Kumar v Sarsfield Engineering Limited
[2021] NZHC 3408
•13 December 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2021-404-001681
[2021] NZHC 3408
BETWEEN VINOD KUMAR
Appellant
AND
SARSFIELD ENGINEERING LIMITED
Respondent
Hearing: 18 November 2021 Appearances:
P L Rice for the Appellant
J A McMillan and N M Thompson for the Respondent
Judgment:
13 December 2021
Reissued:
15 December 2021
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 13 December 2021 at 12 noon and
re-delivered by me on 15 December 2021 in accordance with High Court Rules 2016, r 11.10
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
P L Rice, Barrister, Auckland
Dentons Kensington Swan, Auckland Parshotam Lawyers, Auckland
KUMAR v SARSFIELD ENGINEERING LIMITED [2021] NZHC 3408 [13 December 2021]
Introduction
[1] Vinod Kumar appeals the decision of Judge Nicola Mathers given in the Auckland District Court on 26 July 2021 in which the Judge entered summary judgment against Mr Kumar in favour of the respondent, Sarsfield Engineering Ltd (Sarsfield), for payment of the sum of $80,043.42 plus interest. That was the sum sought by Sarsfield for non-payment of invoices rendered under an agreement for the lease of equipment to Mr Kumar’s company, Vijay Holdings Ltd (the Agreement).1 Judge Mathers also ordered that Mr Kumar pay costs on a solicitor-client basis.
[2] Mr Kumar contends that he has no liability to Sarsfield because Sarsfield varied the terms of the Agreement without Mr Kumar’s consent as guarantor of Vijay Holdings’ obligations under the Agreement. Accordingly, Mr Kumar says he is relieved of his obligations under the Agreement. Mr Kumar also says that the anti- discharge provision in the Agreement, on which Sarsfield relies to preserve their rights against Mr Kumar, does not apply to him because the clause refers to the liability of the Customer and not the Guarantor under the Agreement.
[3] Sarsfield does not dispute that Mr Kumar was not notified personally of the variation of the Agreement but says the anti-discharge clause in the Agreement provides that Mr Kumar’s liability as guarantor is not affected by any amendment to the Agreement with or without the consent of the parties. Sarsfield further says that the word “Customer” in the anti-discharge clause is clearly an error and should be interpreted to read “Guarantor”. Sarsfield says no external evidence is required to show the intention of the parties and that no alternative interpretation is plausible.
[4] Mr Kumar contends that there is no error in the anti-discharge clause and that the clause makes sense construing “Customer” to mean customer and not guarantor and that this is not an obvious and extreme case that warrants the Court amending the Agreement without Sarsfield seeking rectification of the Agreement.
1 Sarsfield Engineering Ltd v Kumar [2021] NZDC 15119.
The background facts
[5] On 3 September 2019, Vijay Holdings, of which Mr Kumar is the sole director, entered into the Agreement with Sarsfield, trading as EquipmentShare, to rent construction equipment. Mr Kumar signed the Agreement on behalf of Vijay Holdings as “Customer”. Mr Kumar also signed as “Guarantor.”
[6] On 3 March 2020, Sarsfield sent a letter to its Customers, including Vijay Holdings, varying the terms of its agreements with its customers. The variations included increasing the interest rate on overdue accounts.
[7] It is common ground that the variation letter was not sent to Mr Kumar’s personal email account and that Mr Kumar did not consent to the variations.
[8] On 6 November 2020, liquidators were appointed for Vijay Holdings. As at that date, Vijay Holdings had failed to pay $80,034.42 (the Outstanding Sum) in respect of invoices for a total of $80,344.71 sent by Sarsfield to Vijay Holdings between September 2019 and October 2020.
[9] On 17 November 2020, Sarsfield, through its solicitors, demanded payment of the Outstanding Sum.
[10] Failing any response from Mr Kumar, on 7 December 2020, Sarsfield served this proceeding on Mr Kumar.
[11] By statement of defence dated 16 February 2021, Mr Kumar denied any liability to Sarsfield and said Sarsfield had varied the terms of the Agreement without his consent or authority.
[12] By notice dated 2 March 2021, Sarsfield applied for summary judgment against Mr Kumar.
[13] Following a hearing on 28 April 2021, on 26 July 2021, Judge Mathers gave judgment in favour of Sarsfield.
