FJ & SM Monaghan Pty Ltd v Slade

Judgment

1. THE COURT: Between 2001 and 2013, the appellant (the Supplier) provided fuel to S & W Slade Pty Ltd (the Debtor) on a running account. On 29 July 2008, the first and second respondents (the Guarantors) - respectively, the sole director and sole shareholder of the Debtor - personally guaranteed "the debt with [the Supplier] for fuel supplied to [the Debtor]". This appeal raises two related issues as to the construction of that guarantee. The first is whether the guaranteed debt includes interest owing by the Debtor to the Supplier. The second is whether that debt is an amount outstanding on the date of the guarantee or thereafter from time to time. Due to payments from the Debtor in partial discharge of its underlying liability to the Supplier, the Guarantors would only be liable if the guarantee covered the amount outstanding from time to time, including interest.
2. The primary judge (Hatzistergos DCJ) held that the guarantee covered the balance outstanding on 29 July 2008 (including interest), and accordingly dismissed the claim against the Guarantors: FJ & SM Monaghan Pty Ltd v S & W Slade Pty Ltd & Ors [2017] NSWDC 139 at [189], [191], [195]. Appealing against that judgment, the Supplier maintains that the guarantee covered the debt, including interest, from time to time. By their notice of contention, the Guarantors support the judgment on the alternative basis that the guaranteed debt excluded interest. The Debtor, now in liquidation, is not a party to this appeal, and the Guarantors do not press their grounds challenging the quantum of the Debtor's underlying liability to the Supplier. The primary facts are not in dispute and may be stated shortly.

Factual context

1. In 2001, the Debtor began purchasing fuel from the Supplier on a "running account" in which payment was due within 30 days of invoice: Judgment [23]. The arrears on that account progressively increased such that by 31 May 2006 the Debtor owed $116,871.23: Judgment [31]. On 9 June 2006, Ms Monaghan, the owner and operator of the Supplier, sent the Debtor (and other customers) a letter that contained the following (Judgment [50], [56]): … As you are aware fuel costs have risen dramatically over the past six months, placing extreme pressure on everyone. All fuel companies demand payment monthly and I am finding it very difficult to meet their demands financially. Therefore could you please ensure your fuel account is paid in full by the thirtieth of each month. From 1 July 2006 overdue accounts will incur interest rate penalties at a rate of 2.5% per month. This cost will be added to your account monthly. So please ensure your account is paid in full monthly to avoid this penalty.
2. The Debtor accepted the revised terms in that letter by continuing to purchase fuel without protest: Judgment [155], [158]. (Contention ground 2, challenging this finding, is not pressed.) Accordingly, from 1 July 2006, the amount outstanding was attracting interest at a compound rate of 2.5% per month, effectively about 34.5% p.a. (Contention ground 4, challenging the refusal to characterise this stipulation as penal, is also not pressed. Contention ground 3, challenging the alternative conclusion that interest would be recoverable in restitution does not arise and is not pressed.)
3. The arrears continued to increase into 2008. At Ms Monaghan's request, her de facto partner and co-worker, Mr O'Leary, instructed his solicitor to prepare a guarantee under which the Guarantors would guarantee "the monies owing by [the Debtor]". Mr O'Leary gave the guarantee so prepared to the first respondent and, at the same time, communicated Ms Monaghan's threat not to supply future petrol unless it was signed. Instead of signing that document, the Guarantors provided the following signed letter dated 29 July 2008 (Judgment [103]-[105]): Dear Wendy This letter is to explain that we Stephen Slade and Wendy Slade are Directors of S & W Slade Pty Ltd trading as Slade Refrigerated Transport. We personally guarantee the debt with F & S Monaghan for fuel supplied to Slade Refrigerated Transport. Yours sincerely STEPHEN SLADE WENDY SLADE Witness: SUSAN JOHNSON
4. On that date, the balance outstanding on the running account was $253,830.28, accounting for "finance charges" of $66,677.40 (slightly less than the agreed interest from September 2006). Assuming, as did the parties, that payments from the Debtor to the Supplier were appropriated to principal before interest, the principal outstanding in respect of petrol was then $187,152.88.
5. The Debtor continued to purchase petrol from the Supplier until 30 April 2013, at which time the balance was $402,335.07 (Judgment [209]), the total of the finance charges incurred was $403,707.60 (Blue 599Z) and, accordingly on the above assumption, no principal in respect of petrol was outstanding. On 28 May 2013, the Suppliers commenced proceedings against the Debtor and Guarantors by statement of claim. (Contention grounds 5 and 6, challenging the refusal to apply a limitation statute and the granting of leave to amend that statement of claim, respectively, are not pressed.)

