MAILMAN v CHALLENGE BANK LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, HANDLEY and SHELLER JJA 21-22 November 1991, 12 December 1991 [1991] NSWCA 182 GUARANTEE — Loan agreement with bank — Mortgage to bank Commercial property — Mortgagee in possession — Bank seeks to recover against guarantors — Alleged representation or promises by bank officers — Resort first to mortgaged property — Then principal debtor — Then guarantors — "Normally" — Estoppel Misleading or deceptive conduct — s52 Trade Practices Act 1974 HELD: Statements did not give rise to representation or promise alleged - No representation that bank would not claim against guarantors before selling property Duty of mortgagee to guarantors - No duty to sell property at request of guarantors - China and South Sea Bank Ltd v Tan Soon Gin (1990) 1AC 536 applied Legione v Hateley (1983) 152 CLR 406 Halsbury's Laws of England 4th ed, vol 9 China and South Sea Bank Ltd v Tan Soon Gin (1990) 1 AC 536 In re Cleadon Trust Ltd (1939) Ch 286 O'Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200 Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335 Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 Rowlatt on Principle and Surety 3rd ed (1936) at 205 (see now 4th ed (1982) at 145) Gleeson CJ In this matter I have had the benefit of reading in draft form the reasons for judgment of Sheller JA. I agree that the appeal should be dismissed with costs for the reasons given by his Honour. Handley JA I agree with Sheller JA. Sheller JA Introduction This is an appeal from a judgment of Rogers CJ Comm D.The respondent Challenge Bank Ltd sues the appellants Mr and Mrs Mailman to recover $3,706,011.48 alleged to be due under the terms of an agreement of guarantee and indemnity ("the guarantee") dated 4 March 1988 as varied by agreement dated 13 November 1989 and interest thereon. By its terms the appellants (a) guaranteed to the respondent the performance by Prime Property Corporation Pty Ltd, ("Prime"), of its obligations to the respondent under a bill acceptance and discount agreement ("the loan agreement") also dated 4 March 1988 as varied by a variation agreement dated 13 November 1989 and under a first registered mortgage in favour of the respondent ("the mortgage") dated 29 June 1987 over land owned by Prime and known as 2 Help Street, Chatswood, on which was erected a substantial commercial property, ("the property"), and (b) indemnified the respondent against any loss suffered by it as a result of any failure by any person to pay in a due and punctual manner the Debt. Prime held the property as trustee of a unit trust in which interests associated with the appellants had a 25 per cent interest. The "Debt" was defined as meaning the total of all moneys actually or contingently payable by Prime to the 2 UNREPORTED JUDGMENTS respondent pursuant to the loan agreement. The appellants' liability for the Debt was limited together with Louise Developments Pty Ltd and Namliam Pty Ltd jointly and severally to 25 per cent. Prime defaulted and the respondent went into possession of the property pursuant to the mortgage. The guarantee provided, inter alia, as follows: "6. PRINCIPAL OBLIGATION (b) This Guarantee and Indemnity is in addition to and not in substitution for any other rights which the Lender may have and may be enforced against the Guarantor by the Lender without first having recourse to any such rights and without taking any steps or proceedings against any other person. (c) The Guarantor acknowledges that it has not relied on any warranty or representation made by or on behalf of the Lender to induce it to enter this Agreement and that it has made and will continue to make without reliance on the Lender its own independent investigation of the financial condition and affairs of the Borrower and assessment of the credit worthiness of the Borrower and that the Lender has no duty or responsibility at any time to provide the Guarantor with any information relating to the financial condition and other affairs of the Borrower." At the time that the appellants entered into the guarantee they had solicitors advising them. Rogers CJ Comm D gave judgment for the respondent and ordered each appellant to pay to the respondent $4,331,230.84. Appellants' submissions Notwithstanding the provisions of CL6(b) and (c) in the guarantee the appellants seek to rely upon representations alleged to have been made to them by bank officers in an attempt to reduce what otherwise would be due by them under the guarantee as written to some lesser amount. In the appellants' submissions to us it was claimed that the respondent had, before the guarantee was entered into, made five separate representations as follows: 1. Except in abnormal circumstances the respondent before enforcing the guarantee would sell the property and exhaust its rights against Prime. 2. Except in abnormal circumstances the respondent in event of default under the loan agreement would sell the property at market value. 3. That the way in which the guarantee worked would have the effect that the appellants would bear only 25 per cent of the shortfall from the sale of the property. 