Lee v ATL

Solicitors: XR Consulting Pty Ltd t/as XR Legal (Appellant) CKSD Lawyers (Respondent) File Number(s): 2023/133934 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Common Law Division Citation: [2023] NSWSC 336 Date of Decision: 6 April 2023 Before: Fagan J File Number(s): 2018/393537

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

HEADNOTE [This headnote is not to be read as part of the judgment] Mr Jeffery Tse Hung Lee (the appellant) was one of four co-guarantors of the obligations of Gondon HLHS Epping Pty Ltd as borrower under a loan agreement dated 15 March 2017 with ATL (Australia) Pty Ltd (the respondent) as lender. By cl 10.2(a)(i) of the loan agreement, Mr Lee guaranteed the payment of money owing "under this document" by the borrower to the lender. Clauses 4 and 5 of the loan agreement established a regime whereby the borrower was to sign a utilisation request in compliant form requesting an advance and interest started to accrue from the day of the advance being made. The loan agreement was executed by the borrower, Mr Lee and the other guarantors on 13 March 2017 and by email at 4:27 pm on 14 March 2017, the executed counterpart of the loan agreement was delivered to the lender's solicitors. At 5:46 pm on 14 March 2017, the borrower's solicitors agreed to the terms of a side letter sent earlier that day by the lender's solicitors. The side letter provided that interest under the facility was to start to accrue (having the same effect as a utilisation) as and when funds under the facility were transferred to Australia in Australian Dollars, which had already occurred in two tranches on 10 March and 13 March 2017. Mr Lee did not provide his agreement or consent to the side letter. On 15 March 2017, the borrower submitted a utilisation request to the lender for $14 million and the lender advanced the total facility of $14 million to the borrower. The borrower subsequently defaulted on repayment. Although $8 million was repaid on 17 April 2018, no further payments were made thereafter. On 20 September 2018, the lender sent a notice of demand addressed to Mr Lee claiming the amount of money owing under the loan agreement, which included the pre-drawdown interest. The lender sued to enforce the guarantee in the Supreme Court. Mr Lee relied upon several defences, including that the guarantee was discharged because the side letter agreement represented a variation of the borrower's obligation to pay interest to the lender to which Mr Lee did not consent, relying on the variation rule referred to in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; [1987] HCA 15. The primary judge rejected all defences and found Mr Lee liable for the principal sum and interest claimed under the loan agreement as unaltered by the side letter agreement: ATL (Australia) Pty Ltd v Cui [2023] NSWSC 336. On Mr Lee's appeal, the main issues were: was the loan agreement amended by the side letter with the consequence that the borrower's varied obligations to the lender were outside the scope of the guarantee given by Mr Lee?; alternatively, was Mr Lee discharged from liability as guarantor by the alteration to the loan agreement contained in the side letter to which Mr Lee did not agree or consent (the variation rule)?; and was the variation rule inapplicable because the guarantee is, in substance, an indemnity? The Court (Gleeson JA, Meagher JA and Griffiths AJA agreeing) held, allowing the appeal: As to the scope of guarantee The scope of the liability of a guarantor is a question of construction of the guarantee and each case turns on its own facts: [27]. When read together with the loan agreement, the effect of the side letter on the legal relations between the lender and borrower was that the side letter altered or amended the borrower's obligation to pay interest under the loan agreement by providing for the accrual of pre-drawdown interest. The variation was express and accommodated the circumstances in the side letter by adopting and treating the existing language of the loan agreement as applying to those circumstances: [36]-[49]. As Mr Lee had not given his agreement or consent to the side letter, the borrower's varied obligations to the lender under the loan agreement, as amended by the side letter providing for pre-drawdown interest on the facility, were not within the scope of the guarantee given by Mr Lee in cl 10.2(a)(i): [51]. Obiter consideration as to the application of the variation rule A variation of the contract guaranteed between debtor and creditor which is not manifestly insubstantial or incapable of prejudicing the guarantor, if not consented to by the guarantor, will discharge the guarantor from his or her obligations guarantor (the variation rule). The variation rule is a rule of equity: [58]-[62]. Holme v Brunskill (1877) 3 QBD 495; Hancock v Williams (1942) 42 SR (NSW) 252, applied. Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; [1987] HCA 15, considered. The variation rule has no application in circumstances where the draft contract guaranteed is altered between debtor and creditor prior to the guarantor entering the contract of guarantee. The relevant question for the variation rule is whether there has been any departure by the debtor and creditor from the contract guaranteed, to which an existing guarantor has not consented: [63]-[73]. Hackney Empire Ltd v Aviva Insurance Ltd [2013] 1 WLR 3400; [2012] EWCA Civ 1716, approved. Holme v Brunskill (1877) 3 QBD 495, explained. As the side letter effected an alteration to the borrower's proposed obligations to the lender under the loan agreement before the contract of guarantee was made, the variation rule had no application in the present case to the contact guaranteed: [74]. Obiter consideration as to the indemnity characterisation Whether a document establishes a guarantee, or an indemnity is a question as to its construction and effect; labels are not determinative: [80]-[83]. Canty v PaperlinX Australia Pty Ltd [2014] NSWCA 309, referred to. The proper characterisation of Mr Lee's obligation under cl 10.2(a)(i) of the loan agreement was a guarantee, not an indemnity: [87]-[106]. That Mr Lee's obligation in cl 10.2(a)(i) was stated to be a "principal obligation" is not inconsistent with the characterisation of that obligation as a guarantee. The variation rule may be excluded by express terms of the contract of guarantee; in each case it is a matter of construction. However, cl 10.2(a)(i) does not provide that the guarantors waive all rights that they otherwise might be entitled to claim qua guarantor. There are no clear and unequivocal words ousting the variation rule in Holme v Brunskill: [94]-[106]. CIMC Raffles Offshore (Singapore) Ltd v Schahin Holding SA [2013] EWCA Civ 644; [2013] 2 Lloyd's Rep 575, approved. Bank of New Zealand v Baker [1926] NZLR 462, distinguished.

