Tjen v Marquess Investment Fund Pty Limited

Contractual documentation

1. The repayment obligation, for breach of which the guarantors would be liable, was expressed in the following terms: "9.1 Amount owing (a) Subject to clause (b), the Borrower must pay the Amount Owing plus any other money due to the Lender on the Termination Date. (b) During the term of the Loan, the parties shall negotiate in good faith with a view of converting the Amount Owing into equity (on terms to be agreed), but if by the Termination Date, the parties have not reached agreement the terms of clause (a) apply."
2. The appellant's case was that cl 9.1 imposed an obligation, but with a binary choice. If the terms of cl (b) were met, there was no obligation to repay the amount owing under cl (a). The appellant submitted that the Forbearance Deed fell within cl (b).
3. The recitals to the Forbearance Deed included the following: "C On 28 February 2017, under a loan agreement ("Loan Agreement") Marquess advanced a loan ("Loan") of $1,100,000 ("Loan Amount") to the Company [Halcyon] and South Land for a period of 3 months for the Project. D The parties have agreed to convert the Loan to equity in the Project on the terms set out in this Deed."
4. The "Project" was defined as the "residential subdivision project" at specified addresses in Box Hill, which Halcyon was carrying out: recital A. By way of background, recital B identified the shareholders of Halcyon, which were two other parties to the deed, being South Land and a party identified as M&A Group Pty Ltd, each of which was a 50% shareholder of Halcyon. Recital B also stated that five other parties which were parties to the Deed and described as "existing shareholders" were entitled to dividends and distributions from the company and the project. The nature of the interests of the existing shareholders was not explored.
5. The Forbearance Deed contained three operative provisions. Clause 1 defined "Net Profit" as "the net profit of the company from the Project available for distribution after payment of all liabilities (including tax liabilities) and development costs". Clause 2 of the Deed provided as follows: 2 Marquess' Share of Net Profit Distributions (a) Despite any other previous agreement and the shareholdings of the Company (as registered with ASIC or otherwise), each of the parties agree that Marquess will be entitled to 8% of the Net Profits of the Project. (b) In consideration of the share of the Net Profits given to Marquess, but subject to clause 3: (i) Marquess agrees to forbear exercising its rights under the Loan Agreement including its right to demand repayment of the loan, interest and all other costs until the senior funder for the Project and all secured creditors have been repaid and funds are available from the Project to repay the Loan but before distributions of Net Profits are made under the Project to shareholders ("End of Forbearance Period"), and (ii) the Loan will not accrue interest under the Loan Agreement from the date of this Deed until the End of Forbearance Period. (c) Marquess does not disclaim or forgive the Loan Amount and all moneys payable under the Loan Agreement, (d) Marquess may exercise its rights under the Loan Agreement at the End of Forbearance Period.
6. Clause 2 (b) was subject to cl 3, which provided as follows: 3 Interest and Risk Fees (a) The parties agree that: (i) total interest accrued for 3 months is $132,000 (at 4% per month) under the Loan Agreement, (ii) legal costs incurred is $5,500, and (iii) Halcyon will pay a risk fee of $100,000 to Marquess for the forbearing the payments under the Loan Agreement. (b) Marquess' agreement to forbear payments under clause 2(b) is subject to payment of all interest, fees and costs set out in clause (a), being a total of $237,500.

Findings of trial judge

1. The trial judge concluded, at [89], that the Forbearance Deed did not constitute an agreement within cl 9.1(b) of the loan agreement. The trial judge noted that cl 9.1 of the loan agreement presented a binary choice, namely that the borrowers would either repay the Amount Owing, or reach agreement to convert that amount into equity in the project: at [92]. The trial judge's reasons continued, in a passage challenged by the appellant: "To be clear the latter was to discharge the former; instead of receiving the amounts owing under the loan agreement, the plaintiff would receive equity in the project. Here, in my view, the forbearance agreement (put simply and relevantly) preserved the amount owing under the loan agreement and made provision for the plaintiff to take equity in the project. An agreement of that kind is plainly not of a kind captured by cl 9.1(b) of the loan agreement."
2. The judge accepted that recital D provided "some support" [2] for the appellant's construction. However, the judge observed that there were "limits" to reliance upon a recital to govern the meaning of an agreement of which it formed part. While accepting that the recital set out context for the transaction, he continued, quoting OneSteel Manufacturing Pty Limited v BlueScope Steel (AIS) Pty Ltd [3] to the effect that whilst recitals "can assist in interpretation of operative provisions, … they do not control the latter's operation when clear and unambiguous". The judge did not consider there was ambiguity that might permit the use of the recital in the way that the appellant contended as that would be "to accord primacy to the recital over the terms of the agreement". He continued: [4] "Furthermore, in my view Recital D is qualified in its expression of what the 'parties have agreed to' do - viz, by emphasising that it is 'on the terms set out in this Deed'."

