New South Wales Supreme Court Precious Metals Australia Limited v Xstrata (Schweiz) AG [2005] NSWSC 141 CITATION : This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 01/03/05 JUDGMENT DATE : 9 March 2005 Equity Division JURISDICTION : Commercial List JUDGMENT OF : Einstein J DECISION : Answers given to first and second separate questions under Part 31. CATCHWORDS : Contracts - Construction - Guarantee and Indemnity Alliance Acceptance Co Ltd v Hinton (1964) 1 DCR (NSW) 5 Andar Transport Pty Limited v Brambles Ltd [2004] HCA 28 Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Australian Joint Stock Bank v Hogan (1902) 2 SR (NSW) 7 Bank of New Zealand v Baker [1926] NZLR 462 Browning v Stallard (1814) 5 Taunt 450; 128 ER 764 Burswood Management Limited v Attorney-General (Commonwealth) (1990) 23 FCR 144 Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1 Campbell v McIsaac (1873) 9 NSR 287 (CA) (Can) Coady v J Lewis & Sons Ltd [1951] 3 DLR 845 Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Commercial Banking Co of Sydney Ltd v Patrick Intermarine Acceptances Ltd (in Liq) (1978) 52 ALJR 404 Conley (t/as Caplan & Conley) Re; Ex parte Trustee v Barclays Bank Ltd [1938] 2 All ER 127 Direct Acceptance Finance Ltd v Cumberland Furnishings Pty Ltd [1965] NSWR 1504 Edwards v Lennon (1986) 6 SCR (NSW) Eq. 18 Elder v Northcott [1930] 2 Ch 422 Forster v Ivey (1901) 2 OLR 480; 32 OR 175 (CA) General Surety & Guarantee Co Ltd v Francis Parker Ltd (1977) 6 BLR 16 George v Cluning (1979) 28 ALR 57 Guild & Co v Conrad [1894] 2 QB 885 Harburg India Rubber Comb Co v Martin [1902] 1 KB 778 Hatfield v Health Insurance Commission (1987) 15 FCR 487 Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Inland Revenue Commissioners v Holder [1931] 2 KB 81 International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyd's Rep 344 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Jowitt v Callaghan (1938) 38 SR (NSW) 512 CASES CITED : Kimball Lumber Co v Anderson (1916) 27 DLR 555 (Sask. CA) L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 McPherson v Forlong [1928] 3 WWR 45 (Can) Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 Minister for Immigration and Multicultural Affairs Morin v Hammond Lumber Co [1923] 1 DLR 519 Moschi v Lep Air Services Ltd [1973] AC 331 Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 Overend, Guerney & Co (Liquidators) v Oriental Financial Corporation (Liquidators) (1874) LR7HL 348 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 Permanent Trustee Co of New South Wales Ltd v Hinks (1934) 34 SR (NSW) 130 Perry v National Provincial Bank of England [1910] 1 Ch 464 Prenn v Simmonds [1971] 1 WLR 1381; [1971] 3 All ER 237 R v Gurofsky (1919) 16 OWN 19 Richards (dec'd); Ex parte Lloyd (1935) 8 ABC 37 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989; [1976] 3 All ER 570 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 Smith v Wood [1929] 1 Ch 14 Sunbird Plaza Pty Limited v Maloney (1988) 166 CLR 245 Thackwell v Gardiner (1851) 5 De G & Sm 58; 64 ER 1017 Total Oil Products (Australia) Pty Ltd v Robinson [1970] 1 NSWR 701 Turner Manufacturing Co Pty Ltd v Senes [1964] NSWR 692 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Victims Compensation Fund Corp v Brown [2003] HCA 54 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 Wauthier v Wilson (1912) 28 TLR 239 Western Dominion Investment Co Ltd v MacMillan [1925] 2 DLR 442 W Thomas & Company Ltd v Welk [1935] SASR 165 Yeoman Credit Ltd v Latter [1961] 1 WLR 828 Precious Metals Australia Limited (Plaintiff) PARTIES : Xstrata (Schweiz) AG (Defendant) FILE NUMBER(S) : SC 50003/05 Mr PR Garling SC, Mr R J L McCormack (Plaintiff) COUNSEL : Mr JT Gleeson SC, Mr MR Elliott (Defendant) Piper Alderman (Plaintiff) SOLICITORS : Mallesons Stephen Jaques (Defendants) LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Wednesday 9 March 2005 50003/05 Precious Metals Australia Limited v Xstrata (Schweiz) AG JUDGMENT Background 1 By agreement entered into on 16 October 2000 between Precious Metals Australia Ltd ["PMA"] of one part and Xstrata Windimurra Pty Ltd ["Xwin"] and its holding company Xstrata AG ["Xstrata AG"] of the other part, PMA sold its 40% participating interest in a Joint Venture Agreement dated 24 December 1998 [as amended by a Deed of Assignment and Call Option dated 27 October 1999] to Xwin ["the PMA Sale Agreement"]. The mining joint venture was known as the Windimurra Vanadium Project. 2 In consideration of PMA entering into the PMA Sale Agreement, by agreement also entered into on 16 October 2000, Xwin agreed to pay to PMA a production royalty and Xstrata AG agreed to guarantee for the benefit of PMA the due and punctual performance by Xwin of its obligations ["the Royalty Agreement"]. 3 By Deed of Assignment Xstrata (Schweiz) AG ["Xstrata Schweiz"] subsequently took an assignment of Xstrata AG's rights, title and interest and assumed Xstrata AG's liabilities and obligations under the Royalty Agreement The contract proceedings 4 In proceedings 50113 of 2004 fixed for final hearing to commence on 4 July 2005 PMA seeks a declaration that Xwin [the first defendant in those proceedings] breached clause 6.1(a) of the Royalty Agreement, damages and other declarations, injunctions and orders ["the contract proceedings"]. Xstrata Schweiz is the second defendant in those proceedings. 5 A principal parameter of the claims asserted in the contract proceedings relates to the allegation that Xwin purported to permanently close the Windimurra Project in early May 2004. The allegation is that this was a breach of the Royalty Agreement. 6 Notwithstanding that allegation PMA claims that it has affirmed the Royalty Agreement which is said to remain on foot with each of the other parties to that agreement being bound to comply with all the terms and conditions of the Agreement. The guarantee proceedings 7 PMA is also the plaintiff in the proceedings presently before the court [50003 of 2005] commenced against Xstrata Schweiz on 14 January 2005. The proceedings were commenced at a time when a notice of motion had been filed but not yet heard in the contract proceedings seeking security for costs. 8 The principal contention raised concerns clause 7 of the Royalty Agreement which is said to oblige Xstrata Schweiz to pay or to reimburse PMA relevantly for all costs charges and expenses incurred by it or which it is obliged to pay in connection with the contract proceedings including, but not limited to, legal costs and expenses on a full indemnity basis. 