The District Court judgment
[14] Judge Mathers recorded that Mr Kumar relied on the rule in Holme v Brunskill2 to the effect that a surety to a contract must be consulted on any alteration to the contract and that, if the surety has not consented to the alteration, the surety will be discharged of their obligations.3 The Judge noted that the rule had been more recently explained in Nelson Fisheries Ltd v Boese, where by Wild CJ had held that any departure from a contract that is not insubstantial that was made without a surety’s consent discharged the surety from liability.4
[15] Judge Mathers also recorded that EquipmentShare was not relying on the variation to the Agreement and said that:5
(a)the variation was insubstantial;
(b)its rights were preserved by cl 17.2(a)(vii) of the Agreement which provided that the liability of the “Customer” under that clause was not affected by any amendment of the Agreement with or without consent of the parties; and
(c)the word “customer” in cl 17.2(a) was an error.
[16] The Judge also recorded that Mr Kumar said “Customer” was a reference to his company and that there was no provision preserving the Guarantor’s liability in the event of an amendment to the Agreement.6
[17] Judge Mathers accepted that the variations to the Agreement were not insubstantial.7 However, the Judge considered that cl 17, which was headed “Guarantee,” when read as a whole made no sense in the context of the word “customer” in the first line. The Judge held that the clause clearly intended that the
2 Holme v Brunskill (1878) 3 QBD 495.
3 Sarsfield Engineering Ltd v Kumar, above n 1, at [2].
4 At [3]; citing Nelson Fisheries Ltd v Boese [1975] 2 NZLR 233 (HC).
5 Sarsfield Engineering Ltd v Kumar, above n 1, at [7] – [9] and [12].
6 At [11].
7 At [14].
liability of the Guarantor should not be prejudiced by the variation of the Agreement.8 Accordingly, the Judge found on the balance of probabilities and in reliance on the approach in Pemberton v Chappell9 that the summary judgment should succeed and that Mr Kumar was liable under the terms of the guarantee despite the variations.10
Approach on appeal
[18] In accordance with s 127 of the District Court Act 2016, an appeal against a decision of the District Court must be by way of rehearing. Under s 128(1)(a) of that Act, after hearing the appeal the High Court may make any decision it thinks should have been made.
[19] In Krukziener v Hanover Finance Ltd, the Court of Appeal summarised the principles applicable on summary judgment:11
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as, for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at
341. In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84 (CA).
Question at issue on appeal
[20] There are no disputed facts. It is common ground that Sarsfield varied the terms of the Agreement and that Mr Kumar, as Guarantor, did not consent to the variation. It is also common ground that the rule in Holme v Brunskill, as reaffirmed in Nelson Fisheries Ltd v Boese, will discharge Mr Kumar from liability as Guarantor
8 At [16] – [17].
9 Pemberton v Chappell [1987] 1 NZLR 1, (1986) 1 NZPC 126 (CA).
10 Sarsfield Engineering Ltd v Kumar, above n 1, at [17] – [18].
11 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
unless cl 17.2(a)(vii) of the Agreement, the anti-discharge clause, preserves Mr Kumar’s liability.
[21] The question at issue on appeal, therefore, is whether cl 17.2(a)(vii) of the Agreement applies to Mr Kumar as Guarantor such as to preserve his liability as Guarantor under the Agreement.
Clause 17
Clause 17 relevantly provides:
17.GUARANTEE
17.1In consideration of EquipmentShare agreeing to supply the Customer with the Equipment and/or agreeing to provide credit to the Customer at the request of the Guarantor, the Guarantor … :
(a)absolutely and unconditionally guarantees the due and punctual performance by the Customer of their obligations under this Agreement to EquipmentShare; and
(b)unconditionally as a separate and independent obligation indemnifies EquipmentShare and agrees to keep EquipmentShare indemnified against any loss which EquipmentShare may suffer arising out of or in relation to a default by the Customer of this Agreement and the Guarantor will upon demand pay to EquipmentShare the aforesaid moneys or the amount of any loss which is the subject of this indemnity.
17.2It is further declared that:
(a)The liability of the Customer under this clause shall not in any way be prejudiced or affected by any act matter or thing, failure or omission which, but for this provision, might operate to exclude the Guarantor from the aforesaid obligations including without limitation, by:
(i)the granting of time or other indulgence or concession to the Customer, the Guarantor or any other person or corporation;
(ii)compounding or compromising with or releasing or discharging the Customer, the Guarantor or any other person or corporation from liability under this clause or from compliance with the provisions of this clause as the same may be varied, amended, novated, replaced or renewed from time to time, or releasing, varying or renewing in whole or in part any security,
document of title, asset or right held by EquipmentShare;
…
(vii)amendment to, novation or replacement, of this clause or this Agreement with or without the consent of the parties;
…
(ix) the liability of the Customer under this clause ceasing for any reason.
