Rava v Logan Wines & Anor

CATCHWORDS: CONTRACTS - General contractual principles - Construction and interpretation of contracts - PARTNERSHIP - Rights and duties of partners inter se - Capital, advances and share of profit or loss

Andar Transport Pty Limited v Brambles Ltd (2004) 217 CLR 424 Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 CASES CITED: Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 North v Marina [2003] NSWSC 64; (2003) 11 BPR 21,359 Pan Foods Company Importers & Distributors Pty Limited v ANZ Banking Group Limited (2000) 170 ALR 579 TCN Channel 9 v Hayden (1989) 16 NSWLR 130 Upper Hunter County Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429

Neville John RAVA (Apellant) PARTIES: Logan Wines Pty Limited (First Respondent) Cleardale Investments Pty Limited (Second Respondent)

COUNSEL: N J Owens (Appellant) M Hadley (First Respondent)

SOLICITORS: Glasheen & Quilty (Appellant) Milne Berry & Berger (First Respondent)

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 040577/06

HODGSON JA TOBIAS JA CAMPBELL JA

FRIDAY 16 MARCH 2007 NEVILLE JOHN RAVA v LOGAN WINES PTY LIMITED & ANOR Judgment 1 HODGSON JA: I agree with the orders proposed by Tobias JA and I agree substantially with his reasons.

2 It was submitted by Mr Owens for the appellant that cl 2 of the relevant agreement had operation only in relation to "the debts of the partnership", and had operation only to the extent that those debts were unpaid; and he submitted that the clause had the effect that Mr Logan and Mr Rava were then obliged to contribute equally to whatever payment had to be made.

3 He submitted that this was the clear effect of the words of the clause, and he relied on the statement in Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109 to the effect that the clear meaning of the words chosen should be given effect to.

4 He submitted that this construction was also confirmed by the principle that agreements in the nature of a guarantee should be construed in favour of the guarantors, in this case Mr Logan and Mr Rava.