Judgment

1. MEAGHER JA: I agree with Gleeson JA.
2. GLEESON JA: This appeal concerns the enforcement of a guarantee. The guarantee was given by several persons, including the appellant, Jeffery Tse Hung Lee (Mr Lee), for money owing under a commercial loan agreement including interest accruing from the date of the advance(s) under the facility. After the loan agreement containing the guarantee was executed by the borrower, Mr Lee and the other guarantors and returned by email to the lender's solicitors, the lender and the borrower agreed in a side letter (without Mr Lee's agreement or consent) that interest under the facility would accrue prior to the date of the advance to the borrower.
3. The lender sued to enforce the guarantee. At trial, the lender limited its claim against Mr Lee to the principal sum and interest accruing from the date of the advance to the borrower; the lender did not press a claim for pre-drawdown interest. Mr Lee relied upon several defences, including that the guarantee was discharged because the alteration of the borrower's obligations to pay interest in the side letter was made without his consent, referring to the variation rule discussed in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; [1987] HCA 15. The primary judge rejected all defences and concluded that Mr Lee was liable for the principal sum and interest claimed under the loan agreement as unaltered by the side letter. Judgment was entered against the guarantor in the sum of $16,737,057.68 and the guarantor was ordered to pay the lender's costs of the proceedings: ATL (Australia) Pty Ltd v Cui [2023] NSWSC 336.
4. Mr Lee appeals from that judgment. He contends that he is not liable to the lender because either (i) the borrower's obligations in the loan agreement were amended by the side letter and are not within the scope of liability of the guarantee, or alternatively (ii) the alteration of the borrower's obligations to pay interest in the side letter was made without his consent, and accordingly the guarantee was discharged by operation of the variation rule referred to in Ankar. The lender's response to the discharge argument by notice of contention is that the variation rule does not apply because the guarantor's obligation is, in substance, an indemnity, not a guarantee.
5. For the reasons set out below, I have concluded that the borrower's obligations in the loan agreement were amended by the side letter and are not within the scope of liability of the guarantee. The appeal should be allowed on that ground.

The parties and the contract guaranteed

1. There is no dispute on appeal as to the facts. In November 2015, Gondon HLHS Epping Pty Ltd (the borrower) was incorporated for the purpose of conducting a real estate project involving the redevelopment and construction of apartment units on land at Epping. The borrower was appointed as trustee of a unit trust known as the Gondon HLHS Epping Trust (the borrower trust). The borrower completed the purchase of the Epping property in early 2016 and commenced the development project. It sought to refinance the initial funding borrowed from other sources by a borrowing of $14 million from ATL (Australia) Pty Ltd (the lender) in March 2017.
2. Mr Lee was one of four proposed guarantors of monies to be borrowed by the borrower from the lender. He was a director of the borrower and through his family trust company, his beneficial interest in the borrower trust amounted to 16.7 per cent.
3. On 2 March 2017, the first draft of the commercial loan agreement (the loan agreement) was provided by the lender's solicitor (Ms Liu) to Mr Terence Tang, another proposed guarantor who acted as the "contact person" for the borrower and four guarantors. Mr Tang was also a director of the borrower and a director of Gondon HLHS Pty Ltd, which held units in the borrower trust. The lender's solicitor, relevantly, stated that the enclosed documents, "are subject to final approval of our client and provided on the basis that no binding relationship exists prior to execution by our client".
4. Following negotiations between the parties, revised draft documents were sent by Ms Liu to Mr Tang on 8 March 2017. It is not necessary to refer to the detail of these documents. On 10 March 2017 at 6:26 pm, Ms Liu sent further amended documents to the borrower's solicitors. The terms of the loan agreement are outlined at [15] below.
5. On 13 March 2017, the borrower and four guarantors, including Mr Lee, executed the loan agreement. It was executed as a deed.

Side letter

1. On 14 March 2017 at 3:55 pm, the lender's solicitors sent an email to the borrower's solicitors enclosing a letter of the same date (the side letter) which those solicitors passed on to Mr Tang at 4:27 pm. The side letter stated: We understand the Borrower has previously been made aware that our client's funds are located overseas and not in Australian currency. In order to facilitate the proposed drawdown of the loan and the Borrower's urgent need for funds, our client had been asked to convert its funds into Australian Dollars and to make it [sic] available in Australia for anticipated drawdown tomorrow. We are instructed that our client has consented to this request on the basis that interest under the Facility will start to accrue (having the same effect as an utilisation), as and when funds under the Facility are transferred to Australia, in Australian Dollars. We have now received confirmation that the Lender has transferred the entire Facility Limit amount to our trust account in Australian Dollars and in two tranches, one in the sum of $6,650,000.00 was transferred on 10 March 2017 ("Tranche One") and another one in the sum of $7,350,000.00 was transferred on 13 March 2017 ("Tranche Two"). Please confirm by return correspondence that the Borrower acknowledges and consents that the interest against Tranche One and Tranche Two will start to accrue from 10 March and 13 March 2017 respectively. (Emphasis added.)
2. At 4:27 pm on 14 March 2017, the counterpart of the loan agreement executed by the borrower, Mr Lee and the other guarantors, was delivered by email to the lender's solicitors. There is no evidence of any formal exchange, but it is not in dispute that the lender subsequently executed a counterpart of the loan agreement. The counterpart executed by the lender in evidence bears the date 15 March 2017, but the evidence does not disclose if this was the date of execution by the lender.
3. At 5:46 pm on 14 March 2017, the borrower's solicitors responded by email to the lender's solicitors agreeing to the terms of the side letter stating: We confirm on the Interest Accrual Date matter as per Attached. Thank you.
4. It is not in dispute that Mr Lee did not consent to the side letter.

Loan agreement

1. The loan agreement established a loan facility with a Facility Limit of $14 million: cl 1.1, definition of "Facility" and "Facility Limit". The lender agreed to make the Facility available to the borrower in one or multiple successive drawings, with each such advance being an advance of principal, up to the Facility Limit, on the terms of "this document": cl 2.1.
2. Clause 3.1 contained conditions precedent to the borrower's entitlement to make a Utilisation Request in respect of the Facility, including the valid execution and delivery to the lender of each Transaction Document, which included the loan agreement.
3. Clause 4, headed "Drawdown", dealt with the procedure of the utilisation of the Facility. By cl 4.1, the borrower could utilise the loan facility by delivering to the lender a duly completed and signed Utilisation Request, being a document in substantially the same form as Schedule 3. In the event that there was no utilisation within three months from the date of the loan agreement, cl 4.3 provided that the borrower's entitlement to utilise the Facility, if any, shall expire and the lender's obligations would come to an end. Further, if there was no utilisation and the lender's obligations under the loan agreement came to an end, the borrower would not be liable for any fees, interest or charges.
4. Clause 5 dealt with interest. By cl 5.1(a)(i), "interest accrues daily and is capitalised during the Interest Period on a monthly basis starting from the 30th day after the first Utilisation of the Facility". "Interest Period" was defined in cl 1.1 to mean the period commencing on the first Utilisation Date and ending on the earlier of the Project Pre-Sale Settlement Date or the Termination Date. It is not necessary to refer to the definitions of the Project Pre-Sale Settlement Date or the Termination Date. By cl 5.1(a)(ii), interest was to be calculated at the Higher Rate of 22 per cent per annum but the lender would accept interest at the Acceptable Rate, being 12 per cent per annum provided the borrower and the guarantors complied with their obligations imposed by any transaction documents and there was no event of default.
5. The combined effect of cll 4 and 5 was that the loan agreement established a regime whereby the borrower was to sign a Utilisation Request in compliant form requesting an advance and interest started to accrue from the day of the advance being made.
6. Clause 24.1 headed "Amendments" provided: This document may only be amended by written agreement between all parties.

