Thusi Pty Ltd v Neonbrook Pty Ltd

[1997] QCA 335

IN THE COURT OF APPEAL	[1997] QCA 335
SUPREME COURT OF QUEENSLAND

Appeal No 5161 of 1996

Brisbane

[Neonbrook P/L v. Thusi P/L]

BETWEEN:

NEONBROOK PTY LTD

(ACN 055 785 245)

(Defendant) Appellant

AND:

THUSI PTY LTD

(ACN 060 527 166)

(Plaintiff)	Respondent
Davies JA Thomas J Williams J

Judgment delivered 26 September 1997

Separate reasons for judgment for each member of the court, each concurring as to orders made.

APPEAL DISMISSED WITH COSTS

CATCHWORDS:	NEGOTIABLE INSTRUMENT - cheque given by third party as security for repayment of loan - dishonoured on presentation - action on cheque - Statute of Frauds held not to apply - acquiescence by drawer of cheque in extension of time for payment of principal debt - held drawer liable.
Counsel:	Mr C Wilson for the appellant. Mr M Amerena for the respondent.
Solicitors:	Bain Gasteen for the appellant. Clayton Utz as town agents for MacDonnells for the respondent.
Hearing Date:	28 April 1997

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5161 of 1996

Brisbane

Before Davies J.A.
Thomas J.
Williams J.

[Neonbrook P/L v. Thusi P/L]

BETWEEN:

NEONBROOK PTY. LTD.

ACN 055 785 245

(Defendant) Appellant

AND:

THUSI PTY. LTD. ACN 060 527 166

(Plaintiff) Respondent

REASONS FOR JUDGMENT - DAVIES J.A.

Judgment delivered 26 September 1997

I agree with the reasons for judgment of Williams J. and with the orders he proposes.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5161 of 1996

Brisbane

Before Davies JA Thomas J Williams J

[Neonbrook P/L v. Thusi P/L]

BETWEEN:

NEONBROOK PTY LTD

(ACN 055 785 245)

(Defendant) Appellant

AND:

THUSI PTY LTD

(ACN 060 527 166)

(Plaintiff) Respondent

REASONS FOR JUDGMENT - THOMAS J

Judgment delivered 26 September 1997

I agree with the judgment of Williams J.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5161 of 1996

Brisbane

Before Davies JA Thomas J Williams J

[Neonbrook P/L v. Thusi P/L]

BETWEEN:

NEONBROOK PTY LTD

(ACN 055 785 245)

(Defendant) Appellant

AND:

THUSI PTY LTD

(ACN 060 527 166)

(Plaintiff) Respondent

REASONS FOR JUDGMENT - WILLIAMS J

Judgment delivered 26 September 1997

After a trial in the District Court the respondent, Thusi Pty Ltd, obtained judgment against the

appellant, Neonbrook Pty Ltd, for $177,660.34 with costs. The appellant appeals against that decision

on a number of grounds.

The facts, though unusual, can be fairly shortly stated. In relation to the transaction in question

a Mrs Obah and a Mrs Conti participated in events as agent for the respondent. For purposes of

stating the relevant facts in these reasons the term respondent should be taken as encompassing each of those two persons and the company. On the other side a Mr Galea acted as agent for the appellant.

Throughout these reasons the term appellant should be taken as encompassing both that person and

the company. There was another relevant participant in the transaction, namely Transworld

Commodities No 2 Pty Ltd; persons by the name of Marks and McQuade were associated with that

company and acted relevantly on its behalf. Throughout these reasons the name Transworld will be

used to encompass each of those persons and the company.

One of the appellant's activities was that of an insurance broker but it was also involved in

money lending and brokering loans. By late 1994 the appellant had had dealings with both the

respondent and Transworld, though there appears to have been no direct contact between the

respondent and Transworld. In early 1995 Transworld approached the appellant about the possibility

of the appellant assisting in raising finance for Transworld. The learned trial judge found it was agreed

that the appellant could either put in its own money or organise the loan from others; in either event it

would all count towards the appellant earning a brokerage fee.

The appellant was aware that the respondent was interested in lending money and arranged a

meeting on or about 17 January 1995. The findings of the learned trial judge as to the arrangement

thereafter made are as follows:

"Mrs Conti was prepared to lend money, but she wanted security over something tangible. She finally said that she would accept Mr Galea's cheque as security. At the same time, Mr Marks was in Cairns. Mr Galea spoke to him about the arrangement. He then went back to see Mrs Conti on Thursday 19 January, and settled the terms of the loan with her. He was acting on behalf of Transworld. He agreed with her that he would borrow, on behalf of his principal, $150,000 for a period of six weeks. It was agreed that interest would be fixed at $20,000. It was agreed that the money would be paid to the credit of McQuade and Neonbrook.

