Tebb v Filsee Pty Ltd; Tebb v KKV Pty Ltd
[2010] VSCA 311
•24 November 2010
SUPREME COURT OF VICTORIA
COURT OF APPEAL
| ROBERT TEBB | S APCI 2009 3818 |
| Appellant | |
| v | |
| FILSEE PTY LTD (ABN 11 084 496 239) and GATELL PTY LTD (ABN 17 084 496 202) | Respondents |
| and | |
| S APCI 2009 3819 | |
| ROBERT TEBB | Appellant |
| v | |
| KKV PTY LTD (ACN 075 355 145) and CARONVALE PTY LTD (ACN 074 605 897) | Respondents |
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| JUDGES | NETTLE, REDLICH and HARPER JJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 7 October 2010 |
| DATE OF JUDGMENT | 24 November 2010 |
| MEDIUM NEUTRAL CITATION | [2010] VSCA 311 |
| JUDGMENT APPEALED FROM | [2009] VCC 0791 (Judge Anderson) |
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GUARANTEES – Securities for obligations of lessee – Default by tenant in payment of rent and land tax – Failure to remedy breach – Repudiation and re-entry by landlord – Licence arrangement to permit tenant’s access to premises in return for immediate payment of a portion of arrears and land tax, resolution of the balance of indebtedness by payment of fees equal to the rent payable under terminated lease and reinstatement of bank guarantees – Failure to comply with all further conditions – Whether guarantees continued to apply or were discharged or extinguished on termination of the leases and grant of the licence – Whether by entry into the licence the landlords fully mitigated their loss such that the landlords’ damages were nil – Progressive Mailing House v Tabali (1984–1985) 157 CLR 17 distinguished – Koch Marine Inc v D’Amica Di Navigazione ARL [1980] 1 Lloyd’s Rep 75 and Luxer Holdings Pty Ltd v Glentham Pty Ltd (2007) 35 WAR 254 considered – Appeal dismissed.
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Appearances: | Counsel | Solicitors |
| For the Appellant | Mr V R W Gray | Somerset Ryckmans through their Melbourne agents Herman Partners Consulting Lawyers |
| For the Respondents | Mr M A Robins | Nathan Kuperholz |
NETTLE JA:
REDLICH JA:
We have had the advantage of reading in draft the reasons for judgment of Harper JA and we agree that the appeal should be dismissed. We wish to add only some observations as to the principal oral argument advanced by counsel for the appellant.
As is explained in Harper JA’s reasons, the respondents’ claim at first instance was for damages for breach of a lease dated 24 September 2004. By the lease, the respondents leased premises at Lot 1, Justin Road, Brooklyn to Precision Container Services Pty Ltd (‘Precision’) for a term of five years beginning on 6 September 2004. It was not in issue that Precision repudiated the lease or that, as a matter of principle, damages for repudiation of the lease were to be assessed in accordance with contractual principles.[1] What was in issue was whether and to what extent the damages were to be reduced to take account of the fact that, following repudiation and forfeiture of the lease, the respondents entered into a further agreement with Precision to licence the premises to Precision for a period corresponding to the remainder of the term of the forfeited lease.
[1]Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, 29–31, 55; Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105, 117–118; Nangus Pty Ltd v Charles Donovan Pty Ltd [1989] VR 184, 189.
If Precision had performed all of its obligations under the licence agreement, the return to the respondents would have been the same as if Precision had performed all of its obligation under the lease. In that event, the respondents would not have suffered any loss. In fact, however, Precision defaulted in the performance of the licence agreement and abandoned the premises. The premises were then vacant for some time while the respondents searched for a replacement tenant. It was not possible to find a replacement tenant willing to pay as much rent as was payable by Precision under the repudiated lease. Ultimately, therefore, the respondents relet the premises at a rent less than had been payable by Precision under the repudiated lease.
The damages for repudiation of the lease awarded at first instance were an amount equal to the rent which, but for termination of the repudiated lease, would have been payable by Precision under the repudiated lease, less so much as was paid by Precision by way of licence fees under the licence agreement, less the rent paid by the new tenant for the remainder of the term of the repudiated lease.
