Starrs v Commonwealth Bank of Australia

[2013] SASCFC 94

SUPREME COURT OF SOUTH AUSTRALIA

(Full Court)

STARRS & ANOR v COMMONWEALTH BANK OF AUSTRALIA

[2013] SASCFC 94

Judgment of The Full Court

(The Honourable Chief Justice Kourakis, The Honourable Justice Kelly and The Honourable Justice Stanley)

17 September 2013

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS

GUARANTEE AND INDEMNITY - THE CONTRACT OF GUARANTEE - CONSTRUCTION AND EFFECT - GENERALLY

BANKING AND FINANCE - INSTRUMENTS - LOAN FACILITIES

This is an appeal against a judgment in the sum of $2,387,976.48 for the respondent (the Commonwealth Bank of Australia) against the appellants (Dr and Mrs Starrs) on guarantees given by them.

The guarantees given by Dr and Mrs Starrs were identical in their terms and secured a credit contract pursuant to which the Commonwealth Bank provided an overdraft facility to a company known at that time as Seniors Care Services Pty Ltd (Seniors). The purpose of the overdraft facility was to acquire and operate the distressed business of Truscott’s Pty Ltd, then in receivership. The guarantees were secured, inter alia, by a mortgage in registrable form given by Dr and Mrs Starrs over a property situated on Jeffcott Street, North Adelaide.  The Commonwealth Bank did not lodge the Jeffcott Street mortgage for registration until nearly two years after the overdraft facility was made.

It is not disputed that Seniors failed to discharge its indebtedness to the Commonwealth Bank.  On appeal, Dr and Mrs Starrs contend that the guarantees are not effective and that their liability under the guarantees never arose because of the failure of the Commonwealth Bank to register the Jeffcott Street mortgage at the time that the overdraft facility was first made available to Seniors.

Held (Kourakis CJ, Kelly & Stanley JJ agreeing):

(1) The overdraft facility was made available pursuant to the credit contract which was guaranteed by Dr and Mrs Starrs despite the failure to register the Jeffcott Street mortgage.

(2) The clause in the guarantees which expressly provides that Dr and Mrs Starrs’ liabilities are not affected by any failure on the part of the Commonwealth Bank to register any security or to effectively secure any other guarantee applies to the Jeffcott Street mortgage.

(3) The failure of the Commonwealth Bank to register the Jeffcott Street mortgage  did not excuse Dr and Mrs Starrs from their obligations under their respective guarantees.

(4) Appeal dismissed.

Chambers v Rankine [1910] SALR 73; Greer v Kettle [1938] AC 156, discussed.

STARRS & ANOR v COMMONWEALTH BANK OF AUSTRALIA
[2013] SASCFC 94

Full Court:  Kourakis CJ, Kelly and Stanley JJ

1. KOURAKIS CJ:  This is an appeal against the judgment in the sum of $2,387,976.48 given by a Judge of this Court for the respondent (the Commonwealth Bank) against the appellants (Dr and Mrs Starrs) on guarantees given by them on 27 November 2006 (the guarantees).

2. The guarantees of Dr and Mrs Starrs were identical in their terms and were given to secure a credit contract pursuant to which the Commonwealth Bank provided an overdraft facility to a company known at the time as Seniors Care Services Pty Ltd, but which later changed its name to Starrs & Co Pty Ltd.  I will refer to the company as Seniors.  The purpose of the overdraft facility was to acquire and operate the distressed business of Truscotts Pty Ltd, which was then in receivership.  It was a condition of the credit contract that Seniors procure guarantees from Dr and Mrs Starrs secured by a registered mortgage over a property owned by them in Jeffcott Street, North Adelaide (the Jeffcott Street mortgage and Jeffcott Street property respectively).  Dr and Mrs Starrs gave the guarantees and provided a mortgage over the Jeffcott Street property in a registrable form.

