Ryan v UPG 322 Pty Ltd [2023] NSWSC 1293 | Case summary

Decree against guarantor

The argument by counsel for the defendants relied heavily on the High Court decision in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245. That decision needs to be understood in the light of the prior decision of the House of Lords in Moschi v Lep Air Services Limited [1973] AC 331.
Moschi was an action by a creditor against an individual guarantor. The principal debtor was a company controlled by the guarantor. The debt was payable by the company in instalments. The terms of the guarantee provided that the guarantor "guaranteed the performance by [the company] of its obligation to make the payments at the rate of £6,000 per week together with the final payment of £4,000". The company defaulted in making the instalment payments; the creditor terminated the contract for breach and sued both the company and the guarantor for the full amount. The question was whether this liability fell within the terms of the guarantee. The guarantor's argument was that, under the terms of the guarantee, he had only undertaken to pay the instalments as they fell due. He had not undertaken to pay later instalments which did not fall due until after termination, or damages arising upon termination.
All the members of the House of Lords agreed that the creditor was entitled to judgment against the guarantor for the full amount. But their reasoning differed in some respects.
Lord Reid said (at 344-345, emphasis added): To meet [the guarantor's] argument I think it is necessary to see what in fact [the guarantor] agreed to do. I would not proceed by saying this is a contract of guarantee and there is a general rule applicable to all guarantees. Parties are free to make any agreement they like and we must I think determine just what this agreement means. With regard to making good to the creditor payments of instalments by the principal debtor there are at least two possible forms of agreement. A person might undertake no more than that if the principal debtor fails to pay any instalment he will pay it. That would be a conditional agreement. There would be no prestable obligation unless and until the debtor failed to pay. There would then on the debtor's failure arise an obligation to pay. If for any reason the debtor ceased to have any obligation to pay the instalment on the due date then he could not fail to pay it on that date. The condition attached to the undertaking would never be purified and the subsidiary obligation would never arise. On the other hand, the guarantor's obligation might be of a different kind. He might undertake that the principal debtor will carry out his contract. Then if at any time and for any reason the principal debtor acts or fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor, not for the unpaid instalment but for damages. His contract being that the principal debtor would carry out the principal contract, the damages payable by the guarantor must then be the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor undertook that he would do.
Lord Reid considered that the guarantor's obligation was of the latter type. The guarantor was thus in breach as soon as the company defaulted, and became liable for damages. Those damages amounted to the loss suffered by the creditor as a result of the company's breach, which his Lordship equated with the full amount due under the contract.
Lord Diplock took a different approach (at 347-349, emphasis added): In section 4 of the Statute of Frauds 1677 a contract of guarantee is described in the language of the 17th century as "any special promise to answer for the debt, default or miscarriage of another person". Translated into modern legal terminology "to answer for" is "to accept liability for", and "debt, default or miscarriage" is descriptive of failure to perform legal obligations, existing and future, arising from any source, not only from contractual promises but in any other factual situations capable of giving rise to legal obligations such as those resulting from bailment, tort, or unsatisfied judgments. ... By the beginning of the 19th century it appears to have been taken for granted, without need for any citation of authority, that the contractual promise of a guarantor to guarantee the performance by a debtor of his obligations to a creditor arising out of contract gave rise to an obligation on the part of the guarantor to see to it that the debtor performed his own obligations to the creditor. … It is because the obligation of the guarantor is to see to it that the debtor performed his own obligations to the creditor that the guarantor is not entitled to notice from the creditor of the debtor's failure to perform an obligation which is the subject of the guarantee, and that the creditor's cause of action against the guarantor arises at the moment of the debtor's default and the limitation period then starts to run. It is also why, where the contract of guarantee was entered into by the guarantor at the debtor's request, the guarantor has a right in equity to compel the debtor to perform his own obligation to the creditor if it is of a kind in which a court of equity is able to compel performance: see Ascherson v Tredegar Dry Dock and Wharf Co Ltd [1909] 2 Ch 401. It is the existence of this right on the part of the guarantor that accounts for the rule [citations omitted] that where the creditor, after the guarantee has been entered into, gives a contractual promise to the debtor to allow him time to pay the guaranteed debt, the guarantor is discharged from his obligation to the creditor. This is because the creditor by altering the debtor's obligation to him has deprived the guarantor of his equitable right to compel the debtor to perform his original obligation to the creditor, which was all that the guarantor had guaranteed. In contrast, the guarantor is not