PACE v IRELAND, LIVINGSTONE v IRELAND SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MEAGHER, HANDLEY and SHELLER JJA 12 August 1993, 10 September 1993 [1993] NSWCA 203 The respondents in each appeal were respectively the Licensee under a Licence to Keep Hens issued under the Egg Industry Act 1983, and the Company owning the specified quota of hens. The respondents were parties to two deeds in substantially the same terms. The other party to each deed was one or other of the first appellants and was described as the Lessee. The Lessee in each deed agreed to lease the Licence from the Licensee and to purchase the hens from the Company. Under CL2(ii) of each deed, repayments under bank loans to be obtained by the respondents were to be made by the Lessees, and the Lessees and their interests agreed to indemnify the respondents against claims for repayment. The Lessees and their interests subsequently executed guarantees supporting the bank loans. CLI15 of each deed provided that its term should end if the poultry farming industry were deregulated but that the termination should not affect those rights of the parties "arising prior to the date of termination". The poultry farming industry was deregulated by the Egg Industry (Repeal and Deregulation) Act 1989 and the agreement was thus terminated. Repayments of the loans ceased and the banks demanded payment from the respondents. The Lessees argued that they were no longer obliged to indemnify the respondents because of the termination. The trial judge held that the obligations to indemnify arose on execution of the deeds and survived the termination. It was conceded that the obligations to make repayments to the banks ceased on termination. Held: Once the primary obligation to repay the advances to the banks ceased, so did the obligation to indemnify against a breach of the primary obligation. Meagher JA In these two matters, I have read in draft the judgments of Sheller JA. I agree with them and with the orders which he proposes. The central point in each case was the construction of CL15 of a lease of a Hen Licence in the circumstances set out by Sheller JA. CL2 of the Deed provided that the lessee should indemnify the lessor against liability to its creditors. On the face of it CL15 provides that if the State system of licensing hens should be deregulated, the lessee's liabilities should be terminated. Nonetheless, Carruthers J held that the lessee's obligation to indemnify should survive the industry's deregulation. His Honour said he reached this conclusion because the matter was covered by certain authorities which were precisely on point. In my opinion this view is untenable for two reasons. In the first place the authorities in question dealt with the point at which indemnities arose not the point at which they terminated. In the second place, to adhere to his Honour's view would result in attributing no meaning whatever to CL15, a clause which (whatever it means) was obviously intended by the parties to have some meaning, and an important one. Handley JA I agree with Sheller JA. Sheller JA INTRODUCTION 2 UNREPORTED JUDGMENTS These two appeals (40116 and 40117 of 1991) raise a short point about the construction of two deeds, in substantially the same terms, for the lease of a Licence to Keep Hens issued under the Egg Industry Act 1983 (the Licence). The deeds were made on 11 March 1988. Colin Leo Ireland and CL Ireland Holdings Pty Ltd, the respondents in each appeal, were parties to both deeds and referred to respectively in the deeds as "the Licensee" and "the Company". In one deed Francis George Pace, the first appellant in appeal 40116, was "the Lessee" and in the other deed Ian Hunter Livingstone, the first appellant in appeal 40117, was "the Lessee". The deeds recited that * the Licensee was the holder of the Licence with a hen quota specification of a stated number of hens; * the Lessee had agreed to lease the Licence by way of surrender and re issue of the Licence from the Licensee; * the Company was the owner of a stated number of hens; and * the Lessee, described in this part of the recital as the Purchaser, had agreed to purchase and the Company had agreed to sell the hens. In the Pace deed the consideration for the lease was expressed in CLI as: "... the sum of ONE MILLION ONE HUNDRED AND FIVE THOUSAND SIX HUNDRED AND SIXTY FOUR DOLLARS ($1,105,664) to be paid in the manner following: (i) The sum of THIRTY FOUR THOUSAND FIVE HUNDRED AND FIFTY TWO DOLLARS ($34,552) to be paid on the granting of the approval of the Poultry Farming Licensing Committee of the New South Wales Egg Corporation constituted under the Egg Industry Act of the transfer of the Licence to the Lessee. (ii) And thereafter by ninety three (93) consecutive monthly payments of ELEVEN THOUSAND FIVE HUNDRED AND SEVENTEEN DOLLARS THIRTY THREE CENTS ($11,517.33) the first instalment to be paid during the fourth month after the approval of the Poultry Farming Licensing Committee as aforesaid. " CL2 of the Pace deed provided: "(i) The Company and the Licensee wish to obtain an advance from the National Mutual Royal Savings Bank Limited in the sum of ONE HUNDRED AND FIFTY NINE THOUSAND TWO HUNDRED AND THIRTY DOLLARS ($159,230) which sum shall be paid to the Licensee. Repayment of the said advance shall be guaranteed by the Lessee and by the Guarantor/s named in Schedule B hereto. Repayments of the said advance shall be made by the Lessee by monthly deductions from the monthly rental