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Watson v Scott

 

[2015] QCA 267

Reported at [2016] 2 Qd R 484

 

SUPREME COURT OF QUEENSLAND

CITATION:

William James Watson & May Marlene Watson as trustee for the WJ & MM Watson Superannuation Fund v Scott [2015] QCA 267

PARTIES:

William James Watson & May Marlene Watson as trustee for the WJ & MM Watson Superannuation Fund
(appellants)
v
CHRISTOPHER ALEXANDER SCOTT
(respondent)

FILE NO/S:

Appeal No 1252 of 2015

DC No 3518 of 2014

DIVISION:

Court of Appeal

PROCEEDING:

General Civil Appeal

ORIGINATING COURT:

District Court at Brisbane – Unreported, 12 January 2015

DELIVERED ON:

8 December 2015

DELIVERED AT:

Brisbane

HEARING DATE:

26 June 2015

JUDGES:

Margaret McMurdo P and Morrison and Philippides JJA

Separate reasons for judgment of McMurdo P; joint reasons of Morrison and Philippides JJA, concurring as to the orders made

ORDERS:

  1. Allow the appeal with costs.
  2. Set aside orders 1 and 3 made on 12 January 2015.
  3. Instead order that judgment be entered for the appellants against the respondent.
  4. The respondent is to pay the appellants’ costs of the proceeding at first instance.

CATCHWORDS:

PROCEDURE – COURTS – QUEENSLAND – SUMMARY JUDGMENT – where the appellants, as trustees for their superannuation fund, employed the respondent as their accountant – where the respondent was a certified practising accountant, partner in an accounting firm, and at all material times controlled Denbraise Pty Ltd – where the appellants and the respondent entered into a property syndicate agreement whereby the appellants’ superannuation fund advanced money to Denbraise, repayable by a specified date or earlier upon certain events arising – where the appellants or companies associated with them entered into consecutive agreements with the Denbraise in similar terms, approximately annually, each time extending the repayment date, and sometimes increasing the loan amount – where the respondent recommended an insurance clause in the agreement to ensure that should he die or become incapacitated the appellants would be reimbursed the full amount of their advance – where Denbraise defaulted under the agreement – where the appellants subsequently terminated the agreement and demanded repayment of all amounts owing, which Denbraise failed to meet – where the appellants then made demand on the respondent as guarantor – where the coversheet of the agreement stated that the agreement was between the appellants’ superannuation fund as “Lender”, Denbraise as “Borrower”, and the respondent as “Guarantor” – where under the heading “Parties” there was no reference to “Guarantor” – where under the heading “Operative Parts” “Definitions and Interpretation” the term “Guarantor” was defined as meaning, inter alia, the person shown in the Schedule who has guaranteed the borrower’s obligations and performance under the agreement – where in the Schedule to the agreement, the respondent was described as “Guarantor” – where the agreement did not contain a stand alone operative guarantee clause stating that the guarantor was liable to the appellants for Denbraise’s debts – where the Special Condition to the agreement, required the borrower to take out a life assurance and trauma $600,000 policy showing the lender as mortgagees – where the Special Condition also provided that the respondent, as Guarantor, will have in effect a Crisis Insurance Policy during the continuation of the agreement in the sum of $600,000 – where unknown to the appellants, before they signed the final agreement, the respondent filed a defence to a claim brought against him as guarantor under another similar agreement where he denied that he was a guarantor of the loan as the agreement did not contain a promise from him to guarantee the loan; his only obligation was to meet the insurance clause – where the appellants applied to the District Court for summary judgment against the respondent on the basis of the guarantee or alternatively under the Australian Consumer Law – where the respondent in his amended defence denied he was a guarantor under the agreement and contended that his obligations were limited to securing the Crisis Insurance Policy – where the primary judge held that neither the terms of the guarantee nor the Consumer Law claim were sufficiently clear to warrant summary judgment being entered – where the appellants contend that the primary judge erred in finding that their claim on the guarantee involved contested facts; in finding that their Consumer Law claim was not so clear that summary judgment should be given; and in failing to find the respondent had no real prospect of defending their claim – whether summary judgment should have been granted

Property Law Act 1974 (Qld), s 56

Uniform Civil Procedure Rules 1999 (Qld), r 292

Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26, cited

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24, cited

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12, cited

Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368, considered

Kelly v The Queen (2004) 218 CLR 216; [2004] HCA 12, considered

Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70, cited

Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq) (2008) 36 WAR 342; [2008] WASCA 80, cited

Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, cited

Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323, considered

Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156, considered

Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236; [1995] FCA 1106, cited

Vincent Nominees Pty Ltd v Western Australian Planning Commission [2012] WASC 28, cited

Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1; [2011] HCA 45, cited

William James Watson & Anor v O’Neil Scott Associates & Ors, Rafter DCJ, unreported, 12 January 2015, related

COUNSEL:

G Handran for the appellant

C J Crawford for the respondents

SOLICITORS:

Murdoch Lawyers for the appellant

Toogoods Lawyers for the respondents

[1] MARGARET McMURDO P:  The appellants, Mr William Watson and Mrs May Watson as Trustees for the WJ & MM Watson Superannuation Fund, commenced proceedings in the District Court against the respondent, Mr Christopher Scott and others, claiming $595,900 from the respondent as guarantor under a guarantee, together with several alternative claims including for damages or compensation for $595,900 under the Australian Consumer Law.  They applied to the District Court for summary judgment against the respondent on the basis of either the guarantee or the Consumer Law claim, together with interest and costs.  This appeal is from the order dismissing their application.  They contend that the judge erred in finding their claim on the guarantee involved contested facts; in finding their claim under the Consumer Law was not so clear that summary judgment should be given; and in failing to find that the respondent has no real prospect of defending their claim.

