New South Wales Court of Appeal CITATION : Metal Manufacturers Pty Ltd v Group One Interiors Pty Ltd [1999] NSWCA 354 FILE NUMBER(S) : CA 40731/97 HEARING DATE(S) : 20 September 1999 JUDGMENT DATE : 20 September 1999 Metal Manufacturers Pty Ltd PARTIES : v Group One Interiors Pty Ltd JUDGMENT OF : Mason P at 1; Priestley JA at 38; Handley JA at 39 LOWER COURT JURISDICTION : District Court LOWER COURT FILE NUMBER(S) : DC 3843/97 LOWER COURT JUDICIAL OFFICER : Patten DCJ COUNSEL : A: CRC Newlinds, J Johnson R: J Simpkins SOLICITORS : A: Kemp Strang, Sydney R: Conway MacCallum, Sydney CATCHWORDS : CONTRACT - Interpretation of particular contract - Limits of actual authority as regards the operation of a credit account - Tripartite arrangement - Doubtful creditworthiness of subcontractor - Whether respondent's conduct by silence amounted to holding out of its subcontractor as its agent - No question of principle; State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170; Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 6 ACSR 464 DECISION : Appeal dismissed with costs IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40731/97 DC 3843/97 MASON P PRIESTLEY JA HANDLEY JA Monday, 20 September 1999 METAL MANUFACTURERS PTY LTD v GROUP ONE INTERIORS PTY LTD JUDGMENT 1 MASON P: Mr Newlinds has put the appellant's case well and at its highest but I am of the view that the appeal should be dismissed. 2 The appellant carries on business under the name of TLE Electrical. It is a wholesale distributor of electrical goods. The respondent is a builder. In 1995 it was using Exel Contractors Pty Limited (Exel) as a principal electrical subcontractor. For this purpose Exel needed a regular supply of electrical goods and equipment. Exel had a poor credit history with the appellant and its application for a credit account with the appellant in April 1995 was refused. 3 Mr Burghard of Exel again approached the appellant's representative, Mr de Wall. The latter suggested that Mr Burghard approach Group One Interiors, that is the respondent, to see if it would open a credit account for Exel to operate and pay. What was held out was the prospect of Exel getting its own credit account if it demonstrated a good record over a trial period. Mr de Wall indicated that with an account in the name of Group One, Exel would be given a limit of $20,000 per month. The limit would be reviewed monthly and if Exel failed in any of its monthly payments, then the credit would be cancelled. 4 During one of these conversations, Mr Burghard told Mr de Wall that basically all the work he was doing was for Group One Interiors. "They are prepared to open an account for me to use for my purchasing for their jobs." 5 Mr de Wall spoke to his superior, Mr Watchorn who instructed him to provide Mr Burghard with an application for credit. Mr Burghard then approached Mr Patterson, a director of the respondent. He asked the respondent to do him the favour and open the account in its own name for Exel to operate. Not surprisingly, Mr Patterson told him that he did not want Group One to be exposed to Exel's liability. Various "controls" were then discussed, including the credit limit of the account. Mr Patterson said "I will agree to $20,000 limit, but I want you to impress on TLE that should there be any change at all from the agreement that we have reached today then Group One must be notified and agree to it". 6 Mr Burghard then prepared a letter from Exel to the respondent reflecting these discussions and he gave a copy to Mr Patterson who received it without adverse comment. The letter which was dated 26 April 1995 provided: The Directors Group one Interiors Pty Ltd 51-53 Chandos Street St Leonards NSW 2065 ATTENTION: MR M PATTERSON/J HARE TLE CREDIT ACCOUNT Arrangements for the opening and running of a trading account with TLE Electrical include the following:- · TRADING COMPANY TLE Electrical Metal Manufacturers Limited 444 Gardeners Road ALEXANDRIA phone 669 2522 · SUPERVISING BRANCH TLE Electrical 65 Rerserve Road ARTARMON phone 437 5844 · ACCOUNT NAME Group One Interiors Pty Ltd · ACCOUNT TERM 30 days · ACCOUNT LIMITED As nominated by TLE or Group One · PAYMENT By Exel at last trading day of month when accounts are due · STATEMENTS AND CORRESPONDENCE All correspondence and statements to PO Box 90 Pymble NSW 2074 · PROOF OF PAYMENT Copy of statement and cheque to be submitted to Directors of Group One on the working day of month · ACCOUNT OPERATORS Directors of Group One or their representative T Burghard - Exel Contractors Pty Ltd N Munro - Exel Contractors Pty Ltd · GUARANTEE Excel Contracts give Group One the right to use monies due to Exel, for payment of the Trading Account, should that be necessary. · DURATION OF ACCOUNT Six month or, Any time before, at the total discretion of Group One · ORDERS On order form only Exel