Counsel for the appellant argued that the method of calculation was erroneous. He contended that the method which should have been followed was the method used by Robert Goff J in Koch Marine Inc v D’Amica Societa Di Navigazione ARL[2] for the assessment of damages for breach of a time charter. According to counsel that meant that damages for repudiation of the lease should have been assessed on the assumption that Precision performed all of its obligations under the licence agreement. Thus, counsel said, damages should have been nil.
[2][1980] 1 Lloyd’s Rep 75.
In Koch Marine, the owners let their vessel (‘The Elena D’Amico’) to charterers for a period of three years from the date of delivery. The vessel was found to be defective and the charterers terminated the charter for breach, as they were entitled to do. There was, however, an available market for appropriate replacement vessels, and no reason to suppose that the charters could not have chartered a satisfactory replacement vessel in that market. Yet, for reasons of their own, the charterers chose not to do so and claimed damages for loss of profits referable to the whole of the period of the terminated charter.
Unsurprisingly, the claim was rejected. Robert Goff J held that where, at the time of termination of a time charter for breach, there is an available market for replacement vessels, damages for wrongful termination of the charter should generally be assessed on the basis of the difference between the contract rate for the balance of the charter period and the market rate for the chartering in of a replacement vessel for that period. It followed, in the circumstances of the case, that the loss of revenue consequent upon the termination of the time charter could not be visited upon the owners. It was the consequence of the charterers choosing not to charter in a substitute vessel for the remainder of the period of the charter.[3]
[3][1980] 1 Lloyds Rep 75, 89.
Counsel for the appellant argued that parity of reasoning dictated a similar result in this case. In his submission, where a lessor of land terminates the lease for breach, and at the time of termination there is an available market for replacement tenants, the lessor’s normal measure of recovery for wrongful termination of the lease should be the difference between the rent payable under the terminated lease and the rent obtainable in the market from a substitute tenant. Furthermore, in counsel’s submission, since Precision was prepared to and did enter into a licence agreement which required it to pay licence fees equal to the rent payable under the repudiated lease, it was apparent that there was market for replacement tenants at the right price. The rent obtainable in the market from a substitute tenant was the same as the rent payable under the terminated lease. It followed, counsel said, that the measure of recovery should be nil.
In our view, the argument is unsound. Damages for wrongful termination of a lease are calculated as at the date of termination. Thus, as counsel for the appellant contended, the normal measure of damages is the full amount of the rent for the whole of the term less such sum as the court estimates the lessor is likely to derive during the remainder of the term of the lease.[4] But where by the time of assessment facts have occurred which allow the court more accurately to determine what damage has been or will be suffered, the court will take those facts into account as part of the assessment. As Lord Macnaghten said in Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Company,[5] in relation to the assessment of compensation for compulsory acquisition of land:
Why should [the arbitrator] listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark? The mine owner prevented from working his minerals is to be fully compensated – the Act says so. That means that so far as money can compensate him he is to be placed in the position in which he would have been if he had been free to go on working. Here it has been proved to demonstration that if he had not been interfered with he would have made between 5000l. and 6000l. I cannot understand upon what principle it is maintained that he should be content with half, and that that half is full compensation.[6]
[4]Lamson Store Service Co Ltd v Russell (1906) 4 CLR 672, 684; Nangus Pty Ltd v Charles Donovan Pty Ltd [1989] VR 184, 189.
[5][1903] AC 426.
[6]Ibid 431.
That is a principle of general application. Thus, in Willis v The Commonwealth,[7] Latham CJ held in relation to the assessment of damages under Fatal Accidents Act legislation that:
… Damages are awarded for injury actually suffered and for prospective injury. Prospective injury can only be estimated with more or less probability. But where the extent and character of what would at one time be described as prospective injury depends upon the happening or non-happening of a particular event and that event has in fact happened, it is unnecessary to speculate as to whether or not this event might happen and, if so, when. In such a case prospective damage (or diminution of damage) has become actual...
[7](1946) 73 CLR 105, 109.
