Sydney Automotive Paints & Equipment Pty Ltd v Grant Lee Thomas

Grounds of appeal 8Briefly, the grounds of appeal are, first, that the Magistrate erred by taking into account the subjective intentions of the defendant in signing the documents which constituted the guarantee; secondly, the Magistrate erred in failing to attach the importance required by law to be attached to the signature of the defendant on the guarantee; thirdly, the Magistrate erred in finding that paint and other automotive products were supplied to Stuart Thomas and Rigoli, and that the defendant otherwise did not obtain or did not intend to obtain any benefit from the transaction that was the subject of the guarantee; fourthly, the Magistrate erred in taking into account irrelevant considerations in reaching her decision; fifthly, the Magistrate erred in applying principles of contractual construction to determine questions which did not involve the construction of any contractual terms; sixthly , the Magistrate erred in misdirecting herself in law in determining the case; seventhly , the Magistrate erred in her reasons for refusing to find that Stuart Thomas was acting on the ostensible authority of the defendant in the provision of the guarantee; eighthly, the Magistrate erred in finding that the guarantee did not come into existence at all; and ninthly, the Magistrate erred in dismissing the statement of claim and otherwise determining the case on grounds which were not pleaded. Most of these grounds overlap.

Notice of contention 9The defendant filed a notice of contention on 2 May 2011. It contends that the decision of the Court below should be affirmed on the ground that the guarantee contained in the Application for Credit document was unjust in the circumstances relating to it at the time it was made for the purposes of the Contracts Review Act 1980.

The pleading framework in the Local Court 10It was not disputed that the plaintiff in the course of its business as a supplier of automotive paints and equipment has supplied paint and associated automotive goods to McGraths Hill Collision Pty Ltd trading as Rigoli Collision Centre between 13 July 2009 and 30 November 2009. However the defendant denied the amount payable. 11The operative part of the original defence dated 3 May 2010 is pleaded at paragraph [4]. It says: "4. The defendant acknowledges being a former director of McGrath Hill and did sign a Deed of Guarantee and Indemnity dated 22 nd April 2009. This Guarantee and Indemnity was executed at a time when McGrath Hill was proposing to purchase a business by the name of Dural Prestige Crash Repair and was to be limited solely to the operation of Dural Prestige Crash Repair and was not related or connected to the business trading as Rigoli Collision Centre. The purchase of Dural Prestige did not proceed and the Guarantee and Indemnity dated 22 nd April 2009 was cancelled and became inoperative and remains inoperative and of no force or effect." 12At the commencement of the hearing in the Local Court, Grant Thomas sought to and was granted leave to amend his defence (paras 4A and 4B of the amended defence filed in Court on 22 December 2010) to add a claim under s 7 of the Contracts Review Act alleging that the contract was unjust in the circumstances relating to it at the time it was allegedly made. As the magistrate decided that the guarantee never came into existence, her Honour did not decide the issues raised under the Contracts Review Act .

The application for credit and guarantee 13At the hearing of this appeal this Court did not have the original documents that were before the Magistrate. The parties consented to this Court obtaining the original application for credit being Exhibit 4 (Ex A in this court), from the Local Court at Sutherland. Exhibit 4 was duly obtained. In the original application for credit, there was coloured ink and white out on the original form. These alterations were not apparent on the copy. 14The application for credit is a proforma one that requires the applicant to complete the blanks in the form. The name of the applicant on the application for credit is named as McGraths Hill Collison Pty Ltd. After the typewritten words "TRADING AS", something has been whited out and the words "Rigoli Collision Centre" has been overwritten in handwriting. Likewise after the words "BUSINESS ADDRESS" an entry has been whited out and an address at Bexley has been overwritten in the same handwriting as the other alteration. These two overwritten entries appear to be in different handwriting to that appearing on the rest of the document except where Stuart Thomas' name and details have been inserted. The postal address of the applicant is stated as an address in Eastwood. The contact name of the applicant is nominated as Stuart Thomas. His phone and fax numbers are provided. Underneath "PARTICULARS OF DIRECTORS, PARTNERS OR PROPRIETORS" the name Grant Lee Thomas, director appears. His details in South Australia are provided. Under the same heading Stuart Guy Thomas' name is also provided. He is described as manager and his residential address is provided. 15Grant Thomas signed the application as director. Stuart Thomas also signed the application as manager. Grant Thomas' signature was witnessed, Stuart Thomas' was not. 16The terms of the application for credit include an agreement to be bound by the terms and conditions of sale as set out on page 2 of the application, a warranty that the information given is true and accurate and an acknowledgement that if the applicant is a company that the "application for credit is conditional upon the deed of guarantee and indemnity being duly completed, executed by the guarantor and witnessed." A notation was added in handwriting to the bottom of the Application for Credit which reads "strict 30 days" in purple ink.

