Northstate Carpet Mills Pty Ltd v B R Industries Pty Ltd

1207/06 - NORTHSTATE CARPET MILLS PTY LTD v BR INDUSTRIES PTY LTD JUDGMENT 1 HIS HONOUR: This case arises because of a dispute over sales of carpet by the plaintiff to the first defendant in the amount of $17,924.00. The second defendant, Mr Christopher Inskip, is sued as guarantor. 2 The hearing was held before me on 22 and 27 September 2006 at which time Mr S Bell of counsel appeared for the plaintiff, and Mr Inskip appeared in person and also claimed to represent the first defendant, a company of which he is the sole director. 3 It was clear that there was no contest that the first defendant was liable to pay the plaintiff $17,924.00 plus the prescribed amount of interest, but both parties recognised that that commercially was of no moment. The case was argued as to the liability of Mr Inskip on the guarantee. 4 The background which is uncontested is that the first defendant wished to obtain carpet from the plaintiff on credit. The plaintiff is based in Queensland. Its territory representative for NSW is one Leanne Drysdale. Ms Drysdale called on Mr Inskip and informed him that "Everyone who wants to trade with us on credit has to do a couple of cash before delivery trades first. You will have to complete an application and send it to Manfred Steigner in Queensland. He is responsible for the granting of credit by the company. It has nothing to do with me." The first defendant placed an order for cash before delivery in April 2003. 5 The story now moves forward to 23 September 2003. Before that day Mr Inskip must have been given an application for credit account form. He completed that form noting that his monthly credit requirement was $20,000.00. The form contained, inter alia, the following: "The Applicant warrants that the particulars in this Credit Application are true and correct and that they will advise Northstate Carpet Mills Pty Ltd of any changes in company ownership.

What is the result of the case? 11 Before dealing with these matters I should review the evidence that I have not yet noted, though it does not proceed very far. 12 It will have been noticed that the guarantee form was not completed with the name of the guarantor nor the customer nor their respective addresses. It will also be noted that there is nothing in the documents before the court to indicate that the contract or the guarantee were accepted by the plaintiff. 13 Ms Drysdale swore that she was not aware of any credit arrangement with the first defendant until 29 September 2003 when Manfred Steigner called her and said, "We have opened a 14 days account for the customer". She then called on Mr Inskip and told him, "Manfred has advised that he has opened a 14 day account for you. Now you can trade on credit and don't have to only trade on cash before delivery". Mr Inskip allegedly said "Okay". 14 It will be noted that the application was not for a 14 day credit account, but for a 45 day credit account. It should also be noted that at no stage did the plaintiff ever return the application form duly accepted, nor did it ever acknowledge the guarantee or make it clear that it was to apply to the 14 day credit account. 15 Mr Inskip himself said that he deliberately did not fill in the guarantee form as he did not intend to guarantee anything. Mr Bell asked me not to believe that evidence. I do not consider I have sufficient material to do so. Alternatively, Mr Bell put to me that that was false and misleading conduct in trade and commerce to utter such a document in blank not intending it to be a guarantee but obviously intending that the supplier would act upon it. Mr Steigner gave evidence that he would not have granted a credit account without a guarantee. He was not cross-examined. 16 In this factual background I turn to the six points that I outlined earlier. 17 1. The modern law of contract was formulated in the 19th century. It owes its existence to the action of assumpsit, an action on the case. However, in the early 19th century from the influence of Pothier and other continental jurists, and later in the 19th century under the influence of Professor Langdell in the United States and authors such as Anson and Pollock, the mass of individual cases were analysed and rules deduced from them. The rules that were deduced were that a contract comes about as a result of an offer made by one person and unconditional acceptance of that offer by the other person, which unconditional acceptance is communicated to the first person. 18 One strongly suspects that the text writers when compiling their books of leading cases which supported their rationalisation of the cases in assumpsit omitted material not supporting their hypotheses. However, their hypotheses soon became black letter law though in more recent times it has been recognised that there may be contracts even though one cannot analyse the situation in terms of offer and acceptance. The most recent authoritative acknowledgment of this is the judgment of the Court of Appeal in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 in which McHugh JA gave the leading judgment. However, the principle that one can infer that there must have been a contract entered into from the conduct of the parties has been employed in cases for over a hundred years; see eg Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 and Brown v Brown (1905) 5 SR (NSW) 146. This type of situation does not raise its head in the instant case, but I need to mention it in view of an argument that was put by Mr Bell which I will deal with later. 19 Various scenarios were presented by Mr Bell as to the analysis of the instant case. The principal scenario was that by submitting the application for credit accompanied with the signed blank guarantee form, Mr Inskip and his company were making an offer to the plaintiff which was open to the plaintiff to accept. The plaintiff says it accepted the offer. However, it never communicated that acceptance. This is usually fatal. 