payments hereinbefore referred to over a period of five (5) years PROVIDED THAT the deductions in the first of those years shall not exceed the monthly amount required to pay interest on the said advance without any reduction of the principal. Thereafter, the monthly payments in reduction of the advance shall be by instalments calculated to pay interest on the advances and to repay the principal over a period of four (4) years subject always to the acceptance of this method of payment by the said Bank. (ii) If the Company or the Licensee should be called upon to repay any of the said advance the Lessee and the Guarantor/s will indemnify and keep the Company and the Licensee and each of them indemnified against that liability." CLIS of the Pace deed provided as follows: "The term of this agreement shall end if the Poultry Farming Industry should be deregulated so as to enable persons, corporations or other bodies to operate a poultry or egg farm without a Licence or permit substantially restrictive of the URJ PACE v IRELAND, LIVINGSTONE v IRELAND (Sheller JA) 3 number of laying hens that may be kept by poultry farmers or the quantity of eggs that may be produced or sold PROVIDED THAT such termination shall not affect the rights and liabilities of the parties inter se arising prior to the date of termination AND FURTHER PROVIDED that in the event that any compensation or other benefit which might be payable or available as the result of any such deregulation or restriction shall go and belong to the said COLIN LEO IRELAND or as he shall direct." The clauses in the Livingstone deed were the same except for the sums of money mentioned and except that in CL2(i) of the Livingstone deed the lending bank was the "Commonwealth Trading Bank". Alimfresh Pty Ltd, the second appellant in appeal 40116, was the Guarantor named in Schedule B to the Pace deed, and Ringal Valley Pty Ltd, the second appellant in appeal 40117, the Guarantor named in Schedule B to the Livingstone deed. FACTUAL BACKGROUND When the deeds were entered into in the early part of 1988, the respondent Mr ireland was in financial straits. He owed creditors approximately $300,000. The creditors held a charge over the hen quota. One purpose of the arrangement was to provide finds to enable Mr Ireland to redeem the charge and then lease the quota to the appellants free of the charge. The advances were obtained under loan agreements entered into by Mr Ireland with the National Mutual Royal Savings Bank Limited and by CL Ireland Holdings Pty Ltd with the Commonwealth Bank of Australia. Guarantees to pay moneys owing by the principal debtors to the banks were executed by Mr Pace and Mrs Pace, who is the third appellant in appeal 40116, in favour of the National Mutual Royal Savings Bank Ltd and by Ringal Valley Pty Ltd in favour of the Commonwealth Bank of Australia. Why the guarantee in favour of the National Mutual Royal Savings Bank Ltd was given by Mr and Mrs Pace rather than by Alimfresh Pty Ltd is not explained. The parties accept that, subject to the effect of the deed, each principal debtor would be regarded as having impliedly undertaken to repay to the respective guarantors moneys paid by them to the respective banks; see McColl's Wholesale Pty Ltd v State Bank of New South Wales (1984) 3 NSWLR 365 at 376. On 12 August 1989 the Egg Industry (Repeal and Deregulation) Act 1989 came into force to deregulate the poultry farm industry. As a result, Mr Ireland, as a holder of a hen quota, became eligible for compensation in an amount of $975,000, CL15 of each deed took effect and, in accordance with its terms, the term of the agreement ended. Repayments to the banks by instalment ceased and accordingly there was default under the respective loan agreements. The banks made demand for payment on Mr Ireland and CL Ireland Holdings Pty Ltd under the loan agreements. COURT PROCEEDINGS The Pace and Livingstone interests each commenced separate proceedings by statements of claim against the Ireland interests and were met by cross claims. The proceedings came on for hearing before Carruthers J who gave judgment for the defendant Ireland interests on 13 February 1991 in both proceedings. His Honour described the contentions of the parties relevant to these appeals in the following terms: "Mr Ireland contends that the effect of CL2(ii) is that in the Livingstone matter, CL Ireland Holdings Pty Ltd is to be indemnified by Mr Livingstone and Ringal and in the Pace matter Mr Ireland is to be indemnified by Mr Pace (the other guarantor, Mrs Pace, not being a party to the deed) and by Alimfresh. The plaintiffs on the other hand contend that the effect of CLI5 is that after 4 UNREPORTED JUDGMENTS deregulation CL2(ii) no longer had effect. The discrete point is therefore raised as to whether the obligation on the part of the Lessee and the guarantor/s to indemnify the Company or the Licensee under CL2(ii), is a liability 'arising prior to the date of termination' within the meaning of the first proviso to CLIS." In dealing with these contentions his Honour referred to a judgment in the English Court of Appeal in In re a Debtor [1937] Ch 156 and said that it was clear from that case "that the various obligations to indemnify arose when the deeds were executed on 11 March 1988 and were subsisting at the date of termination of the terms of the agreements within the meaning of CLI5. " He continued: "With regard to the Livingstone deed, I analyse the situation as follows: The Commonwealth