3. The money was advanced to Seniors’ overdraft facility in November 2006 so that it could settle on the purchase of the Truscott business.  The terms and conditions of the financial facility were varied on two subsequent occasions (the variation agreements).  The variation agreements amended the structure, monetary limits and security schedules of the overdraft facility.  The guarantees were also varied but the terms of the variations are not presently material.   

4. It is common ground that the issue on this appeal can be determined by reference to the terms of the original guarantees.

5. It is not disputed that Seniors failed to discharge its indebtedness to the Commonwealth Bank.  The issue on appeal is whether the guarantees given by Dr and Mrs Starrs are effective and whether Dr and Mrs Starrs ever became liable under the guarantees because of the failure of the Commonwealth Bank to register the Jeffcott Street mortgage at the time that the overdraft facility was first made available to Seniors.  The Jeffcott Street mortgage was not lodged for registration until 10 August 2009.

6. Even though it has no significance to the legal issue in dispute on this appeal, I record that as a result of the Commonwealth Bank’s failure to register the mortgage on the Jeffcott Street property expeditiously, another of Seniors’ creditors, Leader Computers, lodged a caveat over the Jeffcott Street property for a debt of $200,000 about a month before the registration of the Commonwealth Bank’s mortgage.  The Commonwealth Bank negotiated a payment to Leader Computers of about one half of the debt it had caveated in exchange for the withdrawal of the caveat.  The Commonwealth Bank initially made a claim against Dr and Mrs Starrs for the amount paid to Leader but that claim was withdrawn during the course of the trial.  Accordingly, the judgment sum against Dr and Mrs Starrs does not include that amount.

7. In my view, the overdraft facility was provided pursuant to the credit contract notwithstanding the failure of the Commonwealth Bank to register the Jeffcott Street mortgage.  I would also hold that the failure of the Commonwealth Bank to register the Jeffcott Street mortgage did not excuse Dr and Mrs Starrs from their obligations under their respective guarantees because clause 10 of the guarantees, which expressly provides that their liabilities are not affected by any failure on the part of the Commonwealth Bank to register any security or to effectively secure any other guarantee, applies to the Jeffcott Street mortgage.  My reasons for so holding follow.

   The overdraft facility and the guarantees

8. By letter dated 22 November 2006 the Commonwealth Bank offered Seniors an overdraft facility with a limit of $3 million.  The acceptance of the offer (the acceptance document), returned several days later, acknowledged that the offer was made in accordance with, and subject to, the particulars contained in the attached “terms schedule” and “security schedule”.  The security schedule provided:

   Security is to be to the Bank’s satisfaction and is to comprise:

   ·A Registered Equitable Mortgage by Seniors Care Services Pty Ltd ACN 057 365 090 as trustee for Chris Starrs Family Trust 2 over the whole of its asset(s) and undertaking(s) including uncalled capital.

   ·A Guarantee limited to $3,000,000.00 by Janine Ruth Starrs supported by:

   -    A Second Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over residential property situated at 123 Jeffcott St North Adelaide SA 5008

   -    A First Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over commercial property situated at 3-5 Dudley St Semaphore Park SA 5019

   ·A Guarantee limited to $3,000,000.00 by Christopher Damien Starrs supported by:

   -    A Second Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over residential property situated at 123 Jeffcott St North Adelaide SA 5008

   -    A First Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over commercial property situated at 3-5 Dudley St Semaphore Park SA 5019

   -    A First Registered Mortgage by Christopher Damien Starrs over residential property situated at 32 Northcote Tce Gilberton SA 5081

9. The guarantees comprise a covering page, six pages of terms, and an execution page.  The covering page of each of the deeds of guarantee identifies Mrs Starrs and Dr Starrs respectively as the guarantors and Seniors Care Services Pty Ltd as the borrower.

10. The cover sheet sets out the following primary terms of the guarantee:

    Amounts secured by this guarantee –

    All amounts OWING by the BORROWER under the GUARANTEED AGREEMENT to which this guarantee initially applies and every future CREDIT CONTRACT between us and the BORROWER …

    The Guarantee Agreement –

    “the credit contract resulting from the BORROWERS acceptance of our offer dated 22.11.2006 for credit of $3,000,000”.