4. That in normal circumstances the policy and practice of the respondent in the event of default was to take in and realise all securities and then proceed against the borrower and then on the guarantee. 5. In deciding whether and when to enforce the guarantee and whether first to sell the property the respondent would have regard to the question whether the circumstances were then normal. In part these representations were said to give rise to an estoppel or to entitle the appellants to relief under s52 of the Trade Practices Act 1974, in part they were said to be promissory and either collateral or additional to the terms of the written guarantee. The appellants claimed to have been induced by them to enter into the loan agreement and guarantee. Because of my opinion as to the meaning and effect of the words relied upon by the appellants, it is unnecessary to consider further into which of these categories the use of the words might fall or to refer to the evidence of reliance. Evidence of Statements URJ MAILMAN v CHALLENGE BANK LTD (Sheller JA) 3 Rogers CJ Comm D in his judgment at 9 said that he was prepared to accept that statements were made to the appellants on three occasions to the effect that the normal course pursued by the respondent was to resort first to the mortgaged property, then to the principal debtor and only then to the guarantor. His Honour pointed out that in his final address Mr Douglas QC who appeared at the trial for the appellants accepted that on the evidence he was bound to concede that the word "normally" was used. Mr Libling for the appellants before us was not content simply to accept this finding of Rogers CJ Comm D but referred us to the parts of the evidence where the various statements are found. 1. According to Mr Mailman's evidence in the course of a discussion with Mr Hay, the respondent's property manager for New South Wales, in January or February 1988, and Prime's normal contact with the respondent, Mr Mailman asked: "What normally happens in the case of default?" Mr Hay replied: "Tf there has been a default the bank would go into possession, sell the property, pursue the borrower and then the guarantors for any shortfall." Mr Mailman then said: "In other words, if we buy Help Street and then Prime defaults, you will go after Prime then you will go after the guarantors for the rest?" Mr Hay said: "That's the case." In a later written statement Mr Mailman corrected this and said that the words used by him were: "Tn other words, if we go ahead with this deal and then Prime defaults, you will go after Prime, then you will go after the guarantors for the rest?" Mr Hay in oral evidence, said: "Mr Mailman asked what would be the end result of any action regarding the guarantees. I told him that the property would be sold in event of default, a loss established and he would be responsible for payment of 25 per cent of that established loss." At the conclusion of Mr Hay's oral evidence he was asked by his Honour: "Just to try and put the position beyond doubt, was what Mr Mailman asked this, what normally happens in the case of default?" Mr Hay answered: "Yes your Honour." His Honour: "So your answer was intended to refer to what happens when the economy and all other circumstances were normal". Mr Hay: "Yes." No objection was taken to these questions nor did Mr Douglas seek to re-examine on them. Whatever may be the weight to be attached to the answers given, as already indicated Mr Douglas in his address conceded that the word "normally" was used. 2. A conversation took place at the Zenith Brasserie Restaurant in March 1988 at a luncheon attended by Messrs Burns (another guarantor) and Mailman and Messrs Hay and Barnes, the respondent's State manager for New South Wales. In his evidence Mr Burns deposed that he said to Mr Barnes: "Custom Credit have assured us that provision of personal guarantees is only a technical matter and that they have never actioned against a personal guarantor for this kind of facility." To which Mr Barnes replied: 4 UNREPORTED JUDGMENTS "That's the way we do business too. We would take the property by way of security and would intend to action that security if it came to the crunch." Later Mr Burns said: "Let's be clear about this. The order of play is that the bank would proceed against the property then the borrower and then lastly the guarantors." To which Mr Barnes replied: "Yes that's right." While Mr Barnes denied this conversation he gave evidence that during the lunch Burns or Mailman said to him words to the effect: "What would the bank do in the event of default?" To which he replied words to the effect: "Normally we would seize the property, sell it and sue you for the shortfall." 