Zhang v BM Sydney Building Materials Pty Ltd

[2016] NSWCA 166

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Zhang v BM Sydney Building Materials Pty Ltd [2016] NSWCA 166
Hearing dates:	27 June 2016
Date of orders:	19 July 2016
Decision date:	19 July 2016
Before:	McColl JA at [1], Ward JA at [74], Sackville AJA at [75]
Decision:	Appeal dismissed with costs.
Catchwords:	CONTRACT – contractual construction – commercial credit facility and supply agreement – deed of guarantee signed by appellant – whether documents effective to create either primary liability on company’s part or liability as guarantor on appellant’s part – whether strictissimi juris principle of construction enlivened CONTRACT – execution of document by individual holding offices of both director and company secretary – whether execution complied with Corporations Act 2001 (Cth), s 127(1) – whether creditor entitled to make assumption credit facility duly executed – Corporations Act 2001 (Cth), s 129(5)
Legislation Cited:	Corporations Act 2001 (Cth)
Cases Cited:	AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985; (2010) 15 BPR 28,199 Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266 Black & Decker Inc v GMCA Pty Ltd (No 2) [2008] FCA 504; (2008) 76 IPR 99 Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 Caratti v Mammoth Investments Pty Ltd [2016] WASCA 84 Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88 Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310 Dobbs v National Bank of Australasia Limited [1935] HCA 49; (1935) 53 CLR 643 EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 Fitzgerald v Masters [1956] HCA 53; 95 CLR 420 Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503 Hoyt’s Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133 Manks v Whiteley [1912] 1 Ch 735 Metropolitan Gas Co v Federated Gas Employees’ Industrial Union [1925] HCA 5; (1925) 35 CLR 449 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 89 ALJR 990 Rava v Logan Wines Pty Ltd [2007] NSWCA 62 Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068 Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530
Texts Cited:	Lewison and Hughes, The Interpretation of Contracts in Australia, (2012, Lawbook Co) (Lewison and Hughes) R H Kersley, Broom’s Legal Maxims, (10th ed 1939, Sweet & Maxwell Limited)
Category:	Principal judgment
Parties:	Hui Zhang (Appellant) BM Sydney Building Materials Pty Limited (Respondent)
Representation:	Counsel: P Bolster (Appellant) BK Nolan (Respondent)   Solicitors: Mark Marando (Appellant) JHK Legal (Respondent)
File Number(s):	2015/319693
Publication restriction:	No
Decision under appeal	Court or tribunal: District Court of New South Wales Jurisdiction: Civil Citation: [2015] NSWDC 224 Date of Decision: 11 September 2015 Before: Mahony SC DCJ File Number(s): 13/110677

Judgment

1. McCOLL JA: This is an appeal from a decision of his Honour Judge Mahony SC who held that the appellant, Hui Zhang (Hui), [1] had personally guaranteed the obligations of ZH (Holdings) Pty Limited (ZHH) to the respondent, BM Sydney Building Materials Pty Limited (BM), under a commercial credit facility and supply agreement dated 1 April 2010. [2]

   1. As will become apparent, the transactions between Hui and BM also referred to Mr He Zhang, Mr Hui Zhang’s brother. To avoid confusion, and without meaning any disrespect, I shall refer to them as Hui and He respectively.

   2. BM Sydney Building Materials Pty Ltd v ZH (Holdings) Pty Ltd [2015] NSWDC 224.

2. For the reasons that follow, I am of the view that the appeal should be dismissed with costs.

Factual background

3. The primary judge described the background to the commercial relationship between Hui and BM in a manner neither party criticised. Nor, to the extent his Honour did not refer to them, are the facts I set out below controversial.

4. BM is a supplier of building materials. In the period August 2007 to July 2011, BM supplied building materials to ZH International Pty Limited (ZHI) and ZHH, both being companies associated with Hui. At all relevant times Hui was a director of both ZHH and ZHI and the secretary of ZHH. Both ZHH and ZHI had one other director, Ms Ngoc Hong Ly.

5. On 1 August 2007 BM and ZHI entered into a commercial credit facility application and supply agreement and guarantee, with Hui as guarantor (2007 Agreement). The monthly credit limit under the 2007 Agreement was $5,000. BM carried out a company search in respect of ZHI on 2 August 2007. [3]

   3. Primary judgment (at [23]).

6. On 10 August 2007 ZHI was granted an increase of the credit limit under the 2007 Agreement, from $5,000 to $200,000. BM continued to supply goods to ZHI. However, due to a clerical error, it incorrectly issued invoices for those goods to ZHH instead of ZHI. BM realised its mistake in 2010. Its managing director, Ming Lee, asked Hui to enter into an additional credit “application” for ZHH. [4]

