Kearney v Grow Choice Pty Ltd

JUDGMENT

1. MEAGHER JA: I agree with Basten AJA.
2. MITCHELMORE JA: I agree with Basten AJA.
3. BASTEN AJA: The applicant, Simon Kearney, sought leave to appeal from a judgment of SJ Gibb DCJ in the District Court finding him liable to the respondent, Grow Choice Pty Ltd, in the sum of $89,054.93 on the basis that he had guaranteed the obligations of a company, North West Direct Sales Pty Ltd (North West), of which he was the director and shareholder. Leave was required because the amount of the debt fell below the threshold for appeals without leave, pursuant to s 127(2)(c) of the District Court Act 1973 (NSW).
4. For the reasons explained below, there should be a grant of leave to appeal, the appeal should be allowed and the judgment against Mr Kearney in the District Court set aside. (It will be convenient to refer to Mr Kearney by name, or as the appellant; he was the second defendant at trial.)

Background circumstances

1. The respondent (Grow Choice) was a wholesale supplier of agricultural chemicals, with its office in Tamworth. In January 2015, it entered into an agreement with the appellant's company, whereby North West would store agricultural products provided by Grow Choice. The products would either be on-sold by Grow Choice or by North West. Grow Choice was to pay a flat fee of $10 per collection and North West would account to Grow Choice for products which it had sold or distributed for use on properties under the control of Mr Kearney.
2. Grow Choice prepared invoices for the value of chemicals supplied to North West and kept a running account of amounts owing, according to its own system of invoicing, against which it set off what it calculated were the storage charges payable by it to North West. By 6 October 2021, when it commenced proceedings in the District Court, it claimed an amount of $156,774.88 as the amount payable by North West (the first defendant at trial) on the account. Although it was described as a claim for "loss and damage" it was in effect a claim in debt.
3. In addition to the claim against North West, Grow Choice alleged a second agreement entered into by the appellant on or about 16 August 2018 whereby the appellant undertook to pay Grow Choice the moneys owing at that time by North West once he, the appellant, had sold a property under his control known as "Longacres".
4. Grow Choice alleged a second undertaking in identical terms being made by the appellant on 20 November 2018. A third undertaking was said to have been given on 20 January 2019, which varied from the first two only to the extent that payment was said to be dependent upon the appellant selling the water rights to Longacres. Each undertaking was made orally to the principal of Grow Choice, Robert Fagan. Grow Choice alleged that it "accepted the above three offers and did not commence legal proceedings". The statement of claim then alleged that on a further ten occasions between 12 April 2019 and November 2020 the appellant "affirmed" the agreement, again by reference to payment of moneys "owed at that time" by North West to Grow Choice, and again with payment contingent upon the sale of water rights attached to Longacres.
5. Finally, the claim alleged that the appellant had sold Longacres on 19 August 2021 for $8.8 million, but Mr Kearney had failed to pay moneys owing by North West to Grow Choice.
6. The amended statement of claim did not refer to the agreement between the appellant and Grow Choice as a guarantee, but that characterisation appears to have been adopted by the parties at the trial and was used by the trial judge.
7. The trial ran for four days in the first week of May 2023. Grow Choice called its principal, Mr Fagan, to give evidence; Mr Kearney gave evidence on his own behalf and on behalf of the first defendant to the proceedings, North West. There were, in effect, two separate issues litigated at the trial. The first was the amount owing (if any) by North West to Grow Choice. The judge upheld the claim by Grow Choice and gave judgment against North West in an amount of $170,838, including interest. That judgment is not challenged. Nor is the amount of the judgment against the appellant in dispute, the appeal being limited to the question of liability on a guarantee.
8. The notice of appeal contained two grounds, but an amended notice of appeal (which accompanied written submissions in reply filed in this Court on 6 December 2023) added a third. The respondent objected to the attempt to amend the notice of appeal after the date on which the matter was first listed for hearing in this Court, that hearing having been vacated as a result of the illness of counsel for the appellant. It may be accepted that the amendment was late, but for reasons which will be explained, the amendment was of limited relevance and did not cause prejudice to the respondent. The appellant should have leave to rely upon the amended notice of appeal.
9. In substance, the three grounds were that the primary judge had erred: 1. in finding that there was a contract of guarantee between Mr Kearney and Grow Choice; 2. in failing to find that Mr Kearney had not requested that Grow Choice forbear from suing the primary debtor (North West); and 3. in finding that there was consideration in the form of an implicit promise made by Grow Choice to continue to trade with North West.

