Vadasz v Pioneer Concrete

The appellant and his accountant, Nicholas John Storer, were the directors of Vadipile Drilling Pty Ltd (Vadipile), a company which carried on business as a foundation piling contractor. The appellant and Mrs Vadasz were the only shareholders of Vadipile. The respondent manufactured ready-mixed concrete and supplied Vadipile with its product between 1985 and 1987 and again between 1990 and 1992.

In January 1992 Vadipile was operating on extended credit from the respondent. In that month, because of its cash flow problems, Vadipile was granted an extension of trading credit from forty-five to sixty days. Vadipile's financial problems worsened so that, by July 1992, it was in debt to the respondent for more than $200,000. Discussions then took place between the appellant and Mr Storer, on the one hand, and Everett Merlyn Miller, the respondent's credit manager in South Australia, on the other. It was arranged that Vadipile would repay the existing debt by monthly instalments of $30,000 and that future debts would be incurred on forty-five day terms. At an early stage of the discussions Mr Miller told the appellant that the respondent would probably require a personal guarantee from him before agreeing to make further deliveries of concrete to Vadipile. The appellant, at first, was not agreeable to giving a guarantee and Mr Miller said that he would seek instructions from the respondent's head office in Sydney. There were further discussions between the parties and communications between Miller and the respondent's head office.

In the end the appellant signed a personal guarantee on 7 August 1992. He did not read it before signing it. The operative part read:

In Consideration of you having agreed or agreeing to sell goods or to provide services granting or giving credit to Vadipile Drilling Pty Ltd hereinafter called "The Company" at my request and forbearing for the time being to sue the Company for the recovery of monies owing by it to you, I, and where more than one, and each of us Hereby jointly and severally for ourselves and our respective Executors and Administrators Unconditionally and Irrevocably Guarantee to you the due and punctual payment of all monies which are now or may at any time until we are released be owing to you by the Company including all costs, charges and expenses of every description which may be incurred by you in the exercise or attempted exercise of any power or remedy and Undertake as a separate and additional obligation under this Instrument and as a principal Debtor to indemnify and to keep you indemnified against any loss that you incur as a consequence of the failure for whatever reason of the due and punctual payment by the Company of any monies due to you as aforesaid.

The trial judge found that the appellant's decision to give a guarantee "was a direct response to the [respondent's] insistence that failure to do so would lead to an immediate cessation of supplies of concrete". The respondent did make further deliveries of concrete but Vadipile continued to encounter financial difficulties. On 25 November 1992 the respondent sued the appellant for an amount of $357,427.37 representing the total indebtedness of Vadipile at the time the writ was issued.

The appellant resisted the claim on the basis that the guarantee was unenforceable because the agreement he made with the respondent was that he would guarantee only the future indebtedness of Vadipile, not its past indebtedness. Having examined the evidence in some detail, the trial judge said:

I find that, on 30 July 1992 and 7 August 1992, Miller said words which were reasonably understood by the [appellant] to mean that the guarantee sought by the [respondent] would be with respect to future indebtedness only. I find that Miller's words induced the [appellant] to enter into the guarantee.

His Honour then went on to consider whether the respondent was aware that the appellant had misapprehended the extent of the guarantee. In view of the importance this aspect assumed on the hearing of the appeal to this Court it is desirable to set out his Honour's conclusions. He said that he was satisfied that, in discussion with the appellant, Mr Miller "meant to convey that the guarantee would cover future debts only". His Honour went on:

I am satisfied that the [respondent], through Hogan [1] and Miller, formed the intention on or about 5 August 1992 to seek from the [appellant] a guarantee with respect to past indebtedness as well as future indebtedness. I am satisfied that the [respondent], through Miller, was aware at all times between 30 July 1992 and 7 August 1992 that the [appellant's] intention was to give a guarantee with respect to future indebtedness only. 1. Mr Hogan was the respondent's group financial controller, based in Sydney.

The trial judge then held that the appellant was entitled to equitable relief on the ground of the respondent's misrepresentation. His Honour made no precise finding as to the character of the misrepresentation, saying:

The [appellant] is entitled to rescission, and therefore to resist the claim, irrespective of whether the misrepresentation was fraudulent, negligent or innocent.

The respondent filed no reply to the appellant's defence but during his final address at the trial counsel for the respondent raised two matters which should have been pleaded in reply. The first was that the respondent should be entitled to rectification of the guarantee so that it was limited to future debts of Vadipile. The trial judge rejected this submission because, while rectification may be available in the case of a unilateral mistake, here the mistake had been induced by the respondent's misrepresentation.