    Supporting Security –

    Registered mortgage over the property situated at 123 JEFFCOTT STREET NORTH ADELAIDE SA 5008 by JANINE RUTH STARRS and CHRISTOPHER DAMIEN STARRS.

    Registered mortgage over the property situated at 3-5 DUDLEY STREET SEMAPHORE PARK SA 5019 by JANINE RUTH STARRS and CHRISTOPHER DAMIEN STARRS.

11. Both Dr and Mrs Starrs provided a mortgage over the Jeffcott Street property in registrable form but as I have already observed the Commonwealth Bank did not immediately register it.  The appellants contend that as a result their liability under the guarantees never arose.  They rely on a line of authorities which shows that a guarantee may be conditioned on the lender taking other additional security for the loan with the consequence that the guarantor’s liability is not enlivened unless the security is effectively taken.

12. In Chambers v Rankine,[1] the borrower entered into an agreement with the lender to provide an advance to be secured by the delivery of certain chattels by the borrower and by four guarantees.  The borrower defaulted never having delivered the chattels.  The lender brought proceedings against one of the guarantors.  Way CJ, with whom Homburg J agreed, held that, in the circumstances of that case, the provisions contained in the loan agreement, including the provision for the delivery of chattels as security, were incorporated into the guarantee.  Way CJ held that the failure of the borrower to deliver the chattels had the effect that “no liability ever attached to the” guarantor:

    By it she stated the terms on which the loan was to be made, and she declared that the borrower had upon the execution of the agreement delivered to the lender the said chattels by way of pledge.  Before paying over the £700 it was her duty to have received possession of the chattels as the contract declared she had done.  Instead of that she never obtained actual or constructive delivery of the bulk of the security.

    … [i]n this case the terms of the contract are decisive.  There was a representation in the contract itself that the plaintiff was in actual possession of the pledge to be given.  The agreement states— “The borrower has upon the execution hereof delivered to the lender the said chattels by way of pledge.”  That was a representation by Mrs Chambers, but it was more—it was a condition of the contract, a condition precedent to the defendant’s liability.

    The surety’s liability in this case, as in that, never attached, not because Mrs Chambers released or transferred part of the security, as in Polak v Everett, or Holme v Brunskill, but because the security, which was a condition precedent of the guarantee coming into force, was never taken.  …

    … [i]t seems to me clear beyond doubt that the security which was to be taken as a condition precedent to the guarantee coming into force never was taken, and that no liability under the guarantee ever attached.

    [1] [1910] SALR 73.

13. In Greer v Kettle,[2] the corporate borrower agreed to repay an advance with interest and to charge certain specified shares in another company as security.  A guarantee was procured from another company, Parent Trust.  The deed of guarantee recited that the lender had made the advance to the borrower “on the security of a charge dated March 1929 on the shares, particulars of which are set out in the schedule hereto”.  The House of Lords held that Parent Trust had never become liable under the guarantee because a charge was never given over the shares.  Lord Killowen explained:[3]

    … the legal rights and liabilities of these parties depend upon the true construction and effect of the agreement of guarantee …

    Once it is realized that the debt which Parent Trust are undertaking to guarantee is a debt described as a debt the repayment of which by the principal debtor is secured by a charge on (amongst other shares) the 275,000 shares in Iron Industries, Ld, the case (apart from the question of estoppel, to which I will refer) becomes in my opinion a simple one. …

    It is not a case, as Bennett J seems to have treated it, of seeking to imply a condition, the implication of which is alleged to be inconsistent with other provisions in the document.  In other words, as Romer LJ said, it is not a case of Parent Trust being released from a contractual engagement.  It is a case of an attempt to impose upon them a liability which they have never undertaken.  The only debt, the repayment of which by the principal debtor they undertook to guarantee, was a debt secured by a charge on the 275,000 shares in Iron Industries, Ld, and a debt so secured never in fact existed.  The language of Knight Bruce LJ in Evans v Bremridge (i) may well be applied to the present litigants.  In that case it was sought to make a surety liable who became a surety on the footing that a co-surety would join in the covenant with him.  The co-surety had not done so, and the surety was held to be under no liability.  As the Lord Justice truly said: “The defendants seek to charge the plaintiff with “a contract, into which he did not enter.”