Findings as to a guarantee

1. There was no dispute as to the relevant legal principles. The appellant accepted that the trial judge correctly approached the matter on the basis that (i) a contract of guarantee could be entered into orally, even with nothing committed to writing; (ii) forbearance from suing could constitute good consideration; (iii) as could an agreement to continue trading. The appellant's case was that, in the circumstances, the judge erred in finding that he had orally guaranteed the legal obligations of North West in the terms pleaded by the respondent.
2. An email sent by Grow Choice to North West on 13 February 2020 attached a running account, showing a small debt owing on 3 August 2017, but increasing amounts owing, reaching a peak of $120,663 on 14 June 2018. Three payments reduced the amount to $42,423 on 2 August 2018. The final payment, on that date, of $44,000 was the last payment which North West made before the letter of demand. In an affidavit of 17 June 2022, Mr Fagan gave evidence to the following effect: "100 In or around the beginning of August 2018, NWDS stopped paying the tax invoices issued by Grow Choice. 101 On or about 16 August 2018, I called Simon Kearney and said: 'What's going on, Simon? You haven't paid our tax invoices.' Simon said words to the effect of: 'I will pay the outstanding amount once the water rights attached to my property 'Longacres' are sold or 'Longacres' is sold.'"
3. As noted above, Mr Fagan gave evidence of no fewer than 13 occasions upon which such conversations occurred, each commencing with him ringing Mr Kearney to complain of non-payment.
4. Mr Kearney denied the content of such conversations, but the judge accepted Mr Fagan's evidence and there has been no challenge to that finding.
5. The judge then turned to the question of consideration noting first the position of the plaintiff (Grow Choice): [1] "In opening submissions … the plaintiff configured the successive contracts of guarantee as simple offers accepted and made good by consideration (by forbearance and continued trading) … ."
6. The judge then noted the submissions of Mr Kearney, which accepted that forbearance might provide consideration for a promise to pay in the future, referring to the decision of this Court in Ye v Chen [2] applying Edlin v Williams. [3] The joint reasons in Edlin stated: "42 A request for forbearance to sue may be implied from the circumstances: see Crears v Hunter, [4] where Lord Esher MR said: 'It is quite clear on the other hand that a binding promise to forbear would be a good consideration for a guarantee. The question is whether, if the guarantor requests the creditor to forbear from suing and the creditor on such request, although he does not at the time bind himself to forbear, does in fact afterwards forbear to sue, there is a good consideration for the guarantee. It seems to me that … there would in such a case be a good consideration. … [I]f at the request of the guarantor the creditor does in fact forbear, there is a sufficient consideration to bind the guarantor, who has promised to pay the debt.'"
7. The judge quoted the submission for Mr Kearney to the following effect: "None of these alleged conversations either expressly or impliedly contain any reference to the possibility that the plaintiff was considering suing the first defendant, or that the second defendant was offering to make a future payment on the basis that the plaintiff would refrain from bringing such an action."
8. The judge then stated: "The consideration available and invoked here is that which the plaintiff says was implied: forbearance. Whether that may be implied in the circumstances is a question of fact. But there is no doubt that forbearance may constitute good consideration."
9. After noting further authorities which supported those propositions, and which are not in dispute, the judge continued: [5] "It is common ground that on the plaintiff's version, there was no suit threatened in express terms; nor any express mention of suit; nor express mention of any forbearance from suit; nor [even] threat to withdraw supplies. All the essential elements are a [matter] of inference and implication. The core of the guarantee asserted thus rests upon implication, as the plaintiff submitted… ."
10. After further reference to authority, the judge stated: [6] "Both forbearance and the continuance of trading jointly and severally were benefits available to be conferred upon the first defendant by the plaintiff sufficient to found good consideration in this context; and known to be so by the second defendant as well as the plaintiff (and the first defendant, the immediate beneficiary)."
11. After yet further reference to authority, and noting Mr Kearney's submission that "there was no valid contract between the plaintiff and second defendant", the judge stated: [7] "I find that there was consideration in both the implied forbearance and the implicitly promised continuance of trade with the first defendant (after its debt passed the payment period)."
12. The trial judge further stated: [8] "The mutually known circumstances, and both the implications and [sic] continuance of trade and extension of credit, are sufficient to found valuable consideration where a liability existed in the form of outstanding payments due (from by [sic] the first defendant) to the plaintiff under the first agreement, which were outstanding for in excess of the contractually allowed 60 days. Both the implicit promisers [sic] of forbearance and continuance of trade despite account outstanding for more than 60 days were delivered, and of value to both the defendants … ."
13. As to the precise nature of the contract of guarantee, the judge stated: [9] "There were multiple conversations about guarantees. They overlap rather than compound such that each replaced its predecessor and operated at different dates."
14. The amount of the claim by Grow Choice against Mr Kearney was then identified in the terms submitted by Grow Choice, namely that Mr Kearney guaranteed North West's "outstanding debt of $81,723.75 as at 13 February 2020 being the date that Mr Fagan gives evidence that a statement of outstanding accounts was provided to the first defendant". The submission continued (without further comment by the trial judge) that the amount sought against Mr Kearney was "$81,723.75 plus interest calculated from 19 August 2021, being the date the property 'Longacres' was sold".

