that the signatory be personally bound to the contract evidenced in the document, meaning thereby not a subjective intention but an intention to be found objectively, notwithstanding a qualification attached to the signature. That intention, or lack thereof, is to be found upon the construction of the document as a whole, including but not being limited to the qualification attached to the signature, in light of the surrounding circumstances to the extent to which evidence thereof is permissible. The inquiry is not limited to consideration of the signature and its qualification in order to determine whether or not the signature indicates an assent to be personally bound."
In Follacchio v Harvard Securities (Aust) Pty Ltd [2002] FCA 1067 a provision of an agency agreement provided that any signatory for a proprietary company vendor would be personally liable for the due performance of the vendor's obligations.
Reference was made to the following of the dictum of Atkin LJ in Ariadne Steamship in Cheung, its doubting in Scottish Amicable Life and its rejection in Clark Equipment . At [9], Finkelstein J held that a person might sign a document in more than one capacity:
"Mr Simon for the appellant sought to avoid this result by arguing that it is not permissible for a person to affix one signature to a contract and have that signature operate in, say, two capacities: one as agent for a principal and another to assume personal responsibility. But I see no reason in principle why this could not occur. All that is necessary is that the capacity or capacities in which the person is placing his signature on a contract be clear. If it is clear that he intends to sign the contract in two or more capacities, there is no reason why that intention should not be given effect."
It was submitted on behalf of Mr Fleming junior that the position could not be clearer. The lease was executed by him on behalf of Hamola and not in any other capacity. He was described as the authorised person and his authority to sign was identified as s 127 of the Corporations Act 2001 (Cth). It provided, amongst other things, that a company may execute a document without using a common seal if the document is signed by two directors of the company.
It was submitted that no objective intention that Mr Fleming junior should be bound by a personal guarantee should be imputed to his execution of the lease.
But this submission concentrates upon the form of execution to the exclusion of other provisions of the lease.
The lack of a separate signature of Mr Fleming junior as guarantor when coupled with the qualification to his signature suggests a lack of objective intention that he should be bound by a personal guarantee.
On the other hand, his identification as guarantor in Item 10 of the Schedule coupled with cl 13.1 supports an objective intention that he was providing a personal guarantee.
Item 10 in the Schedule clearly identifies Mr Fleming junior as a guarantor. Reference is made in that item to cl 13.1 and it clearly states that the guarantee provisions of cl 13 apply if a guarantor is named in Item 10 and that guarantor has signed or executed the lease. Both conditions were satisfied with respect to Mr Fleming junior. He was named in Item 10 as a guarantor and he signed the lease.
I accept the submission that was put against Mr Fleming junior that the terms of cl 13.1 and Item 10 of the Schedule to the lease were clear and by the operation of its provisions Mr Fleming junior became a guarantor upon signing the lease. His defence to the contrary fails.
The advice of Mr Minter
A critical element of this case is what advice in relation to the provisions of the lease and, in particular, the personal guarantees was given to Mr Fleming junior by Robert Clifford Minter, solicitor, who acted in relation to the lease.
Mr Minter arranged to meet Mr Fleming senior and Mr Fleming junior early before settlement so that he could explain the documents to them. They found a table in the Law Society settlement room and Mr Minter said he spoke with them for about 40 minutes. He said the bulk of the meeting was taken up discussing the terms of the lease and providing an explanation of the lease terms and both Mr Fleming senior and Mr Fleming junior participated in this.
Mr Minter said he explained that he had been negotiating the lease over the last month because it was not included in the sale contract. He said the lease contained various alterations for which Mr Fleming senior had asked concerning the payment of a security bond, the directors' guarantees and their release, as well as provisions for outgoings and obligations to repair.
Mr Minter said he took Mr Fleming senior and Mr Fleming junior to the Schedule to the lease and pointed out that it contained various terms including the guarantee and security bond provisions. He pointed to the provisions at Item 10 in the Schedule and said in effect:
"As you know from your commercial experience it is not uncommon for directors to be required to guarantee the obligations of their company.
You can see at the top here that you are both named as guarantors. There is no monetary limit on the guarantees. They are not limited to 3 months' rent. You will each be personally liable under the guarantees. Your liability is joint and several. That means if Hamola defaults on any of its obligations under the lease, the landlord can seek to recover all the moneys from either one of you, or both of you. We will come to the guarantee provisions in the main body of the lease. I know that the both of you have given guarantees before, and that you are familiar with guarantees. Each of you will be taking on a significant personal responsibility under the guarantee. You need to be satisfied that it is in your own personal interest to do that."
