Ankar Pty Ltd v National Westminster Finance

Ankar Pty Ltd v National Westminster Finance - [1987] HCA 15 - HCA 1987 case summary — Zoe

[32]

19. The foundation of the rule is that the creditor, by varying the principal contract or extending time, has altered the surety's rights without consulting it though the surety has an interest in the principal contract, and that the creditor cannot be permitted to do: see Rees v. Berrington [1795] EngR 4082; (1795) 2 Ves Jun 540; 30 ER 765. Thus the liability of the surety was seen to be strictissimi juris and the suretyship contract was construed strictly in his favour. In the United States the rule of strict construction, though applied in favour of sureties who receive no reward, is not applied to a compensated surety, i.e., a surety for reward. On the contrary the suretyship contract is construed against the compensated surety. This is largely because surety bonds are thought to resemble insurance contracts, the premiums are calculated against estimated risks and the contracts incorporate forms prepared by the surety. The United States approach may be partly due to a belief that the rule of strict construction, as it has been applied in England, is over-zealous in its protection of the surety: see Cardozo, The Nature of the Judicial Process (1921) p.152, et seq.; Stearns, The Law of Suretyship 5th ed., (1951) 5.1; New York Law Revision Commission Annual Report (1937) at pp.891-895; "Guarantee - Effect upon Guarantor's Liability of Subsequent Agreement between Creditor and Principal Debtor" Notes and Comments, Australian Law Journal, vol. 8, (1934), 58. According to the law as it has developed in the United States, the surety company must show some injury before it will be absolved from the contract (Chapman v. Hoage [1936] USSC 3; (1936) 296 US 526, at p 530), and then it will be discharged pro tanto to the extent of the damage or prejudice it suffers: American Jurisprudence (2d) vol. 74, "Suretyship", 259. In accordance with this approach, a surety company is discharged by the creditor giving the debtor an extension of time only if it is shown that the extension is a material variance in the sense that it results in material harm or prejudice to the surety: Guaranty Co. v. Pressed Brick Co. [1903] USSC 212; (1903) 191 US 416.

[55]

7. In due course, Ankar instituted proceedings in the Supreme Court of New South Wales seeking judgment for the amount of $200,000 together with interest. On the hearing of the action, it became apparent that, even if the deposit no longer remained charged to secure performance by Manufacturing of its continuing obligations, Ankar was not then entitled to a return of the $200,000 since the deposit at that stage remained charged to secure the repayment by Nuinga of moneys advanced to that company by Lombard. In those circumstances, the claim was altered to seek declaratory relief. At first instance, Clarke J. found (as was obviously the case) that Lombard was guilty of breaches of its contractual obligations under cll.8 and 9 of the Security Deposit Agreement in failing to notify Ankar either of Manufacturing's default (cl.8) or intended assignment (cl.9). His Honour rejected an argument that, regardless of whether the relationship between Lombard and Ankar was that of creditor and surety, those clauses constituted essential terms of the contract between Ankar and Lombard according to general principles of contract law. He held, however, that the Security Deposit Agreement constituted Ankar as surety, to the extent of the amount deposited, for the performance by Manufacturing of its obligations under the lease with the consequence that Ankar was entitled to rely upon the special rules which regulate the rights and obligations of sureties. His Honour concluded that, under those special rules, the consequence of the assignment of the lease by Manufacturing with the consent of Lombard "in circumstances involving breaches by (Lombard) of conditions 8 and 9 of the Security Deposit Agreement" was that Ankar was discharged from its obligations as surety for the performance by Manufacturing of its obligations under the lease. Accordingly, his Honour granted declaratory relief in Ankar's favour. Subsequently, when it was disclosed that the liability of Nuinga to Lombard had been fully discharged at the time his Honour had granted that declaratory relief, his Honour entered judgment in Ankar's favour for the then outstanding balance under the Security Deposit Agreement.

[56]