Mr Galea agreed to give his cheque as security for the performance of the transaction. He had the Neonbrook cheque book with him. He wrote out a cheque for $170,000 to cover the principal and interest, made it payable to Thusi, and signed it. It was postdated to 3 March, 1995. He handed it to Mrs Conti. That date, of 3 March, was six weeks and one day after the day when they made the arrangement, on 19 January. The advance was to be made the next day."

Later on in the reasons for judgment the following passage, which is relevant for present

purposes, also appears:

"With regard to the $150,000 loan - Mr Galea handed Mrs Conti the cheque for $170,000 as security for that transaction. He did not intend that the cheque would be cashed immediately and he thought it would never be negotiated. The advance had a "maturity date" of 3 March, and that was the date of the cheque."

Fact finding was complicated to a large extent because Galea maintained that most of the

negotiations were with Mrs Conti, whereas Mrs Obah contended that she was the principal negotiator

on behalf of the respondent. It followed that the appellant's evidence was of conversations between

Galea and Mrs Conti, whereas the respondent's evidence was of conversations between Galea and Mrs

Obah. However, there were not, as revealed by a reading of the record, major differences in the

respective accounts given of the making of the arrangement. The learned trial judge came to the

conclusion that he preferred Galea's evidence on that issue. He also said that Mrs Obah was "uncertain

about some aspects of these transactions with regard to the making of the loan arrangements. In

general, where her evidence conflicts with that of Mr Galea, I prefer his version of events."

Unfortunately Galea's evidence is extremely vague when it comes to what was said in relation

to the giving of the cheque as security. His evidence in chief is as follows:

"Did anything - okay. And then - sorry, in relation to the giving of your cheque as
security sorry, there was a cheque that you were giving as security; is that right?- That's
correct.
And you - to whom did you give it?- Physically hand it over to?
Yes?- Mrs Conti."
Then a little later on he was again asked in chief why he gave that cheque; he answered, "I ask

myself that now." He was next asked whether he intended the cheque to be cashed immediately and

he answered, "No, that cheque I thought would never be negotiated."

Unfortunately counsel for the respondent did not put to Galea in cross-examination what,

according to Mrs Obah, Galea said at the time the cheque was handed over. The record reveals that

Mrs Obah gave evidence as to the following conversation she allegedly had with Galea at that time:

"And what did he say?- Then he just kept pushing and pushing and pushing all the time and then he finally came out with this cheque book and said, "Here, I'll write you out a cheque postdated for $170,000. You have known me for a lot of years, my company's worth millions and its 100% guaranteed. You have my cheque as security. If they don't pay I'll pay with my cheque. I'll write you out my cheque"."

The learned trial judge did not specifically refer to that passage from the evidence in his reasons.

In the circumstances it seems tolerably clear that his Honour did not make a finding that a conversation

in those terms occurred. Given his adverse comments, noted above, as to Mrs Obah's evidence, and

his formulation of the terms of the arrangement in the passages quoted above, this court could not

conclude that the passage just quoted from Mrs Obah's evidence could be relied upon as indicating the

terms on which the cheque was handed over.

The clear finding of the learned trial judge was that the cheque was handed over as security for

the loan transaction. It is also clear that there was no other promise made by the appellant at that time;

there was simply the handing over of a cheque for $170,000 on the condition that it was by way of

security. The terms of the arrangement between the appellant and the respondent, including the

condition on which the cheque was delivered, were entirely oral.

The loan funds were not made available by the respondent on 20 January as initially agreed. There were some further discussions between the appellant and the respondent in consequence of that, and it was agreed that the term of the loan would be extended until 13 March. The appellant was a

party to that extension and it was understood, as found by the learned trial judge, that the cheque would

stand as security for the repayment of the advances on the extended day, namely 13 March.

The loan was not repaid on 13 March and there was conflict in the evidence as to what

happened thereafter. Initially there were negotiations for an extension of the term of the loan which

involved Galea. Those negotiations were inconclusive and there was further extensive discussion

between Marks and Mrs Conti which resulted in an agreement. The relevant findings made by the

learned trial judge are as follows:

"The fact that both sides came to agree that $185,000 was repayable on 13 June 1995 is the firmest evidence of their actual agreement. The terms emerge with reasonable clarity from the whole of the evidence:-

(a)         the due date for the repayment of the $170,000 was extended by three months, to 13 June 1995;

(b)        Transworld had the right to repay the loan at any earlier time;

(c)         the agreed interest of $20,000 remained payable from 13 March;

(d)        further interest at $20,000 was to be paid for the three months' extension, past 13 March;

(e)         if Transworld repaid the loan by the first week of April, 1995, then it would only pay interest of $5,000, by repaying $175,000."