Bank, not having been paid by CL Ireland Holdings Pty Ltd (the principal debtor) is entitled to call upon Ringal to discharge the indebtedness in accordance with the Deed of Guarantee. However, having met its obligations as guarantor, Ringal may not look to CL Ireland Holdings Pty Ltd for reimbursement because Ringal has undertaken in CL2(ii) of the Deed to indemnify CL Ireland Holdings Pty Ltd against liability to repay any of the said advance. See Toussaint v Martinnant (1787) 2 TR 100 at 105. CL Ireland Holdings Pty Ltd also has the benefit of an undertaking by Mr Livingstone to indemnify it against an! such liability. Insofar as the Pace deed is concerned, I analyse the situation as follows. The Royal Bank not having been paid by Mr Ireland (the principal debtor) is entitled to call upon Mr and Mrs Pace to discharge the indebtedness In accordance with the Deed of Guarantee. Insofar as Mr Pace is concerned to the extent that he makes any payment to the bank, he may not seek reimbursement from Mr Ireland because he has undertaken in CL2(ii) of the Deed to indemnify Mr Ireland against liability to repay any of the said advance. To the extent that Mrs Pace makes any payment to the bank under her obligations as guarantor, she may seek reimbursement from Mr Ireland but Mr Ireland is entitled to indemnification in that regard from Mr Pace and Alimfresh. " APPEALS The Livingstone and Pace interests appealed from this decision. CLI of the deeds provided that most of the principal sum was to be paid by ninety three consecutive monthly payments. CL2(i) provided that repayments of the advances made by the banks were to be made by the Lessees by monthly deductions from the monthly rental payments over a period of four years. Thus the monthly payments of rental and the monthly repayments of the advances was linked to the point that the obligation of the Lessees to make the repayments of the advances was an obligation to make it by way of deduction from the monthly rental payments. In In re a Debtor the Court held that the implied undertaking of a principal debtor, a married woman, to repay to a guarantor money paid on her behalf by the guarantor to a creditor arose at the time the guarantee was given in 1933 and was accordingly a contract entered into, or debt or obligation incurred before the passing of the Law Reform (Married Women and Tortfeasors) Act 1935. In consequence the unenforceability in bankruptcy of this implied undertaking against the married woman debtor, who was not carrying on a trade or business, was preserved by the Act. The language of the section under consideration by the Court of Appeal made this conclusion and the reasoning for it unexceptionable. Based upon it the respondents argued that, by parity of reasoning, the indemnities. in CL2(ii) of the deeds were rights and liabilities of the parties inter se arising prior to the date of termination of the agreements and hence not URJ PACE v IRELAND, LIVINGSTONE v IRELAND (Sheller JA) 5 affected by such termination under CL15 of the deeds. Carruthers J so held. However if this conclusion and the reasoning for it are correct not only do the indemnities survive but so too do the rights and liabilities of the parties to have made and to make monthly payments of rental and monthly repayments of the advances, since, by the same process of reasoning, these rights and liabilities arose prior to the date of termination. The consequence would be that CL15 of the deeds achieved nothing. It was accepted that upon the coming into operation of the Egg Industry (Repeal and Deregulation) Act CLI5 effectively terminated the Lessees' obligation to make further rental payments. Consistent with this it was not suggested that instalments which otherwise would have been payable monthly after that date were rights or liabilities of the parties inter se arising prior to the date of termination and accordingly not affected by the termination of the agreements under the first proviso to CL15. From this concession it follows that the Lessees' obligation to make monthly deductions also ceased. But the respondents' argument which succeeded before Carruthers J was that even so, the banks having made claim on the principal debtors, their right to indemnity from the Lessees and Guarantors remained unaffected by the termination of the agreements. I am unable to see, as a matter of principle, how these rights and liabilities any more arose prior to the date of termination than the rights and liabilities relating to monthly repayments. They all were derived from the same agreements of March 1988 and contemplated payments being made after 12 August 1989. The answer to this apparent quandary is found in a proper construction of subCL(2)(ii) in the context of the deeds. So long as the agreements remained on foot the Lessees were obliged to repay to the banks the advances by deductions from the monthly rental payments. It stands to reason that if they failed to do so the banks would look to the principal debtors. If the banks call upon the principal debtors, the Company and the Licensee, to repay any of the advances, consistent with the Lessees' primary obligation to the principal debtors to repay the advance to the banks is the provision in subCL(2)(ii) that having failed to do so they will indemnify the principal debtors. However once the primary obligation to repay the advances to the banks ceases so too must the obligation to indemnify the principal debtors for a breach of that obligation. The