Allcott Hire Pty Ltd v Silk

Supreme Court of NSW|2016-06-10|Before: Rothman J

d v Perma Blinds [1970] HCA 63; (1970) 122 CLR 49 Jennings Construction Ltd v QH & M Birt Pty Ltd (1986) 8 NSWLR 18 Jowitt v Callaghan (1938) 38 SR (NSW) 512 Lakeman v Mountstephen (1874) 7 App Cas 17 Marston v Charles H Griffith & Co Pty Ltd (1985) 3 NSWLR 294 McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377 Moschi v Lep Air Services Ltd; Lep Air Services Ltd v Rolloswin [1973] AC 331 Muller v Dalgety & Co Ltd [1909] HCA 67; (1909) 9 CLR 693 Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation [1989] HCA 32; (1989) 167 CLR 219 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541 Rose and Frank Co v JR Crompton & Bros Ltd [1923] 2 KB 261 Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289 Snook v. London & West Riding Investments Ltd [1967] 2 QB 786 St. Aubyn v Attorney-General [1952] A.C. 15 Stramit Industries Limited v Reinhardt [1985] 1 Qd R 562 Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1989) 166 CLR 245 The Mahkutai [1996] A.C. 650 Total Oil Products (Australia) Pty Ltd v Robinson (1970) 1 NSWR 701 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 Texts Cited: JW Carter, The Construction of Commercial Contracts (2013, Oxford) R W Burchfield, The New Fowler's Modern English Usage (3rd ed, 1996, Oxford) Category: Principal judgment Parties: Allcott Hire Pty Ltd (Plaintiff) Thomas John Silk (Defendant) Representation: Counsel: C Alexander (Plaintiff) I G Roberts SC/J Malouf (Defendant)

Solicitors: CCSG Legal Pty Ltd (Plaintiff) M&A Lawyers (Defendant) File Number(s): 2015/216117

Judgment

HIS HONOUR: Allcott Hire Pty Ltd ("Allcott") seeks to appeal a decision of the Local Court of 26 June 2015 in relation to proceedings between it and the defendant, Thomas Silk. The learned Magistrate dismissed the proceedings before him, issuing judgment for the defendant in proceedings which sued on what was alleged to be a guarantee in relation to debts owed by the entity sought to be indemnified (the principal debtor or One Build).

Facts

The facts can be shortly stated. One Build Pty Limited ("One Build") sought to hire equipment, scaffolding, from Aluminium Scaffolds Pty Limited, a member of and part of the Active Hire Group Pty Limited. Allcott, the plaintiff here and below, is the successor in title to Aluminium Scaffolds Pty Limited and Active Hire Group Pty Limited.
On or about 12 August 2000, One Build made a credit application with Aluminium Scaffolds Pty Limited and/or Active Hire Group Pty Limited (hereinafter Allcott) with a credit limit of $25,000. The credit application was necessary in order to hire equipment without the need to pay in advance. As part of the credit application, the defendant, Thomas Silk, signed the document. Mr Silk was a director of One Build. The other director Tony Sutherland also signed the document in a space that is alleged to be designated for the witness. It is not disputed that Mr Silk and Mr Sutherland signed the documents.
Above the signatures was a clause in the following terms: "I/We being director/s of the above companies request Aluminium Scaffolds Pty Ltd & The Active Hire Group (hereinafter called 'the hirer') to enter into hire agreements from time to time with the company and in consideration of the hirer so doing l/we hereby jointly and severally guarantee to such hire agreements and in the event of any default by the company l/we shall deemed to become principal debtor to the hirer and agree that this guarantee shall not be in any way affected by the hirer granting time or other indulgence to the company and that the guarantee shall bind my/our personal representatives."
Allcott hired equipment to One Build under hiring agreements on the basis of its standard terms and conditions from time to time. Allcott sent tax invoices to One Build for the hire of the goods. As at 25 November 2012, the balance payable to Alloctt by One Build was approximately $74,000. On 26 November 2013, One Build was liquidated and had not paid the amount due. Further, Allcott received no amount as a result of the liquidation.
Allcott has demanded payment from the defendant, Mr Silk, on the basis that the foregoing recited provision is a guarantee rendering Mr Silk liable for any amount owing by One Build to Allcott.

Judgment of the Local Court

The learned Magistrate recited the relevant provision that was said to give rise to liability and the facts that were said to underpin the claim. There is no serious dispute as to the recitation of facts by the learned Magistrate.
Essentially, the Magistrate discussed the principles said to be applicable to the interpretation of the clause and generally to guarantees and expressed the view that a purposive approach to the construction ought to be adopted, where possible.
The learned Magistrate determined that the dispute between the parties was not one which could be described as a dispute as to the meaning of an ambiguous phrase, but, rather, that the words "guarantee to such hire agreements" were not words that had two or more possible meanings; they were words "not capable of any possible meaning".
As a consequence, the learned Magistrate determined that the "purposive" construction of commercial contracts did not assist, or make possible, a construction of the words.
Given the inability to give a purposive construction to the term, the learned Magistrate, as a last resort, applied what he described as the contra proferentem rule and construed the rule against the interests of Allcott. As a consequence, the learned Magistrate dismissed the application and gave judgment for the defendant.
Since the construction of a document ought properly take into account the entirety of the document and, in the case of this clause, be read in the context of the document, it is necessary to read the entire terms of that document. The document itself is a form completed by hand, the completed original, as a scanned version, is attached to these reasons for judgment and will be treated as if it is included in the text of the reasons.