Drawdown of the facility, default and lender's claim

1. On 15 March 2017, the borrower gave a utilisation request to the lender under the loan agreement for $14 million and the lender advanced the total facility of $14 million to the borrower. The primary judge held that this advance constituted an acceptance by the lender of the terms of the executed loan agreement: at [1].
2. The borrower subsequently defaulted on repayment. Although $8 million was repaid on 17 April 2018, no further payments were made thereafter. On 20 September 2018, the lender sent a notice of demand addressed to Mr Lee claiming the amount of money owing of $12,993,284, not including the lender's costs arising from the default. The calculation of this sum was made in accordance with the dates for accrual of interest based on the side letter.
3. In the underlying proceedings, the lender sought to enforce the guarantee against several parties, including Mr Lee. By the time of the hearing, the lender limited its claim against Mr Lee to the monies owing under the loan agreement, including interest on the advance from 15 March 2017, but not interest due from 10 March and 13 March 2017 under the side letter.

Issues on appeal

1. Although the notice of appeal contained six grounds, the issues were substantially narrowed at the hearing. Senior counsel for Mr Lee identified two issues as decisive on the appeal: (i) the scope of the guarantor's liability, and alternatively, (ii) whether the guarantee was discharged by the variation rule. The first issue was described by counsel as "the simple and robust, and therefore superior way of analysing this case" in a way that the appeal should be upheld.
2. It was ultimately not in dispute on appeal that (a) there was a contract of guarantee between the lender and Mr Lee, and (b) the loan agreement containing that guarantee was executed as a deed. Accordingly, grounds 4(a) and 6(a) fall away.
3. It is convenient to address the issues in the following order: 1. the scope of liability: for what is the guarantor liable?; 2. the variation rule: alternatively to (1), was the guarantor discharged by reason of the agreement between the lender and borrower in the side letter with reference to the principal contract?; or 3. the indemnity issue: if otherwise applicable, was the variation rule ousted because the guarantee is, in substance, an indemnity?

Scope of liability: for what is the guarantor liable?

1. The scope of the liability issue is a question of construction of the contract of guarantee. To this end, it is essential to identify the precise nature of the obligation or obligations guaranteed. The obligations may be those arising under a specific contract between debtor and creditor or obligations arising out of a contemplated course of dealings.
2. Here, the guarantee involves the former category. "Money Owing" was defined in cl 1.1 of the loan agreement to mean on any date the aggregate of all money owing or payable by the borrower to the lender under "this document" for any reason whatsoever, including the Outstanding Loan and Interest (emphasis added). Clause 1.2 headed "Interpretation", provided in sub-cl (d) that: a reference to a document or agreement (including a reference to this document) is to that document or agreement as amended, supplemented, varied or replaced. (Emphasis added.)
3. "Outstanding Loan" was defined to mean on any day at 5:00 pm, the aggregate amount of all Loans, including any capitalised Interest, Account-keeping Fees and Management Fees, less the aggregate of all principal repayments made by the borrower under this document for the Loans. "Loan" was defined to mean each advance of principal made under the Facility.
4. By cll 10.2(a)(i) and (ii) of the loan agreement, each guarantor: (i) guarantees to the Lender (as a principal obligation under this document) that the payment on the terms of this document of the Money Owing up to a maximum of the Guaranteed Amount and the punctual performance of any of the Borrower's obligations under this document; (ii) indemnifies the Lender against any liability, loss, damage, expense or claim incurred by the Investors arising directly or indirectly from any breach by the Borrower of this document … (Emphasis added.)
5. The capitalised expression "Investors" in cl 10.2(a)(ii) was not defined in the loan agreement. At trial, the parties diverged as to whether this was an obvious error and should be read as a reference to the lender, as the lender contended, or to third parties, as Mr Lee contended. The primary judge did not make any finding on this issue.
6. Addressing the scope of the guarantee, the primary judge referred at [67] to the definition in cl 1.1 of the expression "Money Owing", in particular, the reference to "…moneys owing or payable by the Borrower to the Lender under this document for any reason whatsoever…" (emphasis in original), and found at [68]: The words highlighted in bold in the above provisions of the Loan Agreement show that Mr Lee's liability as one of the Guarantors is limited to amounts payable by the Borrower under the Agreement. Nothing in the document gives rise to any liability of the Guarantors for any amount that may be payable by the Borrower under the side letter agreement or under any other agreement. Consequently, the side letter agreement had and has no impact whatever upon Mr Lee's obligations as a guarantor. The side letter agreement does not engage the principle in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd.

Submissions

1. Mr Lee submitted that the penultimate sentence in [68] contains error for two reasons: 1. the side letter did not give rise to a liability on the part of the borrower that was independent from the facility established under the loan agreement or outside the scope of the loan agreement; and 2. the side letter was an agreement about when and in what circumstances interest in respect of the facility created by the loan agreement was payable, and the change in obligations was not insubstantial or otherwise beneficial to the guarantor.
2. The first submission is directed to the scope of liability of the guarantor. The second submission is directed to the scope of risk under the guarantee. This is addressed below in the context of the discharge argument based on the variation rule.
3. In writing, Mr Lee referred to Adisan Pty Ltd v Irwin [2015] NSWCA 217 as a similar situation to the present case. Adisan does not assist the present case. As counsel for Mr Lee acknowledged in oral argument, the scope of the liability in each case turns on its own facts.

