Smith v Skinner

Evidence of the facts on which the claim is based

1. On the Motion the plaintiff tendered: 1. affidavit of the plaintiff dated 31 January 2018 together with exhibits LJS-1, LJS-2 and LSJ-3 referred to in the affidavit; 2. affidavit of the plaintiff dated 12 July 2018; 3. affidavit of Susanne Barry dated 21 June 2018.
2. Those affidavits establish evidence of the facts on which the claim for the Ongoing Royalty payments is based. Further, the Amended Defence as previously recited, admits that the Ongoing Royalty payments were not made.
3. I find that there is evidence of the facts on which part of the claim is based, and thus r 13.1(1)(a) is satisfied.
4. In the evidence tendered for the plaintiff is the agreement upon which the plaintiff sues. It is dated 29 January 2010 and is tripartite agreement between FMS, the plaintiff and the defendant.
5. For the purposes of the issues raised on this motion, it is necessary to look at cl 3 (Smith's Covenants) and cl 6 (Guarantor).
6. Clauses 3.1 and 3.2 are in the following terms: "Smith's Covenants 3.1 In consideration of the payment by the Company [FMS] to Smith of the Ongoing Royalty, Smith shall continue to support the services of the company and to promote such products and services to his own clients in Australia and overseas. 3.2 Smith shall continue to provide the Company with general industry knowledge concerning carriers' rates and services and shall be available to assist the Company when reasonably possible and appropriate."
7. Clause 6.1 is in the following terms: "Guarantor 6.1 In consideration of Smith entering into this Agreement with the Company and in consideration of Smith's covenants to the Company, the Guarantor as director of the Company hereby irrevocably guarantees to Smith the due and punctual observance and performance of all of the obligations of the Company and the due and punctual payment of the Ongoing Royalty which the Company is or becomes obliged to pay to Smith pursuant to this Agreement and hereby indemnifies Smith in respect of all liabilities (including legal costs on a Solicitor/Client as well as party/party basis) incurred in enforcing this guarantee and indemnity which may arise as a consequence of the act omission or default of the Company or otherwise under this Agreement and the following further covenants and provisions shall have effect: (i) On each and every occasion on which the Company omits or neglects to pay any money by way of Ongoing Royalty as aforesaid then the Guarantor in each such case will immediately upon demand by Smith pay such money as if the Guarantor were the Company; (ii) The liabilities of the Guarantor under this guarantee and indemnity shall not be abrogated prejudiced or affected by the granting of time credit or any indulgence or concession by Smith to the Company or by any omission or neglect or by any modification extinguishment variation or waiver or by any other dealing matter or thing which might (but for this provision) operate to affect or discharge the Guarantor from his obligations it being the intention of the parties to this Agreement that the guarantee and indemnity and the obligations of the Guarantor shall be absolute and unconditional in any and all circumstances; (iii) This guarantee and indemnity is to be a continuing guarantee and indemnity and shall be irrevocable and shall remain in full force and effect until such time as the Company shall have duly performed and discharged its obligations as aforesaid."
8. Counsel for the defendant submitted that there was no evidence of the facts on which the claim is based. In that regard he submitted that there was evidence of some payments being made, but no evidence whether these amounts had been deducted from the Ongoing Royalty payments which were due, and if so how these payments were treated. I reject that submission. There is no doubt which arises from the evidence concerning certain payments being made. The evidence is quite clear that there is still a balance owing of $128,991.51.