Mr Minter said he referred to the release of their liabilities as guarantors in Item 10B. He read it to them:
"The Guarantors shall not be required to provide guarantees referred to in clause 13 during such time as the Lessee shall have paid the Security Bond referred to in clause 16."
He said he then referred Mr Fleming senior and Mr Fleming junior to cl 16 of the lease which he read aloud. It provided:
"The Lessee shall pay to the Lessee (sic) an amount equal to three (3) monthly instalments of Rent plus GST and which said sum shall be held by the Lessor as a bond and which shall be refunded to the Lessee at the expiration of the term of the lease and on vacation of the premises hereby demised to the Lessee PROVIDED THAT such amount shall not be payable until 1 January 2005 AND FURTHER PROVIDED THAT the Lessor shall be entitled to deduct from the said sum or apply the same towards the satisfaction of any amount that may be payable to the Lessor provided that if such amount is payable as a result of a breach of any of the terms conditions or covenants of the Lease then such deduction shall not be deemed to waive the breach."
Mr Minter said he then said words to the effect of:
"The effect of these clauses is this:
Under these clauses you are required to give personal guarantees. Hamola has to pay a security bond equal to 3 months rent by the first of January.
Under the guarantee you are both individually and jointly liable for all of Hamola's obligations under the lease. That guarantee obligation starts today. The document calls for a cash bond. When speaking to your bank, if it becomes apparent that a bank guarantee might be more convenient for you, you can ask Padstow if they will accept that in lieu. Banks take their time to organise guarantees, so you will need to get onto it sooner rather than later.
The bond is payable by 1 January 2005, which is what you negotiated with the Landlord. When you lodge the bond the guarantee provisions will not apply. Otherwise, under the guarantee, you both have an open ended liability for all of Hamola's obligations under the lease.
It is very important that you make sure that the bond is paid by 1 January 2005. Payment of the bond is not optional. It must be paid by that date.
The lease will be starting today and your potential personal liability under the guarantee could be to pay all of Hamola's obligations under the lease. That includes the rent to the end of the lease term.
Although it is not payable immediately, as soon as you pay the bond your guarantee obligations will be suspended, provided you keep it up to date. I recommend that you pay it as soon as possible."
Mr Minter said he went on to explain the guarantee provisions in cl 13.
Mr Minter was challenged on his estimates of time. In his affidavit he estimated the time taken to give his advice to Mr Fleming senior and Mr Fleming junior at 40 minutes. In cross-examination he said it was half an hour to 45 minutes.
Mr O'Brien said that settlement took about 45 minutes all up and his estimate was that Mr Minter spoke with his clients for 10 to 15 minutes.
Mr Minter said he had stressed with Mr Fleming senior and Mr Fleming junior that they were to be early at the settlement. He needed at least half an hour to discuss the documents with them.
Settlement was originally scheduled for 2.30 pm but was changed to 3 pm. Mr Minter said he asked Mr Fleming senior and Mr Fleming junior to leave it at that and to come half an hour earlier.
Mr Minter said that of the 40 minutes, it took the first 10 minutes to get upstairs and get settled.
He was definite in his recollection. He said he wanted half an hour and he got half an hour.
Mr Minter time costed his services in six-minute units. He recorded five units equivalent to half an hour for the settlement. It was submitted that I should find that 10 to 15 minutes was utilised for settlement and only 10 to 15 minutes for any advice to Mr Fleming senior and Mr Fleming junior.
I reject that submission. I have no reason to doubt Mr Minter's evidence of the time it took him to go through the documents with Mr Fleming senior and Mr Fleming junior.
Mr Dennis Raymond Bluth, the expert retained by Mr Fleming junior, does not say that Mr Minter's advice was in any way deficient. He said that the settlement room was busy and noisy. But Mr O'Brien said that it was not busy at the time. And Mr Neville James Moses, the expert retained by Mr Minter, said Mr Minter's advice was adequate and there was no cross-examination of him in that respect.
