Valstar v Silversmith

[2009] NSWCA 80

New South Wales

Court of Appeal

CITATION:	Valstar v Silversmith; Valstar v Van Veizen [2009] NSWCA 80
HEARING DATE(S):	6 April 2009
JUDGMENT DATE:	20 April 2009
JUDGMENT OF:	McColl JA at 1; Basten JA at 2; Sackville AJA at 3
DECISION:	Valstar v Silversmith - 1. Appeal dismissed. 2. Appellant to pay the Respondent's costs of the appeal. Valstar v Van Veizen - 1. Appeal dismissed. 2. Appellant to pay the Respondent's costs of the appeal.
CATCHWORDS:	MORTGAGES - whether guarantors liable to mortgagee as principal debtors - effect of principal debtor clause - GUARANTEE AND INDEMNITY - discharge of surety - whether variation of mortgage discharged surety - whether principal debtor clause excluded discharge
LEGISLATION CITED:	Contracts Review Act 1980 (NSW) Conveyancing Act 1919 (NSW) Real Property Act 1900 (NSW) Trade Practices Act 1974 (Cth)
CATEGORY:	Principal judgment
CASES CITED:	Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; 217 CLR 424 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; 162 CLR 549 Bridgestone Australia Ltd v GAH Engineering Pty Ltd [1997] 2 Qd R 145 Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703 HAG Import Corpn (Aust) Pty Ltd v Krosnienskie Huty Szkla "Krosno" SA [2005] FCAFC 97 Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288 Re Taylor; Ex parte Century 21 Real Estate Corporation (1995) 130 ALR 723 Stadium Finance Co Ltd v Helm (1965) 109 Sol J 471 The Fletcher Organisation Pty Ltd v Crocus Investments Pty Ltd [1988] 2 Qd R 517 Tito v Waddell (No 2) [1977] 1 Ch 106 Wood Hall Ltd v Pipeline Authority [1979] HCA 21; 141 CLR 443
TEXTS CITED:	J O'Donovan and J Phillips, Modern Contract of Guarantee
PARTIES:	Nicholas Valstar (appellant) John Paul Silversmith (respondent) Nicholas Valstar (appellant) Augustine Van Veizen (respondent)
FILE NUMBER(S):	CA 40158 of 2008; 40159 of 2008
COUNSEL:	W G Muddle SC/R E Quickenden (appellant) N Obrart (respondents)
SOLICITORS:	Cutlers The Law Firm (appellant) Keith Hurst & Associates (respondents)
LOWER COURT JURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	DC 1066 of 2008 DC 1074 of 2008
LOWER COURT JUDICIAL OFFICER:	Ainslie-Wallace DCJ
LOWER COURT DATE OF DECISION:	9 May 2008

CA 40158 of 2008
CA 40159 of 2008

McCOLL JA
BASTEN JA
SACKVILLE AJA

Monday 20 April 2009

VALSTAR v SILVERSMITH

VALSTAR v VAN VEIZEN

Judgment

1 McCOLL JA: I agree with Sackville AJA.

2 BASTEN JA: I agree with the orders proposed by Sackville AJA and with his Honour’s reasons.

3 SACKVILLE AJA: Two appeals have been brought from a judgment of the District Court entering a verdict for the respondents (the defendants in the proceedings at first instance). The appellant (the plaintiff below) sued each of the respondents in separate proceedings in the District Court for the sum of $240,000, plus interest of $138,568.75. These amounts were said to be due pursuant to guarantees given in favour of the appellant by each of the respondents whereby the respondents guaranteed the indebtedness of the mortgagor, P & G Pty Ltd (“Company”), under a mortgage executed on 12 March 2003 (“Mortgage”).

4 The primary issue on the appeal is whether the primary Judge was correct in holding that the respondents were discharged from their obligations as guarantors by reason of variations to the Mortgage made without their consent. Her Honour held (at [29]), among other things, that the variations made to the Mortgage (which occurred after the respondents had retired as directors of the Mortgagor) were “material and prejudicial to the interests of [the respondents] as guarantors”. She considered that the variations were intended to create a new agreement between the appellant, the Company and a third guarantor (not a party to the proceedings) in substitution for the existing agreement and “operated to discharge [the respondents] absolutely from their obligations under the guarantee”.

