WATT v STATE BANK OF NEW SOUTH WALES SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CLARKE, SHELLER and POWELL JJA 9 March 1994, 17 March 1994 [1994] NSWCA 339 GUARANTEE — drawdown, construction of facility agreement; whether the exercise of the bank's discretion thereunder frees guarantors from their obligation The appellant and P A Page (who did not appeal) agreed to guarantee loans made to Wysdo Pty Ltd (Wysdo) by the respondent for the purpose of purchasing and developing certain land. The appellant's argument centred on a construction of cl6.1(g) and cl6.1(h) of a facility agreement between Wysdo and the respondent which, the appellant argued, obligated the respondent to withhold the agreed drawdown facility until exchanged contracts of sale and deposit moneys for residential units being constructed on the land were received by the company and deposited with the bank. The appellant submitted that as a consequence of the respondent's failure to receive such documentation as was required in cl6.1(g) and cl6.1(h) of the facility agreement before permitting a drawdown, the appellant's obligation under the separate guarantee to pay the respondent was discharged. Held: The meaning of cl6.1(g) and cl6.1(h) was tolerably clear. The documentation was to be received by the respondent in form and substance satisfactory to it "prior to the first or subsequent drawdown at the Lender's discretion". Thus if the material or some of it was not received before the first drawdown, the respondent might, in its discretion, make an amount available although not obliged to do so. The obligation and discretion remained the same as each drawdown was requested. The decision of the trial judge was upheld and the appeal was dismissed with costs. Clarke JA I agree with Sheller JA. Sheller JA Oswald Gilchrist Watt appeals from a decision of Cole J of 27 October 1993. His Honour gave judgment that the appellant and Peter Armstrong Page (P A Page), the first defendant, pay the respondent, State Bank of New South Wales, $2 million and adjudged that the respondent have possession of land known as 53 Hunter Street, Hornsby of which the appellant was registered proprietor. P A Page has not appealed. The appellant was a long time friend and associate of the Page family, members of which controlled Wysdo Pty Ltd ("Wysdo"), which had been engaged over the years in various development projects. The appellant had, before his admission to the Bar in 1984, been a builder and assisted Wysdo and other members of the Page family in relation to building matters. Wysdo had agreed to purchase some land at Palm Beach in Queensland (the subject land) for development by the construction of twenty-six residential units. On 30 September 1988 a deed was entered into between the appellant's company, O G Watt Pty Ltd, and Wysdo for the provision to Wysdo of consultancy services by the appellant. Wysdo agreed to follow the appellant's directions in relation to the construction of the project works and as to the payment of money in connection with the purchase of the subject land and payment for the construction work. O G Watt Pty Ltd also agreed that the appellant would give a guarantee to the lender of the money for the purchase of the subject land and for the construction of the project and a second mortgage over the property at 53 Hunter Street as 2 UNREPORTED JUDGMENTS security for the loan for the construction of the project. In return for the provision of consultancy services and the giving by the appellant of the guarantee and mortgage, O G Watt Pty Ltd was to receive half the net profits. To purchase the subject land, Wysdo borrowed $1.1 million from the respondent by means of a commercial bill facility. In addition to various other securities the respondent took an "all moneys" second mortgage dated 30 September 1988 over 53 Hunter Street. The mortgage contained a personal covenant by the appellant to repay advances made or to be made to him or to Wysdo. The mortgage and personal covenant obliged the appellant to repay to the bank both the $1.1 million lent to enable purchase of the subject land and any subsequent advances made to Wysdo. In early 1989 Wysdo sought an additional facility from the respondent in the sum of $4.707 million. Approval for that advance was given by the bank by letter dated 6 March 1988. The security required by the respondent included the second mortgage over the appellant's land at 53 Hunter Street. The facility agreement between Wysdo and the respondent to which PA Page, JS Page and the appellant were parties as guarantors of the Wysdo debt, although dated 31 March 1989, was not signed until 10 May 1989. On that date the appellant and the Messrs Page signed a separate guarantee and the appellant signed an acknowledgment and consent of guarantor. By the facility agreement the respondent agreed to make available to Wysdo the facility in an amount or amounts