The Deed of Guarantee 17The Deed of Guarantee and Indemnity ("the guarantee") is made in favour of "McGraths Hill Collision Pty Ltd" and an address at Eastwood is given. There is no reference to a trading name on this document. It is also dated 22 April 2009. The document reads: "DEED OF GUARANTEE & INDEMNITY IN Consideration of you the seller Sydney Automotive Paints & Equipment Pty Ltd - A.B.N. 68 001 717 611 having agreed or agreeing to sell goods or to provide services granting or giving credit to McGraths Hill Collision Pty Ltd Hereinafter called "the company" With its registered office at XXXX Eastwood SA 5063 At my request and forbearing for the time being to sue the company for the recovery of monies owing by it to the seller, I and ... each of us HEREBY jointly and severally for ourselves ... UNCONDITIONALLY AND IRREVOCABLY GUARANTEE to the seller the due and punctual payment of all monies..." 18Both Grant and Stuart Thomas have signed the document as guarantors. The document does not ask them to specify the capacity in which they signed this guarantee. Only Grant Thomas' signature has been witnessed. 19In the credit application and the guarantee McGraths Hill Collison Pty Ltd was named. There were two whited out entries on the application for credit. One was in relation to "trading as" and the other was the business address. 20There was no dispute that the guarantee was signed by Grant Thomas and that he understood the nature of the guarantee. 21The Magistrate made a finding that Stuart Thomas made the alterations to the credit application and that there was no evidence that he had advised the defendant of these changes. Mr Feehan (who processed the guarantee for the plaintiff) gave evidence that he did not notice the white-out. However, her Honour did not make a finding as to whether or not she accepted his evidence on this point.

The Local Court hearing 22At the hearing in the Local Court, Sydney Automotive relied on the statement of Mr Feehan dated August 2010. Grant Thomas relied on his statements dated 31 August 2008 and October 2010 and those of Stuart Thomas dated 31 August 2010 and 8 October 2010. Mr Feehan gave evidence for Sydney Automotive. Mr Stuart Thomas and Grant Thomas also gave evidence. All witnesses were cross-examined. 23Grant Thomas, in his written submissions, said there were three issues to be determined. The first was whether there was an enforceable application for credit and guarantee between the parties; the second was whether the material alteration made to the original application for credit, without the knowledge or consent of the defendant, had discharged the defendant from liability under the guarantee; and the third was whether the guarantee amounted to an unjust contract under s 7 of the Contracts Review Act ? 24In the Local Court, Sydney Automotive, in oral submissions, submitted that it was entitled to take the guarantee on its face and act upon it and that therefore the defendant was liable to guarantee the payments that his company had defaulted on (T3).