The Credit Application/Document

As earlier stated, the document is in two distinct parts. The first part (and the document as a whole) is on the letterhead of the former names of Allcott with a file note headed "One Build Const" and a number that is relevant for a purpose described in an Affidavit and referred to later in these reasons. Further, the document bears the hallmarks, as admitted into evidence, of a document that is used as a working document and, for example, bears notes made after the original execution of the document altering the address and making a comment as to what seems to be its payment record up to a particular point in time when the note was made.
The first part of the document after the heading "CREDIT APPLICATION", which heading seems to apply to the whole of the document, includes a preamble in the following terms: "I/We hereby apply for a credit application with your company."
After that introduction, there is space for the completion of the business name (sic), the address, postal address, telephone numbers, type of business, registered address and date registered and an amount specifying the credit limit. In the case of this particular credit application, the credit limit is specified as $25,000.
There are, thereafter, certain procedural questions which are completed, including whether it is necessary for there to be order numbers, the nature of the business (i.e. partnership, sole trader or company) and if a company the ACN must be specified. There is also a space for DIRECTORS (sic) NAMES and their ADDRESSES and "PHONE NOS"(sic). There is a space for the Accounts Payable Officer, the name of the Bank and the Branch. There is a place for three "References" and their "Phone No". All of those information spaces have been completed.
It is after the listing of the three referees and their telephone numbers that the clause recited at [4] above is included. That clause has a place for the date under which there is a space titled "PRINT NAME", another one which says "PRINT NAME" a third one which says "WITNESS" and a fourth one which says "DIRECTOR'S SIGNATURE". While the foregoing is a little esoteric, the description should be read in conjunction with the annexure, which is the scanned copy of the document.
After the inclusion of the clause that is the subject of debate in these proceedings, there are other pieces of information that are included in the form. At the very bottom of the form are the offices or business premises of Allcott. There is a space for the signature or approval of someone on behalf of Allcott (by its prior names) and the identification of the representative of the firm and two matters of information: first, that accounts are due and payable 30 days from the end of the trading month; and secondly, that credit may be cancelled/suspended without notice if not paid by the due date.

Submissions

At its kernel, the plaintiff's submission is that the findings of fact of the Magistrate were correct, the recitation of principles of construction was correct, but the task upon which the learned Magistrate then embarked to construe the document as if words were replaced in the manner suggested was an error which ultimately misled the learned Magistrate and occasioned error.
The passage in the judgment to which reference was being made is a passage in the reasons for judgment of the learned Magistrate at [13]. It is appropriate to recite the terms of [12] and [13] of the learned Magistrate's judgment, which are in the following terms: "[12] The first part of the clause, in general, begins with a request by the directors of the applicant company to the hirer to enter into hire agreements from time to time with the company. [13] The second part of the clause describes the consideration, and states: 'in consideration of the hirer doing so I/We hereby jointly and severally guarantee to such hire agreements.' The meaning 'of the hirer doing so' refers to the hirer entering into hire agreements from time to time with the company. The meaning of 'such hire agreements' has the same meaning. When the meanings are substituted, the following is stated: in consideration of the hirer entering into hire agreements from time to time with the company l/we hereby jointly and severally guarantee to the hirer entering into hire agreements from time to time with the company. The second part of the clause is ambiguous. It is not possible to define the meaning of 'guarantee to such hire agreements'. The ambiguity is not removed by the words following, which are: 'and in the event of default by the company', because those words do not clarify the words 'guarantee to such hire agreements'."
As a consequence of the foregoing, the learned Magistrate determined that, with the meanings substituted, the term is "ambiguous". Nevertheless, the learned Magistrate, as earlier stated, proceeded to determine that the issue is not one "where the words 'guarantee to such hire agreement' have two or more possible meanings", instead, the "words are not capable of any possible meaning".
The plaintiff submits that there is an irrationality and inconsistency between the finding that the clause is "ambiguous" and the finding that it is "not capable of any possible meaning" or "not one where the words … have two or more possible meanings".
Further, the plaintiff submits that the learned Magistrate erred in misapplying the principle of purposive construction of commercial contracts or not applying the principle. If, as was in one part suggested by the learned Magistrate, the clause were ambiguous, then, the plaintiff submits, the learned Magistrate should have had regard to extrinsic circumstances in aid of construction [1] .
The plaintiff then submits that, error having been disclosed, the Court should analyse afresh the construction of the "guarantee". The plaintiff then submits that the word "guarantee" where used in the phrase "guarantee to such hire agreements" ought to be construed in a way that gives the term "guarantee" a meaning as a verb. The use of the word "to" is "clumsy" (to use the words of the plaintiff's submission) but does not change the meaning of the sentence.
As a consequence, Allcott submits, the clause should be given a commercial meaning which would render the defendant liable under a guarantee for the liability of the company, One Build.
Moreover, relying on the reasons for judgment of Asprey JA in Total Oil Products (Australia) Pty Ltd v Robinson, [2] the term "guarantee" is not conclusive as to whether any promise falls within the classification of a guarantee or an indemnity and the second part of the clause, after rendering Mr Silk liable as a guarantor also renders Mr Silk directly liable to the plaintiff under a contract of indemnity.
The defendant submits that there is no error in the manner in which the Magistrate approached the construction of the guarantee clause and, even if there were error, the clause is incapable of being construed as an enforceable guarantee. In relation to the latter aspect, the defendant has filed a Notice of Contention upon which it relies to defeat the appeal for reasons other than the correctness of the Magistrate's decision.
The defendant's submission, apart from a concentration on the grammatical "clumsiness" (as defined by the plaintiff), addresses the lack of sufficiency of particulars and parameters to the alleged guarantee. The defendant submits that the guarantee does not provide the identity of that which is being guaranteed or whether the guarantee is for the payment of monies or the performance of other obligations under the hire agreement nor does it provide a liability to the plaintiff.
Since the guarantee must be, on the defendant's submission, a guarantee to "such hire agreements", the hire agreements themselves become essential to the guarantee and because the terms of the hire agreements may alter, the guarantee is not certain or cannot be determined. Further, the defendant submits that, as a consequence of the foregoing, the debts claimed, which relate to debts incurred from 31 October 2012 to 25 November 2013, have not been proved and the contracts entered into have not been proved or are not clear and the Court is incapable of making a finding of what was being guaranteed. More importantly, as a consequence of the foregoing, the plaintiff has failed to demonstrate any appealable error.
On the questions raised by the Notice of Contention, the defendant submits that a guarantee and the obligations must be certain and the terms of this clause are vague and uncertain. As a result, the defendant submits that the terms of this clause do not amount to an obligation that is sufficiently clear that there was, at the time of the execution of the document, an intention to enter into a legally binding obligation.
Next, the defendant submits that the proper construction of the guarantee requires that the guarantee be executed by more than one director and more than one company, neither of which pertains to the current circumstances and each such failure renders the guarantee vague and uncertain.
The next aspect to which the defendant refers is that the clause is "entirely contingent upon entering into hire agreements". Since those agreements were not yet ascertained or not described in the document, there could be no certainty as to the debts, if any, that would be incurred and the terms of the guarantee.
If the guarantor (assuming for this purpose that there is a guarantee) understood, from the terms of the alleged guarantee, that there would be two known sureties and the other surety did not execute the document, then the guarantee is void and unenforceable. The defendant submits for reasons given in its written submissions and elaborated during the course of oral submissions that two sureties were contemplated by the terms of the guarantee.
Lastly, the defendant submits that, if there were a guarantee as at August 2000, then that guarantee has since been discharged either by the variation of the terms (being the variation of the hire agreements) or by other actions of the plaintiff including the alteration of terms and conditions upon which hiring would occur, which terms and conditions are said to contain the whole agreement between the owner and the hirer.
Further, the defendant submits that if it were to fail on all other arguments, its liability must be limited to the credit limit upon which the parties agreed, namely, $25,000.