The background facts

[2] The respondent, a certified practising accountant, was a partner in an accounting firm.  By around 2001 and at all material times he controlled Denbraise Pty Ltd, a trustee company of the RBM Investment Trust.  Denbraise owned shares in Trentmark Pty Ltd.  The respondent and his daughter were beneficiaries of the RBM Investment Trust and the respondent was a director of Trentmark which owned land at Glenvale.  Trentmark was raising funds to develop the land.

[3] In or about 2001 the respondent told Mr Watson that Denbraise operated a property syndicate which paid better than bank interest.  At that time Mr and Mrs Watson had used the accounting services of the respondent and his firm for about four years and with the respondent’s assistance had set up a family trust and self-managed superannuation fund.  In or about August 2001, the respondent gave them a written property syndicate agreement prepared by Denbraise’s lawyers.  It provided for the Watsons’ superannuation fund to advance $200,000 to Denbraise, repayable by a specified date or earlier upon certain events arising.  The appellants or companies associated with them entered into consecutive agreements with Denbraise in similar terms, approximately annually, in each case extending the repayment date, and sometimes increasing the loan amount.  The last such property syndicate agreement, the one with which this appeal is concerned, was dated 1 July 2013[1] and was in similar terms to all the previous agreements.  It, too, was prepared by Denbraise’s lawyers.

[4] The respondent deposed at the hearing at first instance, and the appellants accepted, that he recommended an insurance clause which was in Schedule 2 of the agreement to ensure that should he die or become incapacitated they would be reimbursed the full amount of their advance.

[5] Denbraise defaulted under this agreement in February 2014.  The appellants terminated the agreement in March 2014 and demanded Denbraise repay all amounts owing.  Denbraise failed to meet that demand.  The appellants then made the demand on the respondent as guarantor.  The appellants subsequently received $12,300 from Denbraise, reducing the loan amount to $595,900 but otherwise the loan remains unpaid.

[6] Unknown to the appellants in February 2013 before they signed the final agreement, the respondent had filed a defence to a claim brought against him as guarantor, under another agreement in similar terms to that with which this appeal is concerned.  In that defence, as in the present case, he denied he was a guarantor of the loan as the agreement did not contain a promise from him to guarantee the loan.  He claimed his delegation under the agreement as guarantor was merely to meet the insurance clause.

The Agreement

[7] The terms of the 1 July 2013 agreement are critical to this appeal.  The coversheet of the agreement stated that it was between the Watsons’ superannuation fund, as “Lender”, Denbraise as “Borrower” and the respondent as “Guarantor”.  Under the first heading, “PARTIES,” “lender” was described as the lender in the Schedule and the “borrower” as the borrower in the Schedule.  The second heading, “BACKGROUND” provided:

“A.The lender has agreed, at the request of the borrower and the guarantor (if any), to provide an advance to the borrower, in the amount shown in the Schedule.

B.The lender and the borrower have agreed to enter into this agreement to set out the terms and conditions of the loan facility.”

[8] Under the next heading, “OPERATIVE PARTS”, cl 1, “Definitions and Interpretation”, the term “Guarantor” was defined as meaning:

“the person shown in the Schedule and any other person who has guaranteed, or who in the future guarantees, the borrower’s obligations and performance under this agreement”.[2]

[9] The term “Authorised signatory” was relevantly defined as:

“… where the borrower or any guarantor is a natural person, that person.”[3]

[10] The term “Security” was defined as:

“the security listed in the Schedule and any mortgage, pledge, lieu (sic), hypothecation, security interest or other encumbrance or charge now or in the future given by the borrower or any guarantor in favour of the lender to secure the obligations of the borrower under this agreement and includes any guarantee executed by any guarantor.”[4]

[11] Clause 6, Default and Termination, provided in cl 6.1 that, if any of the events in cl 6.2 occurred, then the loan and interest become payable at the option of the lender.  Clause 6.2, Events of Default, included some events of default which referred to the guarantor including:

“6.2.4winding up: if any application for winding up or bankruptcy of the borrower or any relate (sic) body corporate or any guarantor is presented and the borrower or related body corporate or guarantor (as the case requires) cannot within fourteen (14) business days reasonably satisfy the lender that the application is frivolous or vexatious or an order is made for the winding up or bankruptcy, or any resolution is passed for the winding up, of the borrower or any related body corporate or the guarantor (as the case requires) is for the purpose of reconstruction or amalgamation and has the lender’s prior written consent (which consent will not be unreasonably withheld); or