Interest (contention ground 1)

1. It is convenient to deal first with the question whether the guaranteed debt included interest.
2. The primary judge held that "a construction of the reference to 'fuel' that excluded interest would put a meaning on the document which would be divorced from the business reality which confronted the parties": Judgment [189]. That conclusion was said to accord with the approach of the Privy Council in Fahey v MSD Speirs Ltd [1976] 1 NZLR 240, in which a guarantee "to pay for any materials which are purchased from [the supplier] in the event of [the customer] not being in the position to do so" was held to cover interest.
3. Against his Honour's conclusion, the Guarantors submit that interest was, by its nature, due "for the use of money borrowed or the forbearance of a debt", not "for fuel supplied", and thus unambiguously excluded from the scope of the guarantee. The submission implicitly treats the italicised words, which describe the subject matter of the guarantee obligation, as intended to distinguish between two debts: one "for" the supply of petrol and another "for" the supply of credit. In doing so, the submission assumes that the preposition "for" could only refer to such a strict legal or economic relationship of quid pro quo. Considered alone, the italicised words were capable of describing a less direct relationship between "the debt" and the supply of fuel that, in accordance with the terms of supply, included interest. More importantly, the definite article in the expression "the debt … for fuel supplied" indicates a shared assumption that something in the dealings between the Supplier and Debtor answering that description in fact exists. The Court cannot properly identify that something without looking to the surrounding circumstances.
4. On any view, it is permissible to have regard to extrinsic evidence of those circumstances "not to alter the contract but to identify its subject": Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd (1919) 26 CLR 410 at 427 (Isaacs J); see also Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cas ¶60-853 at 75,340-75,342 (Hope JA, McHugh JA agreeing); County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [14]-[16] (Spigelman CJ). That evidence includes a copy of the account statement for the period ending 31 October 2006, which is illustrative of those issued by the Supplier to the Debtor, which was held and managed by the Guarantors. As one would expect in the case of a running account, that statement describes an opening balance, individual charges or debits to the account and the outstanding balance due at the end of the period, there having been no payments made by the Debtor in that particular period. In that context, the only amount which may plausibly be described as the singular "debt with [the Supplier] for fuel supplied to [the Debtor]" at the end of that period is the running balance outstanding, which includes "finance charges" to that date. Accordingly, in this case, as in Fahy (at 243), the exclusion of interest "would put a meaning on the words of the guarantee …. wholly divorced from business reality" because "when the guarantee was signed [all] parties knew and had in mind the terms upon which supplies had been and were being [and would be] purchased", specifically the agreed accounting for interest (see [3]-[4] above).
5. The Guarantors further submit that their construction of the relevant words as excluding interest is "fairly open" and not "unrealistic or unlikely" and thus to be preferred in accordance with the contra proferentem "rule". Before considering that submission, it may be recalled that this rule, "which was introduced to resolve ambiguities, is itself ambiguous": Fenwick v Federal Steam Navigation Co (1943) 44 SR (NSW) 1 at 5 (Jordan CJ). That is so in two respects. First, the proferens has been variously identified as either the party who prepared the relevant instrument (here, the Guarantors) or the party for whose benefit the relevant provision enures, including, perhaps especially, the beneficiary of a guarantee (here, the Supplier): see North v Marina [2003] NSWSC 64 at [56]-[79] (Campbell J); Rava v Logan Wines [2007] NSWCA 62 at [51]-[57] (Campbell JA); but see Gardiner v Agricultural & Rural Finance Pty Ltd [2007] NSWCA 235 at [16] (Spigelman CJ). Therefore, the "rule" providing that ambiguities are to be resolved against the interests of a proferens includes discrete limbs, which may differ in function or weight and, where both apply, may conflict. Secondly, the contra proferentem rule operates by reference to ambiguity, a concept which itself is notoriously ambiguous in meaning and application: see South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478; (1999) 10 BPR 18961 at [35] (Spigelman CJ, Beazley P relevantly agreeing); Cherry v Steele-Park [2017] NSWCA 295 at [68]-[86] (Leeming JA, Gleeson and White JJA relevantly agreeing).
6. In deciding this issue, however, it is unnecessary and inappropriate to resolve any uncertainty embedded in the contra proferentem "rule". The proposition "that ambiguous contractual provisions should be construed in favour of the surety" does not prevent a Court from looking "to the general setting in which the contract has come into existence": Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561 (Mason ACJ, Wilson, Brennan and Dawson JJ), citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 996-997 (Lord Wilberforce); see also Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88 at 92 (Lord Oliver for the Privy Council). Were it otherwise, the task of construing guarantees might be reduced to "preparing a list of all the possible meanings of a clause that the language can bear without breaking, and choosing the meaning that is most favourable to the guarantor": Rava at [56], quoted in Gardiner at [20]. In this case, the commercial setting makes clear that the language was intended to cover interest, and not to distinguish between one debt for fuel and another debt for credit. The effect of this conclusion may be expressed in two ways (perhaps not reflecting a difference in substance): that the guarantee is not sufficiently "ambiguous" to engage the proposition above; or that the surrounding circumstances are sufficiently weighty to rebut the proposition. Regardless, ground 1 in the Guarantors' notice of contention should be rejected.