acknowledges that the operation of the Trading Account is a trusted privilege and can be withdrawn at any time without further notice. We agree to the above conditions. T Burhard Director 7 On about 11 May 1995 Mr Burghard showed a copy of the letter to Mr de Wall. 8 Pausing there, the facts recorded thus far show the initiative stemming from the appellant and Exel, each of whom had a real interest in enabling Exel to trade on credit terms. The facts also disclose that the parties were moving towards a tripartite arrangement in which the respondent would lend its credit by assuming a direct contractual relationship with the appellant but on terms designed to protect the respondent's position in relation to Exel which was known by all to have a shaky credit history. 9 It is equally clear that the creation of the letter of 26 April and the showing of it to the appellant was seen by all as part of the process for inducing the respondent to proceed and for protecting the respondent in relation to its due exposure to the appellant. 10 The appellant submits that the letter of 26 April 1995 represents the only way in which the respondent sought to protect itself, ie by the recourse it reserved against Exel. That strikes me as quite unrealistic. I draw the exact opposite inference. The Exel letter of 26 April 1995 was an integral part of the tripartite arrangement that was coming about. The showing of it to Mr de Wall was part of the process leading up to the appellant's willingness to deal with Exel and to supply on credit to the respondent goods intended for Exel's use. 11 When Mr Burghard showed the letter to Mr de Wall, he told the latter: Burghard: Group One have nominated a credit limit of $20,000. They want to be informed if there are any changes to that agreement (as I said that I pointed to the letter of 26 April 1995). de Wall: Don't worry about that, the office is very particular. Any alterations in the arrangements are notified immediately as a matter of course. TLE operates a very sophisticated system. 12 Mr de Wall then handed Mr Burghard an application for credit to take to the respondent to be completed by the respondent. The following conversation ensued between Messrs Burghard and Patterson: Burghard: TLE have agreed that all communications will be directed through my office. Would you please insert my address PO Box 90 Pymble. Group One need not worry. Patterson: Did you explain to TLE that I wanted to be advised of any hiccups? Burghard: I did. I told Peter de Wall that the amount of credit that you nominated was $20,000 and that you agreed to run the account for six months. Peter de Wall also assured me the problems will be notified and that the account would be cancelled if each month's accounts are not paid. Patterson: So Group One's exposure is limited. Burghard: Yes. Patterson: I'll have Exel's postal address inserted in the application but I'll have Group One's telephone number inserted in the application instead of Exel's. If there's a problem TLE will ring Group One direct. 13 The respondent completed the credit application form and it was returned to the appellant through Mr Burghard. The form nominated Group One Interiors Pty Ltd as the applicant and it provided that company's address and telephone number. It nominated PO Box 90 Pymble (Exel's postal address) as the address for invoices and statements. The form sought credit of $20,000 per month. This stipulation was obviously to be read in conjunction with one of the printed terms and conditions of credit notified on the form, namely that terms of payment were thirty days from the date of statement issued by the appellant. 14 The appellant responded to the application by letter dated 31 May 1995 which was addressed to the respondent but at PO Box 90 Pymble. The letter advised that a trading account had been opened in the name of Group One Interiors Pty Ltd. The letter stated: A credit limit of $30,000 as been allocated and is subject to review should this be necessary. 15 The letter signed by Ms Donnelly, the appellant's regional credit manager, confirmed that trading terms were strictly thirty days: that is payment by the last working day of the month following month of purchase. The letter was handed by Mr Burghard to Mr Patterson. At that time the following conversation ensued: Patterson: The credit limit which I nominated for Group One was $20,000. This sets the limit at $30,000. Burghard: I hadn't noticed that. Patterson: I can see now what it means. It says that the absolute total amount of credit limit on the account will be $30,000, any variation is subject to review. 16 Mr Patterson gave evidence that he read the letter from the appellant and that he understood it to represent that the maximum credit limit would be $30,000. Under cross-examination Mr Patterson conceded that a credit limit is usually something inserted for the benefit of the creditor. However, he maintained that it was reasonable to infer that any variation or certainly any variation upwards would be notified to the account customer, that is the respondent. 