Stonewood Homes NZ (CHCH) Franchisor Limited v Mettrick
[2017] NZHC 1659
•19 July 2017
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2017-409-000114 [2017] NZHC 1659
BETWEEN STONEWOOD HOMES NZ (CHCH)
FRANCHISOR LIMITED Plaintiff
AND
B A METTRICK First Defendant
A W ANDERSEN Second Defendant
Hearing: 10 July 2017 Appearances:
C T Jolliffe for Plaintiff/Respondent
K M Paterson for Defendants/ApplicantsJudgment:
19 July 2017
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
[ON DEFENDANTSʼ SUMMARY JUDGMENT APPLICATION]
Introduction
[1] The plaintiff, Stonewood Homes NZ (ChCh) Franchisor Ltd, holds the franchise rights for a business known as Stonewood Homes. It acquired them by arrangement in 2016.
[2] The defendants, Brent Mettrick and Anthony Andersen, guaranteed obligations of a franchisee, Stonewood Homes (Hamilton) Ltd (the franchisee). The franchisee was placed into liquidation in January 2016.
[3] In this proceeding, the plaintiff asserts that there is a debt of $556,920.50 (plus interest) owing under the franchise agreement for which the defendants are
liable under their guarantees (the guarantee).
STONEWOOD HOMES NZ (CHCH) FRANCHISOR LTD v METTRICK [2017] NZHC 1659 [19 July 2017]
The defendants’ summary judgment application
[4] The defendants apply for summary judgment on the basis that their guarantees do not apply to the claimed debt.
[5] The defendants filed a statement of defence. The issues which here arise are succinctly summarised in the defendants’ affirmative defence:
(a) The term of the guarantee was limited to the initial term of the franchise agreement being three years from 14 March 2008. The reference to 14 March 2008 involves the correction, confirmed by counsel, of an error in the pleading.
(b) The defendants’ liability under the guarantee did not extend to any
sums incurred by the franchisee under the franchise agreement after
14 March 2011.
(c) All sums claimed by the plaintiff in this proceeding were incurred after 14 March 2011.
(d)The defendants are therefore not liable to the plaintiff under the guarantee.
Defendants’ summary judgment application – the principles
[6] The starting point for a defendant’s summary judgment application is r 12.2(2) High Court Rules, which requires that the defendant satisfy the Court that none of the causes of action in the statement of claim can succeed.
[7] I summarise the general principles which I adopt in relation to the application:
(a) The onus is on the defendant seeking summary judgment to show that none of the plaintiff’s causes of action can succeed. The Court must be left without any real doubt or uncertainty on the matter. Where
there is a “complete and incontrovertible answer on the facts”,
summary judgment may be entered for the defendant.1
(b)The Court will not hesitate to decide questions of law where appropriate.
(c) The Court will not attempt to resolve genuine conflicts of evidence or to assess the credibility of statements and affidavits.
(d)In determining whether there is a genuine and relevant conflict of facts, the Court is entitled to examine and reject spurious responses or plainly contrived factual conflicts. It is not required to accept uncritically every statement put before it, however equivocal, imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.
(e) In weighing these matters, the Court will take a robust approach and enter judgment even where there may be differences on certain factual matters if the lack of a tenable response is plain on the material before the Court.
(f) Once the Court is satisfied that none of the plaintiff’s claims can succeed, the Court retains a discretion to refuse summary judgment but does so in the context of the general purpose of the High Court Rules which provide for the just, speedy and inexpensive determination of proceedings.
The franchise agreement provisions
[8] The franchise agreement is dated 14 March 2008.
[9] The franchise agreement was signed by the franchisee, the original franchisor
(that franchisor having subsequently assigned its interests to the plaintiff), and the
guarantors. The guarantors signed as “covenantors”.
1 Body Corporate No 207624 v North Shore City Council [2012] NZSC 83, [2013] 2 NZLR 297, [Spencer on Byron] per Elias CJ at [4].
[10] The parties left incomplete the space for “commencement date” in the schedule to the franchise agreement. The plaintiff’s pleaded case is that the term of the franchise agreement commenced at or soon after the date of the agreement (14 March 2008), which is clearly correct.
[11] Clause 3 of the franchise agreement defines the “Term of this agreement” as:
3.1 The Term of this agreement is set forth in clause 2(a) of schedule 1.
3.2 The Term of this agreement shall commence on the Commencement
Date.
[12] Clause 2 of schedule 1 states:
2. Term
(a) Initial period Three (3) years
(b) Renewal period One of three (3) years
The “Term of this agreement” is therefore, as defined by clause 2(a), only the initial period of three years. Any renewal period specified in clause 2(b), does not constitute a part of the “Term of this agreement”.
[13] Clause 4.1 of the franchise agreement provided the procedure for renewal of the term:
4. RIGHT OF RENEWAL
4.1The Franchisee may by three months’ written notice to the Franchisor prior to expiry of the initial period of the Term and each of the renewal periods specified in clause 2(b) of schedule 1, seek renewal of this agreement for each respective period. The Franchisor shall grant each renewal of this agreement on the terms and conditions then used by the Franchisor excluding the Establishment Fee but including (where appropriate) this covenant for renewal, provided that:
(a) … (b) … (c) …
(d) The Covenantors (if any) or any persons approved by the Franchisor in substitution for the Covenantors, enter into the new agreement as covenantors.
[14] Clause 32 contained an acknowledgement and agreement of the guarantors
(as covenantors):
COVENANTORS’ COVENANTS
32.1The Covenantors acknowledge and agree that they are jointly and severally bound by the terms of the Deed of Guarantee specified in schedule 3.
Deed of guarantee
[15] A form of deed of guarantee then appears as schedule 3 to the franchise agreement.
