Supreme Court New South Wales Medium Neutral Citation: National Australia Bank Limited v Benchmark (Aust) Pty Limited & Ors [2011] NSWSC 1464 Hearing dates: 29 November 2011 Decision date: 30 November 2011 Before: McCallum J Decision: Application for summary judgment granted. Judgment for the plaintiff in the sum of $6,589,177.42. Catchwords: CONTRACT - construction - guarantee - whether later guarantee replaced earlier guarantee - attempt to rely on pre-contractual conversations and post-contractual conduct as an aid in construction Cases Cited: Agricultural & Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 Mahoney v McManus (1981) 180 CLR 370 Spencer v Commonwealth [2010] HCA 28; (2010) 241 CLR 118 Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 Category: Principal judgment Parties: National Australia Bank Limited (plaintiff) Benchmark (Aust) Pty Limited (first defendant) Landon Hodgkinson (second defendant) Michael Sanchez (third defendant) Representation: J Stoljar SC with J Hynes (plaintiff) D Klineberg (first and third defendants) Turks Legal (plaintiff) Levitt Robinson Solicitors (first and third defendants) File Number(s): 2010/27037 Publication restriction: None Judgment 1These are proceedings to enforce guarantees given to National Australia Bank as security for the borrowings of a company now in receivership, Lauderdale Project Pty Limited (Receivers and Managers Appointed). Issues determined in this judgment 2Guarantees to secure Lauderdale's liabilities were given to the Bank by the defendants in both 2007 and 2008. The Bank initially sued only on the guarantee agreement entered into in 2008. The guarantors under that agreement are the three defendants to these proceedings, Benchmark (Aust) Pty Limited, Mr Landon Hodgkinson and Mr Michael Sanchez. 3The first and third defendants filed a defence to the Bank's claim under the 2008 guarantee alleging that, before the guarantee was entered into, the Bank made false or misleading and deceptive representations or otherwise engaged in unconscionable conduct such as to preclude enforcement of the guarantee. 4The second defendant, Mr Hodgkinson, is no longer an active party in the proceedings, having recently had a trustee in bankruptcy appointed. The Bank proposes to discontinue its claim against him and to prove its debt in his bankruptcy. Accordingly, it is not necessary to consider the claim against him. 5On 24 March 2011, the Bank filed a notice of motion seeking summary judgment against the defendants. The notice of motion was initially listed for hearing on 6 June 2011 before Kirby J as duty Judge. Shortly before that date, the Bank filed a reply to the unconscionability defences in which it alleged that, even if the Court were to accept the contentions relied upon by the defendants, they remained liable pursuant to the terms of the 2007 guarantee. 6Kirby J evidently took the view (correctly, in my respectful opinion) that, since the 2007 guarantee had been pleaded only by way of reply to the defences raised and not as a substantive cause of action, it could not be relied upon by the Bank as the foundation for summary judgment. His Honour accordingly stood the notice of motion over to be heard together with the substantive claim and granted leave to the plaintiff to amend. The Bank duly amended its statement of claim to plead a cause of action based on the 2007 guarantee. 7The only defence raised by the first and third defendants to the amended claim invoking the 2007 guarantee is that the Bank was not entitled to rely upon that guarantee after 20 August 2008, when the second guarantee was entered into. 8The proceedings were listed for final hearing commencing on 29 November 2011. At the outset of the hearing, I was informed that the third defendant, Michael Sanchez, was unwell and would be unavailable for cross-examination during the time allocated for the hearing. It was common ground that the hearing of the defences to the claim under the 2008 guarantee could not proceed in his absence. However, the Bank proposed that it could nonetheless move on the notice of motion for summary judgment (with appropriate amendment) so as to seek judgment on the claim under the 2007 guarantee. For that purpose, the Bank did not require Michael Sanchez for cross-examination. It was indicated on behalf of the Bank that, if the Court were to grant summary judgment on the claim under the 2007 guarantee, the Bank would abandon the balance of its claim, obviating the need for any further hearing. 9The first and third defendants did not oppose that course and the hearing proceeded accordingly. This judgment determines the Bank's notice of motion filed 24 March 2011 (as amended by leave during the hearing so as to apply to the claim under the 2007 guarantee). Summary judgment application 10The principles to be applied when the Court is asked to exercise its power to determine proceedings summarily are well-known and need not be repeated here. I am mindful of the principle, recently reiterated by the High Court, that the power should be exercised with great care and only where it is clear that there is no real question to be tried: Spencer v Commonwealth [2010] HCA 28; (2010) 241 CLR 118 at [24] per French CJ and Gummow J. The test is one which requires demonstrated certainty of outcome: Spencer at [55] per Hayne, Crennan, Kiefel and Bell JJ. 11Applying that test, I have concluded that the application for summary judgment on that part of the Bank's claim that invokes the 2007 guarantee should be granted. The 2007 Guarantee 12The initial facility provided to Lauderdale was a bill facility established on about 15 August 2007. The amount advanced to Lauderdale under the bill facility was $5.4 million. 13The letter of offer in respect of the bill facility specified that the Bank required security for the facility in the form of registered mortgages over two properties together with a guarantee and indemnity for $5.4 million from Benchmark, Christian Sanchez, Michael Sanchez and Landon Hodgkinson. At the time the facility was granted, the three individuals named as proposed guarantors were the directors of Lauderdale. 