Beil & Anor v Pacific View (Qld) Pty Ltd & Ors [2003] QSC 43

SUPREME COURT OF QUEENSLAND CITATION: Beil & Anor v Pacific View (Qld) Pty Ltd & Ors [2003] QSC 043 PARTIES: DESMOND THOMAS BEIL and DAJAD PTY LTD ACN 009 9799 284 (applicant plaintiff) v PACIFIC VIEW (QLD) PTY LTD ACN 057 301 907 (first defendant) GARY FRANCIS JOHNSTONE (second defendant) KAY ELIZABETH JOHNSTONE (third defendant) NEIL RAYMOND MANSELL (fourth defendant) FAY CATHERINE MANSELL (fifth defendant) STEVEN MICHAEL PROWSE (sixth defendant) LEE-ANNE PATRICIA PROWSE (seventh defendant) GHERK PTY LTD ACN 050 408 958 (eighth defendant) PARKLANDS BLUE METAL PTY LTD ACN 010 471 548 (ninth defendant) FILE NO/S: S1494 of 2001 DIVISION: Trial Division PROCEEDING: Application for summary judgment ORIGINATING COURT: Supreme Court Brisbane DELIVERED ON: 6 March 2003 DELIVERED AT: Brisbane HEARING DATE: 3 February 2003 JUDGE: Holmes J ORDER: Summary judgment for the plaintiffs against the defendants in an amount to be determined after submissions CATCHWORDS: GUARANTEE AND INDEMNITY – DISCHARGE OF SURETY – DEPARTURE FROM TERMS OF CONTRACT WITH SURETY – whether there was a material variation to -- 1 of 8 -- 2 the loan agreement – whether the guarantee was discharged GUARANTEE AND INDEMNITY – DISCHARGE OF SURETY – ALTERATION OF OBLIGATION GENERALLY – whether there was an agreement to alter repayment CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – PENALTIES AND LIQUIDATED DAMAGES – GENERAL PRINCIPLES – whether increase in interest rate on default is a penalty Uniform Civil Procedure Rules r 165(2), r 168 Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 BP Refinery (Westernport) v Shire of Hastings (1977) 180 CLR 266 British Motor Trust Co. Ltd v Hyams (1934) 50 TLR 230 Burnes v Trade Credits Ltd [1981] 1 NSWLR 93 Davids Securities v Commonwealth Bank of Australia (1990) 23 FCR 1 Duncombe v Australia & New Zealand Bank Ltd [1970] Qd R 202 Hancock v Williams & Anor (1942) 42 SR(NSW) 252 Holme v Brunskill (1877) 3 QBD 495 Invercargill Savings Bank v Genge & Anor [1929] NZLR 375 Legione v Hateley (1983) 152 CLR 406 Lordsvale Finance v Bank of Zambia [1996] 3 All ER 156. Ronstan International Pty Ltd v Thomson [2002] VSCA 75 Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 COUNSEL: Mr Martin for the plaintiffs Mr English for the fourth, fifth and ninth defendants SOLICITORS: North Coast Law for the plaintiffs Reynolds Solicitors for the fourth, fifth, and ninth defendants The application for summary judgment [1] The applicant plaintiffs in this proceeding seek summary judgment against the first, second, third, fourth, fifth, eighth and ninth defendants on a claim against the first defendant for monies lent and as against the remaining named defendants under a guarantee of the loan. The first, second, third and eighth defendants, although served, did not appear in rather unusual circumstances to which I will come later. The fourth, fifth and ninth defendants resisted the application for summary judgment arguing that they had a prospect of successful defence on one or more of -- 2 of 8 -- 3 these grounds: that there was an agreement between the plaintiffs and the second defendant, as agent for all defendants, that repayment of the loan would be deferred and would be accepted in the form of E Banc trade dollars; that the guarantee had been discharged by a material variation to the loan agreement; and that a provision for increased interest on default in repayment was a penalty. The loan and guarantee [2] The statement of claim, filed on 14 February 2001, pleads that the plaintiffs lent monies to the first defendant secured by a mortgage over land at Buddina owned and being developed by the first defendant as a unit complex. The remaining defendants guaranteed the first defendant’s obligations under the loan agreement. The second and fourth defendants, Mr Johnstone and Mr Mansell, were at relevant times directors of the first defendant. The second and third defendants, Mr and Mrs Johnstone, were directors of the eighth defendant, Gherk Pty Ltd. The fourth and fifth defendants, Mr and Mrs Mansell, were directors of the ninth defendant, Parklands Blue Metal Pty Ltd. [3] A copy of the guarantee is in evidence. It contains the following clause: “6. The guarantor shall not be released in whole or in part from its obligations hereunder by virtue of any of the following namely:- (a) Any time or indulgence the grantee may grant to the borrower… - … (d) Any variation to the terms of the deed …” [4] The reference to “the deed” is a reference to the bill of mortgage as varied. The bill of mortgage was executed on 9 December 1993. The terms of the agreement annexed to it (“the loan agreement”) record a loan amount of $425,000 with simple interest at ten per cent to be paid on only part of the principal. The agreement required payment of the moneys advanced not later than 31 December 1995, but a deed of variation extended