THE TRANSACTIONS

5 On 25 February 2003, the appellant entered into a Loan Contract with the Company, whereby the appellant agreed to lend the Company $240,000 for a term of one year. The interest rate, assuming punctual payment, was 12% per annum, increasing to 14% per annum in the event of default. The loan was to be secured by a second mortgage of the Company’s property at Pacific Highway, Ourimbah. The Loan Contract identified the guarantors. They were to be the respondents, both of whom were then directors of the Company, and a third director, Mr Whitbourne (“Guarantors”). There is nothing to indicate that any of the respondents had an interest in the Ourimbah property.

6 On 12 March 2003, the Company executed the Mortgage, being a mortgage under the Real Property Act 1900 (NSW) of the Ourimbah property, in favour of the appellant. The Mortgage identified the “Mortgagor” as the Company “at the request of Guarantors” who were named. The parties to Annexure A to the Mortgage were said to be the Company and each of the Guarantors. The three Guarantors signed Annexure A to the Mortgage.

7 By clause “Firstly” of Annexure A, the Company covenanted with the appellant as mortgagee to pay the principal sum of $240,000 on 12 March 2003 (presumably an error for 12 March 2004). By clause “Secondly”, the Company covenanted to pay monthly interest on the principal calculated at 12% per annum (increasing to 14% per annum in the event of default).

8 Clause “Sixthly” of Annexure A provided as follows:

“This Mortgage shall take effect as if it was entered into by the Guarantors, Robert James Whitbourne … John Paul Silversmith … and Augustinus Anthony Van Veizen … as a further Mortgagor, and are jointly and severally liable to the Mortgagee under this Mortgage. The said Guarantors will not be released from any obligations by reason only of any extension of time granted or any other act or omission by the Mortgagee favouring the Mortgagors. The Mortgagor will be in default under the Mortgage if the Guarantors are made bankrupt or assign or attempt to assign to any other person the obligations of the Guarantor to the Mortgagee.” (Emphasis in original.)

9 On 28 April 2004, the Company executed a Variation of Mortgage in registrable form (“First Variation”). The term of the Mortgage was extended until 12 September 2004 and the interest rate was increased to 12.5% per annum (14.5% in the event of default). Again the Mortgagor was described as the Company “at the request of Guarantors”, who were referred to by name. Two Guarantors executed the First Variation, as a director and secretary of the Company respectively; all three executed it as Guarantors. The space on the printed form providing for variations in the principal sum was endorsed “N.A.”, presumably meaning “not applicable”.

10 In September 2004 a second Variation of Mortgage (“Second Variation”) was executed in the same form as the First Variation. On this occasion the interest rate was increased to 13% per annum (15% per annum in the event of default), and the term of the Mortgage was extended to 12 March 2005. No change was made to the principal sum due under the Mortgage.

11 In October 2004, both respondents resigned as directors of the Company.

12 On 9 February 2005, the Company executed a third Variation of Mortgage (“Third Variation”). The Mortgagor was said to be the Company “at the request of Guarantor’”, identified on this occasion as Mr Whitbourne. Mr Whitbourne executed the Third Variation as an officer of the Company and as guarantor, but the respondents did not sign the document. The Third Variation increased the principal sum secured by the Mortgage to $290,000 and extended the term until 12 March 2006. The interest rate remained unchanged. The Third Variation was in the same form as the First and Second Variations.

13 The Company executed a further Variation of Mortgage in the same form on 19 April 2005 (“Fourth Variation”). One of the respondents (Mr Silversmith) executed the Fourth Variation as secretary of the Company, while Mr Whitbourne signed as a director and as guarantor. The other respondent (Mr Van Veizen) did not sign the document. The Fourth Variation increased the sum secured by the Mortgage to $390,000, but did not change the interest rate or the term of the loan.