9 Clearly enough if this contention be upheld it would likely present an insuperable barrier to the security for costs application. The moving procedural position 10 The procedural position which faced the court at the commencement of 25 February 2005 was that the motions fixed for hearing were: · PMA's motion to have summary judgment in the guarantee proceedings; · the motion for security for costs in the contract proceedings. 11 It being seemingly obvious that a far more efficient approach was to convert PMA's motion into a final hearing of the guarantee proceedings and at the same time to hear and determine the motion for security for costs, that course was taken consensually. The course clearly fits the guideline set by the Courts overriding purpose rule. 12 The security for costs judgment is however delivered in the contract proceedings. The separate question 13 Pursuant to an order made under Part 31 the following question has been separated out for initial hearing: "Order that the following question be determined separately and prior to all other questions in action 50003 of 2005: Whether on the proper construction of clause 7.7(a) of the Royalty Agreement, such Royalty Agreement being considered as a whole, Xstrata is liable to pay or reimburse the costs, charges and expenses as incurred, and [which] may hereafter be incurred by the plaintiff ("PMA") in prosecuting action 50113 of 2004 ("Main Action") against Xwin: (1) as and when incurred and on demand (that is, before resolution of action 50113 of 2004); (2) whether or not PMA succeeds or is entitled to succeed in that action; (3) on an indemnity basis, except insofar as they are of an unreasonable amount or have been unreasonably incurred, so that, subject to the above exceptions, PMA is completely indemnified in respect of the same." The principles 14 Plainly enough the question before the court is one of construction of a written document. Extensive submissions were advanced by both parties as to the proper approach of the Court in that regard. 15 Notwithstanding that the principles are relevantly well established many of the situations which come before the Court raise close questions as to the application of the principles. 16 In deference to the care with which the parties addressed the question of identification of the proper principles it is convenient to note that those principles have recently been affirmed in a number of decisions. 17 Clearly primacy must be given to the actual words used in a written contract. McColl JA in her judgement in Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 at [66] enunciated the following principles: "[69] If the words used [in a written contract] are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate': Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109–110 per Gibbs J (as he then was). However, in construing written contracts it should be presumed that the parties did not intend their terms to operate unreasonably. The more unreasonable the result a party's construction would produce, the more unlikely it is that the parties would have intended it. If the parties did intend an unreasonable result, it is essential that that intention be made "abundantly clear": L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251 per Lord Reid. [70] Dealing with the circumstances where there are internal inconsistencies in a contract, Gibbs J said "it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument.": Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109. [71] Gibbs J's statement in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 that "the court should construe commercial contracts "fairly and broadly, without being too astute or subtle in finding defects", finds reflection in the statement in International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyd's Rep 344 at 350 per Neill LJ (with whom Roch and Auld LL.J agreed) that the primary focus is the agreement itself which "must speak for itself, but … must do so in situ and not be transported to a laboratory for microscopic analysis". [72] Consistently with this approach, it has been held that if detailed semantic and syntactical analysis of a written contract lead to a conclusion that flouts business commonsense the contract must be made to yield to business commonsense: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock; applied by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd , above, at 198 [43]. In Maggbury, after referring to Lord Diplock's observations, Gleeson CJ, Gummow and Hayne JJ added: "what in respect of a particular contract comprises 'business commonsense', as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible"." 18 In Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 Santow JA [with whom Meagher JA and Stein AJA agreed] at [22] referred with approval to what the trial judge had said concerning the observations of the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 292–3: "In Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, Mason J (with whose judgment Stephen J and Wilson J agreed), had referred to authorities [In particular, speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1383–1385 [1971] 3 All ER 237 at 239–241; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 261; and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995–997 [1976] 3 All ER 570 at 574–576] which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. [ Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995–996 [1976] 3 All ER 570 at 574] Such statements exemplify the point made by Brennan J in his judgment in Codelfa at 401: "The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used. Santow JA at [23] continued: "To this I would add the observation of Lord Steyn, writing extra-judicially on "The Intractable Problem of the Interpretation of Legal Texts" (2003) SLR 1 at 7. After pointing to the shift from literal to purposive interpretation, he adds the caveat that it would be an oversimplification to say that there has been a homogenous shift towards a purposive interpretation of all legal texts. Nonetheless he says: " In a network of contracts governing a construction project, parties ought generally to be able to rely on the obvious meaning of the interlocking texts". 