17 In my view, this is the clear meaning of the letter read in context, bearing in mind the nature of the account and the appellant's knowledge of the limited basis upon which the respondent was willing to contemplate exposing itself to liability to the appellant. 18 The letter of 31 May 1995 made it plain that the appellant treated the respondent as its "customer" and that it set a credit limit of $30,000 "subject to review should this be necessary". But this intermeshed neatly with the letter of 26 April 1995 which had referred to the account limited "as nominated by TLE or Group One". 19 Thereafter Exel ordered goods from time to time. The order forms were prepared by representatives of Exel, usually Mr Burghard but were in the name of the respondent albeit with Exel's postal address. Some of the goods were delivered to sites on which the respondent was a contractor, some to sites where it had no interest at all. The account operated without incident until March 1996. That is not to say it traded within the strict thirty day terms or that the limit kept at all times below $30,000. There were occasions when overruns of both types were observed by the appellant. 20 The matter was considered by the appellant's credit managers who, after some hesitation, approved increases of the credit limit or allowed the overrun to pass without incident. All this took place without communication with the respondent, indeed without communication with Exel beyond Exel knowing that the account had been allowed to overrun its strict limits from time to time. Exel kept the account generally in order until the beginning of 1996. 21 Between March and May 1996 the account quickly moved into substantial arrears leaving a total outstanding of $144,446. The appellant's credit manager contacted Mr Hare of the respondent in about May and the following conversation ensued: McAdam: We are quite concerned at the size of your debt is approximately $144,000.00. I would like to discuss this with you. I am disappointed with the account. Patterson: We are disappointed too. We have known Tony Burghard for a while and regard him as a friend of ours. Hare: I am also concerned. The account was opened by Group One to enable our sub-contractor Tony Burghard of Exel Electrical to purchase goods on our behalf for some large contracts which we had won. I realised that the account was opened this way because you had refused credit facilities to Exel Electrical. McAdam: If you were aware of this situation you must realise that Group One is responsible for the debt. Our problem is not with Exel but with Group One Interiors. Hare: Group One had an agreement with Exel for Exel to purchase goods on its behalf. (As he made that statement he opened a folder and appeared to read a document in that folder.) Mr Patterson then took the folder from Mr Hare, appeared to read that document and then the exchange continued in the following terms) Patterson: Shit. It has expired. I was not shown the document to which Mr Patterson and Mr Hare appeared to be referring nor did I ask to see it. The conversation then continued. McAdam: We were never aware of any such agreement. As far as we are concerned the account is with Group One and not Exel. It is your business on how you wish the account to operate. Hare: I cannot understand how if we asked for a limit of $20,000.00 per month, you let the account increase to the level it is at now. McAdam: Credit limits are our internal decisions. We increase or decrease these limits on a regular basis. As payments were always on time I could see no reason why you would not be able to meet your obligations. With this in mind the credit limit was increased by me in conjunction with our Credit Department. When people open an account with us we tell them that it is our right to increase or decrease credit limits as we see fit. Under no circumstances would we let Tony Burghard open an account with us because we consider him to be an extreme credit risk. I have information that he has gone down before. Hare: Burghard told us that believed TLE would eventually open an account for him. McAdam: That is rubbish. Under no circumstances would we even look at him. What are our chances of getting the money? Patterson: We have approximately $300,000.00 in retention that we will apply to the debt. Burghard owes money to a number of creditors including (he then named several creditors by name (I cannot recollect those names) and nominated the amounts which he said Exel owned them. He then appeared to total those creditors and the conversation continued. Hare: There is more than enough in that $300,000.00 to cover TLE and the other debts. McAdam: I am still very concerned. As far as I am aware all outstandings are owned by Group One. Hope we can come to a satisfactory conclusion. Hare: We will look at it and be in touch with this afternoon or tomorrow at the latest. As far as I am concerned we only owe you $30,000. That was the original credit limit. McAdam: No, it is $144,000.00 and that is the sum we require to bring the account up to date. Hare: We will be having a meeting with Tony Burghard almost immediately to sort the matter out. Apart from the formalities that was the end of the conversation. 