The second matter was by way of a submission that the unenforceability of the guarantee should be confined to past indebtedness since the appellant had been prepared to give a guarantee for future indebtedness and signed the guarantee in the belief that he was committing himself to that liability. The trial judge accepted this submission, by reference to the principle that "he who seeks equity must do equity" and for the reason that the appellant signed the guarantee because he was anxious that the respondent continue to supply concrete to Vadipile.

I hold that the [appellant] is entitled to avoid liability under the guarantee, at least to the extent of Vadipile's past indebtedness to the [respondent]. I hold that the [respondent] is entitled, both in equity and under s 87(2)(b) of the Trade Practices Act [2] , to such order as would preserve and enforce the [appellant's] liability under the guarantee with respect to Vadipile's indebtedness to the [respondent] after 7 August 1992. 1. Trade Practices Act 1974 Cth, s 87(2)(b) empowers the making of "an order varying such a contract or arrangement in such manner as is specified in the order".

The judgment extracted to give effect to his Honour's conclusions reads: "Judgment for $170,929.32 and no order as to costs." There is as well provision for interest. Thus the judgment reflects that the action was one brought by the respondent against the appellant to recover a sum of money. There is no formal order by way of rescission or declaratory relief but the amount of the judgment is calculated on the basis that the guarantee is rescinded or set aside as regards past indebtedness.

The appellant appealed to the Full Court of the Supreme Court of South Australia on the ground that the trial judge "erred in law in failing to rescind the guarantee in its entirety". The respondent cross-appealed, primarily on the ground that:

The learned trial judge erred in not finding that the appellant was bound to the guarantee to the full extent of its terms as there was not sufficient evidence to support a finding that the respondent by its servant or agent misrepresented the extent of the guarantee. The Full Court dismissed the appeal and the cross-appeal [3] . The appellant appeals against the dismissal of his appeal. There is no appeal from the dismissal of the cross-appeal. 1. Vadasz v Pioneer Concrete (SA) Pty Ltd (1994) 62 SASR 150.

The leading judgment was delivered by Olsson J, Mohr and Nyland JJ expressing their concurrence. Olsson J accepted that conditions could be imposed on a grant of equitable relief, including rescission, if "fair and appropriate to the circumstances". He had particular regard to the fact that the appellant gave the guarantee in return for the respondent's agreement to make future supplies available "and thereby enable the appellant to continue the business operations of Vadipile". Olsson J added [4] :

The appellant availed himself of that benefit, without which his company's business would, forthwith, have foundered. It would be unconscionable to permit the appellant to retain the benefit, but unconditionally eschew the financial responsibility which he personally accepted as the consideration for receiving it. If it were otherwise he would, in the equitable sense, have been unjustly enriched by virtue of the benefits conferred on him via his company. 1. Vadasz (1994) 62 SASR 150 at 156-157.

It should be noted in passing that there was a complaint by the appellant that the guarantee included a charge over his assets, unbeknown to him. The appellant did rely at trial on this matter as evidence of fraud but he did not plead it as a particular of fraud, the trial judge made no finding on it and it was not an issue before the Full Court. It is not an issue before this Court.

We have spent some time on the course of the litigation below in order to identify the principles which this Court is asked to apply and also to identify the factual basis in relation to which the principles should be applied.

So far as the facts are concerned, there is no doubt that the trial judge held that the respondent misrepresented the contents of the guarantee to the appellant in a highly material respect. But was there conduct constituting fraud, as the appellant claims? Although his Honour referred to evidence of Mr Miller from which fraud might have been inferred, he refrained from making a specific finding on that question. The reason for that was, no doubt, his Honour's conclusion that the appellant was entitled to rescission, "irrespective of whether the misrepresentation was fraudulent, negligent or innocent". The members of the Full Court also seem to have approached the matter on the footing that the outcome of the case would be the same regardless of whether there had or had not been fraud. Accordingly, their Honours dealt with the appeal to that Court on the basis of an assumption of fraud [5] . A trial judge should not lightly make a finding that a party to civil litigation has been guilty of fraudulent conduct [6] . A fortiori an appellate court should not make a finding of fraud when none has been made by the trial judge unless the evidence clearly justifies such a course [7] .

1. See Vadasz (1994) 62 SASR 150 at 154-155. 2. Bride Pty Ltd v KMG Hungerfords (1991) 109 FLR 256 at 281 and Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 at 171; 110 ALR 449 at 450. 3. Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In liq) (1948) 76 CLR 463 at 476.