   4. Ibid (at [8]).

7. On 1 April 2010 BM and ZHH entered into a commercial credit facility application and supply agreement (2010 Agreement). The original of that document was not in evidence. It was uncontroversial that Hui and He each signed the 2010 Agreement in Mr Lee’s presence twice. First, on what was described at the bottom of the page as “Page 1 of 4” and secondly, on what was described as “Page 4 of 4”, being part of a “Deed of Guarantee and Indemnity” (Guarantee) which commenced on the previous page, Page 3 of 4. Page 2 of 4 set out the “Trading Terms and Conditions of Credit Facility”, being clauses (a) – (q). Page 3 of 4 set out the terms of the Guarantee. [5]

   5. A copy of the documents appears in the Schedule to these reasons.

8. Although it appears from the numbers on the bottom of the pages that the 2010 Agreement and the Guarantee are in one document, the copy of the agreement which was annexed to Mr Lee’s affidavit contained an unnumbered page, also headed “Trading Terms and Conditions of Credit Facility” on which terms (a) – (s) appear. That page is in a different font to the other pages, but was also apparently signed by Hui and He at the time they executed the other pages of the document(s). Hui did not suggest anything turned on the apparent inclusion of the unnumbered page in the documents.

9. Mr Lee gave evidence that at the time the 2010 Agreement and Guarantee were signed Hui said to him, “my brother will also order and trade on the company’s behalf”. [6]

   6. Primary judgment (at [8]).

10. Hui accepted that, despite the unnumbered page, the 2010 Agreement and the Guarantee appeared to be one document and, in any event, whether or not the five pages were one document, all were signed by the parties at the same time.

11. On Page 1 of 4, the 2010 Agreement commenced with the words:

“I/We make application on behalf of: ZH Holdings Pty Ltd (Company name or trading name or individual/s), (hereinafter called ‘The Buyer’), for a Commercial Credit Facility with BM SYDNEY BUILDING MATERIALS PTY LTD … (Hereinafter called ‘BM SYDNEY’) …” [7]

7. The italics in this quote from the 2010 Agreement and the quotes in the following paragraphs indicate the hand-written parts of the documents.

12. Section 1 of that page required the entry of “Details of Account Customer” with the instruction “Note: - Place a tick to indicate whichever is applicable)”. There were no ticks in this section.

13. The balance of the 2010 Agreement was completed as follows:

“# If a Company, Corporation, Partnership or Sole Trader:-

2.   Company or Corporation Name: Hui Zhang – ZH Holdings Pty Ltd

Business Name: Hui Zhang [8]

8. There was no business name search for ZHH as at the date of the 2010 Agreement.

Proprietor/Sole Trader Name(s): ..………

Australian Business No: (A.B.N): 38112662825 [9]

9. According to a company search of ZHH undertaken in 2014, this was its ABN.

Trading Address: 270 Cabramatta Rd Cabramatta NSW 216[6] [10]

10. According to the same company search, this was the address of Hui and the other director, Ms Ly. The registered office of ZHH in 2010 was a firm in Haymarket, presumably either an accountant’s or solicitor’s firm.

Particulars of all parties to this Facility are required below.

Full Names & Addresses of Directors:- Partners:- Sole Traders:-

_________________________________________________________   

3.   Full Name      Private Address   Home Mortgaged??

YES/NO

Hui Zhang      270 Cabramatta Rd

Cabramatta NSW 2166

4.   Telephone: (Business): 0412 939 398 (Home):... (Fax No.): 9726 9938

Name of Contact: ……….. Monthly Credit Limit: - $ 200,000.00

Trade References:-

5.   Name:            Town:         Phone No:

1:……………………….   ………………………   …………………….

2:……………………….   ……………………… ……………………..

TO BE SIGNED BY ALL DIRECTOR/S OF A COMPANY, SOLE TRADER/S, PARTNERSHIP APPLICANTS:

Buyer Signature: [Hui Zhang’s signature appeared here]   Title:   Director

Name: Hui Zhang                  Date: 1/4/2010

Buyer Signature: [He Zhang’s signature appeared here]   Title: ……………..

Name: He Zhang                  Date: ……………..

Name, Address and Signature of Witness:-

Name: MING LEE         Signed: [Mr Lee’s signature appeared here]

Date: 1/4/2010            Address: ……………………..”

14. The Guarantee commenced on Page 3 of 4. After prefatory words, the following appeared:

“In consideration of you agreeing at my/our request (hereby confirmed) to supply (either past, now or at some future time) or to continue to supply or to cause to be supplied at your cost to the person(s) identified below as your customer (hereinafter referred to as ‘The Buyer’) goods and services on credit the person(s) identified below as Guarantor(s) (hereinafter referred to as ‘The Guarantor(s)’ HEREBY GUARANTEES the due payment by the Buyer of all monies now due and owing or hereafter becoming due and owing by the Buyer on any account whatever (including on account of goods sold and services supplied and work done) to ‘The Buyer’ AND the Guarantor(s) agrees.”