I find that Mr Minter explained the lease to Mr Fleming senior and Mr Fleming junior and, in particular, he explained to them that they were to execute unlimited personal guarantees but with provision to relieve them of any liability as guarantors if the three-month security bond was put in place.
Whatever Mr Fleming senior said to his son at settlement it was overtaken by the advice of Mr Minter. There is no suggestion that Mr Fleming senior's words were said in the presence of Mr Minter and that was not put to him in cross-examination.
My finding that Mr Minter explained to Mr Fleming senior and Mr Fleming junior that they were about to execute personal guarantees supports my finding that Mr Fleming junior's defence that he was not a guarantor fails.
The Fleming junior defence that the lease was unjust
Mr Fleming junior brought an alternative claim under the Contracts Review Act 1980. Under s 7(1), if a court finds a contract or part thereof to have been unjust in the circumstances relating to the contract at the time it was made, it may if it considers it just do so and for the purpose of avoiding as far as practicable an unjust consequence or result, grant various forms of relief.
Section 9 sets out matters the court must take into account. It was in the following terms:
"(1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of:
(a) compliance with any or all of the provisions of the contract, or
(b) non-compliance with, or contravention of, any or all of the provisions of the contract.
(2) Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following:
(a) whether or not there was any material inequality in bargaining power between the parties to the contract,
(b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation,
(c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,
(d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract,
(e) whether or not:
(i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or
(ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented, because of his or her age or the state of his or her physical or mental capacity,
(f) the relative economic circumstances, educational background and literacy of:
(i) the parties to the contract (other than a corporation), and
(ii) any person who represented any of the parties to the contract,
(g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed,
(h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act,
(i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect,
(j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act:
(i) by any other party to the contract,
(ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or
(iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract,
(k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and
(l) the commercial or other setting, purpose and effect of the contract.
(3) For the purposes of subsection (2), a person shall be deemed to have represented a party to a contract if the person represented the party, or assisted the party to a significant degree, in negotiations prior to or at the time the contract was made.
(4) In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made.
(5) In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made."
If the guarantee was binding upon Mr Fleming junior he submitted that the lease was unjust by reason of the inclusion of that guarantee.
In Mr Fleming junior's behalf it was pointed out that, in terms of s 9(2)(b) of the Contracts Review Act , there were no negotiations with him about the personal guarantee. Mr Fleming junior was added as a co-guarantor of the lease late in the negotiations upon the instructions of Mr Fleming senior. Initially, it was contemplated that Mr Fleming senior would be the only guarantor.
Mr Minter took his instructions from Mr Fleming senior. While Mr Fleming senior said he discussed matters daily with Mr Fleming junior there was no suggestion that Mr Fleming junior was involved in the negotiation of the terms of the guarantee in the lease.
In terms of s 9(2)(c) of the Contracts Review Act , it was not reasonably practicable for Mr Fleming junior to negotiate for any alteration of, or to reject, the terms of the guarantee in the lease.
Mr Fleming senior learned from Mr Minter on 30 July 2004 that a guarantee by him would be required. He said that he had verbal discussions with his son about the guarantee well before that date. But there was no mention of any such discussions in his affidavit.
I accept the evidence of Mr Fleming junior that he was first made aware that a personal guarantee was required of him at the settlement on 1 September 2004. In those circumstances it was not reasonably practicable for him to attempt to negotiate an alteration or rejection of the guarantee in the lease.
Mr Fleming junior said that at the settlement he asked his father: "Is this ok for me to sign? I am not signing a personal guarantee" to which Mr Fleming senior responded: "No. You are signing as a director of Hamola. It is not a personal guarantee."
Mr Fleming senior denied he had that conversation with his son. But in cross-examination he appeared to accept that he had said that, although it is difficult to determine, as Mr Fleming senior changed his evidence on this topic. This exchange took place in cross-examination:
"Q: But in any event Mr Fleming you now admit, don't you, you said to him on that day, "No, you are signing as a director of Hamola, it's not a personal guarantee"?
A: I believed that but I am not a legal person and that's why Robert was there, to make sure that we were doing what, and we knew what we were doing."
If Mr Fleming junior was misled by his father at the settlement, Padstow was in no way implicated. But that does not prevent the court from granting relief. As was said in St George Bank Ltd v Trimarchi & Anor [2004] NSWCA 120 at [45], s 9 of the Contracts Review Act does not require the party seeking to enforce a contract to be on notice of the circumstances rendering it unfair. That observation was cited with approval in Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260 at [51].
