BM Sydney Building Materials Pty Ltd v ZH

Evidence of the plaintiff

1. The plaintiff relied on two affidavits of Ming Lee affirmed on 5 August 2014, and 17 July 2015. In the first of those affidavits, Mr Lee set out the history of his business dealings with the third defendant, and two companies of which he was a director, namely, ZH International Pty Limited ("ZHI") and ZHH, the first defendant to the ASOC. A previous commercial credit facility application and supply agreement and guarantee had been entered into by the plaintiff with ZHI as the applicant, and the third defendant as the guarantor on 1 August 2007. At that time, the plaintiff carried out ABN searches on ZHI and ZHH, and an ASIC search on ZHI.
2. Following that agreement, the third defendant requested and was granted an increase of the credit limit from $5,000.00 to $200,000.00. Supply of goods took place thereafter, however, invoices were incorrectly issued to ZHH instead of ZHI. That mistake was realised in 2010, whereafter Mr Lee spoke to the third defendant and requested that a further credit application be entered into for ZHH. Mr Lee deposed that on 1 April 2010, the third defendant came to his office with the fourth defendant, and they both signed the agreement and guarantee in his presence. At that time, the third defendant said to Mr Lee, "my brother will also order and trade on the company's behalf". That evidence was not challenged by the third defendant.
3. Subsequent to 1 April 2010, invoices continued to be sent to ZHH, and both the third and fourth defendants continued to sign invoices for goods supplied by the plaintiff to ZHH. By 19 July 2011, the total balance outstanding was $160,446.68, at which time Mr Lee deposed that the third defendant was advised of that. He said, "I will send my brother to come down to you to check the amount." Thereafter, the fourth defendant attended the plaintiff's premises on 2 September 2011, to verify the amount outstanding.
4. By his subsequent affidavit affirmed on 17 July 2015, Ming Lee again deposed to the conversation in April 2010, concerning the fourth defendant. The third defendant said words to the following effect: "It is okay for my brother, He Zhang, to order building materials on behalf of ZHH."
5. Mr Lee also deposed to the MYOB accounting software package by which the plaintiff processed its accounts, and deposed that as at 11 February 2015, the amount outstanding was $153,342.78. After checking the amount owing on the occasion previously deposed to, the fourth defendant had said to him words to the effect: "I agree that that is what is owing." Ming Lee said: "Well can you confirm that please by signing and dating the statement?" The fourth defendant then proceeded to sign and date the statement, with the amount then outstanding written in his own handwriting as "$160,446.68".
6. The second affidavit annexed as ML-8, a certificate of the amount claimed to be owing to the first defendant pursuant to the Agreement, referred to as a "Dobbs certificate", citing Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643. That certificate is relied on by the plaintiff as conclusive evidence of the outstanding debt.

The defence to the ASOC

1. The third defendant pleaded in paragraph three of his defence that it was an express condition precedent to the alleged agreement that it be executed on behalf of all directors of the first defendant, and as it was executed by only one of the two directors as at 1 April 2010, there was no agreement.
2. The third defendant admitted that he executed the guarantee on 1 April 2010, but denied that by doing so he guaranteed the obligations of the first defendant to the plaintiff.
3. In respect of the debt alleged to be owing, and the invoices upon which that debt was based, as set out in paragraphs 11, 12 and 13 of the ASOC, the third defendant pleaded: "a. Does not know and cannot admit the nature and extent of the goods and services supplied by the plaintiff to the first defendant in the period alleged; b. Does not know the extent to which the first defendant has paid any of the amounts outstanding; c. Denies that he personally sought the supply of any of the goods and services alleged; d. Denies that any of the goods and services alleged were ever supplied to him, and otherwise denies the matters alleged."
4. The third defendant otherwise denied liability to the plaintiff, and pleaded that no claim or basis for equitable compensation was pleaded, and that the amount sought by the plaintiff by way of equitable compensation exceeds the jurisdiction of the court.
5. The third defendant called no evidence in his case.