Reasoning

1. It is common ground that the side letter is related to the loan agreement. It is also common ground that the lender and borrower had an agreement in the terms reflected in the side letter. Whether the parties intended the side letter would have effect even if they did not enter into the loan agreement was not addressed at trial or in this Court. Although not necessary to decide, the better view seems to be that since the side letter expressly linked the accrual of pre-drawdown interest under the facility with the borrower's obligation to pay "interest under the Facility", the parties intended the side letter would only apply if they entered into the loan agreement.
2. The parties diverged as to whether the agreement in the side letter for pre-drawdown interest is an alteration or variation of the borrower's obligations under the loan agreement, as Mr Lee contended, or "a supplementation of [the terms of the loan agreement] by way of additional or new agreement", as the lender contended.
3. Several matters favour the proper characterisation of the side letter as an alteration or variation of the borrower's obligations under the loan agreement.
4. First, the side letter contained four references which explicitly derived their meaning only from the loan agreement, relevantly: (i) the date from which "interest under the Facility" will start to accrue, (ii) the lender converting its funds into Australian dollars so as to be immediately available for drawdown will have the same effect as an "utilisation", (iii) interest under the Facility "will start to accrue" "as and when funds under the Facility" are transferred to Australia in Australian dollars, and (iv) the entire "Facility Limit" amount had been transferred by the lender to its solicitor's trust account in Australia on the specified dates: 10 and 13 March 2017.
5. It is said by the lender that the side letter did not dispense with the need for a utilisation request by the borrower under cl 4.1 of the loan agreement. That can be accepted but is not determinative of whether the side letter is an alteration or variation of the terms of cl 5.1(a) of the loan agreement with respect to payment of interest on advances under the facility.
6. Second, accepting that the accrual of pre-drawdown interest was a new and additional liability of the borrower to that contained in the draft loan agreement which the lender had proffered to the borrower, does not mean that the side letter was separate and independent from the loan agreement. The express references in the side letter to (a) the date from which "interest under the Facility" will start to accrue, and (b) the transfer of funds by the lender to Australia in Australian dollars as having the same effect as an "utilisation", were plainly intended by the parties to alter or vary the borrower's obligation in cl 5.1(a) of the loan agreement with respect to the date for the accrual of interest on advances under the facility.
7. Third, it should be accepted, as counsel for Mr Lee submitted, that his Honour's reference at [68] to amounts payable by the borrower "under the Agreement" begs the question what is meant by the words "under this document" in the definition of Money Owing in cl 1.1 and by the same words in the guarantee contained in cl 10.2(a)(i). That question is answered by reference to the interpretation provision in cl 1.2(d) that a reference to "this document" includes "the document … as amended, supplemented, varied or replaced". The reference in cl 10.2(a)(i) to the Money Owing "under this document" is to be read as the Money Owing under the loan agreement, as amended by the side letter, with the consequence that the borrower's obligation for Money Owing under the loan agreement included the accrual of pre-drawdown interest.
8. That the parties contemplated there could be amendments to the loan agreement is confirmed by cl 24.1 which provided a power of amendment of the loan agreement, subject to the written agreement of all parties. It was not suggested by the lender that a variation which is in breach of cl 24.1, because the written agreement of a guarantor is not obtained, is somehow ineffective.
9. Fourth, the formality of the alteration to the borrower's obligations in the draft loan agreement which had been proffered to the borrower, was recognised by the lender's request in the side letter for a written acknowledgment and consent by the borrower to the side letter.
10. When read together with the loan agreement, the effect of the side letter on the legal relations between the lender and borrower was that the side letter altered or amended the borrower's obligation to pay interest in cl 5.1(a) of the loan agreement by providing for the accrual of pre-drawdown interest. The variation was express and accommodated the circumstances in the side letter by adopting and treating the existing language of the loan agreement as applying to those circumstances.
11. It is said by the lender that the scope of the anti-discharge clause in cl 10.2(c)(i) informs the scope of the guaranteed obligation in cl 10.2(a)(i). Clause 10.2(c)(i) provided: The liabilities of a Guarantor are not affected by: (i) the granting to the Borrower or to any other person of any time, waiver, indulgence, consideration or concession or the discharge or release of the Borrower;
12. Nothing in cl 10.2(c)(i) informs the scope of the guaranteed obligation in cl 10.2(a)(i), referring to the Money Owing, as including the Money Owing under the loan agreement, as amended by the side letter, relevantly the accrual of pre-drawdown interest.
13. It is also said by the lender that the entire agreement clause in the loan agreement shows an intention that if the lender and borrower were to enter into any other agreement, the parties intended that it be separate from the loan agreement. Clause 24.5(a) provided: (a) This document supersedes all previous agreements about their subject matter and embodies the entire agreement between all parties.
14. I do not accept that cl 24.5(a) shows such an intention of the parties. The entire agreement clause records a tripartite agreement between all parties: the lender, the borrower and the guarantors. It says nothing of a private agreement made between the lender and borrower. Nor should it be accepted that in circumstances where the lender and borrower have accommodated the circumstances in the side letter by adopting and treating the existing language of the loan agreement as applying to those circumstances, that the side letter is a "previous agreement" within the meaning of cl 24.5(a).
15. Finally, it is not to the point that the lender subsequently "trimmed" its claim against Mr Lee in the underlying proceedings by not seeking to recover interest predating the date of advance under the facility. The lender's forensic decision cannot avoid the legal effect of the impact of the side letter on the borrower's obligations to the lender. Mr Lee did not consent or agree to the side letter which amended the borrower's obligations to the lender in the draft loan agreement to include pre-drawdown interest under the facility. The borrower's varied obligations to the lender for the Money Owing under the loan agreement were outside the scope of the guarantee given by Mr Lee. As counsel for Mr Lee correctly submitted, Mr Lee "didn't guarantee that which is the combination of the side letter and the commercial loan agreement".
16. My conclusion on the scope of liability issue is dispositive of the appeal, which should be allowed. Nevertheless, I will consider the alternative way in which Mr Lee put his appeal relying upon the variation rule.

The variation rule: discharge of the guarantor by reason of variation of the principal contract

1. Mr Lee submits, in the alternative, that the primary judge erred in concluding that the variation rule referred to in Ankar did not apply in this case. The rule can be stated as follows: any variation of the underlying contract between debtor and creditor which is not manifestly insubstantial or incapable of prejudicing the guarantor, if not consented to by the guarantor, will discharge the guarantor from his or her obligations under the contract of guarantee.
2. The primary judge gave two reasons why the variation rule was not engaged on the present facts. The first at [68] was that the side letter had no impact upon Mr Lee's obligations as a guarantor. For the reasons given above, that cannot be accepted.
3. The second at [69] was that the variation rule was only concerned with departures by a creditor from a surety contract that occurred after the suretyship contract had been made, and that since, the "additional agreement was made between the principal creditor and the principal debtor prior to the guarantee being executed, the situation is not governed by the High Court's decision [in Ankar]" (emphasis added).
4. It should be observed that [69] of his Honour's reasons contains a slip. The agreement contained in the side letter was not made prior to the guarantee being executed by the guarantors. On his Honour's findings, the guarantee was executed on 13 March 2017, and it was delivered to the lender's solicitors by email at 4:27 pm on 14 March 2017 which was prior to the borrower's solicitor's email at 5:46 pm on 14 March 2017 accepting the side letter.