3. Mr Taylor, the respondent's supervisor in the property department, gave evidence of a conversation some time prior to 4 March 1988 between Mr Mailman and him. Mr Taylor says that Mr Mailman said words to the following effect: "Kevin, will those guarantees work in the same way as the guarantees we have previously signed? If there are any problems or any default, can we take it that the bank would sell the building, then action Prime, then only if some definite loss has been established, rely on the guarantees?" Mr Taylor said words to the following effect: "Yes Greg that is the normal process, as we have previously discussed. That's what would occur if there was a default. The bank would action the security, then the borrower then yourself if a loss is established." Mr Taylor went on to depose: "These words were in accordance with what I believe were my instructions and what I understood to be the normal policy and practice of Challenge." Elsewhere in the evidence there is found similar evidence by the various witnesses of these conversations. We can, I think, safely proceed on the basis that whatever was said about the practice or future conduct of the bank it was qualified by the word "normally" or an expression of similar connotation. This material is relied on to support what the appellants have described as their first and fourth representations. Substantially the same material is relied upon for the other three representations. I shall return to deal with these other three representations separately. The Meaning and Effect of the Statements The fundamental problem facing the appellants is one of context and language. The guarantee document is plain. CL6(b) provides that the respondent may enforce its rights against the guarantors without first having recourse to any other rights or taking any other steps. The statements made by Messrs Hay, Barnes and Taylor, officers of the bank, were made without any evidenced authority either actual or ostensible to vary the terms of the guarantee. This want of authority would naturally lead such an officer to use a word such as "normally" which is guarded, imprecise and non-committal. Further there is no evidence that the appellants or their solicitors took any steps to have CL6(b) of the guarantee varied to take account of the alleged promise or representation. To say that "normally" or that "the normal process is that" something will be done or will happen carries with it the implication that sometimes it will not be done or will not happen. To say that it is abnormal for it not to be done is to say no more than that it is unusual. To say that normally or in the normal course or in normal circumstances I go to work by train is to concede that sometimes I do URJ MAILMAN v CHALLENGE BANK LTD (Sheller JA) 5 not go to work by train. That is abnormal in the sense that for seventy days out of a hundred I do go by train. For the other thirty I do not. I do not think it is possible to build upon such a statement a representation or promise that I do not or will not go by train except in circumstances which can be limited precisely by reference to some extraneous norm such as the state of the weather. Such is to carry the expression beyond its ordinary meaning. It must be borne in mind that a representation must be clear before it can found an estoppel whether in pais or promissory; Legione v Hateley (1983) 152 CLR 406 at 435-6 or an offer capable of acceptance; Halsbury's Laws of England, 4th ed, vol 9, para227. It is worth observing that the respondent did on 21 June 1990 before claiming on the appellants offer the property for sale by auction. It was passed in at $10.1 million. The difficulty of resolving whether these events would satisfy the requirements of the alleged representations or promises shows in a practical way the vagueness of the statements relied upon by the appellants. It is, in my opinion, impossible to extract from the language used a representation that as a matter of practice or future conduct the bank always resorted or would always resort first to the mortgage property, then to the principal creditor and only then to the guarantors except in limited circumstances which could be identified as "abnormal". Put another way I do not think there is to be found in what was said anything by way of representation or promise that the bank would not make claim against the guarantors before it sold the property. Other Three Representations Relied Upon These three representations were not pleaded and were not dealt with in the judgment below. We were referred to particular passages in the evidence said to support the claim that they were made. I have re-read that evidence. In my opinion the three representations are not made out on the evidence. It is true that Mr Hay gave evidence that when Mr Mailman asked what would be the end result of any action regarding the guarantees he told him that the property would be sold in event of default, a loss established and he would be responsible for payment of 25 per cent of that established loss. But I do not think that this statement can be divorced from the context of the general statement which his Honour was prepared to accept had been made, namely, that the normal course pursued by the respondent was to resort first to the mortgage property, then to the principal creditor and only then to the guarantors. In short the appellants stand or fall upon the effect of the representation as it was pleaded. Nor does the evidence support a claim pursuant to s52 of the Trade Practices Act 1974 of misleading