Edmond El Khoury v Denis Harsany & Anor; Joseph Taouk v Assure

Supreme Court of NSW|2018-11-01|Before: Sackar J

Background facts

The genesis of all these disputes began when Assure engaged Berowra Developments Pty Ltd (the Developer) to develop 17 townhouses at 6-12 Kita Avenue, Berowra Heights NSW (Berowra Development) (principal judgment [2]).
The Developer entered into a building agreement on 20 May 2012 with HGH Construction Pty Ltd (the Builder) to carry out the building work under the Development Agreement (Building Agreement). Mr Taouk is the sole director, secretary and shareholder of the Builder (principal judgment [3]).
The parties entered into an agreement on 12 June 2012 together with Mr Taouk who provided Assure with a guarantee and indemnity in relation to the Developer's performance (Development Agreement) (principal judgment [2]).

Legal principles

Each of the 2016 Proceedings and 2018 Proceedings in turn raise quite distinct issues. The 2016 Proceedings concern the appropriate principles to be called in aid in assessing Mr Taouk's liability to Assure pursuant to a guarantee and indemnity. The 2018 Proceedings concern whether Mr Harsany and Mr Taouk are liable as guarantors pursuant to the Loan Agreement and the provision of $200,000 from Mr El Khoury to Assure.

Common law damages

It is I consider uncontroversial that the object of damages for breach of contract is neither to make the defendant disgorge what it has saved due to its breach, nor to make it disgorge profits it has reaped. In contract, common law damages are compensatory. Their fundamental purpose is to put the person whose rights have been violated, in the same position, so far as money can do so, as if those rights had been observed: Robinson v Harman [1848] EngR 135; 154 ER 363.
In Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54 Deane J said (at 119-20) (citations omitted): It has been truly said that the assessment of damages in contract and tort is "a pragmatic subject ... [which] does not lend itself to hard-and-fast rules". The explanation of that is to be found in the fact that the assessment of common law damages for breach of contract or tort was traditionally seen as a matter for the good sense of the jury. Within the context of the principles laid down in Hadley v Baxendale, the more particular rules for assessing damages for repudiation or breach of contract should be treated not "as rigid rules of universal application" but "as prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation ... without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept". That being so, it is neither desirable nor practicable to seek to formulate an exhaustive comprehensive rule defining the circumstances in which it is appropriate for a court to assess damages on the basis that what has been lost or inflicted is the probability or possibility of benefit or detriment as distinct from the benefit or detriment itself.
In Clark v Macourt (2013) 253 CLR 1; [2013] HCA 56 Keane J said (at [106]) (citations omitted): The principle according to which damages for breach of contract are awarded is that the damages should put the promisee in the same situation with respect to damages, so far as money can do it, as it would have been in had the broken promise been performed. The appellant was entitled to claim this measure, rather than a measure based, either on the difference between what she paid for the sperm straws and what they were worth, or on the expense "of undoing the harm which [her] reliance on the defendant's promise has caused [her]". This Court said in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd: "The 'ruling principle', confirmed in this Court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman: 'The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.'"