[16] Material provisions of the deed of guarantee are:
In consideration of the grant by the Franchisor of the Franchise, of which this guarantee, undertaking and covenant forms part, the Covenantors hereby jointly and severally guarantee, undertake and covenant as follows:
1. GUARANTEE
The Covenantors jointly and severally:
(a) Unconditionally and absolutely guarantee to the Franchisor, its successors and assigns, the due, prompt and punctual, full and complete performance and payment by the Franchisee of all the terms, covenants, conditions, obligations, money and amounts respectively which the Franchisee has assumed and made, and has agreed with the Franchisor to perform and pay as Franchisee under this agreement; and
(b) Represent, warrant, covenant and agree to and with the Franchisor that throughout the Term of the franchise agreement (including any renewal or extension of it), the Covenantors will cause the Franchisee to carry on, conduct and operate the Business in a proper and efficient manner under, pursuant to and in accordance with the franchise agreement, and will do or cause to be done all things necessary to preserve and keep in force and effect the corporate existence and good standing of the Franchisee.
2. UNCONDITIONAL GUARANTEE
2.1Not released. The Covenantors shall not be released from this guarantee by reason of any extension of time, compromise, renewal, indulgence, release or discharge granted by the Franchisor to the Franchisee.
2.2Continuing guarantee. The guarantee in clause 1 of this schedule shall constitute a continuing guarantee and the Franchisor shall not be bound to exercise or exhaust its remedies and recourses under the
franchise agreement, or otherwise, before being entitled to enforce this guarantee.
2.3Accept terms. The Covenantors have all read all of the terms and conditions of the franchise agreement and this guarantee and consent to and approve the same, and the guarantee in clause 1 of this schedule shall take effect and shall be binding upon the Covenantors notwithstanding that the franchise agreement or this deed be in any way irregular or defective.
2.4Unconditional guarantee. The Covenantors explicitly acknowledge that the guarantee in clause 1 of this schedule has been delivered free of any conditions and that no representations have been made to them affecting their liability under this clause 1 save as may be specifically embodied in this deed, and agree that the guarantee in clause 1 of this schedule is in addition to and not in substitution for any other guarantee held or which in the future may be held by the Franchisor.
2.5 …
CONFIDENTIALITY
3.1The Covenantors acknowledge that all information of whatever nature regarding the System contained in the Manual and otherwise disclosed to the Franchisee or the Covenantors shall be regarded by the Covenantors as confidential and shall remain the sole property of the Franchisor. The Covenantors shall not during the Term of the franchise agreement (including any renewal or extension of it), or afterwards use, divulge or communicate to any person any confidential information concerning the practice, dealings, transactions or affairs of the Franchisor which may have been acquired by the Franchisee or the Covenantors pursuant to the performance of the Franchisee’s responsibilities under the franchise agreement.
NON-COMPETITION
4.1The Covenanters (sic) shall not during the Term of the franchise agreement (including any renewal or extension of it) or for a period of two years afterwards:
(a) Be concerned or interested in any capacity whatsoever in any business conducted in competition with the Insurer of the Franchisor …
The competing arguments summarised
[17] For the defendants, Ms Paterson submits that the defendants guaranteed only the performance of obligations under the franchise agreement under its term of three years. She submits that the defendants’ guarantee obligations did not cover any renewal period. A fresh guarantee would have been required in the event of renewal
of the franchise agreement. She submits that the defendants’ obligations also did not cover any period of continued franchise arrangements which arose other than by renewal of the franchise agreement.
[18] For the plaintiff, Ms Jolliffe confirms (consistently with the evidence) that the plaintiff does not assert that there was a formal renewal of the franchise agreement. It is the plaintiff’s case that the franchise agreement ran on past its stated term of three years. The evidence is that the franchisee was still operating as the franchisor’s franchisee as recently as 2015. Mr Mettrick, for instance, deposes:
SH Hamilton continued to operate its Stonewood Homes business in the
Hamilton area until it ceased trading in December 2015.
[19] The plaintiff’s case is that this is not a case of renewal of a term. Rather it is one in which the term of the franchise agreement has been extended, with the guarantee continuing to apply for the extended period. Ms Jolliffe identified this situation in contractual terms as a variation of the franchise agreement.
Interpretation of the franchise agreement
[20] I adopt as applicable in New Zealand the approach to contracts of guarantee taken by the English Court of Appeal in Perrylease Limited v Imecar AG in which the Court noted:2
The general approach to construction of guarantees is set out in
20 Halsbury’s Laws (4th edn) para 143:
‘The principles of construction governing franchise agreements in general apply equally to franchise agreements of guarantee. Dealing with a guarantee as to a mercantile contract, the court does not apply to it merely technical rules, but construes it so as to reflect what may fairly be inferred to have been the parties’ real intention and understanding as expressed by them in writing and so as to give effect to it rather than not..’
[21] Having that point in mind, namely that a guarantee is subject to the principles of construction governing franchise agreements generally, I turn to those principles
of construction. Ms Jolliffe took no issue with the principles enunciated by
2 Perrylease Limited v Imecar AG [1987] 2 All ER 373 at 378.
Ms Paterson, and I recognise those points as an appropriate basis for consideration of the contracts in this case:
Contractual interpretation
31.In general, ordinary principles of contract interpretation apply to guarantees.3 It has been said many times that: 4
The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear.
32.The general principles of interpretation of a contract are still those identified by Lord Hoffman in Investors Compensation Scheme v West Bromwich Building Society 5 and adopted in Vector Gas v Bay of Plenty Energy Limited.6 The principles were summarised in Investors Compensation Scheme as follows:7
(a) The object of interpretation is to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation they were in at the time the contract was executed.
(b) The factual matrix includes anything which would have affected the way in which the language of a document would have been understood by a reasonable person, subject to the requirement that it should have been reasonably available to the parties and to an exception mentioned below.
(c) That exception to admissible background is previous negotiations of the parties and their declarations which have subjective intent. Those matters are only admissible in an action for rectification.
(d) The meaning which a document conveys to a reasonable person is not the same as the meaning of its words. The meaning of the document is what the parties using those words against the relevant background would have reasonably understood the words to mean. This approach may even enable the reasonable person to conclude that the parties for some reason have used the wrong words or syntax.
(e) It is not easily accepted that people make linguistic mistakes in formal documents. However the plain meaning rule allows that if something has gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a
3 Faber v Earl of Lathom (1897) 77 LT 168.
4 Vector Gas Limited v Bay of Plenty Energy Limited [2010] NZSC 5; [2010] 2 NZLR 444 at [19]
per Tipping J
5 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at
114-115.
