Henderson-Smart v Quality Blow Moulders Pty Ltd [2010] VSCA 14

3 In about 2006 Redwin began to experience financial problems which affected its capacity to meet its financial commitments to QBM. In his evidence before Judge Kennedy in the County Court on the trial of this case at first instance, Mr Psaras, a Director of QBM, described his company's relationship with Redwin in the following terms:**

[W]e had a very good understanding, very good work relation, until the new sort of owners took over, and that relationship started fairly good and then as the months went by, it was sort of payments were delayed from 45 days to 75 days to 90 days and in some cases it went over 200 days.

4 Despite complaints by Mr Psaras, the problem continued until, in the middle of December 2006, he decided that QBM would cease supplying its product to Redwin. He said:

After I exhausted basically every avenue that I had not to do that [cease supply] because they wanted the product and they were ringing me every day, but basically wanted the product, my truck was ready to leave, you know, to do the delivery, I made the decision that I could not lose any more or have any more money outstanding for that long and that's when I made the decision to stop supply, and I rang them actually and I told them that I could no longer do it so therefore there would be no more goods delivered to their premises.

5 At that time, QBM were delivering up to two truck loads of product per day to Redwin and Redwin owed QBM a considerable sum - perhaps $200,000.00.

6 On 14 December 2006, Mr Psaras spoke by telephone to one of the two directors of Redwin, the appellant, Mr Henderson-Smart. As a result of that conversation an agreement was reached whereby Mr Henderson-Smart would guarantee Redwin's indebtedness to QBM, and QBM would continue to supply its product to Redwin. At Mr Psaras' request, Mr Henderson-Smart sent Mr Psaras an email containing the guarantee which he sought. The e-mail was in the following terms:

Hi George

Further to our discussion I confirm I am prepared to guarantee the amount owed by Redwin on the basis that you will continue to support and supply us at our current level of demand. We will continue to make payments we are able [sic] and are hopeful that in the next 6 weeks we can bring things back to more acceptable trading terms.

Thank you for your continuing support.

Regards

Rob

R. Henderson-Smart

Redwin Ind Pty Ltd

Phone (61-2) 8425-7300

Fax (61-2) 9437-3055

**7 The email was dated 14 December 2006. At the date of the email, Mr Henderson-Smart was a director of Redwin and Mr Psaras was a director of QBM. Upon receipt of that email, QBM recommenced making deliveries to Redwin. It continued to do so until about May 2007 when, Redwin having again failed to meet its obligations, supply was finally ceased. At the time this occurred the amount outstanding to QBM was just over $230,000.00, all of which had been incurred since the date of the guarantee, 14 December 2006. All amounts owing up to that date had already been paid.

8 On 8 May 2008, QBM commenced a proceeding in the County Court against Mr Henderson-Smart on the guarantee. The only issue in the case by the time it got to trial was whether the guarantee entitled QBM, as the creditor of Redwin, to enforce its then outstanding debt against Mr Henderson-Smart pursuant to the guarantee. As all of Redwin's debts to QBM incurred prior to the date of the guarantee had been met, the only question for determination was whether the guarantee applied to debts incurred after that date. Judge Kennedy found that it did and that QBM was entitled to judgment in the amount claimed. Mr Henderson-Smart has appealed that judgment to this Court.

9 In support of his contention that his client is bound only to answer for Redwin's past indebtedness to QBM and not to its indebtedness from time to time, counsel for the appellant put a simple argument: the use of the word 'owed' in the first line of the e-mail concluded the matter. It is a word which denotes the past tense. It speaks only of that amount which Redwin owed at the date that the email was written, not any amount it might owe in the future for goods to be supplied subsequently. Alternatively, he argued, there is an ambiguity in the document created by the use of the word 'owed', and the Court should, therefore, construe the document contra proferentem because, in relying upon a guarantee, a creditor is bound strictissimi juris: he is held to his guarantee only to the minimum extent necessary to give effect to it. He referred to a number of cases, particularly Ankar Pty Ltd v National Westminster Finance (Australia) Limited[1] and Andar Transport Pty Ltd v Brambles Limited.[2]

10 As the High Court reaffirmed in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd, the rights and liabilities of the parties to a contract are determined objectively:**

It is not the subjective beliefs or understandings of the parties about those rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe.[3]