discharged by the mere voluntary forbearance of the creditor to take steps to obtain timeous performance by the debtor of the obligation which is the subject of the guarantee; for this does not affect the guarantor's equitable right to compel the debtor to perform it. It follows from the legal nature of the obligation of the guarantor to which a contract of guarantee gives rise that it is not an obligation himself to pay a sum of money to the creditor, but an obligation to see to it that another person, the debtor, does something; and that the creditor's remedy for the guarantor's failure to perform it lies in damages for breach of contract only. That this was so, even where the debtor's own obligation that was the subject of the guarantee was to pay a sum of money, is clear from the fact that formerly the form of action against the guarantor which was available to the creditor was in special assumpsit and not in indebitatus assumpsit [citation omitted]. The legal consequence of this is that whenever the debtor has failed voluntarily to perform an obligation which is the subject of the guarantee the creditor can recover from the guarantor as damages for breach of his contract of guarantee whatever sum the creditor could have recovered from the debtor himself as a consequence of that failure. The debtor's liability to the creditor is also the measure of the guarantor's. Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties have expressed the promise. Even the use of the word "guarantee" is not in itself conclusive. It is often used loosely in commercial dealings to mean an ordinary warranty. It is sometimes used to mis-describe what is in law a contract of indemnity and not of guarantee. Where the contractual promise can be correctly classified as a guarantee it is open to the parties expressly to exclude or vary any of their mutual rights or obligations which would otherwise result from its being classifiable as a guarantee. Every case must depend upon the true construction of the actual words in which the promise is expressed.
Lord Simon of Glaisdale, who expressly agreed with Lord Diplock's analysis, commented (at 177) that the guarantor's argument would have the absurd consequence that the creditor "would lose the benefit of the guarantee at the moment he most needs it - namely, on a repudiation by the principal promisor of his obligations under the contract".
Sunbird Plaza was similarly a claim against a guarantor for judgment in debt. The underlying contract was a contract for the sale of land. The guarantors had jointly and severally guaranteed "the performance by [the purchaser] of all the terms and conditions of the Contract including the payment of all monies payable hereunder by [the purchaser]". A decree of specific performance was made against the purchaser, but the purchaser failed to complete. The vendor then brought an action against the guarantors claiming the purchase price.
Gaudron J considered that an issue of construction, or, perhaps, of implication, arose (at 271): The guarantee does not in terms oblige the respondents to pay the balance purchase price in the event of the purchaser's failure to complete the contract. In a context where, as here, the purchase price is payable by the purchaser upon settlement and is not recoverable as a debt prior to settlement, a promise of "performance by the ... purchaser of all the terms and conditions of the contract including the payment of all moneys payable ..." does not, standing alone, import an obligation that the respondents will themselves pay the balance purchase price if the purchaser fails to do so. Such an obligation, if it exists, must be spelt out from the word "guarantee" in its particular contractual setting.
In resolving this interpretation issue, Gaudron J placed particular emphasis on another clause in the contract (clause 11) which enabled the purchaser to nominate another purchaser in its place. In that event, the purchaser was to guarantee the new purchaser's obligations. Her Honour stated (at 272): Clause 11 itself recognizes and points to the difference in form between the respondents' guarantee and the guarantee to come into operation in the event of the purchaser nominating another purchaser in its place. By that latter guarantee the would-be guarantor (the original purchaser) expressly "undertakes ... the due and punctual payment of … purchase moneys ... in the manner and at the times and places ... provided". In the light of that express undertaking in the form of guarantee incorporated into cl 11 there is no basis for reading into the quite differently worded guarantee given by the respondents an obligation on their part to pay the balance purchase price in the event of the purchaser's failure to do so in accordance with the contract.
Mason CJ (with whom Deane, Dawson and Toohey JJ agreed) began by considering the purchaser's liability in debt for the purchase price (at 253-254): I agree, for the reasons given by Gaudron J, that in the circumstances of the case the balance of the purchase price did not become a debt payable by [the purchaser] to the appellant vendor. The general rule, stated by Dixon J. in McDonald v Dennys Lascelles Ltd, is that a vendor of land cannot sue for the price before the contract is completed by conveyance, unless the price is expressed to be payable on a fixed day, not being the day fixed for completion. Here the balance of the purchase price was payable "upon settlement". Settlement has not taken place and there has been no conveyance of the property sold. Once this is accepted, the appellant is faced with a daunting task in making good the submission that the respondent guarantors are liable under their joint and several guarantee to pay the balance of the purchase price and interest thereon, notwithstanding the absence of an accrued liability on the part of the purchaser to make the payment.