15. On Page 4 of 4, in the section of the Guarantee providing for the document’s execution, the following appeared:

“DATED THIS          DAY OF

Name of Customer:Hui Zhang

*Name of Guarantor: [Hui Zhang’s signature appeared here]             *Name of Guarantor: He Zhang

*Signed by Guarantor:                                                                         *Signed by Guarantor: [He Zhang's signature appeared here]

*Date Signed: 1/4/2010                                                                        *Date Signed: 1/4/2010

Name of Witness: MING LEE                                                               *Signed by Witness: [Mr Lee's signature appeared here]

16. Ms Ly, ZHH’s only other director apart from the appellant, did not sign the 2010 Agreement. The primary judge noted that BM produced no company search in respect of ZHH in April 2010, and no such search was produced upon a call for any such document. [11]

    11. Primary judgment (at [23]).

17. After the 2010 Agreement was signed, BM continued to send invoices to ZHH. Both Hui and He continued to sign invoices for goods. As at 11 February 2015, ZHH owed BM $153,342.78 for building materials supplied by BM under the 2010 Agreement. [12] BM sought to prove that was the amount owing as against ZHH by relying on a certificate stating the balance of the monies due, and contending, relying on clause (g) of the terms of the 2010 Agreement, that that certificate was conclusive evidence of that fact. [13]

    12. Ibid (at [11]).

    13. Ibid (at [12]), referring to Dobbs v National Bank of Australasia Limited [1935] HCA 49; (1935) 53 CLR 643.

18. By an amended statement of claim filed on 22 April 2015, BM alleged that ZHH had breached the terms of the 2010 Agreement by failing to pay for the goods BM had supplied. BM claimed the amount of $153,342.78, plus interests and costs as against ZHH pursuant to the 2010 Agreement and against Hui and He as guarantors.

19. BM entered default judgment against He prior to the trial. As ZHH filed no appearance, BM also sought default judgment against it. [14]

    14. Primary judgment (at [2]).

The trial

20. At trial, BM submitted that the 2010 Agreement was executed by Hui as director and company secretary of ZHH in compliance with s 127(1)(b) of the Corporations Act 2001 (Cth) (Corporations Act). It also contended that Hui was entitled to exercise ZHH’s power to make contracts as he was acting with the company’s express or implied authority and on behalf of the company. [15]

    15. The summary of BM’s submissions at trial is taken from paragraphs [18] – [21] and [38] – [43] of the primary judgment.

21. The essence of Hui’s submissions at trial (as relevant to the issues raised on appeal) was that the primary judge could not find that he had guaranteed ZHH’s obligations under the 2010 Agreement. [16] He submitted that, on the proper construction of the Guarantee, first, the “Customer” whose obligations were to be guaranteed was not identified and, secondly, it could not be inferred that he was signing that document as guarantor.

    16. The summary of Hui’s submissions at trial is taken from paragraphs [22] – [37] of the primary judgment.

22. Hui submitted that there was no ambiguity on the face of the Guarantee, but that ambiguity arose when one compared that document and the 2010 Agreement having regard to the description of the “Buyer” and the particulars of the “Account Customer” on Page 1. The effect of the ambiguity, he argued, was such that it could not be concluded the “Customer” whose obligations the Guarantee was intended to secure had been identified. He relied upon the principle that any ambiguity had to be resolved in his favour as guarantor.

23. Hui also submitted that there was no “linkage” between the 2010 Agreement and the Guarantee. On that basis, he argued that there was no ambiguity arising on the Guarantee, if one accepted the construction for which he contended. This was that it was not commercially implausible that Hui was the “Customer” and that He was guaranteeing goods Hui ordered from BM. Hui submitted that this construction was open, given the objective background circumstances known to the parties, and did not give rise to absurdity.

24. Hui further submitted that, had BM intended to contract with ZHH, it would have conducted a company search, and there was no evidence of that having been done in April 2010. [17] He relied in this respect on Mr Lee’s acknowledgement in cross-examination that when BM was dealing with a corporation, each director was required to sign its terms of trade, and the reason for obtaining a company search was to establish those directors’ identities. On that basis, it was put to Mr Lee that in April 2010 he was not intending to make an agreement on behalf of BM with ZHH. That was denied. [18]

    17. Primary judgment (at [31]).

    18. Ibid (at [23] – [24]).

25. Hui’s alternative argument was that the 2010 Agreement was not effective to bind ZHH (and presumably ineffective to give rise to a primary obligation to BM which could be the subject of a guarantee) because it had not been executed in accordance with s 127 of the Corporations Act. That submission invoked s 127(1) relevantly to the effect that a company may execute a document without using a common seal if the document is signed by two directors of the company or a director and a company secretary of the company. Hui contended the latter requirement was not satisfied by execution by one person who wore both hats.