19 Hence I take it as axiomatic that: · the Court endeavours to give primacy to unambiguous words used in a written contract, this matter generally being approached in the manner outlined by McColl JA in Peppers Hotel Management supra; · the proper approach seeks the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract" (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 citing Lord Hoffmann, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114; Peppers Hotel Management Pty Ltd supra at [66 et seq]; · commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA at [64]. Turning to the Royalty Agreement 20 The royalty agreement includes the following: The recitals: "A PMA, Xwin, Xcoal, Windimurra, Vanadium Australia Pty Limited (ACN 083 978 232) and Xstrata are parties to a Joint Venture Agreement dated 24 December 1998 as amended by a Deed of Assignment and Call Option dated 27 October 1999 (collectively the Joint Venture Agreement), having Participating Interests (as defined in the Joint Venture Agreement) of: PMA 40% Xwin 51% Xcoal 9%. B PMA will sell its 40% Participating Interest in the Joint Venture to Xwin pursuant to a sale agreement entered into on or about the date of this Royalty Agreement (PMA Sale Agreement) and Xcoal will, at a later date, transfer its 9% Participating Interest to Xwin so that Xwin will ultimately be the sole proprietor of the Project. C In consideration of PMA entering into the PMA Sale Agreement, Xwin has agreed to pay the Production Royalty and the Deposit and Xstrata has agreed to give the Guarantee." Clause 1 entitled "Definitions and interpretation": · defines "Guarantee" to mean the guarantee given in clause 7.1. · states that "Indemnity" is defined in clause 7.2 Clause 2 provides: Agreement to pay Production Royalty and Deposit 2.1 Subject to Completion, Xwin agrees to pay the Production Royalty and the Deposit to PMA throughout the Term on, and subject to, the terms set out in this agreement. 2.2 All Payments must be made in Australian dollars by direct deposit in immediately available funds to such one or more (but not exceeding three) bank accounts in New South Wales, Australian Capital Territory or Queensland nominated by PMA from time to time by notice to Xwin. Any Payment not paid when due will attract interest at the rate specified in clause 7.8 from the due date for payment until the date paid." Clause 6.1 provides: Conduct of Project Conduct efficiently 6.1 Xwin must at all times during the Term: (a) cause the Project to be operated (unless operations are suspended, the timing and occurrence of which shall always be in Xwin's absolute discretion) and maintained in a proper and efficient manner; and (b) maintain the Tenements in good standing by complying promptly and diligently with the conditions of the Tenements and all statutory requirements which apply to them including renewing or replacing tenements at the proper time for renewal or replacement provided that nothing in this clause 6.1(b) will prevent Xwin from relinquishing or surrendering all or part of a Tenement to the Western Australian Department of Minerals and Energy in accordance with prudent mining tenement practice; (c) For the purposes of clause 6.1(a), PMA acknowledges that suspension(s) of the Project at any time by Xwin shall not give rise to any claim against Xwin, and Xwin shall not be liable for any loss of any nature suffered or incurred by PMA as a result of such suspension(s) of the Project. Clause 7 provides as follows: Guarantee 7.1 Xstrata unconditionally and irrevocably guarantees for the benefit of PMA the due and punctual performance by Xwin of its obligations under this agreement and in particular, but without limitation, to make the Payments. Indemnity 7.2 As a separate undertaking (Indemnity) Xstrata unconditionally and irrevocably indemnifies PMA against all liability or loss arising from, and any costs, charges or expenses incurred by PMA as a result of or in connection with: (a) any failure by Xwin to pay a Payment as and when it becomes payable; (b) the liability to make any guaranteed payment under clause 7.1 being unenforceable in whole or in part as a result of lack of capacity, power or authority or improper exercise of power or authority; or (c) an Insolvency Event occurring in respect of Xwin, including loss suffered because interest is payable in consequence of the Insolvency Event; or (d) any guaranteed payment under clause 7.1 not or never being recoverable from Xstrata under clause 7.1 or from Xwin, because of any other circumstance whatsoever including any transaction relating to that payment being void, voidable or unenforceable and whether or not Xstrata knew or should have known anything about the transaction. It is not necessary for PMA to incur expense or make payment before enforcing the right of indemnity in clause 7.2. Continuing obligations 7.3 The Guarantee and the Indemnity are continuing obligations and extend to all of the obligations of Xwin the subject of the Guarantee and are not discharged by any one payment. Liabilities not affected 7.4 The liability of Xstrata under the Guarantee and the Indemnity as guarantor, indemnifier or principal debtor and the rights of the beneficiary of the Guarantee and the Indemnity are not affected by anything which might otherwise affect them at law or in equity, including, but not limited to, one or more of the following: (a) Xstrata granting time or other indulgence to, compounding or compromising with or releasing in any way, Xwin; (b) acquiescence, delay, acts, omissions or mistakes on the part of Xstrata; (c) any variation of this agreement; (d) the invalidity or unenforceability of an obligation or liability of a person other than Xstrata; and (e) any security given in support of the Guarantee being void, voidable or unenforceable. Set-offs etc 7.5 Xstrata may not without the consent of PMA: (a) raise a set-off or counter-claim available to it against Xwin in reduction of liability under the Guarantee and the Indemnity; (b) claim to be entitled by way of contribution, indemnity, subrogation, marshalling or otherwise to the benefit of any security or guarantee held by the beneficiary of the Guarantee or Indemnity in connection with this agreement; (c) prove in competition with the other in respect of any money paid under this clause 7 if a liquidator, provisional liquidator, receiver, official manager or trustee in bankruptcy is appointed in respect of Xwin (or any of its property) or Xwin is otherwise unable to pay its debts when they fall due, until all money payable by Xwin under clause 7.1 has been paid. Void claims 7.6 If a claim that a payment under this agreement is void or voidable (including a claim under laws relating