So, too, in the case of assessment of damages for loss of a chance to litigate, Wilson, Dawson, Toohey and Gaudron JJ said in Nikolaou v Papasavas Phillips & Co:[8]
…it is necessary to speak of the date when the cause of action against the solicitors arose rather than the notional date of trial of the action against the Incorporated Nominal Defendant because the damage flowing from the negligence of the solicitors crystallized at that date. What has to be assessed as at that date is the value of the claim which was lost by the negligence of the solicitors. In so far as that assessment has to pay regard to the injuries received by Mr. Nikolaou in the accident and their effect upon him, there is no reason why evidence relating to those matters, subject to their having been foreseeable as likely losses at the date when the cause of action against the solicitors arose, should be excluded by the trial judge…
[8](1989) 166 CLR 394, 403–4.
In Luxer Holdings Pty Ltd v Glentham Pty Ltd[9] Buss JA of the Western Australian Court of Appeal, with whom Wheeler JA agreed, applied those principles directly to the assessment of damages for wrongful termination of a lease of land, as follows:
The rule that a lessor's loss of bargain damages are ordinarily to be assessed as at the date of termination does not mean that evidence is excluded of events occurring after that date. Evidence of subsequent events which are relevant to the assessment process may be taken into account. For example, subsequent events may be relevant to the value of the lost bargain or whether the lessor has mitigated its damage or not. See Nangus at 189 and, more generally, Willis v The Commonwealth;[10] Johnson v Perez;[11] Nikolaou v Papasavas Phillips & Co[12]…
Also see, to similar effect, the speech of Lord Macnaghten in The Bwllfa & Merthyr Dare Steam Collieries(1891) Ltd v The Pontypridd Waterworks Co,[13] which was cited with approval in Nikolaou.[14] … In my opinion, the statements of principle which I have mentioned, from those authorities, are applicable to the assessment of damages for breach of contract (including loss of bargain damages).
With respect, we agree.
[9](2007) 35 WAR 254, 266 [35].
[10](1946) 73 CLR 105, 109 (Latham CJ).
[11](1988) 166 CLR 351, 368–369 (Wilson, Toohey and Gaudron JJ).
[12](1989) 166 CLR 394, 403–404 (Wilson, Dawson, Toohey and Gaudron JJ).
[13][1903] AC 426, 431.
[14]Ibid 404.
Nothing said by Robert Goff J in The Elena is opposed to that view. His Lordship’s statement that damages should generally be assessed on the basis of the difference between the contract rate for the balance of the charter period and the market rate for the chartering in of a replacement vessel for that period accords with the principle that, where all that is known are the facts as they were as at the date of termination, damages will be calculated in accordance with what is known as at that date, making such assumptions and drawing such inferences as to the future as are reasonably open. But where, by the time of assessment, further facts have occurred and are known, damages will be assessed in accordance with what is known as opposed to what might have been assumed to occur. Indeed, that is implicit in his Lordship’s further observation in The Elena that:
The second rule is the corollary of the first and that is that where the plaintiff does take reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong he can recover for loss incurred in so doing; this is so event although the resulting damage is in the event greater than it would have been had the mitigating steps not been taken. Put shortly, the plaintiff can recover for loss incurred in reasonable attempts to avoid the loss.[15]
[15][1980] 1 Lloyds Rep 75, 88.
In this case, it is not disputed that the respondents did their best to mitigate their loss by, entering into the licence agreement and, when that was terminated, reletting the premises for the best rent obtainable.
In the result, they were entitled to recover damages as assessed by the primary judge.
Conclusion
The appeal should be dismissed.
HARPER JA:
By a lease dated 24 September 2004, the respondents KKV Pty Ltd and Caronvale No 4 Pty Ltd leased the premises at Lot 1, Justin Road Brooklyn to Precision Container Services Pty Ltd for a period of five years commencing on 6 September that year. The commencing annual rent was $318,000.00, payable monthly in advance. On the same day, and by a lease of the same date, the respondents Filsee Pty Ltd and Gatell Pty Ltd leased the adjoining premises at Lot 4 Justin Road. Their tenant was also Precision Container Services Pty Ltd, and the period of the lease was again five years. In this case, however, the commencing annual rent was $232,000.00. Otherwise, the terms of each lease were relevantly identical.