6.2.5receiver, etc: if a receiver or receiver and manager or provisional Liquidator of the assets and undertaking or any part of the assets and undertaking of the borrower or any related body corporate or any guarantor is appointed; or

6.2.6execution: if any execution or other process of any court or authority is issued against, or levied upon, the assets of the borrower or any related body corporate or any guarantor for any amount exceeding $600,000.00 and is not discharged or a stay of execution having been so obtained, the execution or process is not discharged within ten (10) weeks after the issue or levy of the execution or process (as the case requires); or

6.2.7insolvency schemes: if without the lender’s prior written consent the borrower or any related body corporate or any guarantor enters into any arrangement, reconstruction or composition with its creditors or any of them; or

6.2.8administrator or inspector: if the borrower, any related body corporate, or any guarantor or any other person appoints an administrator to the borrower or any related steps to do so or if an inspector is appointed to investigate the affairs of the borrower or any related body corporate or any guarantor.”

[12] Clause 8, Protection of Lender, included:

“8.1No requirement for notice or for enforcement of security

It is not incumbent on the lender:

8.1.1to give any notice of its rights under this agreement or the security to any guarantor, debtor or member of the borrower or guarantor or to any other person; …

unless the lender thinks fit…”.

[13] Schedule 1 described the Watsons’ superannuation fund as “Lender”; Denbraise as trustee for the RBM Investment Trust as “Borrower”; and the respondent as “Guarantor”.  It recorded that there was no security for the $600,000 loan, repayable on 30 June 2014, with interest at 8.2 per cent.

[14] Schedule 2, Special Condition, provided for the loan to be repaid within 12 months or on the occurrence of certain events including the death of either the lender[5] or the borrower.[6]  It required the borrower to take out a life assurance and trauma $600,000 policy showing the lender as mortgagees.[7]  It also included:

“(C)The Guarantor, Christopher Alexander SCOTT on behalf of the borrower acknowledges that he has in effect and will continue to have in effect a Crisis Insurance Policy during the continuation of this loan agreement.  Such Policy is held with AIG Life in the sum of $600,000.00[8]

and provided that “[i]f any instalment shall become due and unpaid then the balance of the moneys due and owing hereunder shall at the option of the lender immediately become due and payable.”

[15] The agreement was “Signed Sealed and Delivered” by Mr Watson on behalf of the superannuation fund as “Lender”; by the respondent on behalf of Denbraise as “Borrower”; and by the respondent as “Guarantor”.

The respondent’s case in the proceeding at first instance

[16] The respondent in his amended defence denied he was a guarantor under the agreement.  He claimed his obligation was limited to securing the Crisis Insurance Policy naming Mr Watson as beneficiary for the amount of the advance in each agreement as required by Schedule 2 (C).  He also denied he was a guarantor as, under s 56 Property Law Act 1974 (Qld), no action may be brought upon any promise to guarantee any liability of another unless the promise or some memorandum or note of it is in writing and signed by the party to be charged or by some other person lawfully authorised by the party.  He denied that he represented to the appellants that the advance would be secure and guaranteed.  He pleaded that the agreement clearly identified the limits of his obligations to them, namely to secure a Crisis Insurance Policy.  He claimed that he explained to them that there was no such thing as a risk free investment; that there was some risk in this investment; that he was not personally guaranteeing its success; and that they should seek independent legal advice.

[17] In an affidavit filed in the proceedings at first instance he deposed that in these initial discussions at the time of the first agreement in 2001, he explained to them that his obligation was to ensure he secured a Crisis Insurance Policy naming Mr Watson as beneficiary for the amount of their advance to Denbraise.  This was to insure against his death or incapacity so that, if either eventuated, they would be reimbursed the full amount of their advance.  As the agreements were rolled over from year to year he continued to comply with this obligation.  He denied telling them at any stage that their advance was secured or that he was personally guaranteeing it.

[18] In his written submissions at first instance, he emphasised that the agreement did not contain any clear and definite guarantee of the usual kind such as, “I hereby hold myself responsible for and guarantee the payment of [the principal debt] to you.”  A vague and equivocal statement of guarantee, he claimed, is insufficient to be effective as a guarantee.  The purpose of him obtaining insurance was because he was the sole director and controlling mind of Denbraise and, should he die or become incapacitated, the appellants should be protected.  The term “guarantee” was used in the agreement only in that sense.  Ambiguity in contracts are generally construed in favour of the guarantor.  Evidence of surrounding circumstances is properly admissible when constructing an ambiguous guarantee like this.  It followed that a trial involving oral evidence and cross-examination was necessary to resolve the issue.  Summary judgment was not appropriate.

[19] As to the misleading and deceptive conduct claim, the respondent emphasised that this raised triable issues that could only be resolved through oral evidence and cross-examination.