to liquidation, insolvency or protection of creditors) is upheld, conceded or compromised then PMA is entitled immediately as against the other to the rights to which it would have been entitled under the Guarantee and the Indemnity if the payment had not occurred. Costs of enforcement 7.7 Xstrata agrees to pay or reimburse PMA on demand for: (a) all costs, charges and expenses in making, enforcing and doing anything in connection with the Guarantee and Indemnity including, but not limited to, legal costs and expenses on a full indemnity basis; and (b) all stamp duties, fees, taxes and charges which are payable in connection with the Guarantee and Indemnity or a payment, receipt or other transaction contemplated by it. Money paid by Xstrata to or on account of the beneficiary of the Guarantee must be applied first against payment of costs, charges and expenses under this clause 7.7 then against other obligations under the Guarantee and the Indemnity. Interest 7.8 Xstrata agrees to pay interest on: (a) any amount payable by it under this clause 7 from when it becomes due for payment, during the period that it remains unpaid; and (b) that part of the guaranteed payments on which interest is not otherwise payable by Xwin from when it becomes due for payment under the Guarantee or the Indemnity, during the period that it remains unpaid, on demand or at times determined by the beneficiary of the Guarantee, calculated on daily balances. The rate to be applied to each daily balance is the Westpac Indicator Lending Rate (or equivalent) plus 4%. Interest which is not paid when due for payment may be capitalised by the beneficiary at intervals which the beneficiary determines from time to time or, if no determination is made, then on the first day of each month. The obligations of Xstrata to pay the outstanding amount on the date it becomes due for payment is not affected by this clause. Interest on judgment awards 7.9 If a liability under the Guarantee or the Indemnity becomes merged in a judgment or order, then Xstrata agrees to pay interest to the beneficiary on the amount of that liability as an independent obligation. This interest accrues from the date the liability becomes due for payment both before and after the judgment or order until it is paid, at a rate that is the higher of the rate payable under the judgment or order and the interest rate specified in clause 7.8. Clause 13.1 provides: Costs Each party agrees to bear its own legal and other costs in connection with the preparation, execution and completion of this agreement. Clause 16 provides: Set offs Other than as expressly permitted under this agreement, neither Xwin nor Xstrata are permitted to set off any sum owing to Xwin by PMA against any sum payable by any of them under this agreement. 21 There are any number of places where the definition of a guarantee and of indemnity have been considered. Guarantee 22 The matter can be clearly understood from the following passages to be found in O'Donovan and Phillips 'The Modern Contract of Guarantee', Law Book Co Ltd, 1985 at 8-10: "Definitions In essence, a guarantee is the promise of one person to be answerable for the debt or obligation of another if that other defaults [ Moschi v Lep Air Services Ltd [1973] AC 331; Yeoman Credit Ltd v Latter [1961] 1 WLR 828; Direct Acceptance Finance Ltd v Cumberland Furnishings Pty Ltd [1965] NSWR 1504; Total Oil Products (Australia) Pty Ltd v Robinson [1970] 1 NSWR 701; General Surety & Guarantee Co Ltd v Francis Parker Ltd (1977) 6 BLR 16; Re Richards; Ex parte Lloyd, Official Receiver; WC Angliss Co (Australia Pty Ltd (1935) 8 ABC 37; Browning v Stallard (1814) 5 Taunt 450; 128 ER 764; Commercial Banking Co of Sydney Ltd v Patrick Intermarine Acceptances Ltd (in Liq) (1978) 52 ALJR 404 at 406; Western Dominion Investment Co Ltd v MacMillan [1925] 2 DLR 442, affirmed in [1925] 4 DLR 562, (CA)]. The person who makes the promise is called the guarantor or the surety; the person to whom the promise is made is called the creditor; and the person on whose behalf the promise is made is called the "principal debtor", or simply, "the principal". In Australia and in most English common law jurisdictions the terms "surety" and "guarantor" are used interchangeably and this practice is followed in this book. However, in some jurisdictions, particularly in the United States of America, the terms "surety" and "guarantor" are distinguished [See LP Simpson, Handbook of the Law of Suretyship (1950), pp 6-11]. Technically, a guarantee is the undertaking that the debt shall be paid [ Campbell v McIsaac (1873) 9 NSR 287 (CA) (Can) . A relation of suretyship can exist between two parties who are both primarily liable to a creditor but who as between themselves have assumed the positions of principal and surety. In the absence of notice of the true relationship between the parties, the creditor's rights against them are unaffected. Forster v Ivey (1901) 2 OLR 480, affirming 32 OR 175 (CA). See too Overend, Guerney & Co (Liquidators) v Oriental Financial Corporation (Liquidators) (1874) LR7HL 348]. Generally in a contract of guarantee there are at least two obligations, one primary and the other secondary [ Western Dominion Investment Co Ltd v MacMillan [1925] 2 DLR 442, affirmed in [1925] 4 DLR 562, (CA)]. (i) The principal obligation A contract of guarantee is predicated upon the existence of a principal obligation owed by the principal debtor [ Morin v Hammond Lumber Co [1923] 1 DLR 519, reversing Morin v Hammond Lumber Co (1922) 68 DLR 519]. If there is no such principal obligation, generally the guarantee fails. Consequently, a valid guarantee depends upon the existence of a promise made to a person to whom a debtor is already answerable or is to become answerable [ Harburg India Rubber Comb Co v Martin [1902] 1 KB 778 at 784, per Vaughan Williams LJ Cf. Kimball Lumber Co v Anderson (1916) 27 DLR 555 (Sask. CA)]. Not only must the principal obligation exist, but it must also remain unchanged throughout the life of the guarantee [ Coady v J Lewis & Sons Ltd [1951] 3 DLR 845]. Even slight unauthorised changes in the primary obligation may discharge the guarantor [ Western Dominion Investment Co Ltd v MacMillan supra] . (ii) The secondary obligation The distinctive feature of a contract of guarantee is the secondary obligation which is assumed by the surety or guarantor [ Turner Manufacturing Co Pty Ltd v Senes [1964] NSWR 692; Coady v J Lewis & Sons Ltd supra]. A guarantee is not a representation