Mr Fleming junior received no independent legal advice with respect to the guarantee at any time prior to the day of settlement. It was on that day immediately before settlement took place that Mr Minter informed both Mr Fleming senior and Mr Fleming junior of the contents the lease.
It was submitted that Mr Minter's advice could not be regarded as independent because he acted on the instructions of Mr Fleming senior and there was a divergence of interest between him and his son in relation to the transactions of which the lease formed a component part.
It is true that this was a sale to an investment vehicle with a lease back but that did not affect Mr Minter's giving of objective advice to both father and son with respect to the guarantee.
Padstow was the corporate trustee of a property unit trust. It purchased the land from TM Fleming & Associates Pty Ltd. The property was then leased to Hamola for an initial term of 8 years from 1 September 2004. The rent was payable by monthly instalments of $42,500.00 plus GST.
The directors of Padstow were Darren Allen Kay and Jason Crofts. Mr Kay and Mr Crofts were also principals of an accountancy practice incorporated as Fleming Moynihan & Kay Pty Limited. The accountants were financial advisers to Hamola and financial advisers to Mr Fleming senior. The unit trust of which Padstow was the trustee was an investment vehicle created by Fleming Moynihan & Kay.
Mr Fleming senior was a director and shareholder of TM Fleming & Associates. In terms of s 9(2)(j) of the Contracts Review Act, Mr Kay had provided accounting advice to Hamola, Mr Fleming senior and Mr Fleming junior since 1999. Mr Fleming senior told his son that Padstow represented a syndicate established by Mr Kay to purchase the property. It was part of the arrangement between Mr Fleming senior and Mr Kay that Mr Kay should receive $50,000.00 for assisting the sale.
In July or August 2004, Mr Fleming junior attended a meeting with Mr Fleming senior and Mr Kay at which Mr Kay said that as the investors were paying $5M and they wanted a 9% return on their investment, the rent would be something like $42,000.00 per month plus GST. Mr Fleming junior said he responded: "You've got to be joking we will never be able to pay that amount" and he walked out.
In cross-examination Mr Fleming junior said he made no inquiries between that meeting and his signing the lease because he had no choice. It had been decided between Mr Kay and his father. He made no challenge to the rent when he signed the lease.
These matters are relevant to the exercise required by s 9 of the Contracts Review Act and they point towards an unjust contract.
But, on the other hand, in terms of s 9(2)(a) of the Contracts Review Act there was not any material inequality in bargaining power between the parties to the contract.
The parties were related to each other, but in terms of s 9(2)(b) of the Contracts Review Act , the provisions were the subject of negotiation between Mr O'Brien who acted in relation to the sale and lease back and Mr Minter who acted with respect to the lease and, with respect to it, there was effective negotiation between the solicitors.
Sale and leaseback arrangements are reasonably common to commercial enterprises. In terms of s 9(2)(d) of the Contracts Review Act they do not involve the imposition of conditions compliance with which is unreasonably difficult. Nor do they involve the imposition of conditions that are not reasonably necessary for the protection of the legitimate interests of any party to the contract.
In terms of s 9(2)(e)(ii) of the Contracts Review Act there was no suggestion that the solicitors who represented the parties were not reasonably able to protect the interests of their clients because of their age or the state of their physical or mental capacity.
Nor was there, in terms of s 9(2)(f)(ii) of the Contracts Review Act, any suggestion of any imbalance in economic circumstances, educational background and literacy of the solicitors.
The physical form of the lease and the intelligibility of the language in which it was expressed were straightforward and gave rise to no cause for concern in terms of s 9(2)(g) of the Contracts Review Act .
Nor was there concern under s 9(2)(i) of the Contracts Review Act since the provisions of the lease, including the guarantee, and its practical effect were accurately explained to Mr Fleming junior by Mr Minter.
In terms of s 9(2)(j) of the Contracts Review Act it was submitted that undue influence was placed upon Mr Fleming junior by Mr Fleming senior.
I do not accept that submission. Mr Fleming junior was given the same advice as his father by Mr Minter and he made no complaint to Mr Minter that he was being forced to give a personal guarantee.
