BLM HOLDINGS PTY LTD and ORS v BANK OF NEW ZEALAND SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CLARKE, SHELLER JJA and O' KEEFE CJ 28 September 1993, 25 March 1994 The appellants had agreed to guarantee certain moneys advanced to Uptown Sydney Development Corporation Pty Ltd ("Uptown") by the respondent. The guarantee was given on the respondent's printed form of guarantee at the end of which was typed CL28. This clause was at the centre of the trial and the appeal. It provided that notwithstanding the "all moneys" clause set out in CL1 of the guarantee, the liability of the guarantor was restricted to moneys advanced to Uptown pursuant to and in accordance with the terms of the facility evidenced by a letter from the bank to Uptown dated 16 December 1988. That letter set out a list of "cross collateralized" security, receipt of which was a condition precedent to any drawing on the facility. The moneys advanced to Uptown were not repaid and the respondent demanded payment from the appellants as guarantors. The appellants argued that as all the conditions precedent to drawing on the loan facility had not been met (certain cross collateralized security not having been received by the respondent) they were not liable for the moneys advanced to Uptown by the respondent. Held: The language of CL28 was plain; the guarantors' liability was restricted to moneys advanced to Uptown by the bank "pursuant to and in accordance with the terms of the facility evidenced" by the letter dated 16 December 1988. Even the most generous construction of the facility could not impose upon the respondent an obligation to advance money to Uptown before receipt of the cross collateralized security; accordingly the moneys advanced to Uptown by the bank were not within the restricted ambit of moneys which the appellants had guaranteed to be repaid. The respondent therefore lent Uptown no moneys to the repayment of which the guarantee applied. The appeal was allowed with the respondent to pay the appellants' costs of the appeal and the hearing of the proceedings at first instance. Clarke JA I agree with the reasons and orders of Sheller JA. Sheller JA INTRODUCTION This is an appeal from a decision of Giles J in proceedings No 50684 of 1991, which were heard together with other proceedings No 50683 of 1991, the evidence in one being evidence in the other. His Honour gave reasons for judgment in both on 30 April 1993. The issues in each proceedings were quite different. We are concerned only with 50684 and hence with part only of his Honour's reasons for judgment. In proceedings 50684, which were commenced by summons, the respondent Bank of New Zealand sought pursuant to a guarantee dated 21 December 1988 to recover from the guarantors, the appellants BLM Holdings Pty Ltd, Sabrack Pty Ltd, Bruce Lawrance Mathieson and Grant McArthur, moneys owed to it by Uptown Sydney Development Corporation Pty Ltd ("Uptown"). BACKGROUND In March 1987 Uptown had purchased a four storey warehouse at 48-74 Dowling Street, Woolloomooloo, ("the property") with a view to its redevelopment into a serviced apartment style hotel. Uptown was one of the companies in a group which included Kylsend Pty Ltd, Aymnest Pty Ltd, Dydolin Pty Ltd, Desegi Pty Ltd and Aynmoss Pty Ltd. The chief executive of these companies was Mr Bruce Doyle. The group of companies can conveniently be referred to as the "Doyle Group". On 19 December 1988 Uptown entered into 2 UNREPORTED JUDGMENTS agreements with the appellants BLM and Sabrack to establish a joint venture in relation to the development of the property and the subsequent conduct of the hotel, restaurant and other businesses to be established there. The agreements included a contract for the sale by Uptown to BLM and Sabrack of a one half share as tenant in common in the property and a contract whereby a company selected by BLM and Sabrack and approved by Uptown would manage the businesses on terms set out or to be established. BLM and Sabrack were companies in what was described as the Cambridge Group controlled by the appellants Messrs Mathieson and McArthur. Concurrently with the negotiations leading to these agreements discussions took place with the respondent directed to the provision of finance to reimburse the purchase price and fund the developments works. In the result the finance was provided to Uptown with guarantees from the Doyle Group side of the venture and the guarantee with which we are concerned from the appellants. TERMS OF THE FACILITY By a letter dated 16 December 1988 ('the first letter") the respondent offered Uptown a facility, by way of revolving commercial bill discount, of up to A$12,600,000 to be utilised to assist with the redevelopment of the property and to expire on 30 September 1989. Included against the side heading "SECURITY and CONDITIONS PRECEDENT" was the following "Receipt of the following securities, in form and substance satisfactory to the Bank in its absolute discretion are [sic] a condition precedent to any drawing on this facility: - All Obligations Joint and Several Guarantee of: * BT Doyle * DB Doyle * Kylsend Pty