His Honour then addressed the principles which apply to the liability of guarantors (at 254-255): Discussion of the question must begin with the proposition, established by the cases on s 4 of the Statute of Frauds 1677 (UK) that a contract of guarantee is, subject to any qualifications made by the particular instrument, a collateral contract to answer for the debt, default or miscarriage of another who is or is contemplated to be or to become liable to the person to whom the guarantee is given: [citations omitted]. Such a promise was required by s 4 of the Statute of Frauds to be evidenced in writing, unlike a contract of indemnity, which stands outside the statutory requirement: [citation omitted]. An indemnity is a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party: [citations omitted]. In their endeavours to distinguish between a guarantee and an indemnity the courts have emphasized the difference between the guarantor's secondary liability and the indemnifier's primary liability: [citation omitted]. There is an element of ambiguity in this distinction unless the reference to primary liability is understood to mean ultimate liability. Once default has occurred, the party having the benefit of the guarantee can call on the guarantor to honour his promise before calling on the principal contracting party to perform his obligation, but the guarantor, having honoured his promise, can hold the principal contracting party to account by virtue of the doctrine of subrogation. The distinction is also blurred by the different distinction which has been made in discussing breach of contract, notably by Lord Diplock in such cases as [Moschi], between the primary and secondary obligations of a party to a contract. And, just to add to the confusion, guarantees are sometimes expressed so as to impose a primary liability on the guarantor. Because many guarantees are given in relation to the payment of debts, it is common to speak of the parties to the relationship as creditor, guarantor and principal debtor. However, the payment of a debt is but one instance of the wide range of obligations the performance of which may be made the subject of a guarantee. Just as I may guarantee the payment of a debt so I may guarantee the performance of a contractual obligation which does not involve the payment of money. So it is that a creditor's rights against a guarantor depend on the terms of the guarantee and the nature of the obligation, performance of which is guaranteed. If the subject of the guarantee is payment of a debt or a sum of money which has accrued due, the creditor may, on default by the principal debtor, sue the guarantor instead of the principal debtor for the debt or sum of money, his claim being for a liquidated amount. If, on the other hand, the subject of the guarantee is the performance of some other obligation, then the person having the benefit of the guarantee may, upon default, sue the guarantor for damages for breach of contract.
His Honour referred to Lord Diplock's "see to it" analysis in Moschi, but evidently did not accept, or wholly accept, that analysis. He commented (at 255-256): It may be that as a matter of history the view that the guarantor has an obligation "to see to it" that the debtor performs his obligation explains why the guarantor is not entitled to notice of the debtor's default and why the creditor's cause of action arises on that default. But the view certainly does not accord with the nature of the guarantor's obligation as it is understood today. Rarely do guarantors have control of, or a capacity to influence, the principal debtor such that they would willingly assume an obligation to ensure that he performs his primary obligation. It is fictitious and quite unrealistic to suggest that this version of the guarantor's undertaking, rather than a promise to "answer for" the debt or default of the debtor, is the true nature of the guarantor's obligation. And it may be doubted whether that view takes sufficient account of what has been said over the years in the long line of cases on s 4 of the Statue of Frauds. My own view of the matter accords with that expressed by Lord Reid in Moschi where his Lordship rejected the notion that there was a common rule applicable to all guarantees and acknowledged that the parties are at liberty to make such agreement as they choose. There are, however, two common classes of guarantee of the payment of instalments by the principal debtor. The first is an undertaking by the guarantor that if the debtor fails to pay an instalment he will pay. This is a conditional agreement. The guarantor's obligation to pay arises on the debtor's failure to pay. The second is an undertaking by the guarantor that the debtor will carry out his contract. Then a failure by the debtor to perform his contract puts the guarantor in breach of his.