The primary judge’s reasons

[20] The primary judge gave brief ex tempore reasons to the following effect.  The terms of the guarantee were not so clear as to warrant summary judgment being entered.  Nor was the case sufficiently clear on the deceptive and misleading conduct claim as to warrant summary judgment.  His Honour identified the guarantee issue as whether the agreement upon which the appellants brought this proceeding against the respondent as guarantor contains a promise to guarantee any liability of Denbraise.[9]

[21] The judge considered the references in the agreement to “guarantor”, and to the respondent’s emphasis that there was no operative clause whereby he clearly and unequivocally undertook to guarantee the obligations of Denbraise.  His Honour noted the respondent’s submission that the agreement was clear in its terms that it required only that the respondent take out the requisite Crisis Insurance Policy.  His Honour considered that as the agreement did not contain a specific clause whereby the respondent expressly guaranteed payment of the debt owed to Denbraise, this was not a suitable case in which to give summary judgment, adding that there were some facts in issue that may be relevant to the construction of the agreement if the view is taken that it is ambiguous.[10]

[22] As to the appellants’ alternative argument concerning the Consumer Law, his Honour considered that, on one possible view of the evidence, the respondent, in defending a similar claim about which he did not inform the appellants, was simply being consistent in his approach to the construction of such agreements.[11]  His Honour dismissed the summary judgment application.

The respondent’s contentions in this appeal

[23] In this appeal, the respondent contends that the primary judge rightly considered there were facts in dispute relevant to the construction of the agreement.  As at first instance, he submits that consideration of whether the agreement obliges the respondent to guarantee Denbraise’s performance, in the absence of an express clause prescribing this obligation, is an unsuitable matter for summary judgment.  The absence of a specific operative guarantee clause against the respondent makes the agreement ambiguous, warranting additional fact finding to assist in its construction: Codelfa Construction Pty Ltd v State Rail Authority (NSW).[12]  Vague or equivocal statements will not suffice to constitute a guarantee.

[24] The respondent emphasises that all that could possibly be construed as an operative clause was contained in the definition section of the agreement but definition sections have no operative effect: Red Hill Iron Ltd v API Management Pty Ltd.[13]

[25] He submits that if the appellants were to turn the vague and equivocal definition clause into a clear and definite undertaking by the respondent to guarantee the repayment of the loan by Denbraise, this Court would need to insert words into the agreement.  A court can do this only if words were obviously omitted and the agreement was absurd without them.  It was neither obvious any words were omitted and nor was the agreement absurd without them.  The term “guarantee” has a much wider meaning than simply accepting responsibility for the performance of another’s obligations under a contract.  Here, it was guaranteeing the special condition relating to insurance in Schedule 2.

[26] The respondent emphasises that a court may admit evidence of facts mutually known to the parties to identify the genesis and the aim of a transaction: DTR Nominees Pty Ltd v Mona Homes Pty Ltd.[14]  He contends that a trial was needed in this case so that the judge could consider the appellants’ level of trust and confidence reposed in the respondent; the appellants’ financial vulnerability or sophistication; the course of dealings between the parties; the nature and extent of the respondent’s previous financial advices to appellants; and the nature and extent of the parties’ conversations 13 years prior to the swearing of their affidavits filed in the proceeding at first instance.

[27] For these reasons, the respondent contends, the primary judge rightly concluded that the respondent had real prospects of success in defending the appellants’ claim.  He was the guarantor under the agreement only in the sense that he was promising to obtain a $600,000 Crisis Insurance Policy with Mr Watson as a beneficiary in the event of the respondent’s death or permanent incapacity.

[28] As to the appellants’ Consumer Law claim, the respondent emphasises it was limited in the summary judgment application to the claim that the respondent did not disclose to them that he was being sued as guarantor under a similar contract and had pleaded a defence to it.  The judge rightly found the respondent had a reasonable basis to defend this claim.  The respondent’s position on that claim is entirely consistent with his position in the present case.

Conclusion

[29] I am unpersuaded that the primary judge erred in refusing summary judgment on the appellants’ Consumer Law claim.  It was not possible to reach a concluded view on that matter without fully considering, at the least, details of and the background to the other case brought against the respondent and his defence to it and making findings of fact about what the parties said, knew and did in this case.  On the material before the primary court it could not be said under r 292 Uniform Civil Procedure Rules 1999 (Qld) that the respondent had no real prospect of successfully defending the claim so that there was no need for a trial.  If that were the appellants’ only ground of appeal, the appeal would be dismissed.

[30] The real question in this appeal is whether the respondent is liable for Denbraise’s debt as guarantor under the agreement.  In construing the terms of the agreement, this Court must discover the objective intention of the parties as embodied in the words used in the agreement.  The parties’ subjective intentions are irrelevant.  The meaning of the agreement is to be determined by what a reasonable person would have understood the terms to mean; evidence of pre-contractual negotiations is only admissible if it provides knowledge of surrounding circumstances and relates to objective facts known directly or inferentially to both parties:  Byrnes v Kendle.[15]  The agreement should be construed in a commercially sensible way although minds may differ as to what equates to “business commonsense”: Maggbury Pty Ltd v Hafele Australia Pty Ltd.[16] In construing a commercial contract a court should know the commercial purpose of the contract.  This will usually require knowledge of the background and the context to the transaction.[17]  The apparent purpose or object can be inferred from the express and implied terms of the contract and from any admissible evidence of surrounding circumstances.[18]  But evidence of surrounding circumstances is admissible to assist in the interpretation of a contract only if the language is ambiguous or susceptible of more than one interpretation; it is not admissible to contradict the language of the contract when it has a plain meaning: Codelfa Construction Pty Ltd v State Rail Authority (NSW)[19] and Western Export Services Inc v Jireh International Pty Ltd.[20]  Where the terms of the agreement are unambiguous, extrinsic evidence may inform but cannot contradict the meaning of the contract.[21]  Courts in construing an agreement must find the objective meaning of what the parties agreed to, not what they meant to agree to.[22]

[31] With these principles in mind I turn now to the agreement to decide whether the terms of the respondent’s guarantee are susceptible of more than one meaning so that evidence of surrounding circumstances is admissible to aid in its construction.  If not, and the guarantee has the meaning for which the appellants contend, they are entitled to summary judgment.