suggestion to the contrary means that even though the Lessees' obligation to repay the advances had ceased with the termination of the agreement the Lessees remained obliged to indemnify the principal debtors for the repayments the principal debtors were in consequence called upon to make. I have no doubt that subCL(2)(ii) was not intended to operate in this way. Accordingly I read CL15 as having the effect of ending both the obligation to make the repayments of the advance in respect of any period after 12 August 1989 and at the same time the obligation to indemnify under CL(2)(ii) since in respect of any such period there was no longer any primary obligation and hence no breach or need for indemnity. In my opinion the appeals should be allowed. ORDERS Appeal 40116 of 1991 In their further amended statement of claim and their notice of appeal the appellants sought orders and declarations which include a declaration that the first respondent Colin Leo Ireland is bound to indemnify completely the first and third appellants Francis George Pace and Dianna Elizabeth Pace for payments made, to be made and liable to be made to the National Mutual Royal Savings 6 UNREPORTED JUDGMENTS Bank Limited pursuant to the bank deed, which I take to refer to the guarantee, and arising out of any liability to the bank for repayments of principal due for any period after 12 August 1989 and orders in the nature of that declaration. The appellants also asked for costs and interest. His Honour gave judgment for the respondents on the further attended statement of claim and on the respondents' cross claim made a declaration that the appellants Francis George Pace and Alimfresh Pty Ltd were each obliged to indemnify Colin Leo Ireland against any liability to repay any of the advance by National Mutual Royal Savings Bank Ltd (account No 269993), the subject of CL2(i) of the deed dated 11 March 1988. In my opinion the judgment for the respondents and this declaration on the cross claim should be set aside and in lieu thereof a declaration and order substantially as claimed by the appellants should be made. His Honour ordered that claims made by Mr Ireland for compensation under s74P of the Real Property Act for rectification of the deed and for damages be dismissed. These orders are not challenged and should not be disturbed. His Honour ordered that the appellants pay the respondents' costs of the main action and the cross claimants' costs of the claim for declaratory relief which his Honour granted. These orders should be set aside and the respondents ordered to pay these costs. The costs orders made in relation to the claim for damages pursuant to s74P and for rectification and damages should remain undisturbed. The appellants should bring in short minutes to give effect to what I have said. Appeal 40117 of 1991 In their further amended statement of claim and their notice of appeal the appellants sought orders and declarations which included a declaration that the second respondent CL Ireland Holdings Pty Ltd is bound to indemnify completely the second appellant Ringal Valley Pty Ltd for payments made, to be made and liable to be made to the Commonwealth Bank of Australia pursuant to the bank deed, which I take to refer to the guarantee, and arising out of any liability to the bank for repayments of principal due for any period after 12 August 1989 and orders in the nature of that declaration. The appellants also asked for costs and interest. His Honour gave judgment for the respondents on the further amended statement of claim and on the respondents' cross claim made a declaration that the appellants Ringal Valley Pty Ltd and Ian Hunter Livingstone were each obliged to indemnify CL Ireland Holdings Pty Ltd against any liability to repay any of the advance by the Commonwealth Bank of Australia (account No 2814 - 164 - 177) to CL Ireland Holdings Pty Ltd the subject of CL2(i) of the deed dated 11 March 1988. In my opinion the judgment for the respondents and declaration should be set aside and in lieu thereof a declaration and order substantially as claimed by the appellants should be made. His Honour ordered that the respondents' claim for compensation under s74P of the Real Property Act, for rectification of the deed and for damages be dismissed. These orders are not challenged and should not be disturbed. His Honour ordered that the appellants pay the respondents' costs of the main action and the cross claimants' costs of the claim for the declaratory relief which his Honour granted. These orders should be set aside and the respondents ordered to pay these costs. The costs orders made in relation to the claim for damages pursuant to s74P and for rectification and damages should remain undisturbed. The appellants should bring in short minutes to give effect to what I have said. As the appeals are allowed the respondents should pay the costs of the appeals. Appeal 40116 of 1991 1. Appeal allowed; URJ PACE v IRELAND, LIVINGSTONE v IRELAND (Sheller JA) 7 2. Appellants to bring in short minutes to give effect to the reasons for judgment; 3. Respondents to pay the appellants' costs of the appeal. Appeal 40117 of 1991 5 1. Appeal allowed; 2. Appellants to bring in short minutes to give effect to the reasons for judgment; 3. Respondents to pay the appellants' costs of the appeal. 19 Counsel for the Appellants: RJ Ellicott QC / LJ Ellison Instructed by: Roberts Mann Davies Counsel for the Respondents: RW Cameron 15 Instructed by: Lyons Barnett Kennedy