SONNTAG v GRAZIANO SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY, CLARKE and SHELLER JJA 18 February 1994, 15 April 1994 [1994] NSWCA 291 Action for recovery of money lent to company and on guarantee by director — terms of loan agreement not followed — whether director released from liability on guarantee — construction of loan agreement APPEAL FROM COMMON LAW DIVISION — Action for recovery of money lent to company and on guarantee by director r Terms of loan agreement not followed — Whether director released from liability on guarantee. CONSTRUCTION OF LOAN AGREEMENT — Grant of security not condition precedent to operation of Loan Agreement or of Guarantee. GUARANTEE ~— Solicitor acting for lender, borrower company and director — Solicitor failed to prepare security documents — Director cannot rely on solicitor's actions to avoid guarantee. Mahoney JA Rohalo Pty Ltd proposed to develop certain land. The plaintiff Paul Graziano agreed to lend money to the company. On 4 December 1990 a loan agreement was made between Mr Graziano and the company. The loan agreement was supported by "an agreement of guarantee and indemnity" given by Lionel Russell Sonntag, one of the two directors of the company. The company defaulted in repayment of the amount lent to it. Mr Graziano sued it and recovered judgment. He also sued Mr Sonntag upon the guarantee. On 5 July 1993 McInerney J gave judgment for Mr Graziano. No appeal has been brought by the company. However, Mr Sonntag has appealed to this Court against the judgment given against him on the guarantee. Mr Sonntag's appeal is based essentially upon the way in which the loan and guarantee transactions were carried into effect. Having regard to the form which ultimately the submissions took, it is sufficient to state briefly the relevant parts of the transactions and what was done. The loan agreement was made between Mr Graziano and the company. It recited that the lender, Mr Graziano, "has agreed to advance to the Borrower up to the Principal Sum" and that the principal sum together with interest "is to be repaid as provided in this agreement". The principal sum was $150,000. It was to be repaid on 22 January 1990 with interest. Cl3 of the loan agreement provided: "3. SECURITY The Borrower shall not be entitled to any advance pursuant to this Agreement unless and until the Lender holds the security specified in Item 1Q (the 'Security') and a guarantee by the Guarantor in form and substance satisfactory to the Lender. The Borrower acknowledges that the Security is charged with payment of the Debt." Item 10 in the agreement specified as "Security": 2 UNREPORTED JUDGMENTS "Unregistered second mortgage of even date between the Lender and Borrower over property known as Albatross Court 60-62 Albatross Avenue Mermaid Beach." The guarantee document recited that the guarantor, Mr Sonntag, had requested the lender, Mr Graziano, to advance moneys "to one or more of the Debtors", "that the Lender has been or will be furnished with the documents specified in Item 5", being the deed of loan and the unregistered second mortgage, and that the guarantor "has agreed to guarantee and indemnify the Lender as set out in this Agreement". The document then provided for a guarantee by Mr Sonntag to Mr Graziano: cl2; it contained non-waiver clauses as, eg, in cl5; and it stipulated that the guarantee "shall be a principal obligation...": cl6. In the end, nothing was, I think, urged to turn upon the precise terms of the guarantee. It is agreed that the loan agreement was executed by the company and by Mr Graziano. In the transaction a solicitor, Mr Francipane, acted as solicitor for all parties, and in particular, for the company and Mr Sonntag. The appeal has proceeded on the basis that the company had two directors, Mr and Mrs Sonntag and that what was done on behalf of the company was relevantly done by Mr Sonntag. Mr Sonntag gave evidence, inter alia, as to the way in which the transaction was carried out. It is agreed that notwithstanding the provisions of cl3 of the loan agreement, no formal mortgage document was executed by the company. It was said in argument before this Court that some steps were taken by Mr Francipane to obtain particulars in relation to the preparation of that document but that for whatever reason no document was prepared. In fact, the moneys agreed to be lent were lent notwithstanding that Mr Graziano did not, as contemplated by cl3, hold "the security specified in Item 10". It is that upon which reliance has been placed by Mr Sonntag as justification for his refusal to meet the guarantee signed by him. Mr Sonntag first submitted that the provision of the security referred to in the loan agreement was a condition precedent to the coming into operation of the loan agreement and/or of the guarantee and that accordingly the guarantee never became operative to bind him. I do not think that that should be accepted. The distinction between a term or condition which is precedent to the coming into operation of a legal obligation and one which is precedent, not to the existence of the legal obligation but to the performance of some or all of its obligations, is well understood. It was referred to by the High Court of Australia in Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 and has been referred to in this Court: see generally Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1 and Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 6839. It is, in my opinion, clear that the execution and delivery of the security was not a condition precedent to the existence of the loan agreement or the guarantee but was a stipulation precedent to the performance of certain of the obligations created by the loan agreement. Thus, the recitals to the loan agreement state that "the Lender has agreed to advance..." the relevant sum: there is in it no promise to make that advance. The loan agreement, operatively, provides for the repayment of that sum and interest and for matters relating to the loan The stipulation as to security was not that the agreement should not come into existence until it was provided, but that the company "shall not be entitled to any advance..." unless and until Mr Graziano "holds the security... and a guarantee by the Guarantor...". URJ SONNTAG v GRAZIANO (Mahoney JA) 3 Similarly, the guarantee recited that Mr Graziano "has been or will be furnished with", inter alia, the security. The contemplation of the document was, in terms, that the security might be furnished after the execution of the guarantee. Mr Morahan, for Mr Sonntag, then submitted that the failure to give the security avoided the guarantee. It is, of course, clear that where a transaction of which a guarantee is part envisages that a security will be given for the performance of the principal obligation guaranteed and that security is not given, prima facie the guarantee is avoided: see Halsbury Laws of England Vol20, para282 and the cases there