Grounds of appeal

1. After a belated amendment on 6 November 2023, the notice of appeal raised nine grounds of appeal, which may be broken down as follows.
2. First, the appellant's primary and overarching proposition was that the Forbearance Deed was an agreement in satisfaction of cl 9.1(b) of the loan agreement: grounds 1 and 2. Secondly, and consequently upon the first proposition, there was no money owing under the loan agreement at the "end of the forbearance period". The judge's error in failing to accept that conclusion was said to lie in construing cll 2(c) and 2(d) as dominant, rather than subject to, cl 2(b): grounds 1B and 3. Thirdly, the appellant contended that as the Forbearance Deed discharged the obligations of the borrowers under the loan agreement, so the obligations under the appellant's guarantee were also discharged: ground 2.
3. The other grounds appeared to be different ways of expressing the same basic issues. Thus, ground 1A identified error on the part of the trial judge in not construing the Forbearance Deed as "binary" in the same manner as the loan agreement: ground 1A. In similar vein, the appellant contended that the judge erred in holding that "a discharge under cl 9.1(b) would obviate any need for a forbearance": ground 1C. This ground appeared to challenge the construction of cl 9.1(b) as envisaging only that the loan would be converted into equity and would therefore no longer subsist. In substance, the appellant's proposition was that, if the contingency in cl 2(b) ("subject to clause 3") were satisfied, then the obligations under the loan agreement were extinguished by the Forbearance Deed. On the other hand, if the contingency were not satisfied, then in accordance with cll 2(c) and 2(d) the loan agreement remained on foot and enforceable. There was no basis, it was submitted, to conclude that such a conditional agreement did not satisfy the requirements of cl 9.1(b).
4. Finally, the appellant submitted that the trial judge ought to have held that "moneys owing under the loan agreement were only payable if funds were available from the project to repay the loan". It may be accepted that the judge did not read cl 2(b) as having that effect. The contention treated the absence of one of the three criteria identifying the end of the forbearance period in cl 2(b)(i) as meaning that the loan need never be repaid, because the period did not come to an end.
5. Finally, grounds 5 and 6 related to the obligations under the guarantee. They challenged a finding that the Forbearance Deed did not constitute a variation of the guarantee (ground 5), and asserted (in ground 6) that the Deed did constitute such a variation and thereby discharged the guarantee.