Since we have come to the conclusion that the present appeal must fail regardless of whether there was or was not fraud on the part of Mr Miller for which the respondent is vicariously liable, it is appropriate that we refrain from making a positive finding on the question of fraud and deal with the appeal on the same basis as the Full Court, namely, that fraud be assumed. It must, however, be stressed that no actual finding of fraud against Mr Miller or the respondent has been or is being made.

As has been indicated, the respondent has not sought in this Court to overturn the trial judge's finding that the appellant's execution of the guarantee was induced by misrepresentation. Nor has the respondent sought to attack his conclusion, which was confirmed by the Full Court, that the guarantee should be rescinded at least as regards past indebtedness. The only question on the appeal to this Court is whether the trial judge was entitled to order rescission on a footing which left the appellant liable to the respondent for the debts incurred by Vadipile after the guarantee was signed.

In this context it should be remembered that the trial judge held that the appellant was "entitled to equitable relief on the ground of the [respondent's] misrepresentation". And his Honour held that the respondent was entitled in equity (as well as under the Trade Practices Act [8] ) to enforce the appellant's liability under the guarantee for future indebtedness. Had the appellant sought to rely on the common law, he would not have been entitled to rescission because the contract did not remain completely executory and "because he was not then in a position to return to the [respondent] in specie that which he had received under the contract, in the same plight as that in which he had received it" [9] . Complete restitution was not and is not possible in the circumstances of the present case where the consideration which moved from the respondent to the appellant was, in the words of the guarantee, the respondent's "having agreed or agreeing to sell goods or giving credit" to a company owned by the appellant and his wife and where, in reliance upon the guarantee, the respondent in fact supplied on credit to that company, which was or became insolvent, large quantities of concrete which have been used and cannot be returned. That being so, the assumption of fraud does not avail the appellant at common law.

1. The claim under the Trade Practices Act was put to one side in the judgment of Olsson J: see Vadasz (1994) 62 SASR 150 at 154. It was not pursued in this Court. 2. Alati v Kruger (1955) 94 CLR 216 at 223.

Thus we are very much in the realm of equity [10] . Indeed, as we followed the argument, the appellant did not really seek to attack the conclusion of the trial judge and the Full Court that the appropriate relief in the circumstances of the present case is equitable in its nature in the sense that its origins can be traced to the old Court of Chancery. The appellant's case is that the appropriate equitable relief was the unconditional rescission or setting aside of the guarantee in its entirety. In that respect it is useful to have regard to what was said by Mason J in Commercial Bank of Australia Ltd v Amadio [11] :

Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. 1. Strictly speaking, where there is fraudulent misrepresentation equity is exercising its concurrent jurisdiction and where there is innocent or negligent misrepresentation equity is exercising its auxiliary jurisdiction: see Meagher, Gummow and Lehane, Equity: Doctrines and Remedies, 3rd ed (1992), pp 656-658. 2. (1983) 151 CLR 447 at 461.

Where, as in this case, the court has granted equitable relief in the shape of rescission of a contract, the result is to set aside the contract ab initio. While equity followed the law in requiring restitution as a condition of rescission where the contract had been wholly or partly executed, it allowed greater flexibility in the basis upon which restitution and accounting between the parties may be ordered. Thus, equity did not require complete restitution of the position which existed before the contract but allowed its remedies, particularly an order for monetary accounts, to be utilised to achieve practical restitution and justice. That point was made by Dixon CJ, Webb, Kitto and Taylor JJ in Alati v Kruger [12] :

If the case had to be decided according to the principles of the common law, it might have been argued that at the date when the respondent issued his writ he was not entitled to rescind the purchase, because he was not then in a position to return to the appellant in specie that which he had received under the contract, in the same plight as that in which he had received it: Clarke v Dickson [13] . But it is necessary here to apply the doctrines of equity, and equity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take account of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo. 1. (1955) 94 CLR 216 at 223-224. 2. (1858) El Bl & El 148 [ 120 ER 463].

In the present case, the appellant obtained the benefit which he sought as consideration for entering the contract of guarantee, namely, the subsequent supply on credit by the respondent of goods to Vadipile. In those circumstances, a practical restoration of the status quo which existed before the execution of the guarantee and the subsequent supply of goods on credit by the respondent would involve not only a cancellation of the appellant's obligations under the guarantee but either a return of the goods subsequently supplied by the respondent or the actual payment, either by Vadipile or the appellant, of an amount equivalent to the value of the goods which were subsequently supplied in reliance upon the appellant's guarantee of payment of their price.