Later, Mason CJ returned to the construction of the terms of the instant guarantee (at 258): The appellant's argument is that the respondent guarantors were promising to pay a sum of money if the purchaser did not complete the contract. The terms of the guarantee do not support the argument. The respondents guaranteed "THE PERFORMANCE ... OF ALL THE TERMS AND CONDITIONS of the Contract including the payment of all moneys payable ... by the ... Purchaser". The respondents' promise was that the purchaser would perform its contractual obligations including the payment of all moneys payable under the contract. The promise falls within the second class discussed above, except, perhaps, in so far as the promise relates specifically to the payment of all moneys payable. In that respect the promise might well fall within the first category. Accordingly, if the balance of the purchase price had become payable, and had not been paid by the purchaser, the vendor might well have been entitled to sue the respondents for a liquidated amount, rather than claim damages for breach of contract. As it is, the balance of the purchase price did not become payable. The appellant contends that this interpretation fails to give effect to the purpose which the guarantee must be taken to have served. The object of the guarantee was, so the argument runs, to enable the vendor to recover the price irrespective of the position between the vendor and the purchaser. The short answer is that the terms of the contract of sale, the guarantee and the matrix of circumstances in which the contract was entered into do not support this sweeping assertion. As we have seen, the terms of the guarantee are specific and clear upon this point. The respondents guaranteed performance of the terms and conditions of the contract, "including the payment of all moneys payable" under the contract. No doubt a promise by a purchaser to pay the balance of the purchase price "upon settlement" gives less protection to a vendor than a promise to pay on a date fixed for settlement. But this circumstance cannot justify reading the promise to pay "upon settlement" of the associated guarantee otherwise than according to its terms.
Counsel also referred me to two first instance decisions of the Supreme Court of Queensland. They were the decision of Daubney J in Fairborne (cited at [25] above) and the decision of Ann Lyons J in Sunbay Projects Pty Ltd v PR Wieland Holdings Pty Ltd [2010] QSC 368.
The Fairborne case, like the present case, was an application for specific performance of a contract for the sale of land. The applicant was the vendor, and the first respondent was the purchaser. There were three individual guarantors. Under the terms of the contract, (see at [27]) they: (a) guaranteed to the applicant the due and punctual payment of monies due and payable under the contract of sale; (b) guaranteed to the applicant the punctual observance and performance by the first respondent of the covenants and provisions contained in the contract of sale; and (c) guaranteed to the applicant that each would "immediately upon demand by [the applicant] in the event of default by [the first respondent] under this Contract of Sale pay and perform the obligations of [the first respondent] under this Contract of Sale".
The vendor sought decrees of specific performance against the purchaser and the individual guarantors. As against the guarantors, the form of the decree sought was that each guarantor "specifically perform the contract of guarantee … by performing all of the obligations of [the purchaser] under the contract". Further and alternatively, a mandatory injunction was sought requiring each of the guarantors to "perform all of the obligations of [the purchaser] under the contract in accordance with the terms of" the guarantee.
Daubney J summarised the decision in Sunbird Plaza and stated that similar considerations applied in the instant case. His Honour observed that if the purchaser failed to specifically perform the contract in accordance with the Court's order for specific performance and the contract was then terminated by the vendor, the vendor would be entitled to sue the guarantors for damages. But the purchase monies under the contract only became payable upon settlement. As in Sunbird Plaza, the balance of the purchase price was not a "debt presently payable" to the vendor which could be recovered from the guarantors. And this provided "no basis for the relief sought" in the proceedings (at [36]).
Daubney J acknowledged that the guarantee contained a further undertaking to "pay and perform the obligations" of the purchaser. He characterised the real question as being whether orders in the nature of specific performance or a mandatory injunction should be made, requiring the guarantors to perform the purchaser's obligations. His Honour characterised those orders as being sought "effectively on a quia timet basis".
Daubney J appears to have accepted that the grant of such relief was possible. But he considered it to be premature. His Honour explained at ([39]-[40]): It seems to me that the pursuit of an application for specific performance against the guarantors at this point in time sits ill with the applicant's request for a decree of specific performance against the first respondent. True it is that the liability of the guarantors, determined according to the terms of the guarantee given, is additional to the primary liabilities and obligations of the purchaser under the contract of sale. But making an order requiring the guarantors to "pay and perform the obligations" of the first respondent under the contract at a time when the first respondent itself is subject to a decree that it perform its own obligations would cause immediate and wholly undesirable tensions to arise both in respect of the legal consequences (e.g. whether, and to what extent the guarantors are subrogated to the rights and responsibilities of the purchaser under the contract of sale) and in the practical consequences of the Court simultaneously ordering two discrete parties (i.e. the purchaser and the guarantors) separately to perform the same obligations under the same contract at the same time. The vendor having persuaded me that the first respondent purchaser has not demonstrated good reason for refusing an order for specific performance against it, I consider it premature for the vendor to seek simultaneous orders tantamount to specific performance of the guarantee at this juncture.
In the end, Daubney J ordered specific performance against the purchaser but dismissed the claim against the individual guarantors.