Evidence of belief of no defence

1. The plaintiff tendered the affidavit of his solicitor Mr Paul Andrew Brown dated 29 June 2018.
2. Mr Brown referred to the Agreement and in particular to the guarantee clause being clause 6. In paragraph 5 of his affidavit he said: "The plaintiff contends that the defence raised by the said paragraphs of the Amended Defence referred to above is defeated by the provisions of clause 6.1. I believe that the defendant has no defence to the claim for the liquidated sum of $128,991.51, together with interest and costs, as claimed in the Statement of Claim."
3. On the face of it, this is evidence given by a responsible person (Mr Brown) that in his belief the defendant has no defence to the claim. Prima facie that evidence satisfies the requirements of r 13.1(1)(b).
4. Counsel for the defendant submitted firstly that such evidence did not satisfy paragraph (b) in the rule, as Mr Brown was not a "responsible person" within the meaning of the paragraph. In support of that submission he cited note r 13.1.60 in New South Wales Civil Procedure Handbook 2018, Lawbook Co. This note says: "The application must be supported by evidence from the plaintiff, or a person referred to in rule 35.3, that verifies the facts on which the claim… is based."
5. No authority is cited for the proposition that a "responsible person" must be one of the people referred to in r 35.3. That rule deals with a list of people who may make an affidavit. It is to be noted that the rule gives authority to persons to make affidavits, where the party required to file an affidavit is either under a legal incapacity, or is a corporation, or is an unincorporated association, or is the Crown, or is a person suing under a right of subrogation.
6. I see no reason in principle why the phrase "some responsible person" in r 13.1(1)(b) should be restricted to the persons listed in r 35.3 who can make an affidavit on behalf of a party. Counsel for the defendant very properly drew my attention to the cognate note in Ritchie's Uniform Civil Procedure (NSW), which lists authorities to the effect that a party's solicitor is a responsible person who can swear an affidavit for the purpose of applying for summary judgment.
7. I find that Mr Brown is a responsible person within the meaning of the rule. Further, the basis for him giving evidence that in his belief the defendant has no defence to the claim is a pure matter of law. He asserts that the guarantee clause is drafted so widely that it cannot apply to save the defendant from liability in the present case, even if it is eventually proved that the plaintiff breached his obligation with FMS. In those circumstances it seems to me that the most appropriate responsible person who could swear an affidavit to comply with the rule would be a lawyer. What Mr Brown is putting forward is only a submission, but it is a submission on the matter of law. I will deal more fully with the legal effect of the guarantee clause below.
8. Counsel for the defendant also submitted that paragraph (b) was not satisfied, as it relied upon an unpleaded allegation. The submission was that the plaintiff had not pleaded or relied upon the guarantee clause in the Statement of Claim to defeat the defendant's Defence. It was pointed out that the first time that it was alleged that there would be reliance on the guarantee clause as defeating the defence of the defendant was in Mr Brown's affidavit in support of the summary judgment application.
9. I find that the fact that the guarantee clause was not raised until that point is of no assistance to the defendant. The guarantee clause, or at least the "unconditional" part of the guarantee clause in 6.1(ii) is not a matter which founds a cause of action and thus it did not need to be pleaded in the Statement of Claim. If anything, it is a matter which the plaintiff should probably plead in a formal Reply. The cause of action upon the guarantee arises not from cl 6.1(ii), but from the opening words of 6.1 as follows: "In consideration of Smith entering into this Agreement with the Company and in consideration of Smith's covenants to the Company, the Guarantor as director of the Company hereby irrevocably guarantees to Smith the due and punctual observance and performance of all of the obligations of the Company and the due and punctual payment of the Ongoing Royalty which the Company is or becomes obliged to pay to Smith pursuant to this Agreement and hereby indemnifies Smith in respect of all liabilities (including legal costs on a Solicitor/Client as well as party/party basis) incurred in enforcing this guarantee and indemnity which may arise as a consequence of the act omission or default of the Company or otherwise under this Agreement…".
10. The effect of the guarantee provision in cl 6.1 is adequately pleaded in the Statement of Claim and the "unconditional" provision in cl 6.1(ii) did not found a primary cause of action and did not need to be pleaded.
11. I therefore reject the submissions put by counsel for the defendant in relation to paragraph (b). I find that r 13.1(1)(b) is satisfied, in that there is evidence given by a responsible person that in the belief of that person the defendant has no defence to the claim or part of the claim.
12. However, that is not the end of the matter.

Principles applicable to a Summary Judgment application

1. Once there is evidence to satisfy paragraphs (a) and (b) of r 13.1(1), the court "may" give judgment for the plaintiff. It has been said that the power to enter summary judgment should be exercised with great care, and an order under the rule should only be made where it is clear that there is no real question to be tried: Fancourt v Mercantile Credits Limited (1983) 154 CLR 87; Webster v Lampard (1993) 177 CLR 598. The High Court has said that if there is a real question to be tried, either of fact or law, and the rights of the parties depend upon it, it is not open for the court to grant summary judgment: Dey v Victorian Railways Commissioners (1949) 78 CLR 62.

Is there a real question of law to be tried?