Damages payable under indemnities

However, amounts payable under guarantees and/or indemnities are of a different nature to common law damages. This is because the amount payable or the action required under a guarantee and/or indemnity is to be determined primarily by the terms and hence scope of the guarantee and/or indemnity. The precise terms of the contractual guarantee and/or indemnity may or may not require payment of a set amount, or require payment according to the compensatory touchstone of common law damages.
In Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245; [1988] HCA 11 Mason CJ said (at 254-6) (citations omitted): An indemnity is a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party: Yeoman; Total Products; Davys v Buswell. In their endeavours to distinguish between a guarantee and an indemnity the courts have emphasized the difference between the guarantor's secondary liability and the indemnifier's primary liability: see, e.g., the comments of Lord Esher MR in Baynton v Morgan. There is an element of ambiguity in this distinction unless the reference to primary liability is understood to mean ultimate liability. Once default has occurred, the party having the benefit of the guarantee can call on the guarantor to honour his promise before calling on the principal contracting party to perform his obligation, but the guarantor, having honoured his promise, can hold the principal contracting party to account by virtue of the doctrine of subrogation. The distinction is also blurred by the different distinction which has been made in discussing breach of contract, notably by Lord Diplock in such cases as Lep Air Services Ltd v Rolloswin Investments Ltd (reported sub nom Moschi v Lep Air Services Ltd), between the primary and secondary obligations of a party to a contract. And, just to add to the confusion, guarantees are sometimes expressed so as to impose a primary liability on the guarantor. Because many guarantees are given in relation to the payment of debts, it is common to speak of the parties to the relationship as creditor, guarantor and principal debtor. However, the payment of a debt is but one instance of the wide range of obligations the performance of which may be made the subject of a guarantee. Just as I may guarantee the payment of a debt so I may guarantee the performance of a contractual obligation which does not involve the payment of money. So it is that a creditor's rights against a guarantor depend on the terms of the guarantee and the nature of the obligation, performance of which is guaranteed. If the subject of the guarantee is payment of a debt or a sum of money which has accrued due, the creditor may, on default by the principal debtor, sue the guarantor instead of the principal debtor for the debt or sum of money, his claim being for a liquidated amount. If, on the other hand, the subject of the guarantee is the performance of some other obligation, then the person having the benefit of the guarantee may, upon default, sue the guarantor for damages for breach of contract. … My own view of the matter accords with that expressed by Lord Reid in Moschi where his Lordship rejected the notion that there was a common rule applicable to all guarantees and acknowledged that the parties are at liberty to make such agreement as they choose. There are, however, two common classes of guarantee of the payment of instalments by the principal debtor. The first is an undertaking by the guarantor that if the debtor fails to pay an instalment he will pay. This is a conditional agreement. The guarantor's obligation to pay arises on the debtor's failure to pay. The second is an undertaking by the guarantor that the debtor will carry out his contract. Then a failure by the debtor to perform his contract puts the guarantor in breach of his.
In Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; [2004] HCA 28 Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ said (at [17]-[18]) (citations omitted): The proper construction of cll 8.2.2 and 8.2.3 cannot be undertaken without reference to the principles of construction applicable to contractual indemnities. The starting-point is the decision of this Court in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd. In that case, the Court considered whether two clauses of a guarantee operated as conditions the breach of which would discharge the surety from liability. In answering that question in the affirmative, Mason ACJ, Wilson, Brennan and Dawson JJ 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.'' In Chan v Cresdon Pty Ltd, Mason CJ, Brennan, Deane and McHugh JJ described the statement in Ankar set out above as evidencing a ''settled principle governing the interpretation of contracts of guarantee''. It may be noted that the conclusions reached in Ankar and Chan as to the principles to be applied to the construction of contracts of guarantee are binding, but did not enjoy unanimous support in the early case law. In Mason v Pritchard, the Court of King's Bench was reported to have held that the terms of a guarantee ''were to be taken as strongly against the party giving the guarantie as the sense of them would admit of''. That approach was disputed in Nicholson v Paget. There, Bayley B said: ''[T]his is a contract of guarantie, which is a contract of a peculiar description; for it is not a contract which a party is entering into for the payment of his own debt, or on his own behalf; but it is a contract which he is entering into for a third person: and we think that it is the duty of the party who takes such a security to see that it is couched in such words as that the party so giving it may distinctly understand to what extent he is binding himself.''
As was evident in the reasoning of the High Court in the above case (at [24]-[29]) the scope of liability must be determined according to the precise language of the contract in question. This is also clear in the judgment of the Court of Appeal in Perry v Anthony [2016] NSWCA 56 (at [40]-[43]): The principle for which the appellants contended, namely, that there can be no indemnity without actual loss, in the unqualified terms it which it was asserted, is not correct. In O'Donovan and Phillips, Modern Contract of Guarantee at 1.1100, the authors state that "the promisee generally has no right to receive a sum under an indemnity unless it suffers actual, ascertainable loss". However, the authors add that that statement is "subject to contrary terms" in the contract. The authors cite Wren v Mahony as authority. Wren v Mahony concerned an application by the appellant, Wren, to go behind a bankruptcy judgment which had been obtained against him at the instance of Mahony. Wren's underlying liability, if any, arose from an indemnity he had given to Mahony in respect of any tax liability Mahony had to the Commissioner of Taxation. Mahony became liable for tax within the meaning of the indemnity. However, Mahony entered judgment against Wren before the Commissioner had obtained judgment against him. Barwick CJ, at 225, applying Rankin v Palmer held that Wren's covenant to indemnify Mahony did not contain a promise to pay the amount of the tax due or which might become due, and without such a promise there was no cause of action against Wren until the tax had been paid. As Barwick CJ further explained at 227, the nature and extent of the liability under an indemnity clause "is of course a matter of construction of the language used in the circumstances in which it was used". Contrary to the appellant's submission, there is no general principle that a person is not entitled to the benefit of an indemnity unless that person has suffered an actual ascertainable loss. Rather, it is always a question of the proper construction of the indemnifying clause as to the nature and extent of the rights and liabilities that arise thereunder and as to when such rights may be enforced. This is clear, not only from the commentary in O'Donovan and Phillips, Modern Contract of Guarantee but also from the remarks of Barwick CJ in Wren v Mahony to which we have made reference. Accordingly, even if it could be suggested that the trial judge ought to have dealt with the appellants' argument on this point, the argument would have failed.

What constitutes consideration?

In Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88 the Privy Council observed (at 94): As to the question of consideration, Rogers J was clearly right in holding that the mere "readiness … to entertain … a request" was no consideration and their Lordships have found themselves unable to accept the reasoning of McHugh JA on this point. It is, however, entirely clear that although the mere promise to consider or entertain a request cannot of itself constitute a valuable consideration for the sureties' promise, the actual advance of money in response to a request does provide a consideration for the sureties' liability. Leaving aside for the moment the question, upon which both Rogers J and McHugh JA agreed, of what type of request is, as a matter of construction, sufficient to give rise to a guaranteed liability, Mr Bennett has submitted that the respondent's claim founders immediately on the rock of consideration for there was, he submits, no evidence of any request made either by the appellants or by Industries subsequent to the date of the guarantee for the provision of finance for Products. In so far as there was any request made by Industries, it took place prior to the execution of the guarantee and was therefore a past consideration. Their Lordships find themselves unable to accept this submission. The consideration is not to be found in the making of the request but in the accession to it and there is, in their Lordships' view, no reason why an advance of money pursuant to a request made contemporaneously with or prior to the guarantee should not constitute a good consideration for the sureties' promise to pay. The facts leave no room for doubt that the advances subsequently made to Products were pursuant to the request for a group facility made by Industries on 1 April 1982 and, subject to the question of whether those advances gave rise to a liability on Industries which is covered by the guarantee, their Lordships see no ground for saying that the guarantee was not supported by consideration.
In Breusch v Watts Development Division Pty Ltd (1987) 10 NSWLR 311 McHugh JA, with Hope and Glass JJA agreeing, said (at 314): The question, therefore, is whether the document of guarantee should be construed as referring to the procuring of the facility of $8 million obtained in July 1982 or to the procuring of individual advances including future advances. If part of the consideration was the procuring of future advances, then when they were obtained, they represented good consideration and supported the promise to indemnify Watts in respect of both past and future advances: White v Woodward (1848) 5 CB 810; 136 ER 1097 and Johnston v Nicholls (1845) 1 CB 251; 135 ER 535. In Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88, the Judicial Committee has stated (at 94) that: "…there is … no reason why an advance of money pursuant to a request made contemporaneously with or prior to the guarantee should not constitute a good consideration for the sureties' promise to pay." Acting upon the principle, ut res magis valeat quam pereat, the courts, where possible, have invariably held that the words of a guarantee imported an executory or future consideration rather than a past or executed consideration. The decided cases proceed upon the principle that the words of a guarantee document, referring to the supply of goods or credit, are to be construed, if possible, as including the future supply of those goods or that credit. The cases also establish that, in determining whether the words of the guarantee were intended to have a future operation, it is permissible to ascertain what were the prior dealings between the parties and what was contemplated as to the future course of their dealings.

