Esanda Finance Corporation Ltd v Strong and Ahern [2011] QDC 151

1-1 [2011] QDC 151 DISTRICT COURT CIVIL JURISDICTION JUDGE ROBIN QC No 1697 of 2010 ESANDA FINANCE CORPORATION LIMITED Plaintiff and JASON HAMILTON STRONG and MATTHEW JOSEPH AHERN Defendants BRISBANE ..DATE 12/07/2011 ORDER CATCHWORDS Uniform Civil Procedure Rules 1999, r 292 Successful application for summary judgment against guarantors - asserted defences or counterclaim based on discharge for plaintiff's effectively varying the defendants' obligations - assertion by one that his liability ceased when he ceased to be a director of the principal debtor rejected -- 1 of 13 -- 1-2 ORDER 1 10 20 30 40 50 60 HIS HONOUR: This is an application for summary judgment under rule 292. The Court has a discretion to give judgment for the plaintiff against the defendants for all or part of its claim if satisfied that the particular defendant has no real prospect of successfully defending all or part of the claim and there is no need for a trial in respect of so much of the plaintiff's claim. The defendants are sued as guarantors of the obligations of a company called Tender Choice (Qld) Pty Ltd. As it happens, each of them has executed two guarantees. Not only are they guarantees, each of them also amounts to an indemnity. They were the directors of Tender Choice and each one of them signed his original "standard guarantee and indemnity" on the 8th of October 2006 in anticipation of transactions that the plaintiff might enter into at the request of Tender Choice. Each of the those documents contains in clause 13.1 the following provision: "I agree to pay whatever I have to pay to Esanda without any set-off or counterclaim." The second instrument of guarantee and indemnity dated 16 October 2006 accompanied the contemporaneous chattel mortgage which Tender Choice entered into with the plaintiff. It contains, in paragraph 13, a provision corresponding to that set out above, "I/we shall not have any right to set-off any -- 2 of 13 -- 1-3 ORDER 1 10 20 30 40 50 60 amount due to the customer from you or any of you in diminution of my/our liability." By clause 3, "This guarantee and indemnity is independent of and in addition to any other guarantee and indemnity or security held or to be held by Esanda for all or any of the obligations and I/we will not in any way or at any time claim the benefit of or seek to require the transfer of any such guarantee, indemnity or security or any part thereof." Mr Sewell, representing the plaintiff, referred to that provision in response to the Court's inquiry as to whether the later instrument of guarantee which both defendants signed in some way supplanted the earlier individual ones. It seems to me that is a tenable reading of clause 3 which might have in contemplation only guarantees and indemnities provided by other parties. I don't say that is the meaning of it but a more careful drafter might have made assurance more sure by stipulating that the other guarantees or indemnities referred to included any that might have been or be given by "me/us". In the end, I don't think it much matters which instrument the plaintiff relies upon if it's not entitled to rely on both. Tender Choice began to make payments which were required monthly in an amount of $5,462.02 on the 24th of October 2006. Those payments continued to be made on the 24th of the month until the first one for 2009 was missed. A payment of only $13.03 above the standard amount was made on the 24th of February rather than the double payment one might have -- 3 of 13 -- 1-4 ORDER 1 10 20 30 40 50 60 anticipated. Thereafter the payments became sporadic chronologically and with the exception of the final one made on the 27th of July 2009, inconsistent in amounts. The plaintiff makes much of the defendants having made the payments required for well over two years as a comment on assertions made in defence of the summary judgment application that there was something radically wrong about the plaintiff's claim. The defendants have been separately represented. Mr Ahern's defence which was filed on the 5th of August 2010 raises the contention that his liability was to endure only so long as he remained a director of the company. He ceased to be a director in June 2007 and there's no reason to doubt his assertion in correspondence that he relied on Mr Strong who seems to have been left in charge to take whatever steps might be necessary with the plaintiff to release him as guarantor. That was not done, to Mr Ahern's cost. He's represented today by Mr Lynch who has certainly not argued the pleaded defence with any enthusiasm although he read the defence as his only material, while indicating that he relied on the evidence in submissions coming from Mr Strong's camp. It would be astounding, as the law of guarantees has developed, if a director guarantor could be freed of his or her obligations by recourse to the simple expedient of -- 4 of 13 -- 1-5 ORDER 1 10 20 30 40 50 60 resigning as a director. The plaintiff confronted this argument to the extent that it was still a live one by referring to what the Court of Appeal had to say about implication of terms in guarantees inconsistent with what is their clearly intended purpose of protecting "absolutely...rights as creditor." See ING Bank (Australia) Ltd v Leagrove Pty Ltd [2011] QCA 131 at [29] and [31]. Mr Strong's resistance to the application is on grounds expanded following the filing of his defence and counterclaim on the 9th of August 2010. That document complained that the plaintiff had paid to a firm of shopfitters, Active Shopfitters Pty Ltd, $54,733.80 more than it ought to have. The contention was that the shopfitting company was obligated to fit out premises in a new shopping centre for Tender Choice for a