New South Wales Supreme Court CITATION : Grenfell Securities Limited v Midland Montagu Securities Pty Limited [2010] NSWSC 529 HEARING DATE(S) : 24 May 2010 JUDGMENT DATE : 24 May 2010 JURISDICTION : Equity Division JUDGMENT OF : Windeyer AJ EX TEMPORE JUDGMENT DATE : 24 May 2010 DECISION : Summons dismissed. Plaintiff to pay defendant's costs. CATCHWORDS : CONTRACTS - construction and interpretation of contracts - commercial agreements CATEGORY : Principal judgment CASES CITED : Grey v Pearson (1857) 6 HL Cas 61; 10 ER 1216 Tutt v Doyle (1997) 42 NSWLR 10 PARTIES : Grenfell Securities Limited (Receivers and Managers Appointed) (Plaintiff) Midland Montagu Securities Pty Limited (Defendant) FILE NUMBER(S) : SC 290579 of 2009 COUNSEL : I M Jackman SC with him D Klineberg (Plaintiff) S G Finch SC with him J S Tobin (Defendant) SOLICITORS : Baker & McKenzie (Plaintiff) Watson Mangioni (Defendant) - 7 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Windeyer AJ Monday 24 May 2010 290579/2009 Grenfell securities Limited (receivers and managers appointed) ACN 075 358 075 v Midland Montagu Securities Pty Limited ACN 072 022 818 JUDGMENT 1 HIS HONOUR: The question for decision in this case is whether certain clauses which appear in indemnity agreements mean what they clearly appear to say. The answer is that they do. The reasons are as follows. 2 The plaintiff company, Grenfell Securities Limited (Receivers and Managers appointed) (Grenfell) raised money on debentures pursuant to a registered prospectus. It then lent those moneys on mortgage secured generally on real estate. 3 The liability of the borrowers to pay the borrowed money was at times guaranteed by a third party who may or may not have given security to support the guarantee. 4 Grenfell entered into a management agreement with the defendant, Midland Montagu Securities Pty Limited (Midland) under which Midland was responsible to oversee the mortgages and, as the moneys secured by debentures were invested in three separate funds, it also was engaged to oversee the operation of those funds. Grenfell and Midland entered into agreements called indemnity agreements under which, for a fee, Midland indemnified Grenfell against certain losses which Grenfell might suffer as a result of default on the mortgage loans. There were four agreements in almost precisely the same terms, each of which covered a period of one year. These are referred to as the 2003 Indemnity, the 2004 Indemnity, the 2005 Indemnity and the 2006 Indemnity. There was a fifth agreement called the 2007 Indemnity in somewhat different terms. There was also a document described as the "2006 Indemnity Extension" which, if effective, extended the terms of the 2006 Indemnity for the period from 1 July 2007 to 30 June 2008. If it did come into operation then the 2007 Indemnity would be cancelled by it or would have to operate beside it. 5 On 31 October 2008, receivers and managers were appointed to Grenfell by Trust Company Fiduciary Services Limited, the trustee for the debenture holders. At the time of appointment the relevant funds had advanced approximately $60 million to approximately 25 borrowers on about 40 separate loans. It is not quite clear from the evidence whether or not the receivers and the managers were appointed to the funds or to the company, but it does not really matter. 6 There is, or was, a close connection between the parties. Mr David Ainsworth has been a director of the plaintiff since 1996 and was a director of the defendant from 1995 to 2007 and became a director again on 1 January 2009. Mr Colin Grady has been a director and secretary of the plaintiff since 1996 and was secretary of Midland from 1995 until 1 March 2009. 7 The indemnity agreements which I will number are as follows: 1. The 2003 Indemnity dated 15 July 2003, covering the period 1 July 2003 to 30 June 2004; 2. The 2004 Indemnity dated 15 July 2004, covering the period 1 July 2004 to 30 June 2005; 3. The 2005 Indemnity dated 31 March 2006, covering the period 1 July 2005 to 30 June 2006; 4. The 2006 Indemnity dated 7 June 2006, covering the period 1 July 2006 to 30 June 2007; 5. The 2007 Indemnity dated 17 July 2007, covering the period 1 July 2007 to 30 June 2008; and 6. The 2006 Indemnity Extension dated 30 June 2008, covering the period 1 July 2007 to 30 June 2008, which, if effective, came into being as a result of a letter signed by Mr Ainsworth on behalf of Midland on 30 June 2008 pursuant to the terms of the 2006 agreement. 8 I have only set out the details in this paragraph to show the dates on which the various documents were signed, as it will be seen that the 2005 Indemnity which covered the period from 1 July 2005 to 30 June 2006 was not signed until 31 March 2006. 9 The relevant clauses of documents 1, 2, 3, 4 and 6, if 6 applies, are as follows: 1.1. This indemnity applies only in respect of losses sustained by the Lender in respect of mortgage loans in the Financial Year set out in schedule as "The Financial Year". 2.1. The losses to which the indemnity applies are any losses suffered by the Lender during the Financial Year in respect of the principal or the balance of principal of any loan recorded in its books of account and secured by a mortgage over real estate situate in Australia (the "Loans") arising from a default under the mortgage by the borrower necessitating a sale of the real estate securing the loan to the Lender and after having exhausted all efforts to recover such losses. 10 The financial year referred to was in each case the period which I have set out in the preceding paragraph. 11 It is convenient to deal with these five documents at this stage. The claim of Grenfell is that under each of the agreements "the plaintiff is entitled to indemnity from the defendant in respect of losses suffered by the plaintiff in respect of Loans (as defined in the 2003 Indemnity) that went into default in the Financial Year (as defined in the 2003 Indemnity) regardless of whether or not the plaintiff had, during the Financial Year, exhausted all other remedies available to it in recovering such losses." What is put is that default triggered the liability to pay the amount of the loss but that the amount to be paid would be calculated as a result of a netting off process in due course. In other words, there was no requirement to exhaust all the remedies before there was a liability under the indemnities. 