Thereafter there were further discussions involving the various parties, and again Galea was

directly involved in some of the events. It is not necessary to detail here all that happened; it is sufficient

to set out some further findings of fact made by the learned trial judge towards the end of his judgment:

"It is necessary to collect the facts bearing on that issue:

(a)         Mr Galea was an intermediary who negotiated the terms of two loans with Mrs Conti. He had a financial interest in the advance to Transworld. He stood to make money, if Mrs Conti agreed to advance the funds.

(b)        He arranged the first extended time for repayment of the $170,000, from 3rd March to 13th March, and acknowledged Neonbrook's liability, to at least, 13 March.

(c)         He then attempted to negotiate another rollover for three months on proposed terms which included further interest of about $25,000 to Thusi. His immediate role came to an end when Transworld did not agree to those particular terms.

(d)        After 3rd March, he at no time asked for the return of the Neonbrook cheque, nor did he make any statement, to the effect that it no longer provided a valid security to Thusi. Neither Mrs Obah nor Mrs Conti sought any further cheque or other security from him. There was no mention of Neonbrook's liability as surety, after the agreement of 19 January. He thought Neonbrook was liable.

(e)         On about 6th April, Mr Marks persuaded Mr Galea to pay the $10,000, in return for Transworld's postdated cheque for $12,000. He did that. The payment of $10,000 must have been pursuant to some new arrangement, as it was not part of any arrangement up to 13 March. As Mr Marks said, "he was aware of the loan proceedings".

(f)          Mrs Obah and Mrs Conti constantly telephoned Mr Galea during this period, expressing their concerns. Mr Galea would refer them to Mr Marks. Mr Galea delivered the two Transworld cheques, together with the letter, on 13th June, 1995, to Mrs Conti. He did not know how the figure of $185,000 had been arrived at but it was apparent to him that it was paid in final satisfaction of the loan agreement.

(g)         When the Transworld cheques were dishonoured, Mr Galea concerned himself with an expected trip to Tahiti to get funds from Mr Marks to pay himself and Thusi. After that, he assured Mrs Obah that he was trying to facilitate a loan from EFIC to Transworld.

(h)         Mr Galea stopped payment on the $170,000 cheque because he had learnt McQuade had stopped payment on his own cheque.

(i)          On 30th April Mr Galea went overseas for two or three weeks. During that time, Mr Marks conducted the negotiations and he was out of the picture.

(j)         The terms of the extension from 13th March to 13th June were little different from those proposed by Mrs Conti to Mr Galea. The term of three months remained constant. Somewhat less interest became payable.

(k)        The arrangement about the payment of the $5,000 was different. It was agreed between Mrs Obah and Mr Marks close to 13th June. There is no evidence that Mr Galea knew anything about that arrangement or consented to it. ... It was an agreed payment to compensate Thusi for delay in paying interest, and not relevant to the present issues. It was not part of the repayment of an advance to Thusi.

(l)          Neonbrook was potentially liable to the extent of $170,000. Any increase in the amount of the payment to be made by Transworld made no difference to that liability, once it reached $170,000. That is another reason why the $5,000 is unimportant."

With regard to the findings in paragraph (e) the following should be noted. By April Transworld

had not paid the $20,000 interest payable as at 13 March. The respondent was demanding payment

of at least portion of that. Transworld could not pay immediately and there was an agreement between

Transworld and the appellant that the appellant would pay the respondent $10,000 in return for a

$12,000 postdated cheque from Transworld.

With respect to the matters referred to paragraph (h) the following additional facts should be

noted. After the appellant gave its cheque for $170,000 to the respondent in January 1995 there were

discussions between the appellant and Transworld with respect to the latter providing the appellant "with

a similar cheque as security". Ultimately that cheque was made available by McQuade personally.

Then, as the learned trial judge said in his findings, the "only thing that seems certain is that Mr Galea

stopped payment on the Neonbrook cheque because he received a notice of dishonour of McQuade's

cheque."

Finally on the facts it should be noted that the appellant's cheque for $170,000 was presented

for payment by the respondent on 29 September 1995 and then dishonoured. The appellant had

stopped payment. The evidence does not make it clear when the stop payment order was made.

As revealed by the plaint, in essence the respondent sued on the dishonoured cheque.

Accordingly, the plaintiff merely alleged as the material facts the drawing of the cheque by the appellant,

its delivery to the respondent, and its dishonour on presentation.

The defence raised the allegation that the cheque was conditionally delivered and asserted that

the condition was that the "cheque was not to be used or presented until there was default in the

payment of the loan on the due date." It also alleged that Transworld did not default in repayment of

the loan on the date fixed for repayment, but rather the loan was extended by way of a new loan being

entered into.