Compound or simple interest

In Agricultural and Rural Finance Pty Ltd v Atkinson [2010] NSWSC 1396 Einstein J said (at [129]-[134]): A contractual provision which merely prescribes that interest is to be payable at a particular percentage rate per annum, imposes an obligation to pay simple and not compound interest. That is the ordinary and natural meaning of such words as appear in clause 5.2. In Bakker v Chanbri Pty Limited (1986) 4 BPR 9234 at 9236 Young J held that unless there is a clear agreement to pay compound interest, interest is taken to be simple interest (see also TSB Developments Pty Limited v HCH & K Fisheries Pty Limited [2003] TASSC 136; Farrow Mortgage Services Pty Ltd (In Liq) v Tunevitsch Pty Ltd (1998) 8 TAS R 65; Polaris Holding Co v Airservices Australia [1997] FCA 208). It should be noted that what is required, in accordance with these authorities, is not merely "agreement" but "clear agreement". In Stein v Torella Holdings Pty Limited [2009] NSWSC 971, McLachlan AsJ cited Chitty on Contracts, 30th ed, 2008, Vol 2, p922, [38.269] for the proposition: "It is settled law that compound interest is payable either by agreement or by custom, but not otherwise". Exceptionally, by reason of a recognised custom or practice on the part of banks, compound interest is payable on bank overdrafts: see Weaver & Craigie's, The Law Relating to Banker and Customer in Australia, 3rd ed, [3.2010-2080]. A contract with a non-bank, which requires interest to be payable at the rates or on the conditions imposed by a bank may thus be construed as requiring the payment of compound interest: Saunders v Nash [1991] 2 VR 63; Morton v Elgin-Stuczynski [2008] VSCA 25. There is nothing at all in the terms of the loan documentation here under consideration to displace the ordinary meaning of clause 5.2 as prescribing interest on a simple basis and not otherwise.
In Stein v Torella Holdings Pty Ltd [2009] NSWSC 971 McLaughlin AsJ said (at [32]-[33] and [42]-[44]): The Plaintiff relied upon the decision of the English Court of Appeal in Re Marquis of Anglesey; Willmott v Gardner [1901] 2 Ch 548 and the decision of the Court of Appeal of the Supreme Court of Victoria in Morton v Elgin-Stuczynski [2008] VSCA 25 (22 February 2008). In that latter case Neave JA (with whom Kellam JA and Cavanough AJA agreed) said, at [27] - [28], In my opinion the words of this contract are capable of bearing the meaning that either simple or compound interest is payable. Although both counsel relied on case law in support of their submissions, a comparison of the meaning which courts have given to the words used in other contracts of loan provides little assistance in interpreting the words used in this particular contract. Whether interest is to be calculated on a simple or compound basis depends on the true construction of the contract, read in the light of surrounding circumstances. Whatever may have been the case historically, today there is no presumption that interest payable on a loan made by a private lender is to be calculated as either simple or compound interest. His Honour cited with approval the following passage from the judgment of the New Zealand Court of Appeal in Alington Group Architects Limited v Attorney-General [1998] 2 NZLR 183 at 189, The question whether the interest payable ... is to be simple or compound interest is to be approached without reference to any predisposition the Courts may have demonstrated in favour of simple interest as against compound interest. It is purely one of contractual interpretation. The agreement is to be interpreted so as to give effect to the meaning intended by the parties. Hence, any ... "presumption" in favour of simple interest is out of place in determining the meaning of the words in issue. … To the extent that the Plaintiff's claim for compound interest is grounded upon the practice of bankers, I reject that claim. As I have already observed, not only is the Plaintiff not a banker, and has never been a banker, but in his dealings with the joint venture the Plaintiff's role cannot in any way be equated to that of banker. To do so would be to disregard the essential fact that the Plaintiff himself was one of the joint venturers. He was not an independent lender. He was advancing money to an enterprise in which he had a personal financial interest, beyond and above the extent of the loan and its repayment. Further, irrespective of the truth or accuracy of the foregoing assertion in the judgment of the High Court of Australia in Hungerfords v Walker, the sentiment behind that statement cannot be substituted for the exercise of establishing, upon the facts of the present case, the terms of the agreement between the parties. Accordingly, a determination of whether the Plaintiff is entitled to compound interest or simple interest will, in the circumstances of this case, depend solely upon the terms of the agreement of the parties, without the need for resort to inferences which may be drawn from any practices in the finance or banking industry, or to general sentiments expressing subjective perceptions of fairness.

Contribution from co-sureties

It is settled law that persons who are under co-ordinate liabilities to make good the one loss must share the burden pro rata: Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342 at 350; [1969] HCA 55 (Kitto J). That is, guarantors for the same principal debtor and for the same debt or obligation have a common interest and a common burden, as long as if the liabilities are "of the same nature and to the same extent": Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [15] (Gaudron ACJ and Hayne J).