1. Counsel for the plaintiff submitted briefly that the words of the guarantee, and in particular the words in cl 6.1(ii) are wide enough to prevent the defendant from raising, against the plaintiff, any cross-claim which could have been run by FMS against the plaintiff. Counsel for the defendant made no submissions on this point. Nevertheless, I have to be satisfied that there is no real question of law to be tried in relation to the meaning and effect of the guarantee clause.
2. The duty of a court construing a written document is to attempt to discover the intentions of the parties from the words of the contract. The whole of the document must be considered, because the meaning of one part may be revealed by other parts. The words of every clause must if possible be construed so as to render them all harmonious one with another - Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99 at 109.
3. In McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 Chief Justice Gleeson said: "Interpreting a commercial contract requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure."
4. In Bofinger v Kingsway Group Ltd [2009] HCA 44 at [53] the High Court said in relation to the interpretation of contracts of guarantee and indemnity: "The principle is that a doubt as to the construction of a provision in such a contract should be resolved in favour of the surety or indemnifier. It is implicit in this that the doubt may arise not only from the uncertain meaning of a particular expression, but from its apparent width of possible application."
5. It is beyond argument that the guarantor may be exonerated from liability, if it can raise a claim or defence that the principal debtor had against the creditor. Since the principal debtor is insolvent, there is no need to join it to the action - Langford Concrete Pty Ltd v Finlay [1978] 1 NSWLR 14. A surety is discharged from its obligations by the creditor's breach of contract, so long as the breach materially prejudices the interests of the surety - Ankar Pty Ltd v National Westminster Finance (Australia) Ltd 162 CLR 549 at 557.
6. In relation to whether a guarantee is so widely drawn that it will prevent a guarantor raising a cross-claim or defence otherwise available to a principal debtor, the following principles and the authorities supporting them are set out at paragraph 11.550 in O'Donovan and Phillips, Modern Contract of Guarantee, Westlaw AU: (1) In order that the guarantors be exonerated from liability, they may seek to rely on any claims and defences that the principal has against the creditor; (2) A guarantor can raise a cross-claim for unliquidated damages against the creditor without joining an insolvent principal debtor; (3) A guarantor can bargain away the right to raise a defence based on conduct alleged to have the effect of discharging the guarantee or of relieving the guarantor of liability under the guarantee; (4) Clear and unequivocal words (or an obvious implication) are required to allow the guarantor to rely on a cross-claim or set-off available to the principal debtor; (5) If there is nothing in the guarantee to exclude the guarantor's right to counterclaim or set-off under the common law and in equity, then these counterclaims and set-offs will be available to the guarantor; (6) More general provisions stating that the guarantor's obligations are to be unaffected "by any matter whatsoever" are unlikely to preclude the guarantor relying on the principal debtor's set-off; (7) The guarantor's right to invoke any right of set-off or counterclaim available to the principal debtor may also be excluded by the court's interpretation of the contract in its factual matrix.
7. Examples of the construction of guarantee clauses which on their face appear to be all encompassing can be found in the cases. In Doherty v Murphy [1996] 2 VR 553, the Appeal Division of the Supreme Court of Victoria heard an appeal from an order for summary judgment. The creditor in suing the guarantor relied upon the guarantee clause in the deed of loan which provided: "24.9 That the liability of the Guarantors hereunder shall not be determined abrogated prejudiced or affected in any way: (b) by anything done or omitted or neglected to be done by the Lender in exercise of the rights or power or discretions vested in the Lender by this Deed or by any other dealing or thing which but for this provision might operate to determine abrogate prejudice or affect this guarantee." (Italics added)
8. Justice Hansen, with whom Justices Tadgell and Nathan agreed, said of this clause at pp 564-565: "The respondents relied in particular on the second limb of the subclause which was submitted as being very wide and "designed to meet the problem which has arisen here". If that submission is correct it means that that part of the subclause was intended to render Burns Philp immune in the event of failing to do an act which it had undertaken to its contracting party to do. It is true that the language is wide but the question is whether it can have the extreme application contended for by the respondents. The appellants submitted that the subclause should be construed as not excusing the alleged breach or as not precluding the appellants' right as guarantors to be relieved from further liability in the circumstances which occurred. In short, it was submitted that the subclause did not apply to a breach. In some cases it may be possible or appropriate to determine a question of construction on a summary application for judgment, but this is not such a case. The subclause is expressed in terms which are not free of difficulty and the construction contended for by the respondents is one with extreme consequences. The point of construction is not a bare point but arises in a context of facts which must first be determined. Unless the facts are determined in a particular way the point of construction of the subclause will not arise. It is undesirable that a court, particularly in a court of appeal, should proffer an opinion as to the construction of a clause in such circumstances. These factors lead to the conclusion that the normal course should be followed of leaving these matters to be determined at a trial when all relevant issues can be investigated and argued."