The Sunbay case likewise arose out of an application for specific performance by a vendor against a corporate purchaser, whose obligations under the contract had been guaranteed by an individual officer of the company. The guarantee clause provided (see at [68]): 30.2 Each Guarantor confirms his request for the Seller to enter into the Contract, accepts all obligations specified in the Contract, agrees to be bound as a party to the Contract and signs the Contract as a Deed. 30.3 Each Guarantor agrees that they are liable jointly and severally to the Seller if the Buyer breaches the Contract. The Guarantor agrees to pay the seller any money for the Seller's loss resulting from the breach. ... 30.5 The Seller may recover from the Guarantors damages for the Seller's losses in enforcing this guarantee. 30.6 The Guarantor indemnifies the Seller against any liability, loss and costs incurred by the Seller resulting from the Buyer's breach of the Contract.
Ann Lyons J was satisfied that a decree of specific performance should be made against the corporate purchaser. The vendor also sought an order against the guarantor, on the basis that it was highly unlikely that if an order was made only against the purchaser, it would comply with that obligation.
Her Honour accepted that the evidence indicated that, historically, the purchaser had been unable to settle due to lack of finance. Her Honour also accepted that the corporate purchaser was "essentially a family company" which was controlled by the guarantor, who would for practical purposes control whether they would have the funds to settle.
Nevertheless, her Honour declined to make an order for specific performance against the guarantor as well as the purchaser. She explained (at [72]-[73]): … I consider the relief currently sought as against the second defendant is premature. It is clear that on the proper construction of the guarantee, Mr Wieland [the guarantor] guaranteed the payment to the plaintiff of any monetary loss it establishes against the buyer as a consequence of its breach of the contract as purchaser. However, no damages are sought as the plaintiff seeks specific performance of the contract by the buyer (the first defendant). A default by the buyer by failing to specifically perform the contract in accordance with the order sought for specific performance will, if the contract is then terminated by the plaintiff, give rise to an entitlement on the part of the plaintiff to sue the buyer and Mr Wieland for damages for breach of the terms of the contract and guarantee respectively.
Her Honour referred to the decision of Daubney J in Fairborne, and in particular quoted from [39] and [40] (see [49] above). She stated that the guarantor should not be compelled to do something until the principal had failed to do it. Accordingly, she did not consider it appropriate to make orders against the second defendant "at this time" (at [75]).
The only order made by her Honour was an order for specific performance against the purchaser. It is not clear from the published version of the judgment whether the claim against the guarantor was dismissed, as in Fairborne, or as her Honour's language perhaps suggested, adjourned.
Returning to the questions of principle involved in the present case, the distinction drawn by Lord Reid in Moschi, between the different types of guarantee, had been recognised in earlier authorities, but not necessarily in precisely the same language. Furthermore, the two classes of guarantee mentioned by Lord Reid have, in other descriptions, not been seen as completely covering the field.
Of particular importance in this Court are the observations of Jordan CJ, speaking for the Full Court, in Jowitt v Callaghan (1938) 38 SR (NSW) 512. His Honour distinguished between, on the one hand, a conditional undertaking to pay if the principal debtor does not (Lord Reid's first class), and, on the other, an unconditional undertaking to accept joint liability with the principal debtor (rather than, as Lord Reid put it, an undertaking that the principal debtor will pay). His Honour stated (at 516-517): A contract of guarantee or suretyship is a contract between two persons which is intended by them to secure the performance of the obligation of a third person to one of them. The existence, present or future, of the obligation of a third person, and an intention in the parties to the contract to secure the performance of that obligation, are essential features of a contract of guarantee. If these elements are present, the contract is one of guarantee whether the promise be collateral to the promise of a principal obligator and in the nature of a distinct and separate promise to perform the principal obligations if he does not: [citations omitted] or whether it be a joint promise with the principal obligor by virtue of which an immediate obligation is assumed to the obligee which is joint with that of the principal obligor: [citation omitted] (in which case, there is suretyship in equity though not at common law: [citation omitted]); and whether the promise to be a promise if to be personally liable if the principal obligor does not perform the obligation, or a promise merely that certain property of the promisor shall be a security for the performance of the principal obligations: [citation omitted].
In McGuinness v Norwich and Peterborough Building Society [2012] 2 All ER (Comm) 265, Patten LJ, who gave the leading judgment of the Court of Appeal, stated (at [7]): It is common ground that a guarantee of a loan may impose one or more of the following types of liability on the guarantor. These are: (1) a 'see to it' obligation, ie an undertaking by the guarantor that the principal debtor will perform his own contract with the creditor; (2) a conditional payment obligation, ie a promise by the guarantor to pay the instalments of principal and interest which fall due if the principal debtor fails to make those payments; (3) an indemnity; and (4) a concurrent liability with the debtor for what is due under the contract of loan.