Submissions in the Taouk v Assure matter (2016 Proceedings)

Mr Taouk

With reference to the principal judgment (particularly at [330] and [335]) Mr Taouk submits that the starting point of this assessment of quantum is that Assure has had the benefit of the expenditure of the amount claimed as damages totalling $3,266,518.44 (submissions [1]-[5]). He contends that there is no evidence to suggest that this amount represents the loss incurred by Assure (submissions [5]).
Further, Mr Taouk asserts that Schedule 8 clause 12 of the Development Agreement makes it clear that it was part of the agreement that the finance which would be obtained by the Developer was going to be deducted from the consideration amount of $9,550,000 (inclusive of GST) (submissions [6]). His case is that the correct interpretation of Schedule 8 of the Development Agreement is that Assure was liable to pay for the first $3,700,000 of the development and finance costs, and Mr Taouk is liable under his guarantee and indemnity only for funding costs linked to a "Default Event". He denies there was any obligation to indemnify Assure because the Developer's breach caused no loss, cost, expense or liability to Assure (supplementary submissions [1]-[9]).
Therefore, Mr Taouk contends the damages arising from his non-performance of the development contract is to be ascertained by comparing the position of Assure had the Developer performed the contract, with Assure's current position given the found non-performance of the contract (submissions [6]-[8]).
Mr Taouk submits that Assure therefore has not factored in that the breach of the Development Agreement has nevertheless provided Assure a benefit, being the release from having to pay the Consideration Amount, whilst still enjoying the benefit of a large portion of the construction work (submissions [8]).
Mr Taouk also criticises the invoice issued by Devlan referred to by Assure, stating that the invoice proves nothing and does not prove the work invoiced was work done to fix defects (submissions [9]). With respect to outstanding payment for equity, Mr Taouk submits that the Developer has not received any equity in the subject land, and in order "to make good this claim Assure must be willing to perform its obligations to give the equity" (submissions [10]).
With respect to the "funding costs" claimed by Assure as damages, Mr Taouk repeats that this issue is likewise to be determined by comparing the position of Assure had the Developer performed the contract with the current position given non-performance (submissions [11]). He further says it is insufficient to say that Assure has had to pay interest on money borrowed by it, and that this interest acts as a measure of damages. Rather, he says pursuant to Schedule 8 clause 4 the Developer was not obliged to pay interest costs and fees (submissions [12]).
Mr Taouk concludes that the way to ascertain Assure's loss is to apply the formula set out in Schedule 6 of deed of variation to the Development Agreements, and compare that to the hypothetical scenario that the Developer had performed the Development Agreement (submissions [13]). He further criticises Assure's approach as wrong, as the remedy for breach of an indemnity is unliquidated damages, and Assure has not framed its cases on the basis of liquidated damages (supplementary submissions [10]).

Assure

The starting point of Assure's argument is that Mr Taouk's liability for breach of the Development Agreement and liability pursuant to his guarantee and indemnity were not successfully challenged on appeal (submissions [1]-[3]). In addition, on appeal, counsel for Mr Taouk expressly disclaimed any intention to challenge Assure's expenditure to the builder, subcontractors and to Devlan, and is thereby bound by the finding that Assure made payments of $3,266,518.14 (submissions [4]-[8]).
In addition, Assure claims payment of an additional $73,411 to Devlan pursuant to an invoice dated 21 February 2016 for defect rectification work, contending this amount has since been identified (submissions [9]-[12], supplementary submissions [25]-[28]).
Assure claims $220,000 from Mr Taouk as payment for equity in the land, as the Developer was liable for this amount, and to the extent that the Developer did not pay this amount Mr Taouk is liable as guarantor (submissions [13]-[16], supplementary submissions [29]-[30]). Assure also claims $1,748,284.14 for funding costs incurred in financing the project (submissions [17]-[23]). Assure also notes the $200,000 provided to Assure by Mr El Khoury is also a claim open on the pleadings (supplementary submissions [31]). It also claims the "Baccus loans" set out in its schedule of damages, rejecting any argument these loans are not within the scope of Mr Taouk's liability (supplementary submissions [32]-[34])
Assure rejects Mr Taouk's argument that if Assure borrowed money to pay for construction costs, then Assure has not suffered any loss because irrespective of who borrowed the funds, the funds would have been paid from the proceeds of sale of the townhouses (submissions in reply [7]). Assure rejects this argument on the basis that Mr Taouk was responsible for paying the construction costs, and had no right of reimbursement in respect of any contributions he and the Developer made to the project (submissions [24]-[27]). Assure denies Mr Taouk can suggest damages should be calculated by this broad compensatory principle (supplementary submissions [9]-[14]).
Assure rejects Mr Taouk's argument as based on the false assumption that his liability should be determined by general common law principles of loss and damage. Assure submits this is wrong because the scope of Mr Taouk's liability should correctly be determined by his guarantee and indemnity in clause 24.1 of the Development Agreement, which indemnifies for "all losses, liabilities, costs and expenses (including without limitation, legal expenses on a full indemnity basis)". Assure submits this clause invites quite a different calculation that ordinary common law damages, as the question of quantum is simply what sum ought to have been paid pursuant to the indemnity (supplementary submissions [1]-[8], submissions in reply [1]-[6]).
Assure submits Mr Taouk's promise was his guarantee and indemnity, and damages should be assessed according to what would have happened had he complied with this guarantee and indemnity. Assure says damages are not concerned with what would have happened had the Builder and the Developer complied with their obligations, as this is not the basis upon which its cross-claim is framed (supplementary submissions [15]-[20]). Upon this basis, Assure rejects Mr Taouk's argument that as Assure has received the benefit of its own expenditure it did not suffer a loss, because had Mr Taouk honoured his funding obligations or his obligations under the guarantee and indemnity, Assure would have received the benefit of the development without paying over $5,000,000 (supplementary submissions [21]-[22]).
Assure rejects any suggestion that the amount it seeks is not connected to those matters set out in clause 24.1 of the Development Agreement (supplementary submissions [23]-[24], submissions in reply [9]). It likewise rejects any suggestion raised by Mr Taouk in his supplementary submissions that Assure bore funding obligations beyond payment of the Consideration Amount, asserting it is not open to him to cavil with a matter already dealt with in my principal judgment (submissions in reply [8] and [10]).
Assure seeks judgment in the amount of $5,289,893.48 as scheduled together with costs on an indemnity basis (submissions [28]-[30]).