Ltd * Aymnest Pty Ltd * Dydolin Pty Ltd * Desegi Pty Ltd * Aynmoss Pty Ltd - Cross collateralized Security in the names of the above guarantors as per Letter of Offer dated 16 December 1988 for the Doyle Group. - Joint and Several Guarantee for $8.0 million (Eight million Australian Dollars) of: BL Mathieson BLM Holdings Pty Ltd as trustee for the Mathieson No 2 Family Trust G McArthur Subrack [sic] Pty Ltd as trustee for the McArthur Family Trust" The letter of offer "dated 16 December 1988 for the Doyle Group" ("the second letter') offered a credit facility to Kylsend and provided that receipt of "the following securities, in form and substance satisfactory to the Bank in its absolute discretion are [sic] a condition precedent to any drawing on this facility: (ii) First Registered Mortgage over the following properties together with comprehensive insurance with Bank's interest noted and Registered Valuations by Bank Panel Valuer: - Kylsend Pty Ltd Caravan Park, Main Road, Anna Bay - Aymnest Pty Ltd Land, 34 Paling Street, Lilyfield - Desegi Pty Ltd URJ BLM HOLDINGS PTY LTD and ORS v BANK OF NEW ZEALAND (Sheller JA) 3 Hotel, 195 Parramatta Road, Flemington House, 3 Burton Street, Concord - Dydolin Pty Ltd Hotel, Rose Street, Chippendale House, 20 Ashcott Street, Kings Langley House, Michigan Avenue, Seven Hills - Aynmoss Pty Ltd Unit, 47/181 Clarence Street, Sydney Unit, 37/181 Clarence Street, Sydney - BT Doyle Commercial property, 134 Blues Point Road, McMahons Point" It is significant for present purposes that referred to in the list of "cross collateralized" security, receipt of which was a condition precedent to any drawing on the facility, were mortgages together with "comprehensive insurance with Bank's interest noted". One such was a mortgage of the hotel of Desegi Pty Ltd at 195 Parramatta Road, Flemington ('the Desegi hotel'). Between 23 December 1988 and 6 March 1989 $6,986,793 was advanced to Uptown by the respondent. The first bills were drawn by Uptown and accepted by the bank on 6 March 1989 to a face value of $6,900,000. THE GUARANTEE The guarantee given by the appellants was on the respondent's printed form of guarantee. CL1 of the printed form although expressed in lengthy terms essentially guaranteed "all moneys" owing or remaining unpaid to the respondent by Uptown. The printed form contained clauses designed to preserve the guarantee or constitute an independent obligation to repay in various events which might otherwise have terminated the guarantee. CL7 provided that so far as the guarantor was concerned the respondent should be under no obligation whatever to take any security or to register any mortgage, agreement to mortgage, letter of lien, transfer of shares or any other instrument or security which the respondent might hold or might thereafter take irrespective of the moneys thereby guaranteed or any part thereof or to lodge any caveat or to give any notice in respect thereof or to keep alive any policy of insurance or the subject matter of any security or to require any mortgage or other document to be executed pursuant to any agreement or instrument or to otherwise perfect or to give effect to any security further or otherwise than as and when the bank might in its own discretion for its own protection think fit and no delay or omission on the part of the bank so to do nor any loss arising from such delay or omission should prejudice or affect the liability of the guarantor under the guarantee. CL15 provided: "As a separate and independent stipulation (but without increasing the total amount recoverable from the guarantor hereunder) the guarantor hereby agrees and declares that all sums of money which may not be recoverable from the guarantor or any of them if more than one on the footing of a guarantee whether by reason of any legal limitation disability or incapacity on or of the principal debtor or any other fact or circumstance and whether known to the Bank or not shall nevertheless be recoverable from the guarantor as sole or principal debtor in respect thereof and shall be repaid by the guarantor on demand together with interest at the rate or rates aforesaid from the date of demand until repayment." CL19 provided that the guarantee should be security for the whole of the moneys thereby guaranteed but so nevertheless that the guarantor should not be liable either jointly or severally by reason of the guarantee to pay to the bank 4 UNREPORTED JUDGMENTS more than the total sum of $8 million. CL22 provided that the guarantee was not subject to the bank taking any other guarantee nor to any other condition precedent whatever. At the end of the printed form was typed the following CL28: "Notwithstanding the provisions of CL1 of this guarantee it is expressly agreed and declared that the liability of the guarantor hereunder is restricted to and remains in full force and effect only in respect of monies advanced to the principal debtor by the Bank pursuant to and in accordance with the terms of the facility evidenced by letter from Bank of New Zealand to the debtor dated 16th December 1988." DEPARTURES FROM TERMS OF THE