5 One difficulty with these submissions is that they would mean that whatever cl 2 was, it did not operate as a guarantee. It could not operate as a guarantee in favour of any creditor of the partnership, because no creditor of the partnership was a party to the agreement. It could not then operate literally as a guarantee of debts of the partnership. 6 The only sensible way in which the clause could operate as a guarantee would be as a guarantee by each principal of the obligation of his company to contribute equally to payment of partnership debts, such guarantee being given by each principal to the other partner and its principal. 7 In my opinion that construction of the clause is supported by the language of the clause, and in that sense the clause can be regarded as amounting to a guarantee of debts of the partnership. It is also a guarantee in respect of which the obligations of Mr Logan and Mr Rava are entirely "on an equal basis", as the clause proposes. That is also a construction that makes full commercial sense. 8 On the other hand, the construction supported by Mr Owens makes the clause quite different from a guarantee, and in that sense is not supported by the language. On his construction, the clause would operate only where both partners, that is, both companies, defaulted in payment of debts of the partnership, and where in those circumstances one individual then paid those debts. On the construction put forward by Mr Owens that individual could then compel the other individual to pay one-half those debts. 9 In my view that construction makes no commercial sense. The creditors could not compel either individual to make the payment; and the only purpose that could be envisaged for an individual voluntarily making such a payment would be with a view to enabling the continuance of a partnership in which both the partners were defaulting on their obligations, and the principal of the other partner was not co-operating. As I have said, in my view that makes no commercial sense. 10 So for those reasons, in addition to what Tobias JA has said, in my view the appeal should be dismissed with costs. 11 TOBIAS JA: In or about August 2002 the first respondent, Logan Wines Pty Limited (Logan Wines) and the second respondent, Cleardale Investments Pty Limited (Cleardale) proposed to enter into a joint venture arrangement which contemplated the formation of a company to be known as NSW Regional Wine Distributors Pty Limited for the purpose of acquiring certain wine and then re-selling it primarily to regional customers in New South Wales and the Australian Capital Territory (the business). The new company was not formed but the two companies commenced the business trading under the business name of NSW Regional Wine Distributors (the partnership). 12 At all relevant times it was not in contest that the appellant, Neville John Rava (Mr Rava) was the controlling shareholder and managing director of Cleardale and Malcolm Logan was the controlling shareholder and managing director of Logan Wines. As will appear, each was referred to in the relevant written agreement between the parties as the "principal" of their respective companies. 13 The business was ultimately unsuccessful as a result of which the partnership owed debts to various creditors. It would seem that Cleardale was unable to contribute to the payment of those debts which were paid out by Logan Wines. Subject to a number of adjustments which are not presently relevant, Logan Wines sought to recover from Mr Rava one-half of the amounts which it had paid to the partnership's creditors in satisfaction of their debts. As Mr Rava denied that he was liable to reimburse the amount claimed by Logan Wines the latter instituted proceedings in the District Court against Mr Rava claiming $93,873.91 together with interest, fees and costs. Its total claim was $120,020.31. 14 Cleardale admitted that that amount was owed by it to Logan Wines but Mr Rava denied that he was liable to Logan Wines for the failure of Cleardale to pay the amount claimed. 15 His Honour, Armitage DCJ, heard the proceedings and on 24 August 2006 found in favour of Logan Wines and entered judgment against Mr Rava in the sum claimed together with costs. It is against that decision that Mr Rava appeals to this court. 16 The original written agreement between Logan Wines and Cleardale was executed by each of Mr Logan and Mr Rava on behalf of their respective companies on 3 September 2002. That document recited that the parties had agreed to form a business under the name "NSW Regional Wine Distributors" to be jointly owned by them and to conduct the business of the sale and distribution in New South Wales and the Australian Capital Territory of certain wines. Clause 2 of the agreement provided that each of the companies owned one-half of the whole of the business and each was entitled to or responsible for one-half of its profits or losses, as the case may be. 17 The agreement was in effect varied by the execution by Mr Logan and Mr Rava on behalf of Logan Wines and Cleardale respectively on 5 March 2003 of a document headed "Reaffirmation of Joint Venture Agreement Between the Parties" (the Reaffirmation). As the issue before the primary judge was confined to the proper construction of this document I shall set it out in full: "1. NSW Regional Wine Distributors is a joint venture/partnership between Cleardale Investments Pty Limited and Logan Wines Pty Limited in which profits and losses are shared equally and both companies share equally the debt funding responsibilities and payment of creditors.

2. The debts of the partnership are also guaranteed by its principals, Malcolm Logan and Neville Rava, on an equal basis.

3. The advance of $10,000 by Logan Wines Pty Limited to NSW Regional Wine Distributors is an unsecured loan at call and ranks in priority to any joint venture profit or loss.