However, the appellant does not offer to pay the respondent the amount which Vadipile has failed to pay for those subsequently supplied goods. Nor does he offer to submit to terms or conditions which would ensure that the purchase price of those goods, which has not been suggested to exceed their true value, is received by the respondent. As has been said, the appellant seeks to be relieved completely and unconditionally from all liability under the guarantee, leaving the respondent without either its subsequently supplied goods or any payment for them. If such complete and unconditional relief is to be granted, it must be on some basis other than mere entitlement to a practical restoration of the status quo upon rescission or "disaffirmance" of a contract induced by fraud. The only such basis that comes to mind is equity's general jurisdiction, in setting aside contracts and other dealings on equitable grounds, to ensure the observance of the requirements of good conscience and practical justice. Thus in O'Sullivan v Management Agency & Music Ltd [14] an exclusive management agreement made by a young composer was set aside by reason of undue influence because of a fiduciary relationship between the parties. The Court of Appeal upheld rescission even though the parties could not be restored to their original position. In their judgments the members of the Court of Appeal pointed out that a contract may be set aside in equity so long as "the court can achieve practical justice between the parties" [15] and that "the court will do what is practically just in the individual case" [16] so long as "it is possible to achieve what is practically just by granting rescission and restitution together with orders for accounts" [17] .

1. [1985] QB 428. 2. O'Sullivan [1985] QB 428 at 458, per Dunn LJ. 3. O'Sullivan [1985] QB 428 at 466, per Fox LJ. 4. O'Sullivan [1985] QB 428 at 471, per Waller LJ.

In the present case, the consideration provided by the respondent involved the supply of goods upon credit to Vadipile. Any need for restitution arises by reason of Vadipile's insolvency. The respondent points to the fact that goods were supplied on credit in pursuance of its promise given as consideration for the appellant's guarantee and says in effect: "I would not have made further deliveries of concrete to Vadipile and risked non-payment if the appellant had not guaranteed payment for those deliveries." In the way in which the action between the parties was constituted, practical justice is achieved, so the respondent's argument runs, by holding the appellant liable on a money claim for that proportion of Vadipile's debt incurred after the appellant signed the guarantee. As Cussen J noted in Bank of Victoria Ltd v Mueller [18] , in the context of insisting that equity shall be done as a condition of setting aside a guarantee: "This is, of course, something quite different from rectification, although in some cases its effect may be much the same."

The idea of a Court of Equity using its powers to do "what is practically just" was referred to by Lord Blackburn in Erlanger v New Sombrero Phosphate Co [19] well over 100 years ago. In contrasting the relief available in law and in equity on rescission of a contract, in particular the ability of equity to take account of profits and make allowance for deterioration of property, his Lordship said [20] :

And I think the practice has always been for a Court of Equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract. In using the expression "what is practically just", Lord Blackburn may well have adapted the language of Lindsay Petroleum Co v Hurd [21] referred to in his judgment. There the Privy Council considered the operation of laches where "it would be practically unjust to give a remedy" [22] . And in a contemporary edition of Story's Commentaries on Equity Jurisprudence, in the context of rescission and specific performance, it was said [23] : [T]he interference of a court of equity is a matter of mere discretion And in all cases of this sort the court will, in granting relief, impose such terms upon the party as it deems the real justice of the case to require The maxim here is emphatically applied, - He who seeks equity must do equity. 1. (1878) 3 App Cas 1218. 2. Erlanger (1878) 3 App Cas 1218 at 1278-1279. 3. (1874) LR 5 PC 221. 4. Lindsay Petroleum (1874) LR 5 PC at 239, referred to by Lord Blackburn in Erlanger (1878) 3 App Cas 1218 at 1279. 5. Story, Commentaries on Equity Jurisprudence, as Administered in England and America, 12th ed (1877), vol 1, par 693.

Referring to Lord Blackburn's judgment, Lord Wright said in Spence v Crawford [24] :

In that case, Lord Blackburn is careful not to seek to tie the hands of the court by attempting to form any rigid rules. The court must fix its eyes on the goal of doing "what is practically just". How that goal may be reached must depend on the circumstances of the case, but the court will be more drastic in exercising its discretionary powers in a case of fraud than in a case of innocent misrepresentation The court will be less ready to pull a transaction to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff. Underlying Lord Wright's judgment is the idea that restoration is essential to the idea of restitution and that the "purpose of the relief is not punishment, but compensation" [25] . 1. [1939] 3 All ER 271 at 288. 2. Spence [1939] 3 All ER 271 at 289.