FACILITY The moneys advanced to Uptown were not repaid and the respondent demanded payment from the appellants as guarantors. Before Giles J the appellants resisted this claim on the ground that the advances made to Uptown were not made as required by CL28 "pursuant to and in accordance with the facility evidenced by the letter from Bank of New Zealand to the debtor dated 16 December 1988". At first instance the appellants relied upon several departures from the terms of the facility. Most of these Giles J rejected and his judgment in this respect is not challenged. He did however find that the mortgage of the Desegi hotel was not received until 19 January 1990, that is after the first draw down under the facility, and that, since receipt of the mortgage was a condition precedent to any draw down, there was a departure from the terms of the facility. Giles J held there was a further departure from the terms of the facility in that no compulsory insurance noting BNZ's interest was obtained over some of the properties listed in the second letter. Giles J rejected an argument that comprehensive insurance was not security and hence not part of the cross collateralized security called for. He also rejected an argument "that in any event the 'form and substance' was satisfactory to (the respondent), when one of the elements of the cross collateralized security was not present at all. " CL28 Even though Giles J found there had been the departures to which I have referred he construed CL28 as doing no more than identifying the facility in question and as not requiring, as the appellants argued, strict compliance with the terms of the facility. The appellants submitted that they undertook liability under the guarantee only in respect of those advances made after everything stipulated in the letter of 16 December 1988 had been fulfilled. In large part the outcome of this appeal turns upon the meaning of CL28. The language is plain. The guarantor's liability is restricted to moneys advanced to Uptown by the bank "pursuant to and in accordance with the terms of the facility evidenced by the letter" dated 16 December 1988. The facility so evidenced stated that receipt of the "cross collateralized security" was "a condition precedent to any drawing" on the facility. The question whether the condition precedent was satisfied is answered by determining whether what happened accorded with what the condition required. It is meaningless to speak of a substantial performance of a condition precedent; see generally Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 at 70SE per Samuels JA. The condition has either been performed or it has not. Of course, properly construed, performance of a condition precedent may involve less than the exact performance the words at first sight suggest; compare Bowes v Chaleyer (1923) 32 CLR 159 at 167 and 168, 187 and 193; Luna Park (NSW) Ltd v Tramways Advertising (1938) 61 CLR 286 at 304 and the learned article by Professor J W URJ BLM HOLDINGS PTY LTD and ORS v BANK OF NEW ZEALAND (Sheller JA) 5 Carter, Conditions and Conditions Precedent, 4 JCL 90 at 101. But even the most generous construction could not here impose upon the respondent an obligation, in accordance with the facility evidenced by the first letter, to advance money to Uptown before receipt of the cross collateralized security. Part of the cross collateralized security was a first registered mortgage over the Desegi hotel and part other mortgages "together with comprehensive insurance with Bank's interest noted". The mortgage over the Desegi hotel was not received when the facility was first drawn on and other securities received were not accompanied by comprehensive insurance with the respondent's interest noted. Accordingly the moneys advanced by the respondent to the principal debtor were not advanced "in accordance with the terms of the facility evidenced by" the first letter. Hence they were not moneys within the restricted ambit of moneys the repayment of which the appellants guaranteed. The respondent lent Uptown no moneys to the repayment of which the guarantee applied. The respondent argued that in the context of the guarantee and the circumstances in which it was entered upon the language of CL28 should not receive this plain meaning. It said that the purpose of CL28 was to ensure that the guarantee given by the appellants was quarantined from the more extensive liability for loans made to Uptown under other arrangements. The guarantee was limited to advances "under" the facility evidenced by the first letter. CL28 was said to identify or describe the source of the obligation for which the appellants were assuming liability. The clause did not incorporate into the guarantee all of the stipulations in the first letter. In substance Giles J accepted this argument. In aid of it the respondent referred to the clauses in the guarantee which showed, it argued, that it was free to depart from the terms of the first letter. The respondent placed particular reliance upon CL7 and CL22. It was pointed out that CL28 expressly by the phrase "notwithstanding the provisions