Principles

There are a number of principles that govern the issues to be decided by the Court. Even though such principles, as were summarised by his Honour below, were not the subject of detailed analysis, the grounds already recited (including the grounds raised by the Notice of Contention) require an understanding of the principles that underpin contracts of guarantee; the distinction between contracts of guarantee and indemnity; the construction of such contracts; and, if not otherwise included in the foregoing, the application of the "contra proferentem" rule.
Guarantees are contracts. Apart from the specific rules that apply to contracts of guarantee as distinct from other commercial contracts, contracts of guarantee are subject to the general rules relating to the construction of commercial contracts.
Lord Diplock [3] described the place of contracts of guarantee in the general law of contract in the following famous extract: "The law of guarantee is part of the law of contract. The law of contract is part of the law of obligations. The English law of obligations is about their sources and the remedies which the court can grant to the obligee for a failure by the obligor to perform his obligation voluntarily. Obligations which are performed voluntarily require no intervention by a court of law. They do not give rise to any cause of action. English law is thus concerned with contracts as a source of obligations. The basic principle which the law of contract seeks to enforce is that a person who makes a promise to another ought to keep his promise. This basic principle is subject to an historical exception that English law does not give the primacy a remedy for the failure by a promiser to perform his promise unless either the promise was made in a particular form, e.g., under seal, or the primacy in return promises to do something for the promiser which he would not otherwise be obliged to do, i.e., gives consideration for the promise. The contract which gives rise to the instant appeal does not fall within this exception. In return for the guarantor's promise to the creditor the latter promised to extend credit to the debtor and to release his lien upon the debtor's goods. … In section 4 of the Statute of Frauds 1677 a contract of guarantee is described in the language of the 17th century as 'any special promise to answer for the debt, default or miscarriage of another person.' Translated into modern legal terminology 'to answer for' is 'to accept liability for,' and 'debt, default or miscarriage' is descriptive of failure to perform legal obligations, existing and future, arising from any source, not only from contractual promises but in any other factual situations capable of giving rise to legal obligations such as those resulting from bailment, tort, or unsatisfied judgments. These words were so construed by Abbott C.J. in Kirkham v. Marter (1819) 2 B. & Ald. 613, 616. By the beginning of the 19th century it appears to have been taken for granted, without need for any citation of authority, that the contractual promise of a guarantor to guarantee the performance by a debtor of his obligations to a creditor arising out of contract gave rise to an obligation on the part of the guarantor to see to it that the debtor performed his own obligations to the creditor. Statements to this effect are to be found in Wright v. Simpson (1802) 6 Ves.Jun. 714, 734, per Lord Eldon and in In re Lockey (1845) 1 Ph. 509, 511, per Lord Lyndhurst. These are the two cases which are cited as authority for this proposition by Sir Sidney Rowlatt in his authoritative work on Principal and Surety. They can be supplemented by other similar statements, including one in your Lordships' House, which confirm that it was taken for granted that this was the legal nature of the guarantor's obligation arising out of a contract of guarantee: Mactaggart v. Watson (1835) 3 Cl. & F. 525, 540, per Lord Brougham. It is because the obligation of the guarantor is to see to it that the debtor performed his own obligations to the creditor that the guarantor is not entitled to notice from the creditor of the debtor's failure to perform an obligation which is the subject of the guarantee, and that the creditor's cause of action against the guarantor arises at the moment of the debtor's default and the limitation period then starts to run. It is also why, where the contract of guarantee was entered into by the guarantor at the debtor's request, the guarantor has a right in equity to compel the debtor to perform his own obligation to the creditor if it is of a kind in which a court of equity is able to compel performance: see Ascherson v. Tredegar Dry Dock and Wharf Co. Ltd. [1909] 2 Ch. 401. It is the existence of this right on the part of the guarantor that accounts for the rule laid down by Lord Eldon in Samuell v. Howarth (1817) 3 Mer. 272, 278 and approved by your Lordships' House in Creighton v. Rankin (1840) 7 Cl. & F. 325, 346 that where the creditor, after the guarantee has been entered into, gives a contractual promise to the debtor to allow him time to pay the guaranteed debt, the guarantor is discharged from his obligation to the creditor. This is because the creditor by altering the debtor's obligation to him has deprived the guarantor of his equitable right to compel the debtor to perform his original obligation to the creditor, which was all that the guarantor had guaranteed. In contrast, the guarantor is not discharged by the mere voluntary forbearance of the creditor to take steps to obtain timeous performance by the debtor of the obligation which is the subject of the guarantee; for this does not affect the guarantor's equitable right to compel the debtor to perform it." [4]
As explained by Lord Diplock, it is for the foregoing reasons that the guarantee is not a direct obligation of the guarantor to pay a sum of money to the creditor, but an obligation to ensure that another person, the principal debtor, does something and the creditor's remedy for the guarantor's failure lies in damages for the breach of the guarantee contract only.
Further, the legal consequence is that whenever the debtor defaults on the primary debt or has otherwise failed voluntarily to perform an obligation under the principal contract, which is the subject of the guarantee, the creditor is entitled to recover from the guarantor damages for breach of the contract of guarantee, regardless of the amount that the creditor could have recovered from the principal debtor as a consequence of that primary failure. The principal debtor's liability to the creditor is the measure of the guarantor's liability.
Moreover, given the plaintiff's alternative argument, whether a contract is one of guarantee or one of indemnity; depends upon a proper construction of the contractual term and not on the use of the word "guarantee".
Thus, the obligation of the guarantor extends to the payment of damages for the loss suffered by the creditor from the default of the debtor. Once there has been default by the principal debtor, in a contract of guarantee, the creditor can call upon the guarantor to honour the promise to guarantee performance of the contract by the debtor. Where, as here, the failure to perform the contract involves the non-payment of a debt, the damages are ascertained or measured by the amount that has not been paid (together with any compensation for late payment and costs). [5]
The characterisation of a contract as one of guarantee or one of indemnity requires an understanding of its purpose and nature. Each contains elements of indemnity that have relevant differences. A contract of guarantee of this kind and a contract of indemnity each has the aim of making good the financial position of the creditor (or someone other than the guarantor or indemnifier). Each performs that task by a different process.