quoted amount of $193,325 -the "initial quote"- rather than a larger amount of $248,058.80, which the pleading contended "the plaintiff mistakenly paid Active." The assertion was that the first defendant was not indebted to the plaintiff as claimed or at all, but a counterclaim sued for the precise amount of the overpayment. Mr Strong's affidavit contends that the overpayment was three times the size of what the pleading mentioned because, in addition to the sum specified there, which in the affidavit becomes an excessive payment of $53,733.80, Tender Choice had already paid Active a deposit of $50,000, which ought to have been taken into account, and furthermore, works Active undertook were defective and incomplete to the extent of $50,360.20. -- 5 of 13 -- 1-6 ORDER 1 10 20 30 40 50 60 Apparently the $50,000 has been recovered with some difficulty, but Active's situation is now such that there's no prospect of recovering anything else. Mr Strong's affidavit asserts in essence that the defendants, or Mr Strong in particular, ought to have been consulted before the plaintiff disbursed moneys from the principal sum agreed to be made available. Reference is made to the loan approval of September 22nd 2006, which according to paragraph 25 of the affidavit stated the following: "Maximum loan amount approved $262,000. Upon completion of fitout Esanda to reimburse direct to suppliers. Esanda will control disbursement of funds and pay supplier on completion of fitout." The chattel mortgage terms and conditions the paragraph says and I accept, provided (referring to Tender Choice as 'I'): "I authorise Esanda to disburse the principal sum by payment to the respective payees as directed by me." The plaintiff says it disbursed $248.058.80 to Active, and $18,168.32 to a company called ACM Convergent IT before October 2006 was at an end. Tender Choice said it did not authorise or direct payment of those sums. Indeed, there is an issue raised, very late, as to whether the smaller amount was paid at all, Mr Strong contending that for the relevant computer products Tender Choice paid a roughly corresponding amount to a different company called AMC Technology for which it holds receipts. -- 6 of 13 -- 1-7 ORDER 1 10 20 30 40 50 60 The affidavit asserts that the directors of Tender Choice "negotiated a final price for the contract with Active of $193,325," the document which forms part of the plaintiff's documentation and refers to the price of $248,058.80 being described as "the indicative invoice” which was said to represent some kind of estimate of the worst possible case scenario and an absolute maximum of what might ever have to be paid to Active, the real price being the one $53,733.80 or less. An explanation of the divergent prices was that it had something to do with Tender Choice being involved in only part of Active’s jobs in the shopping centre, which extended to other occupants and common areas. As I understand the plaintiff's case, it is that Tender Choice effectively directed the disbursement, which happened very quickly after the 16th of October 2006. The initials of the two defendants appear on an Esanda document described as annexure C, which identifies Active and AMC Convergent IT as the suppliers alongside the larger of the Active invoices and the $18,168.32 amount for AMC Convergent IT. Not only that, there followed in the documentation Active Shopfitters' tax invoice for the higher price (terms net 14 days) Alongside payment details with the name of Active Shopfitters and the details of their Westpac bank account were the initials of the two defendants. There is a similar document generated by AMC Convergent IT, which likewise gives their bank account details and the initials of the two defendants are there. -- 7 of 13 -- 1-8 ORDER 1 10 20 30 40 50 60 The plaintiff's case is that there is no occasion for the Court to go into the rights and wrongs of the plaintiff's conduct, taking Mr Strong's affidavit at its highest. If anything has happened that ought not to have, on this analysis Tender Choice will have claims against the plaintiff potentially and matters can be sorted out. I've reached the view that considering the appropriate test under rule 292 that analysis is correct, that there's an analogy here with the well-known situation under which payments certified by an adjudicator in respect of building contracts have to be paid in a system of pay first and sort out matters on a final accounting between appropriate parties in due course. From time to time it appears that there are fashions so far as the robustness which is expected of courts in applications under rule 292 is concerned. The latest Court of Appeal decision to which the Court was referred is Coldham-Fussell v Commissioner of Taxation [2011] QCA 45 in which a judgment entered in favour of the Commissioner of Taxation under rule 292 was set aside on appeal. The reasons at paragraph 97 and following contain a discussion of the leading cases identified. Mr Stevens for the first defendant mounted an argument based on passages in well-known texts which refer to the equitable principle that variation of the principal contract prejudicial to the guarantor may lead to his or her absolute discharge, the guarantor remaining -- 8 of 13 -- 1-9 ORDER 1 10 20 30 40 50 60 liable only where the alteration to the principal contract is obviously "unsubstantial" with no possible prejudice to the guarantor resulting. Reference was made to the statement in the High Court by the majority in Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 of 559, "According to the English cases the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety’s rights unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that to hold the surety to its bargain the creditor must show