[32] The background to the 2013 agreement is that the respondent had been the appellants’ accountant since 2001 and the 2013 agreement was the last of a series of similar agreements under which the appellants lent Denbraise, a company controlled by the respondent, considerable amounts of money for property development.  Their $600,000 loan at interest of 8.2 per cent was unsecured under the 2013 agreement.

[33] The coversheet of the agreement stated that it was between the appellants as lender, Denbraise as borrower and the respondent as guarantor.  It is true, as the respondent emphasises, that, in the introductory words to the agreement the parties were stated as being the appellants as lender and Denbraise as borrower; there was no mention of the respondent as guarantor.  But the agreement was signed, sealed and delivered by Mr Watson on behalf of the appellants as lender, by the respondent on behalf of Denbraise as borrower and by the respondent as guarantor.  It is also true, as the respondent emphasises, that, unusually, the agreement did not contain a stand alone operative guarantee clause stating that the guarantor was liable to the appellants for Denbraise’s debt.

[34] But the term “guarantor” is defined in cl 1, Definitions and Interpretation, cl 1.1.8, as meaning “the person shown in the Schedule and any other person who has guaranteed, or who in the future guarantees, the borrower’s obligations and performance under this agreement”.  The guarantor in Schedule 1 is stated to be the respondent.  I consider the ordinary, unambiguous meaning of those words as conveying that the person named in the Schedule as guarantor (the respondent) has guaranteed Denbraise’s obligations and performance under this agreement.  The respondent seeks to diminish the significance of this definition and contends that Beech J’s observations in Red Hill Iron Ltd[23] are authority for the proposition that definitions do not have substantive effect and are not to be construed in isolation from the operative provisions in which a defined term is used.  Beech J’s observations must be considered in the context of the agreements he was construing in that case.  Importantly here, cl 1, Definitions and Interpretation, is contained below the heading “OPERATIVE PARTS”.  This clearly indicates that the definitions in cl 1 are intended to be operative provisions and explains why there is no discrete operative clause in the agreement setting out the role of guarantor.  The terms of the definition in cl 1.1.8 of the agreement in the context of the agreement read as a whole (the loan was to a private company at 8.2 per cent interest and was unsecured) and the objective background facts leading to it (the respondent, the appellants’ accountant, was the controlling mind of Denbraise) make clear that the guarantor is the person shown in the Schedule (the respondent) who has guaranteed Denbraise’s obligations to the appellants under the agreement.

[35] The respondent emphasises Special Condition (C) in Schedule 2 which provided that he as guarantor on behalf of the borrower acknowledges that he has in effect and will continue to have in effect a Crisis Insurance Policy in the sum of $600,000 during the continuation of the agreement.  He contends that under this agreement his role as guarantor was limited to this; it was not to guarantee Denbraise’s obligations under the loan.  I consider that such a construction is fanciful and uncommercial.  Schedule 2, although poorly drafted and sometimes making no sense,[24] is what it says, a “Special Condition”.  It is not a guarantee.  It requires Denbraise to repay the loan upon any of the events set out in (A) arising.  Special Conditions (B) and (C) are clearly aimed at ensuring the appellants were protected if the respondent (who controls Denbraise and the property development project for which the loan was raised) dies or becomes seriously incapacitated.  The final paragraph to the Special Condition provides that if any instalment becomes due and unpaid then the balance of the moneys due and owing under the agreement are immediately due and payable at the option of the lender.  None of this is inconsistent with the respondent as guarantor also guaranteeing Denbraise’s obligations under the loan agreement.

[36] Even when Schedule 2 is read together with the definition of “Guarantor” in cl 1.1.8 and the agreement as a whole, I can see no ambiguity as to the obligations of the respondent as guarantor under the agreement.  Taking into account the objective background facts surrounding the signing of the agreement on 1 July 2013; its terms read as a whole; and adopting a commercially sensible approach to an unsecured loan of this kind, a reasonable person in the position of the parties would have understood the agreement as requiring the respondent as guarantor to guarantee Denbraise’s obligations and performance under the agreement.  This follows especially from the coversheet; the definition of “Guarantor” in cl 1.1.8 under the hearing “OPERATIVE PARTS”; the naming of the respondent as guarantor in Schedule 1; and the respondent’s signing, sealing, and delivering the agreement as guarantor.  Special Condition (C) was a further and additional obligation of the respondent as guarantor; it did not detract from his principal obligations as guarantor to guarantee Denbraise’s obligations under the loan.