Submissions in the El Khoury v Harsany matter (2018 Proceedings)

Mr El Khoury

Mr El Khoury submits that the chronology of emails and the findings of fact in my principal judgment demonstrate that Mr El Khoury advanced $200,000 to Assure after execution and delivery of the Loan Agreement by Mr Harsany to Mr El Khoury (submissions [1]-[2]). His case is that the delivery of the signed Loan Agreement to Mr El Khoury by Mr Harsany was Mr Harsany's request that money be advanced to Assure, and the consideration was Mr El Khoury acting on the request (supplementary submissions [1]-[7]).
Mr El Khoury notes that Mr El Khoury in fact required execution and return of the Loan Agreement (containing Mr Harsany's guarantee) before allowing Lane & Lane to release the $200,000 to Assure. He also contends this was a precondition, and without Mr Harsany's guarantee in the Loan Agreement, the $200,000 would not have been advanced (submissions [2]).
Although Mr El Khoury originally submitted that the document was a deed, this was no longer pressed (submissions [5]-[6], T37/13-41). Mr El Khoury, however, denies that the obligations of guarantee under the Loan Agreement have been discharged, as Assure's failure to repay the loan is ongoing (supplementary submissions [8]-[9]).
As the debt has not been repaid, and interest is referred to in Item 6 of the Loan Agreement as 2% per month, Mr El Khoury asserts he is entitled to separate judgments for the same amount of $200,000 plus interest compounded monthly from the date of advance of 7 August 2012 against both Mr Harsany and Mr Taouk as joint and severable guarantors (submissions [7]-[13]). With reference to clause 4.2, which reads "interest so in arrears shall without prejudice to the right of the Lender to sue for and recover such interest and to the other rights and powers of the Lender be added to the Loan and shall thenceforth bear interest payable", Mr El Khoury states interest should be charged every month on a compounded basis (supplementary submissions [10]-[11]).

Mr Harsany

The primary argument put forward by Mr Harsany with respect to the $200,000 provided by Mr El Khoury is that the guarantee he entered into jointly with Mr Taouk (guaranteeing Assure's obligations under the Loan Agreement) was not supported by consideration (submissions [1]-[4]).
Mr Harsany contends that because the $200,000 was advanced on 27 June 2012, and the Loan Agreement was only executed on 3 August 2012 after the provision of the money, the actual guarantee in the Loan Agreement was entered into with no consideration (submissions [5]-[18]). Therefore, the provision of the $200,000 into the solicitors' account effected the creation of a trust, which is not capable of supporting a contract (supplementary submissions [1]-[16]).
Mr Harsany contends the "release" of the $200,000 was no consideration, because the termination of a trust cannot amount to consideration (submissions [19]-[23], supplementary submissions [17]-[22]).
As an alternative, Mr Harsany contends the loan was also provided purely for the purposes of a short-term bridging loan awaiting time for receipt of a development loan for Assure, which was an implicit term of the Loan Agreement (supplementary submissions [23]-[29]). As that did not eventuate, he argues the purpose of the guarantee has now been discharged (submissions [34]-[38]).
With respect to the interest rate, Mr Harsany notes that whilst clause 4 of the Loan Agreement refers to a "Higher Rate" and a "Lower Rate", Item 6 of the Appendix only refers to "2% per month if the fund not paid on the due date" with no rest periods, due date for instalment or arrears. Accordingly, he contends the interest rate should be 2% simple interest per month, reinforced by the background to the arrangement by way of informal bridging loan (submissions [41]-[45], supplementary submissions [30]-[38]).
Mr Harsany asserts Item 6 of the Loan Agreement provided interest was to be payable when the amount was "not paid on the due date" and the due date was "upon receipt of development loan" being 27 July 2013, when the development loan was obtained (principal judgment [33], supplementary submissions [39]-[44]).
If he is found liable, Mr Harsany would seek contribution by Mr Taouk as co-surety, as reflected in the Defence to Amended Statement of Claim at [19] (submissions [46]-[56]).
Mr Harsany further submits that the Loan Agreement was in any event not a deed as it uses the language of consensual agreement, regardless of the words "signed, sealed and delivered" on its execution page (submissions [24]-[33]). As I have said this issue does now not strictly arise, because in argument counsel for Mr El Khoury did not press this point (T37/13-41).