Then by its reply (delivered on the first day of trial) the respondent alleged that "the truth of the

whole facts and circumstances attendant upon their delivery is that they were delivered to secure the

performance of certain principal obligations which Transworld owed the plaintiff." That pleading

expressly alleged that the appellant's cheque for $170,000 "was delivered by the Defendant to secure

Transworld's obligation to repay a principal sum of $150,000 and interest thereon of $20,000 both such

principal and interest being repayable on or about 3 March 1995."

On the basis of those pleadings the respondent went to trial relying on the cause of action

derived from s.76 of the Cheques and Payments Orders Act 1986. The respondent asserted it was not

suing "upon any promise to guarantee any liability of another" such as would call into play s.56 of the

Property Law Act 1974. The appellant submitted during the trial that the respondent's true cause of

action, if any, was on such a promise, and that by framing the action as it did the respondent denied the

appellant the opportunity of pleading the absence of a memorandum or note of the promise in writing.

There was an attempt during the trial, renewed on the hearing of the appeal, by the appellant to deliver

a rejoinder raising that point in response to the respondent's reply. The learned trial judge effectively declined to give leave to deliver a rejoinder pleading the Statute of Frauds but the parties canvassed the

relevant issues during evidence and dealt with that point in final submissions.

Cases and texts, some of which were cited by the learned trial judge, clearly establish that a

cheque, any negotiable instrument, or any instrument of title can be provided as security; the form, more

often than not, is that of a pledge. Sometimes the cheque, usually postdated, will be provided by a party

to the principal transaction (see, for example, HJ Wigmore and Co Ltd v. Rundle (1930) 44 CLR 222)

and on other occasions it will be provided by a third party; in that latter situation it will in essence be a

collateral security. A good factual illustration of the deposit by a third party of an instrument of title as

a pledge is Re Conley; The Trustee v. Barclay's Bank Ltd (1938) 2 All E.R. 127. The legal

consequences of giving a cheque by way of pledge may be affected by the terms of any specific

agreement associated with the transaction.

At least since the enactment of the Cheques and Payment Orders Act 1986 a cheque may be

delivered subject to conditions; s.27 thereof expressly provides that a cheque may be delivered

conditionally or for a special purpose only. That is probably a statutory reflection of the common law

principle stated by the Privy Council in Macdonald v. Whitfield (1883) 8 App. Cas. 733 at 745:

"But it is a well established rule of law that the whole facts and circumstances attendant upon the making, issue and transference of a bill or note may be legitimately referred to for the purpose of ascertaining the true relation to each other of the parties who put their signatures upon it, either as makers or indorsers; and that reasonable inferences, derived from those facts and circumstances, are admitted to the effect of qualifying, altering or even inverting the relative liabilities which the law merchant would otherwise assign to them."

There is no reason to doubt that since s.27 a cheque may be delivered on condition that it not be

negotiated unless a third party defaults in making a payment on a certain date. In those circumstances the condition would have to be satisfied before the cheque could be presented for payment; the drawer

could not be said to have dishonoured payment until the condition had been satisfied.

The learned trial judge approached the question here by saying that a cheque could be delivered

as security for the performance of another's obligation, and referred to the discussion of that in Francis

and Thomas Mortgages and Securities (3rd ed) at 302-3. His Honour went on to say that such "an

arrangement is not a contract of guarantee" and "need not be recorded in writing." He cited no authority

in support of those propositions. Significantly he went on to hold that the "drawer of the cheque is a

surety or 'quasi-surety' for the performance of the principal transaction, and pledges the cheque by way

of security." Because of that he held that the usual consequences of suretyship (such as, discharge of

the surety when the principal transaction is varied by subsequent agreement between the debtor and

creditor, and discharge when the creditor gives time to the debtor to pay without the knowledge and

consent of the surety) apply.

In this case there is no doubt (subject to what will be said later about the extension of time from

13 March to 13 June) that the condition on which the cheque was delivered was satisfied; Transworld

did not repay the loan by the due date. In order to succeed in an action on the cheque (s.76) the

plaintiff here, in addition to the usual material facts, only had to prove that the condition was satisfied.

Two issues then arise for determination. Firstly, is the arrangement by which a cheque subject

to such a condition is delivered a contract of guarantee? Secondly, is an action on a cheque where such

a condition has been satisfied an action upon a promise to guarantee the liability of another so that a note

or memorandum of the agreement is required?

In Duncan, Fox and Co v. The North and South Wales Bank and Others (1880) 6 App. Cas. 1 one of the partners in a firm deposited with the bank the title deeds of two of his own freehold properties, and signed a memorandum acknowledging them to be deposited as securities for what the

bank might advance to the firm. Subsequently the bank accepted a bill drawn on it by the firm and

endorsed by the appellant. The bill was dishonoured after the firm stopped payment; thus the appellant

became liable to the bank. The appellant then became acquainted with the fact that securities had been

deposited with the bank to cover advances on the firm's bills, and brought the action against the bank

to have the benefit of the securities so deposited. The House of Lords upheld the appellant's claim. At

18 Lord Blackburn said:

"Though the indorser is primarily liable as principal on the bill, and is not strictly a surety for the acceptor, he has this in common with a surety for the acceptor, that he is entitled to the benefit of all payments made by the acceptor and is entitled, on paying the holder, to be put in a situation to have a right to sue the acceptor."

