Smith v Skinner

Is there a real question of law to be tried?

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.
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.
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."
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."
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.
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.
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)
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."
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".
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.
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.
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".
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."
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".
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.
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".
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.
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.
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.
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.
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.
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.

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