26. In reply to Hui’s s 127 submissions, BM argued first, that s 127 did not preclude a director and secretary of a company, being one person, holding two offices, from executing a contract or deed so as to bind the company, secondly, that s 127(4) made it clear s 127(1) did not limit the ways in which a company may execute a document and thirdly, that s 127(1) was not mandatory. BM also submitted it was entitled to rely upon the assumption of due execution in s 129(5) and that there was no evidence at the time of the dealings that Mr Lee knew or suspected that assumption was incorrect. [19]

    19. Cf Corporations Act, s 128(4).

Primary judgment

27. The primary judge’s dispositive reasons were succinct. His Honour said:

“[44]   There is no issue between the parties as to the principles to be applied in construction of a contract of guarantee or indemnity. They were set out by the High Court in Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424 at [17] – [23] and further explained by the plurality in Bofinger v Kingsway Group Limited (2009) 239 CLR 269. The principles for construction of commercial contracts are similarly well settled, and must be applied so as to give effect to the purpose and object of the transaction (Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at [40]); and are to be construed so as to avoid ‘commercial nonsense’ or ‘working commercial inconvenience’ (see Electricity Generation Corporation v Woodside Energy Limited (2014) 251 CLR 640 at [35]).

[45]   Here, the evidence establishes that the objective circumstances known to the parties prior to the agreement on 1 April 2010, were that [BM] had been trading with a corporation related to [Hui], ZHI, whereas it had been invoicing another corporation of which [Hui] was a director, namely, ZHH. The agreement and guarantee were entered into to rectify that situation.

[46]   In respect of the agreement, I find that [BM] contracted with ZHH. ZHH is clearly identified in the agreement as the company name for whom the credit facility was being established and was, by definition, thereafter referred to as ‘The Buyer’. Its name was further identified as ‘the Account Customer’ by way of its name, ABN and trading address.

[47]   [Hui’s] particulars were identified on the face of the document as a director of ZHH and he signed the agreement as director.

[48]   I do not accept [Hui’s] submission that there is ambiguity in the agreement. I find that [Hui] was, at the relevant time, a director and secretary of ZHH and by signing the agreement he bound ZHH to it. He clearly had both implied and ostensible authority to do so, applying the principles set out in Bruce Harvey v State of New South Wales, supra, at [21].

[49]   I accept the submissions of [BM] in respect of the application of ss 126, 127 and 129 of the Act set out in [20], [21], and [38] – [43] above. Applying the judgment of Heerey J in Black & Decker Inc, supra, s 127(1) is not mandatory and pursuant to s 127(4), s 127 does not limit the ways in which a company may execute a document, including a deed. I find [Hui] had ostensible authority to act on behalf of ZHH and was not engaged on a frolic of his own. Pursuant to s 129(5) of the Act, [BM] was entitled to assume that the agreement had been duly executed by ZHH, given the history of dealings between [Hui] and [BM].

[50]   I find that no ambiguity arises by virtue of [He] signing the document, when he was not an office holder of ZHH. The evidence of Ming Lee went unchallenged that He Zhang had been authorised by [Hui] to place orders on behalf of ZHH.

[51]   I further find that there is no ambiguity arising in respect of the guarantee. I find that [Hui’s] name was printed incorrectly opposite the words ‘Name of Customer’, but that he executed the agreement as guarantor on 1 April 2010.

[52]   Giving a purposive construction to the document as a whole, a commercially sensible construction based on the language of the document is that [Hui] and [He] were guaranteeing the credit facility being established with [BM] on behalf of ZHH. Having concluded that language is unambiguous, in accordance with Macfarlan JA’s judgment in Jireh International Pty Limited, supra, the court must give effect to that language unless to do so would give the contract an absurd operation. In my view, no absurdity arises; rather, the only mistake was in the place where [Hui’s] name was printed above his signature as guarantor. That mistake can be disregarded, having regard to the unambiguous language by which both [Hui] and [He] guaranteed the performance of the agreement as entered into by [Hui] on behalf of ZHH.”

28. Accordingly, the primary judge found that Hui was indebted to BM in the sum claimed of $153,342.78. He also held that BM was entitled to interest pursuant to the 2010 Agreement at 18% per annum from 28 April 2011 to 11 September 2015, calculated at $122,430.55. [20] Judgment was entered against Hui, ZHH and He in the sum of $275,773.33.

    20. Primary judgment (at [53] – [54]).

Issues on appeal

29. The notice of appeal advanced three grounds of appeal, however the third was abandoned in the course of the appeal. The first is, in substance, that the primary judge erred in finding that Hui had guaranteed ZHH’s obligations to BM pursuant to the 2010 Agreement. The second is that his Honour erred in finding ZHH executed, and was bound by, the 2010 Agreement having regard to s 127 of the Corporations Act.

Appellant’s submissions

30. As I have said, Hui accepted that the 2010 Agreement and Guarantee was one document, or that the two documents were executed so contemporaneously as to be treated as such. He also accepted that regard could be had to both documents, to the extent that it was necessary to resolve any ambiguity. However, he submitted that any ambiguity was not cured by taking that approach. Rather, either way, there was ambiguity as to what was the parties’ objective intention.

31. Hui submitted that, in substance, whether the documents were taken as a whole or separately, there was no valid primary agreement such as would create any liability to BM on ZHH’s part or, if that was not correct, there was no valid guarantee whereunder Hui guaranteed ZHH’s obligations to BM.

32. As will be apparent, Hui’s submissions supporting those propositions vacillated between contentions that the documents was or were ambiguous but ineffective.