That is generally taken to be the ratio of the decision on the point. But Lord Selborne L.C. made some

observations which are interesting for present purposes. Relevantly he said at 11:

"In examining the principles and authorities applicable to this question, it seems to me to be important to distinguish between three kinds of cases: (1) Those in which there is an agreement to constitute, for a particular purpose, the relation of principal and surety to which agreement the creditor thereby secured is a party; (2) Those in which there is a similar agreement between the principal and surety only, to which the creditor is a stranger; and (3) Those in which, without any such contract of suretyship, there is a primary and secondary liability of two persons for one and the same debt, the debt being, as between the two, that of one of those persons only, and not equally of both, so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid."

After discussing, for example, the principle of contribution between sureties he went on at 13: "It appears to me that these principles of Equity are not less applicable to cases of the third class, - cases in which there is, strictly speaking, no contract of suretyship, but in which there is a primary and secondary liability of two persons for one and the same debt, by virtue of which, if it is paid by the person who is not primarily liable, he has a right to reimbursement or indemnity from the other, - than to those of the second class, in which there is a contract of suretyship to which the creditor is not a party. To this third class of cases, the rights of an indorser against an acceptor of a bill of exchange may most properly be referred. The liability of the indorser to the holder is, by the law merchant, conditional, and ... only secondary; but, when the conditions required by that law are fulfilled, it becomes absolute, and is that of a principal; and the indorser's right, if he pays the holder, to recover over against the acceptor is not found in any agreement between him and the acceptor ... but is established by the same law."

There is in the usual case no note or memorandum between the indorser and acceptor of the

bill which would evidence a promise to be answerable for the liability of the other. The liability flows

from the bill itself and in consequence no other writing to satisfy the Statute of Frauds is required in

order to enforce by action that liability. (See also Rouquette v. Overmann (1875) L.R. 10 Q.B. 525

at 537).

Such a conclusion appears to be supported by the decision of the Court of Appeal in Wilkinson

v. Unwin (1881) 7 Q.B.D. 636. There Bramwell L.J. observed at 638:

"It has been argued by Mr Fullarton, that the agreement relied upon by the plaintiff must be proved by a memorandum in writing because the contract is one of suretyship. The contract, however, is not within the words or the reason of the Statute of Frauds. If the buyer of goods accepts a bill drawn upon him for the price by a surety who afterwards indorses to the seller, the surety cannot refuse to pay the amount upon default of the principal debtor, because the agreement under which the bill was signed was not in writing."

Baggallay L.J. reached the same conclusion; at 639 he said:

"I was much impressed by the argument which has been addressed to us, and under other circumstances there might be great force in the contention that the agreement put forward by the plaintiffs is not in writing; but I think that the defendant is precluded by the findings of the jury from raising the defence upon which he wishes to rely. They have found that she indorsed the bills of exchange in order to make herself liable as surety for the debt due from her son."

The third member of the court was Brett L.J. Relevantly he said at 640:

"It has been contended that the only evidence of a consideration was the defendant's promise to become a surety for her son, and that as this promise was not in writing the endorsement was not binding upon the defendant. But the plaintiffs are not suing upon a guarantee; the case is not within wither the words or the spirit of the Statue of Frauds, s.4. Moreover, verbal evidence of the consideration was admitted, and the complaint ought to have been made to High Court; but the objection was not sustainable, and the defendant has in truth lost nothing by the omission to apply to that tribunal."

That decision was referred to by Goddard J in McCall Brothers Limited v. Hargreaves (1932)

2 K.B. 423 before saying at 429:

"It would, I am sure, astonish most people to be told that the Statute of Frauds could ever be set up as an answer to a claim under a bill, and I am glad to find that there is nothing in the authorities which obliges me to so hold."

In that case the effect of the agreement pursuant to which the bill was indorsed was that the defendant-

indorser would pay the drawers if the acceptors failed to do so. Goddard J also said at 429-430:

"It is true, no doubt, that the agreement which has been found to exist ... in this case, is in one sense a contract of guarantee; but none the less an action will lie on the bill against a person who has indorsed it in these circumstances and with the intention I have found."

In both Wilkinson and McCall Brothers the action was on the bill.