The guarantee will impose a secondary obligation to the primary obligation of the principal debtor. A contract of indemnity imposes a primary liability on the indemnifier to the creditor. The obligation, in the latter case, is primary, not collateral.
Whether a contract is a contract of guarantee or indemnity (or, as argued in these proceedings, both) is ascertained by a construction of the contract, but is significant when seeking to identify the mutual rights and obligations of the parties to the contract.
As a matter of history, Lord Diplock's view was that the obligation of the guarantor under a guarantee contract was to see to it that the principal debtor performed the obligations pertaining to that party under the principal contract. According to Mason CJ, [6] such an understanding does not accord with the modern view of a guarantor's obligation, because guarantors rarely have control over, or even a capacity to influence, the principal debtor's conduct.
According to Mason CJ, [7] the more modern view, was that the obligation under a guarantee contract was to "answer for" the debt or default of the principal debtor.
Nevertheless, and notwithstanding the "unreality" to which Mason CJ refers, in the case of a guarantee issued by the directors of a corporate body, there is no lack of reality in the capacity of the guarantor to influence the conduct of the principal debtor. Of course, as Mason CJ points out, by reference to the judgment of Lord Reid in Moschi, the obligations of the guarantor are a matter for agreement between the parties, whether those parties include or exclude the principal debtor.
Apart from the distinction between the primary and secondary nature of the obligations imposed by a contract for indemnity and a contract of guarantee, once it is established that it is for the parties to agree on the terms of the indemnity or guarantee, the distinction is of less importance. [8] As Young J stated, it may not really matter "what label one puts on the document".
That which is obvious is that this document intends a legally binding agreement between the parties and an intention to create legal relations. Ordinarily, the onus of establishing that there was no such intention to create legal relations rests on the party so contending. [9]
Generally, if there be a written document purportedly creating legal rights, then for the document to be a "sham", with the legal consequences that may follow from such a description, all of the parties to the document must have a common intention that the document not create the legal rights and obligations expressed. [10]
One can immediately distinguish contracts that are not in the strict sense contracts of suretyship such as performance bonds, letters of credit, bank guarantees, insurance contracts, letters of comfort and other such devices. Contracts of suretyship fall in to two main categories: contracts of guarantee and contracts of indemnity. [11] Depending on their respective terms, generally, an indemnity has more flexibility than does a guarantee, but both are contracts of surety. Therefore, assuming, as I do, that the document is intended to create legal relations, the contract is a contract of surety in that it is a contract by which the surety (the defendant, Mr Silk) agrees to answer for the liability of the principal debtor (One Build) to the creditor (Allcott). It is a three-party agreement. [12]
As a consequence of the foregoing, an indemnity may be a surety in that it is a liability involving three parties. Nevertheless, a guarantee is always a secondary obligation and an indemnity is a species of primary obligation.
Thus, in order to determine into which, if any, of the class of contracts a commercial contract of this kind will fit, the first question must be whether there is a tripartite (or three-party) arrangement. If so, the arrangement is a surety.
Then, one must ask whether the obligation between the surety and the creditor is a primary obligation or a secondary obligation. By that distinction, one may determine whether the contract is an indemnity or a guarantee.
There will of course be guarantees that are not a three-party arrangement. In each case, the question is determined by the construction of the document that is said to give rise to the obligations, including the label given to it by the parties, although the latter is indicative, not conclusive. [13]
The principles of construction of a commercial contract are well-known and, to the extent possible, the contract shall be given a commercial construction. Such an approach examines the whole contract and construes it in a commercial context. While the ordinary and grammatical meaning will be given to words, that meaning will be taken from a common sense approach, meaning, amongst other things, that the parties intend the contract to operate reasonably and commercially. [14]
Nevertheless, reasonableness and commercial construction will not overtake words that are clear and fairly susceptible of only one meaning. [15]
The first aspect of the construction on which the learned Magistrate relied, relates to the interaction of two rules of construction. The learned Magistrate purportedly applied the contra proferentem rule of construction. At the same time, the learned Magistrate was required to give a meaning to the terms of the contract and to construe it in a way that rendered it operative and not "nonsensical".
The contra proferentem rule applies, usually to exclusion clauses, against the party in whose benefit it is intended to operate, [16] but is a rule of construction and is relevant only in cases of ambiguity. [17] The learned Magistrate, while expressing seemingly inconsistent results, found that there was no ambiguity and that no meaning could be given to the clause. The learned Magistrate then purported to apply the contra proferentem rule and hold it against the party obtaining the benefit. It may be that there is no inconsistency. The ambiguity to which the learned Magistrate refers may be limited to the phrase "guarantee to such hire agreements" and the incapacity to give any meaning to the whole clause or vice versa.
Ordinarily (and it is used in other ways, particularly in insurance contracts), the rule requires an instrument to be construed against the person who prepared it or proposed it. In a case such as this, where the contract is a printed form, completed by One Build and/or Messrs Silk and Sutherland, and proposed as the contractual terms to Allcott, it is not without argument as to which of the two parties "prepared the document". [18]
Further, such rules of construction are valuable servants but dangerous masters. [19] In other words, the modern approach must be, in the case of commercial contracts, to construe the contract using a purposive construction, reading the document as a whole and construing it in the commercial context in which it is operating or intended to operate. [20]
In fact, it seems that the learned Magistrate applied the strictissimi juris approach to the contract of surety, whereby ambiguous contractual provisions are to be construed in favour of the surety (Mr Silk). [21]
Thus, the principles of construction that apply to the determination of a contract, including a particular term of the contract, is that: first, the whole contract must be construed (including any implied terms, if they be relevant); [22] secondly, a common sense reasonable and commercial approach to the construction of commercial contracts must be taken; [23] thirdly, in the case of ambiguity or uncertainty, the context or surrounding circumstances may be used to determine the factual situation in which the contract was intended to operate; [24] and, lastly, where there is ambiguity, the liability of a surety is strictly construed in favour of the surety. Nevertheless, the task of a court is to give meaning to a contract and clause, that is, one meaning, applying primarily the words of the document itself.