that the nature of the alteration can be beneficial to the surety or that by its nature it cannot in any circumstances increase the surety's risk." The leading text at page 290 - I'm referring to O’Donovan and Phillips, The Modern Contract of Guarantee (second edition). ... HIS HONOUR: refers to examples such as agreements to increase the rent payable under a lease, agreements to allow a tenant to assign his interest under a lease contrary to its terms, changing the work or design in a building contract from the original specifications, payments made to a building -- 9 of 13 -- 1-10 ORDER 1 10 20 30 40 50 60 contractor before the due contractual date for payment stipulated in the principal contract. The decisions referred to in the footnotes are of some antiquity and in my opinion somewhat at variance with the outcomes in more recent guarantee cases. Doubtless, that owes much to the boiler plate provisions which abound in modern guarantee/indemnity instruments like the ones that concern the Court today. It seems to me that the nineteenth century tenderness for guarantors has been replaced by a more recent recognition, as in the ING case, that guarantees (often bolstered, as here have a serious commercial purpose and that that shouldn't be weakened by processes such as implying inconsistent terms. It seems to me that the plaintiff here has acted in making the disbursements it says that it has to suppliers strictly as required by the documents of the 16th of October 2006. If it's not done so redress can, in principle, be obtained by Tender Choice. I ought to mention an issue raised very late regarding payment of the computer company which Mr Strong's affidavit says the plaintiff cannot prove happened, although at several places in his affidavit he appears to accept that it did happen. Mr Parker, an officer of the plaintiff, was permitted to be cross-examined. He is of the view that the plaintiff, given time, could obtain documentation, the precise nature of which he was uncertain of. One possibility was that there'd have -- 10 of 13 -- 1-11 ORDER 1 10 20 30 40 50 60 been a bank cheque. I was persuaded by his confidence that had the moneys not been disbursed the plaintiff's systems would have flagged in an unmistakable way that moneys set aside for disbursement, which would have happened here, had not been disbursed. That particular issue I doubt has anything in it. In any event, I think it was raised too late. If ACM Convergent IT were not paid at all or ought not to have been paid that's again something Tender Choice can pursue. I hope not inconsistently with the general confidence I've described in relation to the plaintiff's systems, I have developed serious concerns about its interest calculations. Mr Stevens has done calculations which indicate that from around August 2008 interest appears to have been charged at a rate in excess of 8.55 per cent per annum, which is what the documents indicate was the appropriate rate and which is the one the plaintiff asserts it has been applying. Mr Parker was helpful in conceding that there appeared to be no explanation for the increase in daily interest accruals that begins in August 2008, given that the balance due the plaintiff continued to fall. As Mr Parker (whose province these matters really are not) indicated from his point of view what occurs is the insertion in an Excel spreadsheet of the date and amount of payment received from a customer, the computer then does the rest, making interest calculations and the like. -- 11 of 13 -- 1-12 ORDER 1 10 20 30 40 50 60 Mr Sewell, confronted with this difficulty, relied on the now familiar principle that it's for Tender Choice to raise these points. The situation must be that if a claim appears excessive in a substantial enough amount the Court will be concerned enough not to give the plaintiff a judgment it might otherwise be entitled to. That is my approach, in any event, Rule 292, as noted, gives the Court a discretion in these matters. The interest calculation which the plaintiff's solicitors advance today I'm prepared to accept applies an 8.5 per cent rate. My associate has done a calculation or an addition to identify the problematic interest components which totalled $31,988.64. I'm happy if any party wants to go into the matter and produce a more refined calculation, but it seemed to me that it might be appropriate to dock the plaintiff so far as the interest claimed to----- ... HIS HONOUR: -----the 6th of August 2009 is concerned 25 per cent of that amount. ... HIS HONOUR: What I'll indicate today is that there will be judgment for the plaintiff for it's the $158,507.04 in HP14 less what I've suggested should be about $6,000 plus interest -- 12 of 13 -- 1-13 ORDER 1 10 20 30 40 50 60 at 8.55 per cent from that starting date of the 6th of August 2009. There's something peculiar about the interest. It was clear from Exhibit HP15, which gives a figure as at June 2011, being $173,371.54, whereas the solicitor's calculation produced a total of $172,430.68. Presumably the plaintiff gets the costs of the proceeding, including this application, to be assessed. ... HIS HONOUR: The defendants are to pay plaintiff's costs on the standard basis to be assessed not agreed without prejudice to such entitlements as the guarantees indemnities and indemnities it has may confer to indemnity costs. ... Note: the court subsequently made an order in terms of an initialled draft giving judgment for $63,953.78 inclusive of 705 days interest at $32.96 per day (being $23,236.80). This was supported by an affidavit of Mr Parker sworn 21 July 2011 and an email communication to the Associate and other parties of the same date detailing circumstances showing the defendant’s acquiescence in the latest calculations. ----- -- 13 of 13 --