or deceptive conduct by the respondent. The evidence of Mr Taylor which I have quoted suggests the reverse. Duty of Mortgagee to Guarantor A further submission made by Mr Libling is summarised in para3 of the appellants' written submissions. It is that the statements imposed on the respondent the duty, in the normal course, to enforce the guarantees in such a way as to impose on the appellants a liability no greater than 25 per cent of the shortfall after the sale of the property. Mr Libling told us that he relied upon the pleading. Relevantly this is found in paral4A to paral4F of the amended defence and 12A of the amended cross claim in the following terms: Amended Defence "14A. Further, or in the alternative, at the time when possession was taken of the property in May 1990 the real estate market in Sydney was falling in value and 6 UNREPORTED JUDGMENTS any reasonable mortgagee in the position of the plaintiff ought to have realised that it was in the interest of itself and the defendants that the property should be realised by sale. 14B. In the premises the plaintiff was under a duty to the defendant in all the circumstances of the case to realise the property by sale upon taking possession of the property in or about May 1990 or so soon thereafter as it was practicable to do so. 14C. If the property had been realised by sale at or about that time, the plaintiff could have expected to receive between $12 million and $13 million for the sale of the property, resulting in a principal loss of $2.23 million which is significantly less than the principal loss which would be experienced if the property were now to be realised by sale. 14D. The plaintiff has brought these proceedings against the defendants prior to the realisation by sale of the property. 14E. By reason of the facts and matters aforesaid the plaintiff has prejudiced the defendants in their rights either against Prime or each of the other defendants or co-sureties of the defendants. 14F. In the premises, equity will intervene to prevent the plaintiff from seeking to enforce the guarantees of the defendants, or alternatively, from seeking to enforce those guarantees for an amount in excess of $2.25 million." Amended Cross Claim "12A. Further, or in the alternative the cross claimants repeat and rely upon the matters referred to in paral4A to paral4F of the Defence." Mr Libling's argument as formulated in his oral submissions was to the effect that a creditor has a duty, if requested by a guarantor, to act in a manner which is not prejudicial to the guarantor provided by so acting he is not acting to his own prejudice. It was said that the creditor may determine what is his own prejudice provided he does so bona fide. This general statement of principle was tied to the present case by reason of the following findings of fact. In September 1989 the building was valued by Jones Lang Wootton on a fully leased basis at $18.1 million. The property was put up for auction by Prime in December 1989. The top bid of $16.4 million was rejected by Prime. In April 1990 the property was valued by Chestertons on an existing tenancy basis and allowing for a two year letting up period at $13.5 million. The mortgage fell into arrears and in May 1990 the respondent went into possession as mortgagee. As mortgagee the respondent offered the property for sale by auction on 21 June 1990. It was passed in at $10.1 million. Following upon the auction by letter dated 5 July 1990 Y and L Corporation of Japan offered $13 million, subject to FIRB approval, and subject to certain further conditions. On 27 July 1990 litigation was commenced by Prime the appellants and others against the respondent and their agents concerning the conduct of the auction on 21 June 1990. At some time prior to 23 August 1990 the respondent received an unconditional offer of $11.5 million from Mr Loblay. The appellants submit that by August 1990 the respondent could have sold the property for between $12 million and $13 million resulting in a shortfall of up to $2.25 million including costs. On 12 October 1990 Prime, the appellants and others requested that the property be sold for $12 million. It is said that the bank should have acted on this request and could have done so without prejudice to itself and that its failure to do so has prejudiced the guarantors by reason of their increased liability under the guarantees. URJ MAILMAN v CHALLENGE BANK LTD (Sheller JA) 7 The appellants recognised that the decision of the Privy Council in China and South Sea Bank Ltd v Tan Soon Gin (1990) 1 AC 536 stood largely if not entirely against their submission. In that case the creditor made successful application for summary judgment against a guarantor which sought to rely upon a defence that shares mortgaged by the principal debtor had substantially declined in value between the date of the mortgage, the date when the principal sum became due and the date when proceedings were commenced against the guarantor to the point where they were worthless. The guarantor alleged that the creditor knew or ought to have known of the declining value of the shares and should have sold