20 However, it is possible for offers to be accepted by conduct and Mr Bell said that is what occurred in the instant case. He relies on a passage in O'Donovan and Phillips, The Modern Contract of Guarantee, 3rd ed (LBC, 1996) at pp 38-39: "In accordance with normal contractual principles the method of acceptance will depend upon the terms of the offer. But often the promisor's offer to provide a guarantee may be accepted by conduct. Thus, in an offer to furnish a guarantee when goods are supplied to the principal, the acceptance of the offer will take place when the goods are supplied." 21 It is always dangerous to rely on statements in textbooks, even eminent textbooks like O'Donovan and Phillips on guarantees. One must go back to the primary authorities. When one does that one can see that whilst the statements made in the text are generally correct, they are a slight over-simplification. 22 The leading case in this area of the law is the decision of the Court of Appeal in Latec Finance Pty Ltd v Knight [1969] 2 NSWR 79. In that case, Jacobs JA, giving the judgment of himself, Sugerman and Walsh JJA said at 81: "The ordinary rule is that a contract is not made, that an offer is not accepted, until the acceptance of the offer has been communicated. If the parties, as they are entitled to do, wish to vary this rule such an intention must be made clear in the offer. The variation may, generally speaking, take either of two forms. It may provide for the acceptance by the doing of an act, which may be done without any relation to communication. The well known example of this appears in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. … Secondly the offer may provide expressly or impliedly for acceptance to be communicated in a particular manner, so that acceptance is deemed to have been communicated when that manner is adopted, whether or not the communication is actually received. A common case of this kind is found in the sufficiency of an acceptance by post if the offer is made by post." 23 That passage is binding on me. However, I would not for a moment suggest that it was revolutionary; it merely stated what the law has always been. It was applied by Yeldham J in Mandalinic v Government Insurance Office of NSW [1983] 1 NSWLR 598, 611, where he said: "The principles enunciated in Latec Finance Pty Ltd v Knight and in the cases referred to therein do make it clear that the mere endorsement without communication of that fact (ie of acceptance) cannot constitute an acceptance." 24 In the Mandalinic case the insurance company had merely written the word "accepted" on the plaintiff's application form and never communicated it to the plaintiff. 25 The decision was reversed on appeal Georgoulis v Mandalinic [1984] 1 NSWLR 612, principally on the ground of estoppel and on the ground that if a person proposes insurance to an insurance company for a particular period and the insurer only grants it for a lesser period, the insurer has accepted the offer, it has not made a counter offer. The basic law stated by Yeldham J was not affected. 26 The cases cited by O'Donovan and Phillips in their footnotes 27-29 do not affect what I have just said. 27 The principal illustration is the decision of the English Court of Appeal in Sorby v Gordon (1874) 30 LT 528. However, in that case the Full Court of Exchequer consisting of Bramwell and Pigott BB, took the view that on the facts there was an express offer of guarantee which could be accepted by the plaintiff's shipping the relevant goods. It does not state any matter of principle. 28 The other cases referred to by O'Donovan and Phillips really deal with the question of consideration for a guarantee rather than when an offer of a guarantee is accepted. 29 Mr Bell referred to the decision of this Court in Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523. 30 That was a case where a property developer had the motto that he never signed contracts, but an architect, at his request had done a tremendous amount of work in respect of his development. McHugh and Samuels JJA held that there was a contract in place. McHugh JA said at 534: "The objective theory of contract requires an external manifestation of assent to an offer. Convenience, and especially commercial convenience, has given rise to the rule that the acceptance of the offer should be communicated to the offeror. After a reasonable period has elapsed, silence is seen as a rejection and not an acceptance of the offer. Nevertheless, communication of acceptance is not always necessary. The offeror will be bound if he dispenses with the need to communicate the acceptance of his offer … ". 31 The Court was not referred to the Latec case but what McHugh JA said in the passage I have just set out is consistent with it, that is, one must look to see the terms of the offer to see whether there can be an acceptance in other than the ordinary way. 32 However, his Honour continued: "Nevertheless, the silence of an offeree in conjunction with the other circumstances of the case may indicate that he has accepted the offer … . The offeree may be under a duty to communicate his rejection of an offer. If he fails to do so, his silence will generally be regarded as an acceptance of the offer sufficient to form a contract." 33 Kirby P at 528 took the same view saying that: "The circumstances in which assent may be inferred, although never specifically stated, vary with the infinite variety of facts which come before the courts in disputed contractual cases. From the facts, looked at objectively, a court may be willing to infer a party's acceptance." 34 I cannot, however, see anything in the facts and circumstances of the present case which would take it out of the ordinary rule. The application form provided for acceptance by an officer of the plaintiff. This tells against any suggestion that the offer implied that there could be acceptance by conduct or that one could infer acceptance by the actions of the parties. 