that the principal debtor is credit-worthy [ R v Gurofsky (1919) 16 OWN 19]. The main or immediate object of the transaction must be that the guarantor or his property will be answerable to the creditor [The mere fact that an agreement may create a liability for the debt of another does not in itself make the agreement a contract of guarantee: McPherson v Forlong [1928] 3 WWR 45 (Can)]. It is not necessary for a guarantor to assume personal liability for the debt of another since a person who provides a pledge of property without incurring liability beyond the pledge is nevertheless properly classified as a guarantor [ Edwards v Lennon (1986) 6 SCR (NSW) Eq. 18; Perry v National Provincial Bank of England [1910] 1 Ch 464, HL; Conley (t/as Caplan & Conley ) Re; Ex parte Trustee v Barclays Bank Ltd [1938] 2 All ER 127, CA; Bank of New Zealand v Baker [1926] NZLR 462; Smith v Wood [1929] 1 Ch 14]. Jordan CJ aptly described the general nature of a contract of guarantee in Jowitt v Callaghan (1938) 38 SR (NSW) 512: "The contract of guarantee or suretyship is a contract between two persons which is intended by them to secure the performance of the obligation of a third person to one of them. The existence, present or future, of the obligation of a third person, and an intention in the parties to the contract to secure the performance of that obligation, are essential features of a contract of guarantee. If these elements are present, the contract is one of guarantee whether the promise be collateral to the promise of a principal obligor and in the nature of a distinct and separate promise to perform the principal obligation if it does not: Inland Revenue Commissioners v Holder [1931] 2 KB 81 at 101-102; Elder v Northcott [1930] 2 Ch 422 at 430; or whether it be a joint promise with the principal obligor by virtue of which an immediate obligation is assumed to the obligee which is joint with that of the principal obligor; Permanent Trustee Co of New South Wales Ltd v Hinks (1934) 34 SR (NSW) 130 (in which case, there is suretyship in equity though not at common law: Wauthier v Wilson (1912) 28 TLR 239); and whether the promise be a promise to be personally liable if the principal obligor does not perform the obligation, or a promise merely that certain property of the promisor shall be a security for the performance of the principal obligation : Conley (t/as Caplan & Conley) Re; Ex parte Trustee v Barclay's Bank Ltd [1938] 2 All ER 127. The guarantor's liability is secondary in the sense that it is contingent upon the principal debtor's continuing liability and, ultimately, his default [ Guild and Co v Conrad [1894] 2 QB 885 at 896]; Coady v J Lewis & Sons Ltd [1951] 3 DLR 845; Western Dominion Investment Co Ltd v MacMillan [1925] 2 DLR 442, affirmed in [1925] 4 DLR 562, (CA). See also Commercial Banking Co of Sydney Ltd v Patrick Intermarine Acceptances Ltd (in Liq) (1978) 52 ALJR 404 at 406. It is common practice, however, to insert a clause in guarantees making the "surety" a principal debtor so far as the creditor is concerned]. This collateral obligation is completely dependent upon the primary obligation as it existed when the secondary liability arose [ Western Dominion Investment Co Ltd v MacMillan [1925] 2 DLR 442, affirmed in [1925] 4 DLR 562, (CA). As to the difference between a guarantee and collateral security see Thackwell v Gardiner (1851) 5 De G & Sm 58; 64 ER 1017. See also W Thomas & Company Ltd v Welk [1935] SASR 165, where it was held that a letter from a creditor in which he agreed that on dissolution of a partnership a continuing partner should take over the liabilities and receive the assets of the partnership, did not amount to a novation of his principal obligations so as to release the outgoing partners. Compare Australian Joint Stock Bank v Hogan (1902) 2 SR (NSW) 7]. Thus if the principal debtor is excused or his liability terminates, the guarantor is generally discharged from his secondary obligation [In certain cases, however, the guarantor may yet be liable under a specific provision in the guarantee on the basis of an indemnity or an estoppel; Alliance Acceptance Co Ltd v Hinton (1964) 1 DCR (NSW) 5]." Distinction between Guarantee and Indemnity 23 O'Donovan and Phillips at 21 - 22 put the matter as follows: "The performance of an obligation or the payment of a debt of another may be secured not by a guarantee, but by a contract of indemnity. The distinction between a contract of guarantee and a contract of indemnity is that in a contract of indemnity a primary liability is assumed whether or not a third party makes default, whilst, … in a contract of guarantee the surety assumes a secondary liability to the creditor for the default of another who remains primarily liable to the creditor. The contract of indemnity, therefore, is 'a contract by one party to keep the other harmless against loss' and is not dependent on the continuing liability of the principal debtor. The party giving the indemnity (the indemnifier) may and often does, derive a direct benefit from his indemnity". Combined Guarantee and Indemnity 24 O'Donovan and Phillips at 24 - 25 set about a number of classifications including: · a simple guarantee; · a guarantee containing clauses preserving the guarantor's liability in certain circumstances; · a guarantee which contains clauses preserving the liability of the guarantor in specified circumstances where the principal is no longer liable; · a simple indemnity; · a combined 'guarantee and indemnity'. 25 The following description of a combined guarantee and indemnity is given [at 25]: "The contract securing the obligation or payment of another may be drafted in such a way that it expressly contains a promise to guarantee and a promise to indemnify. An example is an agreement in these terms: "(1) I will upon demand pay to you such sum or sums of money as at any time or from time to time have become payable by the customer but be unpaid by him, (2) I will indemnify and keep indemnified you, your successors and assigns from all loss or damage suffered and all claims costs and expenses made against or incurred by you in any way arising out of or consequent upon your having entered into such agreement, whether arising out of a breach by the customer of any of the terms and conditions thereof or otherwise including any such loss or damage, etc., as aforesaid as may arise form the said agreement being (for whatever reason) unenforceable against the customer. (3) No relaxation or indulgence which you may from time to time or at any time extend to the customer shall in any way prejudice or act as a waiver of your strict rights against me hereunder."" 