of clause I of this guarantee" overrides or replaces only clause I in so far as that clause is inconsistent with it. Thus it was said that CL28 must be read as subject to the provision that the bank was under no obligation to take any security and that the guarantee was not subject to any other condition precedent. But these clauses are in the printed form of an all moneys guarantee which may or may not be limited in amount. They are not in any way concerned to define or indicate the moneys repayment of which is guaranteed. CL28 is directed to just that. The problem with the respondent's argument is that it effectively reads the words "and in accordance with" out of CL28. With respect the respondent's written submission, "that the true inquiry as to the liability of (the appellants) is whether the advances made by (the respondent) were advances under the particular facility granted" (my emphasis) is to substitute a word of different connotation to the phrase used. This points up the flaw in the argument. The inquiry is whether the moneys were advanced to Uptown by the respondent "pursuant to and in accordance with the terms of the facility evidenced" by the first letter. The respondent argued that it would be incongruous to conclude that the parties intended that the respondent's entitlement under the guarantee should be conditional upon anterior punctilious performance of the conditions of the first letter. As Giles J put it: "It would make little commercial sense that, as the argument for the Cambridge guarantors required, they would not be liable if (say) Kylsend failed to mortgage its property prior to any advances made by BNZ to Uptown under 6 UNREPORTED JUDGMENTS the facility, but would be liable if there were no such departure and would remain liable notwithstanding that BNZ immediately discharged the mortgage". With all respect I think these arguments overlook the central thrust of the appellants' case. The first task is to identify the moneys the repayment of which the appellants guaranteed. If no moneys were advanced to which the guarantee applied it is beside the point to examine the effect upon the guarantor's obligations of a failure by the respondent to comply with the terms of the guarantee. If the moneys advanced were not advanced "pursuant to" the facility evidenced by the first letter and a claim were made against the guarantors arising out of the debtor's failure to repay those moneys the answer to such claim would be that the guarantee had no application. Similarly if, as it seems to me is the present case, the moneys were not advanced "in accordance with" the facility evidenced by the first letter the guarantee does not apply and the respondent's claim against the appellants fails. A variation or waiver by the respondent of the terms of the facility and the effect of this upon the obligations under the guarantee are quite irrelevant if no moneys were lent to which the guarantee applied. As a matter of language in the present case, in my opinion, the moneys lent to Uptown for which claim is now made against the appellants under the guarantee were not moneys to which the guarantee applied. Moreover I am not persuaded that there was any want of commercial sense in a strict construction. Assuming that, consistent with the continuance of the guarantee, a mortgage received prior to the first draw down could be discharged immediately thereafter such a chain of events seems unlikely. The insistence upon the receipt of security prior to any draw down is obviously to protect the lender. It is unlikely that the lender having obtained this protection would cast it aside at least in the absence of a comparable replacement. For like reason the receipt of security before draw down also protects the guarantor, which might ultimately need to have recourse to the security. While no doubt it is possible that the mortgage may be discharged later, the guarantor's position is stronger if at least the lender must insist upon obtaining security before any loan is made. I do not regard considerations such as these as sufficient to override the meaning of the language used. In addition to the matters to which Giles J referred in preferring the construction of CL28 for which the respondent contended, the respondent relied upon oral and written communications between its solicitor, Mr Williams, and Mr Patten, the solicitor for the Cambridge Group, in which Mr Williams was told by Mr Patten that if the standard form was to be used "I am concerned that my clients' liability under those guarantees be limited to this facility and not include any other indebtedness or facilities of Uptown". Mr Patten asked Mr Williams to obtain instructions. When Mr Williams sent the standard form of guarantee to Mr Patten his covering letter of 16 December 1988 included the proposal ".. that an additional CL28 be added to that Guarantee providing that notwithstanding the provisions of CLI relating to the monies secured thereby, the Bank and the guarantor agree that the Guarantee is security for and remains in full force and effect in respect of monies advanced to the principal