RD1 Limited v McKinnon HC Auckland CIV-2011-404-003499
[2011] NZHC 1647
•4 November 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-003499
UNDER the District Courts Act 1947
IN THE MATTER OF an appeal against the decision of the
District Court at Auckland
BETWEEN RD1 LIMITED Appellant
ANDIAN JAMES MCKINNON Respondent
Hearing: 26 October 2011
Counsel: M D Branch and S J Rawcliffe for the Appellant
M J Smyth for the Respondent
Judgment: 4 November 2011
JUDGMENT OF DUFFY J
This judgment was delivered by Justice Duffy on 4 November 2011 at 11.00 am, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Counsel: M J Smyth P O Box 91053 Victoria Street West Auckland 1142 for the
Respondent
Solicitors: Harkness Henry Private Bag 3077 (DX GP20015) Waikato Mail Centre
Hamilton 3240 for the Appellant
RD1 LTD V MCKINNON HC AK CIV-2011-404-003499 4 November 2011
[1] This is an appeal against a decision of the District Court limiting a creditor’s recovery under a guarantee to a specified credit limit as between the creditor and the debtor. The appeal is opposed.
[2] The appellant, RD1 Limited (RD1), is a supplier of agricultural products. It supplies store purchases for cash or for credit. In the latter case, RD1 may require a guarantee.
[3] M J Fencing was an unincorporated two person partnership providing fencing services that purchased items on credit from RD1. I shall use the partnership’s trading name rather than the names of the two partners. The credit terms between RD1 and M J Fencing required a guarantee; this was provided by the respondent, Mr McKinnon, who is the father of one of the partners of M J Fencing.
[4] Between February 2008 and May 2008, M J Fencing purchased items totalling $22,035.01 on credit from RD1 in circumstances where the debt and other recoverable costs were never paid. Consequently, RD1 sought payment from Mr McKinnon under the guarantee.
[5] Proceedings were commenced in the District Court against M J Fencing and
Mr McKinnon. Default judgment was entered against M J Fencing for the sum of
$30,057.48. This debt represents the credit purchases, plus interest and other recoverable costs under the supply of credit agreement. The claim under the guarantee went to a defended hearing, following which the District Court found that the terms of the guarantee limited RD1 to recovering no more than the $2,000 credit limit specified in the application for credit which M J Fencing had completed.
[6] RD1’s standard form application for credit (the application) includes provision of a guarantee; the terms of the guarantee and the guarantor’s signature together with witness jurat are set out in this form. Written terms of supply of goods and services are also included in the application. RD1’s acceptance of the application and provision of credit thereunder completes what then becomes a supply of credit agreement (the credit agreement).
[7] RD1 contends that under the terms of the guarantee, it is entitled to full recovery of the judgment debt entered against M J Fencing, as well as costs incurred by recovery under the guarantee. Mr McKinnon contends that the District Court correctly interpreted the guarantee. The parties are agreed that the appeal turns on how the guarantee should be interpreted.
Discussion
[8] The principles for how this Court should approach an appeal from the District Court are well settled; on general appeal (which is what this appeal is), the appeal court has the responsibility of arriving at its own assessment of the merits of the case: see Austin Nichols and Co Inc v Stichting Lodestar [2007] NZSC 103; [2008] 2 NZLR 141 at 147.
[9] The appeal raises the following questions:
(a) Whether the credit limit formed part of the consideration for the guarantee;
(b) Whether the credit limit was a term of the guarantee;
(c) Whether the terms of the guarantee caused it to continue following
M J Fencing receiving credit in excess of the credit limit;
(d)Whether the provision of credit that M J Fencing received constituted a material change which could negate the guarantee; and
(e) Whether the inclusion of a term referring to Mr McKinnon being treated as if he were a principal debtor enabled RD1 to proceed against him for recovery of the debt.
[10] Before dealing with each of the questions, it is helpful to set out the relevant parts of the credit agreement. First, the terms of the guarantee. These were set out in the application for credit and provided as follows:
To: ... RD1
In consideration of RD1 giving credit to the applicant in accordance with the attached application at the guarantor’s request, the guarantor:
1.Guarantees the applicant will perform all of the applicant’s obligations set out in the application which includes the annexed Terms of Supply.