35 The Empirnall case was considered by Allsop J in the Federal Court in a mammoth judgment Branir Pty Ltd v Owston Nominees Pty Ltd (No 2) (2001) 117 FCR 424 at 525. His Honour then said: "The essential question in such cases is whether the parties' conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract." 36 His Honour quotes a number of cases as examples including cases which are in the Brogden v Metropolitan Railway type category rather than cases where an acceptance has been inferred from all the circumstances. However, even applying Allsop J's test, we just do not have the evidence here to conclude that the parties would have taken the non-communication from the plaintiff's head office as showing that there was an acceptance. 37 Mr Bell points to Ms Drysdale's words to Mr Inskip that Mr Steigner had granted him a 14 day credit account. That certainly was not an acceptance of a communication of the acceptance of the offer which was asking for a 45 day account. Although in cases such as Georgoulis v Mandalinic cited earlier, one can sometimes construe an offer as meaning "grant me a 45 day credit account or any other credit account that you see fit to grant me", it is difficult in the light of the wording of clause 2.1 of the terms and conditions for the sale of goods to construe it in this way. Then Mr Bell says, "Well one might forget about the application for credit, the guarantee was a completely separate transaction and it was an offer to the company that if it supplied Mr Inskip would stand guarantor. The plaintiff did supply and Mr Steigner says that he would not have supplied were it not for the guarantee being in place." 38 With respect, the matter is not as simple as that. Guarantees must be strictly viewed. A person who is guaranteeing that someone will pay a debt within 45 days is in a different plight to a person who is guaranteeing that someone will pay a bill in 14 days. Ordinarily, if the contract between the principal debtor or the person who becomes the principal debtor and the creditor is varied, then the guarantee is discharged. On like reasoning, if one sends an application for a 45 day credit account in the same envelope as a guarantee for supply, a reasonable bystander would infer that the guarantee was in connection with that transaction and none other. 39 Accordingly, in my view there was no contract between the parties in respect of the matters contained in the application for credit account and the guarantee. There of course, was a contract between the supplier and the first defendant with respect to the supply of carpets, but the plaintiff has not shown to my satisfaction that the guarantee was part of that contract. 40 Some might think that this ruling is artificial. Unfortunately, courts have been noticing over the last few years that commercial enterprises have been cutting corners, mostly in the name of cost reduction and it has not been uncommon for finance companies not to send the debtor or its guarantor copies of the completed finance contracts and rely on the fact that the customer has the loan or product as the case may be. It is fashionable to minimise the importance of complying with the law of contract. Unfortunately, this line of thinking, whilst it may reduce costs, leads to the present sort of problem, that is, where too little attention was given to the making of the contract as a result of which what the supplier thought was a guaranteed transaction was not. 41 I must say that Mr Bell tried every possible argument to try and establish the guarantee. He is to be commended for his ingenuity. I deal with other arguments under the ensuing heads of these reasons. However, the reason for loss was not any fault of Mr Bell. It was because of the neglect (doubtless for reasons of cost cutting) to ensure that the contract was properly documented. 42 2. As there is no contract, there is no need to deal with this question. 43 3. It is to be noted that the guarantee was to apply in accordance with the law of Queensland. Queensland still retains the Statute of Frauds requirements with respect to guarantees; see Property Law Act 1974, s 56. The Act requires writing or a memorandum or note in writing signed by the party to be charged. The Statute of Frauds requirements are that the note or memorandum must contain essential parts of the guarantee, that is, what is often called "the four Ps", the parties, the price, the promises and the property. 44 Whilst one may be able to construe the guarantee as containing the names of the parties, and the matter of property is not relevant, and s 56(2) of the Act may dispense with the need of stating the price, there is not a full statement of the promises because the customer is not named. There are some situations in which one can read the signed document in conjunction with other documents, see for instance, the material in Carter and Harland, Contract Law in Australia, 4th ed (Butterworths, Australia, 2002) para [515]. However, Mr Bell precluded himself from so doing, because he chose (doubtless for good reason) to argue on the basis that the application for credit and the guarantee were completely separate documents and transactions. 45 Accordingly, had there been a guarantee it would be unenforceable by the law of Queensland. 46 No-one raised the question (and it really does not affect the result as things have turned out) as to whether a guarantee unenforceable by the law of Queensland is enforceable in NSW courts because there is only a procedural bar to its enforcement. 