Each lease was executed on behalf of the lessee by two directors: a man named Michael Duckworth, and the appellant Robert Tebb (who was also the company secretary). At about the same time, the two men entered into two separate deeds, each headed ‘Guarantee and Indemnity’. One of the deeds secures the lessee’s obligations under the lease of Lot 1 Justin Road, while the other has a similar function in relation to the lease of Lot 4. In each deed Messrs Tebb and Duckworth are described as the ‘guarantor’, while the lessors (being, as the case requires, either KKV Pty Ltd and Caronvale No 4 Pty Ltd or Filsee Pty Ltd and Gatell Pty Ltd) are
described as the ‘landlord’. Precision Container Services Pty Ltd is in each case referred to as the ‘tenant’.
Each deed contained the following presently relevant terms:
3. Guarantee
The guarantor irrevocably and unconditionally guarantees to the landlord:
(a)the due and punctual payment of all monies which the tenant must pay under the lease, including all monies which the tenant must pay due to any default; and
(b)the performance and observance of all terms and conditions of the lease by the tenant,
and if at any time the tenant defaults in the payment of any monies or compliance with any of the terms and conditions under the lease then the guarantor must on demand pay all monies payable by the tenant or comply with those terms and conditions or both.
4. Indemnity
As a separate and independent obligation from clause 3, the guarantor irrevocably and unconditionally indemnifies the landlord and will keep the landlord indemnified against all losses, damages, penalties, costs, charges and expenses which the landlord may incur or suffer because of:
(a)any default by the tenant in the payment of any monies under the lease;
(b)any default by the tenant in the performance and observance of any of the terms and conditions of the lease; and
(c)the landlord not being able to recover all of the monies from the tenant or enforce all of the tenant’s obligations under the lease for any reason,
whether or not the landlord or the guarantor knew or should have known about the circumstance that gives rise to a claim under this clause 4.
5. Joint and several liability
5.1 Jointly and severally
Where the guarantor consists of more than one person, the guarantor’s obligations in this guarantee and indemnity will bind all those persons jointly and severally.
5.2 Guarantee and indemnity binding
This guarantee and indemnity binds each of the persons who execute the guarantee and indemnity as a guarantor even if:
…;
(b)execution by one or more of those persons is or becomes … unenforceable.
5.3 Landlords’ rights
The landlord may enforce its rights under this guarantee and indemnity and proceed against any one or more of the persons named as guarantor in the manner, order and at the times the landlord determines in its discretion. The landlord is not required to enforce its rights or proceed against all the persons named as guarantor.
…
6. Guarantors’ liability not released
The guarantor’s liability under this guarantee and indemnity will not be affected by anything which would wholly or partly release or discharge the guarantor including but not limited to:
(a)the landlord giving to the tenant any time, concession, waiver or other indulgence or any surety for or in relation to the observance or performance of the tenant’s obligations;
(b)any variation being made to the terms and conditions of the lease or its subsequent termination, other than by due exercise by the tenant of its rights under the lease;
(c)any other security or contractual obligations to secure the tenant’s obligations being or not being taken, held, renewed, varied or enforced by the landlord or that security being void, defective, informal or unenforceable for any reason …;
(d)all or any of the tenant’s obligations being released or discharged other than by their due performance or observation under the lease;
(e)the … bankruptcy … of … any person named as guarantor;
(f)the landlord abandoning or transferring any right, compromising with or releasing the tenant or any person named as guarantor;
(g)…;
(h)anything done or omitted to be done by the landlord or by anything else which, under the law relating to sureties, might, but for this clause operate to wholly or partially release or discharge any of the guarantors from their liability …
By thus guaranteeing the performance by Precision Container Services of the terms of each lease, the appellant guaranteed, among other things: (a) the monthly payment of rent; (b) the provision of a security deposit of three months’ rent; (c) the reinstatement of that deposit (within five days of demand) should it be appropriated by the landlord; and (d) the payment of land tax levied in respect of the leased premises.
The tenant did default in payment of the rent and land tax under both leases. In each case, as a consequence, the landlords appropriated the security deposit. The tenant then defaulted again, this time in failing to effect a reinstatement. A notice of default was given by each set of landlords, but the tenant failed to remedy the breach. The appellant accepts that it thereby evinced an intention no longer to be bound by either lease. Each was, accordingly, repudiated; and on 10 May 2007 the landlords re-entered. Subject to the matters pleaded in his further amended defence and counterclaim, the appellant admits the quantum as at 22 June 2009 of the claim by the respondents KKV Pty Ltd and Caronvale No 4 Pty Ltd for loss and damage in the sum of $564,805.78; and he likewise admits the like claim of the respondents Filsee Pty Ltd and Gatell Pty Ltd in the sum of $279,131.17.
