Manfred Schoenhoff & Evelyn Schoenhoff v The Commonwealth Bank of Australia

LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT SC 50193/02 FILE NUMBER(S) : LOWER COURT Einstein J JUDICIAL OFFICER :

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41032/03 DC 50193/02

IPP JA McCOLL JA STEIN AJA

24 May 2004 Manfred Schoenhoff and Evelyn Schoenhoff v Commonwealth Bank of Australia Judgment

1 IPP JA: I agree with Stein AJA 2 McCOLL JA: I agree with Stein AJA 3 STEIN AJA:

This is an appeal from a decision of Einstein J dismissing a summons brought by the appellants and upholding the respondent's cross-claim in the sum of $369,195.05. The action concerned a guarantee and indemnity given by the appellants, Mr and Mrs Schoenhoff, to the respondent, the Commonwealth Bank of Australia, for the obligations of a Mr Karl Mansfield arising under a Margin Lending Facility agreement. The latter had defaulted on his obligations and the bank called upon the appellants under the surety and indemnity. 4 The appellants submit that his Honour erred in failing to conclude that the guarantee had been discharged, and, further, in failing to find that the indemnity had also been discharged. 5 The basic principles flowing from Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 at 558-560 are not in dispute. That is that a guarantee is discharged when the creditor's conduct has the effect of altering the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety.

Basic facts 6 The debtor entered into a Margin Lending Facility with the respondent bank in September 1998. Apparently prior to that time and on 14 August 1998 the appellants had lent $40,000 to Karl Mansfield (the debtor) so that he could purchase shares. On or about 3 May 1999 the debtor directed the bank to credit the bank account of the appellants with the sum of $30,000 from his Margin Lending Facility account. The bank carried out the instruction and debited the sum, described as a "Loan Advance", to the debtor's Margin facility account 7 The way in which the lending facility worked is explained in the documents under the heading "How do I make an investment?" Essentially the borrower choses an investment from the bank's extensive list of securities. The borrower then places an order to purchase listed equities with his/her broker and obtains a copy of the contract note for each trade. The bank then settles each trade with the broker. The shares are registered in the borrower's name but the title deeds are held by the bank as security (cl1.2). Interest is charged on the loan as loan funds are advanced. 8 Clause 17 deals with "Guarantee and Indemnity." The guarantee is contained in clause 17.1 and 17.2 and provides: 17.1 The guarantor guarantees that the Borrower will perform all of the Borrower's obligations on time and in the manner specified in the transaction documents. This guarantee continues until all of those obligations have been fully discharged. 17.2 If we ask, the Guarantor must do or pay anything that the Borrower has failed to do or pay under the transactions documents. We need not first ask the Borrower to perform the outstanding obligation 9 The indemnity in clause 17.3 relevantly provides:

17.3 The Guarantor indemnifies us and the Nominee against, and therefore must pay us and the Nominee on demand for, loss or costs we and the Nominee suffer or incur if: (a) the Borrower does not, is not obliged to, or is unable to, perform the Borrower's obligations in accordance with the transaction documents, or (b) the Guarantor is not obliged to perform the Borrower's obligations as anticipated in clauses 17.1 and 17.2; or

(c) … 10 Clause 20.1 is headed 'Rights' and 'Our rights are protected'. It is important to set out in full: Rights given to us under the transaction documents and the Guarantor's liabilities under them are not affected by any act or omission by us or the Nominee or by anything else that might otherwise affect them under law relating to guarantees and indemnities, including:

(a) the fact that we vary or replace the Borrower's obligations under this agreement, such as increasing the credit limit or extending the term; or

(b) the fact that we give the Borrower a concession, such as more time to pay; or

(c) the fact that the Borrower opens another account with us; or

(d) the fact that we release, lose the benefit of or do not obtain any security ; or

(e) the fact that we do not register any security which could be registered; or

(f) the fact that we release any person who has guaranteed the Borrower's obligations under the transaction documents ; or

(g) the fact that the obligations of any person who guarantees the Borrower's obligations under the transaction documents may not be enforceable; or

(h) the fact that any person who was intended to guarantee the Borrower's obligations under the transaction documents does not do so or does not do so effectively; or

(i) the fact that rights in connection with the Borrower's obligations under the transaction documents are assigned; or

(j) the death (or the receipt by us of notice of the death), mental or physical disability or insolvency of any person including the Guarantor or the Borrower. 11 It is common ground that when the bank advanced the $30,000 to the debtor in May 1999 at his request, he did not purchase any shares with it so the bank did not have the security in shares it would otherwise have had. The debtor used the advance to repay part of the $40,000 he had been loaned by the appellants in August, 1998. 12 The appellants' case is that the cash advance was made by the bank in breach of the facility. The appellants contend that the advance could only have been used to purchase shares, which the bank would hold as security. 13 His Honour found that the variation to the facility by the loan advance to the debtor was to the benefit of the appellants since it was paid to them by the debtor in repayment of the debt he owed to them. The appellants dispute the finding. They contend that their position was diminished by the transaction. His Honour also found that considering the whole of the circumstances, the variation was "obviously unsubstantial." It was not prejudicial to them. This finding is also disputed, as is the third, which was that the appellants had not discharged the onus of proving that the variation was unsubstantial.