26 In Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1 [first instance, Clarke J] and (1985) 4 NSWLR 22 [Court of Appeal]] a provision in an agreement was in the following terms: "9. That notwithstanding anything contained in this guarantee and notwithstanding that the whole or any part of the moneys hereinbefore described as 'the Moneys Hereby Secured' are or may be irrecoverable or at any time not presently recoverable from the debtor by the lessor (whether by reason of any legal limitation, disability, incapacity of or affecting the debtor or by reason of the rights of the lessor to enforce payment by the debtor of the whole or part of the Moneys Hereby Secured, having been suspended or postposed by order of any court or otherwise or by reason of any other fact or circumstance whatsoever and whether the transactions or any of them relating to such moneys whether or not any of the matters or facts relating thereto have been or ought to have been within the knowledge of the lessor) whereby such moneys or any part thereof are not recoverable from the guarantors as sureties by the lessor then and in such case each of the guarantors hereby as a separate and additional liability hereunder jointly and severally indemnifies the lessor in respect of such moneys and each as a principal debtor agrees with the lessor to pay to the lessor on demand a sum equal to the amount of such moneys and the terms of this instrument shall mutatis mutandis apply as far as possible to this indemnity and the sum of money covered by this indemnity shall be deemed to be part of the Moneys Hereby Secured." 27 Clarke JA [whose view on this matter was not affected by the judgments given by the Court of Appeal] said with respect to clause 9: "I turn then to cl 9 which presents as the foundation of the plaintiff's argument. This clause proceeds, quite correctly in my view, upon the basis that the agreement as a whole is an agreement of guarantee and then seeks to impose upon the guarantors' liabilities separate from and additional to the liability undertaken in the habendum. It both reinforces my opinion that the document when read as a whole is a guarantee and, in addition, sets up a separate liability of the guarantors, an obligation to indemnify. The operative part provides "indemnifies the lessor in respect of such moneys and each as a principal debtor agrees with the lessor to pay to the lessor on demand a sum equal to the amount of such moneys". The meaning of the phrase "such moneys" is established, by reference to the earlier part of the clause, as being that part of "the moneys hereby secured" which is irrecoverable or not presently recoverable from the debtor." Returning to clause 7 of the Royalty Agreement Preliminary The essence of PMA's submissions 28 As Xstrata submitted, the contention of PMA with respect to clause 7.7 can be reduced to its essence: · the costs incurred by PMA in pursuing the main action against Xwin can be charged to the account of Xstrata: - as they are incurred – i.e. in advance of any decision in the main action; - even if the claim against Xwin fails; and - whether or not PMA obtains a costs order against Xwin. · hence the effect of this construction, if correct, would be to render Xstrata an indemnifier of PMA's litigious proclivities: Xstrata must indemnify PMA for its costs of pursuing any actions against Xwin in respect to any of its conduct under the Royalty Agreement irrespective of whether those actions are good, bad or hopeless. Clause 7.1 29 There is no doubt but that clause 7.1 is a guarantee not only in respect of obligations to make the Payments but also in respect of the due and punctual performance by Xwin of the entirety of its obligations under the agreement. 30 Clause 7.1 contains a guarantee of the second type referred to in Sunbird Plaza Pty Limited v Maloney (1988) 166 CLR 245 at 255 – 7: it is a promise by Xstrata to see to it that Xwin performs its obligations "under this Agreement". 31 As Xstrata submitted this has the following consequences: · if in the main action PMA fails to prove that Xwin has breached any obligation under the Royalty Agreement, there will be no remedy for PMA against Xstrata under clause 7.1; · if in the main action PMA succeeds in establishing that Xwin was in breach of contract by its closure of the mine, the Court will proceed to consider the appropriate remedies against Xwin, the principal obligor. The primary remedy sought is an injunction which, if awarded, will cause Xwin to perform its obligations under the Agreement and give rise to no consequential remedy being needed against Xstrata; · the additional or alternative remedy would be damages against Xwin under the main Agreement. If such damages are awarded the Court may, in its discretion, either award the same damages against Xstrata because of its breach of its obligation in clause 7.1 to see to it that Xwin performs its obligations; or, alternatively, it may defer any remedy against Xstrata until it is evident whether Xwin has met its damages obligation. The interaction between clause 7.1 and 7.2 32 I accept as correct the following propositions: · clause 7.2 is a backup indemnity in the event that clause 7.1 would otherwise have been triggered but for some reason the guarantee against Xstrata is unenforceable; · specific reference to the 4 subject matters referred to in paragraphs (a) – (d) of clause 7.2 is consistent with this. 33 The indemnity provided for in clause 7.2 is a broad indemnity imposing upon Xstrata liabilities separate from and additional to the liability provided for in the guarantee clause 7.1. These were separate promises of guarantee and indemnity. The last sentence of clause 7.2 and the 'pay or reimburse' initial words of clause 7.7 34 Mr Garling SC submitted that there is significance apparent from the last sentence of clause 7.2 which provided that it was not necessary for PMA to incur expense or to make payment before enforcing the right of indemnity provided for in the clause. The submission was that the objectively discernable clear contemplation of the parties was that the indemnity could be called upon whether or not PMA had yet incurred expense or made a payment which issue could be determined in a curial proceeding. 