Submissions

1. Mr Lee says that the equitable principle in Ankar is not constrained so as to only apply where a borrower and lender agree to depart from a "surety contract" after the contract was made, that is, after the contract guaranteed was made between the principals. It is said that the temporal distinction adopted by his Honour contains error because the timing issue is irrelevant. Rather, any departure from the state of affairs that the guarantor has "signed up to", whether occurring before or after the guarantee becomes binding, is sufficient to attract the variation rule.
2. Although Mr Lee did not formally abandon ground 6 which contended that the guarantee was binding on Mr Lee as guarantor when delivered to the borrower's solicitors, as it was executed as a deed prior to the side letter amending the loan agreement, counsel for Mr Lee described this ground as "an extra when you don't need an extra". Given the lender's objection to Mr Lee relying on this argument on appeal as it was not pleaded or run at trial, and that it was not otherwise referred to by Mr Lee in oral argument, it is appropriate to treat ground 6 as not having been pressed.

The variation rule

1. As indicated, the variation rule addresses the scope of the risk, whereas the construction of the contract of guarantee addresses the scope of liability. The rule protects the guarantor from conduct of the creditor which might increase the risk that the guarantee will be called upon or effect the quantum of liability or the guarantor's rights of subrogation, contribution or indemnity. The variation rule is derived from equity: Ankar at 559-600 (Mason ACJ, Wilson, Brennan and Dawson JJ).
2. The rule is stated in Holme v Brunskill (1877) 3 QBD 495 at 505-506, where Cotton LJ (Thesiger LJ agreeing) said: The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged. (Emphasis added.)
3. The variation rule in Holme v Brunskill has been accepted in Australia, including in Hancock v Williams (1942) 42 SR (NSW) 252; Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703 at 707-709 (Kirby P), 711-712 (Mahoney JA agreeing); Corumo Holdings Pty Ltd v C Itoh Ltd; BNY Australia Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 at 404D-E (Meagher JA); Valstar v Silversmith [2009] NSWCA 80 at [28]-[29], [42] (Sackville AJA, McColl and Basten JJA agreeing); Geelong Building Society (in liq) v Encel [1996] 1 VR 594 at 599 (Tadgell J, Ormiston and Ashley JJ agreeing).
4. In Hancock v Williams, Jordan CJ said at 255: A guarantor is responsible only for the obligation which he has guaranteed. Hence, if the obligee and obligor, without his consent, agree between themselves to alter the nature of the obligation, the guarantor is discharged because the obligation in its altered form is not that which he guaranteed. (Citations omitted.)
5. The two cases cited by Jordan CJ at the conclusion of this passage at 255 (Egbert v National Crown Bank [1918] AC 903 at 908-9; and Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1939) 39 SR (NSW) 174 at 200), both approved the statement of Cotton LJ in Holme v Brunskill at 505-506, which has been set out at [59] above.

Reasoning

1. Mr Lee's argument that the timing of the alterations to the contract guaranteed is irrelevant for the operation of the variation rule involves the proposition that the phrase in Holme v Brunskill at 505, "if there is any agreement between the principals with reference to the contract guaranteed", embraces not only variations to the original contract, but also alterations to the terms of the draft original contract before the contract of guarantee is made. No authority was cited for this proposition, although reference was made to several statements in Ankar which are addressed below.
2. Hackney Empire Ltd v Aviva Insurance Ltd [2013] 1 WLR 3400; [2012] EWCA Civ 1716 involved the different issue of whether the variation rule applied to separate contracts made after the original guaranteed contract which affect the performance of the guaranteed contract. Addressing the judgment of Cotton LJ in Holme v Brunskill, Jackson LJ (Moses LJ and Sir John Thomas P agreeing) said at [68] that the phrase in Holme v Brunskill ("if there is any agreement between the principals with reference to the contract guaranteed") refers only to variations made to the original contract for two reasons: first, the subject matter of Holme v Brunskill was a variation to the original agreement and that was the issue addressed by Cotton LJ, who was not undertaking a broader exegesis of the law; and second, the narrower construction of Cotton LJ's judgment has been treated as the ratio of the decision in a long line of subsequent authorities.
3. Accepting that the remarks by Jackson LJ in Hackney were the context of a subsequent agreement between the principals after the contract guaranteed had been made, they are nevertheless instructive as to the principle stated in Holme v Brunskill. Mr Lee submitted that statements in Ankar support a wider view of the "contract guaranteed". For the reasons which follow that cannot be accepted.