33. Hui first submitted that, standing alone, the Guarantee was not ambiguous. However, it was not a guarantee of ZHH’s obligations under the 2010 Agreement. Rather, he argued that, on its proper construction, Hui was the “Customer” and his brother, He, was guaranteeing goods Hui ordered from BM. Hui contended that this construction offered a “commercially sound explanation” for what occurred and was open, given the objective background circumstances known to the parties. This explanation also refuted BM’s argument that the appearance of He’s name on, and his execution of, the 2010 Agreement was surplusage. Hui complained that this commercially sound explanation was not considered by the primary judge.

34. Hui contended the primary judge erred in concluding there was no ambiguity in the Guarantee but, rather, that ZHH was the customer whose debts he guaranteed. Hui contended as his name appeared against the words “Name of Customer” in the Guarantee, it did not identify any principal borrower other than himself. In particular, it did not identify ZHH as the “Customer” to whom goods would be supplied under the 2010 Agreement, so as to engage the Guarantee.

35. Hui identified paragraph [52] of the primary judgment, in which the primary judge treated the appearance of his name against the word “Customer” on the Guarantee as a mistake, as the key to identifying the error of which he complained. He submitted that the case was not pleaded as one of mistake, and no relief by way of rectification was sought. Notwithstanding that, he complained that the primary judge raised the issue of mistake and resolved that question impermissibly “by re-writing and, in effect, granting rectification of the document based on a mistake.” Hui submitted that his Honour’s finding of mistake identified a real ambiguity in the Guarantee which was incapable of resolution on the face of the Guarantee.

36. Alternatively, Hui submitted that if the 2010 Agreement and Guarantee were taken as a whole, the following matters gave rise to ambiguity sufficient to lead to the conclusion that there was no valid guarantee binding him in respect of any obligation of ZHH:

1. ZHH’s name appears in two places in the 2010 Agreement: first, as the name on whose behalf the credit application is being made, and secondly, following Hui’s name in Section 2. Although the first use of the name supported the primary judge’s conclusion, Hui submitted the second did not.

2. The parties left Section 1 blank, and did not select whether the “Account Customer” was a corporation, partnership or sole trader.

3. Hui’s name had been entered as the “Company or Corporation Name”.

4. Hui’s name had been entered as the “Business Name”; rather than ZHH.

5. In Section 3, Hui, not ZHH, was expressed to be the party to the 2010 Agreement.

6. Both Hui and He executed the 2010 Agreement under the heading “To be signed by all director/s of a company, sole trader/s, partnership applicants”, even though He was not a director of ZHH. Hui submitted there was no logical explanation or rational basis, if the 2010 Agreement was to bear the meaning for which BM contended, why He signed both the 2010 Agreement, given that he was neither a director nor shareholder of ZHH, and the Guarantee.

37. Secondly, Hui submitted that the primary judge erred in finding that the 2010 Agreement was valid notwithstanding that it was not executed by its two directors, contrary to s 127(1) of the Corporations Act. He contended that Mr Lee had been on notice that ZHH was a two director company since 2007. [21] Accordingly, it was not correct that in the case of a company with two or more directors, it was sufficient for a single director (who also happened to be the company secretary) to execute a document.

    21. There was no 2007 search of ZHH. This submission appeared to be based on the premise Mr Lee ought to have inferred the directorship of ZHH from that revealed by a 2007 search of ZHI.

38. Hui also argued that Mr Lee was not entitled to make any assumptions as to valid execution pursuant to s 129(5) of the Corporations Act. He submitted that it was implicit in the drafting of s 127 of the Corporations Act that where there was more than one director, it was necessary for all directors to execute a document.

Respondent’s submissions

39. BM submitted that the primary judge did not err in finding that the relevant “Buyer” or “Customer” was ZHH, rather than Hui in his personal capacity. BM contended that his Honour’s construction of the documents was open, having regard to the objective evidence and the face of the relevant documents, and was an unexceptionable application of principles informing the construction of commercial agreements.

40. BM also submitted that there was “nothing apparent on the face of the language” of s 127 that a director and secretary of a company, being the one person holding two offices, is not permitted to execute a contract or deed so as to bind the company. BM contended that the purpose of s 127 is to move away from the stringent application of common law formalities as to the execution of a deed, with a greater focus on substance and intention. In addition, BM argued that s 127 is not mandatory, as is apparent from s 127(4).

Consideration

41. The primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. [22] This is an objective exercise in which regard may be had to the “text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.”[23] The “legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions.”[24]

    22. Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 (ABC v APR) (at 109) per Gibbs J (as his Honour then was).

    23. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 89 ALJR 990 (Mount Bruce Mining) (at [46]) per French CJ, Nettle and Gordon JJ; this paragraph and [47] – [51] were approved unanimously in Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 (at [51]).

    24. Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 (at [34]) per Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ.