up to the aggregate Commitment Limit of $4.707 million subject to the terms and conditions of the agreement, or such other amount as the respondent might in its discretion determine. The Advance Facility was so much of the amount of the Commitment Limit as was granted by the respondent to Wysdo. The securities for the loan included all those previously taken. Wysdo agreed to repay to the respondent the "Outstanding Amount" on the "Termination Date". "Outstanding Amount" was defined to mean "the Advance Amount together with interest and any other money due and payable (whether contingent or otherwise) under this Agreement and the Securities". The effect of the clause was to require Wysdo to repay to the respondent both the $1.1 million previously borrowed as well as the $4.707 million borrowed under the facility agreement. The facility agreement contained a Construction Drawdown Procedure (cl3.2) which required that Wysdo when drawing the facility should give to the respondent a Drawdown Notice (cl3.1). The drawdown procedure was set in train by the builder submitting to Wysdo or the architect a claim for a progress payment pursuant to the building contract. If the procedures were followed the respondent ultimately became obliged to make available the facility or the undrawn portion thereof from time to time pursuant to the Drawdown Notice (cl3.3). The separate guarantee signed by the appellant was in unqualified terms. Under it the appellant guaranteed to pay to the respondent on demand "the moneys hereby secured" which included "All the moneys now or hereafter to become owing (contingently or otherwise) or payable to the (respondent) by (Wysdo) on any account whatsoever'. The appellant's pivotal argument in this appeal depended on a particular construction of cl6.1 of the facility agreement. The material parts of that clause were as follows: "6.1 The obligations of the Lender under this Agreement, to make the Facility available to the Borrower are conditional upon the receipt by the Lender in form and substance satisfactory to the Lender prior to the first or subsequent drawdown at the Lender's discretion:- URJ WATT v STATE BANK OF NEW SOUTH WALES (Sheller JA) 3 (g) evidence of duly executed and exchanged Contracts for Sale (which are conditional only upon building and development applications being approved and Building Units plan being registered) demonstrating the sale of such number of residential units comprised in the Project as will yield a total purchase price of $5,807,000.00. (h) the deposit moneys (being 10% of the purchase price) payable to the Borrower under the Contracts for Sale referred to in 6.1(g) being deposited with the Lender. " At least one drawdown occurred before any contracts for sale of units were exchanged or deposit moneys deposited with the respondent. The appellant said that he was unaware that this was the position until he learnt of it on 13 June 1989. The appellant submitted that as a consequence of the respondent's permitting a drawdown without evidence of duly executed and exchanged contracts for sale demonstrating the sale of such number of residential units comprised in the project as would yield a total purchase price of $5.807 million and without deposit moneys (being 10% of the purchase price) payable to Wysdo under the contracts for sale referred to in para(g) being deposited with the respondent, the appellant's obligation under the separate guarantee to pay the respondent was discharged. The appellant submitted that cl6.1 should be construed to mean that the respondent could not lend money to Wysdo pursuant to the facility agreement until such time as evidence of duly executed and exchanged contracts for sale to the value stipulated had been received by and the 10% deposit moneys deposited with the respondent. Such a construction of the clause was not pressed upon Cole J who noted in his judgment that senior counsel for the appellant accepted that cl6.1 did not impose any obligation upon the bank to lend only if the contracts and deposits referred to were evidenced and received. Counsel accepted that the respondent was entitled to lend to Wysdo even though the contracts were not evidenced and the deposit not received. The argument before Cole J was that notwithstanding that entitlement of the respondent to lend in disregard of the receipt of the contemplated evidence and deposits, if it did so, the guarantor was thereby discharged. In my opinion the meaning of cl6.1(g) and cl6.1(h) is tolerably clear. The facility agreement contemplated that the amount to be lent would be made available by a series of drawdowns. Cl6.1 made the obligation of the respondent under the agreement to make available the facility in amounts up to the aggregate of the Commitment Limit conditional upon the receipt of the material listed in the lettered paragraphs of the clause. The material was diverse and included Wysdo's Memorandum