**11 The Court must consider not only the text of the relevant agreement, but also the surrounding circumstances known to the parties, and the purpose and object of the transaction: Secured Income Real Estate (Australia) Ltd v St Martin Investments Pty Ltd.[4]

12 At the time Mr Henderson-Smart wrote the email in which he agreed to guarantee his company's debts, there were a number of significant matters known both to him and to Mr Psaras. They both knew that for some time Redwin had been seriously in arrears with respect to its financial obligations to QBM, and that Mr Psaras was not going to tolerate that situation any longer. Mr Henderson-Smart knew that QBM was going to cease supplying his company with product unless something was done. They both knew that Mr Henderson-Smart was desperate for QBM to continue supplying his company with product so that it could keep faith with its customers and, hence, preserve the value of its business which was in the process of being sold. They were both aware that Redwin wanted (and needed) further time to bring its account with QBM into order.

13 In writing the email Mr Henderson-Smart concentrated on future events. The use of the phrase 'I am prepared to guarantee' conveys a future intention. His emphasis on continued supply 'at our current level of demand' speaks of events after the date of the guarantee. Even his hopeful expression of faith in his company's capacity to meet its obligations in 'the next six weeks' relates to future expectations rather than past or even present events.

14 The consideration for this guarantee was the continuation, by QBM, of supply of plastic containers to Redwin notwithstanding its delinquent financial record in the recent past. Thus, at the time the guarantee was negotiated, both parties contemplated an ongoing relationship in which Redwin would continue to incur debts to QBM regularly, as it ordered and took delivery of QBM's products. Commercial reality would suggest that an ongoing commercial relationship required some degree of security of supply for Redwin and security for payment for QBM.

15 Viewing this agreement in the context in which it was created, it should be construed as a guarantee of Redwin's indebtedness to QBM from time to time; that is to say, it guarantees both past and future indebtedness. To construe it otherwise would fail to accord it commercial reality. A preparedness by QBM to accept the pious, if uncertain, expectations of Redwin that it would be able to bring things back to 'more acceptable trading terms' in six weeks further confirms that, objectively, the parties were concerned with both past and future indebtedness.

16 A further matter, not argued by counsel, lends support to the view expressed above. Although the evidence is sparse as to the actual quantity of product QBM supplied to Redwin on a regular basis prior to the creation of the email, it may be inferred from Mr Psaras' evidence that, as at December 2006, QBM was making up to two deliveries a day. It is probable that some of the debt owed at the time the email was written had been only very recently incurred. To construe the email as providing a guarantee of a debt incurred immediately before it was written but not a debt incurred on the day after it was written (or perhaps even later on the day on which it was written) would be commercially unreal. The contention of Mr Henderson-Smart that he was offering only a guarantee of past indebtedness, which Mr Psaras accepted, is highly unlikely. The far more probable meaning of their exchange was that supply would be continued and payment for that supply would be secured. The object of the transaction was to effect that result - not a result whereby QBM would continue supply whilst taking the risk as to Redwin's solvency.

17 Construed in its context, the guarantee in this case is effective to impose liability upon Mr Henderson-Smart in respect of debts incurred after it was entered into; that is, after 14 December 2006. It continues as long as QBM supplies goods to Redwin's order, or is superseded by some other agreement.**

**18 As construed in the manner and for the reasons expressed above, the guarantee in this case applies to the principal debtor's indebtedness to its creditor from time to time. In the context in which the guarantee was given, no question of ambiguity arises. Accordingly, the principles expounded by the High Court in Ankar[5] and Andar[6] as to the construction of contracts of guarantee or indemnity have no application to the facts of this case.

19 Judge Kennedy was correct. This appeal should be dismissed.**

20 I, too, agree with Bongiorno JA that the appeal should be dismissed.

[1] [1987] HCA 15; (1987) 162 CLR 549 ('Ankar').

[2] [2004] HCA 28; (2004) 217 CLR 424 ('Andar').

[3] [2004] HCA 52; (2004) 219 CLR 165, 179.

[4] [1979] HCA 51; (1979) 144 CLR 596, 606 (Mason J).

[5] [1987] HCA 15; (1987) 162 CLR 549, 561.

[6] [2004] HCA 28; (2004) 217 CLR 424, 433.