12 The question is whether that is what the agreement means. On its clear words it is not. If agreements on their wording are absurd then wording can be added or deleted to make the agreement sensible. If words are just unreasonable the words still mean what they say. Here the words are not unreasonable and they are certainly not absurd. Even in commercial contracts there is a lot to be said for Lord Wensleydale's Golden Rule, namely "that in construing wills and indeed statutes, and all written instruments, the grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some absurdity, or some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid that absurdity and inconsistency, but no farther". Grey v Pearson (1857) 6 HL Cas 61; 10 ER 1216 at 1236. 13 Commercial agreements are, however, to be construed in context so as to make them commercially effective. That, however, does not necessarily mean that one picks a construction for a commercial outcome contrary to an outcome which does make commercial sense on the ordinary meaning of the words. I am of the clear view that counsel for the defendant is correct and that liability was conditioned upon a default giving rise to a loss and that a loss only arose after exhaustion of all efforts to recover such losses. That, in my view, is the only construction which can be given to paragraphs 1.1 and 2.1 of those five instruments. 14 In the 2007 Indemnity the relevant clauses are different. They are as follows: 1.1. All previous agreements between MMS and GRE are terminated as at June 30, 2007 other than the agreement for provision of premises, staff, furniture and equipment as noted in paragraph (f) above and as regards any moneys due the one to the other under any prior agreement. 2.1. MMS will indemnify GRE for any loss of principal it may suffer during the financial year ending June 30, 2008 arising under any mortgage loan which is in or goes into default during the financial year. GRE will not make any loan as from the date hereof other than as provided in its Prospectus. 2.2. A loss of principal will only arise once GRE has exercised and exhausted all its rights against the security, the borrower and any guarantor of the mortgaged [sic] loan. 15 In my view clause 1.1 makes it clear that if under any of the prior indemnity agreements moneys had become due because a loss had crystallised and all recovery efforts had concluded but the amount due had not been paid, then it was still to be paid. So far as the balance is concerned, in my view it means exactly the same as was meant under the prior agreements, and that is that the indemnity was against a loss of principal but a loss of principal would only arise after exhaustion of rights. I cannot see that there is any other construction which is reasonably available. "Once" does not carry a meaning which is different from "and after". 16 There is in the 2007 agreement an additional clause which provided that Midland would be engaged in realising securities arising from the default and it is said that Midland would therefore be able to delay recovery processes, thereby ensuring or perhaps helping to ensure that no payments would have to be made under the indemnity. I do not think that conduct should be thought as something which was likely to occur and neither do I think that it would make any difference to the proper construction of the agreements as they would be without that clause being there. 17 I turn finally to the extension agreement. If it came into operation it did so as a result of a letter which Mr Ainsworth signed and gave to Grenfell. Indemnity agreements numbered 1 to 4 provided for extension if Midland signed a letter in the form annexed to the indemnity deed. That form provided that the indemnity would apply on receipt of the indemnity fee calculated and set out in the letter. Mr Ainsworth says that the letter was signed by mistake. If so, it was a unilateral mistake because the other party to the contract, if there were one, was not required to do anything to bring it into effect. 18 The indemnity extension agreement, in accordance with the document annexed to each of the agreements, did state in its second paragraph, "On receipt of payment of the "Indemnity Fee" for July the Indemnity will apply for that Financial Year on the same terms and conditions." Mr Ainsworth said that no indemnity fee was paid. That is in effect correct, although there was an indemnity fee paid for July, but clearly that was paid under the 2007 agreement. Counsel for the plaintiff said that it may have been paid on the basis that the extension agreement would subsequently be brought into effect, but I do not think there is anything to suggest it was paid on that basis. 19 If the signing of the letter brought a contract into effect then the ordinary principles which apply to unilateral mistake cannot really bear on the matter because it could not be said that the conduct of Grenfell brought about the mistake which was made. Nevertheless, if it were important it would seem to me that the signing of the letter was clearly a mistake of which Grenfell knew or ought to have known and on that basis, bearing in mind the principles stated by Justice Handley in Tutt v Doyle (1997) 42 NSWLR 10 at 17, it would appear that that mistake would mean that any contract brought about was void or could be rescinded. 20 In this case I do not think that there is any point in going into the matter any further because on the decision to which I have come it would not matter which of the 2007 Indemnity agreement and the 2006 Indemnity Extension applied because the proper construction would bring about the same result. In those circumstances the summons should be dismissed with costs. 21 The orders are that the summons be dismissed, and the plaintiff to pay the defendant's costs. 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