4. Neville Rava to be paid from 1 February 2003 $1200 per month as an administration fee (not salary) plus up to $150 per month for mobile phone and half of office rent, these fees to be reviewed when the joint venture becomes profitable." 18 As I have noted, Mr Rava was the controlling shareholder and managing director of Cleardale and Mr Logan was the controlling shareholder and managing director of Logan Wines. It was also common ground that Logan Wines and Cleardale were in partnership and that as a matter of law each was entitled to share equally in the profits of the partnership and each was liable to contribute jointly and severally to the debts of the partnership. Paragraph 1 of the Reaffirmation confirmed that position. 19 The issue between the parties focused upon the true construction of cl 2 of the Reaffirmation. It was submitted by Logan Wines that if, as in the present case, one of the partners, here Logan Wines, paid out a number of debts of the partnership, then if Cleardale did not contribute to the payment of those debts, Logan Wines was entitled to call upon Mr Rava to contribute Cleardale's one-half share of the debts, the payment of which it had failed to meet. On the other hand, Mr Rava contended before his Honour that cl 2 of the Reaffirmation had no operation once there were no outstanding debts of the partnership. 20 Accordingly, because Logan Wines had paid out those debts there was no obligation upon Mr Rava to "guarantee" debts which no longer existed. In particular, it was submitted on behalf of Mr Rava that cl 2 was not a true guarantee because it did not constitute a collateral contract between Mr Rava and any creditor of the partnership whereby Mr Rava guaranteed the payment of the partnership's debts to that creditor. 21 His Honour accepted that the word "guarantee" in cl 2 had been used loosely by the parties who were businessmen and not lawyers and that the Reaffirmation, having been drafted by lay persons, needed to be construed in the light of that fact. 22 In essence, both before the primary judge and on the appeal, Mr Rava submitted that the effect of cl 2 was purely and simply to cater for the case where the partners, Logan Wines and Cleardale, were unable to meet any debt incurred by the partnership in which event Mr Logan and Mr Rava were required under cl 2 to pay that debt in equal shares. Accordingly, where any partnership debt had already been paid out by either of the partners cl 2 had no operation because there were no outstanding "debts of the partnership" within the meaning of that provision. 23 Notwithstanding the submission on behalf of Mr Rava that the so-called guarantee in cl 2 was not a true guarantee, Mr Rava relied upon, and his Honour accepted, the proposition that cl 2 was to be construed strictly against Logan Wines so that if there was any ambiguity in its operation and two interpretations were equally available, that favouring Mr Rava should be adopted in preference to any interpretation favouring Logan Wines. In this respect reliance was placed upon the decision of the High Court in Andar Transport Pty Limited v Brambles Ltd (2004) 217 CLR 424 AT 433-437; cf. Pan Foods Company Importers & Distributors Pty Limited v ANZ Banking Group Limited (2000) 170 ALR 579 at [11]-[13] and [24] per Kirby J. 24 The primary judge nevertheless considered that the meaning of cl 2 was to be resolved by reading it in conjunction with cl 1. It followed that the effect of cl 2 was to provide that if Cleardale and Logan Wines did not meet the debts of the partnership in equal shares, as cl 1 required them to do, then Mr Logan and Mr Rava would be liable to contribute to such debts in equal shares. According to his Honour that interpretation was uncontroversial as it assumed that the partnership debts were unpaid. In the present case they were paid by one of the partners only. Did this make a difference? 25 The primary judge held that it did not. He considered that the clear meaning of cl 2 was to provide that where, as in the present case, Logan Wines had paid the debts of the partnership and Cleardale had failed to contribute thereto the purpose of cl 2 was to provide that in such an event Logan Wines was entitled to call upon Mr Rava to pay the share of the debts that the company of which he was "principal", namely, Cleardale, did not pay. 26 Because of the word "also" in cl 2 his Honour considered that the intention of the parties was that just as Logan Wines and Cleardale had agreed in cl 1 to share equally "the debt funding responsibilities and payment of creditors" of the partnership, so also did Mr Logan and Mr Rava. 27 His Honour then referred to the words "share equally" in cl 1 and "on an equal basis" in cl 2 and concluded that those words imposed what he referred to as "symmetrical obligations". He explained that expression in the following terms: "That is to say, the two clauses, cl 1 and cl 2 together, have the effect that if Logan [Wine] and Cleardale do not share equally in the payment of the partnership debts then Mr Logan and Mr Rava assume the obligations which their companies had, that is, to share equally in such debts."

28 Mr Rava submitted on the appeal that the competing constructions with respect to cl 2 were as follows: (a) That of Mr Rava, namely, that in circumstances where the partners were unable to pay the debts of the partnership, cl 2 operates to require Mr Logan and Mr Rava to contribute equally to remedy the shortfall in the partnership's funds.