Determination of appeal

1. At one stage in the course of her reasons, the trial judge stated that: [10] "This is not a contest about intention or status or role, i.e. whether Mr Kearney was speaking in his own right or qua director on behalf of the first defendant."
2. Because the judge rejected Mr Kearney's evidence, that issue was not pursued. However, the issue was material and called for a degree of caution. The conversations were between the principals of two companies which had a contractual relationship. To imply from statements by the principal of the debtor company that he was undertaking a legally enforceable obligation to pay a company debt may arise by implication, but the circumstances of the implication should be clear. The circumstances, including the verbal exchanges, in the present case were quite unclear.
3. First, Grow Choice claimed that when the two principals spoke, Mr Fagan was speaking on behalf of his company about a debt owed by Mr Kearney's company, but when Mr Kearney responded, he was giving a personal undertaking. The only basis for this distinction was that Mr Kearney's undertaking was conditional on him obtaining moneys from a source other than North West. On that basis the implication was available, but by no means persuasive.
4. Secondly, the conversations otherwise made such an implication implausible. Thus, Mr Fagan gave evidence that he had some 13 conversations between 16 August 2018 and November 2020 in the course of which he called Mr Kearney and complained that "he" (clearly referring to North West) had not paid "our tax invoices". No doubt Mr Fagan was pressing for payment on behalf of Grow Choice, but at no stage did he suggest in the course of those conversations that the company was planning to take legal proceedings against North West. In his affidavit, he stated, with respect to the first three conversations that he "continued to supply chemical through Grow Choice to NWDS in the belief that Simon Kearney would pay the amount owed by NWDS to Grow Choice once he sold his property Longacres". Given that he received the same response on each of the 13 occasions when he raised the issue (all of which preceded the sale of Longacres) it is significant that at no stage did he raise the possibility of taking proceedings if the promise were not complied with when the property was sold, nor did he raise the possibility of taking proceedings against Mr Kearney personally. In short, the inference that each and all of these conversations created a legally enforceable contract of guarantee does not appear to be consistent with the understanding of the parties at the time the conversations occurred.
5. Thirdly, it is implausible that the parties entered into 13 consecutive contracts of guarantee, as the judge found in stating that "each replaced its predecessor and operated at different dates". There is an artificiality underlying that finding, but it reflects the difficulty in finding that any one of the conversations gave rise to a legally enforceable contract but that others did not. However, the finding did not reflect the pleaded case.
6. Fourthly, the pleading was important. Grow Choice pleaded its "second agreement" on the basis that each conversation involved an offer to pay moneys owed by North West to Grow Choice "at that time", but contingent on sale of Longacres or sale of the water rights attached to Longacres. However, if the finding by the trial judge were to be taken at face value, there was an implied revocation in each conversation, casting doubt upon whether it was open to the respondent to choose one conversation, rather than the latest, as the basis upon which suit was brought. Importantly, each conversation involved a different sum, namely the amount outstanding at the time the conversation took place.
7. Fifthly, the Mr Fagan's evidence did not include any statement that he had said to Mr Kearney that Grow Choice would not take proceedings against North West until the sale of Longacres, or the water rights. In other words, not only did Mr Kearney not seek forbearance, but Mr Fagan did not offer it. While it may be possible to imply a contract of guarantee where there was no discussion of the possible consideration for such a contract, the implication is, at best, strained. The mere fact of not bringing proceedings does not relevantly constitute forbearance.
8. Sixthly, Mr Fagan did assert in his affidavit that he continued to permit Grow Choice to trade with North West in the belief that Mr Kearney would honour his promise of payment when Longacres was sold. However, the evidence relied on in this Court did not convey that belief to Mr Kearney, nor suggest that the trading relationship would come to an end if the promise were not fulfilled.
9. Seventhly, on 16 March 2021, Mr Fagan as managing director of Grow Choice wrote to Mr Kearney at North West, noting that there was a large sum outstanding and stating: "We request that payment be made in full or suitable arrangements for a payment plan be put in place by Wednesday, 31 March 2021 or the matter will be referred for debt collection through the District Court of NSW and an Order for North West Direct Sales to pay Grow Choice's legal costs will be sought."
10. That letter cast doubt on the existence of a guarantee for two reasons. First, it disregarded any undertaking that payment would be made only after the sale of Longacres or the water rights. The letter was therefore inconsistent with an agreement on Mr Fagan's part for Grow Choice to forbear from pursuing debts owing by North West until the sale of Longacres. Secondly, there was no suggestion in the letter that Mr Kearney was personally liable for the debt.