(b)The aforesaid obligations of the Guarantor are principal obligations and may be enforced against the Guarantor without the necessity of EquipmentShare first taking action against the Customer in respect of the Customer’s obligations under this clause and notwithstanding the termination of this clause.
(c)This Guarantor agrees to waive each and all of its rights as Guarantor whether legal, equitable, statutory or otherwise which may at any time be inconsistent with the provisions of this clause or which in any way restricts EquipmentShare’s rights, remedies or recourse.
(d)This clause is a continuing guarantee and indemnity and shall remain in full force and effect until those obligations have been met in full by the Customer.
…
Submissions on behalf of Mr Kumar
[23] Mr Rice, counsel for Mr Kumar, submits that the separate identities of Vijay Holdings as “Customer” and of Mr Kumar as “Guarantor” are recognised in the Agreement, such as in the Execution page and in the definitions of “Customer” and “Guarantor” in cl 19.
[24] Mr Rice submits that the rule in Holme v Brunskill is to be applied strictly and that a guarantor who has not consented to an alteration to a contract will remain liable only where the alteration is obviously insubstantial with no possible prejudice to the guarantor. Mr Rice says the District Court Judge was in error in concluding that the term “Customer” in cl 17.2(a) is an error and must mean “Guarantor,” despite there being no claim by Sarsfield for rectification of the Agreement or relief under s 28 of the Contract and Commercial Law Act 2017.
[25] Mr Rice says cl 17(2)(a) still makes sense by construing “Customer” to mean Customer. He says that this is not an obvious and extreme case such as those referred to by the Supreme Court in Firm PI 1 Ltd v Zurich Australian Ltd t/as Zurich New Zealand,12 where it would produce a commercially absurd result to give the contractual language its ordinary and natural meaning.
[26] Mr Rice acknowledges that the clause as drafted reads somewhat uneasily but says it is capable of interpretation that makes sense. He submits that cl 17(2)(a) means that the liability of the Customer under the clause is not prejudiced by anything that might relieve the Guarantor of its obligations under the clause, including the circumstances set out in sub-paragraphs (i) – (viii).
[27] Mr Rice submits that if it is Sarsfield’s contention that the parties’ intention was that the word “Guarantor” rather than “Customer” should have been included in the introductory phrase of cl 17.2(a), the appropriate course was to apply for rectification of the clause and not to invite the Court to reinterpret a provision that makes adequate commercial sense.
[28] Absent such an application, Ms Rice submits that the Court cannot conclude that Mr Kumar does not have an arguable defence to Sarsfield’s claim.
Submissions on behalf of Sarsfield
[29] Mr McMillan, counsel for Sarsfield, submits that two provisions in the Agreement operate together to preclude the application of the rule in Holme v Brunskill. The first is cl 20.3, under which Sarsfield may unilaterally amend the Agreement upon 30 days’ written notice to the Customer. The second is cl 17(2)(a)(vii).
[30] Mr McMillan says cl 17.2(a)(vii) preserves the Guarantor’s liability in the situation where Sarsfield varies the Agreement without the consent of the Customer or the Guarantor. He says Mr Kumar’s interpretation that the clause preserves the
12 Firm PI 1 Ltd v Zurich Australian Ltd t/as Zurich New Zealand [2014] NZSC 147, [2015] 1 NZLR 432 at [93].
liability of the Customer rather than the Guarantor is not tenable having regard to the context of cl 17 taken as a whole.
[31] Mr McMillan says that, as confirmed by Tipping J in Rattray Wholesale Ltd v Meredyth-Young & A’Court Ltd,13 the Court can, as a matter of construction, correct mistakes of expression if satisfied that the mistake fails to reflect the intention of the parties to the agreement. In the present case, there is a clear mistake in cl 17.2(a); “Customer” should clearly be read as “Guarantor.”
[32]For these reasons, Mr Kumar has no arguable defence to Sarsfield’s claim.
Relevant law on the interpretation of contracts
[33] In order to answer the question at issue, it is necessary to canvas some of the evolution of the law on the interpretation of contracts. Since we are dealing with one word in an otherwise generally unremarkable contract for the hire of equipment, what follows is a summary discussion in broad strokes apposite to the circumstances. Much of the case law on contractual interpretation concerns the extent to which extrinsic evidence, including of prior negotiations, can be taken into account when interpreting a contract. That question does not arise in the present dispute where extrinsic evidence is not called in aid by either party.