2. Agrees:
(a) to be bound by the dispute resolution clause; and
(b) not to prove in any bankruptcy or liquidation of the application in competition with RD1; and
(c) the failure of any person named as a guarantor to sign this guarantee will not invalidate the guarantee of those who do sign it.
3.Waives all rights as surety and accepts responsibility for the performance of the applicant’s obligations as if primarily liable for them.
4.Acknowledges and agrees that the guarantee in clause 1: (a) is a continuing guarantee; and
(b) is given jointly and severally (if there is more than one person named as guarantor); and
(c) will continue if the application is renewed or any of its terms (including the TERMS of SUPPLY) are changed; and
(d) will continue to be binding and at all times enforceable by RD1 even if the applicant dies, is placed in liquidation or becomes insolvent (as the case may be).
(e) may be relied on by any successor of RD1.
[11] Over the page, the credit application contained a section which was headed “credit information” and which posed the question “how much credit do you require? (multiply your peak monthly purchases estimates by two)”; the section then made provision for the insertion of a figure and went on to provide that “this becomes your requested credit limit based on payment 20 of the month following date of invoice”. Within the relevant space, the figure $2,000 had been entered.
[12] There is no evidence as to when the figure was entered. The hearing in the District Court proceeded on the basis of an agreed statement of facts, which was silent as to whether the guarantee was executed by Mr McKinnon before or after the requested$2,000 limit was inserted. In principle, this matter would be relevant to an argument that there could be no limit to this guarantee.
[13] The fact that the Court was not informed as to whether the credit limit was inserted or not at the time the guarantee was executed may have provided a basis for sending the proceeding back to the District Court for re-hearing. However, I have been able to reach a view of the scope of the guarantee without recourse to this line of argument.
[14] RD1’s standard written terms of supply of goods and services, which formed part of the credit agreement, are also relevant. Clause 1 provided that RD1 would provide goods and services on the terms contained therein, unless otherwise agreed in writing. However, clause 1 also gave RD1 the ability to amend the terms from time to time and RD1 was under no obligation to accept all or any orders.
[15] Clause 4, headed “purchase on extended credit”, provided that if RD1 agreed in writing to give the debtor extended credit, the required payment would not apply. Clause 4 went on to provide:
(b) We will charge you interest at a rate fixed by us; (c) We may change the rate from time to time;
(d) We will adjust your repayment instalments when we change the rate so that what you originally owed us is paid in full over the same period;
(e) Your adjusted repayments, instalments and new rate of interest will be shown on your next monthly statement;
(f) Nothing in this clause affects our other rights against you.
[16] Clause 14 dealt with waiver and provided as follows:
(a) If we delay or do not exercise any of our rights or remedies, that will not be a waiver of the right or remedy.
(b) Any waiver or consent we give you must be in writing and will be effective only in the specific instance and for the specific purpose for which it is given.
Did the credit limit form part of the consideration for the guarantee?
[17] Mr McKinnon argued that the phrase in the guarantee section of the application for credit that stated that the guarantee was provided in consideration of RD1 giving credit to the applicant meant that the clause setting a credit limit of
$2,000 formed part of the consideration for the guarantee. In this way, he sought to argue that the guarantee was a limited guarantee for debts not exceeding $2,000, and that debts in excess of that sum fell outside the consideration.
[18] The clause expressing the consideration for the guarantee refers to the application for credit. I consider, therefore, that everything in the application is relevant to understanding the effect of this clause. The agreed statement of facts records that the application for credit bound M J Fencing to the terms of supply of goods and services that were in force at the time the application was executed. Such terms were drawn into the application through the reference to them in clause 4(c) of the guarantee. Thus, the terms of the supply of goods and services are also relevant to understanding the meaning of “consideration” in the guarantee.