6 At [78].
7 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at
114-115.
conclusion that flouts business common sense, it must be made to make business common sense.
33 The Court of Appeal in WEL Energy Group v Electricity Corporation of
NZ Ltd8 identified the following steps to be followed:9
(a) an examination of the words themselves;
(b) an examination of the provisions immediately surrounding the clause in question – the most immediate textual context;
(c) an examination of other clauses in the contract – the wider textual context;
(d) an examination of the surrounding circumstances of a factual character. The question is the meaning of the words used in light of surrounding circumstances.
34.Some of these points are materially expanded upon and explained in the leading New Zealand case on contractual interpretation, Vector Gas. In that case, though unanimous as to the outcome, the Supreme Court Bench differed slightly in their approach to the principles of interpretation. The Court unanimously confirmed that the starting point in determining the objective intention of the parties is always the ordinary meaning of the words used in the agreement.10 The majority view was that the surrounding factual matrix may also be relevant to the Court’s assessment of the objective meaning of contractual provisions, even if the terms are not, on their face, ambiguous.
35.Finally on general principles, on the basis of the contra proferentem rule, if the Court considered there was any ambiguity, that should be resolved in favour of the guarantors. For example, in Eastern Counties Building Society v Russell,11 Hilbery J said:
Rather will the court in case of doubt lean in [the surety's] favour. Neither equity nor law will put a construction on the document which results in imposing on the surety any more than, on the strictest construction of the instrument, he must be said expressly to have undertaken, or so as to detract from the right given to the surety by the proviso defining the circumstances in which the surety is to be held discharged.
36. And in Chan v Cresdon Proprietary Limited:12
In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 C.L.R.
549, at p.561, Mason A.C.J., Wilson, Brennan and Dawson JJ. observed:
At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety.
In the light of this settled principle governing the interpretation of contracts of guarantee, there is no justification for reading cl. 23.01 as extending to obligations which, at best, as between the landlord and the lessee, arise, not under the lease at law
8 WEL Energy Group Limited v Electricity Corporation of NZ Ltd [2001] 2 NZLR 1.
9 At [22]-[25].
10 At [4] per Blanchard J.
11 Eastern Counties Building Society v Russell [1947] 1 All ER 500 at 503.
12 Chan v Cresdon Proprietary Limited (1989) 168 CLR 242 at 256.
but under an equitable lease which is the equivalent of the lease at law.
37. The above passage was cited with approval in White & Ors v Cariste Pty Ltd,13 where the Court also noted that this principle should apply not only in the case of ambiguity, but also simply in support of a strict and literal reading of the relevant guarantee.
[22] In White v Cariste Pty Ltd, the Court found that there had been a renewal of the lease and therefore the guarantee which referred to "the Lease" did not extend to the renewed lease.
[23] In this case, it is common ground that there has not been a renewal.
Defendants’ submissions
The terms of the Deed of Guarantee
[24] Ms Paterson focussed interpretation first on the provisions of the guarantee of debts in clause 1(a). The guarantee which the defendants gave was of the franchisee’s performance and payment of all terms, covenants, conditions, obligations, money and amounts which the franchisee had agreed to perform and pay the franchisee under this agreement.
[25] Ms Paterson submits that “this agreement”, appearing in schedule 3 of the
franchise agreement, must mean the franchise agreement.
[26] Ms Paterson submits that to determine the duration of the debt guarantee the Court must therefore look to the agreed term of the franchise agreement. Pursuant to clause 3.1 (above [16]) and schedule 1 (above at [12]), the term of this franchise agreement is three years. Ms Paterson submits that any further term of the agreement obtained through renewal is not covered by the guarantee under clause 1(a). She says that three covenantor provisions support that interpretation:
(a) The wording of the clause 1(a) debt guarantee is to be contrasted with the wording of the clause 1(b) conduct of business guarantee. The clause 1(b) covenant (requiring the franchisee to carry on its franchise
business in a particular manner) is expressly stated to apply:
13 White v Cariste Pty Ltd [2005] ANZ ConvR 30 at 42.
… throughout the Term of the franchise agreement
(including any renewal or extension of it)…
(emphasis added)
Ms Paterson contrasts this clause 1(b) with clause 1(a) where the words I have emphasised are omitted.
Ms Paterson referred to the decision of the New South Wales Supreme Court in Yulin Pty Ltd v Japan Building Projects (Australia) Pty Ltd.14 One of the issues in that case was whether a guarantee (of payment and other obligations “under the Lease”) were to be read as if they were “under this lease or any extension or renewal thereof”. Young J found it impossible to read the guarantee clause in the context of the contract as having the sense that “under this lease”
included under the lease or any renewal thereof. His Honour also found that the express provision in the guarantee clause that it was a “continuing guarantee” did not change the correct view of the whole of the document. Finally, his Honour found that the contra proferentem rule reinforced his interpretation. The “guarantor” was not liable for obligations of the principal under the renewed lease.
(b)Ms Paterson referred also to the franchisee’s right of renewal under the franchise agreement. The parties recognised in clause 4.1(d) that a renewal constitutes a “new agreement” (which may be viewed in contradistinction to the “this agreement” referred to in clause 1(a) of the deed of guarantee). Ms Paterson referred to the inclusion of the condition in clause 4.1(d) (above at [13]) – providing for fresh commitment by the covenantors in relation to “the new agreement” - as supporting the conclusion that the parties intended that there be no guarantor liability beyond the initial term unless the guarantors agreed to that. Such fresh commitment would be unnecessary if the renewal
was intended to operate as a continuation of the original agreement.
14 Yulin Pty Ltd v Japan Building Projects (Australia) Pty Ltd [1991] ANZ ConvR 390, at 394.
(c) Ms Paterson referred to clauses 3.1 and 4.1 of the deed which respectively provide for confidentiality and non-competition by the covenantors. In parallel with clause 1(b) of the franchise agreement, clauses 3.1 and 4.1 include, immediately after the reference to “the Term of the franchise agreement”, the words in parentheses including any renewal of extension of it. Those provisions are, again, to be contrasted with the wording of clause 1(a).