42. The document must be construed as a whole. That is to say, “every passage … must be read, not as if it were entirely divorced from its context, but as part of the whole instrument … in order to collect from the whole one uniform and consistent sense, if that may be done; or, in other words, the construction must be made upon the entire instrument, and not merely upon disjointed parts of it”. [25]

    25. Metropolitan Gas Co v Federated Gas Employees’ Industrial Union [1925] HCA 5; (1925) 35 CLR 449 (at 455) per Isaacs and Rich JJ; see also ABC v APR (at 109).

43. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable business person would have understood its terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. [26] Unless a contrary intention is indicated, a commercial contract is to be construed to avoid “making commercial nonsense or working commercial inconvenience”. [27]

    26. Mount Bruce Mining (at [47]); see also Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 (Electricity Generation Corporation) (at [35]).

    27. Electricity Generation Corporation (at [35]), citing Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530 (at [82]).

44. In Hillas v Arcos, [28] Lord Wright observed that “[b]usiness men often record the most important agreements in crude and summary fashion: modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise.” In that context, his Lordship continued (footnote added):

“It is accordingly the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects, but, on the contrary, the Court should seek to apply the old maxim of English law, ‘verba ita sunt intelligenda ut res magis valeat quam pereat.’* [29] That maxim, however, does not mean that the Court is to make a contract for the parties, or to go outside the words they have used, except in so far as there are appropriate implications of law, as, for instance, the implication of what is just and reasonable to be ascertained by the Court as matter of machinery where the contractual intention is clear but the contract is silent on some detail.”

28. Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503 (at 514); referred to with approval in ABC v APR (at 109).

29. * “A liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties”: R H Kersley, Broom’s Legal Maxims, (10th ed 1939, Sweet & Maxwell Limited) (at 361).

45. Where a commercial transaction is implemented by several contracts or documents, all of the contracts or documents may be read together for the purpose of ascertaining their proper construction and legal effect, at least where the contracts or documents are executed contemporaneously or within a short period. [30] As Lewison and Hughes observe,[31] the rationale for this proposition as explained in Manks v Whiteley is that “[e]ach [deed] is executed on the faith of all the others being executed also and is intended to speak only as part of the one transaction, and if one is seeking to make equities apply to the parties they must be equities arising out of the transaction as a whole.”[32]

    30. EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 (at [104]) per Buss JA (Owen and Newnes JJA agreeing); see also Lewison and Hughes, The Interpretation of Contracts in Australia, (2012, Lawbook Co) (Lewison and Hughes) (at [3.03]).

    31. (at [3.03]), referring also to Hoyt’s Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133 (at 142) per Isaacs J.

    32. [1912] 1 Ch 735 (at 754 – 755) per Fletcher Moulton LJ.

46. The process of contractual construction ordinarily proceeds by reference to the contract alone. However recourse to events, circumstances and things external to the contract may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding of the genesis of the transaction, the background, the context and the market in which the parties are operating, or in determining the proper construction where there is a constructional choice. Where such materials may be considered, the court may have regard to events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating, but not to evidence of the parties’ statements and actions reflecting their actual intentions and expectations. [33]

    33. Mount Bruce Mining (at [48] – [50]).

47. The liability of the surety is strictissimi juris such that ambiguous contractual provisions should be construed in the surety’s favour. [34] While, accordingly, a guarantee is to be read contra proferentem, that does not exclude reference to circumstances surrounding the execution of the document as an aid to construction where the words are ambiguous. [35]

    34. Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 (at 561) per Mason ACJ, Wilson, Brennan and Dawson JJ; see also (at 569) per Deane J; Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 (at 256) per Mason CJ, Brennan, Deane and McHugh JJ; Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424 (Andar) (at [17], [23]) per Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ; Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 (at [53]) per Gummow, Hayne, Heydon, Kiefel and Bell JJ.

    35. See Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88 (at 92); referred to in Andar (at [19]).

48. As Campbell JA pointed out in Rava v Logan Wines Pty Ltd, the strictissimi juris principle of construction “is an aspect of the contra proferentem rule.”[36] It “needs to be used bearing in mind the fundamental purpose of construction of a document, namely, to ascertain the intention of the parties arising from the document as a whole and reading the document with such background information as was known by all the parties to it” and “along with other aids that the law recognises for the construction of a document”. [37]

    36. [2007] NSWCA 62 (Rava) (at [51]).

    37. Ibid (at [53] – [54]).

49. Further, “it is not a legitimate use of the contra proferentem rule to say that two meanings of a particular contractual provision are possible and hence the meaning unfavourable to the proferens should be chosen if one of those meanings is an unrealistic or unlikely construction of the contract … [r]ather, the contra proferentem rule is to be used only where the document is otherwise ambiguous, and it is a principle of last resort”. [38] Thus, the strictissimi juris principle of construction “does not involve preparing a list of all the possible meanings of a clause that the language can bear without breaking, and choosing the meaning that is most favourable to the guarantor or indemnifier. Rather, the choice is limited to choosing amongst meanings that are fairly open by reason of the application of other rules of construction.”[39]

Conclusion

38. Ibid (at [55]).

39. Ibid (at [56]).

Construing the documents

50. The pagination of the 2010 Agreement and the Guarantee strongly suggests that they are one document, notwithstanding the inclusion of the unnumbered page. In any event, Hui accepted that the documents were executed at the same time. Accordingly, consistently with the authorities to which I have referred, they should be read together to determine their proper construction and legal effect. In this context, it is also relevant to take into account that while the printed parts were apparently prepared by lawyers, they were completed by lay people, all of whom, as far as Mr Lee’s evidence reveals, worked in the building industry. [40]

    40. Cf Hillas v Arcos, supra.

51. Hui’s primary submission was that the identity of the “Customer” whose liability he was said to be guaranteeing was not apparent on the face of the Guarantee document. This of course focused on the manner in which that document was executed on the last page of the documents.