14 On 30 January 2006, the Company executed the final Variation of Mortgage (“Fifth Variation”). Mr Whitbourne signed the Fifth Variation on behalf of the Company and in his capacity as guarantor. Neither of the respondents signed this document. The Fifth Variation increased the principal sum to $500,000. It was also said to have increased the interest rate to 13% per annum (15% per annum in the event of default), although in fact interest had already been increased to these rates by the Second Variation. The term of the secured loan was extended to 12 March 2008. The Fifth Variation took the same form as all the other Variations.

15 The Company defaulted on its obligations to make the payments due under the Mortgage. The Ourimbah property was ultimately sold in or about September 2007 by the first mortgagee in exercise of its power of sale. The proceeds were insufficient to discharge any portion of the debt due by the Company to the appellant.

THE PROCEEDINGS

16 On 20 February 2007, the appellant commenced separate proceedings in the District Court against each of the respondents. The amount claimed in each case was $240,000, plus interest of $138,568.75, calculated from 12 March 2003 until 19 February 2007.

17 The appellant’s pleading was in substance identical in both proceedings. The statement of claim was as follows:

“1. By mortgage dated 12th March, 2003, registered number 9457254P, between the [appellant] as mortgagee, [the Company] as mortgagor and [each respondent] being a guarantor pursuant to the said mortgage of the property situate at … Ourimbah being Folio Identifier 1/119870 to the [appellant] in consideration of the [appellant] at the request of [each respondent] advancing the sum of $240,000.00
2. It was a term and condition of the said mortgage that [each respondent] would guarantee to the [appellant] the due performance of the [Company] under the said mortgage.
3. It was a further condition of the said mortgage that the [Company] would pay interest on the principal sum or on so much thereof as for the time being remained unpaid at the rate of 14% per annum.
4. Furthermore it was a condition of the mortgage that [each respondent] would guarantee the payment and interest of the mortgage by the [Company].
5. Furthermore on 28th April, 2004, by consent of [each respondent] the mortgage was varied pursuant to a Variation of Mortgage No. AA598819B to provide for an increase in the interest rate to 14.5% per annum subject to reduction to 12.5% per annum on payment within seven (7) days of the date provided by the mortgage for payment of interest.
6. Furthermore on 14th October, 2004 a Variation of Mortgage No. AA977111M was registered with the LPI [Land and Property Information], which was consented to by [each respondent], to provide for an increase in the interest rate to 15% per annum subject to reduction to 13% per annum on payment within seven (7) days of the date provided by the mortgage for payment of interest and further the term was extended until 12th March, 2005.
7. The [Company] has failed to pay the sum of $240,000 now due and payable under the said mortgage.”

18 It will be seen that this pleading does not assert that the respondents were liable to the appellant as principals, whether pursuant to clause Sixthly or otherwise. The pleading alleges that the respondents were guarantors of the Company’s due performance under the Mortgage and that they were indebted to the appellant by reason of the default of the Company.

THE PRIMARY JUDGMENT

19 The primary Judge noted that it was common ground that the First and Second Variations were intended to amend the Mortgage and, as a consequence, to amend the obligations guaranteed by the respondents. Her Honour observed (at [15]) that it was clear from the terms of the First and Second Variations that they were intended only to alter some terms in the Mortgage “while preserving those to which the [V]ariation did not speak”. The respondents had argued, however, that the Third and subsequent Variations had the effect of creating a new agreement in substitution for the agreement guaranteed by them and that the substitution had brought an end to their liabilities under the Mortgage. In support of this contention, the respondents relied on the concept of novation.

20 The primary Judge (at [18]) accepted that novation involves parties to a contract agreeing to substitute a new contract for the one they have already made. According to her Honour, novation of a contract results in the extinguishment of one obligation and the substitution of another in its place.

21 Her Honour found (at [22]) that neither respondent consented as guarantors to the Variations after they ceased to be directors of the Company. The appellant’s case had effectively conceded this by limiting the claim to the principal sum originally agreed (that is, $240,000) and by reference to the terms of the Mortgage as they were before the Third Variation (that is, the interest rates specified in the Mortgage, as altered by the First and Second Variations).