47 4. I now pass to rectification. Mr Bell wants to have the document rectified by adding the name of the guarantor and the customer in the blanks at the beginning of the document. Mr Inskip opposes that on the basis that he never intended to complete the document and never intended it to be a guarantee and virtually asked me to infer that he had hoped that it would just pass muster in the credit department without anyone insisting on doing it properly as in fact happened. On the other hand, Mr Steigner says he made a mistake in that he would not have granted any credit without the guarantee. 48 Unless I disbelieve Mr Inskip, there is no evidence of common mistake, that is, a mistake made by both parties about the document. I don't see sufficient reason to disbelieve Mr Inskip. He may have been tricky or smart in the business sense, but there is no material to show that he had made a mistake. 49 If one construes the guarantee as a one party deed it is possible to rectify it if a mistake has been made. However, all the cases of which one of the more recent examples is Christie v The Public Trustee (1921) 22 SR (NSW) 148, were cases where the maker of the deed made a mistake. There is no case where the recipient of a one party deed made the mistake. 50 Thus, the basis for rectification has not been made out. 51 I should note that it would not matter that the contract may have been unenforceable without rectification as the document once rectified would become a memorandum sufficient to satisfy the statutory requirements; see Malmesbury v Malmesbury (1862) 31 Beav 407, 417; 54 ER 1196, 1200. 52 I should also note that even if Mr Steigner had been negligent in acting on the document in blank, the authorities say that, generally speaking, negligence is no defence to a rectification suit; see Ball v Storie (1823) 1 Sim & St 210, 219; 57 ER 84, 88; Weeds v Blaney (1977) 121 Sol Jo 794 especially per Goff LJ and Katsaounis v Belehris [1995] Anz ConvR 114, 118 (Debelle J). There is, however, no case where there has been a finding that gross negligence is a defence to rectification. Accordingly, Mr Steigner's granting credit without appreciating that the document was defective would not of itself, amount to a defence to the suit. 53 While the fact that an instrument in its unrectified form is void for uncertainty is no bar to rectification, Issa v Berisha [1981] 1 NSWLR 261, I do not consider one can rectify a contract that does not exist because there has never been a communication of acceptance; cf Coolibah Pastoral Co v The Commonwealth (1967) 11 FLR 173. 54 Accordingly, the case on rectification fails. 55 5. As I said earlier, Mr Bell sought to amend the summons to rely on breach of the Trade Practices Act and estoppel. 56 I refused this application. This was on two grounds. First, the defendant was a litigant in person who had already come to court to meet a particular case, had no chance of meeting the new ways in which the plaintiff was putting its case legally, and there was no way in which he could be adequately compensated for an adjournment. The second ground was that the two new ways of putting the case would fail, it having been said by Mr Bell that there was no further evidence. 57 As to the Trade Practices case, I can see that a person sending a blank form of guarantee with no intention that the guarantee should operate might be considered to be misleading conduct in trade and commerce. However, the facts do not make me infer, and I do not infer, that that was what induced the granting of credit. Care must be taken in accepting statements made in hindsight that "I would not have done X if the other side had not done Y". There is very sketchy evidence from the plaintiff and it would seem to me that on the balance of probabilities the plaintiff merely discerned that its paper work had been returned by Mr Inskip and then for some reason or other, decided not to grant a 45 day credit but a 14 day credit. As Mr Inskip has submitted, the facts and circumstances show that there was never any evaluation of the details which he provided. The Trade Practices claim must fail on inducement. 58 So far as estoppel is concerned, Mr Bell had difficulty in indicating what type of estoppel he was putting forward. He finally said "promissory estoppel". That seemed to suggest, contrary to what is set out in Handley on Estoppel by Conduct and Election (Thomson, London, 2006) 1-028, that there was really no difference. I cannot see any promise made by Mr Inskip which in any way influenced the conduct of the plaintiff, nor can I see any material which would suggest that the subsequent trading brought forth some estoppel of a different kind. Courts must always be very careful not to weaken the law of contract and the commercial certainty that the principles of contract provide by being too free with implying circumstances that give rise to estoppels. 59 6. It follows that the plaintiff's case against Mr Inskip wholly fails and must be dismissed with costs. 60 Under clause 13 of the guarantee the plaintiff placed a caveat on the title of one of Mr Inskip's properties. It is acknowledged that if I come to the view that I have reached that the caveat must be removed. 61 Mr Inskip asks for compensation under s 74P of the Real Property Act 1900 because the caveat has been on his title. However, in order to get damages it must be demonstrated that not only did the caveator have no caveatable interest, but also he did not have an honest belief based on reasonable grounds that that caveat interest existed. I cannot see how the second has been made out. Accordingly, I cannot give Mr Inskip any damages. 62 The result accordingly is that the plaintiff is entitled to a verdict against the first defendant for $17,924.00 plus interest in accordance with the Civil Procedure Act 2005 and the plaintiff is entitled to its costs of the action against B R Industries Pty Ltd. In the proceedings against Mr Inskip, the proceedings are dismissed with costs and the Court orders that the plaintiff, within 48 hours of receipt of these reasons by its counsel, remove Caveat AB903223 affecting Register Folio A/375201.

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