(b) That of Logan Wines, namely, that in circumstances where one party pays more than its half share of the debts of the partnership, the "principal" of the under-contributing partners is liable to satisfy his company's debt to the over-contributing partner. 29 Mr Rava submitted that his Honour erred in accepting the second of the above constructions for four principal reasons. The first was that the word "also" in cl 2 did not have the effect suggested by his Honour. The second was that if there were "no debts of the partnership", then cl 2 was not engaged. It was submitted that in the present case the "debts of the partnership" had been replaced by a debt owed by Cleardale as the under-contributing partner to Logan Wines as the over-contributing partner and that such a debt owed by one party to the other was not a "debt of the partnership". 30 The third was that the words "on an equal basis" in cl 2 tell against the construction adopted by the primary judge. Rather, those words indicated that the obligation created by cl 2 could only ever be imposed on Mr Logan and Mr Rava together rather than individually. It was submitted that if cl 2 required money to be paid then both Mr Logan and Mr Rava were required to bear that burden equally. It could not have been intended that cl 2 was to operate as a guarantee by Mr Rava of Cleardale's obligations to Logan Wines or by Mr Logan of Logan Wines' obligations to Cleardale. 31 The fourth was that the use of the word "guaranteed" by lay persons in cl 2 indicated that the parties intended Mr Logan and Mr Rava to be liable to contribute to the payment of the debts of the partnership only if the partnership itself could not pay those debts. Accordingly, before cl 2 could be engaged it had to be demonstrated that:

(a) There were outstanding "debts of the partnership", and

(b) that the partnership itself could not meet those debts.