35 Clearly Clause 7.7 is expressed in extremely wide terms. The subject matter of the obligation is "to pay or to reimburse" [contemplating a payment prior to outlay by PMA and contemplating a reimbursement after such an outlay]. The obligation to make payment or reimbursement is an obligation "on demand". 36 Further such payment is to be made for "all costs, charges and expenses …including, but not limited to, legal costs and expenses on a full indemnity basis". Those costs, charges and expenses are to be paid or reimbursed to PMA where it has been or is involved in any of a number of particular activities. Those activities are described as: "making, enforcing and doing anything in connection with the Guarantee and Indemnity". 37 Mr Gleeson SC made the point that it would have been possible for the draftsperson to have provided as follows: " Xstrata agrees to pay or reimburse PMA on demand for: (a) all costs, charges and expenses in making, enforcing and doing anything in connection with any obligations of Xwin or Xstrata under this Agreement." 38 This was not the approach taken hence requiring the particular focus upon the Guarantee and Indemnity provided for in clause 7.1 and 7.2. " In connection with…" as used in clause 7.7 39 The words "in connection with" must of course be construed against the particular context in which one finds such a phrase. This requires reference to the purpose of the provision: Hatfield v Health Insurance Commission (1987) 15 FCR 487 at 491. Questions of characterisation remain important (see, for example, MIMA v Singh [2001] FCA 845 [at 28 – cited below]. 40 The context in which the phrase "in connection with" is used in clause 7.7 requires a relevant nexus to be established. There would be many circumstances which could be appropriately described as covering PMA being involved in the making, enforcing and [a question arises as to whether this word should be read as meaning "and/or"] doing anything in connection with the Guarantee and [the same question arises as to whether this word should be read as meaning "and/or"] Indemnity. 41 In Victims Compensation Fund Corp v Brown [2003] HCA 54 Heydon JA at [13] made the point that: "The ordinary meaning of 'and' is conjunctive." His Honour then went on to consider whether there was any occasion shown to depart from that ordinary meaning. The ultimate holding was that there was no convincing textual reason emerging from the rest of the legislation there under consideration for departing from the ordinary meaning. 42 Mr Gleeson submitted and I accept that: · the expression "in making, enforcing and doing anything in connection with" is a composite expression, not a disjunctive one; · it seeks to catch the various related and sequential ways in which PMA may find itself out of pocket in establishing a liability of Xstrata under clause 7.1 or 7.2. 43 There is some support to the effect that the words "in connection with" may be read in the sense of extending to ancillary or consequential steps. In Minister for Immigration and Multicultural Affairs supra, the Full Federal Court [Black CJ, Kiefel, Sundberg, Katz and Hely JJ albeit dealing with a statutory context said: [at 28] "The case law on the phrase "in connection with" indicates that it is an expression of wide connotation that merely requires a relation between one thing and another [citing authorities for this proposition]. But in Burswood Management Limited v Attorney- General (Commonwealth) (1990) 23 FCR 144 at 146 the Full Court quoted with approval a statement made by Davies J as follows: 'Expressions such as 'relating to', 'in relation to', 'in connection with' and 'in respect of' are commonly found in legislation but invariably raise problems of statutory interpretation. They are terms which fluctuate in operation from statute to statute… The terms may have a very wide operation but they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear" [at 34] "The giving of the s 430 statement may not be a procedure to be observed in the exercise of the power of decision, but unless the context otherwise indicates or requires, the expression "in connection with" naturally encompasses matters which, although occurring after the making of the decision, of consequential upon it or incidental to it." 44 Clearly there is a difficulty with the words "in making". The words would not appear to have been used to describe to the act of entering into the Guarantee or Indemnity. Not only would this seemingly be inconsistent with the heading of clause 7.7 "Costs of enforcement " [cf George v Cluning (1979) 28 ALR 57 at 62-63 per Barwick CJ] but clause 13.1 of the Royalty Agreement included specific provision for each party to bear its own legal and other costs in connection with the preparation, execution and completion of that agreement. 45 I accept that the word "making" in this context should probably be regarded as an elliptical expression intended to cover the costs of drawing a demand, service of the demand and the like. Possibly what was intended would have been better expressed using words such as "making a demand in respect of". If those precise words or similar had been used then the reference in its expanded form would have been: "… costs, charges and expenses in making a demand in respect of, enforcing and doing anything in connection with the Guarantee and Indemnity.." 46 Even an alternative analysis which saw the expression "in making, enforcing and doing anything in connection with" as a disjunctive one would not assist PMA in the present context. The words "doing anything in connection with", which, as has already been observed, are expressed in such wide terms, the real question would on such an analysis concern the extent, if at all, to which these words may be construed as extending beyond the otherwise reach of the word "enforcing". The question would then be whether it could be said that these additional words supply that which would be seen as missing from the natural meaning of the anterior word "enforcing", effectively now embracing the concept of "attempting to enforce"? It does not seem to me that this would follow. The word "enforcing" 47 In my view the word "enforcing" [in the context of enforcing the Guarantee and Indemnity] cannot be stretched to mean " unsuccessfully attempting to enforce" or "making an invalid claim to enforce". The natural meaning of the enforcement of a legal right is just that. An attempt to make [and pursue in curial proceedings] a misconceived claim to what is in due course held not to be a legal right, cannot properly be described as "enforcing a legal right". To the contrary this will have been shown to have been an attempt to enforce something entirely different. 