    [2] [1938] AC 156.

    [3] Ibid, 164-165.

14. The credit contract made on the acceptance of the Commonwealth Bank offer had stipulated for secured guarantees from both Dr and Mrs Starrs.  Dr and Mrs Starrs each guaranteed the debt due under the credit contract on the basis that the other would also provide an effective guarantee of that debt.  Therefore, I proceed on the basis that it was a condition of each of the guarantees given by the appellants that the other had also provided a guarantee secured by the mortgages referred to in the acceptance document.  To use the language of Lord Killowen, the debt which each of the appellants guaranteed was a debt secured not just by his or her guarantee but also by the guarantee of the other.  A debt guaranteed by multiple guarantors is different from a debt guaranteed by one alone because of the rights of contribution as between the guarantors.  If, in this case, Dr Starrs had provided a guarantee and Mrs Starrs had not provided any guarantee, or alternatively, if Mrs Starrs had provided a guarantee but had not executed the contemplated security, it would have been arguable that the advance made by the Commonwealth Bank was not the advance contemplated in the guarantee given by Dr Starrs.

15. The extension of that principle to a case like this, in which the same security is required from both guarantors, is doubtful.  The rationale of the principle is that one guarantor should not be left with a greater financial exposure and risk than he or she bargained for because another independent security for the debt is not taken.  That rationale is not as obviously applicable when the security, which the lender fails to procure effectively, is over a common asset of both guarantors.

16. However, it is not necessary to determine that question on this appeal because, as is apparent from the authorities just discussed, the issue is ultimately one of construction of the terms of the guarantees.  The liability of a guarantor must be determined in accordance with the terms on which his or her promise is given.  It is of course open to the guarantors to agree that they will be liable notwithstanding the lender’s failure to obtain any other security which was contemplated at the time the guarantee was given.  The Commonwealth Bank contends that clause 10 of the guarantees has that effect.  It provides:

    Our rights are protected

    10.1Our rights and your liabilities under this guarantee are not affected by any act or failure to act by us or by anything else that might otherwise affect our rights or your liabilities under law relating to guarantees, including:

    (a)     the fact that we vary the GUARANTEED AGREEMENT;

    (b)     the fact that we give the BORROWER a concession, for example, more time to pay;

    (c)     the fact that we release, lose the benefit of or do not obtain any SECURITY or other guarantee;

    (d)     the fact that we do not register any SECURITY which could be registered;

    (e)     the fact that we release any PERSON who guarantees the BORROWER’S obligations under a GUARANTEED AGREEMENT;

    (f)    the fact that the obligations of any PERSON who guarantees the BORROWER’S obligations under a GUARANTEED AGREEMENT may not be enforceable;

    (g)     the fact that any PERSON who was intended to guarantee (either in this guarantee or under another guarantee) the BORROWER’S obligations under a GUARANTEED AGREEMENT does not do so or does not do so effectively; or

    (h)     the death, mental or physical disability or INSOLVENCY of any PERSON including you or the BORROWER.

    …

17. Security is defined to mean:

    A mortgage, charge or other security for the BORROWERS obligations under the GUARANTEED AGREEMENT or for your obligations under this guarantee.