The Magistrate's reasons 25Her Honour considered that the ultimate issue for the Court to decide was whether or not the guarantee was binding on the defendant. To determine this she asked: when Grant Thomas signed the guarantee on 22 April 2009, what did he intend to guarantee? Her honour also posed and answered the question: did the guarantee ever come into existence at all? 26Sydney Automotive submitted that Grant Thomas guaranteed the obligations of McGraths Hill for the purchase of all goods supplied by Sydney Automotive and that there was nothing to indicate in the guarantee that it was only for a specific business. It was not in dispute that the three-page document (the application for credit and the guarantee) could be read as a whole. 27On 21 January 2011, her Honour, in the Local Court, made the following findings: "The Court does find that the plaintiff should have made enquiries when it noticed that the date of the guarantee was one month earlier than the other documents received. Whilst there may be no strict requirement at law for copies of the executed documents to be forwarded to the guarantor, it is prudent business practice and [in] this instance would have uncovered the [flaws]. The Court is satisfied by the defendant's evidence that when he executed the guarantee, it was for the Dural Prestige Smash Repair business only and he did not intend to cover other businesses. The plaintiff submitted that Stuart Thomas had the authority to bind the defendant. He bases this on the fact that it was ... Stuart Thomas, that did all the negotiations with the plaintiff. He signed agreements. He signed the lease and he was the face of McGrath [sic] Hill, although he was not a director. Mr Feehan's evidence was that he thought Stuart Thomas was the manager. The plaintiff further submits that Grant Thomas, by signing the guarantee and leaving it in the hands of his brother, allowed the plaintiff to act on Stuart Thomas' implied authority. However, the Court finds in this case, because of the special character of a guarantee and the need to interpret the terms and the document strictly, the Court cannot be satisfied in all the circumstances that surround this case - namely, because Ray McMartin, the plaintiff's principals [sic], distrust of Stuart Thomas - Mr Feehan's knowledge that Stuart Thomas had looked at other businesses, the date one month earlier of the guarantee and the failure to follow up, that the plaintiff is able to rely on the apparent authority of Stuart Thomas. The last question is; did the guarantee ever come into existence at all. The Court is not satisfied that the guarantee did come into existence. The Court accepts the defendant's evidence that he completed the guarantee in favour of Dural Prestige Smash Repairs only and when this purchase did not proceed, he believed that the guarantee was at an end." 28It is important to remember that the role and function of this Court on an appeal is still confined to the correction of error; there may be ancillary powers thereafter, but it is necessary for an appellant to show error in reasons or in procedure in order to engage the jurisdiction of this Court to make any orders: Patey-Dennis v MUT Constructions (NSW) Pty Ltd [2011] NSWSC 497 per Rothman J. Further, in this instance the error must be an error of law, since leave was not sought to appeal on an error of fact and law.