[34] In Wilson v Wilson, Lord St Leonards said, “If you find a clear mistake and it admits of no other construction, a Court of Law … may correct an obvious mistake on the face of an instrument the record without the slightest difficulty.”14
[35] In Prenn v Simmonds, Lord Wilberforce held that evidence of the factual background known to the parties at or before the date of a contract is admissible but confirmed that evidence of negotiations and of the parties’ intentions is not.15 In that case, Lord Wilberforce was satisfied that the appellant’s case did not fit in any way the aim of the agreement or correspond with commercial good sense and that it was not even linguistically sensible. For these reasons, he dismissed the appeal on the basis
13 Rattray Wholesale Ltd v Meredyth-Young & A’Court Ltd [1997] 2 NZLR 363.
14 Wilson v Wilson (1854) 5 HLC 40 (HL) at 66.
15 Prenn v Simmonds [1971] 1 WLR 1381 (HL) at 1385.
of his construction of the agreement and held that it was unnecessary to consider the alternative claim by the respondent for rectification, in relation to which it was accepted that evidence of the parties’ intentions was admissible.16
[36] In Rattray Wholesale, Tipping J cited Wilson v Wilson and said that the Court’s power to correct a mistake is distinct from its power to rectify. His Honour also said that the Court must be sure there is a mistake and be sure what the mistake is.17 Tipping J went on to say that he was satisfied that the draftsperson had made a mistake by omitting certain words from the first part of the relevant clause and held, by way of construction, that the missing words should be added.18
[37] In Investors Compensation Scheme Ltd v West Bromwich Building Society, Lord Hoffman set out five principles of interpretation by which contractual documents are to be construed.19 In summary, these principles are:
(a)First principle: interpretation is the ascertainment of the meaning which the documents would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties;
(b)Second principle: the background includes anything which would have affected the way in which the language of the document would have been understood by the reasonable person;
(c)Third principle: except in an application for rectification, the law excludes from the admissible background the previous negotiations of the parties;
(d)Fourth principle: the meaning a document conveys to a reasonable person is not the same as the meaning of its words. The background may not merely enable the reasonable person to choose between the
16 At 1383 and 1389.
17 Rattray Wholesale Ltd v Meredyth-Young & A’Court Ltd, above n 13, at 371.
18 At 372.
19 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912 – 913.
possible meanings of words but even to conclude that the parties have used the wrong words;
(e)Fifth principle: the rule that words should be given their “natural and ordinary meaning” reflects the common-sense proposition that it should not be easily accepted that people have made linguistic mistakes, particularly in formal documents. However, if the Court concludes from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention that they plainly could not have had.
[38] Lord Hoffman re-confirmed the Investors Compensation Scheme principles in Chartbrook Ltd v Persimmon Homes Ltd.20 In relation to the fifth principle, which was applicable to the case before the House of Lords, Lord Hoffman said:
[15] It clearly requires a strong case to persuade the court that something must have gone wrong with the language … . … It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational that to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another … . … The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appear to be an exceptional case in which the drafting was careless and no-one noticed.
[39] In Firm PI,21 the majority of the Supreme Court discussed the concept of commercial absurdity by reference to Investors Compensation Scheme and Chartbrook:
[88] Where contractual language, interpreted in the context of the contract as a whole, has a natural and ordinary meaning, the courts will generally give effect to that as they “do not easily accept that people have made linguistic mistakes, particularly in formal documents”. The “primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage”. It requires a “strong case” to persuade a court that something must have gone wrong with the language.
[89] But if consideration of the relevant background forces a court to the conclusion that something has gone wrong with the contractual language, it is not required “to attribute to the parties an intention which they plainly could
20 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14].
21 Firm PI 1 Ltd v Zurich Australian Ltd t/as Zurich New Zealand, above n 12.
not have had”. Just as the courts have accepted that understanding the commercial purpose of a commercial contract is relevant to its interpretation, so have they accepted that that if a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language might suggest. However, it has also been accepted that a court is not justified in concluding that a contract does not mean what it seems to say simply because the court considers that, so interpreted, the contract is unduly favourable to one party. There is an obvious tension between these two positions, and it will often be difficult to determine whether particular cases fall within one category or the other.