48 The word "enforcing" has a clarity about it. It fits naturally with the scheme of the provisions [where clauses 7.1 and 7.2 set out the terms of the Guarantee and Indemnity which may require to be enforced and where clause 7.7 is concerned with activities related to such enforcement]. But one does need to give content to the additional words "and doing anything in connection with the Guarantee and Indemnity". The above holding has made plain that because the expression "in making, enforcing and doing anything in connection with" is a composite expression, it may be seen as seeking to catch the various related and sequential ways in which PMA may find itself out of pocket in establishing a liability of Xstrata under clause 7.1 or 7.2. 49 It is not necessary and probably impossible to be exhaustive in seeking to identify what the content of the expression "in doing anything in connection with the Guarantee and Indemnity" may include. Xstrata submits and I accept that the expression is probably a catch all phrase designed inter alia to ensure that any other step closely related to making or enforcing a valid demand under those clauses, or consequential upon a valid demand, is also the subject of the costs indemnity. 50 The resultant holding is that: · the parties have deliberately chosen that the subject matter of the clause 7.7(a) obligation will be the narrow and specific obligations under clauses 7.1 and 7.2; · the parties have refrained from, either in addition or substitution, defining the subject matter of the clause by reference to obligations of Xwin under the Agreement, or indeed more broadly obligations of Xwin or Xstrata under the Agreement; · the purpose of clause 7.7 (a) is to give PMA a costs , charges and expenses indemnity where Xstrata does have a liability under clause 7.1 or 7.2. 51 As Mr Gleeson submitted the construction of clause 7.7(a), confining it to costs incurred in respect to valid claims under clauses 7.1 and 7.2, is confirmed by the balance of the clause. Specifically: · under clause 7.7(b) the indemnity for stamp duties, etc payable in connection with (to use those words again) the obligations under clauses 7.1 and 7.2 goes on to refer to "a payment, receipt or other transaction contemplated by it". This, by ordinary meaning, is referring to payments, receipts or other transactions which are called for pursuant to the correct operation of clauses 7.1 and 7.2, not matters invalidly claimed under them; · the final 4 lines of clause 7.7 recognise that receipts from Xstrata in the hands of PMA are first applied to the costs under clause 7 and then against "other obligations under the Guarantee and Indemnity". This serves to confirm that the purpose of clause 7.7 is to facilitate and make effectual the rights of PMA secured by clauses 7.1 and 7.2. They are the drivers under the clause. Costs are a subsidiary but important protection. There is no intent to give costs protection for invalid claims; · the heading of the clause (which may be taken into account) confirms this construction. 52 Xstrata drew attention to the fact that although there is discussion in O'Donovan and Phillips, The Modern Contract of Guarantee, 2003 at pages 277 – 278 of a number of cases concerning attempts by the creditor to hold the guarantor liable for costs incurred in pursuing the principal debtor, on analysis all of those cases are limited to the situation where the creditor has succeeded in establishing a liability of the principal debtor. I accept that none of them appear to provide any support for the proposition that a costs of enforcement clause in a guarantee permits the creditor to hold the guarantor liable for failed actions against either the principal debtor or the guarantor itself. 53 Returning to the principles earlier referred to, I accept that in construing written contracts it should be presumed that the parties did not intend their terms to operate unreasonably, and indeed the more unreasonable the result a party's construction would produce, the more unlikely it is that the parties would have intended it: Peppers Hotel Management Pty Ltd v Hotel Capital Partners Limited supra. As was noted in Peppers, if the parties did intend an unreasonable result it is essential that that intention be made 'abundantly clear': L Schuler AG v Wickman Machine Tool Sales Limited [1974] AC 235. It seems to me that had the parties to the agreement intended that clause 7.7 would require an invalid demand to be honoured, and for the defendant to pay for the costs of a wrongful claim to be made against it by the plaintiff, those matters would have been expressly stated. 54 Clearly if there be any doubt, the Guarantee and the Indemnity should be construed favourably to Xstrata: Andar Transport Pty Limited v Brambles Ltd [2004] HCA 28 at [21] – [23] and [29]. 55 What follows is that if the outcome of the curial proceedings be such as to demonstrate that PMA had indeed sought to enforce what are shown to be its actual legal rights under the Guarantee and/or the Indemnity, then Xstrata will be liable to pay all costs, charges and expenses including legal costs and expenses incurred in connection with that enforcement. However it is important to note that because of the number of issues being litigated questions might arise as to the extent of costs of the proceedings which could be seen to have involved only enforcement of PMA's legal rights under the Guarantee and/or the Indemnity. Further questions not presently falling for consideration may arise in relation to merger of contractual obligations into judgment. Other considerations 56 It should be noted that it has not been a necessary for the Court to consider whether or not the costs of pursuing Xwin in the contract proceedings may be properly described as "costs in connection with the Guarantee and Indemnity". The separate question determination 57 For the above reasons each of the first and second separate questions is answered in the negative. Submissions will be taken on the need, if any, to answer the third of the separate questions. I certify that paragraphs 1 - 57 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 9 March 2005 ___________________ Susan Piggott Associate 9 March 2005 18/03/2005 - Mr McCormack's initials were incorrectly typed as RJC instead of RJL - Paragraph(s) Counsel box 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.