32 Finally, it was submitted that the purpose served by cl 2 was that it was a "guarantee" by Mr Logan and Mr Rava that they would step in only to the extent that the partnership was unable to meet its obligations. In practical terms, therefore, it provided each partner with a means of compelling the other party to continue to fund the business in circumstances where the partnership's funds were deficient. 33 Logan Wines submitted in its written submissions that the construction contended for by Mr Rava was "egregious, commercially implausible and contrary to the equitable maxim: equity is equality". The approach of Mr Rava, it was contended, ignored the central issue, namely, what did the parties intend? By digressing to the characteristics of guarantees, Mr Rava sought to avoid what was the parties' plainly expressed intention. 34 It was further submitted that the construction contended for by Mr Rava resulted in an unusual and elaborate arrangement which was required to be teased out of what was the simple language of commercial lay people. Compared to the plain idea of each principal of Logan Wines and Cleardale backing their respective company's obligations to meet the debts of the partnership Mr Rava's construction had the consequence that neither principal was required to pay anything unless both partners were unable to meet the debts of the partnership. In other words, if both partners failed or were otherwise unable to meet the debts of the partnership, then each of the principals were required to do so equally. On the other hand, if one partner was unable to meet the debts of the partnership by contributing its half share but the other partner was in funds and able to do so and in fact did pay those debts, then the principal of the defaulting partner was under no obligation to meet his company's liability in respect of those debts. 35 Accordingly, it was submitted that the construction contended for by Mr Rava resulted in the creation of an arrangement by two businessmen which would only benefit the principal of the partner which failed to honour its primary obligation to pay its share of the debts of the partnership. It made no commercial sense, so it was contended, that when a partner failed to pay but the other partner stepped forward and met its legal obligation to pay the whole debt the payment of that debt by the non-defaulting partner deactivated the promise of the principal of the defaulting partner to stand behind the partner of which he was the principal. 36 In my opinion Mr Rava's submissions should be rejected. It was common ground that the primary liability to pay the creditors of the partnership was imposed on each of Cleardale and Logan Wines equally. Each was jointly and severally liable to pay the partnership creditors. Each principal agreed to guarantee the "debts of the partnership...on an equal basis". In its context the so-called guarantee constituted a promise by each principal to pay the debts of the partnership where the partner of which he was principal failed to pay its share. 37 In the present case there were partnership debts which both partners, Logan Wines and Cleardale, were severally required to pay in full. It followed that if one partner could not pay, the other was obliged to do so and in respect of the whole, and not only half, of the debt. The failure of Cleardale to pay its half share of the debts of the partnership in my opinion enlivened Mr Rava's guarantee to do so. 38 In my opinion no other possible construction of cls 1 and 2 is available which makes practical common sense. In particular, cl 2 is not open to the construction advanced by Mr Rava that he was not required to answer to his guarantee of Cleardale's liability to pay its one-half share of the debts of the partnership if the other partner, Logan Wines, had paid those debts in full as it was obliged to do with the result that there was then no outstanding partnership indebtedness. Such a construction would not make commercial sense as each partner was severally (as well as jointly) liable for the whole of each of the debts of the partnership owed to its creditors. 39 It is true that the guarantee contained in cl 2 was unusual insofar as it was not a conventional guarantee in which a surety promises the creditor that if the principal debtor does not pay the surety will. In the present case cl 2 was clearly intended to contain a guarantee or promise by each of Mr Rava and Mr Logan to answer for the default of the partner of which each was the principal in meeting that partner's primary liability under cl 1 to pay the debts owed to the partnership's creditors. 40 The fact that Logan Wines paid the whole of those debts is irrelevant. What is material is that Cleardale failed to pay its share of the partnership debts and it was that failure that Mr Rava guaranteed . As Logan Wines paid the whole of the debts it was entitled to call upon Mr Rava's guarantee to answer for Cleardale's failure to pay its one-half share of those debts. 41 In oral argument it was submitted that the beneficiary of the promises of each of Mr Logan and Mr Rava was the partnership itself, being the two companies jointly and not severally. If the partners both paid the debts of the partnership but there was a shortfall then Mr Logan and Mr Rava would be obliged under cl 2 to jointly pay the shortfall equally. 42 The difficulty with this construction is that if both partners declined or were unable to pay the debts of the partnership then cl 2 did not oblige Messrs Logan and Rava to do so. This is because they would be unlikely to volunteer payment to the partnership creditors when the creditors themselves had no enforceable claim against the two principals. Of course they could but they would not be obliged to do so by the terms of cl 2. 43 In my opinion such a construction makes no commercial sense. The only purpose of cl 2 was to impose an obligation upon each of Mr Logan and Mr Rava when the debts are paid not by both partners but only one. In other words, each guarantees that the company of which he is principal will pay its share of the partnership debts. Such an obligation will only arise when one partner pays the whole of the debt but the other does not contribute its one-half share. This is because if both partners pay the whole of the debt there can be no engagement of the guarantee. If neither pays then again there can be no engagement of cl 2. 44 It was nevertheless submitted that cl 2 would only be engaged when the partners paid, say, 80 per cent of the debt. In such a case each of Mr Logan and Mr Rava would be required to pay 10 per cent of the debt. But why is this reasonably so? They would not be obliged to pay the creditor the shortfall of 20 per cent and the creditor would have no recourse to the two principals for that purpose. Their only reason to volunteer payment would be to avoid the creditor suing the partners for the shortfall or otherwise to save the partners from being liquidated. In my view that is a far too narrow and commercially nonsensical construction of cl 2 and I would reject it. 45 In summary, while the guarantee in cl 2 is not one between Mr Logan and Mr Rava on the one hand and the partnership creditors on the other, it is a guarantee between those two individuals as the principal and guiding mind of each of the partnership companies and, therefore, of the partnership itself. As such, the provision clearly reinforces the obligation in cl 1 of the partners to "share equally" the responsibility for funding the partnership to pay its creditors. It extended that obligation from the partners themselves to their individual principals. 