22 It is accepted that this was the first time when the appellant made direct contact with any representative of the respondent in relation to the operation of the account and in relation to any problem occurring with it. 23 Exel went into liquidation. In May 1997 the appellant sued the respondent for the full amount owing. The respondent did not dispute that officers of Exel had actual authority to order goods in the name of the respondent and to accept delivery of those goods for the purposes of Group One Interiors projects. The principal issue was whether in some way the respondent's liability was limited to $30,000 because this was the original credit limit of the account when it was opened. The respondent asserted that Exel's authority to order goods on the respondent's credit was limited accordingly. 24 Patten DCJ found in favour of the respondent. He entered judgment in the sum of $40,240 representing $30,000 plus interest at two per cent per month (as set forth in the respondent's application for credit facilities) from 30 April 1996 to date of judgment. 25 From the dealings between the respondent and Exel it is clear that Exel had actual authority to order goods on behalf of the respondent up to the credit limit of $30,000 originally set by the appellant. So much was common ground. The learned trial judge held that this was at all times the limit of Exel's actual authority. He also held that Exel had no greater ostensible authority because the only representation from the respondent to the appellant was the form of application for credit facilities which on its face was silent as to the authority of anyone to incur liabilities for which the respondent would be responsible. Alternatively the trial judge held that the appellant's letter of 31 May 1995 constituted a representation that the credit limit was $30,000 and the respondent relied upon this representation. These matters were held to estop the appellant from increasing the credit limit without reference to the respondent in circumstances where the appellant was aware that liabilities were being incurred on the respondent's behalf by Exel. 26 The statement in the letter of 31 May 1995 that the credit limit was subject to review should it be necessary did not, his Honour held, entitle the appellant to increase the limit unilaterally. His Honour was fortified in this conclusion by the conversations passing between Mr de Wall and Mr Burghard and between Mr Burghard and Mr Patterson immediately after the establishment of the credit facility. I have already recounted the nub of those conversations. 27 The appellant challenged the finding that Exel's actual authority to order goods pursuant to the arrangement was limited in effect to orders within the limits of the account as set in the letter of 31 May 1995. It was submitted that the facts revealed lack of concern on the respondent's part beyond concern reflected in the recourse arrangements in the letter of 26 April 1995. I have effectively addressed this submission in my recounting of the facts. 28 The respondent had every reason to be concerned about giving Exel a totally free hand. It obviously could have done more, including stipulating that copies of invoices and statements should come directly to it from the appellant. But its insouciance was in part a reflection of the limitations which it had placed upon Exel's authority, limitations which the go-between Mr Burghard had brought to the appellant's attention. 29 The respondent did not give Exel a carte blanche as regards the operation of the account. The credit terms of thirty days and $30,000 maximum were a key part of the limits of actual authority of Exel to commit the respondent's credit under the arrangement with the appellant. 30 The learned trial judge held that Exel's ostensible authority was relevantly coterminous with its actual authority. In my view this finding was correctly made. The appellant submitted that the respondent held out Exel as having authority to buy additional goods in March to May 1996. Alternatively, it was submitted that Exel itself was clothed by the respondent with authority to make such representations about the extent of its own authority. 