The surrounding circumstances
[27] Ms Paterson submitted that there is little in the way of surrounding circumstances relevant to the interpretation of the franchise agreementual documents here.
[28] One relevant circumstance, she submits, is that at the time the franchise agreement was signed and the guarantees entered into (14 March 2008) the defendants were directors and shareholders of both the franchisor and the franchisee. By contrast, on the expiry of the three year term (around March 2011), Mr Anderson was no longer involved in the Stonewood Group in any capacity and Mr Mettrick was no longer managing director of the franchisee, having sold the majority of his shares. The franchise agreement contained express provisions for the assignment of the franchisee’s interest – in Ms Paterson’s submission this would lead the reasonable bystander to contemplate that the nature of the defendants’ involvements and control could come to an end at any point (as they did).
[29] Mr Mettrick has deposed that as a director of the franchisor he could have ended the guarantee liability of himself and Mr Anderson at any time. He deposes that he would have taken such steps immediately had the defendants ever thought they remained liable as guarantors beyond the initial three year term. As matters occurred, they did not effect such changes before the assignment of the franchisor’s interests to the plaintiff in March 2016.
Plaintiff ’s submissions
The terms of the Deed of Guarantee
[30] Ms Jolliffe submitted that, for the purposes of interpreting the guarantee obligations, the relevant terms of the deed (as fully set out above at [16]) were as follows:
(a) Under clause 1(a), the full wording of the covenant;
(b)Under clause 1(b), the requirement that the covenantors cause the franchisee to properly conduct its business “throughout the Term of the franchise agreement (including any renewal or extension of it) …”;
(c) Under clause 2.1, the covenantors would not be released by reason of
(amongst other events) “any extension of time”.
(d) Under clause 2.2, the guarantee constituted a continuing guarantee;
(e) Under clause 2.3, the covenantors acknowledged that they had read all the terms and conditions of the franchise agreementual documents and consented to them and that the clause 1 guarantee would be effective and binding “notwithstanding that the franchise agreement or this deed be in any way irregular or defective”.
(f) Under clause 2.4, the clause 1 guarantee was delivered free of any conditions and was “in addition to and not in substitution for any other guarantee …”.
Conduct of the parties
[31] Ms Jolliffe suggested that the parties had not renewed the franchise agreement. But she submitted that, as the franchisee continued after 14 March 2011 to operate its Stonewood Homes business, it is arguable that it did so pursuant to a variation of the (original) franchise agreement. She submits that the variation involved (arguably) an extension of the “Term” specified in the franchise agreement.
[32] Ms Jolliffe submitted that the Deed of Guarantee (with its repeated references in clauses 1(b), 2.1, 3.1 and 4.1) contemplated that there might be a variation of the franchise agreement (through extension of the term) and that the defendants arguably consented to a variation. Ms Jolliffe referred to authority for the proposition that consent to a variation may be implied by conduct, such as when a guarantor
instigates a variation.15 Ms Jolliffe submitted that the Court may imply a consent to
variation so as to estop guarantors from arguing that their guarantee has been discharged by the variation. Ms Jolliffe also referred to Winstone Ltd v Bourne as authority for the proposition that a guarantor may be held to have assented to a variation of the guarantee when acting in another capacity.16 In that case, parties who were both directors of the principal and guarantors of its obligations endorsed their consent as directors to an alteration of a debenture. The Court held that their
endorsement also constituted their informed but unrecorded assent as guarantors.
[33] Ms Jolliffe further notes the peculiarity of the circumstances in this case where Mr Mettrick was at material times acting in dual capacities as franchisor and franchisee (in addition to his standing as guarantor). Ms Jolliffe notes that Mr Mettrick was in the best possible position to cancel the guarantee by obtaining a release from the franchisor (which he controlled). Ms Jolliffe submits that it is relevant that Mr Mettrick did not so arrange for a cancellation.
[34] Finally Ms Jolliffe refers to the evidence of Michael Allan, the plaintiff’s franchise relationship manager. Ms Jolliffe described the evidence as showing that “rolling over” of franchise agreements within the old Stonewood Homes group was common practice allowed by Mr Mettrick. Mr Allan’s evidence in that regard was directed to discussions which took place in late 2014 about the terms of franchise agreements which were described as “rolled over”. Mr Allan exhibits legal advice (or more correctly draft legal advice) which was obtained in October 2014 as to the terms which continued to apply between franchisor and franchisee. The draft advice does not address the standing of related guarantees – it relates specifically to the
obligations as between franchisee and franchisor.
15 Harris v Rathbone (1911) 13 GLR 500.
16 Winstone Ltd v Bourne [1978] 1 NZLR 94 at [96].
Application of franchise agreementual terms
[35] Ms Jolliffe submitted, having regard to the 2008 contractual terms and the parties’ conduct from 2011, that the guarantees continued in force and did not terminate on 14 March 2011 (being the expiry of the initial term of the franchise agreement).
Analysis
The timing of the claimed debts
[36] It is common ground that the franchisee’s debts as claimed in this proceeding all came into existence after the initial term of the franchise agreement expired around 14 March 2011.
[37] It is also common ground that the parties did not renew the franchise agreement under clause 4.1 of the franchise agreement. Counsel both described what had happened in terms of the franchise agreement being allowed to “run on”.
Interpretation of the guarantee
[38] I begin with the text of the defendants’guarantees. The starting points are the guarantee covenants contained in that part of the Deed of Guarantee which the parties expressly called “the guarantee”. They are clauses 1(a) and 1(b). Then I will consider the provisions of the franchise agreement to the extent they are relevant to the guarantee by reference or incorporation or as part of its surrounding circumstances. I must then consider the debt guarantee in the light of the Deed of Guarantee as a whole.