Plaintiff's submissions

1. Counsel for the plaintiff submitted that the agreement was executed by the third defendant as director and company secretary of ZHH in compliance with s 127(1)(b) of the Corporations Act 2001 (Cth) ("the Act"). It was further submitted that execution in compliance with the Act, was not a condition precedent to the contract, nor was it a condition subsequent to performance of the contract.
2. Counsel further contended that there was no ambiguity in either the agreement or the guarantee. The third defendant was authorised to place orders on behalf of ZHH and had both implied and ostensible authority to do so. The only inference that could be drawn from the execution of the guarantee was that the third defendant had signed it as guarantor.
3. Counsel further relied on s 126 of the Act which provides: "126 Agent exercising a company's power to make contracts (1) A company's power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company's express or implied authority and on behalf of the company. The power may be exercised without using a common seal. (2) This section does not affect the operation of a law that required a particular procedure to be complied with in relation to the contract."
4. Counsel referred to the principles set out by Johnson J in Bruce Harvey v State of New South Wales [2006] NSWSC 1436 at [56] to [61], as to ostensible authority which included the following: "d. Ostensible authority comes about where the principal, by words or conduct, has represented that the agent has the requisite actual authority, and the party dealing with the agent has entered into a contract with him in reliance on that representation. The principal in these circumstances is estopped from denying that actual authority existed. In the commonly encountered case, the ostensible authority is general in character, arising when the principal has placed the agent in the position, which in the outside world is generally regarded as carrying authority to enter into transactions of the kind in question. e. Ostensible general authority may also arise where the agent has had a course of dealing with a particular contractor and the principal has acquiesced in this course of dealing and honoured transactions arising out of it: Armagas Limited v Mundogas SA [1985] UKHL 11; (1986) AC 717 at [777]; Essington Investments at [43]."

Submissions of the third defendant

1. In opening the third defendant's case, when asked to identify the issues between the parties, counsel for the third defendant referred to that part of the attestation clause of the guarantee where, adjacent to the words "Name of Customer", the third defendant's name appeared in print, below which, his signature appeared. Counsel opened on the basis that there was no ambiguity on the deed of guarantee, but that ambiguity arose from the agreement, given the description of the buyer, and the particulars of the account customer as set out on page one of the agreement.
2. Mr Lee was cross-examined by the third defendant as to what happened when the credit facility with ZHI was established in 2007. Mr Lee agreed that company searches were carried out in respect of ZHI. The plaintiff had produced no company search in respect of ZHH in April 2010, and no such search was produced upon a call for any such document. Mr Lee acknowledged that when the plaintiff was dealing with a corporation, each director was required to sign its terms of trade, and the reason for obtaining a company search was to establish who those directors were.
3. On that basis, it was put to Mr Lee that in April 2010 he was not intending to make an agreement on behalf of the plaintiff with ZHH. That was denied.
4. Counsel for the third defendant submitted that the customer was not identified in the guarantee at all. On the face of the document, it could not be inferred that the third defendant was signing the document as guarantor.
5. It was submitted that ambiguity arose in terms of the agreement because the customer was not identified, and any ambiguity had to be resolved in favour of the guarantor, in accordance with long-established principle.
6. Further, the agreement did not refer to the guarantee at all, although it did incorporate a term whereby the buyer charged its beneficial right, title and interest of any property owned by them to the plaintiff, which was entitled at its discretion to lodge a caveat.
7. Counsel referred the court to the judgment of Sackar J in Sydney Attractions Group Pty Limited v Frederick Schulman [2013] NSWSC 858, which concerned a contract for sale of shares in a corporation. Sackar J referred to well-known principles of construction of written contracts and the general principles set out by Bathurst CJ (with whom Macfarlan and Meagher JJA agreed) in Cordon Investments Pty Limited v Lesdor Properties Pty Limited [2012] NSWCA 184 at [52] as follows: "A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction … At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision … (authorities and citations omitted)."
8. Sackar J went on to say: "35 A commercial agreement should be given a business-like or commercially sensible construction. However, generally speaking, if the language used is unambiguous a court must give effect to that language unless to do so would give the contract an absurd operation. As Macfarlan JA said in Jireh International Pty Limited, trading as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137 at [55]: '[55] In my view the primary judge erred in taking this approach. So far as they are able, courts must of course give commercial agreements a commercial and business-like interpretation. However, their ability to do so is constrained by the language used by the parties. If after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the court must give effect to that language unless to do so would give the contract an absurd operation. In the case of absurdity, a court is able to conclude that the parties must have made a mistake in the language that they used and to correct that mistake. A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and business-like operation if an interpretation different to that dictated by the language were adopted.'"
9. Counsel submitted that there was no ambiguity arising on the guarantee, accepting the construction advocated by him that the customer was the third defendant, and it was the fourth defendant who was guaranteeing goods ordered by the third defendant from the plaintiff. It was submitted that this construction did not give rise to absurdity and was open, given the objective background circumstances known to the parties.
10. Further, it was submitted by counsel for the third defendant that ambiguity did arise in respect of the agreement. Any ambiguity should be construed against the interest of the guarantor. Further, if the plaintiff had intended to contract with ZHH, it would have conducted a company search, and there was no evidence of that having been done in April 2004.
11. It was further submitted that Mr Lee had witnessed the signatures on both the agreement and the guarantee. Having witnessed the description on the guarantee as "The Customer", Mr Lee did nothing. The identity of the customer was important to the proper construction of the guarantee and applying principles of construction, the plaintiff could not rely on it.
12. A further issue arose as to whether one person could execute a document on behalf of a corporation as a director and secretary pursuant to s 127. Counsel for the third defendant submitted that where there was more than one director, the proper construction of s 127(1)(b) required all directors to sign. Both parties were given the opportunity to make further submissions in writing on that issue.
13. Section 127 of the Act provides relevantly as follows: "127 Execution of Documents (including deeds) by the Company itself (1) A company may execute a document without using a common seal if the document is signed by: (a) Two directors of the company; or (b) A director and a company secretary of the company; or (c) For a proprietary company that has a sole director who is also the sole company secretary - that director. Note: If a company executes a document in this way, people will be able to rely on the assumptions in sub-section 129(5) for dealings in relation to the company … (3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with ss (1) or (2). (4) This section does not limit the ways in which a company may execute a document (including a deed)."
14. Counsel for the third defendant submitted that as ZHH had at all material times two directors, the signatures of both of those directors were required for ZHH to be bound by the terms of the agreement. The third defendant therefore submitted that there was no compliance with s 127 of the Act, citing In the matter of Matlic Pty Limited (in liq) [2014] NSWSC 1342 per Black J at [3] and [44], and Knight Frank Australia Pty Limited v Paley Properties Pty Limited [2014] SASCFC 103.
15. Counsel referred to the principles of construction of guarantee and indemnity documents as set out by the High Court in Ankar Pty Limited & Arnick Holdings Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 at [21], where the plurality said: "At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. The doctrine of strictissimi juris provides a counterpoise to the law's preference for a construction that reads a provision otherwise than as a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety."
16. It was submitted on behalf of the third defendant that there was no linkage between the agreement and the guarantee, other than the clause relating to caveatable interest. It was not commercially implausible that the third defendant was the customer pursuant to the guarantee, and if the guarantee could be said to be ambiguous, then it was submitted that it cannot be construed with respect to the agreement because that document is itself ambiguous, and contra-indicates that the corporation ZHH is the buyer. There being no agreement between the plaintiff and ZHH, the plaintiff's cause of action based on a guarantee must fail.