Conclusions

1. In the circumstances set out above, the respondent failed to demonstrate at trial that Mr Kearney, through oral statements made on numerous occasions to Mr Fagan, had entered into any one or more contracts of guarantee of the debts of North West. That is a rejection of the respondent's case based on the findings of primary fact (as to the contents of the conversations) made by the trial judge. The only factor supporting such an implication (that Mr Kearney would need to source funds from another source) was outweighed by fundamental problems with the evidence and the pleading.
2. Counsel for the respondent in this Court resisted a grant of leave to appeal on the basis that the findings made by the trial judge were "open" to her. It appears that the submission was formulated in those terms so as to engage the principle regularly applied in this Court that leave to appeal should not be granted where the applicant's case is no more than "merely arguable". There are three observations to be made in relation to that submission. First, when an appeal has been fully argued, on a concurrent hearing, the Court may be affirmatively satisfied that the grounds of appeal should succeed, in which case degrees of arguability may be put to one side. Secondly, even a test of what is merely arguable may operate differently when applied to an appeal brought by a person having the burden of proof and one brought by the party which did not. Thirdly, the test of what is merely arguable may have greater application where findings of fact are in issue, rather than a case turning on a claimed error of law. The present case lies somewhere between those two categories.
3. The Court having heard full argument in the matter and having formed a view as to the proper outcome, there should be a grant of leave to appeal.
4. In relation to the proposed amendment to the notice of appeal, the reasoning above demonstrates that while there may have been two bases upon which the trial judge found that there had been consideration for the acceptance of the promise of payment by Mr Kearney, neither constituted consideration in the necessary sense, and for similar reasons in each case. Accordingly, there was no prejudice to the respondent in addressing both issues. There was, for example, no submission that the respondent came to this Court intending to rely upon the finding that the relevant consideration was an agreement to continue to trade, in circumstances which did not involve any forbearance to sue.
5. There was no difference between the parties as to the costs of appeal, which should follow the event. However, the appellant's application for costs in the District Court was resisted. The respondent submitted that there had been a joint trial with the first and second defendants being jointly represented. The respondent was successful against North West and was entitled to its costs of the trial against the company. It further submitted that the case against North West and an unsuccessful cross-claim by North West occupied most of the hearing time. Accordingly, it was submitted, the applicant should not have his costs in the District Court and this Court "should at least hear further submissions and evidence (on the papers) as to any costs order below".
6. In its reply submissions, the appellant did not take issue with the statements as to the form and outcome of the proceedings below, but said that if he were successful "further submissions on the costs below are warranted".
7. This was not a case in which the result of the appeal carried even the possibility that the costs order would turn on the findings of this Court. Furthermore, there was, as the respondent submitted, a live issue as to whether leave should be granted, given the amount in dispute. In those circumstances, having been put on notice that his application for costs of the trial was resisted, it was not appropriate for the appellant to avoid making any response to the basis on which he might be deprived of his costs of the trial and simply rely upon this Court permitting the matter to be left unresolved, requiring the parties to put on further submissions and thus incur further expense.
8. A perusal of the written and oral evidence, and the written submissions in the District Court, suggests that the question of the guarantee and the liability of Mr Kearney took up a relatively small proportion of the trial time and the parties' resources. Given the joint representation of the defendants, an assessment of costs might well be complex. In those circumstances, the better course is to set aside the order of the trial judge with respect to the second defendant's costs, so that those costs will lie where they fall. If either party seeks to vary that outcome, it may do so by a motion filed by 2 February 2024.
9. The Court makes the following orders: 1. Grant the applicant leave to appeal from the judgment and orders in the District Court of 2 June 2023. 2. Grant leave to the appellant to file and rely on the amended notice of appeal annexed to the notice of motion dated 12 December 2023, and direct the appellant to file the amended notice of appeal by 12 January 2024. 3. Allow the appeal and - 1. set aside so much of order (1) made in the District Court as gave judgment for the plaintiff against the second defendant; 2. set aside order (4) with respect to the liability of the second defendant for the costs of the first defendant; and to the extent that it covered the plaintiff's claim with respect to the second defendant; 3. dismiss the amended statement of claim in so far as it claimed relief against the second defendant. 1. If either party seeks costs of the trial, it may do so by a motion filed by 2 February 2024 2. Order that the respondent pay the applicant/appellant's costs in this Court.

Endnotes

1. Primary judgment, p 30.5.
2. [2022] NSWCA 219 (Macfarlan JA, Meagher and Mitchelmore JJA agreeing).
3. [1998] QCA 439; [2000] ANZ Conv R 43 at [41]-[43] (McMurdo P and Thomas JA).
4. (1887) 19 QBD 341, 344.
5. Primary judgment, p 32.3.
6. Primary judgment, p 33.7.
7. Primary judgment, p 34.5.
8. Primary judgment, p 34.8.
9. Primary judgment, p 35.3.
10. Primary judgment, p 30.5. 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: 21 December 2023