that date to 30 June 1997 with provision for payment of interest at ten per cent on the balance outstanding, agreed at $505,808.00. The principal had not, plainly enough, been repaid by 2000; whether by express agreement or otherwise is unclear. [5] On 8 September 2000 the second and fourth defendants executed on behalf of the first defendant a deed by which, inter alia, it was agreed by it and the plaintiffs that the amount outstanding under the loan as at 21 July 2000 was $761,936; that the plaintiffs would release their security over the remaining lots in the strata title building for sale on the basis that they would receive at least $540,000 in reduction of the loan; that the first defendant would place at least one million E Banc trade dollars in an account to which the plaintiff was a signatory; that interest would now accrue at 16% on a compound basis, calculated on monthly rests; and that the loan would be repaid not later than 31 December 2000, with interest increasing in the event of failure to repay on that date to 25 per cent per annum. The deed also recorded the first defendant’s undertaking that the guarantors had been separately -- 3 of 8 -- 4 advised of the terms of the agreement and that the guarantee was not released. The plaintiffs plead in their Statement of Claim, and it is not disputed, that no payments had been made by the first defendant in reduction of the loan after 21 July 2000. The defence [6] The first, second, third, fourth, fifth, eighth and ninth defendants filed a single defence on 30 March 2001 alleging, in effect, variations of the September agreement. The relevant paragraphs are as follows:- “4. On or about 8 September, 2000 a verbal agreement was reached between Desmond Thomas Beil on his own behalf and on behalf of Dajad Pty Ltd (ACN 009 979 284) to the effect that notwithstanding the execution of the agreement referred to in paragraph 6 of the Statement of Claim (“the agreement”), the Plaintiff would accept a payment of the sums owing pursuant to the aagreement [sic] in E-Bank [sic] trade dollars. 5. The Plaintiff was a signatory to an E-Bank [sic] account from which the trade dollars payment would be made. 6. Further, subsequent to the execution of the agreement, Desmond Thomas Beil on his own behalf and on behalf of Dajad Pty Ltd (ACN 009 979 284) agreed with Gary Johnstone on behalf of the First, Second, Third, Fourth, Fifth, Eighth and Ninth Defendants that the Plaintiff would wait until the sale of the remaining units to be paid any outstanding sums.” [7] In support of the application for summary judgment Mr Beil has sworn an affidavit denying the existence of the agreements pleaded in the defence, which had been served on his solicitor on 9 October 2002. He further deposes that he has not had discussions with any of the defendants other than Mr Johnstone, the second defendant. He had not proceeded with the action after filing the statement of claim in February 2001 because Mr Johnstone had advised him that the defendants were seeking to refinance their project in order to pay him out; but he had only received one payment, of $875.60, in April 2002. [8] Somewhat surprisingly, Mr Johnstone, the second defendant, has filed an affidavit in support of the plaintiffs. In it he says that to the best of his knowledge all discussions and agreements in relation to the development project took place between Mr Beil on behalf of the plaintiffs and himself on behalf of the defendants. There was no variation to the agreement reached in September 2000; and in particular, there was no agreement reached by him with Mr Beil either as to payment in E Banc trade dollars or deferral of payment. He asserts that he did not provide instructions in terms of the defence to the solicitors who filed it. Mr Ridge, a solicitor from the firm which previously acted for all the defendants and which drew the defence has filed an affidavit to contrary effect. It annexes instructions which Mr Ridge says he took from Mr Johnstone in March 2001, which do reflect what is in the defence. Mr Ridge’s firm has been given leave to withdraw, and the fourth, fifth, eighth and ninth defendants have retained new solicitors. -- 4 of 8 -- 5 [9] Mr Mansell, the fourth defendant, has sworn an affidavit in which he confirms that Mr Johnstone alone negotiated with the plaintiff Mr Beil in relation to the development of the unit complex. He says that neither he nor his wife on their own behalf or on behalf of the ninth defendant signed any document acquiescing to the extension of time to repay the loan or the imposition of penalty interest after that date. Is the existing defence maintainable? [10] Mr English, for the fourth, fifth and eighth defendants, submitted that the plaintiffs were not entitled to rely on the affidavit of Mr Johnstone (although it was in fact read) because the allegations made in the defence were, by virtue of r 168 of the Uniform Civil Procedure Rules 1999, taken