22 The primary Judge said (at [23]) that she was satisfied that:

“by agreeing to variations to the mortgage which materially altered the agreement as originally made between the [respondents], Whitbourne and the [appellant] to the prejudice of the [respondents], the intention of the [appellant] and Whitbourne was to create a new agreement.”

23 Her Honour then asked what was the effect of the new agreement. She noted (at [25]) that the respondents had argued that the fact that a material alteration had been made to the agreement (presumably meaning the Mortgage) with their consent “repudiated the guarantee … and discharged the [respondent] from liability under the guarantee”, while the appellant had relied on the wording of clause Sixthly. The primary Judge continued as follows:

“27. The ‘ Principal Debtor ’ clause as it is called may operate to prevent the discharge of a guarantor through variation, for example where a creditor gives an extension of time to the debtor to perform the obligations under the contract [ Heald v O’Connor [1971] 1 WLR 497] or when the creditor gives some other indulgence to the creditor. The clause does not create an indemnity in place of the guarantee [ Heald v O’Connor at 503] nor can it operate to enlarge the ambit of the guarantee [O’Donovan and Phillips , The Modern Contract of Guarantee (3rd ed), at 308]. In this case the effect of the variations was a novation of the agreement. A principal debtor clause cannot in those circumstances prevent the discharge of a guarantor from his obligations.
28. Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [(1987) 162 CLR 549] affirmed the proposition that when conduct on the part of the creditor has the effect of altering the surety’s rights, unless the alteration is unsubstantial and not prejudicial to the surety, the conduct acts to discharge the surety [ Ankar , at 559].
29. The variations made after the resignation of the [respondents] from the Company were material and prejudicial to the interests of the [respondents] as guarantors. I am satisfied that the intention of the [appellant] and Whitbourne was to create a new agreement in substitution for that to which the [respondents] were parties with Whitbourne and the [appellant] and operated to discharge them absolutely from their obligations under the guarantee.”

24 For these reasons her Honour entered a verdict for the respondents.

REASONING

25 The argument on the appeal was shaped by different interpretations of the primary judgment. Mr Muddle SC, who appeared with Mr Quickenden for the appellant, interpreted the judgment as resting solely on her Honour’s conclusion that the original agreement (however that might have been defined) had been novated and that one or more of the Third, Fourth and Fifth Variations substituted a fresh agreement for the original, thereby discharging the respondents from their obligations. Mr Muddle accepted that reference had been made, both in argument at trial and in the judgment, to the principle in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; 162 CLR 549 (“Ankar”), but he contended that neither the respondents nor her Honour had relied on the principle as having discharged the respondents from their obligations as guarantors under the Mortgage. On this basis, Mr Muddle devoted much of his argument to challenging her Honour’s conclusion that the doctrine of novation had resulted in the respondents being discharged from their obligations.

Novation

26 To the extent that the primary Judge’s conclusion that the respondents’ obligations had been discharged rested on the doctrine of novation, it cannot be sustained. Novation involves the substitution of a new contract for an old contract. For novation to occur, all parties to the old agreement must be parties to the new contract: Tito v Waddell (No 2) [1977] 1 Ch 106, at 287, per Megarry V-C; HAG Import Corpn (Aust) Pty Ltd v Krosnienskie Huty Szkla “Krosno” SA [2005] FCAFC 97, at [59], per Branson and Hely JJ, citing Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288, at [20], per Finkelstein J.

27 In the present case, one of the respondents executed the Fourth Variation as secretary of the Company. This conceivably could justify an inference that he agreed to the Third Variation in his own right, although the point was not debated in argument. But the other respondent did not execute the Fourth Variation and neither respondent executed the Third or Fifth Variations. There is no basis for inferring that the respondents consented to the Third or Fifth Variations, nor that the respondent who did not execute the Fourth Variation consented to it. Her Honour was therefore in error in holding that any of the Variations was capable of novating the original agreement to which the respondents were parties. It follows that the respondents’ obligation as guarantors of the Company’s obligations under the Mortgage were not discharged by reason of a novation of the original agreement.