[37] Had the respondent’s role as guarantor been solely that in Special Condition (C) as he contends, the definition of “Guarantor” in cl 1.1.8 would have been in those terms rather than in terms consistent with the conventional construction of the term “guarantor”.  The many other references in the agreement to “guarantor” are entirely consistent with this construction which, contrary to the respondent’s contentions does not require the insertion of any words.

[38] It follows from my construction of the agreement, that the respondent finds no comfort in s 56 Property Law Act as the agreement was a written agreement, signed, sealed and delivered by the respondent to guarantee Denbraise’s liability to the appellants under the agreement.

Summary

[39] I consider the primary judge erred in finding that the terms of the guarantee were not so clear as to warrant summary judgment.  Even though the agreement did not contain a specific clause in which the respondent expressly guaranteed payment of Denbraise’s debt, and despite its Schedule 2, Special Condition (C), the text of cl 1.1.8 in the context of the terms of the agreement considered as a whole and the objective background circumstances make clear that the respondent as guarantor was guaranteeing Denbraise’s obligations to the appellants under the agreement.  This appeal is from a discretionary judgment, but, for the reasons I have given, the primary judge erred in not concluding under Uniform Civil Procedure Rules 1999 (Qld) r 292 that the respondent has no real prospect of successfully defending the appellants’ guarantee claim and there is no need for a trial of it.  His Honour should have given summary judgment for the appellants against the respondent.

Orders

[40] I propose the following orders:

  1. Allow the appeal with costs;
  2. Set aside orders 1 and 3 made on 12 January 2015;
  3. Instead order that judgment be entered for the appellants against the respondent; and
  4. The respondent is to pay the appellants’ costs of the proceeding at first instance.

[41] MORRISON AND PHILIPPIDES JJA:  We have had the advantage of reading the draft reasons of the President.  We agree with those reasons and the orders her Honour proposes, but wish to add some observations of our own.

[42] We gratefully adopt the description of the background and issues, set out in paragraphs [1] to [28] of McMurdo P’s reasons.  That permits us to express our views in short compass.

[43] The “Property Syndicate Agreement” at the centre of the appeal was the last in a long series of loan agreements between the Watsons’ Superannuation Fund and Mr Scott’s company, Denbraise Pty Limited.  The first was in 2001, then as the loan funds were rolled over the others followed in 2003 and 2006,[25] and then each year between 2007 and 2013.  Over that whole period Mr Scott was the personal accountant for the Watsons.

[44] All the loan agreements were in the same form, contained the same clauses, and listed Mr Scott as “Guarantor”.  The drafting was not carefully done and there were numerous mistakes,[26] which were simply repeated in each loan agreement.  The most obvious of these is clause 6.1 which provides:

“If any of the events described in clause 6.2 occurs, the loan, together with all interest accrued on the loan and not then paid and all other amounts payable under this agreement and unpaid shall, at the option of the lender and notwithstanding any delay or previous waiver of the right to exercise that option. In addition if the lender exercises that option, the security will become immediately enforceable.

[45] Another is clause 4, which refers to “clause 2.1” when there is no such clause.

[46] Then, clause 6.2.4 which contains, at the end, the phrase: “is for the purpose of reconstruction or amalgamation and has the lender’s prior written consent (which consent will not be unreasonably withheld)”.  The phrase is meaningless in the context of the breaches the subject of the clause.

[47] A further example is in clause 6.2.8, where the phrase “or any related steps to do so” seems to have little to do with the balance of the clause.

[48] The inference is that no-one reviewed the form of the loan agreement from one loan arrangement to the other.  This bespeaks the lack of formality that seems to have attended the making of the loan arrangements, in which the loan was rolled over from year to year.

[49] Mr Scott relied upon statements by Beech J in Red Hill Iron Pty Ltd v API Management Pty Ltd[27] for the proposition that definition clauses do not have operative effect.  The relevant passage is:

[127]As mentioned earlier in s 2, both the Farm-in Agreement and Joint Venture Agreement make extensive use of defined terms.  Definitions do not have substantive effect.  They are not to be construed in isolation from the operative provision(s) in which a defined term is used.  Rather, the operative provision is to be read by inserting the definition into the provision: Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216 [84], [103]; Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue [2011] WASCA 228 [62], [150], [218].  Those cases dealt with statutory interpretation; the same principle applies in interpreting contracts: Vincent Nominees Pty Ltd v Western Australian Planning Commission [25].”

[50] The important part of that passage is the rule of construction that “the operative provision is to be read by inserting the definition into the provision”.  That was referred to by McHugh J in Kelly v The Queen:[28]

[84]However, a legislative definition is not or, at all events, should not be framed as a substantive enactment.  In Gibb v Federal Commissioner of Taxation, Barwick CJ, McTiernan and Taylor JJ stated:

The function of a definition clause in a statute is merely to indicate that when particular words or expressions the subject of definition, are found in the substantive part of the statute under consideration, they are to be understood in the defined sense – or are to be taken to include certain things which, but for the definition, they would not include. … [Definition] clauses are … no more than an aid to the construction of the statute and do not operate in any other way.

(emphasis added).”