Consideration

As earlier stated, Allcott has described the syntax of the most relevant clause as "clumsy". Such a description may be an understatement. It is understandable that the learned Magistrate might describe the words as "not capable of any possible meaning". [25] It is also understandable that the Magistrate would describe the words "guarantee to such hire agreements" as not one which has two or more possible meanings. [26] But, with great respect to him, it is possible to arrive at a meaning of the words "guarantee to such hire agreements", even though the words are not as clearly expressed as one might hope.
Taking a common sense, commercial approach to the construction of the clause (in the context of the document as a whole), the word "to", in that phrase, may well be superfluous. But the meaning is clear. The word "to" does not alter the meaning. Whether the words and the clause achieve that which may have been intended by one or other or both of the parties is a very different issue, to which I will come.
In the expression "I/we hereby … guarantee to such hire agreements", the term "guarantee" is used as a verb and not a noun. While the verb "guarantee" is mostly used as a transitive verb in such circumstances, the verb "guarantee" may be used intransitively when followed by an infinitive or another preposition referring to the object of the guarantee. Thus, it is perfectly grammatical to say that one may "guarantee to win an Olympic medal". (Such a guarantee may not be worth very much.) Similarly, one may "guarantee against forfeiture" or guarantee against injury or, more relevantly, "guarantee against default". Otherwise, one may use, in a grammatically appropriate way, the verb "guarantee" followed by a phrase usually commencing with the word "that". Thus, one may "guarantee that the earth is not flat".
When one uses the verb "guarantee" in a grammatically appropriate manner followed by the preposition "to" (not being part of another verb expressed as an infinitive, e.g. "guarantee to buy") it is ordinarily an identification of the beneficiary of the guarantee. Thus, one may, in a grammatically appropriate manner, say that one will "guarantee to the bank all of the debts of a particular person". In the last mentioned example, the bank would then be the guarantee (used as a noun) and the person giving the guarantee would be the guarantor and, as used in these reasons, the other person would be the principal debtor.
In those circumstances the preposition "to", used in the phrase "I/we … guarantee to such hire agreements", is an ungrammatical expression and is superfluous. Nevertheless, the meaning is, as earlier stated, clear. The intention of the clause is that the surety guarantees such hire agreements. Historically, the word "guarantee" was used only as a verb (or, in legal documents or phraseology, as the person who is the beneficiary of a guaranty) and the noun was always used with the spelling "guaranty". Since at least 1926 the noun has been spelt in either manner. [27]
Moreover, with great respect to the learned Magistrate, it is a dangerous, if not impermissible, practice to substitute words into a passage for the purpose of construing it. The instant judgment is a case in point.
The learned Magistrate [28] construed the clause by inserting the term "entering into hire agreements from time to time" both for the phrase "of the hirer doing so" and for the phrase "such hire agreements" and came to the conclusion that the clause was ambiguous or had no meaning (it matters not for this purpose which of the two prevailed). The Magistrate was correct to determine that the expression "such hire agreements" was a reference to the hire agreements that were to have been entered into from time to time, but that is a different proposition from utilising the term "entering into hire agreements from time to time" for the term "such hire agreements".
Once the superfluousness of the preposition "to" is acknowledged, then the term "so doing" refers to Allcott entering into hire agreements from time to time with One Build and the term "such hire agreements" refers to the "hire agreements into which One Build will have entered". That part of the clause may or may not be effective to create liabilities or obligations, but its meaning is relatively clear.
Before dealing with the obligations that may have been imposed by such a provision, it is convenient to deal with the alternative argument for the plaintiff. As I understand the alternative argument, it is that the expression "in the event of any default by the company, I/we shall [be] deemed to become principal debtor to the hirer" creates a principal liability and is an indemnity, not a guarantee.
The submission relies upon the expression that the surety will be "deemed to become principal debtor". Historically, someone or something was deemed to be something, when it was not, as a matter of fact or law, not that thing. Otherwise, something was deemed to have happened in circumstances where it did not or it is not known whether or not it had happened.
In more recent times, it has moved from the necessary implication that the status or state of affairs is fictional to the use of the term as a statement of fact, effect or meaning, either including something that may not otherwise be in that class or clarifying something that may arguably not be in that class, but including a fictional state of affairs. [29]
Here the expression "deemed" is used with the word "to become". Thus the clause suggests that in the event of any default by the company the surety "shall [be] deemed to become principal debtor", thereby referring to a change in status from one in which there is a secondary obligation to one in which the surety will be deemed to have a principal obligation. As a consequence, the clause does not itself create a situation in which the surety is a principal debtor, but seeks to explain the effect of the guarantee (so described) to which an earlier reference has been made in the clause.
On the construction that I prefer, the occurrence of a default is not an event which causes the surety to become an indemnifier, but, rather, is a condition precedent to the capacity to enforce the secondary obligation said to be created by the guarantee. It is, in that sense, a common sense description of the effect of the surety after default occurs. Of course, used otherwise than in the usual technical sense, upon default the surety is the "principal debtor" under the contract of guarantee.
The term "guarantee" utilised in the clause is, as earlier stated, indicative not determinative. Nevertheless, the intention of the parties seems to be reflected better if the clause were to be construed, in a common sense manner, as a guarantee.
The commercial context in which this document was executed is, in part, attested to in the evidence of Doreen Bonwick, whose Affidavit was before the court below and is in evidence in these proceedings. The credit application was a pro forma document, not computer generated, but in hard copy, thereafter used for certain notations by the plaintiff, Allcott. The Conditions of Hire were standard conditions of hire as at 2010 and there were a standard set of Conditions of Hire as at 2013, the date written in handwriting by Ms Bonwick on the credit application. The Conditions of Hire are provided to customers at the time of delivery or pick-up of any equipment. The terms of hire are altered from time to time to meet changing requirements.