[39] At one point of Ms Jolliffe’s synopsis, there appeared the following
submission as to the correct approach to interpretation:
It is the plaintiff’s position that the Franchise Agreement and the Deed of Guarantee are separate documents, which confirms that any limitation on the term of the Franchise Agreement as stipulated in the Franchise Agreement, does not impact the liability of the Defendants under the Guarantee …
[40] The invitation to the Court to effectively ignore all provisions of the franchise agreement is incompatible with the modern approach to interpretation of contracts. Furthermore, it could not be appropriate here when the close relationship between the two contractual documents is self-evident.
[41] The interrelationship of the two documents is seen throughout the franchise agreement, including in:
● recital E of the franchise agreement which records:
In consideration of the Franchisor entering into this agreement at their request, the Covenantors have executed this agreement as convenanting parties.
● clause 4.1(d) which makes commitment to fresh guarantees a condition of any renewal of the franchise agreement
● clause 32 which contains the guarantors’ agreement
● the execution page which was to be executed by the guarantors as well as the parties to the franchise agreement
Clause 1(a) of the guarantee
[42] I focus first on the debt guarantee in clause 1(a) (above at [16]) as it is the provision for payment of the franchisee’s debts which the plaintiff seeks to enforce against the guarantors (clause 1(b) in contrast is a guarantee as to the proper conduct of the franchisee’s business).
[43] The defendants’ guarantee is of the payment of such amounts as the franchisee is required to “pay … under this agreement”.
[44] The term “this agreement” in clause 1(a) is clearly, as submitted by Ms Paterson, a reference to the franchise agreement of which the Deed of Guarantee (as Schedule 3) forms part. I have referred (above [41]) to the extent which the guarantee obligations are woven into the franchise agreement. The Deed of Guarantee is structured as part of that agreement.
[45] While the succeeding clauses of the Deed of Guarantee (clauses 2 to 4) are material to the interpretation of the franchise agreement, the provisions of clause 1(a) defining the debt guarantee obligation by reference to what has been “agreed under this agreement” make it appropriate in this case first to consider the material provisions of the franchise agreement.
The term of the franchise agreement
[46] For the plaintiff, Ms Jolliffe submitted that it is important to note that the Deed of Guarantee itself “did not specify a limit on its term”. While that submission is literally correct, it ignores the fact that the scope of the guarantee provided by the defendants is defined under the clause 1(a) debt guarantee by reference to what had been agreed under the franchise agreement. The clause 1(a) guarantee was of debts accruing under that agreement.
[47] The following aspects of the franchise agreement are therefore important in interpreting the scope of the guarantee:
(a) The term of the franchise agreement is the three year period identified as the “Initial period” under clause 2(a) of Schedule 1: see clause 3.1.
(b)The franchisee had the right, prior to the expiry of the initial period, to request a renewal of the agreement, which the franchisor was required to grant if four conditions were met. One condition was that the guarantors (or any persons approved by the franchisor in substitution for the guarantors) enter the new agreement as covenantors: see clause 4.1.
(c) The parties, including the covenantors, recognised any franchise agreement entered into pursuant to a renewal as a “new agreement”: see clause 4.1(d).
[48] By reading these franchise agreement provisions, together the plain meaning of the words used to this point, the guarantors under clause 1(a) have guaranteed
payment of the debts which accrued under the franchise agreement during the three year period ending 14 March 2011.
[49] I move then beyond clause 1(a) of the Deed of Guarantee to consider the provisions of the deed in its entirety.
Other provisions of the Deed of Guarantee
[50] Ms Paterson submits that the reading of clause 1(a) (in conjunction with the provisions of the franchise agreement) as a guarantee limited to the initial term is reinforced when one contrasts the clause 1(a) guarantee (relating to “this agreement”) with subsequent clauses which expressly provide for obligations to continue into any period during which the franchise agreement is renewed or extended. There are three such sets of obligations, namely the proper business conduct guarantee (clause 1(b)), the covenant to maintain confidentiality (clause 3.1) and the covenant against competition (clause 4.1).
[51] Ms Paterson submitted, correctly in my view, that had the parties intended to have the guarantors’ obligations cover debts accruing after the initial term, the appropriate wording would have been easily achievable, in parallel with the appropriate wording added in relation to the obligations under clauses 1(b), 3(1) and
4(1). As Ms Paterson submitted, the case in this regard bears some similarity to the facts in Hodren v Coffey.17 In that case, the defendant had guaranteed to observe all the “conditions … contained or implied in this lease …” and recorded that he was individually liable as a principal debtor “… on all covenants in the said lease”. The first two paragraphs of the Report headnote accurately summarise why Master Williams QC dismissed the lessor’s summary judgment application:
1. A guarantee of a lease normally expires for the expiration of the term of the lease unless the terms of the guarantee itself clearly extend this liability to subsequent leases.
2. The terms of the guarantee indicated clearly that the guarantor’s obligations were not intended to extend beyond the term of the lease. It would have been simple for the parties, had they intended to do so, to have expressly extended the guarantor’s liability beyond the term of the lease but there was nothing to that effect in the form of the guarantee.
17 Hodren v Coffey [1992] 2 NZ ConvC 191,238.
[52] Here the absence of reference, in clause 1(a) of the guarantee, to any period of renewal or extension is all the more significant when the parties in three separate instances expressly extended the guarantee or covenant to any periods of renewal extension.
[53] To this point I have focused on the provisions which the parties expressly recognised as their guarantee, namely clause 1 of the Deed of Guarantee.
[54] I now turn, for the purpose of the interpretation of the guarantee, to the succeeding provisions in clause 2 of the deed which the parties headed “Unconditional Guarantee”. It is apparent when one reads the provisions of clause 2 in its entirety that these provisions follow the clause 1 guarantees in order to ensure that named events will not serve to discharge the guarantors from their guaranteed liability. Sub-clauses 2.1 – 2.5 do not operate to extend the guaranteed liability defined under clauses 1(a) and 1(b).