It will of course be different if for some reason the action cannot be maintained on the bill and

the action must be brought on the promise. In both the Third and Fourth editions of Halsbury the

statement is made that "a promise to give bills for a debt due to a company is collateral and accessory,

and within the statute." (4th ed vol 20 para 152) The authority cited is the decision of the Court of

Appeal in Harburg India Rubber Comb Company v. Martin (1902) 1 K.B. 778. A director of a

company orally promised the plaintiffs, who were judgment creditors of the company, that he would

endorse bills for the amount of the debt. The statement of facts indicates that the "action was brought

for breach of the defendant's promise". The report in 71 L.J.K.B. 529 clearly says the defendant

refused to indorse the bills as promised, so the action was not on the bills. It was held that the promise

was one to answer for the debt of another and therefore within the Statute of Frauds; in consequence

the action was not maintainable. The judgments were primarily concerned with discussing the distinction between guarantee and indemnity; but once the conclusion was reached that the promise was a

guarantee then it was clear the action could not be maintained because of the absence of writing.

That was also effectively the position considered by the courts in Steele v. M'Kinlay (1880) 5

App. Cas. 754, Jenkins v. Coomber (1898) 2 Q.B. 168, and MT Shaw & Co Limited v. Holland

(1913) 2 K.B. 15. In each of those cases, for reasons which are of no immediate concern, it was held

that the person whose signature was on a bill in the apparent capacity as indorser was not liable on the

bill as such. In consequence an alternative cause of action based on the antecedent promise to indorse

was pleaded, but such action failed for want of a note or memorandum of the promise to satisfy the

Statute of Frauds.

That line of cases can be distinguished for present purposes. This is an action on the cheque

and not on the antecedent promise.

The appellant here relied very heavily on the Court of Appeal decision in Conley which was

apparently not cited to the learned trial judge. But before analysing Conley it is necessary to look at the

decision of the Court of Appeal in Perry v. National Provincial Bank of England (1910) 1 Ch. 464. P

as surety executed mortgages over certain property of his own to a bank to secure the overdraft of a

firm in which he was not a partner. The mortgage deeds contained extensive provisions dealing with

the rights of the bank in dealing with the firm; inter alia, it could release securities, extend time for

payment, and accept composition from and make arrangements with the firm. On the firm becoming

insolvent an arrangement was entered into whereby a new company was formed to purchase the assets

of the firm and that company agreed to give and each creditor of the firm agreed to accept a certain

amount of debenture stock in satisfaction of the debts of the firm. The bank in accordance with that

scheme applied for debenture stock agreeing thereby to accept the stock in full discharge of all their claims against the firm. The debt relied upon by the bank on its application for debenture stock was the

amount arrived at by deducting from the total debt the value it put upon the securities it held other than

P's mortgages. When interest on the debenture stock was not paid the bank threatened to sell the

property comprised in P's mortgages and that gave rise to the litigation. The instrument of mortgage was

considered in depth by Cozens-Hardy M.R. at 471. He described it as "a very peculiar document",

and went on: "It is a document in which there is no covenant to pay the debt; it is a document in which

the surety's property is made available to the creditor. The plaintiff conveys certain property to the

defendant bank for the purposes of securing the account of certain customers of the bank ... . There

is no covenant to pay the debt ..." The critical argument on behalf of P was that as the firm had been

released there could be no suretyship thereafter. Cozens-Hardy M.R. dealt with that at 473 where he

said: "But I think the answer to that is that it is perfectly possible for a surety to contract with a creditor

in the suretyship instrument that notwithstanding any composition, release, or arrangement the security

shall remain liable although the principal does not." That was something provided for in this case. In

his view the inclusion of such a provision meant that it was "not then a simple contract of suretyship" but

in "one sense it is a contract of suretyship ... a contract of suretyship containing special clauses which

deliberately exclude certain rights which the surety otherwise would have had." Fletcher-Moulton L.J.

agreed entirely with Cozens-Hardy M.R. Buckley LJ also concluded that where the instrument by

which the "surety" accepted liability contained apt words to deal with the situation the "surety" could

remain liable although the principal debtor had been discharged by the creditor (477). The result was

that P's property remained liable with respect to that part of the debt which remained unpaid though the

firm was discharged.

The issue in Conley arose in a somewhat unusual way. On separate and several occasions the

wife and mother of a bankrupt deposited with a bank War Loan certificates as collateral security for

the bankrupt's indebtedness to the bank. Shortly before becoming bankrupt, the bankrupt deposited

large sums of money into the bank account so that his wife and mother could obtain the release of those

securities. Then the Trustee in bankruptcy claimed that the wife and mother were "sureties or

guarantors" within the meaning of the Bankruptcy Act 1914 and therefore had obtained a fraudulent

preference. It was noted by Greene M.R. at 129 that the "deposit of the War Loan was accompanied

in each case by a memorandum signed by the depositor. It was argued on behalf of the appellant that

each depositor entered into an implied undertaking with the bank to become personally liable for the

amount of the overdraft. I am unable to accept this view, and the matter must be treated upon the

footing that neither of the depositors incurred any personal liability for the bankrupt's debt to the bank."