(footnotes omitted)
[40] The Supreme Court noted the need for caution because commercial absurdity tends to lie in the eye of the beholder, as Lord Hoffman had noted in Chartbrook and Neuberger LJ had discussed in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd.22 The Supreme Court cited with approval the following passage from Skanska:
[22] Particularly in these circumstances, it seems to me that the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may must or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood.
[41]However, the Supreme Court went on to say, citing a further passage from
Skanska:
[92] Despite his expression of caution in Skanska, Neuberger LJ did accept that commercial common sense still had a role to play:
Of course, in many cases, the commercial common sense of a particular interpretation, either because of the peculiar circumstances of the case or because of more general considerations, is clear. Furthermore, sometimes it is plainly justified to depart from the primary meaning of words and give them what might, on the face of it, appear to be a strained meaning, for instance where the primary meaning of the words leads to a plainly ridiculous or unreasonable result.
[93] All this means that where contractual language, viewed in the context of the whole contract, has an ordinary and natural meaning, a conclusion that it produces a commercially absurd result should be reached only in the most obvious and extreme of cases.
(footnotes omitted)
22 Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732.
[42] In its recent decision, Bathurst Resource Ltd v L & M Coal Holdings Ltd, the Supreme Court said that its decision in Firm PI can be regarded as settling the general approach to contractual interpretation.23 The Supreme Court also reaffirmed what it had said in Firm PI regarding commercial absurdity.24 It then stated:
[46] The objective approach as articulated in Firm PI is one grounded in the policy objectives identified above: the desirability of providing the certainty needed to facilitate the efficient conduct of commerce; of holding people to the bargains they make; and of supporting access to justice through the efficient and just conduct of proceedings. Giving primacy to the written words of the agreement accords with the policy of providing commercial certainty. It also recognises that since the written contract contains the words the parties chose to record their agreement, the language used to do so has to be important. But by allowing a contextual reading of those words, the Firm PI approach recognises both that words have to be read in context and that the promotion of commercial certainty should not be allowed to defeat what the parties actually meant by the words in which they recorded their agreement. The objective approach to this contextual assessment is a legal construct designed as the best way of reliably determining the true agreement as recorded in the words of the contract. …
Analysis
[43] The essence of Mr Kumar’s case is that it does not produce a commercial absurdity to interpret cl 17.2(a) other than by reference to the ordinary meaning of the words used.
[44] Having regard to the Investors Compensation Scheme principles and the Supreme Court’s decisions in Firm PI and Bathurst Resources, the first question to consider is what would the document convey to a reasonable person, having all the background knowledge that would reasonably have been available to the parties in the situation in which they were at the time of the contract.
[45] The context of the document is that it is a contract between a supplier and a customer for the hire of equipment. The third party is the guarantor of the performance of the Customer’s obligations under the contact. The purpose of the guarantee is to ensure that the obligations of the Customer are performed by making the Guarantor liable for the Customer’s performance.
23 Bathurst Resource Ltd v L & M Coal Holdings Ltd [2021] NZSC 85 at [43].
24 At [45].
[46] The first 16 clauses of the contract deal with the respective obligations of the supplier and the Customer. The only reference to the Guarantor in those causes is in cl 15 which relates to the supplier’s right to collect, hold and use information in about the Guarantor as well as information about the Customer.
[47] Clause 18 deals with the giving of notices and communications under the Agreement. Clause 19 contains definitions and principles of interpretation. Clause 20 deals with miscellaneous matters, including the supplier’s right to amend the agreement upon 30 days’ notice.
[48] Clause 17 is the only clause that imposes obligations on the Guarantor. Those obligations are set out in cl 17.1. They are to guarantee the performance of the Customer under the Agreement and to indemnify the supplier in the event of default by the Customer.
[49] Clause 17.2 does not, of itself, set out any obligations of either the Customer or of the Guarantor although it makes reference to the obligations of both at various places. In substance, however, cl 17.2 is aimed at ensuring that liability imposed under “this clause” is not prejudiced or affected by anything, including the matters set out at sub-paragraphs (i) – (vii).
[50] Since clause 17 is about the guarantee and is the only clause in the Agreement that deals with the guarantee, and since cl 17.1 sets out the liability of the Guarantor, it would be expected that the commercial purpose of cl 17.2 would be directed at ensuring that the liability the Guarantor to the supplier is not prejudiced or affected. That the clause addresses the liability of the Customer under the clause is not consistent with that commercial purpose and strongly suggests that something has gone wrong with the drafting of the clause.