Mr El Khoury

Mr El Khoury swore two affidavits on 18 October 2018 and 30 October 2018.
In his first affidavit (18 October 2018) he largely annexed relevant contemporaneous documents and other documentation.
However he did state on or about 27 October 2014 that he met with Mr Harsany at 125 Cosgrove Rd and asked for the money he loaned to him. He said Mr Harsany replied by stating when the refinance was completed he would pay him the loan.
In his second affidavit (30 October 2018) he further attached the Loan Agreement dated 3 August 2018 and stated as at 30 October 2018 he had not received any payment or debt of the $200,000 he advanced to Mr Harsany and Mr Taouk.
In cross-examination Mr El Khoury said he had borrowed the $200,000 from someone else, which was AB Traders Pty Ltd managed by Ali Bahmed (T10/46-49). He said he still owed them the $200,000 plus interest and produced the loan document he had with AB Traders Pty Ltd (T11/13-39). He said during the 2016 Proceedings he was aware of this document (T12/9-10). He said he thought Mr Taouk was aware of this document when he borrowed the money, and had spoken to Mr Taouk very often about it because he wanted his money back (T12/21-25).

Mr Harsany

Mr Harsany swore two affidavits on 19 December 2016 and 29 October 2018
In his first affidavit (19 December 2016), which was before me in the original proceedings, Mr Harsany described the background to the dispute including asking Mr Taouk on 27 June 2012 to provide $200,000 in funding to the purchase of one site in the development. He said the conversation was in words to the effect: Mr Taouk: Denis, I've got the $200,000. Mr Harsany: That's great. Without it, we can't get the project going. When can you pay it in? We need it ASAP. I'm really stressed with all these delays. Mr Taouk: I've got the loan from Edmond but he wants security over the property. He doesn't feel comfortable otherwise. Mr Harsany: What? It's a loan? Mr Taouk: Yes, just until I get the development finance. Mr Harsany: But we can't give security over the property. The bank won't allow it. I thought you had got the money yourself. Can't you just borrow from him? Mr Taouk: Come on, he needs to feel safe with his money. Mr Harsany: But you're protected by the Development Agreement and you're supposed to contribute that money. Mr Taouk: I can't. I don't have any money at the moment. So poor these days, because of problems on the San Souci project. Don't worry, I will get the development finance very soon after. Mr Harsany: I guess I don't have much choice.
He said Mr El Khoury deposited the funds into the trust account of Lane & Lane solicitors.
In his second affidavit (29 October 2018) Mr Harsany set out the background to the $200,000 provided by Mr El Khoury, namely that Assure had needed to obtain bridging finance in order to complete its acquisition of the fourth lot of property at 8 Kita Avenue. He said he had a conversation on 27 June 2012 with Mr Taouk where he asked for $200,000 to be advanced to Assure, where Mr Taouk said "[y]es, just until I get the development finance".
He said on 2 July 2012 he received an email from Mr El Khoury which attached an unexecuted copy of the Loan Agreement and security documentation. He said prior to receiving the email he had not been informed that he was supposed to execute any guarantee. He said he signed the Loan Agreement on 3 August 2012, and received an email on that date from Mr Taouk who said he had also signed. He said he sent an email to Mr El Khoury on 3 August 2012 attaching a copy of the Loan Agreement signed by him, and later that day received an email from Mr El Khoury in which he told Mr Sephton of Lane & Lane solicitors to release $200,000 which had been paid into the firm's trust.
Mr Harsany stated in the 2016 Proceedings Mr Taouk alleged that he had repaid the amounts owing under the Loan Agreement. He asserted he thought it was likely someone had repaid the Loan Agreement. He said he was concerned that someone else had repaid the advance under the Loan Agreement, such that Assure's obligations may already have been satisfied without his knowledge.
In cross-examination, Mr Harsany accepted he had received and signed the Loan Agreement in question, and added some words "upon receipt of development loan" to it, after he had been told Mr Taouk had signed a version of the document (T16/43-T17/5). He accepted he did not tell Mr El Khoury via email that he had made a handwritten alteration (T19/11-13).
Mr Harsany denied that it was his understanding that Lane & Lane solicitors had held the $200,000 on trust for Mr El Khoury (T18/9-19). He accepted however, that at least by 3 August 2012, his understanding was that if he and Assure did not sign the Loan Agreement, Mr El Khoury was not going to give any money to Assure (T18/46-49). He agreed the $200,000 was released after he had signed the Loan Agreement and sent it to Mr El Khoury (T19/42-45).
Mr Harsany denied Mr El Khoury had made an oral demand for repayment of the money in October 2014 (T20/4-6). He accepted however that in around May 2016 he had received a written demand (T20/37-T21/2). He accepted when Assure had sold the proceeds of the development, no money had gone to Mr El Khoury (T21/41-43).
Mr Harsany accepted he had transferred some property to his ex-wife, and she had not made any significant payment for this transfer, but that he would need to check if there was any payment whatsoever (T22/44-T45/6). He said an administrator was appointed to Assure on 17 January 2018 (T24/24-25) and that he had entered into a deed of company arrangement, but had not turned his mind at that time to the amount Assure owed to Mr El Khoury (T24/27-36).