Ankar

1. Ankar was not a case based on the variation rule; it concerned the circumstances in which a guarantor may be discharged because of a breach by the creditor of the contract of guarantee. It is convenient to reproduce what I said in Adisan at [57]-[59] concerning the decision in Ankar: [57] … Ankar concerned the circumstances in which a creditor's breach of a contract of guarantee discharged the guarantor from liability under that contract. The plurality (Mason ACJ, Wilson, Brennan and Dawson JJ) viewed that question as involving an application of the general principles of the law of contract (at 561). This required in Ankar an examination of whether two provisions of the guarantee (relating to the creditor giving notice to the guarantor should the principal debtor propose to sell or assign its interest in the leased machinery, or otherwise default in its obligations under the lease, being the subject matter of the guarantee), should be treated as conditions, breach of which, at the guarantor's election, discharged it from performance of its obligations under the guarantee (at 561-562). A detailed analysis of the plurality judgment in Ankar and the reasoning underlying the ratio, is to be found in the reasons of Campbell JA in Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 at [71] - [83], in particular [80] and [83]. [58] Deane J (at 570) adopted a different approach in Ankar. His Honour considered (at 570-571) that there was a special rule applying to guarantees whereby a significant departure by the creditor from the terms of the contract of guarantee will, in the absence of agreement to the contrary, operate to preclude the existence or continued existence of the circumstances in which the guarantor has agreed to be bound. On this approach, there is no need for the guarantor to rescind the contract for repudiation or breach of an essential or fundamental term. Absent questions of waiver or estoppel, the situation is simply that the circumstances of liability as guarantor do not exist. [59] The special rule as described by Deane J has not escaped criticism by text writers: see J O'Donovan and J Phillips, Thomson Lawbook Co, Modern Contract of Guarantee, Vol 1 (at update 58), [8.110]. However, it is unnecessary here to address whether that criticism is well founded.
2. The statements in Ankar to which counsel for Mr Lee referred in oral argument were carefully analysed by Campbell JA in Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 at [71]-[83]. What follows is based on his Honour's analysis.
3. Campbell JA observed at [76] that starting with the final sentence on 557 the plurality in Ankar consider how the obligations in the contract between the creditor and guarantor are affected by the special character of a contract of suretyship. They start that discussion by considering: … the special principle, said to apply to a suretyship contract, that the surety is discharged from its obligations by the creditor's breach of that contract, so long at any rate as the breach materially prejudices the interests of the surety. (Emphasis added.)
4. At 558 the plurality observed that "[o]ne of the problems with this special principle is that it has been expressed in a variety of ways". (I interpose to observe that this statement cannot be read as embracing a wider view of the variation rule, such as that advanced by Mr Lee in this Court.) The plurality at 558 then set out various statements in English cases of the circumstances in which a guarantor is discharged, and recognised at 558 that the special circumstances in which a guarantor can be discharged are: … founded not so much on cases dealing with a breach of a term in the suretyship contract, as on cases in which conduct on the part of the creditor materially altered the surety's obligations. Such an alteration takes place when the creditor agrees to a variation of the principal contract or to an extension of time within which the debtor may comply with that contract. The creditor's agreement with the debtor thereby alters the nature of the surety's obligations without the surety's consent.
5. After consideration of more English cases at 558-559, including Holme v Brunskill, the joint judgment said at 559 that the principle is the by-product of the special relationship between creditor and surety arising out of the suretyship contract upon which equity fastens to protect the surety when the creditor's conduct affects the surety's liability, referring to Holme v Brunskill at 505 (Cotton LJ). The plurality continued at 559-560: … According to the English cases, the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety's risk, e.g., a reduction in the debtor's debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety. The foundation of the rule is that the creditor, by varying the principal contract or extending time, has altered the surety's rights without consulting it though the surety has an interest in the principal contract, and that the creditor cannot be permitted to do. (Citations omitted.)
6. The obiter statements in Ankar concerning the variation rule to which counsel for Mr Lee referred the Court cannot be read as embracing the wider view of Holme v Brunskill for which Mr Lee contended. The submission that the variation rule embraces alterations to the contract guaranteed prior to the guarantor entering the contract of guarantee should be rejected. The relevant question is not whether there has been any departure from the state of affairs that the guarantor has "signed up to" before any binding contract of guarantee is made; the question is whether there has been any departure from the contract guaranteed, to which an existing guarantor has not consented.
7. As the primary judge correctly observed at [69], the situation where a draft principal contract proffered by the lender to the borrower is altered before it is made, without notice to the proposed guarantor, may give rise to other questions such as whether the guarantor may have been induced to enter into the guarantee by material nondisclosure, which was not raised by Mr Lee, or the construction of the scope of the guarantee, which has been addressed at [36] above. The primary judge did not, relevantly, err in stating or applying the correct legal principles concerning the variation rule.
8. One further matter should be mentioned. No argument was advanced by Mr Lee by reference to an orthodox view of the variation rule relying upon the existence of a scintilla temporis, which Lord Oliver of Aylmerton in Abby National Building Society v Cann [1991] 1 AC 56 at 93 described as "no more than a legal artifice". Such an argument would have involved the proposition that the side letter was subject to an implied term in the nature of a suspensory condition or a condition subsequent that the side letter only came into effect immediately after the making of the loan agreement and thereby operated as a variation of the "contract guaranteed".
9. If it were necessary to decide, I would reject Mr Lee's argument relying on a wider view of the variation rule, that the guarantee given by Mr Lee was discharged.

Is the guarantee an indemnity, and not subject to the variation rule?

1. Given the conclusion on the discharge argument, the issue raised by the notice of contention does not arise. Against the possibility that I am wrong in rejecting the discharge argument, I will address the lender's notice of contention.
2. The lender says that the variation rule can have no operation in the present case because Mr Lee's obligations under the loan agreement are primary obligations and, in substance, an indemnity rather than a guarantee. Mr Lee says that the special clauses in cl 10.2 do not change the nature of the obligation in the guarantee contained in cl 10.1(a)(i) of the loan agreement.
3. Mr Lee did not dispute the premise of the lender's contention - that the variation rule has no application to an indemnity. That premise is consistent with authority refusing to extend the variation rule to a contract of indemnity: see, eg, Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235; [2008] Aust Contract R 90-274 at [128] (Spigelman CJ); GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm) at [127]-[149]; ABM Amro Commercial Finance Plc v McGinn [2014] EWHC 1674 (Comm); [2014] 2 Lloyd's Rep 333 at [37]; Associated British Ports v Ferryways NV [2009] EWCA Civ 189; [2009] 1 Lloyd's Rep 595 at [1].
4. However, it should be observed that there are possible contrary arguments. In Caltex Australia Petroleum Pty Ltd v Troost [2015] NSWCA 64 at [53], Emmett JA (Meagher and Barrett JJA agreeing) noted: … there may well be an implied term of an indemnity that the indemnified party will not vary the terms of the principal obligations so as to render more onerous the obligation to indemnify in respect of loss or damage resulting from a breach of the principal obligations. That argument was left open by this Court in Schoenhoff v Commonwealth Bank [2004] NSWCA 161 at [26]-[29]. See also, the discussion in Thomson Reuters, The Modern Contract of Guarantee, electronic version, at [7.800].
5. Mr Lee did not seek to rely on such an argument in this case.

Construction of the guarantee

1. The distinction between a guarantee and an indemnity is discussed in Canty v PaperlinX Australia Pty Ltd [2014] NSWCA 309 at [37]-[39] (Gleeson JA, Barrett and Emmett JJA agreeing). The distinctive feature of a contract of guarantee is the secondary nature of the obligation which is assumed by the guarantor: Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 254; [1988] HCA 11.
2. In contrast, an indemnity is an independent obligation to make good a loss: Sutton v Grey [1894] 1 QB 285 at 288-289 (Lord Esher MR). A contract of indemnity is "a contract by one party to keep the other harmless against loss" and is not dependent on the continuing liability of the principal debtor: Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 830-831; Total Oil Products (Australia) Pty Ltd v Robinson [1970] 1 NSWLR 701 at 703.
3. As stated in Canty at [41], whether a document is a guarantee or an indemnity, or whether it imposes a secondary or a primary liability, will always depend upon the "true construction of the actual words used in which the promise is expressed": Moschi v Lep Air Services Ltd [1973] AC 331 at 349C (Lord Diplock). The task should be approached without any preconceptions as to what the document is. The description or heading of a document as a "guarantee" or "indemnity" is simply a label. The question is as to its effect.
4. Whilst the use of the words "guarantee" or "indemnity" in the document itself may be an indication of the intentions of the parties, they are not decisive because the essential nature of the agreement must always be considered: Yeoman Credit Ltd v Latter at 833; Total Oil Products (Australia) Pty Ltd v Robinson at 703.