46 Accordingly, as Logan Wines submitted, it would be a commercial nonsense to construe cl 2 in such a way that the better funded of the two partners (whichever that may have been at the time) was agreeing to put itself in a position where it would end up bearing the entirety of the financial risk of the venture or that, if it had agreed to that course, it would have allowed the partnership to run up debts in circumstances where if one of the parties paid the debts but the other failed to contribute its share, the paying partner had no recourse to the defaulting partner's principal. The plain words of the clause do not permit of such a construction. 47 For the foregoing reasons in my opinion the primary judge was correct to construe cl 2 in favour of Logan Wines and no error in his Honour's construction of that provision has been demonstrated. I would therefore propose that the appeal be dismissed with costs. 48 CAMPBELL JA: I agree with the orders that Tobias JA has proposed and also agree with the reasons of both Tobias JA and the learned presiding judge. 49 I wish to make remarks concerning one topic only and that is the reliance by Mr Owens upon the principle of construction for guarantees that has been most recently approved by the High Court in Andar Transport Pty Limited v Brambles Ltd (2004) 217 CLR 424. In Andar at 433, [17] the majority judgment of Gleeson CJ and McHugh, Gummow, Hayne and Heydon JJ affirmed the principle previously stated in Ankar Pty Limited v National Westminster Finance Australia Limited (1987) 162 CLR 549 at 561 that: "At law, as in equity, the traditional view is that liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety." 50 That principle is one that would apply to the construction that the trial judge adopted, namely, that the guarantee involved in this case is in substance a guarantee by each man of the obligation of his company to pay half the debts of the partnership. That construction could be sustainable only if it was consistent with the principle for construction of guarantees that was re-stated by the High Court in Andar. Mr Owens in his submissions to us relied upon that principle of construction. 51 Andar at 435, [19] recognised that that principle of construction is an aspect of the contra proferentem rule. As I have pointed out in North v Marina [2003] NSWSC 64, (2003) 11 BPR 21,359 at [57]-[72], there are several totally different and inconsistent lines of authority about what construing a document contra proferentem means. That account has been in substance approved in Lewison, The Interpretation of Contracts, 3rd edition, 208-212 and in the preface. The oscillations that there have been in the courts' approach over two centuries to the construction of guarantees that is set out in Andar at 433-436, [18]-[21] is the consequence of favouring first one and then the other of the principles embodied in those lines of authority. Now, Andar has clearly laid down that one of those lines of authority is to be used in Australia, at least so far as the construction of contracts of guarantee or indemnity is concerned. 52 There is an unusual feature of clause 2 of the guarantee in the present contract in that under it, on the construction adopted by the trial judge, both Mr Logan and Mr Rava are guarantors. I accept Mr Owens' submission that that is not a sufficient basis to treat the principle of construction that was adopted in Andar as inapplicable to this contract. Rather, I accept Mr Owens' submission that that feature of the guarantee means only that the Andar principle could result in the scope of the indemnity given by each of Mr Logan and Mr Rava being read down. 53 There is, however, another way in which the principle of construction that was adopted in Andar needs to be applied to the facts in this case. It needs to be recalled that the contra proferentem rule is just one rule of construction. It needs to be used bearing in mind the fundamental purpose of construction of a document, namely, to ascertain the intention of the parties arising from the document as a whole and reading the document with such background information as was known by all the parties to it. 54 Further, it is to be used along with other aids that the law recognises for the construction of a document. Other such aids for construction of a document include the one that says that a contract that has been entered in a business context and is elliptical or ambiguous should be not read in a way that is commercially unlikely to be what the parties intended: Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109; Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 at 300; The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437. Closely allied principles are ones whereby a construction should be avoided if it leads to a capricious and unreasonable result (Australian Broadcasting Commission at 109) and whereby if a contract is open to two constructions it will receive that construction which will avoid consequences that are capricious, unreasonable, unjust or inconvenient (TCN Channel 9 v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 146). 55 Further, it is not a legitimate use of the contra proferentem rule to say that two meanings of a particular contractual provision are possible and hence the meaning unfavourable to the proferens should be chosen if one of those meanings is an unrealistic or unlikely construction of the contract - North v Marina at para [75] and cases there cited. Rather, the contra proferentem rule is to be used only where the document is otherwise ambiguous, and it is a principle of last resort: North v Marina at [76]-[78] and cases there cited. 56 Where it is understood in that way, the application of the principle for construction of guarantees and indemnities that was adopted by the High Court in Andar does not involve preparing a list of all the possible meanings of a clause that the language can bear without breaking, and choosing the meaning that is most favourable to the guarantor or indemnifier. Rather, the choice is limited to choosing amongst meanings that are fairly open by reason of the application of other rules of construction. 57 In the present case, for the reasons given by Hodgson JA and Tobias JA, I can see no sensible commercial purpose in the construction for which the appellant contends. The construction for which the appellant contends is one that, for the reasons that their Honours have already given, warrants the label "capricious and unreasonable". On the other hand, the construction that the trial judge placed on the agreement is a commercially realistic one. In those circumstances no question arises of a choice needing to be made between competing constructions, and hence no question arises of the application of the principle for the construction of indemnities and guarantees that was adopted by the High Court in Andar. 58 HODGSON JA: The order of the court is appeal dismissed with costs. **********

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