In this taxonomy, type (1) apparently corresponds with Lord Reid's second class (which is equated with the "see to it" obligation identified by Lord Diplock). Type (2) corresponds with Lord Reid's first (conditional class). Type (3) is an indemnity rather than a guarantee. But type (4) (which corresponds with the alternative to type (2) identified by Jordan CJ in Jowitt) is apparently an additional class of guarantee. And Patten LJ expressly stated (at [8]) that guarantees of types (2) and (4) both "create a liability in debt".
In McGuinness, the relevant clauses of the guarantee were clauses 2.2, 2.3, 2.4 and 4.2, which provided: 2.2 You guarantee that all money and liabilities owing, or becoming owing to us in the future, by the Borrower (whether actual or contingent, whether incurred alone or jointly with another and whether as principal or surety) will be paid and satisfied when due. 2.3 Any amount claimed under the Guarantee is payable by you immediately on demand by us. 2.4 As a separate obligation you agree to make good (in full) any losses or expenses that we may incur if the Borrower fails to pay any money owed to us, or fails to satisfy any other liabilities to us, or if we are unable to enforce any of the Borrower's obligations to us or they are not legally binding on the borrower (whatever the reason). … 4.2 Your obligations under this Guarantee are those of principal, not just as surety. We will not be obliged to make any demand on, or take any steps against, the Borrower or any other person before enforcing this Guarantee.
Patten LJ concluded that the guarantor was under a direct obligation to the lender to pay the mortgage debt. In doing so, his Lordship appears to have seen the choice as one between types (2) and (4). He stated (at [66], emphasis added): … It seems to me that the first sentence of cl 4.2 has to be given some meaning. If the guarantor's obligations are to be those of a principal and not merely those of a surety then something has to be added to cl 2 by cl 4.2. Clause 4.2 does not refer to the requirement of notice in cl 2.3 and it seems to me to be odd for the draftsman to have introduced a requirement to make a demand under cl 2.3 and then to have taken it away in cl 4.2. The better view is that the second sentence of cl 4.2 reflects the status of the guarantor as principal debtor by making it clear that his liability is concurrent with that of the borrower and not contingent upon it. The Society is entitled to proceed against the guarantor without first exhausting its remedies against the borrower and the guarantor cannot rely on any failure to do so as a failure to mitigate which reduces his own liability.
A few years before, the decision in Sunbird Plaza had been considered by the Court of Appeal for Queensland in Wharf Street Pty Ltd v Amstar Learning Pty Ltd [2004] QCA 256. McPherson JA, with whom Williams JA agreed, referred to the passage from the judgment of Mason CJ quoted at [42] above, and stated (at [24]): Although it would be unwise to be dogmatic about it, I read his Honour's reasons, based as they are on his approval of what Lord Reid said in Moschi, as implying that, unless there is something enabling it to be regarded as in the second form rather than the first, a straightforward guarantee of a debt will ordinarily be construed as a simple undertaking to pay if the debtor does not.
Jerrard JA, the remaining member of the Court, took a somewhat narrower view of the effect of the Sunbird Plaza decision. His Honour expressed, as a matter of principle, a preference for the analysis of Lord Diplock over that of Lord Reid, but recognised that Lord Reid's view had prevailed. His Honour stated (at [34]): The latter approach, binding on intermediate appellate courts until reconsidered, requires case by case construction of contractual terms to determine whether a guarantor has undertaken "no more than that if the principal debtor fails to pay any instalment he will pay it", as opposed to an undertaking "that the principal debtor will carry out his contract".
The context for this body of authority is significant for present purposes. Moschi and Sunbird Plaza were both debt recovery actions in which the question was what the scope of the guarantor's obligation was, as a matter of construction of the guarantee. Jowitt and Wharf Street were likewise debt recovery actions, but the question was whether the supervening insolvency of the principal debtor prevented the recovery of the debt from the guarantor. McGuinness was also a debt recovery action, in which the question was whether the action gave rise to a debt for the purposes of the procedural rules of the Court.
In each case, therefore, the question was one as to the nature or extent of the guarantor's personal obligations at law. None of the cases involved consideration of equitable principles (although, as I note below, Lord Diplock's speech in Moschi briefly touched on this subject).