The Ankar Principle

28 Ms Obrart, who appeared for the respondents, maintained that the primary Judge had not relied solely on the doctrine of novation and a consequent discharge of the respondents’ obligations as guarantors. Ms Obrart submitted that the primary Judge had also invoked the principle stated in Ankar, at 558, per Mason ACJ, Wilson, Brennan and Dawson JJ:

“Then it has been said that any departure by the creditor from the suretyship contract ‘which is not obviously and without inquiry quite unsubstantial, will discharge the surety from liability, whether it injures him or not, for it constitutes an alteration in the surety’s obligations’: Halsbury’s Laws of England , 4th ed., vol. 20, par. 259. The final clause in the passage quoted from Halsbury indicates that this proposition is founded not so much on cases dealing with the breach of a term in the suretyship contract, as on cases in which conduct on the part of the creditor materially altered the surety’s obligations. Such an alteration takes place when the creditor agrees to a variation of the principal contract or to an extension of time within which the debtor may comply with that contract. The creditor’s agreement with the debtor thereby alters the nature of the surety’s obligations without the surety’s consent.”

29 This passage states an equitable principle which is applied strictly: J O’Donovan and J Phillips, Modern Contract of Guarantee, par 7.100. The principle is a by-product of the special relationship between creditor and surety upon which equity fastened to protect the surety when the creditor’s conduct affected the surety’s liability: Ankar, at 559. Consequently, to hold the surety to the bargain, the creditor:

“must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety’s risk e.g., a reduction in the debtor’s debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety.” (at 559-560)

30 Mr Muddle disputed that what can be conveniently referred to as the Ankar principle had been pleaded or relied on by the respondents at trial. He submitted that her Honour had intended only to hold that there had been a consensual contractual discharge of the respondents’ obligations, not that these obligations had been discharged by the operation of the Ankar principle.

31 In my view, the Ankar principle was clearly put in issue at the trial. The amended defence filed on behalf of the respondents uses the language of “termination” rather than “discharge” but is framed in terms that are capable of embracing the Ankar principle. In any event, as the passages identified by Ms Obrart demonstrate, the point was specifically relied on by the respondents in argument at the trial.

32 In these circumstances, although the judgment is not entirely unambiguous, the better view is that her Honour applied the Ankar principle as an alternative ground for holding that respondents had been discharged from their obligations as guarantors of the Company’s liability under the Mortgage. This seems to be the explanation for the citation of Ankar in par 28 and the reference to the “Principal Debtor” clause in par 27 of the judgment. It is therefore open to the respondents to rely on the Ankar principle in this Court to uphold her Honour’s judgment without the need to file a notice of contention.

33 As I understood Mr Muddle’s argument, he contended that the Ankar principle did not apply because clause Sixthly of the Mortgage made the respondents liable to the appellant as principals. As the argument unfolded, it seemed that this contention encompassed two separate propositions:

· First, since the respondents were liable as principals and since the Ankar principle is available only to sureties, the respondents could not rely on the Ankar principle to discharge them from their liabilities.

· Secondly, by providing that the Mortgage was to take effect as if entered into by the Guarantors, clause Sixthly prevented the Ankar principle operating.

The Guarantors as Principals

34 The first proposition encounters the difficulty that the case pleaded and run by the appellant at trial unambiguously alleged that the respondents were liable to the appellant as guarantors. The statement of claim (extracted at [17] above) expressly pleads that it was a term of the Mortgage that each respondent would guarantee to the appellant the due performance of the Company under the Mortgage (pars 2, 4) and that the respondents’ liability arose by reason of the default of the Company (par 7).

35 Had the appellant pleaded that the respondents were liable as principals, the case may have taken a different course. For example, the respondents did not pursue a pleaded defence under the Contracts Review Act1980 (NSW). That decision may well have been prompted by concerns as to whether the contract was entered into for the purpose of a trade or business (s 6(2) provides that the Contracts Review Act does not apply to such a contract). But if the appellant had pleaded that the respondents were principal debtors and, for that reason, could not rely on the Ankar principle, it may have been open to the respondents to invoke equitable principles or provisions such as s 51AA of the Trade Practices Act 1974 (Cth) (unconscionable conduct by a corporation) by way of defence.