The relevant terms of the guarantee

1. The terms of the guarantee contained in cl 10.2(a) are set out at [30] above. It is of assistance to refer to the other provisions relied upon by the lender.
2. Clause 10.2(b) was a principal debtor clause which provided that the guarantee and indemnity "is a principal obligation of the Guarantor and is not collateral to any other obligation".
3. Clause 10.2(d), (e), and (g), relevantly, provided: (d) This guarantee and indemnity will continue notwithstanding: (i) the Lender has exercised any of its rights under this document including any right of termination; (ii) the Borrower is wound up; or (iii) this guarantee and indemnity is for any reason unenforceable either in whole or in part. (e) This guarantee and indemnity: (i) is of a continuing nature and will remain in effect until final discharge of the guarantee or indemnity is given by the Investors to the Guarantor; (ii) may not be considered wholly or partially discharged by the payment of the whole or any part of the amount owed by the Borrower to the Lender; and (iii) extends to the entire amount that is now owed or that may become owing at any time in the future to the Lender by the Borrower including any interest, costs or charges payable to the Lender under this document; … (g) The Lender can proceed to recover the amount claimed as a debt or damages from the Guarantor without having instituted legal proceedings against the Borrower and without first exhausting the Lender remedies against the Borrower.

Reasoning

1. The lender referred to five matters in support of its characterisation of Mr Lee's obligations in cl 10.2(a)(i) as, in substance, an indemnity rather than a guarantee. As explained below, none of these matters, either individually or in combination, lead to that conclusion.

Definition of "Guarantee"

1. Although the lender referred to the expansive definition of "Guarantee" in cl 1.1 meaning a "guarantee, indemnity …", in oral argument, senior counsel for the lender accepted that this is not a case in which the nomenclature assists greatly. That concession was properly made. Any reliance on the expansive definition in cl 1.1 of the capitalised term "Guarantee" is misplaced; the capitalised term "Guarantee" is not used in cl 10.2.

The subject matter of the guarantee

1. It is said that the scope of the indemnity in cl 10.2(a)(ii) reinforces what is contained in cl 10.2(a)(i) that there is a principal obligation on the part of the guarantors.
2. The difficulty with this submission is that it ignored the different subject matter of the obligations in cl 10.2(a)(i) (guarantee) and cl 10.2(a)(ii) (indemnity). The subject matter of the guarantee is the Money Owing and the performance of the borrower's obligations under the loan agreement. The subject matter of the indemnity is any liability of the lender to the "Investors" arising directly or indirectly from any breach by the borrower of the loan agreement; that is, the indemnity concerns the liability of the lender to third parties.
3. Contrary to the lender's submission, the reference to "Investors" in cl 10.2(a)(ii) is not plainly a drafting error or "obvious mistake" which can be resolved as a matter of construction as a reference to the lender: Fitzgerald v Masters (1956) 95 CLR 420 at 426-428; [1956] HCA 53; Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; (2000) 9 BPR 17,521 at [34]-[37]. Given that the lender was obtaining the funds for the facility provided to the borrower from offshore, the reference to the Investors should not be construed as a reference to the lenders in the absence of a successful claim for an estoppel or a suit for rectification.

References to "this guarantee and indemnity"

1. Emphasis was placed by the lender on the several references to "guarantee and indemnity" in cll 10.2(b), (d) and (e). But the references in cl 10.2 to the phrase "this guarantee and indemnity" are consistent with the distinction drawn in cl 10.2(a) between the different obligations undertaken by Mr Lee qua guarantor in cl 10.2(a)(i) and qua indemnifier in cl 10.2(a)(ii). Further, there is no reason for reading the reference to "guarantee" in the phrase "this guarantee and indemnity" as embodying the wider meaning of the capitalised term "Guarantee" when the capitalised term is not used in that phrase in cl 10.2 and the lender acknowledged this nomenclature did not greatly assist: see [88] above.

Dispensing with notice

1. Reference was made to the lender's entitlement in cl 10.2(g) to claim directly against a guarantor without having to institute or exhaust its remedies, against the borrower. Clause 10.2(g) does not exclude the variation rule. This provision operates to dispense with the need for either notice of default or previous recourse against the borrower or simultaneous recourse against other guarantors. Clause 10.2(g) makes explicit what would otherwise be the position at general law absent any special stipulation in the guarantee: see, eg, Moschi v Lep Air Services Ltd at 356-357, where Lord Simon said: … that on default of the principal promiser causing damage to the promisee the surety is, apart from special stipulation, immediately liable to the full extent of his obligation, without being entitled to require either notice of the default, or previous recourse against the principal, or simultaneous recourse against co-sureties. …