Timing (appeal grounds 1 to 4)

1. The primary judge held that "the reference to 'the debt' for 'fuel supplied' gives rise to no ambiguity and refers to past indebtedness": Judgment [191] (emphasis in original). This analysis identifies two textual considerations: the definite article ("the"), which focuses attention on an existing "debt … for fuel supplied", and a past participle ("supplied"), which has temporal significance in some contexts. Submissions to this Court fixed upon both considerations, which may be addressed in reverse order.
2. In this case, as in Mikasa (NSW) Pty Ltd v Festival Stores (1972) 127 CLR 617, the use of the word "supplied" is itself "neutral in temporal meaning and applies equally to the future as to the past": at 661 (Stephen J); see also New South Wales v The Commonwealth (The Incorporation Case) (1990) 169 CLR 482 at 482 (Deane J). Put simply, the expression "debt … for fuel supplied" is equally capable of meaning "debt at present … for fuel already supplied", "debt from time to time … for fuel already supplied", or "debt … for fuel supplied from time to time". The difference between these possibilities might not have been apparent at the date of the guarantee. But, with time, the second would diverge from the first due to interest on past fuel, and the third would diverge from the second due to the principal and interest cost of future fuel. The clarification achieved by inserting different temporal markers (e.g. "at present" or "from time to time") clearly exposes the ambiguity which exists in their absence.
3. The grammatical reason for the ambiguity is that past and present participles have no tense: considered alone, a participle conveys no information about whether the action to which it refers (here, supplying) is to occur before, during or after the utterance in which it appears (here, the guarantee). For example, the statement "Anyone caught shoplifting will be prosecuted" includes a past participle ("caught") and a present participle ("shoplifting") but contemplates three actions in the future from the perspective of the speaker or writer (namely, shoplifting, catching and prosecuting). Any temporal significance associated with a participle derives from its context.
4. In its linguistic context, the form of the word "supplied" merely conveys the obvious fact that the action of supplying is done to, not by, the petrol. It says nothing about the relation between the date of the guarantee and the date of supply. Insofar as he relied upon this textual consideration, the primary judge erred.
5. As indicated at [10] above, and as the respondents submit, the language in the guarantee, specifically the definite article, "presupposed an existing debt". It did not, however, presuppose that the "debt" was unchanging in quantum. In this respect, it is again "obvious that we cannot decide that question upon the mere construction of the document itself, without looking at the surrounding circumstances to see what was the subject-matter which the parties had in their contemplation when the guarantee was given": Heffield v Meadows (1869) LR 4 CP 595 at 599 (Willes J). For the following reasons, the guarantee in this case, like that in Heffield, was "a continuing guarantee" for the balance due from time to time.
6. First, the only singular "debt" in existence between the Debtor and Supplier on 29 July 2008 was the balance on a running account: Judgment [205]. As Brennan CJ explained in Airservices Australia v Ferrier (1996) 185 CLR 483 at 495: … in the case of a running account, when no appropriation of a payment to particular debit item is made either by debtor or creditor, the immediate effect of the payment is not the discharge of a debt itemised on the account. The immediate effect is a reduction pro tanto in the balance and, in so far as it is material to attribute the payment to particular debit items, the rule in Clayton's Case [Devaynes v Noble (1816) 1 Mer 572 at 608; 35 ER 781 at 792-793] prima facie applies to discharge the oldest debts that have not been discharged by intermediate payments.