The re-entry of the landlords on 10 May was followed, on the same day, by an offer put by the appellant (or, more accurately, his personal assistant) on behalf of the tenant. The appellant, through her, suggested, that Precision Containers Services would pay a portion ($69,226.36) of the outstanding rent and land tax in return for the company’s immediate right of access to each tenancy.
The landlords were receptive. Through their jointly-engaged property managers, Mulcahy & Co., they informed the tenant that afternoon that they would permit the requested access, provided that the appellant met certain preconditions. First, that Mr Tebb signed a letter to the effect that ‘the offer of 69k will be in our [the property managers’] account today with bank confirmation’; secondly, that the balance of the tenant’s indebtedness (the exact amount of which was then in dispute) be resolved within seven days; and, thirdly, that the bank guarantees be reinstated within 14 days.
The tenant was unable to comply with the requirement that it provide the respondents with a letter signed by the appellant, because he was unavailable at the time it was prepared. When, therefore, it went out by facsimile later during the afternoon of 10 May, it was signed by his personal assistant. Perhaps taking advantage of this, Mulcahy & Co replied (the words in bold being reproduced in that form from the original):
We are in receipt of your fax dated 10th May 2007 @ 3.15PM.
We note your acceptance in your rent reconciliation that at least $109,883.68 is owing to the landlord.
The landlord is prepared to make the following arrangement:
1.If you pay $69,226.36 into our trust account today (with a copy of the bank confirmation being received by our office today); and
2. If you undertake in writing today:
(a)to pay into our trust account at least another $40,657.32 (being $109,883.68 – $69,226.36) with 7 days of today’s date;
(b)to seek in good faith to resolve the discrepancy between the amount that you accept that you owe and the amount claimed by the landlord and to pay into our trust account that part of the discrepancy which you do owe within 7 days of today’s date; and
(c)to reinstate the full amount of the bank guarantees required by two leases and provide those two bank guarantees to our office within 28 days of today’s date, as discussed between Chris Mulcahy and Michael Duckworth at 5:20 pm today;
3.Then the landlord will grant you a licence to access to the premises from the time of our receipt of the $69,226.36 provided that you comply with all of the tenant’s other obligations under the leases.
4.If you fail to comply with the terms of your undertaking or all of the tenant’s other obligations under the leases, then your licence to access the premises will be revokable immediately by the landlord and without further notice to you.
5.If you do comply with the terms of your undertaking and all of the tenant’s other obligations under the leases, then the landlord will allow you to re-enter the premises as the tenant under the leases.
The landlord requires your undertakings to be signed by Robert Tebb personally.
If a copy of this letter is signed by Robert Tebb and faxed to our office today, then this letter will no longer be ‘without prejudice’, but may instead be relied upon by both parties.
At the foot of the letter was an important addition. It was a single sentence headed ‘Agreement and Undertakings’, which read:
I, Robert Tebb, for and on behalf of Precision Container Services Pty Ltd, agree to the arrangement and give the undertakings set out in this letter.
The appellant’s signature appears below that sentence and opposite the date ‘10/05/2007’.
The tenant resumed occupation of the two properties in accordance with the arrangements thus negotiated. Indeed, it remained in possession for some months thereafter. But although the agreed sum of $69,226.36 was paid on 10 May, the bank guarantees were never forthcoming, and Precision Container Services failed to make the payments required of it. Accordingly, in separate proceedings issued in the County Court on 3 July 2008, and given the case identification numbers of, respectively, Cl 08-02646 and Cl-08-0247, the two sets of respondents claimed the now agreed quantum of loss and damage, being, respectively, the amounts of $564,805.78 and $279,131.17 made up of unpaid rent from 6 August 2007 to 14 April 2008 (the date on which a new tenant commenced paying rent), the shortfall from 15 April 2008 to the date on which the leases were due to terminate (5 September 2009), default interest, and other costs and charges as calculated to 22 June 2009.