Principal debtor clause

1. It is said that the description of Mr Lee's obligation as a principal obligation in cl 10.2(a)(i) and (b) is inconsistent with those obligations being in the nature of a guarantee.
2. It is well-established that a principal debtor clause, if sufficiently broadly expressed, is capable of excluding the variation rule: Valstar at [44] (Sackville AJA, McColl and Basten JJA agreeing). That is because "[t]he principles of equity generally applicable to the relationship between creditor and surety, and between co-sureties, may be limited or qualified by the contract between those persons": The Fletcher Organisation Pty Ltd v Crocus Investments Pty Ltd [1988] 2 Qd R 517 at 534-535 (Williams J, who was in dissent in the result).
3. In each case, it is a question of construing the terms of the suretyship to determine whether the variation rule is reserved or abrogated or altered by a special clause: see generally Perry v National Provincial Bank of England [1910] 1 Ch 464 at 471, applied in Bank of Adelaide v Lorden (1970) 127 CLR 185 at 191-193; [1970] HCA 59, where Cozens-Hardy MR said in the context of a special clause reserving the rights of a creditor against the surety: It is important to distinguish clearly between the rights of a surety under an ordinary contract of suretyship not containing any special provisions and the rights of a surety where the instrument creating the suretyship contains certain special clauses … There are a certain number of acts which will not release the surety if, when the act in question is done, there is a reservation of rights against the surety. … When you find in the instrument of suretyship itself a provision that the surety shall be liable notwithstanding certain acts being done by the creditor which would otherwise release him, these doctrines have no application at all. It is not then a simple contract of suretyship. It is true that in one sense it is a contract of suretyship, but it is a contract of suretyship containing special clauses which deliberately exclude certain rights which the surety would otherwise have had.
4. In CIMC Raffles Offshore (Singapore) Ltd v Schahin Holding SA [2013] EWCA Civ 644; [2013] 2 Lloyd's Rep 575 at [57], Sir Bernard Rix LJ (Arden LJ and McCombe LJ agreeing) said of provisions of a guarantee that rendered the guarantor a "primary obligor": … [I]n Heald v. O'Connor [1979] 1 WLR 497 Fisher J said that the phrase "as a primary obligor and not merely as a surety" is merely part of a common form to avoid the consequences of giving time or indulgence to the principal debtor and does not convert what is in reality a guarantee into an indemnity (at 503D). In Marubeni & South China Ltd v. Government of Mongolia [2004] EWHC 472 (Comm), [2004] 2 Lloyd's Rep 198, Cresswell J concluded, in an obiter part of his judgment, that even a guarantee under which the guarantor accepted primary liability did not thereby exclude the principles underlying Holme v. Brunskill (at [142]). In this court in Marubeni [2005] EWCA Civ 395, [2005] 1 WLR 2497 this issue was not reached. A case comment on Marubeni in (2005) JIBLR 488 suggests that in this context an important distinction is to be made between first demand guarantees or performance bonds issued by banks and other forms of guarantee: but that even so, the Holme v. Brunskill doctrine is not necessarily ousted by provisions for primary liability (at 493): Equity prevents two parties to a triangular relationship altering their arrangements behind the back of the third…If anything the justification for the rule in Holme v. Brunskill is heightened in the case of a primary liability instrument, given the more onerous nature of such an instrument on the part of the guarantor… The authors submit, citing textbook and Commonwealth authority, that any ousting of the Holme v. Brunskill doctrine must be clear and unequivocal and that there is no clear decision to support the view that it can be achieved merely by a primary obligor clause.
5. For example, where a surety contract makes no provision for any variation of the contract guaranteed, a principal debtor clause may not constitute a waiver of what would otherwise be the effect of a material alteration to the terms of the surety: Bridgestone Australia Ltd v GAH Engineering Pty Ltd [1997] 2 Qd R 145 at 158 (Moynihan J).
6. In this case, the description of Mr Lee's obligation qua guarantor as a principal obligation in cl 10.2(a)(i) and (b) may operate to dispense with the need for a notice to the guarantors of the borrower's default before any action is commenced against them. However, the clause does not go on to say that the guarantors waive all rights that they otherwise might be entitled to claim. There are no clear and unequivocal words ousting the variation rule in Holme v Brunskill.
7. Further, whilst the loan agreement contained its own provision for variation, the requirement in cl 24.1 that the agreement may only be amended by written agreement between all parties, is inconsistent with the principal debtor clause constituting a waiver of what would otherwise be the effect of a material alteration to the terms of the guarantee: Bridgestone Australia v GAH Engineering.
8. The language of cll 10.2(a)(i) and (b) is distinguishable from cases where it has been held that the wording of the guarantee was sufficient to oust the variation rule. There are no additional words in cl 10.2 to the effect that the obligations of the guarantors shall be deemed for all purposes "not that of a surety": cf a special clause in a surety contract which provides that the surety's liability "be deemed for all purposes that of a principal obligant and not that of a surety", may be sufficient to oust the variation rule: Bank of New Zealand v Baker [1926] NZLR 462 at 474, 476 (Ostler J) and 487-488 (Sim J, Stringer, Reed and Adams JJ agreeing).
9. Nor are cl 10.2(a)(i) and (b) similar to the provisions considered in CIMC Raffles. There the guarantee styled "Deed of Guarantee and Indemnity", included section 1(a), which made reference to a guarantor being a "primary obligor and not merely as surety", and that was developed in section 1(b), which stated that the guarantor agrees "as separate, independent and alternative obligations" that (see at [20]): any sum not recoverable "on the basis of a guarantee" shall nevertheless be recoverable "as if it [the guarantor] were the sole principal debtor"; and (ii) the guarantor bears "a primary obligation to indemnify" the builder against any loss suffered by it as a result of any sum or payment obligation becoming "void, voidable or unenforceable for any reason".
10. Rix LJ accepted at [60], without needing to express any concluded view, that section 1(b) of the guarantee appeared on the face of it to be a powerful clause for the purpose of excluding the Holme v Brunskill doctrine. In this case, cl 10.2(a)(i) and (b) are not worded as broadly as section 1(b) in CIMC Raffles which provided for separate, independent and alternative obligations to that of guarantor, specifically an obligation as principal debtor if any sum was not recoverable on the basis of a guarantee, and an obligation as primary indemnifier if the creditor suffered any loss as a result of any sum or payment obligation becoming void, voidable or unenforceable for any reason.
11. Fletcher Organisation involved a mortgage which contained the following provision: 6 … In order to give full effect to the provisions of this instrument the Guarantor agrees and declares that the Mortgagee shall be at liberty to act as though the Guarantor were the principal debtor and the Guarantor hereby waives all rights in connection with such provisions that it might otherwise be entitled to claim or enforce.
12. As Sackville AJA observed in Valstar at [44], the mortgage in Fletcher Organisation was held sufficient to exclude the right of a co-surety to contribution and to the benefit of every security held by the mortgagee. It was therefore held that a compromise between the mortgagee and the other co-surety did not release the first co-surety: at 527 (Shepherdson J); 537 (Williams J); 543 (Ryan J). By contrast, in this case, the guarantor did not waive all rights of contribution and subrogation.
13. That Mr Lee accepted a primary obligation to the lender under the guarantee did not have the consequence that the guarantee was, in substance, an indemnity. If it was necessary to decide, the lender's notice of contention should be rejected.

Conclusion

1. The appeal has succeeded. There is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.
2. I propose the following orders: 1. Appeal allowed. 2. Orders (1) and (2) made by Fagan J on 6 April 2023 be set aside. 3. In lieu thereof, order that: 1. the plaintiff's claim against the second defendant be dismissed; and 2. the plaintiff to pay the second defendant's costs of the proceedings below. 1. The respondent to pay the appellant's costs of the appeal.
3. GRIFFITHS AJA: I agree with Gleeson JA.

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