Mr Fleming junior was familiar with personal guarantees. He had entered into personal guarantees prior to this transaction. That prior conduct weighs against the guarantee being unjust in terms of s 9(2)(k) of the Contracts Review Act.
And, in terms of s 9(2)(l) of the Contracts Review Act, the purpose and effect of the guarantee was to provide security to the lessor who should not be required to run the risk of non-performance by the lessee without security.
In CIT Credit Pty Ltd v Blayn Norman Keable [2006] NSWCA 130; (2006) Aust Contract R 90-243 at [42] Spigelman CJ with whom Giles JA and Gzell J agreed said this:
"The obtaining of guarantees from directors is a common transaction in Australian commercial practice. It is a product of the combined effect of limited liability and of tax incentives to incorporate small businesses or to operate through family trusts with corporate trustees. The general nature of what a guarantee entails is part of the usual knowledge of the overwhelming majority of persons who become company directors, particularly since the removal of the requirement that all companies must have two directors."
In weighing up those features suggestive of an unjust contract against those features suggesting to the contrary, I am of the view that the inclusion of a personal guarantee in the lease was not unjust.
The giving of guarantees by directors is a common practice in the commercial world. Mr Fleming junior knew this and had a detailed knowledge of guarantees, having entered into them in the past. He approached the meeting of 1 September 2004 believing he might be asked to give a personal guarantee and before settlement Mr Minter explained in detail the effect of the guarantees in the document.
Claim by Padstow
As the lease contained effective personal guarantees Padstow's claim for enforcement against Mr Fleming junior succeeds.
The claim against Mr Fleming senior was settled and no order is appropriate.
Claim against Mr O'Brien
As I have found that the lease contained an effective personal guarantee by Mr Fleming junior, it follows that the claim by Padstow against Mr O'Brien should be dismissed. There was no breach of contract or breach of duty by Mr O'Brien in drawing the lease as it effectively created a personal guarantee by Mr Fleming junior.
First cross-claim
By his second further amended cross-claim Mr Fleming senior sought relief against Fleming Moynihan & Kay, Mr Fleming junior, Alan Maurice Sher and Mr Kay.
A notice of discontinuance was filed under which Mr Fleming senior discontinued the first cross-claim against Fleming Moynihan & Kay and Mr Kay.
The claims against Mr Fleming junior and Mr Sher were for breach of contract and against Mr Fleming junior there was an alternative claim for equitable contribution if the claim by Padstow succeeded against Mr Fleming senior.
Mr Fleming senior settled the proceedings against Mr Sher and proceeded with the claim for damages for breach of contract against Mr Fleming junior.
Mr Fleming senior accepted that as a result of the terms of settlement with Padstow, he was not entitled to contribution from Mr Fleming junior.
Mr Sher had acquired half the shares in Hamola. The remaining shares were transferred to Mr Fleming junior by Mr Fleming senior as a succession plan.
The share sale agreement was executed on 4 July 2006 by Mr Fleming senior, Mr Fleming junior, Mr Sher, Hamola and Webbing and Trimming (NZ) Limited. Mr Fleming senior transferred his 60% interest in Hamola to Mr Fleming junior and Mr Sher equally. And he transferred his shares in Webbing and Trimming to Mr Fleming junior and Mr Sher equally.
Prior to the execution of the share sale agreement, Mr Fleming senior had told Mr Fleming junior and Mr Sher that he was ready to retire and would give them both equal shares in the business for nothing as long as he had no further responsibilities in the business and he said he needed to be released from all liabilities and "off" the guarantees.
In the agreement Mr Fleming senior was referred to as the transferor, Mr Fleming junior as the first transferee, Mr Sher as the second transferee and Hamola as the company.
Clause 6.5 of the share sale agreement, so far as is material, was in the following terms:
"The First and second transferee's (sic) agree to ensure the Transferor is removed from all current guarantees signed by him in his capacity as a director of the company ... including, but not limited to: ...f) any guarantees provided in relation to rent of the premises for the Company ..."
Mr Fleming junior reviewed a draft of the share sale agreement on 30 April 2006 when he read cl 6.5. It did not change and was in the same terms as in the executed document.
Clause 11 of the agreement provided that it constituted the entire agreement of the parties. The share sale agreement also contained as cl 9.1 the following:
"The parties shall, on the request of any party, do all things necessary and execute such documents and do all such acts, matters and things as are necessary or desirable in order to implement and give full effect to the provisions and purposes of this agreement."