14On 15 August 2007, each of the defendants duly executed a guarantee and indemnity up to a limit of $5.4 million plus specified additions such as interest, fees and costs. 15The primary obligation of the guarantors under the guarantee was set out in clause 6.2 of that agreement, which provided: You guarantee that the customer will pay NAB all the amounts which the customer owes NAB at any time. If the customer does not pay an amount when due, you agree to pay that amount to NAB when NAB demands it. NAB may demand from you separately different amounts which the customer fails to pay. 16The "customer" was Lauderdale. The term "you" was defined to mean: The person/s named in the details as guarantor, and if there are more than one, means each of them separately and every two or more of them jointly. It includes the lawful successors of you. Your has a corresponding meaning. 17Clause 20 of the guarantee was headed "your liability is separate to all other security NAB holds" and provided: Despite any rule of law or equity to the contrary: (a) this guarantee is additional to every other security, guarantee, indemnity, right and remedy NAB holds now or later; and (b) this guarantee and NAB's rights and remedies under it and any other security, guarantee, indemnity, right, remedy or instrument which NAB has at any time continue to exist separately and do not merge with or affect each other. 18Finally, clause 25 of the guarantee provided: 1. NAB may exercise its rights, remedies and powers under this Guarantee in any way that NAB considers appropriate without giving you reasons. 2. If NAB does not exercise any of them at any given time, this does not mean that it has given them up, or that it cannot exercise them later. 3. NAB cannot be considered to have given up any of them, or any demand or notice given under them, because it has started negotiations or accepted any payment. Events after the execution of the 2007 guarantee 19On 5 November 2007, one of the guarantors under the 2007 guarantee, Christian Sanchez, resigned as a director of Lauderdale. 20On 20 August 2008, the Bank granted to Lauderdale an overdraft facility for a further $200,000. The security required in respect of the overdraft facility included a guarantee and indemnity for $5.6 million from Benchmark, Landon Hodgkinson and Michael Sanchez. At that time, Landon Hodgkinson and Michael Sanchez were the directors of Lauderdale. 21The 2008 guarantee was duly executed the same day by those three parties who, as already noted, are the defendants to these proceedings. Importantly, the 2008 guarantee contained clauses in identical terms to clauses 6.2 and 20 in the 2007 guarantee (set out above) except that clause 20 in the 2008 guarantee has some additional words that put the position further beyond doubt: Despite any rule of law or equity to the contrary: (a) this Guarantee is additional to every other security, guarantee, indemnity, right and remedy NAB holds ( including from you ) now or later; and (b) this Guarantee and NAB's rights and remedies under it and any other security, guarantee, indemnity, right, remedy or instrument which NAB has at any time continue to exist separately and do not merge with or affect each other. 22In April 2009 the Bank cancelled the overdraft facility and demanded its repayment. Lauderdale's failure to comply with that demand constituted default under the initial facility on the strength of which the Bank demanded repayment of the $5.4 million in May 2009. That and other demands on Lauderdale were not met and in due course, in July 2009, the Bank called on the 2008 guarantee. On 21 April 2011, in response to the defences filed in these proceedings, the Bank also called on the 2007 guarantee. The defendants do not dispute any of those matters. 23As at 22 November 2011 the balance due to the Bank under the 2007 guarantee (assuming its enforceability) was $6,589,177.42, made up as follows: (a) limit of liability under the 2007 guarantee: $5,400,000; (b) interest accrued on the bill facility and unpaid: $1,189,107.42. (c) bank fees and charges unpaid: $70. 24The defendants do not dispute the calculation of those amounts. In the circumstances, the Bank is plainly entitled to judgment, subject only to the following issue. Is there a real question to be tried? 25The only issue raised in opposition to the summary judgment application is whether, after the 2008 guarantee was entered into, the 2007 guarantee continued to be effective and to bind the defendants (as contended by the Bank) or whether it ceased on that date to have any effect (as contended by the first and third defendants). 26The question is one of the proper construction of those two agreements. The principles to be applied in determining that question are beyond dispute. The task is to determine what a reasonable person in the position of the parties would have understood the agreements to mean in the circumstances. 27The first and third defendants do not dispute that, until 20 August 2008, the 2007 guarantee was enforceable against them. They submit, however, that the 2008 guarantee replaced the 2007 guarantee. In support of that contention, they rely (in part) on evidence of certain conversations set out in the affidavits of Michael Sanchez and Christian Sanchez each sworn on 18 July 2011. 28In short, the effect of that evidence is that, in various conversations involving the directors of Lauderdale, it was contemplated that the 2008 guarantee would be given by them in substitution for the 2007 guarantee and that Christian Sanchez would no longer be liable as a guarantor for the debts of Lauderdale, since he was no longer a director of that company. 