[19] In its entirety, the application for credit did more than set a credit limit. The waiver clause of the terms of supply of goods and services (clause 14) provided that if RD1 did not exercise any of its rights or remedies, this did not constitute a waiver of the right or remedy. Implicitly, RD1 reserved the ability to choose not to exercise its rights or remedies by this clause. Insofar, therefore, as the credit limit gave RD1 the right to refuse to extend credit beyond $2,000, clause 14 preserved RD1’s right to go beyond that credit limit without such conduct constituting a waiver of RD1’s right to enforce this limit.
[20] Clause 4, which dealt with purchase on extended credit, provided express terms for an extension of credit. Whilst that clause contemplated that an extension of credit would be given in writing, this too was a right which RD1 was free to waive if it chose to do so.
[21] It is clear that the standard terms of supply of goods and services contained in the credit agreement allowed RD1 to go beyond the credit limit without harm to its own rights or remedies, should it choose to do so. This choice formed part of the terms on which RD1 offered to supply credit to M J Fencing. The consideration for the guarantee, therefore, was: from RD1, the supply of credit to M J Fencing on the terms outlined above, and, in return, Mr McKinnon assumed liability under the guarantee to pay those debts. Since the terms on which the credit was offered allowed RD1 to exceed the stated credit limit, the notion that the consideration included the $2,000 credit limit is not sustainable.
[22] I also note that in relation to the clauses set out in the guarantee, clause 1 referred to the annexed terms of supply, and clause 4(c) provided that the guarantee was to continue if the application for credit was renewed, or any of its terms (including the terms of supply) were changed. The terms of the guarantee formed part of the application for credit. The references in the terms of the guarantee to the terms of supply drew those terms into the application for credit as well. In this way, the application for credit allowed for an increase in the credit limit that would have no effect on the enforceability of the guarantee.
[23] For the above two reasons, therefore, I find that when the application for credit is viewed in its entirety, it cannot be read in the way for which Mr McKinnon contends.
Was the credit limit a term of the guarantee?
[24] Clause 1 of the guarantee provided that M J Fencing would perform all of the obligations set out in the application, including the annexed terms of supply. This clause, which needs to be read in conjunction with clause 4(c), set the initial scope of the guarantee. I do not read the credit limit in the application as amounting to an obligation imposed on M J Fencing; instead the credit limit should be seen as setting the amount of credit that M J Fencing could expect to receive each month. M J Fencing was not obliged to use up to that credit limit, and I consider that if M J Fencing acted in a way that put it beyond the credit limit, it was then a discretionary decision for RD1 as to whether or not to extend credit beyond the set
limit. The way the credit limit is couched in the application cannot be read as imposing an obligation on M J Fencing. The words “how much credit do you require” and “this becomes your credit limit” are not the type of words associated with the imposition of an obligation on M J Fencing. They do no more than provide an assurance that M J Fencing will receive credit up to the limit specified. This assurance was subject to any other terms that permitted RD1 to refuse to provide credit up to $2,000. Thus, any provision of credit over and above $2,000 was at RD1’s discretion.
[25] The appellant has criticised the reliance in the District Court on Redwood Pty Ltd v Manning Homes Pty Ltd (1990) 1 Qd R 481. I consider that the case of Relwood Pty Ltd v Manning Homes Pty Ltd is distinguishable as it dealt with a guarantee that provided that a credit limit was to be agreed not only as between the creditor and debtor, but between the guarantor as well. Furthermore, I consider that the outcome in each case will turn on the construction of the guarantee under consideration. There is nothing in the terms of the guarantee in this case that ties the guarantee to the credit limit; indeed, clause 4(c) expressly allows the terms of credit to be varied.
[26] I find, therefore, that the credit limit of $2,000 was not a term of the guarantee.
Did the terms of the guarantee allow for credit in excess of the credit limit?
[27] Mr McKinnon has argued that the guarantee was limited by the credit limit of
$2,000 and, therefore, any credit beyond that amount fell outside the terms of the guarantee. However, clause 4 provided that it was a continuing guarantee that would continue to be binding if the application for credit was renewed or any of its terms (including the terms of supply) were changed. In my view, this provides for the guarantee to continue to have effect if the terms on which credit was being supplied to M J Fencing were changed. I find, therefore, that the terms of the guarantee did allow for credit in excess of the $2,000 credit limit to be covered by the guarantee.