[103]As I earlier pointed out, the function of a definition is not to enact substantive law.  It is to provide aid in construing the statute.  Nothing is more likely to defeat the intention of the legislature than to give a definition a narrow, literal meaning and then use that meaning to negate the evident policy or purpose of a substantive enactment.  There is, of course, always a question whether the definition is expressly or impliedly excluded.  But once it is clear that the definition applies, the better – I think the only proper – course is to read the words of the definition into the substantive enactment and then construe the substantive enactment – in its extended or confined sense – in its context and bearing in mind its purpose and the mischief that it was designed to overcome.  To construe the definition before its text has been inserted into the fabric of the substantive enactment invites error as to the meaning of the substantive enactment.”

[51] McHugh J was referring to statutory construction but the same principles have been applied to construction of contracts.[29]

[52] In the Property Syndicate Agreement clause 1.1.8 contains the definition of “Guarantor”:

““Guarantor” means the person shown in the Schedule and any other person who has guaranteed, or who in the future guarantees, the borrower’s obligations and performance under this agreement;”

[53] The term Guarantor is thus exhaustively defined by use of the verb “means”.  An exhaustive definition indicates “that its object is the whole of its subject”.[30]

[54] The definition shows that a guarantor can fall into two categories, one being Mr Scott and the other “any other person”.  Thus the word “Guarantor” is intended to cover both the person actually shown in the schedule[31] who “has guaranteed … the borrower’s obligations and performance under this agreement”,[32] and additionally any other person who provides such a guarantee in the future.

[55] The words “who has guaranteed, or who in the future guarantees, the borrower’s obligations and performance under this agreement” are qualifying words that must be understood in that context.  The words “who has guaranteed … the borrower’s obligations and performance under this agreement” qualifies the person named in the schedule.  The words “who in the future guarantees … the borrower’s obligations and performance under this agreement” refers to “any other person”, that is a person not named in the schedule but who may in the future be a guarantor.

[56] Further support for that construction is given by the definition of “Security” which means “the security listed in the Schedule … and includes any guarantee executed by any guarantor”.  The two are distinct concepts so that even if (as here) there is no security listed in the Schedule, the term “Security” still comprehends any guarantee executed by any guarantor.

[57] Following the rule in Kelly, Segelov and Horsell the definition of “Guarantor” should be read into the substantive clauses, which are then to be construed in their extended sense, in context and bearing in mind their purpose.

[58] The relevant substantive clause is Special Condition C:

The Guarantor, Christopher Alexander SCOTT on behalf of the borrower acknowledges that he has in effect and will continue to have in effect a Crisis Insurance Policy during the continuation of this loan agreement.  Such Policy is held with AIG Life in the sum of $600,000.00.”

[59] Once the definition is read into the clause Special Condition C reads:

“The person who has guaranteed the borrower’s obligations and performance under this agreement, Christopher Alexander SCOTT on behalf of the borrower acknowledges that he has in effect and will continue to have in effect a Crisis Insurance Policy during the continuation of this loan agreement. Such Policy is held with AIG Life in-the sum of $600,000.00.”

[60] In our view, if Special Condition C is construed with that addition in it, it clearly provides for or recognises an obligation on Mr Scott to guarantee the borrower’s obligations and performance.  The same result would follow if the clause read: “Christopher Alexander SCOTT, the person who has guaranteed the borrower’s obligations and performance under this agreement,…”.

[61] Further, Schedule 1 is part of the operative clauses in the loan agreement.  It identifies the “Guarantor” as Mr Scott.  Applying the rule in Kelly, Segelov and Horsell the definition should be read into Schedule 1.  That means that Mr Scott is identified as “the person who has guaranteed the borrower’s obligations and performance under this agreement”.

[62] That the Special Condition C and Schedule 1 should be construed that way is supported by the construction of the default clauses, 6.2.6 dealing with execution, and 6.2.7 dealing with insolvency schemes.  They provide for the following events of default:

“6.2.6execution: if any execution or other process of any court or authority is issued against, or levied upon, the assets of the borrower or any related body corporate or any guarantor for any amount exceeding $600,000.00 and is not discharged or a stay of execution having been so obtained, the execution or process is not discharged within ten (10) weeks after the issue or levy of the execution or process (as the case requires); or

6.2.7insolvency schemes: if without the lender’s prior written consent the borrower or any related body corporate or any guarantor enters into any arrangement, reconstruction or composition with its creditors or any of them;”[33]

[63] On the contention advanced by Mr Scott those two clauses are inutile in so far as they provide that a default occurs when the guarantor is impacted by execution or insolvency schemes, because there is no guarantor.

[64] In our view, it is difficult to see that those clauses had any work to do in respect of the guarantor, if the obligation on Mr Scott was limited to securing the Crisis Insurance Policy as provided in Special Condition C.  The policy named Mr Watson as the beneficiary[34] so it could not have mattered if Mr Scott was the subject of execution over the sum of $600,000 or if Mr Scott entered into an insolvency scheme.

