New South Wales District Court CITATION: Roadhound Electronics Pty Ltd No 1 v Cheihk [2006] NSWDC 144 HEARING DATE(S): 27 November 2006 EX TEMPORE JUDGMENT DATE : 11/28/2006 JURISDICTION: Civil JUDGMENT OF: Sidis DCJ DECISION: Matter adjourned to allow parties to address on issue of service of notice of demand. CATCHWORDS: Guarantee of trading account - Notice of demand as precondition to recovery action. CASES CITED: Bond v Hong Kong Bank of Australia Limited (1991) 25 NSWLR 286, Bradford Old Bank Limited v Sutcliffe [1918] KB 833, O'Day v All States Leasing System WA Pty Ltd (1983) 152 CLR 35 PARTIES: Roadhound Electronics Pty Ltd Anthony Cheihk FILE NUMBER(S): Newcastle 1124/01 COUNSEL: Plaintiff - P S Brahm Defendant - K G Odgers SOLICITORS: Plaintiff - Turnbull Hill Lawyers Defendant - Edwin Davey Commercial & Litigation Lawyers JUDGMENT HER HONOUR: 1 In this matter the plaintiff, Roadhound Electronics Pty Limited claims against Mr Cheihk the sum of $576,176.30. This sum represents amounts claimed to be owing to Roadhound for goods sold to Mobile Tron Pty Limited and for a service fee applied to Mobile Tron's account in accordance with the credit agreement entered into between Roadhound and Mobile Tron. 2 The claim is made against Mr Cheihk as guarantor of Mobile Tron's obligations to Roadhound under their trading arrangements. 3 The issues for determination in the proceedings were as follows: 1. Whether the goods were in fact supplied to Mobile Tron or to another related company named Nobull Fones Pty Limited. 2. Whether the terms of the guarantee and indemnity required that a demand be made on Mr Cheihk before a cause of action arose and whether a demand was in fact made. 3. Whether the account service fee applied to overdue amounts was a true pre-estimate of the loss or damage likely to be suffered by Roadhound in the event of default by Mobile Tron. If so, what amount would be reasonable to compensate Roadhound for delays in payment. 4. Whether the terms of credit extended by Roadhound to Mobile Tron allowed for the account service fee of 1.5 per cent, per month to be added in a compounding fashion. Issue 1: to whom were the goods supplied? 4 The credit application form and credit agreement was signed on 30 May 2000. The documents were entered into in the name of Mobile Tron Pty Limited trading as Nobull Fones. The Australian Company Number of Mobile Tron was handwritten into the credit application form by Mr Cheihk. The documents were signed by Mr Cheihk and by Mr Saab as directors of Mobile Tron. I was left in no doubt that Mr Cheihk was aware that Mobile Tron was entering into this arrangement and not Nobull Fones Pty Limited. 5 On 11 September 2000 Roadhound forwarded a letter to Mobile Tron trading as Nobull Fones confirming that its application for credit had been approved and allocating account number 12800. 6 Documents exhibited to the affidavit of Mr Cook, the credit manager for Roadhound, indicated that a series of transactions took place. The documentary evidence in each case comprised: 1. A purchase order printed with the name of Mobile Tron and an address at 1/53 Stanley Street, Bankstown. The same name and address were specified in the purchase order for shipping purposes. 2. A sales order with a reference number which matched that handwritten on the order form. 3. An invoice addressed to Nobull Fones bearing account number 12800 and the relevant sales order number. 7 The defence to the claim was that the goods referred in these transactions were not supplied to Mobile Tron but to Nobull Fones Pty Limited, a company trading from 53 Stanley Street, of which Mr Cheihk and Mr Saab were also directors. 8 In his affidavit and in evidence Mr Cheihk stated that Mobile Tron traded from Blacktown. The company trading from Bankstown he said and the company which purchased the goods was Nobull Fones Pty Limited. Not having guaranteed the obligations of Nobull Fones Pty Limited, Mr Cheihk said he was not liable for its debts. 9 There were a number of problems with this contention. 10 Firstly, the orders were clearly and distinctly placed by Mobile Tron. They specified Mobile Tron's address as the Bankstown address that Mr Cheihk said belonged to Nobull Fones Pty Limited. The invoices were issued to Nobull Fones on Mobile Tron's account. It was not contended by Mr Cheihk that the invoices were issued on an incorrect account. 11 Significantly, the evidence indicated that Nobull Fones Pty Limited was registered with the Australian Securities and Investments Commission on 7 April 2000, nearly two months before Mobile Tron and its directors signed the credit application and credit agreement with Roadhound. Mr Cheihk did not explain why, if indeed it was intended that Nobull Fones Pty Limited be the company in the group to transact business under that name, Mobile Tron was representing that it traded as Nobull Fones two months after the company bearing that name had been registered. 12 The documentary evidence of the order forms and invoices with the account number and sales order number persuades me that the goods were in fact purchased by Mobile Tron. For these reasons this basis for defence fails. Issue 2: was a formal demand necessary? 13 Mr Cheihk did not deny that he guaranteed Mobile Tron's obligations to Roadhound. He contended that clause 1 of the guarantee required that a demand be made before any cause of action arose in respect of which recovery proceedings could be commenced. 14 In this respect Roadhound's solicitor, Mr Woodward provided evidence that a letter of demand was written by his firm to Mr Cheihk on 21 August 2001. It was addressed to him at 21 Sturt Avenue, Georges Hall. Mr Woodward was called for cross-examination in respect of this evidence to suggest that it was unreliable as to whether the letter was in fact posted or received. Mr Woodward's evidence was based on the general practice adopted by his firm for the despatch of mail, there being no evidence to suggest other than that the general practice was adopted in this case. The evidence concerning the despatch of the letter is accepted. 15 Mr Cheihk stated that he moved from this address to Bankstown in 1999. 16 I have some scepticism about this evidence because the documents filed with the Australian Securities and Investments Commission in April 1999, upon registration of Mobile Tron, showed his address at 21 Sturt Avenue. The same address was nominated on registration of Nobull Fones Pty Limited in April 2000. Mr Cheihk said that this was an error by his accountant who had completed the forms. He conceded that he had in fact signed those forms as a director of Nobull Fones Pty Limited. 