In Amadio [26] , Deane J referred to what was said by Cussen J in Mueller in support of the proposition:

Where appropriate, an order will be made which only partly nullifies a transaction liable to be set aside in equity pursuant to the principles of unconscionable dealing [T]he order will, in an appropriate case, be made conditional upon the party obtaining relief doing equity. Thus unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other. 1. (1983) 151 CLR 447 at 481.

In Amadio this Court upheld an order setting aside a mortgage in its entirety where the mortgagors believed they were committing themselves to securing their son's overdraft to a limit of $50,000 and for six months only. The reason for not setting aside the mortgage only to the extent that it involved a liability in excess of $50,000 was that the Amadios would not have entered into the transaction at all, had they known the true financial position of their son [27] . In the present case it cannot be maintained that the appellant would not have entered into the guarantee had it been confined to the future indebtedness of Vadipile. Rather, the evidence is that he would have done so, if not happily, because it was the only way to secure future supplies of concrete for Vadipile. And, by reason of the guarantee of future debts, the respondent supplied concrete to the value of $170,929.32. In giving the guarantee, the appellant, who was one of two directors and one of two shareholders, was fully aware of the financial position of Vadipile. He stood to benefit personally from the operations of the company.

1. Amadio (1983) 151 CLR 447 at 481; see also Alderton v Prudential Assurance Co Ltd (1993) 41 FCR 435 at 449, per Heerey J.

The appellant suggested that to set aside the guarantee in the present case only to the extent of past indebtedness was an invitation to others to misrepresent the terms of a contract because they would be no worse off than if they had revealed the true position. But that suggestion misconceives the ordinary function of civil remedies, including equitable relief. It may, depending upon whether the respondent would in fact have supplied its goods on the basis of the more limited guarantee which the appellant was prepared to give, be true to say that the orders made by the trial judge and upheld by the Full Court disadvantage the respondent only to the extent that it is unable to enjoy the benefit of its misrepresentation and is required to bear its own costs of the trial. Such a result would not, however, be either surprising or inappropriate. The concern of equity, in moulding relief between the parties is to prevent, nullify, or provide compensation for, wrongful injury. If it appears that the other party would not have entered into the contract at all if the true position were known, the contract may be set aside in its entirety as in Amadio.

The appellant is "seeking the assistance of a court of equity and he who seeks equity must do equity" [28] . The Court must look at what is practically just for both parties, not only the appellant. To enforce the guarantee to the extent of future indebtedness is to do no more than hold the appellant to what he was prepared to undertake independently of any misrepresentation. This approach has been taken in several cases [29] . A similar approach was taken by the Court of Appeal in New South Wales to proceedings under the Contracts Review Act 1980 NSW in setting aside an "unjust" contract [30] . There a guarantee was enforced against the guarantor to the extent that she believed she had agreed to. As Olsson J said in the present case [31] : "the practical approach adopted by the learned trial judge was clearly justified, if not demanded, by the situation revealed by the evidence."

1. Cheese v Thomas [1994] 1 WLR 129 at 136; [1994] 1 All ER 35 at 41. 2. Barclays Bank Plc v O'Brien [1993] QB 109. The House of Lords dismissed the appeal: Barclays Bank v O'Brien [1994] 1 AC 180. See also Midland Bank Plc v Greene [1994] 2 FLR 827. The view adopted by Nourse LJ in TSB Bank Plc v Camfield [1995] 1 WLR 430 at 435-437; [1995] 1 All ER 951 at 956-958 to the effect that setting aside is an "all or nothing process" should not be accepted in this country. 3. S H Lock (Aust) Ltd v Kennedy (1988) 12 NSWLR 482. See also Parkes v Commonwealth Bank of Australia [1990] ASC 59,203. Similarly in relation to misleading and deceptive conduct under s 52 of the Trade Practices Act, see Money v Westpac Banking Corporation (1988) 10 ATPR (Digest) 53,104. 4. Vadasz (1994) 62 SASR 150 at 156.

In the courts below it would seem to have been assumed that the effect of the conclusion that equitable relief in respect of the appellant's liability under the guarantee should be restricted to past indebtedness was that the appropriate order (if a formal order were made) would be an order for rescission of the guarantee in so far as it related to Vadipile's prior indebtedness. Neither party attacked those judgments on the ground that the appropriate order would, in the absence of an offer to do equity, be an order partially setting aside the guarantee rather than such an order for partial rescission. In the context where the amount of the final monetary judgment would be the same on either approach, it is unnecessary that we address that particular question.