[65] Furthermore, on the contention advanced by Mr Scott one is driven to wonder why Special Condition C was put in at all.  It records an acknowledgment that Mr Scott has an insurance policy in place and the policy nominated Mr Watson as the beneficiary.  Therefore the contention would have the Court determine that the parties’ presumed objective intention was that Mr Scott would be effectively compelled, in death or conditions of disability, to do that which he was not obligated to do in life.  That is an odd and uncommercial intention to find.

[66] However that may be, applying the rule in Kelly, Segelov and Horsell those clauses provide for events of default if:

“6.2.6execution: if any execution or other process of any court or authority is issued against, or levied upon, the assets of the borrower or any related body corporate or the person who has guaranteed the borrower’s obligations and performance under this agreement, Christopher Alexander SCOTT, for any amount exceeding $600,000.00 and is not discharged or a stay of execution having been so obtained, the execution or process is not discharged within ten (10) weeks after the issue or levy of the execution or process (as the case requires); or

6.2.7insolvency schemes: if without the lender’s prior written consent the borrower or any related body corporate or the person who has guaranteed the borrower’s obligations and performance under this agreement, Christopher Alexander SCOTT, enters into any arrangement, reconstruction or composition with its creditors or any of them;”

[67] Construed with the definition of “Guarantor” in the body of the provision, the clauses provide for or recognise an obligation on Mr Scott to guarantee the borrower’s obligations and performance.

[68] For the reasons above we consider that the Property Syndicate Agreement contained an obligation on Mr Scott to guarantee the obligations and performance of the borrower.  As indicated earlier we also agree with the reasons of McMurdo P, and the orders her Honour proposes.

Footnotes

[1] See Property Syndicate Agreement, Schedule 1.

[2] Property Syndicate Agreement 1 July 2013, cl 1.1.8.

[3] Above, cl 1.1.2.1 and cl 1.1.2.2.

[4] Above, cl 1.1.14.

[5] Above, Schedule 2, (A)(i).

[6] Above, Schedule 2, (A)(iii).

[7] Above, Schedule 2, (B).

[8] Above, Schedule 2 (C).

[9] William James Watson & Anor v O’Neil Scott Associates & Ors, 3518 of 2014, Unreported, 12 January 2015, 4.

[10] Above, 6.

[11] Above.

[12] (1982) 149 CLR 337, 352.

[13] [2012] WASC 323, [127].

[14] (1978) 138 CLR 423, 429.

[15] [2011] HCA 26; (2011) 243 CLR 253, [59], [98].

[16] [2001] HCA70; (2001) 210 CLR 181, [43].

[17] Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995 – 996; Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337, 350; Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323, [109] – [111].

[18] Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq) [2008] WASCA 80; (2008) 36 WAR 342, [41]; Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323, [112] – [114].

[19] [1982] HCA 24; (1982) 149 CLR 337, Mason J, 350, 352.

[20] [2011] HCA 45, [3] – [5].

[21] Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323, [116].

[22] Byrnes v Kendle [53], [98] – [99]; Red Hill Iron Ltd, [121].

[23] [2012] WASC 323, [127].

[24] Special Condition (A)(i) is an example of the poor drafting of this agreement in that it refers to “the death of the lender.” As the lender is the appellants’ superannuation fund, this makes no sense. Further, Special Condition (B) requires Denbraise to take out a life assurance and trauma $600,000 policy showing the lender as mortgagees but as Denbraise is a private company it is difficult to apprehend how it could take out such a policy.

[25] There were probably others in between but Mr Watson could not locate them: AB 62, paragraph 25.

[26] For example: clause 1.1.3 has a phrase “first and body corporate” which should read “first any body corporate”; and clauses 4.1 and 4.2 contain the phrase “of the security” which should read “or the security”.

[27] [2012] WASC 323 at [127]. (Red Hill)

[28] [2004] HCA 12; (2004) 218 CLR 216, at [84] and [103]. (Kelly) Emphasis added; internal footnotes omitted.

[29] Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368 at [158] per McColl JA, Beazley P concurring (Horsell); Segelov v Ernst and Young Services Pty Ltd [2015] NSWCA 156 at [88] per Gleeson JA, Meagher and Leeming JJA concurring (Segelov); Vincent Nominees v Western Australian Planning Commission [2012] WASC 28 at [25] per Beech J.

[30] Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236, at 266–267.

[31] Mr Scott in this case.

[32] Emphasis added.

[33] AB 341. Emphasis in original.

[34] AB 198, 200; affidavit of Mr Scott, paragraph 6, AB 363.

Close

Editorial Notes

  • Published Case Name:

    William James Watson & May Marlene Watson as trustee for the WJ & MM Watson Superannuation Fund v Scott

  • Shortened Case Name:

    Watson v Scott

  • Reported Citation:

    [2016] 2 Qd R 484

  • MNC:

    [2015] QCA 267

  • Court:

    QCA

  • Judge(s):

    McMurdo P, Morrison JA, Philippides JA

  • Date:

    08 Dec 2015

Litigation History

Event Citation or File Date Notes
Primary Judgment - - QDC
Notice of Appeal Filed File Number: 1252/15 06 Feb 2015 DC3518/14
Appeal Determined (QCA) [2015] QCA 267 08 Dec 2015 -

Appeal Status

{solid} Appeal Determined (QCA)