Allcott's practice, applied universally, was that if a personal guarantee was not provided in the terms of the clause relevant to these proceedings, it would reject the credit application and not trade with any applicant for credit, or persons seeking the hiring of equipment on a basis that was "unsecured". [30]
Allcott reviewed the credit application when received to ensure that the guarantee had signed and that the document had been witnessed. The operation then involved the hirer of the equipment requesting the equipment, the terms and conditions being supplied on delivery and subsequently invoices rendered to the hirer. Invoices are generated on the return of the machines (or notification of their availability) or, in the case of continuing hire arrangements, at the end of each month.
I take the foregoing into account as to the context within which the document was executed and I also note that the hire in this case was to be to a corporate entity who, under law, has a limited liability. The guarantee was sought as a personal guarantee which "secured" default from an entity with a limited liability by a person without such liability limitations. In the absence of the personal guarantee no hiring would occur. [31]
The first aspect with which it is convenient to deal is the submission of the defendant that the clause in question by use of the plural and by use of the term "jointly and severally" requires that the guarantee be provided (assuming there be a guarantee) by more than one surety and the failure of the document to bind a second surety negates the guarantee.
Further, Mr Silk submits that if he understood, presumably from the terms of the guarantee itself, that he would be only one of two known sureties and the other surety was not bound as part of the guarantee, the guarantee is void and unenforceable. I prefer not to use the term void as it raises more questions than it resolves.
Nevertheless, if the document assumes or implies that there will be two sureties and only one executes the document the "guarantor" that has executed the document (assuming the document is otherwise a guarantee) is not bound as the surety. [32]
Each of these submissions rests upon the proposition that the document implies there will be more than one surety. Certainly the term "jointly and severally" implies, ordinarily, more than one person bound by the respective clause. However, in this case, the terms of the respective clause plainly contemplate that there may be one or there may be two (or more) sureties. Assuming for present purposes that the name of Mr Tony Sutherland is the witness, as each party suggests, then, at the time that the document was completed and delivered to Allcott, Mr Silk was aware that there was only one surety "guaranteeing" the hire agreements and, in the case of default, acting as if he were the principal debtor.
The terms of the clause, as written, contemplate the existence of one or more persons executing the document. The use of the term "I/We" and "my/our" clearly contemplates one or more possibilities, namely, that one or more persons may bind himself/herself/themselves as guarantor.
There is no evidence or implication suggesting that the understanding of a person signing the document as the director, in the knowledge that no other director was executing it as a director, would be to the effect that some other surety was to be bound by the guarantee.
The use of the terms "I/We" or "my/our" or "jointly and severally" does not involve an unavoidable assumption or necessary implication that there would have to be more than one director or guarantor.
Further, the identification of two directors in that part of the document that relates to the credit application by One Build does not necessitate that each of the directors would be required to execute that part of the document which was a personal guarantee or security. The use of the plural "companies" as the body or bodies requesting Allcott (by its prior names and defined in the clause as "the hirer") does not assume that the identity of the requesting entity is anything other than the applicant identified in the credit application, even if wrongly, which, in this case, is One Build Pty Ltd.
If, as may be part of the suggestion of Mr Silk, the terms of the clause require that there be more than one surety, then the use of the singular "I" and "my" is expressly inconsistent with such an approach. Even the use of the term "jointly and severally", given that it follows the use of the alternative "I/We" does not take the argument to any higher level.
If there be an available submission as to the number of sureties, it must be based upon the proposition that two directors having been identified, the clause necessarily implies that each of the directors shall execute the guarantee as guarantor. In my view there is nothing in the document that gives rise to that implication.
The next issue with which the Court must deal is the proposition that the clause, purporting, as it does, to guarantee future contracts the terms of which may change or have changed, means that the guarantee is either uncertain or has been discharged by an alteration in its terms.
As is made clear from the comments of the House of Lords and in particular Lord Diplock in Moschi (above) and by the High Court in Sunbird Plaza (above), a contract of guarantee is, first and foremost, a contract. The parties to that contract are the guarantor or surety and the creditor.
The guarantee contract is dependent upon the existence of a principal contract between the creditor and the principal debtor. While the more modern approach is that the guarantor guarantees a sum of money owed by the principal debtor, that is simply the result of necessity, being the proposition, explained by Mason CJ, that rarely will a guarantor be in a position to require the principal debtor to perform its obligations.
The guarantee contract is, nevertheless, relevantly independent of the principal contract. It must be certain and not vague. The Defendant submits that because the terms of the hiring agreement between Allcott and One Build vary so too does the contract of guarantee.
However, the manner in which this clause has been crafted (if that be the appropriate term) does not involve the proposition that the surety contract or guarantee will alter on each occasion that the contract for hire alters. [33]
The nature of the guarantor's obligation to the creditor is that the guarantor guarantees the hire agreements and in the event of any default, the guarantor shall be deemed to become the principal debtor. The fact, if it be the fact, that the monetary effect of default may be different and the terms of the hire agreement may be different does not alter the nature of the guarantor's obligation.
As explained above in the passage from Moshi, the claim against the guarantor by the creditor is a claim for breach of the guarantee contract, the measure of which is the damages that would be payable by the principal debtor under the principal contract. In this case, the clause clearly contemplates that any default (however minor) will give rise to the guarantee being enforceable. However, if, for example, the principal debtor was late by one day in the payment of an amount that was owed, the creditor could, theoretically, sue for damages for the damage occasioned by the delay of one day.