Farwell J at first instance, held that the terms "surety or guarantor" did not extend to the "case of a

person who, without incurring personal liability, charges his property by way of security for another's

debt." (130) That proposition was rejected by the members of the Court of Appeal. Relevantly for

present purposes Greene M.R. said at 131:-

"In considering this question, it is, of course, important not to be misled by the fact that certain relationships involve the application of equitable principles similar to those which apply in the case of sureties. Their existence is recognised in the Bankruptcy Act, 1914, itself, for in s.28(4) it is provided that an order of discharge "shall not release any person who was surety or in the nature of a surety" for the bankrupt. Such relationships are sometimes loosely referred to as cases of suretyship. For example, in the case of a bill accepted for value, the relationship between drawer and indorsers, on the one hand, and the acceptor on the other is referred to as one of suretyship ... Rouquette v. Overmann (1875) L.R. 10 Q.B. 525 at 536, 537. We have the authority of the House of Lords for saying that this relationship is not one of suretyship, although it is analogous thereto: Duncan, Fox and Co v. North and South Wales Bank per Lord Selborne L.C. at 11, 13, 14 - quoting Lord Eldon L.C. - and per Lord Blackburn at 19.

Nothing that I say must be taken as expressing the view that analogous relationships of this kind fall within the words now under consideration. I base my decision upon the view that, upon the assumed facts of the present case, the depositors were, at the relevant date, sureties for the debt in the true sense. It appears to me that the assumption of personal liability is not a necessary element in suretyship. "Surety" and "security" are in origin the same, and a person who provides a pledge or security for the performance of another's obligation is, I think, making himself, by means of that pledge or security, a surety for that other, just as much as if he pledges his personal credit. This view accords with the language used in a number of authorities cited to us but not cited to the judge. ... In Perry v. National Provincial Bank of England, a person who, without entering into any covenant to pay the debt, mortgaged his property as security for the debt of others, was referred to in all the judgments of the Court of Appeal ... as a surety."

Clauson L.J. reasoned in much the same way; at 133 he said:

"These considerations have satisfied me that it would be unsound to treat the phrase "surety or guarantor" as necessarily connoting a personal liability, and as failing to cover the very case on which the whole conception of suretyship and guarantee appears as a matter of history to be founded, of a person who has provided a pledge without undertaking liability beyond the pledge."

The third member of the court was Luxmoore J: relevant passages in his judgment are found

at 136 and 138-9, to the following effect:

"In my judgment none of these definitions is sufficiently clear to exclude the case of a person who agrees to pledge, or in fact pledges, a specific part of his property to answer the debt, default or miscarriage of another, without entering into any agreement to incur personal liability. Such an agreement would, I think, plainly fall within the provisions of s.4 of the Statute of Frauds."

"The conclusion to which I have come is that there is no warrant for the view that the words "surety" or "guarantor" are, in their use in legal documents, confined to those persons only who undertake personal liability in respect of the debt of a third party to his creditor, and that the words in their prima facie legal sense include persons who pledge, mortgage or charge their property for the debt of another, as well as those who pledge their personal credit."

Counsel for the appellant relied heavily on the statement of Luxmoore J that the agreement was

caught by the Statute of Frauds. His submission almost went as far as to state that a pledge, to be

enforceable, must be evidenced by a note in writing.

One finds Conley referred to in most, if not all, texts dealing with the topic of guarantees and

it has been referred to in a number of subsequent cases. Most references have been to the definition

of guarantee and surety discussed therein, rather than to the proposition that the giving of a security or

pledge to answer the debt of another should be evidenced in writing before it could be enforced by

action.

The security (or pledge) in Conley was not a negotiable instrument. What had been deposited

were the instruments of title to loans. So far as is revealed by the report there was no action which

could be brought based on those instruments of title; the only action available was that on the promise

pursuant to which those instruments of title were deposited. As any action had to be based on the

promise then it was caught by the Statute of Frauds. Looked at in the light of that consideration, and

in the light of the discussion of Perry which significantly affected the thinking of the members of the court,

there is nothing unusual about the result in Conley, and it is consistent with the other authorities to which

I have previously referred. The decision does not mean, and I do not regard the members of the court

as believing otherwise, that, in circumstances such as exist here, no action could be brought on the

cheque because of the absence of a written memorandum of the promise.