Plaintiff's further submissions

1. Counsel for the plaintiff submitted that neither authority relied on by the third defendant in respect of its construction of s 127 of the Act supports the proposition that it was necessary for two directors of the company to sign the agreement. It was submitted that s 127 does not preclude a director and secretary of a company, being one person, holding two offices, to execute a contract or deed so as to bind the company. The purpose of the section is to move away from the stringent application of common law formalities relating to the execution of deeds and look at the substance and intention.
2. It was submitted that s 127(4) makes it clear that it does not limit the ways in which a company may execute a document and that s 127(1) is not mandatory. The plaintiff relied on Black & Decker Inc v GMCA Pty Limited (No. 2) [2008] FCA 504 per Heerey J at [144]: "However, s 127(1) is not mandatory. Section 127(4) provides that the section does not limit the ways in which a company may execute a document (including a deed). As to authority to execute, persons dealing with BDA, including BDI, were entitled to assume that the company's constitution had been complied with and that a director had been duly appointed and had authority to exercise the powers customarily performed by a director of a similar company: s 129(1), (3), the statutory equivalent of the Rule in Turquand's Case (Royal British Bank v Turquand (1856) 6E & B 327). Section 128(1) provides that a person is entitled to make the assumptions in s 129 and a person is not entitled to make an assumption under s 129 if they knew the assumption was incorrect. While there is no evidence in the present case as to the powers of a director of a similar company to BDA, the onus is on GMCA to establish the contrary. In any event, it seems inherently likely that a director of a company similar to BDA, a wholly owned subsidiary of an overseas company, would have authority to execute on the company's behalf a document of the kind executed by Ms Armstrong. A degree of informality is to be expected. The reality is that Ms Armstrong was not, in the time‑honoured expression, engaged on a frolic of her own."
3. Section 129 of the Act sets out certain assumptions about officers of companies that may be made, for example, that an officer has been duly appointed, and has authority to exercise the powers and perform the duties customarily exercised by that kind of officer (see ss 129(2) and (3)). The section also relevantly provides: "129(5) A person may assume that a document that has been duly executed by the company if the document appears to have been signed in accordance with ss 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices."
4. It was submitted that there was no evidence at the time of the dealings that Mr Lee knew, or suspected that the assumption was incorrect, and that he was cross‑examined to the contrary. It was not put to Mr Lee that he suspected that the third defendant was "engaged in a frolic of his own or acted without authority to bind ZHH".
5. The plaintiff further relied on Carter v Schmierer [2003] QSC 35 where a document was signed by one director only. In that case it was held that mere apparent non-compliance with ss 126 and 127 of the Act was not fatal, and that the deed of mortgage was effective so that receivers appointed had been validly appointed under it.
6. The plaintiff submitted that there was no evidence before the court that at the time of the making of the agreement, the plaintiff was not entitled to make the assumptions set out in s 129 of the Act.