Consideration 14 One matter needs to be set aside. Both parties adhere to the view that the $30,000 loan advance in May 1999 by the respondent to the debtor was one made under the Margin facility. It was not a separate transaction. That was the way in which it was treated by the bank in the debtor's account with it. 15 It was submitted on behalf of the appellants that because the moneys were lent for a purpose different from the agreement, which was to buy shares, it constituted a breach of the agreement. Another way it was put was as a variation of the agreement. 16 The respondent submitted that the repayment of the debt by the debtor to the appellants, using the $30,000 loan advance, was for their benefit. While their liability under the guarantee was increased, they were no worse off because they had been repaid a debt outstanding for some 8 months. In addition, they were better off because they were able to save on interest payments under their own overdraft facility with the St George Bank. Furthermore, they had the use of the money once it was repaid. 17 I do not accept this submission. It cannot be said that the loan advance by the respondent to the debtor of $30,000 was for the benefit of the appellants since it increased their potential liability under the guarantee and they would not have the protection afforded by secured shares. The fact that they were repaid their debt by Mansfield does not alter this position. The breach or variation is not obviously unsubstantial and not one clearly for the benefit of the guarantor. Indeed, to the contrary, it is plain that the cash advance was to the detriment of the appellants. 18 The fact of the matter is that the conduct of the bank in lending $30,000 to the debtor for a purpose other than to buy shares to be secured by it had the effect of altering the appellants' rights. It was prejudicial to the appellants and the alteration was not unsubstantial.

Clause 20.1 19 However, the respondent argues that cl.20.1 authorised the variation. Clearly the clause was designed to overcome Ankar, see for example the clause in Bond v Hong Kong Bank of Australia Ltd [1991] 25 NSWLR 286 at 298, per Gleeson CJ; Duncombe v ANZ Bank Ltd [1970] Qd R 202 at 207 and see O'Donovan and Phillips, The Modern Contract of Guarantee (1996) (3rd Edition) at 350-352. 20 The introductory words of cl.20.1 make it plain that the bank's rights to call on the guarantee under cl17 are not affected "by any act or omission by us … or by anything else that might otherwise affect them under law, including: (a) the fact that we vary or replace the Borrower's obligations under this agreement,…" See also subclause (d) regarding the bank not obtaining any security. 21 The variation by the bank when it made the loan advance to the debtor for a purpose other than his purchase of shares was such an act as contemplated by the umbrella words to cl.20.1. It had the effect of varying or replacing the obligations of the borrower under the agreement. 22 The appellants rely on the contract of guarantee being construed strictissimi juris so that any ambiguous provisions are construed in favour of the surety (Ankar at 561). But I cannot see any ambiguity in cl.20.1 and it was, as I have said, designed to overcome Ankar. 23 Nor should the word "including" in cl.20.1 be construed to mean "means" (a) to (j) inclusive and no more. The list is of obvious examples which come to mind and is not intended to be an exhaustive list of every circumstance where the rights given to the bank are not affected. Clause 20(1)(a) itself contains two examples but it is not too difficult to see that others would be possible. 24 The appellants also submit that the guarantee is void for uncertainty because the guarantors cannot know of the variation. However, the words of the guarantee in cl.17.1 and 17.2 do not lack any certainty 25 It follows that the appellants must fail in their case that the guarantee had become discharged.

The indemnity 26 It is accordingly unnecessary to address the indemnity in cl17.3. However, if the appellants' claim under the guarantee were to succeed, it is plain that the bank could succeed under the indemnity. 27 The appellants' argument is dependent upon there being implied into the agreement a term that the indemnity will not be altered. This submission comes from O'Donovan and Phillips, at 357 as follows: It is thought, therefore, that the indemnifier will not be discharged in equity by other types of variation of the principal contract, although in particular cases it may be possible to identify an express or implied term in the indemnity to the effect that the contract which is indemnified should not be altered by the parties to it. For example, if the indemnifier promises to indemnify the lessor of a chattel against any loss arising from entering into the lease, it is arguable that the indemnity is given on the basis that the lessor and lessee do not radically alter the nature of the lease. 28 Counsel for the appellants Mr Perram conceded that the statement is not supported by the usual copious footnotes nor by any authority that he or his junior had found. Nevertheless, he submitted that an implied term arose which was breached when the principal parties to the agreement, the bank and the debtor, radically altered the nature of the agreement. 29 Whether or not the learned authors are correct, I do not see that it is possible to imply such a term in this case, particularly given the express content of cl.20.1. 30 It follows that the appeal should be dismissed with costs. * * *

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