The guarantee provision in the present case is special condition 44 of the contract. That clause provides as follows: Guarantee and Indemnity If the Purchaser of the property is a Company …, the officers or persons who execute this Contract on behalf of the Company or who attest the affixing of the seal of the Company to this Contract ("Guarantor"), hereby jointly and severally: (i) unconditionally guarantee to the Vendor the performance of ail obligations of the Purchaser under this Contract, including payment of all money payable by or recoverable from the Purchaser, notwithstanding this Contract is not enforceable against the Purchaser in whole or in part or is varied without notice to the Guarantor; (ii) indemnify the Vendor in respect of any default of the Purchaser under this Contract; and (iii) acknowledge the provisions of this clause shall be deemed to constitute the giving of a Deed by virtue of their execution of this Contract. This guarantee and indemnity is given by each Guarantor as a principal and is not discharged or released by any release or variation of this Contract.
As is frequently the case, this guarantee clause refers to various different obligations of the purchaser, some of which are clearly obligations which, if breached, would sound in damages. But that can be put aside. Attention for present purposes is confined to the undertaking to guarantee payment of "money payable by … the Purchaser", and, in particular, the payment of the purchase price.
Counsel for the defendants submitted that the present case was indistinguishable from Sunbird Plaza. Mr Bhushan's obligation with respect to the purchase price was of the "see to it" type. Breach of the obligation, so the submission ran, only sounded in damages. In any event, there could be no obligation to pay the price until UPG 322 had failed, following the making of an order for specific performance against it, to do so. Counsel contended that, as in the Queensland cases, the application for specific performance should be dismissed, or, at the least, deferred until after the time for specific performance by UPG 322 had passed.
I do not accept counsel's contention. In my view, their arguments face three obstacles.
The first point is that if the guarantor cannot be said to be liable for relevant purposes until there has been a default by the purchaser, then that condition is satisfied. In fact, UPG 322 has been in default since 18 April when the contract initially required completion. The fact that, at that stage, time had not been made of the essence seems to me to be quite immaterial. There is thus no reason why the guarantor should not be called upon to do what the purchaser has failed to do. The fact that the purchaser's failure was not, at least initially, a breach which permitted termination of the contract does not seem to me to make any difference.
Secondly, and more broadly, I am not sure that the guarantee obligation in the present case arises only upon the purchaser's default. Even if, as McPherson JA thought, the Sunbird Plaza decision means that that is the usual effect, it is clearly a question of construction in each case.
In the present case, there is no other guarantee clause in the contract which could influence the construction of the clause in question, as there was in Sunbird Plaza (see [39] above). More importantly still, the present clause provides that the guarantor's obligation is as principal. Such a provision was not a feature of the Sunbird Plaza guarantee: cf Mason CJ's reference to "add[ing] to the confusion", quoted at [41] above.
Considerations of business commonsense are also relevant. On the defendants' approach, before the time for specific performance by UPG 322 as purchaser arrives, there is no obligation on the guarantor. Afterwards, the obligation arises if title is transferred, but that is meaningless because the transfer will only take place if the purchase price is paid by the purchaser, in which case there is no ongoing obligation on the part of the purchaser to which the guarantor's obligation can attach. If, on the other hand, the purchaser fails to comply with the order for specific performance, then, on the defendant's approach, all the vendor can do is terminate the contract and sue the guarantor (as well as the purchaser) for loss-of-bargain damages. As counsel for the defendants accepted in the course of oral argument, the effect of their argument would be that there would never be any point at which it could be said that there was an enforceable obligation on the guarantor to pay the purchase price.
I would have thought that the parties, in referring to amounts payable under the contract, would have been thinking, more than anything else, of the obligation to pay the purchase price. The defendants' approach seems to me to parallel the approach criticised by Lord Simon in Moschi, of achieving a construction under which the guarantor's obligations become meaningless at the very point at which he is wanted.
If it is relevant to consider Mason CJ's comment in Sunbird Plaza that in the ordinary course the guarantor does not control the borrower, then that comment would not apply here. On the facts of this case, Mr Bhushan was in complete control of the affairs of UPG 322, and it was essentially up to him as to whether UPG 322 was provided with support from other members of the UPG group (or perhaps from Mr Bhushan personally) to enable it to come up with the purchase price.
In my view, the critical factor in the present case is that the guarantor's obligation is stated to be given as principal. Both as a matter of language, and as a matter of business commonsense, it seems to me that the better reading of the clause is that it creates a concurrent obligation of the type recognised by the Court of Appeal in McGuinness, and, much earlier, by the Full Court in Jowitt.