Was the credit which M J Fencing received a material change such as to negate the guarantee?
[28] A substantial variation of the basis of the contract between the creditor and the debtor without the consent of the guarantor will discharge the guarantor from liability: see Dunlop New Zealand Ltd v Dumbleton [1968] NZLR 1092. However, where a guarantee contains a clause which gives the creditor power to make variations to the contract with the debtor, this principle will not apply: see Pogoni v R & W H Symington & Co (NZ) Ltd [1991] 1 NZLR 82 (CA). As was recognised in Pogoni at [85], the question is one of construction of the guarantee to determine whether the guarantor’s right to treat the guarantee as discharged has been effectively excluded.
[29] Clause 4(c) provides that the guarantee will continue if the terms on which credit is given are changed. Thus, by the use of clause 4(c), RD1 has given itself the power to vary its credit contract with M J Fencing, such that RD1 can act to vary the terms on which it supplies credit without the guarantor’s consent and still enjoy the benefit of the guarantee. I consider, therefore, that the question of whether or not the extension of credit beyond $2,000 in this case constitutes a material variation of the credit supply agreement is of no relevance. Clause 4(c) allows for the guarantee to apply should this circumstance arise.
Was Mr McKinnon a principal debtor?
[30] Clause 3 of the guarantee provides that Mr McKinnon waived all rights as surety and accepted responsibility for the performance of the applicant’s obligations as if Mr McKinnon were primarily liable for them. Such a clause is a separate and complete answer to the argument that the extension of credit beyond the credit limit of $2,000 was a material variation of the guarantee which precludes it from being enforced. Insofar as that right might have survived clause 4(c) (which I do not think is the case), it is overridden by clause 3 because under this clause, Mr McKinnon has waived all the usual rights of a surety.
[31] Thus, under clause 3, Mr McKinnon has accepted responsibility for the performance of M J Fencing’s obligations as if he were the primary debtor. By doing so, he has divested himself of the rights a surety has, and has taken on the liabilities of a principal debtor: see Orme v De Boyette [1981] 1 NZLR 576 at 580 and the discussion in Laws of New Zealand Guarantees and Indemnities (online ed) at [206].
[32] The question here is what amounts to performance of the “applicant’s obligations”, in this case those being the obligations of M J Fencing. Under the credit agreement, M J Fencing was obliged to pay all credit extended to it. Mr McKinnon argued that the credit supply agreement was limited to credit of
$2,000 and that insofar as credit over and above that limit was extended to M J Fencing, this was a separate contract which arose independently of the credit supply contract. I do not accept that argument. There is nothing in the credit supply agreement which would preclude RD1 from advancing credit in excess of $2,000. In this case, it has done so and I consider that just as M J Fencing was responsible for payment of all the credit it received, so too is Mr McKinnon.
Conclusion
[33] It follows that the District Court was wrong to hold that Mr McKinnon’s liability under the guarantee was limited to $2,000. I consider that he is liable for the full debt incurred by M J Fencing. The terms of the credit supply agreement which Mr McKinnon has guaranteed performance of provide in clause 5 that the debtor must pay all costs, including legal costs, incurred by RD1 and collecting or attempting to collect overdue payments. Clause 5(a) also provides for calculation of interest on overdue payments. RD1 raised this matter at the hearing, and I gave leave for RD1 to address the issue following a determination by this Court on the correctness or otherwise of the District Court’s decision.
Result
[34] The appeal is allowed. Judgment is entered against Mr McKinnon in the sum of $30,057.48, being the amount owed by M J Fencing to RD1.
[35] Leave is given to RD1 to file further submissions on any further costs it is entitled to recover under the credit agreement as a result of having to issue proceedings to recover payment from Mr McKinnon. Mr McKinnon is to file any submissions in response within 10 working days of receipt of RD1’s submissions. RD1 has seven days following receipt of Mr McKinnon’s submissions to file any reply.
Duffy J
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