7. The statements of account issued to the Debtor at the end of each month did not treat debits for fuel or interest at particular times or in particular periods as separate debts. Nor did they explicitly apportion any payments made by the Debtor, other than in reduction of the running account. (It is unnecessary to find or attribute any understanding of the rule in Clayton's Case between the Guarantors and Supplier.) Nothing in the evidence suggested that the debt between the Supplier and Debtor would cease to be a single, but fluctuating, balance on the account.
8. Secondly, the guarantee was given in response to the Supplier's ultimatum (communicated by Mr O'Leary) to withhold the supply of fuel unless a guarantee was signed. Its evident commercial purpose was to secure the continued supply of fuel and credit on the terms of the existing running account. By those terms, there was, and would be, only one amount outstanding at any point in time, no distinct debt for fuel or credit supplied at or before particular times, and no express appropriation of future payments to any particular debit items.
9. Thirdly, the primary judge erred in drawing inferences from evidence that Mr O'Leary instructed his solicitor to prepare a guarantee for "the monies owing" by the Debtor and that the first respondent understood the letter of 29 July 2008 as having that meaning: cf Judgment [192] (emphasis in original). Evidence of the parties' subjective intention is not relevant to construction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]. That remains so where one party's understanding of a document happens to coincide with another party's privately expressed wishes for a different document. Accordingly, ground 2 identifying this error should be accepted. In any event, the use of the present participle "owing" says nothing as to Mr O'Leary's relevant intentions for the reasons at [15]-[16] above.
10. Finally, the considerations above are not overcome by the Supplier's assertion that the debt on 29 July 2008 was large enough to be the subject of a commercially sensible guarantee. That much may be necessary, but it is not sufficient, for acceptance of the construction advanced by the Supplier, even insofar as ambiguity should be resolved in its favour (see above [13]). Grounds 1 and 3 challenging the primary judge's conclusion on this issue also should be accepted.

Conclusion

1. Properly construed, the guarantee covered the balance from time to time on the running account between the Debtor and Supplier. That balance included charges for interest. Accounting for agreed interest to the date of judgment, the amount for which the Guarantors are liable to the Supplier is acknowledged to exceed the jurisdictional limit of the District Court, $750,000, there having been no agreement to extend its jurisdiction; the Supplier is thus entitled as against the Guarantors to that amount; and ground 4 should be accepted: District Court Act 1973 (NSW), ss 4(1), 44(1)(a)(ii), 51.
2. The Debtor's appeal from the verdict and judgment entered against it has not proceeded, and the proceeding before this Court only concerned the Supplier's appeal with respect to the guaranteed liability. Accordingly, we make the following orders in appeal proceedings 2017/202918: 1. Appeal allowed. 2. Order 2 made by the District Court on 9 June 2017 (being the verdict for the second and third defendants on the plaintiff's claim) be set aside and, in lieu thereof, verdict and judgment for the plaintiff against the second and third defendants in the sum of $750,000, that judgment to take effect on 9 June 2017. 3. Order 2 made by the District Court on 11 July 2017 (being that the plaintiff pay 20% of the second and third defendants' costs on the plaintiff's claim) be set aside and, in lieu thereof, order the second and third defendants pay the plaintiff's costs of its claim in the District Court, including costs on the argument as to costs. 4. Order the respondents pay the appellant's costs of this appeal.

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