The third and fundamental obstacle derives from the nature of these proceedings. I am not dealing with a claim in debt or damages, but with an equitable claim for the grant of orders of specific performance. The fact that (as Sunbird Plaza establishes) the purchase price is not currently a debt owing at law only reinforces the conclusion that relief at law is inadequate. It is a reason for granting specific performance, not for withholding it.
In principle, specific performance does not depend upon a prior breach by the purchaser. Of course, in most specific performance cases there has been a refusal by the purchaser to go ahead with the contract. Specific performance as relief is granted because of the risk to the vendor (in the present case) that the other party to the contract will not comply with its obligations. In that sense, relief is granted quia timet, as Daubney J said in Fairborne. Usually, as in the present case, the refusal would give rise to a breach of contract and indeed a repudiatory breach. But this is not necessary. All that is required is a sufficient risk of non-compliance to justify a decree.
Analogies with other forms of equitable relief support this conclusion. The most obvious is the guarantor's right of indemnity against the principal debtor. This was described by Mason CJ in Sunbird Plaza as an instance of subrogation. But later authority has described it as a stand-alone equitable doctrine, often referred to as the "equity of exoneration" (see the discussion by Edelman J, speaking for the Western Australian Court of Appeal, in Ierino v Gutta (2012) 43 WAR 372 at [27]-[39]).
Ascherson v Tredegar Drydock and Wharf Co Ltd [1909] 2 Ch 401, referred to by Lord Diplock in Moschi, in the passage quoted at [35] above, as an instance of specific performance, was in fact an equity of exoneration case. The plaintiffs were the executors of a surety who had provided a guarantee in support of a bank overdraft. The plaintiffs successfully applied for orders compelling the principal debtor to pay off the overdraft. There was no contract between the surety and the principal debtor and the reasoning of Swinfen Eady J makes it clear that an independent equitable doctrine was involved.
Equity intervenes in such cases because it is considered unreasonable that the surety should have "a cloud hang over him", in the form of a potential liability to the creditor which the surety may have to satisfy and then claim back from the principal debtor (see Ascherson at 407). In that sense, relief is of a quia timet nature (In re Anderson-Berry [1928] Ch 290 per Sargant LJ at 307; see also Heydon JD, Leeming ML and Turner PG, Meagher, Gummow & Lehane's Equity Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) at [10-035] 397.
In Thomas v Nottingham Incorporated Football Club Ltd [1972] Ch 596, Goff J reviewed Ascherson and subsequent decisions, and made an order for exoneration. The significance of the case for present purposes is that no formal demand had been made by the creditor for payment, and accordingly no obligation to pay the debt had arisen on the guarantor at law. This, however, was no obstacle to the grant of relief.
The decision of Goff J was referred to in a later decision of the Court of Appeal for England and Wales, Stimpson v Smith [1999] Ch 340. That was an application by a surety, not for exoneration by the principal debtor, but for contribution from another surety. Again, the Court held that it was unnecessary, before relief was granted against the other surety requiring a contribution to be paid, for a demand to be made on the plaintiff guarantor. The Court expressly approved the decision of Goff J.
In my view, the analogy with exoneration and contribution, in the present context, is a close one. In each case, equitable relief is granted on a quia timet basis which does not depend on any liability existing at law. I see no reason in principle why specific performance should not be granted against the guarantor on the same basis.
I do not think that the Queensland decisions to which I was referred stand in the way of this conclusion. Counsel for Mr Ryan submitted, by reference to the particular wording of the clauses, that, in each case, the obligation was, as a matter of construction, conditional upon a failure by the purchaser to complete the contract. I am not sure that in the end counsel for the defendants disputed that the cases were distinguishable on that basis.
In any event, with all respect to those who may consider otherwise, I do not think that the Court is obliged, in considering whether to grant specific performance, to make it a two-stage process. I respectfully agree with Daubney J that it could be confusing, or perhaps incoherent, to order both the purchaser and the guarantor to perform the same obligation. Certainly, I think that is so for the obligation to take title and register: these obligations cannot be carried out by more than one person and, at least in the usual case, they would be decreed against the purchaser alone.
However, I see no difficulty at all in making an order against both the purchaser and the guarantor requiring them both, jointly and severally, to pay the purchase price, together with contractual adjustments, on settlement. The PEXA platform allows for a purchaser's financier to participate in the settlement so as to provide the money. As I understood it, there was no dispute before me that similar arrangements could be made for the guarantor to be a party to the settlement transaction so that, if the purchaser were unable to pay, the guarantor could make up the difference.

Ryan v UPG 322 Pty Ltd

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