36 A second difficulty is that clause Sixthly, insofar as it provides that the Mortgage is to take effect as if entered into by the Guarantors as a further Mortgagor, does not necessarily have the effect that the respondents are to be regarded for all purposes as principal debtors and not guarantors. In Re Taylor; Ex parte Century 21 Real Estate Corporation (1995) 130 ALR 723, Burchett J quoted with approval (at 728) from Stadium Finance Co Ltd v Helm (1965) 109 Sol J 471, where the Court of Appeal had to consider whether a document described as an “indemnity form” was in substance a guarantee. The Court held that the document was a guarantee. The reported note of Lord Denning’s judgment includes the following:

“Lord Denning MR said that the test was whether, as between two people, one of the two was under a primary liability to perform the obligation, while the other’s obligation was secondary only. If so, it was a contract of guarantee and not of indemnity. One always looked to see if there was a primary and a secondary obligation, or two primary obligations. Clause (1) of this document was a contract of guarantee. It was something which the customer ought to pay and had not paid. Clause (3) was also applicable to a guarantee. But the company relied on cl (2) as an indemnity. His Lordship did not think that these cases could be decided on a literal construction of these documents. Reading cl (2) in relation to cll (1) and (3), the whole burden of this document was that it was a guarantee, to come into force if the principal debtor defaulted and to the extent of his default .” (Emphasis added.)

37 In my view, it is very doubtful whether clause Sixthly would have entitled the appellant to sue the respondents simply as principal debtors under the Mortgage, rather than as guarantors. Had the appellant sued the respondents as principal debtors, they may have been able to adduce evidence in addition to that mentioned in [35] above. In particular, it may have been open to the respondents to adduce evidence of surrounding circumstances, if not of subjective intent, in order to strengthen their claim to have been in substance guarantors of the Company’s obligations and not principal debtors.

38 For these reasons, I do not think that the appellant can rely in this Court on the first proposition that I have distilled from the submissions made on his behalf.

Clause Sixthly

39 Mr Muddle did not develop the second proposition by reference to the authorities. However, he seemed to accept, for the purposes of the argument, that the Third, Fourth and Fifth Variations varied the terms of the Mortgage, as between the Company as mortgagor and the appellant as mortgagee, and that the Variations did not constitute separate contracts.

40 Whether or not I have understood Mr Muddle correctly, I think it clear that the Variations were intended, as between the Company and the appellant, to vary the Mortgage. As Handley JA pointed out in Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703, at 718, parties to a contract can always alter their bargain by varying or adding to its terms. A later agreement between parties to a contract may affect the contractual relations established by the earlier contract, but the later agreement may be interdependent with the earlier. (Handley JA dissented in the result in Credit Lyonnais, but not on this point).

41 In the present case each of the documents executed was described as a “Variation of Mortgage”. Each was in registrable form and, if registered, would have enabled a memorandum to be endorsed on the Mortgage (cf Conveyancing Act 1919 (NSW), s 91). The only changes made to the Mortgage were to the interest rate, the principal sum and the term of the Mortgage (although none of the later Variations dealt with all three matters). The remaining terms of the Mortgage were unaltered. The provisions of Annexure A were unaltered, except insofar as the Variation affected the three matters to which I have referred. It is difficult to see how the Third, Fourth and Fifth Variations could operate otherwise than as variations to the Mortgage.

42 Mr Muddle also seemed to accept for the purposes of this argument that the Third, Fourth and Fifth Variations each altered the nature of the Guarantors’ obligations and that the alteration could not be regarded as unsubstantial or non-prejudicial. Mr Muddle was correct to do so. The Third, Fourth and Fifth Variations each altered the amount borrowed by the Company. By reason of the increase, the Guarantors were exposed to a potentially greater risk of being called upon to meet a default by the Company of its obligations under the Mortgage. The Guarantors were exposed to a greater risk even if their liability was limited to the original sum lent to the Company ($240,000), plus interest. The increased borrowing by the Company may have made it more likely that the Company would default and that the Guarantors would be required to meet any shortfall (albeit up to a limit of $240,000). This is not a risk that can be dismissed as purely “theoretical” or the product of “passing fancies of judicial imagination”: see Corumo Holdings Pty Ltd v C ItohLtd (1991) 24 NSWLR 370, at 380-381, per Kirby P; cf at 404, per Meagher JA.