What was required of Mr Fleming junior under cl 6.5 of the share sale agreement was to use all reasonable endeavours to ensure that Mr Fleming senior ceased to have any liability under any guarantee that he had provided in relation to the rent payable by Hamola under the lease amongst other guarantees.
One way in which that could have been achieved was with the consent of Padstow. Another way in which it could have been achieved was to provide the security bond.
An obligation to use all reasonable endeavours requires the promisor "to do all he reasonably can in the circumstances to achieve the contractual object" ( Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at [24]; 64).
In this case, that obligation was supplemented by cl 9.1 of the share sale agreement.
It was submitted that Hamola was not in a position to arrange for the payment of the security bond. It was not earning sufficient revenue.
But there were other means of achieving the result. Mr Fleming junior could have approached Padstow to replace Mr Fleming senior by some other person. The evidence was that Padstow would have been amenable to such an approach. But Mr Fleming junior did not approach Padstow. He did nothing.
In his affidavit, Mr Fleming junior said nothing about attempts made to honour cl 6.5 of the share sale agreement. What he said was that his understanding of the share sale agreement at the time he signed it was that he could not release Mr Fleming senior from any guarantees provided in relation to rent of the premises for the company "because he believed Mr Fleming senior had not provided any guarantees in relation to the rent or lease of Hamola."
For the reasons set out above with respect to Mr Minter's advice to Mr Fleming junior on 1 September 2004 and the absence of any suggestion that that advice was altered prior to 4 July 2006, Mr Fleming junior's stated understanding is erroneous.
Furthermore, to the curious email of 3 May 2006 from Mr Fleming junior to Mr Crofts asking for confirmation that he did not have a personal guarantee there came an immediate response from Mr Crofts: "Both you and your father have offered personal guarantees."
Mr Fleming junior said he spoke with his father after this exchange of emails saying to his father that Mr Crofts said that they signed personal guarantees. Mr Fleming junior said that his father responded that they may have, but if Mr Fleming junior paid $150,000 there would be no guarantee.
In late May 2006, Mr Fleming junior said that he told his father that when he signed the lease his father told him that he was only signing as a director to which he said that his father replied that may be he was wrong.
Mr Fleming senior denied this conversation. If it did occur it contradicts Mr Fleming junior's stated belief at the time he executed the share sale agreement.
Finally, there was an email from Mr Crofts to Mr Fleming junior on 20 June 2006 which spoke about the possibility of exercising the guarantees:
"I have to report to investors again this week and if I can give them 30 June as a firm date I believe I can stop legal action (ie - imposing personal guarantees)."
When taken to this evidence Mr Fleming junior persisted in the statement that he knew Mr Fleming senior was not a guarantor when he signed the share sale agreement.
His evidence of belief is inconsistent with the contemporaneous documents and I reject it.
Geoffrey Paul Bartels, solicitor, was retained by Hamola at the instance of Mr Fleming junior and Mr Sher.
Any belief Mr Fleming junior said he held that he and his father were not guarantors was dispelled when Mr Bartels, in August and September 2006, advised him that he and his father were both guarantors under the lease.
By 6 September 2006, Mr Fleming junior had had several conversations with Mr Crofts on his being removed as a guarantor. In his email of 6 September 2006, Mr Crofts referred to this. He said:
"I appreciate all is up to date to 31 August but if you still want to be removed as personal guarantees on lease we probably need to show 3-6 months of payments on time."
Mr Fleming junior was given the opportunity in cross-examination to say what he had done in discharge of cl 6.5 of the share sale agreement. He maintained that there was no obligation to be discharged and apart from several conversations with Mr Crofts he did nothing.
Mr Fleming junior made no attempt to ensure that his father as opposed to himself ceased to be liable under the guarantee. Mr Crofts agreed that Mr Fleming junior never put a proposal whereby Mr Fleming senior alone would be released as a guarantor.
Mr Crofts said that in 2006 and 2007 Padstow was agreeable to removing the personal guarantees of Mr Fleming senior and Mr Fleming junior if Hamola or its directors provided alternative security.
Padstow had its solicitors draw up a proposed variation of lease that would have removed Mr Fleming junior as a guarantor in exchange for a six-month bank guarantee. Mr Crofts was of the view that a bank guarantee would improve the saleability of the property.