52. That narrow focus was at the expense of giving effect to the 2010 Agreement and the Guarantee as a whole. As a matter of logic, and having regard to the contemporaneous execution of the documents, the starting point of the construction exercise should look to the beginning of the 2010 Agreement. This was of course the primary judge’s approach. There, “The Buyer” on whose behalf the application for the supply of goods on credit is made is identified as ZHH. ZHH and “Hui Zhang” are identified in Section 2, the section dealing with “Details of Account Customer”, against the heading “Company or Corporation Name”. “Hui Zhang” also appears against the heading “Business Name” in the same Section of the document. Finally, those words appear against the printed words “Name of Customer” in the Guarantee.

53. Hui criticised the primary judge’s conclusion that ZHH was identified as “The Buyer” because, he submitted, his Honour failed to consider the appearance of his name, “Hui Zhang” in portions of both documents referring to the “Customer”.

54. However, in my view, the appearance of the words “Hui Zhang” against “Corporation Name” and “Business Name” suggests that those completing the document treated those headings as synonymous, an interpretation which is comprehensible given the fact they were not lawyers. Objectively, it is also open to the interpretation that “Hui Zhang” was ZHH’s business name. This is consistent with the insertion of Hui’s name in Section 2 of the 2010 Agreement under the heading “Details of Account Customer”. On that basis too, the insertion of “Hui Zhang” as the “Name of Customer” in the Guarantee makes perfect sense. There is no controversy that Hui executed the Guarantee.

55. On their plain reading, in my view, it is clear that the Customer was identified as ZHH throughout the documents. By his execution of the Guarantee, Hui guaranteed its obligations.

56. Although this is not the approach the primary judge took, in my view, it is clearly an available interpretation having regard to the manner in which the documents were completed. As I understand his submissions, Hui contests that approach, in part because he says it is contradicted by the fact that He signed the 2010 Agreement even though he was not a director of ZHH. Accordingly, Hui contends that the appearance of He’s signature in a space designated for execution by a director of the Buyer highlights the ambiguity of the 2010 Agreement.

57. Assuming that that submission is correct, it may be open to the court to have regard to extrinsic evidence to resolve any ambiguity. BM submits that the appearance of He’s name in that position is consistent with the fact that He was going to order goods on ZHH’s account. It may be doubtful, however, whether evidence of that nature is admissible in this context, being prima facie evidence of the parties’ statements reflecting their actual intentions and expectations. [41]

    41. Cf Mount Bruce Mining (at [50]).

58. It is unnecessary to determine that point. In my view, He’s signature under the heading requiring execution by “all director/s of a company, sole trader/s, partnership applicants” can be treated as redundant, that is to say as surplusage. While there is said to be a “presumption against redundant words”, [42] that is a presumption which appears to operate principally in relation to the drafting of a contract, rather than its completion, particularly, at the expense of tedious repetition, where those completing the documents are not lawyers.

    42. Lewison and Hughes (at [7.03]).

50. In any event, the presumption does not operate invariably, for example, “where the alternative construction of the words is inconsistent with other provisions of the contract or where the alternative construction is inconsistent with the commercial purpose of the contract or where it appears that the words have been included out of abundant caution”. [43] In this case, He’s signature appeared in the position allocated for execution by a director of the Buyer company, a position he did not hold and did not profess to hold, as is apparent from the fact he was not ascribed a “Title” in that section of the 2010 Agreement. That anomaly does not detract from the fact that, construing the documents as a whole, the credit application was on ZHH’s behalf and it was the parties’ objective intention that its obligations under the credit facility be guaranteed by the two men who executed the Guarantee.

    43. AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985; (2010) 15 BPR 28,199 (at [13]) per Ball J; see also Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266 (at 274) per Lord Hoffmann.

51. This construction of the documents reflects, in my view, what reasonable business people would have understood the agreements as executed to mean. Hui’s emphasis on the execution of the documents gives no, or no adequate, weight to the identification of ZHH as the Buyer/Account Customer on the first page, its business name apparently being “Hui Zhang” and the appearance of that name as the Customer in the relevant section of the Guarantee.

52. Further, Hui’s submission that a commercially sensible construction of the documents was that Hui was the principal whose debts He was guaranteeing confounds commercial reality. There was no evidence that Hui traded on his own behalf with BM. Mr Lee’s evidence was consistent that all BM’s dealings were either with ZHI or ZHH. The documents were executed in the context of the parties regularising transactions between BM and ZHH.