[51] Further analysis of cl 17 suggests that the introductory words of cl 17.2(a) is not the only place where something has gone wrong. The use of the term “Customer” rather than “Guarantor” in cl 17.2(a)(ix) and cl 17.2(d) is incongruous and, in the latter case in particular, does not make legal or commercial sense. It posits that the guarantee and the indemnity, which are stated in cl 17.1 and are obligations of the Guarantor,
continue until “those obligations are met in full by the Customer.” Leaving aside the syntactical curiosity of the Customer meeting the obligations of the Guarantor, the purpose of the guarantee is to ensure the performance of the Customer’s obligations by the Guarantor, not vice versa.
[52] As Mr McMillan says, even within the context of cl 17.2(a) itself, the term “Customer” in the opening lines of the clause does not make sense:
(a)While cl 17.2(a) states that the liability of the Customer under the clause shall not be prejudiced or affected, the Customer is not liable under the clause;
(b)Clause 17.2(a) is addressed to acts or failures “which, but for this provision, might operate to exclude the Guarantor” from “the aforesaid obligations”, which must be those in cl 17.1 which are obligations of the Guarantor;
(c)Clause 17.2(a) is intended to list circumstances that will not prejudice or affect the liability of the Guarantor and that the list in sub-paragraphs
(i) – (vii) does not makes sense unless “Customer” is read as a reference to the Guarantor.
[53] In addition, for “Customer” to mean customer would vitiate the non-discharge provision with respect to the Guarantor, whose liability such clauses are intended to ensure, as recognised by the Court of Appeal in Cancian v Carters.25
[54] For these reasons, I do not accept Mr Rice’s submission that the clause makes adequate sense to interpret “Customer” as meaning customer. To say that the clause ensures that the liability of the Customer under the clause is not prejudiced by anything that might relieve the Guarantor of its obligations under the clause is to state a legal nonsense. The Customer has no liability under clause 17 and nothing the Customer did could relieve the Guarantor of its obligations under the Clause.
25 Cancian v Carters [2021] NZCA 397 at [22].
[55] For all these reasons, I am satisfied that there is a clear and obvious mistake on the face of the Agreement. The opening words of cl 17.2(a) do not fit with the aim of the Agreement or correspond with commercial good sense. Something has indeed gone wrong with the language of the clause. To interpret “Customer” as meaning Vijay Holdings rather than Mr Kumar would be to attribute to the parties an intention that they plainly could not have had and would produce a commercially unreasonable and absurd result because it would vitiate the non-discharge clause. It follows that this is, indeed, an obvious and extreme case where the Court should use its powers of construction and interpret “Customer” in the opening lines of cl 17.2(a) as meaning “Guarantor.”
[56] I note that the article in the Cambridge Law Journal that Mr Rice invited me to read did not assist his case.26 The purpose of the article was to contrast the differences in approach to the admissibility of evidence in “construction” cases as compared with those where rectification is sought. The article acknowledges that the process of construction under principle 5 of Investors Compensation Scheme is structurally the same as that of rectification and addresses the same problem of mistaken or incompetent drafting.27 It does not, however, suggest or argue that correcting mistaken or incompetent drafting can be achieved only by rectification.
Conclusion
[57] For the reasons given, I am satisfied that the term “Customer” in the opening lines of cl 17.2(a) of that Agreement is to be interpreted as meaning Guarantor. As a consequence, the liability of Mr Kumar as Guarantor to Sarsfield is preserved by the non-discharge provision in cl 17.2(a)(vii) and Mr Kumar is liable to Sarsfield for the debt owed by Vijay Holdings.
[58] It is plain that Mr Kumar has no arguable defence to Sarsfield’s claim and that Judge Mathers was correct to give summary judgment in favour of Sarsfield.
26 Richard Buxton “Construction” and Rectification after Chartbrook” (2010) 69 CLJ 253.
27 At 260.
Result
[59]Mr Kumar’s appeal is dismissed.
Costs
[60] Clause 3.9 of the Agreement provides that the Customer is liable for all expenses and costs (including legal costs) incurred by or on behalf of Sarsfield for recovering any overdue amounts from the Customer. As Guarantor, Mr Kumar is liable for those costs.
[61]Accordingly, Mr Kumar is to pay Sarsfield’s costs on a solicitor client basis.
[62] If the parties are unable to agree costs, they may submit memoranda of no more than five pages. Any memorandum by Mr Kumar is to be filed no later than 10 working days after a memorandum has been filed and served by Sarsfield.
G J van Bohemen J
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