29In particular, the evidence included the following: (a) on 9 May 2008, Michael Sanchez proposed at a meeting of the directors of Lauderdale that Christian should no longer be required to be a guarantor of any of Lauderdale's debts. The other director, Mr Hodgkinson, agreed; (b) in early June 2008, Michael Sanchez spoke to Mr John Encina, the finance broker who applied for the initial facility on behalf of Lauderdale, and said " Landon and I have agreed that as Christian is no longer a director of Lauderdale he should no longer be a guarantor for Lauderdale's debts. Can you speak to NAB to issue a new guarantee to replace the old one when they approve the additional funds?"; (c) when the 2008 guarantee documents arrived, Christian noted that he had been taken out as a guarantor and said to his father " only you and Landon will have to sign for the replacement guarantee for $5.6 million instead " whereupon Michael Sanchez responded "ok, Phillip and John have sorted that one out then ". 30That evidence can only go to establishing the subjective intention of the first and third defendants in executing the 2008 guarantee, which is of no relevance to the present task. It is evidence which, strictly speaking, I ought to have excluded, even though it was not objected to: see Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [35] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ. It is of no assistance to the first and third defendants on the present application. 31Separately, the first and third defendants relied on a number of other circumstances in relation to the proper construction of the agreement. First, it was noted that Mr Christian Sanchez had been a director of Lauderdale at the time the 2007 guarantee was entered into, and was a party to that guarantee, whereas he was not a director Lauderdale by the time of the 2008 guarantee and was not a party to that guarantee. I do not think his resignation as a director between the dates of the two agreements is of any assistance in construing the clear terms of those agreements. 32Secondly, the defendants relied upon the fact that the limit of the 2008 guarantee comprehended the sum of the two facilities (the $5.4 million advanced under the 2007 facility and the additional overdraft in the sum of $200,000). I accept that that fact is capable of providing some indication pointing in favour of the defendants' contention that the later guarantee was intended to supplant the original guarantee. To put the matter another way, upon obtaining the 2008 guarantee, the Bank had no apparent need for the earlier guarantee, and that is some support for the conclusion that the parties intended that it should no longer be enforceable. That matter is considered further below. 33Finally, the defendants relied upon Bank's conduct in first commencing these proceedings relying only on the 2008 guarantee; in not joining Christian Sanchez as a defendant and in turning to rely on the 2007 guarantee only in response to the defences raised. The Bank accepts that the first demand pursuant to the 2007 guarantee was made on 21 April 2011 and that the claim on that basis was first pleaded in the amended statement of claim filed on 14 June 2011. The defendants further noted in that context that the fourth guarantor under the 2007 guarantee, Christian Sanchez, is still not named as a defendant to these proceedings. 34Those matters do not assist the defendants. As submitted on behalf of the Bank, whilst later conduct may in some circumstances be relied upon as informing the issue whether or not a contract has been entered into, such conduct cannot be relied upon in aid of the construction of the contract: see Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at [26], [36] per Heydon JA; Agricultural & Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [35] per Gummow, Hayne and Keifel JJ and at [163] per Heydon J. 35I have reached the conclusion that none of the matters relied upon by the first and third defendants is capable of prevailing over the clear wording of the contract, set out above. Clause 20 in the 2008 guarantee provides in the clearest terms that the 2008 guarantee was given as security additional to other security held by the Bank, including other security given by the same guarantors. The words used could hardly be clearer. 36In my view, the only factor pointing in favour of the defendants' contention is the fact that the second guarantee secured the whole sum that had then been advanced. Whilst I accept that is a relevant consideration, it is a weak indicator, in my view. The two agreements may have entailed a measure of duplication but they were not inconsistent. There is no reason why they could not both be effective: cf Mahoney v McManus (1981) 180 CLR 370 at 379.7 per Gibbs CJ, Murphy and Aickin JJ agreeing. 37Conversely, in my view, the 2008 guarantee records in the clearest terms the agreement of the parties that it be provided in addition to the 2007 guarantee. Further, as submitted by Mr Stoljar SC on behalf of the Bank, it would be a surprising construction of the 2008 guarantee without express words or indeed any indication to such effect that it expressly released Christian Sanchez from his liability up to a limit of $5.4 million freely entered into by him at a time when he was a director of Lauderdale: cf Mahoney at 379.7. In my view, there are no words in the 2008 guarantee capable of sustaining such a conclusion. 38As already noted, the first and third defendants did not raise any other defence or opposition to the relief claimed in the notice of motion (as amended). I am satisfied to the point of certainty that there is no real question to be tried in respect of the Bank's claim under the 2007 guarantee and, accordingly, that the Bank is entitled to the relief sought. 39I order that judgment be entered for the plaintiff against the first and third defendants in the sum of $6,589,177.42. 40I will hear the parties as to costs. ********** 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. Decision last updated: 16 December 2011