Determination of appeal

1. Reading cl 9.1(b) as it might have been read in February 2017, before the Forbearance Deed was prepared or executed, both text and purpose are readily identifiable. Paragraph (a) contained a standard obligation for the borrower to repay moneys due at a specified time. The term "Amount Owing" was defined in cl 9.1 to mean "on any day the aggregate of all money owing or payable actually or contingently by the borrower to the lender under this document". However, cl (b) was given primacy, so as to remove the repayment obligation in circumstances where it applied. It did not require that a further agreement be entered into, but required the parties to negotiate in good faith to that end. If they failed, cl (a) continued to apply.
2. What needed to be achieved to satisfy cl (b) was an agreement by which the "Amount Owing" was converted "into equity". The appellant accepted that cl 9.1 involved true alternatives: if the amount owing was converted into equity, it was no longer repayable; if it were not converted into equity, it remained repayable under the loan agreement. It was that proposition (the correctness of which was not challenged by the appellant) which led the trial judge to conclude that if cl (b) were satisfied, there would be no need for a forbearance deed, because there would be no outstanding obligations, the enforcement of which might be forborne. On that approach, a deed which purported to provide for forbearance would not satisfy the terms of cl (b).
3. The appellant sought to avoid that conclusion by noting that cl 9.1(b) envisaged that the converting of the amount owing into equity was to be done "on terms to be agreed". However, that neutral expression in parenthesis cannot be read as qualifying the nature of the agreement which was to be a conversion of the amount owing under the loan agreement into a capital contribution to the project.
4. There was, as the appellant submitted, no necessary difficulty in finding that a conditional or contingent agreement might satisfy the terms of cl 9.1(b). The contingency in the Forbearance Deed was satisfaction of cl 3. That conditioned Marquess' agreement to forbear upon payment of an amount of $237,500. It was common ground that that condition was satisfied, though it is not commercially insignificant that satisfaction was achieved by the respondent making a further loan (of $2 million) and withholding the amount specified in cl 3 as a payment by the borrowers to it for the purposes of the Forbearance Deed. The method of payment is commercially significant because it suggested that the borrower would not have been able to repay even that small amount of the loan prior to completion of the project. To construe cl 2(b) as an agreement by the lender to forego any entitlement to enforce the loan agreement unless the project succeeded (in which case enforcement would not be required) would be commercially implausible.
5. The appellant's reliance on recital D, as the trial judge noted, carried little weight. There is no doubt that recital D reflected the terms of cl 9.1(b). However, the obligation under that clause was to negotiate in good faith with the purpose of achieving an agreement of a specified kind. The recital confirmed that an agreement was reached (thereby implicitly acknowledging satisfaction of the obligation to negotiate in good faith), but it could not, even if it purported to, characterise the terms of the agreement otherwise than in accordance with their proper construction.
6. The appellant relied on an email (which had been tendered at trial without objection) from the solicitor for Marquess to the principals of the respective parties, dated 18 May 2017. The email read: "I attach the Deed that 'converts' the $1.1m to the 8% 'equity' in the project. Please note that: ● it is structured as a forbearance of the loan - the loan is not discharged but Marquess will not enforce until the project end - so $1.1 million is still payable, but interest stops after 3 months ● The structure of the loan is that from the proceeds of sale, after the secured creditors are paid (bank), the $1.1m then gets paid and then you receive your 8% as part of everyone's distributions (after all project costs are also paid) ● The 3 months interest plus $100k is payable first (this will be from the new $2m advance) ● The profit share is fixed at 8% of the net profits of the project."
7. To the extent that the solicitor's email identifies anything by way of context or background that does not appear from the terms of the deed (including the recitals), it is not favourable to the appellant. It may be accepted that the solicitor (and the parties) drafted (and executed) the forbearance deed with one eye on cl 9.1(b) of the loan agreement. However, it is clear that the intention was not that the respondent in fact convert its entitlements under the loan agreement into a share in the capital of the project. Rather, it is clear that the deed was indeed based on "forbearance", with the effect that the loan agreement remained on foot but the entitlement to interest was replaced by an entitlement to a share in the profits (if any).
8. It is necessary to turn to the express terms of cl 2 of the Forbearance Deed. Contrary to the appellant's submissions, the trial judge, quite properly, did not give priority or precedence to sub-cll (c) and (d) in cl 2. Rather, he approached cl 2 on the basis that it should be read harmoniously as one provision. Clause (a) identified an agreement that the respondent would be entitled to 8% of the net profits of the project. Clause (b) was awkwardly drafted but may be understood as having two parts. The first was an agreement by the respondent to forbear exercising its rights under the loan agreement and an agreement that the loan would not accrue interest from the date of the deed. The second part specified the period during which the respondent would adopt that approach, which was undoubtedly intended to be a finite period. The loan agreement continued to subsist throughout that period with one qualification, that during the period interest would not accrue. That reading was confirmed by cl (c) which expressly stated that the respondent did not "disclaim or forgive" the moneys payable under the loan agreement. Further, cl (d) expressly confirmed that the respondent could exercise its rights under the loan agreement at the end of the specified period.
9. It is not possible to construe that language as involving a conditional discharge of the loan agreement, let alone an unconditional conversion of the amount owing under the loan agreement into equity. The language of the deed expressly preserved the entitlement to recover the amount owing at the end of the specified period. The only variation of the loan agreement (to which it will be necessary to return) was the foregoing of an entitlement to interest according to the terms of the loan agreement during the specified period. Subject to one further consideration, the trial judge was clearly correct to conclude the Forbearance Deed did not satisfy cl 9.1(b) of the loan agreement. An agreement which had that effect would have discharged the obligation of repayment under cl 9.1(a); the Forbearance Deed did the opposite, by preserving the obligation of repayment.
10. The further consideration is the identification of the specified period. One function of par (b)(i) was to limit the time during which the respondent agreed not to exercise its rights under the loan agreement. It did so somewhat awkwardly, the end point of the period being identified by reference to an assumption that at some point in time "net profits" would be realised. There are two points to note in that regard. The first is the assumption that there would be funds available from the project "to repay the loan". Consistently with every other part of cl 2, that confirmed that the loan would remain repayable despite the operation of the Forbearance Deed.
11. The second point is that the period of forbearance has not, on the appellant's case, ended, and never will end, because the necessary funds were not and will not be available to satisfy either the repayment of the loan or other costs incurred by the borrower. On that reading, the respondent has not yet become entitled to exercise its rights under the loan agreement, pursuant to cl 2(d), and never will.
12. This submission appeared to reflect submissions made at trial, which the trial judge noted were not withdrawn even after the appellant had conceded that the borrower had repudiated the agreement, at least by 20 September 2018. [5]
13. The trial judge dealt with "the repudiation issue" (issue 3) at some length. [6] He dealt with more briefly with the "end of forbearance period issue" (issue 4). [7] Thereafter he quantified the plaintiff's claim in terms which ultimately led to the amount included in the orders. Calculation of the amount turned on the date of acceptance of the repudiation. [8] There being no challenge to any of these findings of the trial judge, this question need not be addressed further.