2016 Proceedings

The key controversy in the 2016 Proceedings is the quantum of Mr Taouk's liability to Assure, which was entered into for judgment at $3,266,518.14 before being overturned on appeal to give Mr Taouk the opportunity to advance any arguments he wished on quantum. Assure now has provided an updated schedule of damages seeking $5,289,893.48 (Amended Schedule).
On appeal, there was no issue that Mr Taouk was liable to the cross-claim. However, what remains in issue is the quantum of liability under the cross-claim.
In addition, what is not in issue is the legitimacy of some of the payments. In the course of argument on appeal senior counsel for Mr Taouk accepted that during the trial there was no issue concerning the amounts actually paid out by Assure (appeal judgment [148]). That is, there is no suggestion the amounts paid out by Assure were not legitimately incurred or were incurred with insufficient causal connection to the Development Agreements and the Berowra Development. However, I do note that Mr Taouk has challenged the "Baccus loans" and construction costs invoiced to Devlan in the Amended Schedule provided by Assure.
Nevertheless, the question is only quantum. Mr Taouk submits that because Assure has reaped the benefit of the profits of the Berowra Development, quantum should be calculated by the compensatory mechanism of comparing Assure's position had the Developer performed the contract, with its current position given its non-performance.
This argument is in my view misconceived. This is because it incorrectly frames the basis upon which Mr Taouk is liable to Assure. He is liable to Assure not only for breach of the Development Agreement but also liable for his breach under the terms of the guarantee and indemnity. Importantly, the guarantee and indemnity, including clause 24.1 sets out the basis for Mr Taouk's liability as requiring the payment of "all losses, liabilities, costs and expenses" in connection with: 1. The occurrence, cure and attempted cure of any Default Event; 2. Where the Developer is in default under this Agreement or any other Project Document, the administration, enforcement or attempted enforcement or preservation or attempted preservation of any rights under this Agreement or any other Project Document; and 3. Any amendment to, or any consent, approval, waiver, release or discharge of or under, this Agreement or any other Project Document.
As I have made clear in my principal judgment and appeared uncontroversial on appeal the Developer engaged in a "Default Event" so as to engage the indemnity, and/or the Developer failed in the due and punctual performance of its obligations so as to engage the guarantee (principal judgment [349], appeal judgment [89]).
To this end, the Macquarie Dictionary defines: 1. "Loss" as "detriment or disadvantage from failure to keep, have, or get"; 2. "Liability" as "an obligation, especially for payment; debt or pecuniary obligations"; 3. "Cost" as "the price paid to acquire, produce, accomplish, or maintain anything"; and 4. "Expense" as "cost or charge" or "a cause or occasion of spending".
There is no general principle that a person is not entitled to the benefit of an indemnity unless that person has suffered an actual ascertainable loss. It is not a question of purely compensatory common law damages. Rather, it is always a question of the proper construction of the indemnifying clause or guarantee, and the nature and extent of the rights and liabilities that arise under the clause. Here, Mr Taouk is liable for all losses, liabilities, costs and expenses in connection with the occurrence, cure and attempted cure of the Default Event.
The precise wording of this clause displaces in my view the orthodox principle of compensatory damages that may be payable at common law for breach of contract. The express provisions require Mr Taouk to be liable for all losses etc. Further, these terms do not all mean the same thing. As I have said each has their own distinct meaning, flavour and import attached to them.
In my view, the guarantee and indemnity requires payment for all amounts properly characterised accordingly in connection with the Default Event regardless of the resultant profit Assure received from the Berowra Development. These terms, in my view, are of wide import. As I have said, on appeal, counsel for Mr Taouk eschewed any contention as to the amounts actually paid out by Assure which was then calculated at $3,266,518.14 (appeal judgment [148]). Now Assure seeks $5,289,893.48.
Apart from challenging those construction costs paid to Devlan and briefly questioning the Baccus loan facilities in the schedule (T70/10-16) Mr Taouk has, as far as I have understood his argument, taken a point of principle rather than an approach of questioning the legitimacy of those amounts included in Assure's Amended Schedule. That is, he has not criticised the calculation of the Amended Schedule or suggested seriously any of those amounts have not been legitimately incurred. Mr Taouk's case is simply that the calculation of Assure's damages should be off-set by a broad compensatory approach.
I do not agree with Mr Taouk's point of principle, and further accept the legitimacy of those amounts in the Amended Schedule as falling within the wide words of the guarantee and indemnity. They amount to: (1) construction costs; (2) outstanding payments for equity; and (3) funding costs, including loan facilities with Westpac, CEG, Optima, Baccus, as well as associated interest, fees and charges associated with funding. There has been interest credit included in the Amended Schedule paid on settlement of the various townhouses. I am satisfied, therefore that those amounts expended at the very least qualify as costs and expenses, whether or not some may also be characterised as losses and/or liabilities. I am therefore satisfied they are properly claimable under the guarantee and indemnity. I am also satisfied they are properly connected to those limbs of 42.1 and particularly the occurrence, cure and attempted cure of a Default Event.
In addition, the claim could have expressly provided for the guarantee and / or indemnity to take account of property but it did not, and no implied terms were pleaded to this effect or otherwise. There is no case for off-setting these profits from those losses, liabilities, costs and expenses because this is not provided for in the Development Agreement.
In short, what the Development Agreement required was for Assure to provide the Consideration Amount (as calculated by the formulae in the Development Agreements) and Mr Taouk was to ensure the completion of the project by indemnifying for all losses, liabilities, costs and expenses.
Each of the amounts itemised in the Amended Schedule provided by Assure has not been challenged in terms of mathematical calculation. As I have said, Mr Taouk's case was one predominantly if not solely based on the appropriate principle to be used to calculate damages, and on this point he is in my view wrong.
In supplementary submissions Mr Taouk did allude cryptically to an argument that "there was no obligation to indemnify because the Developer's breach caused no loss, cost, expense or liability to Assure" (supplementary submissions [4]). Further he did assert Assure bore funding obligations beyond the payment of the Consideration Amount, including payment of the first $3,700,000 of construction costs (supplementary submissions [6]-[9]). In relation to these arguments, I agree with Assure that they are contrary to my findings and seek to cavil with the findings already made by the Court (principal judgment [164]-[167]).
As the losses, liabilities, costs and expenses now are calculated at $5,289,893.48 Mr Taouk is liable for this amount.