18. The intended purpose of clause 10.1 of the guarantees is to relieve the Commonwealth Bank of the consequences of dealing with its other securities in a way which adversely affects the position of the appellants as guarantors.  Clause 10.1(d) of the guarantees governs the circumstances of this case because the definition of security includes a security provided for the guarantor’s obligation with respect to each of the guarantees of Dr and Mrs Starrs.  The Jeffcott Street mortgage was such a security, even though it served as a security for both.   Even if the Jeffcott Street mortgage cannot be treated as a security for the purpose of clause 10.1(d), because it is common to both guarantees, the failure to register it comes within the terms of clause 10.1(g) of the guarantees.  To put it in another way, in the claim against Dr Starrs on his guarantee, the failure to register the Jeffcott Street mortgage is either, or both, a failure to register a security given by him which is excused by clause 10.1(d), or a failure to procure an effective guarantee from Mrs Starrs which is excused by clause 10.1(g).  The converse is also true in the claim against Mrs Starrs on her guarantee.

19. The appellants put an in limine contention that clause 10 of the guarantees has no application because the Commonwealth Bank on the one hand, and Dr and Mrs Starrs on the other, never entered into the “Guaranteed Agreement” as defined by the guarantees.  The appellants submit that the failure of the Commonwealth Bank to register the Jeffcott Street mortgage, or to procure its registration by Dr and Mrs Starrs, meant that the money was not advanced on a “credit contract resulting from the acceptance of the 22 November 2006 offer for credit of $3,000,000”.  The appellants submit that given the failure to register the Jeffcott Street mortgage the advance can only have been made under another contract, perhaps an oral or implied one.

20. That submission should be rejected.  The terms of the acceptance document, and in particular the opening paragraph together with the security schedule, impose an obligation on Seniors to provide executed guarantees in the form described in the security schedule, including the Jeffcott Street mortgage.  I would not construe the acceptance document so as to impose an obligation on Seniors to register the mortgage.  In the ordinary course, and as a matter of commercial and conveyancing practice in South Australia, the responsibility for registration rests with the mortgagee.  The obligation on Seniors was only to procure the Jeffcott Street mortgage in registrable form.  Nor would I construe the terms “registered mortgage” to impose an obligation on the Commonwealth Bank to register the mortgage, even though banks often do so in order to protect the value of their security.  On a proper construction, the terms of the “Guaranteed Agreement” and guarantees themselves gave the Commonwealth Bank the option to register the mortgage but did not impose an obligation to do so.  However, even if it be accepted that a contractual obligation had been imposed on Seniors, or the Commonwealth Bank, to register the Jeffcott Street mortgage, the failure to register it means no more than that one or other of Seniors, or the Commonwealth Bank, was in breach of that term.  It is another thing altogether to contend that the money was advanced by the Commonwealth Bank and received by Seniors, pursuant to some other contract.

1. A breach of a term of contract does not annihilate the contract.  It is precisely because of its subsistence that an action for breach can be brought.  Moreover, the process of registration is not instantaneous and I would not construe the terms of the offer and acceptance which comprise the “Guaranteed Agreement” as requiring registration of the Jeffcott Street mortgage prior to the Commonwealth Bank making the overdraft facility available to Seniors.  Objectively, the provision of the overdraft facility must be seen as an act of performance of the “Guaranteed Agreement” which was made on the acceptance of the Commonwealth Bank’s offer of 22 November 2006, and not as a manifestation of a different oral, or implied, contract.

2. It follows that the money was advanced to Seniors by the Commonwealth Bank pursuant to the acceptance of its 22 November 2006 offer and that Seniors has therefore defaulted on the “Guaranteed Agreement” as defined.

3. Indeed, the appellants did not expressly plead that the advance to Seniors was not made pursuant to the credit contract, performance of which they had guaranteed.  The appellants pleaded only that the failure to register the mortgage over the Jeffcott Street property, in a way which was not explicitly explained, meant that the guarantees did not “attach” and were “not binding”.

   Conclusion

4. I would dismiss the appeal.  I would hear the parties as to costs.

5. KELLY J:             I would dismiss the appeal.  I agree with the reasons of the Chief Justice.

6. STANLEY J:         I would dismiss the appeal.  I agree with the reasons of the Chief Justice.