Determination

1. There is no issue between the parties as to the principles to be applied in construction of a contract of guarantee or indemnity. They were set out by the High Court in Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424 at [17] - [23] and further explained by the plurality in Bofinger v Kingsway Group Limited (2009) 239 CLR 269. The principles for construction of commercial contracts are similarly well settled, and must be applied so as to give effect to the purpose and object of the transaction (Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at [40]); and are to be construed so as to avoid "commercial nonsense" or "working commercial inconvenience" (see Electricity Generation Corporation v Woodside Energy Limited (2014) 251 CLR 640 at [35]).
2. Here, the evidence establishes that the objective circumstances known to the parties prior to the agreement on 1 April 2010, were that the plaintiff had been trading with a corporation related to the third defendant, ZHI, whereas it had been invoicing another corporation of which he the third defendant was a director, namely, ZHH. The agreement and guarantee were entered into to rectify that situation.
3. In respect of the agreement, I find that the plaintiff contracted with ZHH. ZHH is clearly identified in the agreement as the company name for whom the credit facility was being established and was, by definition, thereafter referred to as "The Buyer". Its name was further identified as "the Account Customer" by way of its name, ABN and trading address.
4. The third defendant's particulars were identified on the face of the document as a director of ZHH and he signed the agreement as director.
5. I do not accept the defendant's submission that there is ambiguity in the agreement. I find that the third defendant was, at the relevant time, a director and secretary of ZHH and by signing the agreement he bound ZHH to it. He clearly had both implied and ostensible authority to do so, applying the principles set out in Bruce Harvey v State of New South Wales, supra, at [21].
6. I accept the submissions of the plaintiff in respect of the application of ss 126, 127 and 129 of the Act set out in [20], [21], and [38] - [43] above. Applying the judgment of Heerey J in Black & Decker Inc, supra, s 127(1) is not mandatory and pursuant to s 127(4), s 127 does not limit the ways in which a company may execute a document, including a deed. I find the third defendant had ostensible authority to act on behalf of ZHH and was not engaged on a frolic of his own. Pursuant to s 129(5) of the Act, the plaintiff was entitled to assume that the agreement had been duly executed by ZHH, given the history of dealings between the third defendant and the plaintiff.
7. I find that no ambiguity arises by virtue of the fourth defendant signing the document, when he was not an office holder of ZHH. The evidence of Ming Lee went unchallenged that He Zhang had been authorised by the third defendant to place orders on behalf of ZHH.
8. I further find that there is no ambiguity arising in respect of the guarantee. I find that the third defendant's name was printed incorrectly opposite the words "Name of Customer", but that he executed the agreement as guarantor on 1 April 2010.
9. Giving a purposive construction to the document as a whole, a commercially sensible construction based on the language of the document is that the third and fourth defendants were guaranteeing the credit facility being established with the plaintiff on behalf of ZHH. Having concluded that language is unambiguous, in accordance with Macfarlan JA's judgment in Jireh International Pty Limited, supra, the court must give effect to that language unless to do so would give the contract an absurd operation. In my view, no absurdity arises; rather, the only mistake was in the place where the third defendant's name was printed above his signature as guarantor. That mistake can be disregarded, having regard to the unambiguous language by which both the third and fourth defendants guaranteed the performance of the agreement as entered into by the third defendant on behalf of ZHH.
10. I therefore find that the plaintiff's claim is established on the basis of the certificate annexed to the second affidavit affirmed by Ming Lee at ML-8. I therefore find the third defendant is indebted to the plaintiff in the sum claimed of $153,342.78.
11. I further find that the plaintiff is entitled to interest pursuant to the agreement at 18% per annum from 28 April 2011 to 11 September 2015. I intend to defer entering final orders subject to the parties agreeing on the arithmetic calculation of that interest.
12. Further, upon proof of service of the ASOC on the first defendant, judgment will be entered against ZHH in the same amount as the judgment entered against the third defendant.

Orders

1. I make the following orders: 1. Verdict and Judgment in favour of the plaintiff against the first, third and fourth defendants in the sum of $153,342.78 plus the amount for interest calculated at $122,430.55. Total Judgment amount $275,773.33. 2. Exhibits to be returned forthwith. 3. In respect of costs on the Plaintiff's Notice of Motion filed on 18/9/15, I make further orders: (1) By consent, order the first, third and/or fourth defendants to pay the plaintiff's solicitor/client costs in the sum of $70,304.35. (2) Order the first, third and/or fourth defendants pay any other costs on an indemnity basis. (3) Such other costs to be agreed or assessed. (4) The defendants have liberty to apply on 7 days' notice to show cause why such orders for indemnity costs otherwise ordered, not be ordered. (5) Defendants to pay the Plaintiff's costs of the Motion filed on 18/9/15.

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: 02 October 2015