The terms of the clause contemplate agreements for hire being reached from time to time. The terms of the clause say nothing as to any restriction on the terms and conditions of such hire. Of course, the terms and conditions of such hire would need to have been agreed between Allcott (on the one hand) and One Build (on the other hand), before any agreement would have been reached. Nevertheless, the terms of the clause require the guarantor to guarantee any and every such future contract and, in the event of default, be liable as if the guarantor were principal debtor.
The terms of the guarantee clause are not void or unenforceable for uncertainty. They guarantee compensation, measured by the level of damages caused by the default of the principal debtor. Further, alterations in the terms and conditions upon which equipment may be hired do not alter the nature of the obligation undertaken by the guarantor.
The guarantee is contingent upon the entering into of such hire agreements in the future and, once entered, the nature of the obligation of the guarantor is to "secure" any damages caused by the default of the principal debtor.
There are two remaining submissions upon which the Court needs to comment. The defendant submits that the plaintiff has not proved default by the principal debtor, One Build, or, more accurately, has not proved default to the extent of the amount claimed.
As earlier mentioned, the measure of the guarantee is the damages to the creditor arising from the default. That, in an appropriate case, would include interest on amounts outstanding. The submission, seemingly put for the first time in the Notice of Contention, does not arise from the proceedings at first instance and was not raised at first instance.
Notwithstanding that failure, the Court will deal with the issue. As earlier stated, an Affidavit of Doreen Bonwick was read in the proceedings below. That Affidavit annexes conditions of hire at relevant times. It also describes the manner in which the document in contention in these proceedings was executed. Further, the Affidavit proves that Allcott is the successor in title, on account of the company name change, to the company or one of them recited in the document that has been impugned in these proceedings.
The Affidavit exhibits the credit application which is recited as an annexure to these reasons for judgment. The Affidavit also describes the manner in which the various notations on the document were completed and attests to the fact that the number 5968 was the client number ascribed by Allcott to One Build.
From paragraphs [44] through to paragraph [65] of the Affidavit, Ms Bonwick attests to the system used for recording payments, to the invoices rendered and the outstanding balances and to the fact that the balance had not been reduced by any payment by One Build. Each of those statements is supported by documents that have been exhibited to the Affidavit. Ms Bonwick was not cross-examined and the Affidavit was read without objection. In those circumstances, the Court finds that the principal debt has been proved.
The last matter to be considered is whether the "credit limit" identified in the credit application is the limit of the liability to which a guarantor, assuming this be a guarantee, would be liable. First, even if the credit limit were the limit to which One Build could remain indebted, if the measure of the guarantee were the damages payable for the default, the limit would be the credit limit plus any interest that otherwise would be payable.
The substantive issue is whether the $25,000 credit limit is the limit of the guarantee to which the surety or guarantor, in this case, the defendant, is bound. While the document (Exhibit B) must be read as a whole and construed in that context (together with the issues already discussed above), the document is in two distinct parts.
The credit limit allowed One Build to hire equipment without paying for the hire in advance. In other words, the credit, once granted, was a credit facility that enabled an agreement to be entered for the hiring of equipment and the equipment to be delivered, even though no money had been paid.
However, as already recited, the practice of Allcott was not to allow any hiring in the absence of a personal security (at least on their understanding). The terms of the guarantee are not limited to the extent of the credit advanced. The guarantee obliges the surety to indemnify the creditor in relation to any default by One Build.
Thus, if One Build were to destroy or damage equipment, if the guarantee were to operate in its terms, the guarantor would be liable for the damage sustained (assuming it was not paid and owed by the principal debtor). [34] In those circumstances it cannot be said that the limit of the guarantee is $25,000.
On the material before the Court, One Build was in default as to payment to Allcott by the amount claimed and the defendant has guaranteed the hire agreements and will be liable to Allcott under that guarantee by an amount measured as the damages resulting from the default by One Build.
Taking into account the principles of construction by which I am bound and disregarding the subjective intention of any of the officers acting for Allcott and the defendant, the clause is sufficiently clear and sufficiently certain to amount to a guarantee of any sum arising as a result of the default by One Build in a hire agreement entered into by it with Allcott, the sum being measured by the amount of damages for such default.
The Court makes the following orders: 1. To the extent necessary, leave to appeal be granted; 2. To the extent necessary, leave to raise the issue of the existence of an indemnity, as distinct from a guarantee, be granted; 3. Leave be granted to raise the issue relating to the lack of proof of the primary obligation; 4. Appeal allowed; 5. The judgment of the Local Court of 15 May 2015 in Allcott Hire Pty Limited v Silk be set aside; 6. The matter be remitted to the Local Court for it to deal with remaining issues between the parties, if any, not dealt with by this judgment; 7. The defendant to pay the plaintiff's costs of the appeal; 8. Costs of the proceedings in the Local Court be dealt with by the Local Court on remitter; 9. To the extent eligible, the defendant be granted a Certificate under s 6 of the Suitors Fund Act 1951 for the costs of these proceedings; 10. The parties have liberty to make application for any different or special order as to costs within seven days of the date of this judgment. Such application shall be in writing to the Associate of Justice Rothman with a submission of no more than three pages together with any documents upon which such submission may be based that are not otherwise before the Court. Any such application may be the subject of response by any other party affected by the application. Such response shall also be limited to three pages, together with any documents upon which the response is based that are not otherwise before the Court.