The relationship between the drawer and payee of a cheque delivered on condition that it would

only be presented if the principal debtor defaulted in meeting its obligation is, to use the phraseology of

the members of the House of Lords in Duncan, Fox and Co, "analogous to suretyship"; subsequently

the term "quasi-surety" has been used by many writers to describe the person in the position of the

drawer of the cheque. The learned trial judge here adopted that terminology. In any event it is clear

that consideration must be given to the conduct of the creditor, principal debtor and surety with a view

to determining whether the liability of the surety has been extinguished because time for payment was extended. The leading Australian authority is Ankar Pty Ltd v. National Westminster Finance

(Australia) Limited (1987) 162 C.L.R. 549. The High Court held in that case that certain breaches of

conditions of the agreement between the parties entitled the surety, at its election, to become discharged

from liability. That leads to consideration in this case of the question whether or not the extension of

time for repayment of the loan from 13 March to 13 June provided a ground for discharging the

appellant from its liability. In that regard the findings of the learned trial judge enumerated above in the

paragraphs (a) to (l) are of critical importance.

The learned trial judge found as a fact that the appellant impliedly consented to the extension

of time and that there was no basis on which it could be found it had elected to extinguish its liability.

That finding was based not only on the paragraphs to which I have specifically referred, but also on

other general findings made by the learned trial judge as to the relationship between the appellant and

Transworld. There is a finding, clearly supported by the evidence, that initially the appellant sought to

negotiate such an extension of time as agent for Transworld but those negotiations did not result in

agreement. Afterwards, with full knowledge of the appellant, there were direct negotiations for an

extension between Transworld and the respondent. It is clear that the appellant knew that Transworld

was unable to repay the loan on 13 March, and it knew that failure by Transworld to repay on that date

without some extension of time would have resulted in immediate presentation of the cheque which it

had given the respondent. Though the appellant was not directly involved in the further negotiations it

was clearly aware of them at the time and of the outcome. In his reasons the learned judge said that the

appellant "consented to Mr Marks making that arrangement directly, and taking over his own efforts

to negotiate a deal."

Counsel for the appellant submitted that this court should conclude that the agreed extension

and the implied consent thereto by the appellant, as found by the learned trial judge, must have arisen

after 13 March. In that event he submitted consideration was necessary to support an agreement for

extension of time. In support of that he referred to the observations of Griffith CJ in Queensland

Investment and Land Mortgage Company Limited v. Hart, Robinson and Barker (1894) 6 QLJ 186

at 193-5 and the discussion of that case in Phillips and O'Donovan The Modern Contract of Guarantee

(2nd ed) at 300-303. I am by no means satisfied that an agreement supported by consideration is

necessary to hold a surety bound by an extension of time granted after the original due date for payment;

or to put it another way, I am by no means convinced that in those circumstances it is necessary to

prove an enforceable contract to that effect. As Ankar makes clear the factual circumstances in

question give the surety the option of avoiding liability. Questions of election and estoppel will often

arise where the circumstances in question occur prior to or on the original due date for performance.

Equally there appears to me to be good reason for concluding that an acknowledgment amounting to

election by the surety with knowledge of the variation made after the original due date for payment

would be sufficient to constitute an implied consent to the variation. It is true that mere knowledge of

the variation is not enough to establish consent (Wren v. Emmett Contractors Pty Limited (1969) 43

ALJR 213 at 220), but here the conduct of the appellant in accordance with the findings goes much

further. The appellant had given a cheque by way of security and it was clearly unconditional and

negotiable by 13 March if there was no extension of time with respect to the condition. Thereafter by

its conduct in allowing the respondent to retain possession of the cheque, and in not immediately

stopping payment thereon, the appellant elected to acknowledge the continuing validity of the security.
Applying the general principles relevant to the discharge of a surety's obligations consequent

upon there being an extension of time within which the principal debt is to be paid, there was a proper

basis upon which the learned trial judge could conclude that the appellant impliedly consented to or

acknowledged the continuing validity of the security so that its liability on the cheque was not

extinguished.

In consequence it is not necessary to consider in detail a possible alternative basis on which it

could be held that the appellant remained liable. On the appellant's evidence as to the condition on

which the cheque was handed over it could be argued that the appellant was agreeing to be answerable

for the debt if the principal debtor should make default at any time. Given the vagueness of the

appellant's evidence on the point, there is little, other than the dating of the cheque 3 March, to indicate

that the appellant was guaranteeing the transaction on the basis that repayment had to be effected by

a specific date. A surety may agree that the guarantee shall not be avoided by the creditor extending

time, and it is arguable that would be the position here if the term be that the cheque could be presented

if the principal defaulted at any time. But in the circumstances it is not necessary to take that argument

further.

The findings and conclusions of the learned trial judge were correct. This was not a situation

to which the Statute of Frauds applied, but the relationship between the parties was such that the general

principles governing the rights and obligations of a surety applied. On the facts the appellant impliedly

consented to an extension of time for repayment by the principal debtor to June 13 and in all the

circumstances the cheque remained a valid security at all material times. It was dishonoured on

presentation and the learned trial judge was correct in finding in favour of the plaintiff-respondent.

The appeal should be dismissed with costs.