[55] The first, and on Ms Jolliffe’s submission, most significant of the clause 2 provisions is clause 2.1. It is introduced with the title “Not released” (above at [16]). As that title, and the words of sub-clause 2.1 clearly indicate, the function of sub- clause 2.1 is to prevent certain events from operating (as they otherwise would) to discharge the guarantors from liabilities under the guarantee. Ms Jolliffe emphasised particularly the “extension of time” provision in clause 2.1. In the present case the franchisor and franchisee allowed the franchise agreement to run on. Ms Jolliffe’s submission is that the extension of time so resulting here was in the nature of an agreed variation of the franchise agreement and therefore still within “this agreement” as referred to in clause 1(a) of the deed.
[56] The role of a clause such as clause 2 is to deal with the rule in Holme v Brunskill.18 In the absence of other agreement between the parties, any material variation of the terms of the principal franchise agreement (that is between the
creditor and the principal) will discharge a surety. The rule encompasses an
18 Holme v Brunskill (1878) LR 3 QBD 495 (CA). See Courtney and others, The Modern Contract of Guarantee (3rd English ed, Sweet & Maxwell 2016) at [7-002]; G Andrews and R Millett Law of Guarantees (7th ed, Sweet & Maxwell 2015) at [9-023].
agreement by the creditor to give time to the principal debtor.19 Those who draft guarantee deeds frequently include clauses which exclude discharge on the ground of the giving of time.20
[57] The authors of The Modern Contract of Guarantee, having reviewed case law, observe:21
The result is that the usual “indulgence clause” in modern guarantees will not be effective to preserve the guarantor’s liability if an agreement for an extension of time also poses an additional liability, unless the additional burden is contemplated by the principal contract.
In other words, the “indulgence clause” does not “preserve” a guarantee beyond the
contemplated scope of the guarantee.
[58] Ms Jolliffe submits that clause 2.2 of the Deed of Guarantee is also relevant to the correct interpretation of the guarantee in clause 1(a). Clause 2.2 provides that the guarantee in clause 1 constitutes “a continuing guarantee”. In her collective submission in relation to clauses 2.1, 2.2 and 2.4, Ms Jolliffe submitted that:
The clear intention of those sub-clauses is that the guarantee could extend and would extend and continue in the event that the term of the franchise agreement was extended.
[59] Reliance on the “continuing guarantee” provision in sub-clause 2.2 to indicate that the scope of the guarantee was so extended involves a further misconstruction of the role of this particular type of clause. Guarantees may be either specific or continuing.22 As explained by the authors of Rowlatt on Surety:23
A guarantee for a future debt may either be restricted to a debt of that amount to be incurred once and for all, or it may be continuing.
19 Andrews and Millett, above n 18 at [9-029]; Courtney and others, above n 18, at [7-074] –
[7-107].
20 Andrews and Millett, above n 18 at [9-033]; Courtney and others, above n 18, at [7-096] –
[7-100].
21 Above n 18, at [7-097].
22 Andrews and Millett, above n 18, at [4-017]; Courtney and others, above n 18 at [5-051], D Marks and G Moss (eds), Rowlatt on Principal Surety (6th edition, Sweet & Maxwell 2011) at [4-20].
23 Marks and Moss, above n 22, at [4-20].
[60] Clause 2.2 was plainly intended to record the parties’ agreement that the guarantee would cover not a particular liability or a particular series of transactions but would cover all liabilities of transactions which continued to occur between the franchisor and franchisee for the term of the guarantee. Clause 2.2 clarifies that this guarantee sits within the category of continuing guarantees. It avoids any argument that the guarantee may have been intended to be a specific guarantee. The use of the word “continuing” lends no weight to an argument that the guarantors were agreeing to a potentially unlimited period of guarantee as recognised in Yulin Pty Ltd v Japan
Building Projects (Australia) Pty Ltd.24
[61] Ms Jolliffe also referred to the provisions of sub-clause 2.4 in which the defendants explicitly acknowledged that the guarantee in clause 1 of the deed had been delivered free of any conditions. She did not develop a particular submission on sub-clause 2.4 as to how (beyond the effect of any provisions in clauses 2.1 and
2.2) sub-clause 2.4 would have merited an interpretation that the guarantee was not limited in time. It does not.
The “purview doctrine”
[62] To support her submissions that any variation of the principal contract which arguably occurred did not operate to discharge the defendants’ guarantee obligations, Ms Jolliffe referred to the “purview doctrine”. She drew the relevant discussion from the judgment of Associate Judge Smith in Samson Corporation Ltd v
Macrennie Commercial Construction Ltd.25 His Honour there referred to the
decision of the English Court of Appeal in Triodos Bank NV v Dobbs (No 2), in which the Court recognised that a material variation operates to discharge a guarantor unless the variation is one to which the guarantor assented or which was provided for in the contract of guarantee.26 Longmore LJ approved commentary from the first edition of Rowlatt on the Law of Principal and Surety which stated:27
… it is apprehended that assent, whether previous or subsequent to a
variation, only renders the surety liable for the contract as varied, where it
24 Yulin Pty Ltd v Japan Building Projects (Australia) Pty Ltd, above n 14, at 394.
25 Samson Corporation Ltd v Macrennie Commercial Construction Ltd [2014] NZHC 1203.
26 Triodos Bank NV v Dobbs (No 2) [2005] EWCA Civ 630, [2005] 2 Lloyd’s Rep 588, at [14].
27 At [14].
remains a contract within the general purview of the original guarantee … If
a new contract is to be secured then there must be a new guarantee.
[63] As is evident from the cited passage, the consideration of the “purview of the guarantee” operates potentially to limit the possibility that a material variation will not discharge the guarantor. It does not operate as a doctrine to expand the guarantor’s liability beyond the plain wording of the guarantor’s agreed covenants.
[64] Where, as in this case, the guarantor committed to meet debts which had accrued under “this agreement”, the purview doctrine cannot assist the plaintiff in asserting that the guarantor has a liability for other debts which did not accrue “under this agreement”.
[65] If correctly applied to this case, the principle clarified in Rowlatt supports the conclusion that the defendants were discharged precisely because the guarantee of debts accruing after 14 March 2011 did not fall “within the general purview of the original guarantee”.
A variation of the term of the franchise agreement?