31 The appellant placed particular reliance upon the respondent's silence during 1995/1996 when Exel ran the account over its strict limits from time to time. But the problem for the appellant is that these overruns were not seen by the appellant itself as serious until May 1996. Throughout 1995 Exel paid the accounts within the unilaterally extended credit limit, or at times which led the appellant to take no action. Nothing was done by the appellant to contact the respondent, to put it on notice that the account limit had been or was about to be reviewed. Had this occurred, one might have expected a sudden collapsing of the whole arrangement by the respondent. 32 The sending of statements to the addresses nominated by the respondent, ie, addresses of Exel, did not effectively put the respondent on notice of any problems with the account, let alone on notice of any decision by the appellant to extend the credit limit. Everyone knew that those accounts were effectively for Exel's eyes and Exel attended to payment of them in a satisfactory way until the period March to May 1996. The appellant was content with this until it blew the whistle in May 1996 when it was too late. 33 This was from start to finish a tripartite arrangement. The appellant was not willing to trust Exel's creditworthiness. It was in the joint interests of Exel and the respondent to secure for Exel the credit necessary to enable Exel to be able to get goods from the appellant for the respondent's building projects. But the respondent also had good reason to keep Exel on a tight leash. What came about as the result of a joint initiative of Mr de Wall and Mr Burgland in the first instance was an arrangement whereby the respondent became the contracting party in whose name the goods were ordered and to whom they were invoiced and sold with Exel having authority to place orders in the respondent's name. The intent of the three parties was that Exel would receive invoices and statements and attend to payment of them. If that arrangement broke down, then the respondent retained its right of recourse against Exel. But this right of recourse did not undermine the limits of the arrangement as known and intended by the three parties. 34 That tripartite arrangement effectively limited Exel's authority to order goods so long as orders did not take the account over the agreed limit. That agreement was capable of variation, if only because the credit limit of $30,000 stipulated by the appellant in its letter of 31 May 1995 was expressed to be "subject to review should this be necessary". What happened internally within the credit department of the appellant did not constitute such a review. It certainly did not constitute a review affecting the respondent and departing from the common understanding reached by the end of May 1995. 35 In support of its submission that the respondent's conduct by silence in 1995/1996 amounted to a holding out of Exel as its agent, the appellant referred the Court to State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 at 194 and Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 6 ACSR 464 at 476-7. But those cases are clearly distinguishable having regard to the limits imposed upon Exel's authority (to the knowledge of the appellant) at the commencement of the arrangement, and the absence of anything to bring about a relevant change in those limits as represented between the appellant and the respondent. As I have indicated, the respondent may have been negligent in not taking greater steps to ensure that the appellant kept it informed about the state of accounts from time to time, but this conduct was itself in turn induced by what had occurred in April/May 1995. 36 The events in those months conveyed to all parties the clear message that Exel's trading could only put the respondent in debt to the appellant if that trading was kept within the critical limit of $30,000 maximum exposure. The respondent relied upon this arrangement more than anyone. Its reliance grounded the estoppel in its favour found by the trial judge and precluded the later estoppel said to arise in consequence of the respondent's silence in not objecting to the statements of account which were sent by the appellant to Exel. 37 In my view the appeal should be dismissed with costs. 38 PRIESTLEY JA: I agree with Mason P. 39 HANDLEY JA: I agree with the reasons delivered by the President. I would merely add that suretyship is a matter of substance, not form, see Rowlatt on Principal and Surety 4th ed, p3. In the circumstances of this case, there is much to be said for the view that the tripartite arrangement made the respondent a surety for Exel Contractors Pty Ltd. However, the matter was not argued and it is not necessary to express a concluded view. The appeal should be dismissed with costs. 40 MASON P: That is the order of the Court. * * * * * * * * * * DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.