Although the appellant admits that he not only guaranteed the performance and observation by the tenant of all its obligations under lease, including the due and punctual payment of all monies, but also promised to indemnify the landlords against ‘all losses, damages, penalties, costs, charges and expenses [which they] might incur or suffer because of the tenant’s default under the lease’,[16] he nevertheless maintains that the trial judge ought not to have given judgment against him. He contends that, because the leases had been terminated on 10 May 2007, his Honour was wrong to find that he (the appellant) was liable to the respondents under the guarantees. The licence which replaced them ‘applied and governed the rights and obligations as between the [respondents] and the [appellant], in substitution for and to the exclusion of the terms and conditions and covenants of the lease.’[17] Not only that, but the licence contained an implied term that upon its coming into operation, the respondents would not enforce their rights as landlords under either the relevant lease or the relevant deed of guarantee.[18]
[16]Statement of claim [3(c)].
[17]Further amended defence and counterclaim [28].
[18]Ibid [29].
As pleaded in his further amended defence and counterclaim, the appellant contends in the alternative that the obligations of Precision Container Services under the leases, and his own under the deeds of guarantee, were discharged or extinguished by, or were ‘merged into’ the licence, and accordingly are unenforceable against it or him.[19]
[19]Further amended defence and counterclaim [30]–[30A].
The appellant’s fellow guarantor, Michael Duckworth, did not appear at the trial because, in the words of his solicitors, ‘he will shortly be an undischarged bankrupt’. In these circumstances, his Honour held that his defence as pleaded must fail, since he could not discharge the onus (which was upon him) to prove the allegations there made.
As his Honour understood the issue in contention between the appellant and the respondents at the trial, it was whether the grant of the licence extinguished the appellant’s obligations under the deeds of guarantee. Having examined the terms of the deeds of guarantee as well as the contents of the 10 May 2007 correspondence, the judge concluded that the appellant remained liable under those deeds because (a) they did not relevantly limit the appellant’s liability, but rather contemplated its continuance in just such circumstances as those which in fact arose (that is, a variation in the terms of the leases, or their termination) and (b) in any event, the licence was revocable at the instance of the respondents unless Precision Container Services complied with all its obligations under the leases. The respondents’ entry into the 10 May licence agreement did not, therefore, discharge the company from its liability for damages resulting from its breaches of the leases. Nor, as his Honour further held, did it discharge ‘the obligation of the guarantors pursuant to their separate obligations of guarantee and indemnity.’[20] His Honour accordingly gave judgment against both the company and the appellant.
[20]Judgment [21.h].
There are four grounds of appeal. They are that his Honour erred in:
1.Failing to apply or correctly apply the relevant authorities to the facts and circumstances of the case.
2. Failing to give proper reasons for his judgment.
3.Holding that the appellant is liable to the respondents under a guarantee and indemnity … purportedly given in connection with a lease … between Precision Container Services Pty Ltd ( the ‘tenant’) and the respondents.
4.Not holding that the appellant’s defences were sufficient as a matter of law to warrant a judgment in the appellant’s favour and the dismissal of the respondents’ claims; to wit failing to hold that:
(a)The purported obligations of the tenant under the lease and of the appellant under the guarantee and indemnity, which may have existed as at the date of termination of the lease, were discharged or extinguished by the entry into a licence agreement by the tenant and the respondents on 10 May 2007 … or alternatively that the purported obligations of the tenant and the appellant merged into the licence, upon the entry into the licence by [the] tenant and the respondents.
(b)The appellant was released and discharged from any obligations arising under the guarantee and indemnity to the respondents and the respondents may not enforce the same.
(c)The appellant did not guarantee or indemnify the respondents in respect of any obligations of the tenant under the licence.
(d)By entering into the licence the respondents avoided any loss and damage arising by reason of the tenant’s breaches of the lease as alleged in the Statement of Claim and accordingly, have fully mitigated any loss and damage arising by reason of the tenant’s breaches of the lease as alleged in the Statement of Claim.
(e)The purported indemnity given by the appellant was not a true indemnity which was capable of enforcement against the appellant.