[66] Ms Jolliffe submits that “the franchise agreement continued to apply on its terms past the initial term”. In the summary judgment context, Ms Jolliffee submits that the parties’ conduct arguably constituted a variation of the terms of the franchise agreement in that the three year term of the franchise agreement was extended. Implicitly it is suggested that the duration of the franchise agreement was extended on an indefinite basis. The argument is that the guarantee continues to apply under clause 1(a) because “this agreement” has not expired. Rather it still exists albeit in varied form.
[67] I find that the plaintiff has neither in its evidence provided a satisfactory factual foundation for the variation argument, nor in its pleadings asserted a variation. I have regard to:
(a) The affidavit evidence (of Mr Allan) for the plaintiff – Mr Allan’s narrative of events begins in 2014 (some three years after the expiry of the initial term in the franchise agreement. He does not identify any
prior discussion (2011-2014) as to variation of that franchise agreement. Rather, Mr Allan’s evidence, against a background in which numerous Stonewood Homes franchise agreements were apparently running on, focuses on the draft legal advice obtained in
2014. The draft goes so far as to record an understanding (by inference obtained from the plaintiff) that the franchise agreements for a number of Stonewood Homes franchisees had “expired”. The early version of the draft refers to the issue of “what will happen if the parties allow the agreement to “run on after the end of the term” (emphasis added). Mr Allan does not identify circumstances which would evidence a variation of the franchise agreement in the time of an agreement to vary its contract by varying its term. His evidence focuses instead on later (draft) advice obtained after numerous franchise agreements had apparently run on.
(b)Plaintiff’s pleadings – by its statement of claim, the plaintiff does not plead a variation of the franchise agreement (as to its term), whereby the guarantees continued in force in relation to debts accrued after
14 March 2011. The most specific pleading as to continued operation of the franchise arrangements is pleaded as:
SH Hamilton continued to operate as franchisee in the Hamilton territory under the Agreement until it was placed into liquidation on 12 January 2016.
That pleading is entirely consistent with the concepts of “expired” and “running on” which the plaintiff and its solicitors adopted. It is not an allegation of variation of the franchise agreement whether in 2011 or afterwards.
In response to the defendants’ affirmative defence (alleging that the guarantee did not extend beyond the initial term), the plaintiff filed a Reply. The Reply invoked the terms of the guarantee (particularly sub- clauses 2.1, 2.2 and 2.4). The Reply did not plead a variation of the franchise agreement.
(c) Plaintiff’s opposition documents – the plaintiff’s Notice of Opposition
mirrored its pleadings in its Reply to the Affirmative Defence.
[68] The plaintiff does not have an arguable basis on the plaintiff’s pleadings for this Court either on the evidence adduced to infer that the parties to this particular franchise agreement (or other franchise agreements which ran on) varied the franchise agreement as to its term.
[69] I have found that the plaintiff has not provided in evidence a factual foundation to support an argument that the franchisor and franchisee entered into a variation of the franchise agreement.
[70] If that conclusion was found to be incorrect, there remains a second reason
why the plaintiff’s variation argument cannot sustain a finding of liability.
[71] Clauses in guarantees frequently purport to preserve the guarantor’s liability
despite a future variation of the principal contract.28
[72] The authors of The Modern Contract of Guarantee identify a number of provisions which are “invariably” included in modern forms of guarantee, designed to achieve the objective of preserving guarantee liability despite variation of the principal contract.29 (These are all to be distinguished from the situation of a consent by the guarantor at the time that a variation is agreed.)30
[73] The standard clauses so used to exclude discharge on this ground are the “principal debtor” clause and a clause stating that the guarantee is not to be effected by a variation. The “principal debtor” clause generally states that the liabilities of the guarantors shall be deemed to be those of the principal debtor or primary obligor.31 Such clauses are frequently found to have prevented a guarantor from
being discharged in the event of a variation of the principal contract when varied.32
An example of the alternative drafting approach, commonly employed, of having the
28 See for instance Courtney and others, above n 18, at [7-033].
29 At [7-033].
30 At [7-056].
31 At [7-035].
32 See the cases footnoted in Courtney and others, above n 18 at [7-035], 107,108.
guarantor simply agree that the guarantee shall not be affected by any variation of the principal contract is set out in The Modern Contract of Guarantee:33
we … agree that the guarantee shall not be avoided, released or affected by the [creditor] making any variation or alteration in the terms of the [principal] agreement.34
[74] The judgment of Wild CJ in Nelson Fisheries Ltd v Boese illustrates the significance of not including such a clause.35 In that case the lender sought to enforce a guarantee which provided that Mr Boese:
… shall not be discharged from liability hereunder nor shall his liability be lessened or affected by any waiver or default that may operate to discharge a surety …
The evidence established that the lender and borrower materially altered the contractual arrangements upon which the borrower was to conduct his business. Sir Richard Wild observed that a matter of express agreement such as had occurred did not constitute a mere “waiver or default” in terms of the guarantee. Then, identifying the type of provision which the deed of guarantee did not contain, his
Honour noted:36
The covenant does not provide, as it might have done, that the defendant shall not be released by any variation in the provisions of the deed or by any agreement relating thereto made between its parties.
[75] Similarly, in this case the Deed of Guarantee did not contain a clause apt to exclude discharge on the grounds that the principal contract had been varied.
A lease analogy?
[76] Ms Paterson, for the defendants, invited the Court to apply principles established in relation to contracts between landlord and tenant, where a guarantor’s obligations in respect of a lease end at the contractual termination date unless the
contrary is specifically agreed.37 The line of English authority in relation to landlord
33 Above n 18, at [7-037].
34 The authors cite British Motor Trust Co Ltd v Hyams (1934) 50 TLR 230 as containing a similar clause.
35 Nelson Fisheries Ltd v Boese [1975] 2 NZLR 233.
36 Nelson Fisheries Ltd v Boese at 235 – 236.
37 Junction Estates Ltd v Cope (1974) 2 P & CR 382; see Marks and Moss, above n 22, at Chapter
14.
and tenant appears germane here because the relationship frequently gives rise to
periods of “holding over” and, apparently, consequential litigation.