Annexure to Judgment* *Telephone numbers and addresses have been redacted.

Endnotes

Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337.
(1970) 1 NSWR 701.
Moschi v Lep Air Services Ltd; Lep Air Services Ltd v Rolloswin [1973] AC 331.
Ibid, at 346 - 348, per Lord Diplock.
Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1989) 166 CLR 245 at 254, per Mason CJ.
Ibid, at 255 (with whom Deane, Dawson and Toohey JJ agreed) and see, per Gaudron J, at 269 - 271.
Ibid.
Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 at 551, per Young J (as his Honour then was).
Atco Controls Pty Ltd (In Liq) v Newtronics Pty Ltd (Receivers and Managers Appointed) (In Liq) [2009] VSCA 238; (2009) 25 VR 411 at 431 [68]; Esso Petroleum Co. Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 at 121, per Vicount Dilhorne; Rose and Frank Co v JR Crompton & Bros Ltd [1923] 2 KB 261 at 288, per Scrutton LJ, and at 293, per Aitkin LJ; see also JW Carter, The Construction of Commercial Contracts (2013, Oxford) at [9-25] - [9-28].
Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802, per Diplock LJ (as Lord Diplock then was).
Berghoff Trading Ltd v Swinbrook Developments Ltd [2009] EWCA Civ 413.
Lakeman v Mountstephen (1874) 7 App Cas 17, per Lord Selbourne; Jowitt v Callaghan (1938) 38 SR (NSW) 512, per Jordan CJ at 516.
See Moschi, supra; and Total Oil v Robinson, supra.
Codelfa, supra; Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 at 437, per Barwick CJ; Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312; Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541 at 553.9 - 554.8, per Kirby P.
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 851, per Lord Diplock.
McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377.
Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation [1989] HCA 32; (1989) 167 CLR 219 at 227.
Jennings Construction Ltd v QH & M Birt Pty Ltd (1986) 8 NSWLR 18; Anderson v Fitzgerald (1853) 4 HLC 484, (1853) 10 ER 551; Guardian Assurance Co Ltd v Condogianis [1919] HCA 33; (1919) 26 CLR 231.
Houssein v Under Secretary of Industrial Relations & Technology (NSW) [1982] HCA 2; (1982) 148 CLR 88 at 94.
See Codelfa, supra.
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 at 561, per Mason ACJ, Wilson, Brennan and Dawson JJ; see also Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424.
Associated Alloys v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588 at 609-610, per Gaudron, McHugh, Gummow and Hayne JJ.
See Codelfa, supra; The Mahkutai [1996] A.C. 650 at 667-8; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45.
See Codelfa, supra; and Royal Botanic Gardens, supra
Allcott Hire Pty Limited v Silk (District Court (NSW), Bradd LCM, 26 June 2015, unrep) at [14].
Ibid.
See R W Burchfield, The New Fowler's Modern English Usage (3rd ed, 1996, Oxford) at 343.
At [13], see these reasons for judgment at [20], above.
See Muller v Dalgety & Co Ltd [1909] HCA 67; (1909) 9 CLR 693 at 696, per Griffith CJ for the historical meaning; and Hunter Douglas Australia Pty Ltd v Perma Blinds [1970] HCA 63; (1970) 122 CLR 49 at 65, per Windeyer J for the more modern approach; see also Cooper & Dysart Pty Ltd v Sargon [1991] 4 ACSR 649 at 655-656, per Rowland J; and see also St. Aubyn v Attorney-General [1952] A.C. 15, per Lord Radcliffe.
Affidavit of Doreen Bonwick, 17 October 2014 at [13].
Ibid.
Stramit Industries Limited v Reinhardt [1985] 1 Qd R 562; Marston v Charles H Griffith & Co Pty Ltd (1985) 3 NSWLR 294 at 299-301 (Delivered 30 September 1982).
Ankar Proprietary Limited v National Westminster Finance (Australia) Limited, supra.
Moschi, supra, per Lord Diplock. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 August 2016

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