None of these grounds was abandoned. Nevertheless, the submissions put on behalf of the appellant were in effect limited to an argument that the appellant’s guarantees were extinguished by the respondents’ entry into the licence agreement.[21] Two reasons were put forward. First, the guarantee did not in its terms cover the circumstances which obtained after the licence agreement was made.[22] Or, to put the argument somewhat differently, the guarantees extended only to the obligations of the tenant under the lease, not to its obligations under the licence. Secondly, even if the guarantee did extend to cover the licence, by their entry into the licence agreement ‘the respondents avoided any loss and damage by reason of the tenant’s breaches of the lease as alleged in the statement of claim and accordingly have fully mitigated any loss and damage arising by reason of the tenant’s breaches of the lease as alleged in the statement of claim.’[23]
[21]Ground 4(a).
[22]Ground 4(c).
[23]Ground 4(d).
The first of these reasons must contend with the fact that by the guarantee the appellant irrevocably and unconditionally guaranteed the due and punctual payment of all monies payable by the tenant under the leases, and irrevocably and unconditionally indemnified the respondents against all losses which they might incur because of any default by the tenant. He also agreed, by giving the guarantee, that his liability would not be affected by anything which might otherwise release him from it.
In my opinion, the guarantees therefore operated to secure the respondents, in this way, against the tenant’s breaches of its obligations under the leases; and their operation was not affected by the entry into the licence agreement.
The second of the two reasons is, in my opinion, equally unsound. By their entry into the licence agreement, the respondents mitigated their loss by no more than the amounts actually paid to them thereafter by the appellant or the tenant. The appellant, however, argues that, having at the request of the tenant and its guarantor put themselves in a position from which the losses caused by the tenant might be rectified by that company, the respondents suffered no loss at all in the eyes of the law – or at least no loss recoverable under the lease the breach of which was the cause of the loss. The end result, according to the appellant, is that by acceding to the wishes of the party in breach of its obligations to them (that is, the wishes of the tenant), and by thus giving it the opportunity to remain in possession of the leasehold premises in return for a promise of rectification, the respondents suffered no loss as a result of those breaches – and this even though rectification was no more than partial. By some process which, according to the appellant, is recognised by the law (but surely not by commercial reality or common sense), any loss must be attributable solely to a breach of the licence agreement.
And (the argument continues) no guarantee covered a loss of that kind. The appellant may have been closely involved in the attempt by the tenant to obtain a favour from its landlords; but, the favour having been granted, that is no bar to him profiting from the tenant’s breach to the extent of being unwittingly released by the respondents from his obligations under the guarantees.
What the appellant describes in his outline as ‘the doctrine of mitigation’ seems in the circumstances of this case to be encompassed by ‘the principle that a landlord must act to mitigate loss upon termination of the lease by taking reasonable steps to actively seek another tenant on similar terms.’ The High Court case of Progressive Mailing House v Tabali[24] was cited in support.
[24](1984-1985) 157 CLR 17.
The case cited does not stand for that proposition. It is not a case about mitigation of loss, which in any event is not appropriately described in terms of a positive duty. Rather than speak of a duty to mitigate, it is more accurate to say that an innocent party must not act unreasonably – for if it acts otherwise, it will suffer a reduction in the amount of damages it may successfully claim.
In my opinion, the respondents acted reasonably, whether their actions are judged against purely commercial criteria or against their response to (that is, their acceptance of) the appellant’s own request on behalf of his company, the tenant. It does not now lie in his mouth to say that, by agreeing to his request to allow the tenant to re-enter as a licensee, the respondents somehow released him from his obligations under a guarantee which, in its terms, covered the respondents’ loss.
Another way of saying the same thing is that, having acted reasonably, the respondents cannot be said to have somehow ‘mitigated’ their loss by having ‘extinguished’ it; and, it being extinguished, the tenant and the guarantors are no longer liable for it. The fact is that the loss remains. The tenant likewise remains liable, under either the lease or the licence. The terms of the guarantee remain, because the guarantee itself remains as an extant contract. Nothing done in the course of the creation of the licence altered or extinguished that contract. Its terms cover the events which happened. The appellant cannot airbrush them out of existence.
The appeal should be dismissed.
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