17 In any event, Mr Cheihk claimed that he moved to Brisbane in April 2001 and that his mail was forwarded to him from his then Blacktown address for a period of three months. Thus, it was contended that he would not have received the letter of demand even if it had reached its destination at 21 Sturt Avenue and even if he had continued to reside there. 18 I note that Mr Cheihk dated his move to Brisbane as coinciding with the time at which Mobile Tron and Nobull Fones Pty Limited ceased to trade. The records of the Australian Securities and Investments Commission in evidence indicated that those companies continued to trade until October 2001. 19 There are two issues that arise out of this evidence. The first is whether it was necessary for any demand to have been served in accordance with the terms of the guarantee itself and secondly, whether it was necessary that Mr Cheihk be personally served. 20 Mr Cheihk relied upon the authority of Bradford Old Bank Limited & Sutcliffe [1918] 2 KB 833 at 848 and 849 where Lord Justice Scrutton in differentiating between a present debt, where an express demand is unnecessary, and a collateral promise said: The promise of a surety to pay on demand if his principal does not appears to me to be a collateral promise. In such circumstances he said it was necessary for the creditor to prove that there had been a real demand for payment. 21 Also relied upon was the authority of Bond v Hong Kong Bank of Australia Limited (1991) 25 NSWLR 286. In my view this was a decision that was not on point. In that case it was not argued that a demand was not necessary. The argument went to whether the notice had been served in accordance with the provisions of the guarantee. 22 For the plaintiff it was argued that clause 1 of the guarantee and indemnity signed by Mr Cheihk on 30 May 2000 contained two separate and distinct promises. The first of those read as follows: The guarantor unconditionally guarantees to the beneficiary (Roadhound) the due and punctual performance by the debtor of all of the debtor's obligations under each and every agreement including the payment by the debtor of all monies payable under each and every agreement. The second read: The guarantor promises to pay the beneficiary on demand or monies which the debtor defaults in paying under the agreement. 23 I do not accept this argument on the part of the plaintiff. In my view clause 1 of the form of guarantee and indemnity must be read as a whole with the second part of the clause being a consequence of the failure by the debtor to perform its obligations to the beneficiary. 24 The plaintiff also relied upon clause 2 of the document which is expressed to be a separate and independent severable agreement under which the guarantor agrees, as a primary obligation, to indemnify the beneficiary in respect of amounts which the beneficiary would have been entitled to recover from the debtor. The problem that the plaintiff faced with this argument was that it was not pleaded and notwithstanding its submissions to the effect that I should infer such a pleading, in my view, the amount claimed and the consequences to both parties of these proceedings are of such significance that a specific pleading was required. 25 There is a third issue which was not directly addressed by the parties to me in the course of argument when the matter came on for hearing on 27 November 2006. The third argument is the question of whether or not the demand was in fact served in accordance with the requirements of the document. The document does not provide for written notice. It simply requires that the promise to pay be performed on demand. 26 Clause 8 of the document provides that any demand may be made by the beneficiary at the address set out in item 3, that was the Bankstown address, or at such other address as may have been notified in writing to the beneficiary. Roadhound relied upon the address that was notified in writing to ASIC however, that being an address of Mr Cheihk on public record at the time the notice of demand was despatched. It appears to me that it may well be open to the plaintiff to argue that the notice of demand was served in accordance with the terms of the guarantee and that the fact that Mr Cheihk now claims that he did not receive it is immaterial to the question of whether a cause of action arose. 27 I leave that matter to one side for the time being. Issue 3: was the account service fee, a genuine pre-estimate? 28 In this respect the defendant relied upon O'Day v All States Leasing System WA Pty Limited (1983) 152 CLR 359. This decision was based upon facts that are substantially distinguishable from the current case. In this case the amounts to be applied to overdue accounts was 11/2 per cent per month, or 18 per cent per annum. It was argued that this well exceeded overdraft interest rates. There is no evidence of what overdraft interest rates were at the time of entry into these credit arrangements. However, I think I could take judicial notice of the fact that in 2000 overdraft interest rates were less than 18 per cent per annum. 29 This does not conclude the matter for the defendant. The onus was on the defendant to persuade me that 18 per cent was not only exorbitant but also not a commercial arrangement. This was a transaction between commercial trading entities entered into freely and there was no suggestion of any oppression of imbalance of power in terms of the negotiations between the parties. I do not know to what expense the plaintiff has been put by reason of the failure of the principal debtor to pay the amounts due, nor do I know what losses it might have suffered as a result of being kept out of its funds for such an extended period of time. 30 In the circumstances, this aspect of the defence fails. It is therefore not necessary to consider what might be an appropriate amount to compensate the plaintiff for the delay in the receipt of its funds. Issue 4: is Roadhound entitled to apply the service fee in a compounding fashion? 31 In my view, the terms of the agreement are such that a simple interest calculation is required, rather than a compounding calculation. This means that were I to enter judgment for the plaintiff the amount claimed would have to be recalculated. 32 Could I stand the matter over to say, 9.30 on Thursday? MORAN: Yes, that would be suitable, thank you your Honour. WALKER: Thank you your Honour. (Matter adjourned to allow parties to address on issue of service of notice of demand) ********* DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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