Mr Crofts said that if Padstow had been asked to delete Mr Fleming senior as a guarantor as part of the proposed variation of the lease it would have agreed to do so.
In these circumstances Mr Fleming junior was in breach of cl 6.5 of the share sale agreement and Mr Fleming senior is entitled to damages from him for his lost opportunity under the first cross-claim.
Second cross-claim
By a further amended statement of cross-claim, Mr Fleming junior sought relief against Mr Fleming senior pursuant to s 72 of the Fair Trading Act 1987 for misleading or deceptive conduct in contravention of s 42 by an alleged representation at settlement that Mr Fleming junior was not signing a personal guarantee but was signing as a director of Hamola. Mr Fleming junior also sought damages for negligence and an indemnity or contribution in respect of any damages Mr Fleming junior becomes liable to pay.
Notwithstanding the amendments to the Fair Trading Act by the Fair Trading Amendment (Australian Consumer Law) Act 2010, the former Act as in force prior to 1 January 2001 continues to operate in relation to acts or omissions which occurred prior to that date. ( Fair Trading Act , sch 5, cl 16(1)(a)).
It was submitted that conduct in relation to the entry into a lease by a company falls within the description of conduct in trade or commerce.
But if there was a misrepresentation as Mr Fleming junior claims it was not causative of any loss. It was superseded by Mr Minter's advice. And there is difficulty in determining precisely what Mr Fleming senior said. The passage from Mr Fleming senior's evidence set out earlier in these reasons appears to be his evidence at its highest and it defers to what Mr Minter might say. That portion of the second cross-claim must fail.
Mr Fleming junior alleged that at the time of signing the lease he said that Hamola would never be able to pay the amount of rent. It was too much. To which Mr Fleming senior responded: "Well, that is the price Darren Kay wants, calculated on the sale price."
No such statement was made on 1 September 2004. Mr Fleming junior had complained about the rent at an earlier meeting and nothing had changed between then and the signing of the lease.
Mr Fleming junior said he did not read the lease before signing it. But he did see the rent and he did read it to that extent. It was the same figure to which he had objected at the earlier meeting but he made no objection to it when signing the lease.
In any event, by signing the lease without reading it Mr Fleming junior represented that he had read and approved the contents of the lease or was willing to take the chance of being bound by those contents ( Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [45]; 180-181; Fitzgerald v Watson [2011] NSWSC 736 at [15]-[16]).
Mr Fleming junior's evidence of what happened on 1 September 2004 is not corroborated by any witness, contemporaneous document, or the apparent logic of the events.
It was submitted that Mr Bartels corroborated his evidence because he said that Mr Fleming junior told him that he had not signed as a guarantor and had not been told that he was a guarantor.
That simply establishes that Mr Fleming junior was consistent in his account of the events, not that his account was true.
Mr Fleming junior not only said he saw the rent figure in the lease he also saw his name in printed form. Both of those writings appear on the guarantee page and the printed name of Mr Fleming junior is within a few millimetres of the words "The guarantor" and the words "The Guarantors."
If Mr Fleming junior thought he had been tricked by his father he would have done something after he received Mr Crofts' email in June 2006. But he did nothing. He did not seek advice from Mr Bartels or Mr Minter. He was told by Mr Bartels in August 2006 that there was a personal guarantee and in September 2006 he sought to be removed as a guarantee in conversation with Mr Crofts.
Mr Fleming junior's negligence claim against Mr Fleming senior is based upon an alleged failure to warn Mr Fleming junior of the existence of the personal guarantee in the lease and a failure to either advise Mr Fleming junior about the provision in the lease by which the guarantee could be avoided if a security bond was provided, or Mr Fleming senior's failure to arrange for payment of the security bond.
It is questionable whether Mr Fleming senior owed any duty of care to Mr Fleming junior. Mr Fleming junior was experienced in business and was an employee, director and shareholder of Hamola. Mr Fleming junior was perfectly able to read the lease for himself.
Features of the special relationship in which the law will import a duty of care in utterance by way of information or advice were restated by Brennan J in San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 [1986] HCA 68; (1986) 162 CLR 340 at 372, cited with approval in Tepko Pty Ltd v Water Board [2001] HCA 19; (2001) 206 CLR 1 at [47]; 16-17.