referred to; see also Phillips and O'Donovan The Modern Contract of Guarantee (2nd ed) (1992) pp 343-345; Marks and Moss Rowlatt on the Law of Principal and Surety (4th ed) (1982) pp 185-186. The matter was discussed in Williams v Frayne (1937) 58 CLR 710 and in this Court in Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689. As a general principle, that is not in dispute. But Mr Phillips, for Mr Graziano, submits that, by reason of the way in which the transactions were, carried out and the actions of the company and Mr Sonntag, that principle has no application in the present case. His submission is to the effect that Mr Sonntag at all times knew what was happening: in particular, he knew that the advance of money was taking place notwithstanding that the security had not been given by the company to Mr Graziano. And he knew and accepted what was being done or not done thereafter, by his solicitor and otherwise. In these circumstances, he submits, Mr Sonntag is liable on the guarantee even though the security was not given. In order to understand this submission, it is necessary to determine what was the precise relationship between the loan agreement and the guarantee and in what regard what was done failed to comply with the documents. As I have said, it was contemplated by the loan agreement that, when it was executed, the security might not yet have been provided by the company to the lender, Mr Graziano: Recital B provided that "The Lender has been or will be furnished with" the Deed of Loan and the security, ie, that the security might be furnished to the lender, Mr Graziano after the guarantee was executed. The position is complicated by Recital C which provided "The Guarantor has before execution of this Agreement inspected, understood and approved the Documents", being the Deed of Loan and the security. If the recital meant that Mr Sonntag had inspected an unregistered mortgage of the relevant land, executed or unexecuted, it was apparently not true: as the court has been given to understand the security concerned had not been prepared. Mr Sonntag and the company would both have been aware that no such inspection had taken place because the document had not been executed. But however that be, the contemplation of the parties was, or must be taken to be, that when the loan agreement and the guarantee were executed, the security had not been executed but might, conformably with them, be executed subsequently. To that point, what was done was not inconsistent with the documents. As IT have said, the guarantee by its terms contemplated that the security might be given after the loan agreement was executed. It is not clear what calls were made upon the company to execute the security after the advance was made. Had it been called upon in the appropriate way and at the appropriate time, it could not have resisted a claim that the security be given. It has not been contested but that, as with the other transactions, Mr Sonntag was in a position to cause the company to give the security at the relevant times. He did not suggest that, had 4 UNREPORTED JUDGMENTS he been called on, he would have not done so. He did not do so because the solicitor acting for all parties did not call on him and the company to cause the mortgage to be executed. If Mr Sonntag had caused the company to omit to give the security and/or had instructed the solicitor acting for all parties not to take the security or to delay having it executed, Mr Sonntag could not, I think, have relied upon the failure of the company to give the security as a ground for avoiding the guarantee. Mr Morahan for Mr Sonntag suggested that, in effect, Mr Sonntag had left the matter in the hands of the mutual solicitor, had assumed that what was to be done would be done, and accordingly could not now be blamed because the security was not given, or given in time. He conceded that Mr Sonntag accepted expressly in his evidence that he knew at the relevant times that the security had not been given but, as the submission was, as he and the other parties had left the matter to the solicitor, the guarantee was to be avoided if the security was not in fact obtained. I do not think that that submission should be accepted. The guarantee envisaged that, in the context, the security "will be furnished". It was open to Mr Sonntag to waive or to acquiesce in the non-fulfilment of that arrangement. The learned judge found that there was in law a waiver of the provision of the security by Mr Sonntag. I do not dissent from that finding. See generally Morten & Anor v Marshall (1863) 2 H & C 305; 159 ER 127; Halsbury, Laws of England (4th ed) Vol 20, para258. But however that be, I do not think that it was open to Mr Sonntag to rely upon the non-provision of the security as a ground for avoiding the guarantee. I have dealt with the matter upon the basis on which, before the judge, it was argued, viz, that no security was provided by the company as required by the loan agreement. That assumption may, perhaps, be questionable. C13 provided: "The Borrower acknowledges that the Security is charged with payment of the Debt". The term "security" is there intended, I think, to mean the land at Mermaid Beach. The purpose of the clause I have cited was, in my opinion, to effect a charge upon that land - the words "is charged with" indicate this - irrespective of the execution of the security as provided. The effect of cl3 was, in my opinion, to create an immediate charge upon the land: an agreement to give a charge is, in equity, ordinarily immediately effective as a charge: see, for example, In re Fireproof Doors Ltd Umney v Fireproof Doors Ltd [1916] 2 Ch 142 at 150-151. See also Halsbury Laws of England (4th ed) Vol 16, para[1307] and the cases referred to in n 4 thereof. See generally Meagher Gummow and Lehane, "Equity - Doctrines and Remedies" (3rd ed) (1992) para[339] and para[340]. It is arguable that there is, for this purpose, a distinction between an unregistered second mortgage and a security of the kind given by cl3: cf Real Property Act 1877 (Qld), s48; see generally Breskvar & Anor v Wall & Ors (1971) 126 CLR 376 at 398-399 and 410-411; and that therefore the condition of the agreement was not satisfied merely by the existence of such an equitable charge. This matter was not argued. In view of the conclusions I have reached it is not necessary to determine whether that charge is sufficient satisfaction of the provision that Mr Graziano was to "hold" a security as specified in Item 10 of the loan agreement. In my opinion the judge was correct in holding Mr Sonntag liable on the guarantee. The appeal should be dismissed with costs. Clarke JA I agree with Mahoney JA. Sheller JA I agree with Mahoney JA. URJ SONNTAG v GRAZIANO (Sheller JA) Appeal dismissed with costs. Counsel for the appellant: T J Morahan Solicitor for the appellant: Somerville and CO Counsel for the respondent: J P Phillips Solicitor for the respondent: White Barnes