to be the subject of non-admissions by the plaintiffs. Rule 165(2) precluded the plaintiffs from giving or calling evidence in relation to a fact not admitted. Assuming for present purposes that r 165(2) applies to an application for summary judgment, I do not think that matters are much improved for the defendants. If one disregards Mr Johnstone’s affidavit altogether, one is left with a defence the allegations in which are denied on oath by the plaintiffs and as to which no supporting evidence is available from the defendants. In those circumstances I am satisfied that there is on the defence as it stands no real prospect of the defendants successfully defending the claim, and that were the defence to remain as presently pleaded there would be no need for a trial. Were the guarantors discharged? Mr English argued, however, that there was a defence available, although not yet pleaded, to the fourth, fifth and ninth defendants as guarantors. They were discharged from their liabilities under the guarantee because of a material change to the terms of the loan agreement affecting their obligations; specifically, the provision for an increase in the interest rate payable on default. Clause 6 of the guarantee should, Mr English said, be read as limited to variations which would benefit the guarantors or, alternatively, as limited to variations of which they had express knowledge or to which they had consented. He also argued that the reference in the September agreement to the guarantors being informed of its terms and the guarantee remaining in place until full repayment constituted an acknowledgement that the variation would otherwise discharge the guarantors from their obligations. [11] The authorities relied on by the applicant as supporting the effectiveness of the clause, Wood Hall Ltd v The Pipeline Authority 1 and British Motor Trust Co. Ltd v Hyams 2 were, Mr English contended, distinguishable, involving differently worded clauses. In the Wood Hall case the relevant clause preserved liability in respect of a variation made “with or without the knowledge or consent of the [guarantors]” while the British Motor Trust clause included the proviso: “[P]rovided that no variation shall make us liable for a greater maximum sum under this guarantee than that for which we are at present or may become liable under the present terms of the said agreement.” 1 (1979) 141 CLR 443. 2 (1934) 50 TLR 230. -- 5 of 8 -- 6 [12] Mr Martin, for the plaintiffs, submitted that the variations in the loan agreement were not so substantial that the plaintiff and the first defendant could be regarded as having rescinded their original agreement. That is, in my view, correct, and I did not understand Mr English to suggest otherwise. More to the point, Mr Martin maintained that cl 6 of the guarantee entitled the plaintiffs to vary the loan agreement as they did without discharging the liability of the defendants under the guarantee. [13] Both the extension of time for repayment and the increase in the interest rate upon default were capable of amounting to material variations 3 such as would release a guarantor from liability in the absence of contrary agreement. But as a general proposition, where a guarantee permits the obligee to vary the terms of the guarantors’ obligation, “the exercise by him of these rights does not affect the liability of the guarantor” 4 . The guarantee here expressly preserves the guarantors’ obligations in the event of time being granted to the borrower or any variation being made to the terms of the deed. [14] The reference in the Wood Hall clause to variation “with or without the knowledge or consent of [the guarantor]” seems to me not a significant point of distinction from the clause in the present case. Certainly the case provides no basis for supposing that in the absence of such language a requirement of knowledge or consent must be implied5 . The implication of such requirements is not necessary “to give business efficacy to the contract” and does not otherwise meet the conditions set out in BP Refinery (Westernport) v Shire of Hastings 6 . The reference in the September agreement to the guarantors having been informed cannot affect the construction of the guarantee itself. There is no basis, therefore, to regard the guarantors as having impliedly reserved some right of consultation prior to variation; although, indeed, it seems that the fourth defendant (having signed the September agreement for the first defendant) at least was aware of the variation. [15] Nor do I think, as a matter of construction, that there is anything in the argument that the variations contemplated by cl 6(d) were confined to those to the benefit of the guarantors. Other events specified in the clause as not giving rise to release are patently events adverse to the interests of the guarantors: the insolvency of the borrower or any other reason making the loan incapable of recovery, the