What militates against the duty of care in this case is that Mr Fleming senior had no expertise or special competence to advise Mr Fleming junior about the legal effect of the lease and his son knew that. Mr Fleming junior was able to read the lease for himself and draw his own conclusions and a solicitor was present and able to give advice to both him and Mr Fleming senior as to what the lease meant.
It would have been unreasonable for Mr Fleming junior to rely on what his father told him rather than to ask Mr Minter.
Furthermore, both Mr Fleming senior and Mr Fleming junior were directors of Hamola owing duties to the company to exercise their own judgment and to inform themselves about the terms of the transaction to which they were committing the company.
But it follows from my findings that Mr Minter at settlement advised Mr Fleming junior that he was about to give a personal guarantee and that he would be released from the guarantee if the security bond was given that any failure on Mr Fleming senior's part was not causative of any loss or damage.
Mr Fleming junior's suggestion that nobody told him about the personal guarantees and their suspension is illogical. Mr Fleming senior was to retire from the business and obtain a withdrawal of his personal guarantee. To keep secret the fact that the lease contained personal guarantees but it also contained a mechanism for their suspension would be contrary to his interests.
Mr Fleming junior and Mr Fleming senior had offices only metres apart. They saw each other almost every day. They both had put their own homes as security for the company's overdraft with St George Bank. Their wives were guarantors of the overdraft. The proposition, in that context, that the father tricked the son into signing a guarantee, a guarantee that the father was assuming as well, is inherently unlikely.
I find that Mr Fleming senior did inform his son about the proposed guarantee and the need to lodge a security bond to take advantage of the mechanism that Mr Minter had negotiated.
It was no part of Mr Fleming senior's obligations to arrange for payment of the security bond. That was the responsibility of Mr Fleming junior and Mr Sher under the share sale agreement, cl 6.5.
Mr Fleming junior's negligence claim fails.
So far as his claim to equitable contribution is concerned, the reference to the Law Reform (Miscellaneous Provisions) Act 1946, s 5 as a basis for contribution is misconceived because neither Mr Fleming junior nor Mr Fleming senior are said to be liable to Padstow as a result of a tort.
A party has no equity to receive contribution from a co-surety unless he has paid or proves that he is willing and able to pay his own share of the principal debt ( Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 at [60]; 154 approving what had been said by Needham J in Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242 at 245).
Mr Fleming junior has no assets and unless and until he pays or proves he is willing and able to pay in excess of 50% of the amount owing to Padstow he is not entitled to equitable contribution from Mr Fleming senior.
Mr Fleming junior prevaricated. He would not answer a question directly. He answered the question whether he had any ability to satisfy any part of a judgment in favour of Padstow by repeating the statement that he had no assets:
"Q: What are your personal assets?
A: I don't have any personal assets.
Q: You don't have any?
A: No.
Q: Nothing: is that right?
A: I have no assets.
Q: Is it your evidence that if judgment was given in favour of Padstow against you you would have no ability whatsoever to satisfy any part of that judgment?
A: I have no assets.
Q: Is it your evidence that you would have no ability to satisfy any part of the judgment in favour of Padstow in these proceedings?
A: I have no assets.
Q: So is that yes?
A: I have no assets. That's what I said."
I infer that not only did Mr Fleming junior have no assets, he had no ability to satisfy any part of a judgment in favour of Padstow. His claim to equitable contribution fails.
The second cross-claim fails.
Third cross-claim
The third cross-claim by which Mr Sher brought claims against Mr Fleming senior for misleading conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) and/or s 42 of the Fair Trading Act and for an order varying a contract under s 7 of the Contracts Review Act was discontinued upon settlement between Mr Sher and Mr Fleming senior.
Fourth cross-claim
By the fourth cross-claim Mr Fleming junior claimed that Mr Minter negligently and in breach of a duty of care owed to him failed to advise him of the nature or the effect of the guarantee provisions of the lease as they related to him.
I have found that Mr Minter did explain the terms of the lease including the provisions in relation to the personal guarantees to Mr Fleming junior and his fourth cross-claim must fail.
Damages
I will set the issue of damages down for hearing before me at a time suitable to the parties. Upon their determination, I will hear the parties on the terms of orders to be made and I will hear the parties on costs.
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Decision last updated: 16 December 2011
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