8. Lombard appealed from the decision of the learned trial judge to the New South Wales Court of Appeal. The Court of Appeal (Glass, Samuels and Priestley JJ.A.) agreed with Clarke J's conclusion that cll.8 and 9 of the Security Deposit Agreement were not essential terms of the contract between Lombard and Ankar according to general principles. That court also agreed with his Honour that Ankar was constituted a surety under the terms of the Security Deposit Agreement with the consequence that the rules regulating the rights and obligations of a surety were applicable. However, the members of the Court of Appeal disagreed with Clarke J's finding that the assignment of the lease by Manufacturing with the consent of Lombard had, in the circumstances in which that assignment and consent had been effected and given, discharged Ankar from its obligations as surety for Manufacturing. Their Honours identified two distinct grounds upon which Ankar had relied to support that finding that it was discharged from its obligations as a surety. The first of those grounds was that the assignment, to which Lombard had been a party, constituted a variation of the principal contract (i.e. the lease) between Lombard and Manufacturing. They held that that ground had not been made good for the reason that the assignment with the consent of Lombard had not involved any variation of the principal contract (i.e. the lease) at all since cl.25 of that contract had expressly authorized such an assignment. The second ground was that Lombard had been guilty of breach of its obligations under conditions 8 and 9 of the surety agreement (i.e. the Security Deposit Agreement) between itself as principal creditor and Ankar as surety. It would seem that the basis upon which this second ground was advanced before the Court of Appeal was that, even accepting that cll.8 and 9 were not essential or fundamental terms of the contract between Lombard and Ankar according to general principles, Lombard's conduct in consenting to the assignment in the circumstances of the breaches varied the contract of suretyship or altered Ankar's obligations under it. Their Honours rejected this ground, holding that Lombard's breach of cll.8 and 9 "did not constitute a variation of the terms of the guarantee" (per Samuels J.A., with whom Glass J.A. agreed). In the result, the Court of Appeal upheld the appeal and dismissed Ankar's action. The present appeal is from the judgment and orders of the Court of Appeal.

[61]

11. Obviously, a creditor could not "without the surety's consent" effect a "departure" from the contract with the surety in the sense of effecting a unilateral variation or alteration of its terms. The reference to a "departure" by the creditor from his contract with the surety constituting an "alteration in the surety's obligations" is a reflection of the fact that the obligations of a surety are strictly confined to what he has undertaken in the contract which constitutes him a surety; "(h)e is bound ... merely" to "the letter of his engagement" (see per Lord Westbury L.C., Blest v. Brown (1862) 4 De GF & J 367, at p 376 [1862] EngR 631; (45 ER 1225, at p 1229)). A failure by the creditor to observe the terms of that contract would, if the surety nonetheless remained liable, alter the surety's obligations in the sense that the surety would be held liable in circumstances which did not accord with the letter of his engagement as specified by the contract. In other words, the proposition in Halsbury should be understood as meaning that a relevant failure by the creditor to perform the terms of his contract with the surety will "discharge" the surety for the reason that the creditor's failure to perform the terms of his contract would otherwise result in a situation where the surety was held liable in circumstances other than those in which he had agreed to be bound. As senior counsel for Ankar pointed out, this reading of the proposition in the 4th edition of Halsbury derives support from de Colyar K.C.'s original article on Guarantees (in the 1st edition of Halsbury) from which the proposition was derived (see Halsbury's Laws of England, 1st ed., vol. 15, pp.550-552, pars. 1034-1035 and see also de Colyar, A Treatise on the Law of Guarantees, 3rd ed. (1897), p.405). That general proposition accords with the long-standing statement of high authority that a "claim as against a surety is strictissimi juris, and it is incumbent on the plaintiff to shew that the terms of the guarantee have been strictly complied with" (see per Lord Ellenborough, Bacon v. Chesney [1814] EngR 11; (1816) 1 Stark 192, at p 193 [1814] EngR 11; (171 ER 443, at p 443)). So understood, and subject to what is said hereunder, it represents a correct statement of a special rule which prima facie (in the sense that it may be excluded by express or implied agreement to the contrary) governs the particular relationship of guarantor and principal creditor.

[62]