cessation of liability of any other guarantor, or unenforceability of the guarantee against any other guarantor. Given that it is well established an alteration for the benefit of the guarantor does not discharge his obligations 7 , a clause preserving liability restricted to variations beneficial in effect would be otiose. [16] The limitation, in the British Motor Trust case, of the effect of variation to the guarantors’ existing liability is immaterial to present considerations. What is significant is that Branson J regarded the provision, by which the parties agreed that the guarantee of payments under hire purchase agreements was not to be affected by 3 Holme v Brunskill (1877) 3 QBD 495; Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 (extension of time for payment); Invercargill Savings Bank v Genge & Anor [1929] NZLR 375 (increase in interest rate); Burnes v Trade Credits Ltd [1981] 1 NSWLR 93 (increase in interest rate and extension of term of mortgage). 4 Hancock v Williams & Anor (1942) 42 SR(NSW) 252 at 256. 5 For a contrary view, see Duncombe v Australia & New Zealand Bank Ltd [1970] Qd R 202 at 207. 6 (1977) 180 CLR 266 at 283. 7 Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 559. -- 6 of 8 -- 7 the giving of time, by the substitution of other vehicles for hire, or by the creditor and principal “making any variation in the terms of the …agreement” as “so wide that it was almost impossible to put any limit to the power to vary.” Clause 6 is, in my view, of similar breadth. [17] In summary I do not think that the fourth, fifth and ninth defendants have any tenable argument that they are discharged from the obligations imposed by the guarantee. Was the increase in interest rate on default a penalty? [18] There remains the question of whether the increase in the interest rate to 25 per cent if the loan were not repaid by the due date amounted to a penalty, or whether that is at least arguable. There is a good deal of authority for the proposition that an increase in the rate of interest upon default may constitute a penalty8 although where the increase is prospective rather than retrospective in effect the lender may be able to support it “as a liquidated satisfaction fixed and agreed on by the parties as compensation for the lender being kept from his money.” 9 Mr Martin argued that the defendants having adduced no evidence to establish that the increase in interest rate was not “a genuine pre-estimate of damage” 10 , there was no basis for supposing otherwise. But while the additional interest might, indeed, represent a genuine pre- estimate of the amount needed to compensate the plaintiffs, the fact that 16 per cent was, at the time the agreement was made, considered the appropriate rate of payment for the use of the plaintiffs’ capital is suggestive that an increase to 25 per cent was intended as “a punishment for non-observance of a contractual stipulation”11 . There is, in my view, a real prospect of the defendants successfully defending this aspect of the claim and a consequent need for a trial on this issue. Conclusions [19] For the reasons given, the plaintiffs are entitled to judgment against all defendants for the unpaid principal in the amount of $761,936.00. They are also entitled to interest at the lower rate of 16%; but the claim so far as it seeks the difference between that rate and the higher rate of 25% should, assuming the filing of an appropriately amended defence, proceed to trial. Puzzlingly, although Mr Beil’s affidavit calculates interest from 21 July 2000 on a compound basis, as the September agreement appears to permit, only simple interest is claimed in both statement of claim and application for summary judgment. I will hear the parties as whether only simple interest as claimed should be awarded (which, at $334 per day for 958 days would give an amount of $319,972) or whether this aspect of the claim should be left for resolution elsewhere. There remain also to be dealt with the question of appropriate time frames for any amendments to the statement of claim and defence in respect of interest claims, and costs. Given the nature of the plaintiffs remaining claim – for interest only - and the argument open to the defendants that it constitutes a penalty, I do not consider this an appropriate case for any security for costs order as suggested by Mr Martin. 8 See the cases set out at p 29 of Davids Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1; Ronstan International Pty Ltd v Thomson [2002] VSCA 75 at paras 23-25.. 9 Davids Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 at 30; Lordsvale Finance v Bank of Zambia [1996] 3 All ER 156. 10 Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 520. 11 Legione v Hateley (1983) 152 CLR 406 at 445. -- 7 of 8 -- 8 [20] I will give summary judgment for the plaintiffs in an amount to be determined after submissions on the question I have identified as to interest. -- 8 of 8 --