them before they became worthless. The Privy Council restored the order of the court of first instance giving summary judgment against the surety for the principal and interest secured by the guarantee. In the course of doing so Lord Templeman who delivered the judgment said at 545: "Tn the present case the security was neither surrendered nor lost nor imperfect nor altered in condition by reason of what was done by the creditor. The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all. If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety. If the creditor chose to exercise his power of sale over the mortgage security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell. The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full and the surety, having paid the whole of the debt is entitled to a transfer of the mortgage securities to procure recovery of the whole or part of the sum he has paid to the creditor. The creditor is not obliged to do anything. If the creditor does nothing and the debtor declines into bankruptcy the mortgaged securities become valueless and the surety decamps abroad, the creditor loses money. If disaster strikes the debtor and the mortgaged securities but the surety remains capable of repaying the debt then the creditor loses nothing. The surety contracts to pay if the debtor does not pay and the surety is bound by his contract. If the surety, perhaps less indolent or less well protected than the creditor, is worried that the mortgaged securities may decline in value then the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them. No creditor could carry on the business of lending if he could become liable to a mortgagor and to a surety or to either of them for a decline in value of mortgaged property, unless the creditor was personally responsible for the decline." Leaving aside for the moment the effect of any representations made by the bank the only difference in point of principle between what was decided in the Privy Council and what is submitted by the appellants is that here there was a request by the guarantor to the bank to sell the property. It was not explained how this would put the guarantor in a better position than the case where the creditor knew or ought to have known of the declining value of the property. In an attempt to get round the effect of the decision of the Privy Council reliance was placed on more general statements of principle to be found for example in the dissenting judgment of Sir Wilfred Greene MR in In re Cleadon Trust Ltd (1939) Ch 286 at 301 dealing with circumstances in which equity will assist a person who has no right at law but is able to show that money belonging 8 UNREPORTED JUDGMENTS to himself has gone to swell the assets of the person to or for whose benefit he has paid it. Reference was made also to the judgment of McTiernan J in O'Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200 at 223, a passage entirely consistent with the advice of the Privy Council; and the judgment of Gibbs ACJ in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335 at 348. His Honour there referred to the principle underlying the doctrine of subrogation that it would be inequitable for a creditor, by choosing not to resort to remedies in his power, to cast the whole of the obligation on the surety. His Honour's judgment again is entirely consistent with what is said in the Privy Council. If the surety is worried that the mortgaged securities may decline in value the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them. The fact that in the present case the presence of other guarantors inhibited the guarantor from taking this course does not as a matter of principle impose any greater duty upon the creditor than that described by the Privy Council. In Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 at 668-671 Aickin J discussed the principle stated in Rowlatt on Principle and Surety 3rd ed (1936) at 205 (see now 4th ed (1982) at 145) that a surety paying off the debt has always been held entitled to any securities which may have been given for the debt by the principal debtor to the creditor. The right does not depend upon contract but upon the equity that the surety does not have the whole burden of the debt thrown upon him by the choice of the creditor not to resort to the remedies in his power. His Honour made it plain at 670 that the entitlement of the surety is conditioned upon the surety paying the amount due on the guarantee. If the surety cannot or does not pay the amount the entitlement is not available to him and he has no other basis of complaining, in the absence of mala fides, about the order in which the creditor pursues the remedies available to it. If it was any part of the appellants' case to assert that the respondent acted mala fide nothing was put by way of submission to support such a suggestion. In my opinion the appeal should be dismissed with costs. Appeal dismissed with costs. COUNSEL for the Appellant: D Libling Counsel for the Respondent: M J Finnane QC / B A Coles SOLICITORS for the Appellant: Dunhill Madden Butler Solicitors for the Respondent: Kemp Strang and Chippendall