53. In my view there is no ambiguity in the documents such as would attract the operation of the principle as to the strict construction of a guarantee. The objective intention of the parties is apparent from the documents. Hui’s contentions are an unrealistic and unlikely construction of the documents. [44]

    44. Cf Rava (at [55]).

54. Finally, I would also reject Hui’s submission that the primary judge erred in treating the placement of the words “Hui Zhang” in the place for the “Name of Customer” on the Guarantee as a mistake which could be disregarded. His Honour’s conclusion was consistent with the requirement to construe commercial contracts fairly and broadly, without being too astute or subtle in finding defects, or “making commercial nonsense or working commercial inconvenience”. In that context, “[w]ords may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency.”[45] His Honour did not engage in an impermissible exercise in rectification.

    45. Fitzgerald v Masters [1956] HCA 53; 95 CLR 420 (at 426 – 427) per Dixon CJ and Fullagar J.

55. This conclusion is not confounded by the fact that Mr Lee did not produce a 2010 search of ZHH. His evidence at trial was that any such search would have been undertaken by his accountant. No such search was produced on a call for such a document. Assuming it to be the case that the failure to respond to the call led to an inference that no such search was conducted, that does not contradict the conclusion on an objective construction of the documents that the parties intended that BM would extend credit to ZHH and that ZHH’s resulting obligations to BM were guaranteed by, inter alia, Hui.

56. The primary judge did not err in holding that ZHH was the “Buyer” or “Customer” both for the purposes of the 2010 Agreement and the Guarantee.

Corporations Act, s 127

66. It was not clear whether Hui pressed the second ground of appeal relating to s 127 of the Corporations Act. If he did, the submission should be rejected.

67. Section 127 relevantly provides:

“127 Execution of documents (including deeds) by the company itself

(1)    A company may execute a document without using a common seal if the document is signed by:

(a)    2 directors of the company; or

(b)    a director and a company secretary of the company; or

(c)    for a proprietary company that has a sole director who is also the sole company secretary--that director.

Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company.

…

(4)    This section does not limit the ways in which a company may execute a document (including a deed).”

68. Section 128 of the Corporations Act relevantly provides:

“128 Entitlement to make assumptions

(1)   A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

….

(4)   A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.”

69. Section 129 sets out assumptions that can be made under s 128. They relevantly include the assumption in s 129(5) that a document has been duly executed by the company if the document appears to have been signed in accordance with s 127(1).

70. Section 127(1) is not mandatory, as is apparent from s 127(4). [46] Persons dealing with ZHH were entitled to assume that the company’s constitution had been complied with and that a director had been duly appointed and had authority to exercise the powers customarily performed by a director of a similar company. [47] The primary judge held that Hui had ostensible authority to act on behalf of ZHH, a finding of fact Hui did not challenge. To persuade the primary judge that Mr Lee was not entitled to make the s 129(5) assumption, Hui had to establish that, as at 1 April 2010, Mr Lee actually knew or suspected that assumption was incorrect. [48] It was not necessary that BM establish that Mr Lee had actually made any of the assumptions in s 129. [49]

    46. Corporations Act, ss 129(1) and (3); Black & Decker Inc v GMCA Pty Ltd (No 2) [2008] FCA 504; (2008) 76 IPR 99 (at [144]) per Heerey J.

    47. Ibid.

    48. Corporations Act, s 128(4); Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310 (Correa) (at [127], [159]) per Gleeson JA (Barrett JA and Tobias AJA relevantly agreeing); Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068 at [70]) per Hodgson CJ in Eq (as his Honour then was); Caratti v Mammoth Investments Pty Ltd [2016] WASCA 84 (at [592]) per Newnes and Murphy JJA.

    49. Correa (at [115]).

71. Hui submitted that BM was not entitled to make the s 129(5) assumption because Mr Lee had been on notice since BM obtained a search of ZHH in 2007 that the latter was a two director company. [50] The primary judge accepted BM’s submission that there was no evidence to that effect, not least, it would appear, because no such proposition was put to Mr Lee in cross-examination. [51] Hui did not advance any submission on appeal challenging his Honour’s finding in this respect.

    50. As I have noted, there was no 2007 search of ZHH.

    51. See primary judgment (at [49]), accepting BM’s submissions (at [38] – [43]).

72. In my view, the primary judge did not err in holding that, in the circumstances, BM was entitled to assume that the 2010 Agreement had been duly executed by ZHH, given the history of dealings between it and Hui. [52]

    52. Ibid (at [49]).

Orders

73. The appeal should be dismissed with costs.

74. WARD JA: I agree with McColl JA.

75. SACKVILLE AJA: I agree with McColl JA.

**********

Schedule (254 KB, pdf)

Endnotes

Amendments

20 July 2016 - Full copy of Schedule referred to now attached.

Minor formatting to [13].

19 July 2016 - pages added to schedule

Decision last updated: 20 July 2016