Appeal ground 1 - Subjective or objective intentions 29Sydney Automotive submitted on this appeal that the Magistrate fell into error in taking into account and deciding the case on the subjective intentions of Grant Thomas in signing the documents which constituted the guarantee. 30Counsel for Grant Thomas submitted that the Magistrate did not take into account his subjective intentions. They further argued that her Honour's finding that the business that Mr Thomas had intended to guarantee was Dural and not Rigoli was a matter of fact, not law, and referred to Handbury v Nolan (1977) 13 ALR 339 at 341, where Barwick CJ stated: "The matter... is not to be resolved... by construction of written documents, but as a matter of fact, ie what in substance was the subject matter of the sale and purchase." 31The case law clearly indicates that, in determining the intention of the parties to a contract, the court is to determine what would be objectively conveyed by what was said or done. If the Magistrate did consider the uncommunicated, subjective intentions, of Mr Thomas, the Magistrate adopted the wrong approach and that constitutes an error on a question of law. 32In Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179, the High Court observed: "This Court, in Pacific Carriers Ltd v Paribas , has recently affirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe." 33I accept that the Magistrate did not specifically state that she was taking the subjective intentions of Mr Grant Thomas into account. However, further analysis is required to ascertain whether Grant Thomas' subjective intentions were taken into account. In relation to the defendant's intentions, her Honour said the following: "To determine this [whether the guarantee is binding on the defendant], the Court asks; when the defendant signed the guarantee on 22 April 2009, what did he intend to guarantee? ... The Court is satisfied by the defendant's evidence what when he executed the guarantee, it was for the Dural Prestige Smash Repair business only and he did not intend to cover other businesses. ... The Court accepts the defendant's evidence that he completed the guarantee in favour of Dural Prestige Smash Repairs only and when this purchase did not proceed he believed that the guarantee was at an end." 34A difficulty in determining whether the Magistrate has considered the subjective intention of Grant Thomas arises because it is not clear from her Honour's reasons whether she was construing the terms of the guarantee, or determining whether the guarantee was ever formed. 35In Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8, the majority of the High Court discussed the requisite intention to create contractual relations : "It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty." ... Because the inquiry about this last aspect may take account of the subject-matter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances, not only is there obvious difficulty in formulating rules intended to prescribe the kinds of cases in which an intention to create contractual relations should, or should not, be found to exist, it would be wrong to do so. Because the search for the "intention to create contractual relations" requires an objective assessment of the state of affairs between the parties (as distinct from the identification of any uncommunicated subjective reservation or intention that either may harbour) the circumstances which might properly be taken into account in deciding whether there was the relevant intention are so varied as to preclude the formation of any prescriptive rules. Although the word "intention" is used in this context, it is used in the same sense as it is used in other contractual contexts. It describes what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened. It is not a search for the uncommunicated subjective motives or intentions of the parties." (citations omitted; emphasis added) 36The question is then whether the Magistrate performed an "objective assessment of the state of affairs between the parties" to determine whether the guarantee was formed. 37Alternatively, in construing the document, the Magistrate's task was to construe the contract in its commercial setting in accordance with the surrounding objective circumstances known to both parties: see Codelfa Constructions Pty ltd v State Rail Authority of NSW (1982) 149 CLR 337. It is my view that the proper construction of a contract is a matter of law. 38Her Honour noted that the courts have required strict interpretation of guarantees and any ambiguity is to be resolved in the guarantor's favour. She referred to Northstate Carpet Mills Pty Ltd v BR Industries Pty Ltd [ 2006] NSWSC 1057 , where Young CJ in Eq said at [38] and [40]: " [38] ... Guarantees must be strictly viewed. A person who is guaranteeing that someone will pay a debt within 45 days is in a different plight to a person who is guaranteeing that someone will pay a bill in 14 days. Ordinarily, if the contract between the principal debtor or the person who becomes the principal debtor and the creditor is varied, then the guarantee is discharged. On like reasoning, if one sends an application for a 45 day credit account in the same envelope as a guarantee for supply, a reasonable bystander would infer that the guarantee was in connection with that transaction and none other. ... [40] Some might think that this ruling is artificial. Unfortunately, courts have been noticing over the last few years that commercial enterprises have been cutting corners, mostly in the name of cost reduction and it has not been uncommon for finance companies not to send the debtor or its guarantor copies of the completed finance contracts and rely on the fact that the customer has the loan or product as the case may be. It is fashionable to minimise the importance of complying with the law of contract. Unfortunately, this line of thinking, whilst it may reduce costs, leads to the present sort of problem, that is, where too little attention was given to the making of the contract as a result of which what the supplier thought was a guaranteed transaction was not." 39It is not in dispute that guarantees must be strictly viewed. 40It was not in dispute that Grant's brother, Stuart, changed the "trading as" entry on the credit application description from Dural Prestige Smash Repairs to Rigoli Collision Centre. The company name McGraths Hill Collision Pty Ltd remained unaltered and was the only company name that appeared on the guarantee. Stuart had also altered the address of the business. The Magistrate concluded that Grant Thomas completed the guarantee in favour of Dural only and when this purchase did not proceed, Grant Thomas believed that the guarantee was at an end. 41The Magistrate did not make a finding that Mr Feehan noticed the white out on the letter of credit. Nor did she make a finding that the plaintiff or Mr Feehan were aware that Grant Thomas only intended to execute a guarantee for the purchase as opposed to the lease of a business. Nor did she make a finding that Mr Feehan or the plaintiff was aware that Grant Thomas only intended to guarantee sales to Dural. 42It is my view that her Honour did take the uncommunicated subjective intentions of Grant Thomas into account to arrive at the conclusion that the guarantee was not binding on him. These were not objective facts known to both parties. Her Honour adopted an incorrect approach to the construction of the documents. This is an error of law. Alternatively, in considering the intentions of the parties to form the guarantee, her Honour erred in considering the subjective intentions of Grant Thomas to only bind himself with respect to sale to Dural.