and Articles of Association, necessary licences, permits, approvals and authorisations for the construction of the project and evidence that all insurances had been effected as required by the agreement, the securities and the building contract. The material was to be received by the respondent in form and substance satisfactory to it "prior to the first or subsequent drawdown at the Lender's discretion". Thus if the material or some of it was not received before the first drawdown, the respondent might in its discretion make an amount available on the Drawdown Notice although not obliged to do so. If the material or some of it was not received when the next drawdown notice was given, once again the respondent was under no obligation to make any further amount available until the material was received 4 UNREPORTED JUDGMENTS but once again had a discretion to make an amount available. The obligation and discretion remained the same as each drawdown was requested. This is what the language used meant and the meaning was commercially sensible. It would be absurd if the whole project could have been held up because a particular material had not been received when a drawdown for a progress payment was sought and even more absurd if the result of the respondent's meeting the drawdown request was that its protection under the guarantee was lost. Faced with this flaw in what I would regard as a strained and far-fetched construction of cl6.1, the appellant submitted that the clause obliged the respondent not to meet the final request for drawdown until all the material listed in cl6.1 had been received. There is nothing in the language which would support this submission. In my opinion the argument that cl6.1 imposed the obligation upon the respondent formulated by the appellant fails. The appellant conceded that if this argument failed the appeal fails. I think it appropriate, however, to say something further about the appeal. As Ihave said the pivotal argument was not one put to Cole J. His Honour regarded the appellant's argument before him that the guarantee was discharged by the respondent's lending without receiving the contemplated evidence and deposits as defeated by cl6 of the separate guarantee. C16, so far as material, provided that the respondent might at any time grant to Wysdo in respect of the moneys secured by the guarantee any time or consideration or other indulgence without discharging, satisfying or affecting the liability of the guarantors under the guarantee. I do not understand how the argument was put to Cole J. On a proper construction of cl6.1 of the facility agreement the respondent had a discretion to lend even though evidence of the contracts and the deposits had not been received. This was part of the agreement to which the appellant was a party. The respondent exercised its discretion in accordance with the facility agreement. There was no variation of the agreement. The respondent did not waive compliance with its terms. There was no need to have recourse to cl6 of the separate guarantee. The respondent was exercising a discretion under the contract and not granting Wysdo an indulgence; perhaps it was for these reasons that this argument was not pressed in the oral submissions before us. In the course of his oral submissions, counsel for the appellant referred to evidence of assurances given by officers of the respondent to the appellant that moneys would not be lent until contracts to the value of $5.807 million satisfactory to the respondent's solicitors had been sighted. Cole J said that he was satisfied that the appellant did not rely on any alleged representation to him that the respondent would not advance moneys to Wysdo without sighting exchanged contracts and receiving deposits. Nothing has been said to undermine this conclusion. The appellant submitted that he did not know that evidence of such contracts and the deposits had not been received by the respondent until 13 June 1989. Cole J found that at the time of the first request for a drawdown on 22 March 1989 and of the second request on 26 April 1989 the appellant was aware that contracts had not been exchanged in the sum of $5.807 million. Again no reason is shown to disturb this finding. To it should be added the concession that by 13 June 1989 the appellant was aware that no contracts had been exchanged and no deposits received and yet stood by while the respondent continued to make substantial advances under the facility agreement. The orders made by Cole J were entirely justified. In my opinion the appeal has no merit and should be dismissed with costs. Powell JA I agree with Sheller JA. URJ WATT v STATE BANK OF NEW SOUTH WALES (Powell JA) Appeal dismissed with costs. Counsel for the Appellant: A T McInnes QC/I R Sanderson Counsel for the Respondent: M R Aldridge Solicitor for the Appellant: Bradfield & Scott Solicitor for the Respondent: Gordon & Johnstone