2018 Proceedings

Mr Harsany's argument is that at the time the $200,000 was deposited into the account of Lane & Lane solicitors, it was subject to a trust but not subject to any agreement and not susceptible to any guarantee.
Mr Harsany's evidence was that Mr Taouk told him he would organise finance of $200,000, and Mr El Khoury entered the scene as it were as a "white knight" to pay the $200,000 himself, entering into his own agreement with AB Traders Pty Ltd for the money.
From the contemporaneous emails it is clear that although the $200,000 was placed into the account of Lane & Lane solicitors prior to Mr Harsany signing the Loan Agreement, the parties intended that the release of the $200,000 from the solicitors' account was subject to the requirements of the Loan Agreement including the guarantee.
Furthermore, it is reasonable to draw the inference in my view that as at the time the $200,000 was paid into the solicitors' account, it was contemplated that there would be some arrangement and conditions attached to its release.
The $200,000 was not paid out pursuant to some oral arrangement. On the contrary, it was clearly paid out as per the terms and conditions of the Loan Agreement signed prior to its release. The argument that the guarantee was given absent consideration is, in my view, without merit. The release of the $200,000 was clearly the consideration and had clearly been contemplated by all the relevant parties prior to its release.
The Loan Agreement is therefore binding upon the parties, including the guarantee of Mr Taouk and Mr Harsany.
There is an issue as to the interest provided for in the Loan Agreement. Clause 4 provides for a "Higher Rate" and "Lower Rate". However Item 6 of the Appendix to the Loan Agreement simply states the interest provision is "2% per month if the fund not paid on the due date". The draftsperson has clearly not made provision for two interest rates and does not specify whether interest is to be simple or compound. Likewise, clause 4.2 confusingly provides: 4.2. If any interest payable under Clause 4.1 or any interest payable on arrears of interest capitalised under this clause shall be unpaid on the due date therefore, then in every such case the interest so in arrears shall without prejudice to the right of the Lender to sue for and recover such interest and to the other rights and powers of the Lender be added to the Loan and shall thenceforth bear interest payable at the Higher Rate and at the times specified in Clause 4.1.
Contrary to the submissions of Mr El Khoury, this is far from a provision effecting compound interest, given the confusion with "Higher Rate" and "Lower Rate" and the ambiguity of what means that interest and "other rights and powers" be "added to" the loan.
In my view, interest in the Loan Agreement is simple interest of 2% per month. There is no general presumption of fairness that in the absence of express provision interest is to be simple not compound (or vice versa). However, on the clear wording of the interest rate in Item 6 there is no word "compound" and no clear language to suggest the mechanism of compounding should be superimposed upon the agreement. Rather, the mechanism of interest is formulated in the Loan Agreement in a vague and internally incoherent manner. This means that unless there is a clear agreement to pay compound interest, interest is taken to be simple interest.
Interest as per the Loan Agreement is therefore 2% simple interest per month.
In my view interest should accrue from 27 July 2013, when a development loan was obtained in favour of Assure. This is the clear import of the words "[u]pon receipt of development loan" handwritten onto the Loan Agreement by Mr Harsany. To suggest to the contrary is to subvert the clear terms of the Loan Agreement, which Mr El Khoury assented to by authorising release of the $200,000.
There is a further issue as to the joint and several liability of Mr Harsany and Mr Taouk. No Cross-Claim was filed by Mr Harsany within the time allowed, as discussed in argument (T44/35-T45/13). However, his Defence to Amended Statement of Claim does seek in further alternative payment against him being conditional upon Mr El Khoury having paid his proportionate share of the amount to the Plaintiff of 50% by way of co-surety. This was not fully ventilated by the way of pleadings and not referred to in detail in submissions by any party.
In my view, it is therefore inappropriate to order that payment of the debt by Mr Harsany be contingent upon payment by Mr Taouk, except as to note that it is settled law that Mr Harsany may seek contribution from Mr Taouk as a co-surety.

Conclusion

I will hear the parties as to the precise form of orders to be made in each case, and on the question of costs if they cannot be agreed. 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: 23 November 2018

Procedural history

The primary proceedings (2016/264640) were brought by Mr Joseph Taouk (Mr Taouk or Plaintiff) against Assure (NSW) Pty Ltd (Assure or Defendant) concerning a payment dispute surrounding a joint venture agreement for the development and construction of a townhouse complex in Berowra Heights (2016 Proceedings). I gave judgment in this matter on 4 May 2017 in Taouk v Assure (NSW) Pty Ltd [2017] NSWSC 534 (principal judgment).
Mr Taouk was almost entirely unsuccessful in this principal judgment, and I found he was further liable to Assure for breach of agreement and pursuant to a guarantee and indemnity. At the conclusion of the trial I entered judgment for $3,266,518.14 pursuant to Assure's Cross-Claim against Mr Taouk. However on appeal that was set aside on the basis that Mr Taouk had not been given an opportunity to dispute the amount claimed under the Cross-Claim.
This judgment concerns the outstanding issue of the quantum of Mr Taouk's liability to Assure for breaching the said agreement and guarantee and indemnity.
This judgment also concerns a further dispute (2018/198183) which I ordered be heard together with the proceedings (pursuant to a Notice of Motion filed 25 September 2018) on 19 October 2018 in relation to the alleged payment of $200,000 from Mr El Khoury (Mr El Khoury) to Assure and guaranteed by Mr Taouk and Mr Denis Harsany (Mr Harsany) who is the sole director and secretary of Assure (2018 Proceedings). The payment of the $200,000 featured in the principal judgment and was therefore heard together with the 2016 Proceedings (principal judgment [21]-[23], [219]-[220], [265]-[274]). Mr Harsany opposed being joined to the expedited proceedings. However, I proposed to hear the two matters together, reserving Mr Harsany's position in terms of costs, by reason of the fact that the events surrounding the 2016 Proceedings were so intertwined to the 2018 Proceedings that there was a compelling case for hearing the two matters together.

At a glance

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Judgment (18 paragraphs)

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Cases Cited (24)