9. To similar effect, although not dealing with a guarantee, was the decision of the English Court of Appeal in BOC Group plc v Centeon LLC [1999] 1 All ER (Comm) 970. In that case the obligations of a purchaser of a corporate business to make payment were "absolute and unconditional". The obligations were not to be affected by the transfer of any equity interest, the transfer of assets or business, the dissolution of the business, the termination of the business, the success or failure of the research projects, the future commercialisation or otherwise of any products, the company's future business or technological or technical successes, or "by any other matter whatsoever".
10. The purchaser paid the first two instalments but failed to pay the third instalment alleging that there was a breach of the agreement by the vendor. The vendor brought proceedings for payment of the third instalment and the purchaser sought to set-off a claim for damages against the sum claimed. The vendor applied for summary judgment, contending that the general words, particularly the word "whatsoever" excluded the purchaser's right of set-off. The application for summary judgment was dismissed and the vendor appealed.
11. The Court of Appeal held that on its true construction, the clause did not have the effect of excluding the purchaser's right of set-off. The words listed in the clause were all concerned with the subsequent fate of the company being sold, and the general words, though tending to include rather than exclude, could refer to other situations affecting its progress. In those circumstances the word "whatsoever" was ambivalent and the clause did not provide with sufficient clarity that the purchaser was to pay instalments regardless of any rights of cross-claim. The appeal was dismissed.
12. Exclusion clauses which are designed to preserve the liability of a guarantor when it would otherwise be discharged often attract a strict rule of construction. In Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank plc [2001] Lloyd's Rep Bank 224 at [59] the court stressed that "strict words" should be required to exclude or limit the general rules applicable to guarantees because "the reasonable man does not expect fundamental principles of law, equity or justice to be excluded unless the contract clearly says".
13. In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (cited above) the High Court said at 561: "At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety."
14. The words in cl 6.1(ii) of the guarantee presently under consideration commenced with a list of matters which would normally mean that the guarantee was discharged. Such matters include the granting of time to the principal debtor, the granting of an indulgence or concession to the debtor, and the modification, extinguishment, variation or waiver of any obligation of the debtor. Such matters "might (but for this provision) operate to affect or discharge the Guarantor from his obligations".
15. There is nothing in the first six lines of cl 6.1(ii) which indicate that the parties were contracting to ensure that the guarantor was giving up any rights it might have to raise a set-off or defence which would have been available to the principal debtor. It would have been a simple drafting exercise to include such rights.
16. The plaintiff relies upon the last three lines of cl 6.1(ii): "it being the intention of the parties to this Agreement that the guarantee and indemnity and the obligations of the Guarantor shall be absolute and unconditional in any and all circumstances".
17. There is room for argument that these words are intended to apply only to the kinds of matters listed in the first six lines of cl 6.1(ii) which would otherwise extinguish the obligations of the guarantor.
18. That being so, there is uncertainty as to whether the last three lines of cl 6.1(ii) should be construed so as to apply only to the first six lines of the paragraph, or were intended to extend the operation of the paragraph to any and all matters, including the right of a guarantor to raise a set-off or defence available to a principal debtor.
19. The apparent width of the construction put by the plaintiff upon the last three lines of cl 6.1(ii) is also relevant to the proper construction of the provision, as held by the High Court in Bofinger, referred to above.
20. In my view this case is similar to Doherty v Murphy, referred to above, in that it is inappropriate to determine a question of construction on an application for summary judgment. The clause expressed is in terms which, in the words of Justice Hansen, are "not free of difficulty and the construction contended for by the [plaintiff] is one with extreme consequences". Further, the point of construction arises in the context of facts which must first be determined.
21. I am of the view, in accordance with the decision in Doherty v Murphy, that it is undesirable that this court should proffer an opinion as to the construction of the clause in the circumstances. The normal course should be followed of leaving these matters to be determined at a trial when all relevant issues can be investigated and argued.
22. In this regard, I note that the matter has been listed for hearing on 29 October 2018 for two days. It is appropriate that it proceed as a full hearing on those dates. I propose to dismiss the Motion for summary judgment.

Orders

1. At the hearing of the Motion on 13 July 2018 I made some orders concerning the supply of particulars. Those orders stand. I stood over the balance of the Motion to be determined on this reserved judgment.
2. Normally costs of a Motion would follow the event. However, I will not order that the plaintiff pay the costs of that part of the Motion relating to the application for summary judgment. The defendant has succeeded in defending the summary judgment application on a ground not put forward in submissions. The plaintiff has partly succeeded on the Motion (in relation to particulars) and partly failed (in relation to summary judgment). In those circumstances I find that the appropriate costs order is that costs of the Motion be costs in the cause.
3. My orders in relation to the balance of the Motion are: 1. Apart from the orders made on 13 July 2018, the plaintiff's Motion is dismissed. 2. Order that the costs of the Motion be costs in the cause.

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