43 It is open to the parties to a contract of guarantee to agree that a variation of the principal amount will not discharge the surety: Wood Hall Pty Ltd v Pipeline Authority [1979] HCA 21; 141 CLR 443, at 455, per Gibbs J (with whom Barwick CJ and Mason J agreed). Whether the contract of guarantee has that effect will depend on its terms, bearing in mind the principle that the liability of the surety is strictissimi juris and that ambiguous provisions should be construed in favour of the surety: Ankar, at 561; Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; 217 CLR 424, at 433 [17], per Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ.

44 A principal debtor clause, if sufficiently broadly expressed, is capable of excluding the Ankar principle. For example, in The Fletcher Organisation Pty Ltd v Crocus Investments Pty Ltd [1988] 2 Qd R 517 (“Crocus Investments”) a mortgage contained the following provision:

“6 … In order to give full effect to the provisions of this instrument the Guarantor agrees and declares that the Mortgagee shall be at liberty to act as though the Guarantor were the principal debtor and the Guarantor hereby waives all rights in connection with such provisions that it might otherwise be entitled to claim or enforce.”

This was held sufficient to exclude the right of a co-surety to contribution and to the benefit of every security held by the mortgagee. It was therefore held that a compromise between the mortgagee and the other co-surety did not release the first co-surety: at 527, per Shepherdson J; at 537, per Williams J; at 543, per Ryan J.

45 Clause Sixthly in the Mortgage is not worded as broadly as the clause considered in Crocus Investments. Moreover, other provisions of the mortgage in that case, especially a clause by which the guarantor waived all rights as surety, played a part in the reasoning of the Court: see the analysis in Bridgestone Australia Ltd v GAH Engineering Pty Ltd [1997] 2 Qd R 145, at 158, per Moynihan J. In the present case, clause Sixthly merely says that the Mortgage shall take effect as if it was entered into by the Guarantors as a further Mortgagor and that they are jointly and severally liable to the Mortgagee. The clause does not go on to say that the Guarantors waive all rights that they otherwise might be entitled to claim. On the contrary, clause Sixthly expressly states that the Guarantors are not to be released from any obligations by reason only of any extension of time or any other act or omission favouring the Company. Read as a whole, the clause contemplates that the Guarantors may be released by reason of acts or omissions of the appellant that do not necessarily favour the Company. Such acts or omissions include agreeing with the Company to increase the amount of the loan secured by the Mortgage.

46 In my view, clause Sixthly, insofar as it includes a principal debtor clause, does not have the effect of excluding the Ankar principle where the appellant agrees to advance further moneys to the Company pursuant to the terms of the Mortgage. This is not to deny clause Sixthly any operation. It may operate, for example, to dispense with the need for a notice to the Guarantors of the Company’s default before any action is commenced against them.

47 Mr Muddle did not submit that the appellant’s act in advancing further moneys to the Company could be characterised as “an act or omission by the mortgagee favouring the Mortgagor” for the purposes of clause Sixthly. There is therefore no basis for the appellant relying on the second sentence of clause Sixthly to escape the operation of the Ankar principle.

48 I should record that Mr Muddle advanced an argument that, as the respondents were not parties to the Third, Fourth and Fifth Variations, their liability under the Mortgage could not be affected by the later agreements. It is not clear whether Mr Muddle relied on this argument to avoid the application of the Ankar principle. If he did, the argument cannot succeed. The very point of the equitable principle expounded in Ankar is to discharge sureties from obligations by reason of agreements or other transactions to which they were not parties.

CONCLUSION

49 Although not all of the primary Judge’s reasoning has been upheld, the appeals must be dismissed. The appellant must pay the respondents’ costs of the appeals.

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