12. In the context of defining that special rule it is inappropriate to speak, as does the 25th edition of Chitty on Contracts (1983), vol. II, at p.1222 (and cf., e.g., Bowmaker (Commercial) Ltd. v. Smith (1965) 1 WLR 855, at p 858; (1965) 2 All ER 304, at p 306), of it being necessary that the creditor's breach go "to the root of the contract" between himself and the surety or evince "an intention to repudiate the contract". Nor is it appropriate in that context to speak either of essential or fundamental terms of the guarantee or of the surety being pro tanto discharged to the extent of damage actually sustained (cf. American Jurisprudence 2d, vol.38, "Guaranty", par.107; Corpus Juris Secundum, vol.38, "Guaranty", par.63, at p.1225). If the breach by the creditor is of an essential or fundamental term or constitutes repudiation of the contract between the surety and himself, the surety will, of course, be entitled to rescind the contract in accordance with general principle. That is not, however, the special rule which is here under discussion. That special rule is that, in the ordinary case where a surety agrees to be liable for the default of another upon the terms of the contract of suretyship, a significant departure by the creditor from the terms of that contract will, in the absence of agreement to the contrary, operate to preclude the existence or continued existence of the circumstances in which the surety has agreed to be bound. That being so, there is no need for the surety to rescind the contract for repudiation or breach of an essential or fundamental term. In the absence of any question of waiver or estoppel, the situation is simply that the circumstances of his liability as surety do not exist (cf., e.g., United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd. (1968) 1 WLR 74, at p 81; (1968) 1 All ER 104, at p 107; Eshelby v. Federated European Bank, Ltd. (1931) 146 LT 336, at p 342 (Divisional Court) and (1932) 1 KB 423, at p 432 (Court of Appeal); Bank of British Columbia v. Turbo Resources Ltd. (1983) 148 DLR (3d) 598, at pp 605-608; Corporation of Chatham v. McCrea (1862) 12 UCCP 352, at p 355; Sullivan v. Willson (1864) 3 SCR (N.S.W.) (L) 180, at p 184; but note e.g., Bank of Montreal v. Wilder (1983) 149 DLR (3d) 193, at pp 199-200). In some of the cases, one finds that the promissory obligations of the creditor under the surety agreement are described as conditions precedent of the surety's liability. While the difference would seem to be of little real importance, it is preferable to speak of those promissory obligations in terms of their constituting part of the general circumstances in which the surety has agreed to become liable for the default of the principal debtor rather than to categorize them as conditions precedent. One reason for that is the obvious difficulty in reconciling the unqualified fulfilment required of a true condition precedent with the apparently established qualification to the effect that an obviously immaterial and insignificant failure by the creditor fully to discharge his promissory obligations will not preclude the liability of the surety (see below). A more fundamental reason is that the basis and, for present purposes, the limits of the rights and liabilities of the parties to the particular relationship of guarantor and principal creditor are consensual and it is impermissible to approach the identification of the special rules defining the prima facie limits of the consensual rights and liabilities of the parties to a particular category of relationship in a way that effectively denies their special character by forcing them into the formalized terms appropriate to the expression of universal principle. Put differently, special rules which prima facie (in the sense of being subject to contrary agreement) define the rights and liabilities of the parties to a particular category of consensual relationship, such as that between guarantor and creditor or that between partners, are essentially concerned with presumptions of contractual intention. There is no warrant, either in principle or in utility, for distorting them into statements of immutable and overriding principle.

[65]

15. The provisions of cll.8 and 9 of the Security Deposit Agreement make clear Ankar's concern to avoid a situation in which its liability as surety for Manufacturing as "lessee" in possession of the equipment had been transformed into a liability as surety for the performance by Manufacturing of its obligations under the lease in circumstances where Manufacturing had ceased to be entitled to possession of the leased machinery. The reason for that is not hard to discern. Obviously, in the latter situation, any rights of subrogation against Manufacturing would be of dubious value. Thus it was that cl.8 of the Security Deposit Agreement expressly required Lombard to use its best endeavours to ensure that the equipment remained in the possession of Manufacturing while cl.9 contemplated that, in the event of default by Manufacturing in performance of its obligations under the lease, Ankar might negotiate with Lombard for an assignment to it of Lombard's interest as lessor of the leased equipment. In that context, it simply could not be said that, viewed objectively, Lombard's departure from its obligations under cll.8 and 9 was not sufficiently serious to preclude the existence of the circumstances under which Ankar had agreed to be liable as surety. To the contrary, the failure to notify Ankar of Manufacturing's default (cl.8) and intended assignment (cl.9) precluded the circumstances existing in which Ankar could enjoy the agreed opportunity of attempting to avoid the very situation which it was obviously most concerned to avoid, namely, the situation in which it would be liable as surety for a lessee of equipment who remained liable to pay the rent for the equipment but no longer enjoyed the quid pro quo of possession of it. It follows that Lombard was not entitled to claim from Ankar, as surety, payment of the moneys owing to it by Manufacturing under the lease or to apply the amount deposited with it by Ankar in payment of those moneys. It may well be that this result in the instant case is open to the justified criticism that it is brought about by the application to a commercial transaction of a special rule which reflects a common law approach to sureties which is a survival "of the days when commercial dealings were simpler, when surety companies were unknown, when sureties were commonly generous friends whose confidence had been abused" (see Cardozo, The Nature of the Judicial Process, (1921), p 154 and cf. Midland Counties Motor Finance Co. Ltd. v. Slade (1951) 1 KB 346, at p 352). That special rule can however be excluded by contrary agreement of the parties to a commercial transaction if they so desire. The wider question whether the traditional special rules applicable to sureties should be made generally inapplicable to a guarantee given in a purely commercial context raises considerations of general policy which, in the context of settled law, are best left to the legislature to resolve.

At a glance

Court

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Before

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Judgment (68 paragraphs)

Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 (7 May 1987)

Parties

Cases Cited (3)