Appeal ground 4 - Irrelevant considerations 43Sydney Automotive argued that the Magistrate erred in taking into account irrelevant considerations. At the appeal hearing, counsel for the plaintiff submitted that her Honour had significantly based her finding that Grant Thomas was happy to provide a guarantee for the purchase of Dural but not for the lease of Rigoli on a document that was not in evidence (T12). 44Paragraphs [10] and [11] of Mr Grant Thomas' statement dated 31 August 2010 were not read and therefore the exhibits annexed to the statement that were referred to in paragraphs [10] and [11] were not in evidence (T 30.5 of the Local Court hearing). Those paragraphs referred to a subsequent credit application that was requested by the plaintiff before they would supply goods on credit to Rigoli. However, that credit application itself was attached to Stuart Thomas' affidavit and not challenged. I accept that the Magistrate had the actual credit application before her but she did not have Grant Thomas' explanation in evidence before her. When Grant Thomas signed this application he explained that he did not sign as Guarantor of the company and crossed out the "Guarantors" section altogether. The paragraphs stated: 10. A subsequent credit application was requested by the plaintiff from the Company on or about 16 th June 2009 and this was also signed by myself. A copy of that credit application is annexed hereto and marked "C". This was required before the plaintiff would supply product to the Company on credit. The new credit application was completed by myself on behalf of the Company on or about 25 th June 2009 and returned to the Plaintiff on or about the 25 th June 2009. The credit application was sent by Rigoli Collision Centre in Sydney to my Adelaide office on or about the 23 rd June 2009. At the time I signed the Application I deleted a reference to the Guarantors and I did not sign or purport to sign as Guarantor of the Company. In any event the Plaintiff does not rely on this document in its Statement of Claim. The Plaintiff would not supply product until this credit application was completed by the Company and I also believe a similar document was signed by my brother, Stuart Thomas who managed the business of the Company. 11. When that credit application was signed by myself for the Company known as Rigoli Collision Centre in relation to the business Rigoli Collision Centre the guarantor portion of the form was deleted. I was not prepared to provide a guarantee in relation to the business Rigoli Collison Centre. I did not sign the Guarantee section of the Credit Application. That business was being operated by my brother Stuart Thomas for and of (sic) the Company. The first product delivered Rigoli Collision Centre was on the 16 th July 2009. This was only after: (i) the trading terms application of the 25 th June 2009 of myself on behalf of the Company had been delivered; and (ii) a second Trading Terms Application had been completed by my brother Stuart Thomas had been processed and approved by the Plaintiff." 45Despite the paragraphs referring to the subsequent credit application, and the credit application itself, not being in evidence, her Honour said in her judgment (page 3.6): "His [Grant Thomas'] evidence was that he was happy to provide a guarantee for the purchase, but not for a lease and to some extent, his proposition is supported by another document headed "Trading Terms Application and Agreement" dated 25 June 2009 where the defendant has specifically crossed out the word 'guarantor'." 46The date 25 June 2009 should read 19 June 2009. The explanation propounded by Grant Thomas in relation to the credit application faxed 19 June 2009 may have affected her Honour's findings in relation to the guarantee. 47If a judicial officer allows extraneous or irrelevant matters to guide or affect them, then their determination should be reviewed: House v The King (1936) 55 CLR 499 per Dixon, Evatt and McTiernan JJ. 48In Avon Downs Proprietary Limited v Federal Commission of Taxation (1949) 78 CLR 353, Dixon J confirmed that the taking into account of an irrelevant consideration is an appellable error: "His [the Commissioner's] decision, it is true, is not unexaminable. If he does not address himself to the question which the sub-section formulates, if his conclusion is affected by some mistake of law, if he takes some extraneous reason into consideration or excludes from consideration some factor which should affect his determination, on any of these grounds his conclusion is liable to review." (emphasis added) 49In this case it is my view that the Magistrate did take into account an irrelevant consideration when she based her determination, in part, on a document that was not in evidence. This amounted to an error of law.

Remaining grounds of appeal (grounds 2, 3 & 5 - 11) 50Grounds 7 and 8 were not pressed. 51The remaining grounds of appeal, save for ground 6, appear to raise only alleged errors of fact. Ground 6 (that her Honour erred in misdirecting herself in law in determining the case) was not sufficiently particularised. However, since this matter is being remitted, it is not necessary for me to consider these grounds further.

Determination of Notice of contention 52Grant Thomas raised s 7 of the Contract Review Act in his defence on the first day of the hearing. Because her Honour decided that the guarantee did not come into existence it was not necessary to deal with that issue. As the matter is to be remitted for determination according to law, this issue may need to be determined in the Local Court.

Conclusion 53There is an error on a question of law. The appeal is upheld. The decision of her Honour Magistrate Hawdon dated 21 January 2011 is set aside. The matter is remitted to the Local Court to be determined according to law. 54Costs are discretionary. Costs usually follow the event. The defendant is to pay the plaintiff's costs as agreed or assessed.

The Court orders:

1. The appeal is upheld.
2. The decision of her Honour Magistrate Hawdon dated 21 January 2011 is set aside.
3. The matter is remitted to the Local Court to be determined according to law.
4. The defendant is to pay the plaintiff's costs as agreed or assessed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 December 2011