[77] Ms Paterson referred me to authorities both for the proposition that the renewal of a lease ordinarily creates a new lease, with the guarantor of the original lease discharged (unless consenting),38 and for the recognition that a guarantee will not extend to any statutory extension of a lease when the original period expires, unless the wording clearly contemplates such liability.39
[78] Those authorities were adverted to by Associate Judge Bell in CCNZ Ltd v Booth, in relation not to a landlord/tenant situation but a franchisor/franchisee situation.40 In that case, as here, a franchise agreement ran on after its initial term without being renewed despite the existence of express renewal provisions. His Honour recognised that landlord/tenant law would not regard the continued occupation of premises by a tenant after the expiry of a lease as a renewal or extension of that lease.41 His Honour then followed an approach he described as similar to that in holding-over cases (as in landlord/tenant situations), before concluding:42
There is authority that when there is a holding-over, after the expiry of a lease, a guarantee will not extend to the holding-over unless there is express wording to that effect within the guarantee.
[79] In the light of such authority, his Honour found that the defendant had an arguable defence that he was not liable for the obligations of the principal debtor which arose in the period after the initial term.
[80] While Ms Paterson invited the Court to apply the landlord/tenant authorities in relation to holding-over to the present case, I prefer to reach the conclusions in
38 Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] 8 NZCPR 374; Yulin Pty Ltd v Japan Building Projects (Australia) Pty Ltd, above n 14, at 394, Young J rejecting a submission that the words of guarantee of obligations “under this lease” might be read as if they were “under this lease or any extension or renewal thereof”. Contrast Mahoe Buildings Ltd v Fair Investments Ltd [1994] 1 NZLR 281, at 288, in which the guarantee expressly referred to covenants “in the foregoing Deed of Lease and any lease in renewal thereof …”.
39 White v Cariste Pty Ltd, above n 13, at 67; Junction Estates Ltd v Cope, above n 37, at 484;
Hodrem v Coffey, above n 17.
40 CCNZ Ltd v Booth HC Hamilton CIV-2011-419-1231, 7 March 2012.
41 At [16].
42 At [21].
this judgment on my earlier reasoning. The analysis in the holding-over cases has parallels, but I am not satisfied on the limited argument presented that such cases can be directly applied. As the detailed discussion in some of the cases indicates in the landlord/tenant cases, the existence of an estate assumes significance. Furthermore, the reasoning in the first instance decision of the Supreme Court of New South Wales (Equity Division) on which Ms Paterson placed some emphasis (Yulin Pty Ltd
v Japan Building Projects (Australia) Pty Ltd)43 has been questioned by a Full Court
of the Supreme Court of South Australia in Tessari v Bais Pty Ltd.44 That Court noted that Young J in Yulin had not referred to the reasoning and decision of the High Court of Australia in Mercantile Credits Ltd v The Shell Co of Australia Ltd.45
[81] Leaving aside matters which arise in the landlord/tenant cases which may be specifically referable to that relationship, what the courts in most of those cases have emphasised – relevant here – is that it is the terms of each guarantee which are critical. Hence the introductory words in Rowlatt on Principal Surety that:46
Unless the contrary is specifically agreed, a surety’s obligations in respect to
the lease end at the contractual termination date.
(emphasis added)
[82] For the plaintiff, Ms Jolliffe submitted that the Court should not apply the line of authority drawn from landlord/tenant litigation because (by reason of the arguments I have earlier noted) the wording of the Deed of Guarantee reflected the express contemplation of the parties that the term of the franchise agreement might be extended without affecting the guarantee liability. For the reasons set out at [50]
– [61] above, I do not find it arguable that the parties to the guarantee agreed that the guarantee would apply in the situation which occurred with the franchise arrangements simply running on.
Outcome
[83] The defendants have established that they have a complete and
incontrovertible answer to the plaintiff’s claim. Under their guarantee, they
43 Yulin Pty Ltd v Japan Building Projects (Australia) Pty Ltd, above n 14.
44 Tessari v Bais Pty Ltd [1993] ANZ ConvR 352.
45 Mercantile Credits Ltd v The Shell Co of Australia Ltd (1976) 136 CLR 326.
46 Marks and Moss, above n 22, at [14.01].
guaranteed debts of the franchisee which accrued under the franchise agreement during its initial term. The franchise agreement was not renewed. The plaintiff has not established an evidential foundation for an argument either that the franchise agreement was varied or that the guarantors assented to such variation. Had there been a renewal of the franchise agreement, the parties by clause 4.1 of the franchise agreement recognised that such renewed contract would be a new contract, in relation to which new guarantees would be required. The same requirement must apply where the parties simply permitted the franchise arrangements to run on after the initial term of the franchise agreement.
[84] The guarantee related expressly to debts “under this [franchise] agreement”. The fact that the parties at various points of the contract documents recognised the prospect of renewal and extension cannot alter the scope of the defendants’ liability under the clause (clause 1(a)) by which they guaranteed payment of the franchisee’s debts. To the contrary, the specific provision for other covenants to run on in the events of renewal and extension reinforces the objective conclusion that the parties did not intend to have the differently worded debt guarantee run on in such situations.
[85] There was the implicit suggestion in the plaintiff’s case that it ill behoves the defendants, who had been the directors of both the franchisor and franchisee under the initial arrangements, to now assert against an assignee of the franchisor’s rights a discharge of liability which the franchisor (through them) could have avoided. The multiplicity of capacities in which the defendants may have been involved does not alter the terms of the contractual relationship which existed or the correct construction of the contractual provisions. When the plaintiff took its assignment of the franchisor’s contractual rights, it acquired those rights in terms of the contractual obligations as they stood.
[86] The defendants are entitled to summary judgment on the correct construction of their guarantees.
Costs
[87] Costs must follow the event.
[88] I order:
1. There is summary judgment for the defendants against the plaintiff;
2. The plaintiff is to pay a single set of costs for the defendants on a 2B47
basis together with disbursements to be fixed by the Registrar.
Associate Judge Osborne
Solicitors:
Anthony Harper, Christchurch
Buddle Findlay, Christchurch
47 High Court Rules, Category 2 under r 14.3(1) and Band B under r 14.5(2).
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