Variation of guarantee

1. The only further issue concerns grounds 5 and 6, alleging that the Forbearance Deed constituted "a variation of the guarantee signed by the appellant" and thereby discharged the guarantee.
2. The written submissions in support of grounds 5 and 6 commenced with the following proposition: "22 If the Court accepts the construction at paragraphs 17-21 above, the effect of the primary Judge's decision is that the scope of liability under the Guarantee extends beyond clauses 9.1(a) and (b) of the Loan Agreement. This is a variation of clause 9.1 of the Loan Agreement, without the written consent required under clause 20 of the Guarantee … and discharged the liability of the appellants because the alteration was an extension of liability past 23 May 2017 …."
3. Two things may be noted in this regard. First, the formulation of the grounds was inept to the extent that they alleged a variation of the guarantee, rather than a variation of the obligations under the loan agreement, the subject of the guarantee. Secondly, as counsel for the appellant confirmed in oral submissions, grounds 5 and 6 were contingent upon the Court accepting the propositions under grounds 1-4 to the effect the Forbearance Deed satisfied cl 9.1(b) of the loan agreement. That has not been accepted.
4. The Forbearance Deed varied the obligations of the borrower under the loan agreement in two respects. First, it removed any liability to pay further interest after 23 May 2017, during the period for which the deed was on foot. Secondly, it removed the obligation of the borrower to pay the amount owing under the loan agreement whilst the deed remained on foot. The appellant's written submissions, further stated, with respect to the variation affecting the guarantee: "23 It is not to the point that the appellant was aware of the alteration, which he plainly was. The point was that the bargain of the parties that any variation to the appellant's liability under the Guarantee had to comply with clause 20 of the Guarantee and was not operative otherwise."
5. The submission misstated cl 20 of the guarantee, which was in the following terms: "20 Variation An amendment or variation to this document is not effective unless it is in writing and signed by the parties."
6. Relevantly, cl 4.3 of the guarantee stated: "4.3 Preservation of Guarantor's obligations The Guarantor's obligations and the Lender's rights under this document are not affected by anything that might abrogate, prejudice or limit them or the effectiveness of this document, including: (1) Any variation of a right of the Lender or variation (whether material or not), termination or replacement of any agreement giving rise to the Guaranteed Money or any agreement between the Lender and any transaction party including any: … (c) variation in the time or method of payment of any amount payable by the Borrower to the Lender; (2) The granting of any forbearance, time or other concession to any Transaction Party or any other person; … ."
7. The trial judge concluded that the Forbearance Deed did not vary the loan agreement, [9] but dealt with the possibility that it might amount to a variation in the following passages: "109 First, the defendant did not argue that it did; the defendant's argument was confined to the variation being contained in cl 2(c) of the forbearance agreement. Even if that were not so, any such variation would not, in my view, be substantial or prejudicial to the guarantor. 110 Secondly, the guarantee expressly dealt with, and preserved, the guarantor's obligations when there was any change in the time for payment etc: (a) 'variation in the time or method of payment of any amount payable by the Borrower to the Lender': cl 4.3(1)(c); and (b) by 'the granting of any forbearance, time or other concession to any Transaction Party or any other person": cl 4.3(2). The plaintiff therefore argued that even if it be found that by the entry into the forbearance agreement there was a variation, these clauses meant that the plaintiff's rights under the guarantee remained unaffected. It has long been accepted that clauses may be included in contracts of guarantee which have the effect of excluding the principles in Ankar (see, for example, Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 at [91]) and the plaintiff, to this end, relied upon the decisions in Vivlios v Westpac Banking Corporation [2010] QCA 230 at [6]-[7] and [19]; Hickory Developments Pty Ltd v Brunswick Retail Investment Pty Ltd [2012] VSC 224, especially at [64]-[65], [72]. … 113 To be clear, even if there was an alteration of the obligation in the way that the defendant has argued, I accept, and find, that the alteration is insubstantial and not prejudicial to the guarantor. The performance that the defendant guaranteed was satisfaction of cl 9.1 of the loan agreement - essentially the money advanced (specifically, the Amount Owing), unless an agreement of the kind envisaged by cl 9.1(b) was reached by the termination date. At that date, there being a failure to perform, the defendant could at any time have been called upon by the plaintiff to make good the borrowers' breach of the loan agreement. By the forbearance agreement, the requirement to repay that amount was deferred. In those circumstances, it is not easy to understand how deferring the time for payment of this amount, without imposing any other obligation upon the defendant, acts to his disadvantage. In my view it did not."
8. There was no submission in this Court that cl 4.3 would not be effective according to its terms. However, counsel for the respondent drew the Court's attention to the observations of Gleeson CJ in Bond v Hong Kong Bank of Australia Limited, [10] dealing with the discharge of liability under a guarantee based on a variation in the amount due under a loan agreement. After concluding that the debtor (Mr Bond) knew about, and had consented to, a deed of rectification, Gleeson CJ continued: "Furthermore, I would not accept that what occurred constituted a variation of the contract between the principal debtor and the creditor for the purposes of the application of the principle relied upon. All that occurred was a rectification of the written document which had imperfectly expressed the terms of the contract between the principal debtor and the creditor. In any event, the instrument of guarantee, in clause 1.2(a) provided that a reference in that instrument to any other instrument includes a variation or replacement of any such other instrument and clause 7.1(c) provided as follows: '7 Preservation of agents and financier's rights 7.1 The liabilities under this guarantee and indemnity of the guarantor as a guarantor, principal debtor or indemnifier and the rights under this guarantee and indemnity of the agent and the financier are not affected by anything which might otherwise have that affect at law or in equity including, without limitation, one or more of the following (whether occurring with or without the consent of a person: … (c) Any variation or novation of a right of the agent, a financier or another person, or alteration of a document, in respect of the debtor, the guarantor or another person including, without limitation, an increase in the limit of or other variation in connection with advances or accommodation.' I believe I understand why the point was not argued at first instance."
9. There was no challenge to the trial judge's conclusion as to cl 4.3, nor the finding that any variation to the loan agreement was not substantial, nor prejudicial to the guarantor. [11] As the joint judgment in Ankar noted at 560: "The foundation of the rule is that the creditor, by varying the principal contract or extending time, has altered the sureties rights without consulting it though the surety has an interest in the principal contract, and that the creditor cannot be permitted to do …."
10. The conditional basis upon which grounds 5 and 6 were supported does not require further consideration of this matter, although in principle, where the appellant was not only "consulted" but was a signatory to the Forbearance Deed and gave no evidence at the trial, the grounds should be rejected for that additional reason.

Conclusions

1. Accordingly, the Court should make the following orders: 1. Dismiss the appeal from the judgment and orders of Chen J in the Common Law Division. 2. Order that the appellant pay the respondent's costs in this Court.

Endnotes

1. Marquess Investment Fund Pty Ltd v Tjen [2023] NSWSC 675 ("Marquess").
2. Marquess at [87].
3. (2013) 85 NSWLR 1; [2013] NSWCA 27 at [63].
4. Marquess at [95].
5. Marquess at [117], [119].
6. Marquess at [114]-[166].
7. Marquess at [167]-[169].
8. Marquess at [172].
9. Marquess at [107].
10. (1991) 25 NSWLR 286 at 298.
11. Marquess at [109] applying the test in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 559 Mason ACJ, Wilson, Brennan and Dawson JJ); [1987] HCA 15. 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: 15 December 2023