debtor pursuant to this specific facility." Mr Patten responded by a letter of the same date which included "We have not seen the facility letter in its final form as issued by your client but we suggest that the additional CL28 proposed by you might be in the following terms.. " URJ BLM HOLDINGS PTY LTD and ORS v BANK OF NEW ZEALAND (Sheller JA) 7 There then followed, apart from the date of the letter, what became CL28. Giles J said that so far as the evidence showed, Mr Williams simply adopted Mr Patten's wording. While in a sense few if any English words have a plain meaning (see Manufacturers Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cas 60 - 853 at 75,343 per McHugh JA (as he then was); Sola Basic Australia Ltd v Morganite Ceramic Fibres Pty Ltd (unreported) Court of Appeal 11 May 1989 per Priestley JA and Trawl Industries v Effem Foods Pty Ltd (1992) 27 NSWLR 326 at 358 and 359 per Clarke JA) and accordingly words ordinarily need to be read in the context of their surrounding circumstances, the evidence is here relied upon to cast doubt upon the plain meaning of the language by taking account of communications between the parties' solicitors as part of the process of negotiating the terms of the guarantee. In Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352 Mason J, as he then was, said that in so far as prior negotiations consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. "The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parole evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification." I do not think that the interchanges between Mr Williams and Mr Patten are available to assist in the construction of CL28. In any event the proposal by Mr Williams in his letter of 16 December 1988 which used only the phrase "pursuant to" was amended by Mr Patten in his letter in reply of the same date to add the phrase "and in accordance with". Clearly the appellants did not accept, unqualified, a phrase consistent with the construction the respondent seeks to put upon the clause. NOTICE OF CONTENTION Departures The respondent contended that comprehensive insurance was not a security the receipt of which was a condition precedent to any drawing on the facility and that in any event the form and substance of the security had only to be to the satisfaction of the respondent "'in its absolute discretion". I do not think that the word "securities" or "security" in the expressions "Receipt of the following securities" or "cross collateralized security" in the first letter should be read so narrowly as not to require the receipt together with a first registered mortgage of comprehensive insurance with the respondent's interest noted. It was agreed by the parties that an appropriate definition of "comprehensive insurance" is that found in the Macquarie Dictionary namely "a form of insurance covering all instances in which the insured asset or property may be lost". In my opinion in the context of the language of the first letter this was part of the security as it was described. A registered mortgage unaccompanied by such insurance is a different and lesser security. The only argument advanced to deal with the departure created by the non receipt prior to the first draw down of the mortgage of the Desegi hotel was that this variation or waiver was catered for by clauses such as CL7 and CL22. For reasons that I have given these clauses are not relevant to the critical determination of whether the money lent was money to the repayment of which the guarantee applied. 8 UNREPORTED JUDGMENTS CLIS Alternatively the respondent sought to rely upon CL15 of the guarantee to say that insofar as the amount claimed by the respondent pursuant to its terms was not recoverable from the appellants on the footing of a guarantee the appellants were liable to the respondent as sole and principal debtors. This argument, in my opinion, fails for the same reason. CL15 did not apply to the moneys lent to Uptown because they had not been lent in accordance with the terms of the facility evidenced by the first letter. CONCLUSION I would propose the following orders: 1. Appeal allowed; 2. The judgment of Giles J in proceedings No 50684 of 1991 set aside; 3. In lieu thereof order that the proceedings be dismissed; 4. The respondent to pay the appellants' costs of the appeal and the hearing of those proceedings at first instance; 5. If qualified the respondent to have a certificate under the Suitors' Fund Act. O'Keefe CJ I have read the draft judgment of Sheller JA and agree with the orders proposed by him and with his reasons for such orders. Appeal allowed; The judgment of Giles J in proceedings No 50684 of 1991 set aside; In lieu thereof order that the proceedings be dismissed; The respondent to pay the appellants' costs of the appeal and the hearing of those proceedings at first instance; 5. If qualified the respondent to have a certificate under the Suitors' Fund Act 1951. RYN Counsel for the Appellant: AJ Myers QC/NC Hutley Instructed by: Laurence and Laurence Counsel for the Respondent: BA Coles QC/CRC Newlinds Instructed by: Kemp Strang and Chippindall