Supreme Court New South Wales Medium Neutral Citation: Padstow Corporation Pty Ltd v Fleming (No 3) [2013] NSWSC 24 Hearing dates: 19 November 2012 Decision date: 30 January 2013 Jurisdiction: Equity Division - Revenue List Before: Gzell J Decision: Guarantee unlimited. Damages to be calculated on basis no GST. Entitled to diminution in value of land at sale plus loss of rent to date of sale. Small discount for possibility of non-removal as guarantor Catchwords: GUARANTEE AND INDEMNITY - Actions against surety - damages - whether limited to amount of bond for three month's rent - whether calculated on basis no GST on court awards - whether entitled to diminution in value of land on sale plus loss of rent to end of lease - damages for breach of agreement to remove a guarantor - amount paid to settle action on guarantee less discount for possibility that might not have been removed Cases Cited: Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 Padstow Corporation Pty Ltd v Fleming (No 2) [2011] NSWSC 1572 Texts Cited: M Y Bearman and DJ McInerney, CGT, GST on Judgments and Settlements (2008) Victorian Tax Bar GST Ruling GSTR 2001/4 Category: Separate question Parties: Padstow Corporation Pty Ltd (Plaintiff) Thomas John Fleming (Second Defendant) Harold O'Brien (Third Defendant) Thomas Maurice Fleming (First Defendant) Alan Sher (Third Cross-Claimant) Robert Minter (Cross-Defendant to Fourth Cross-Claim) Representation: Counsel: J Sleight (Plaintiff) L Thomas (First Defendant) Solicitors: Neville and Hourn Legal (Plaintiff) Addisons Lawyers (First Defendant) Cordato Partners (Second Defendant) File Number(s): SC 2008/279166 Judgment 1I delivered judgment on liability in this matter on 16 December 2011: Padstow Corporation Pty Ltd v Fleming (No 2) [2011] NSWSC 1572. I now deal with quantum. 2In accordance with my finding on liability the only matters that require a determination of damages are those payable to the plaintiff, Padstow Corporation Pty Ltd (Padstow), by the second defendant, Thomas John Fleming (Fleming Jnr), pursuant to the guarantee in the lease and those payable by Fleming Jnr to Thomas Maurice Fleming, the first defendant (Fleming Snr), for breach of cl 6.5 the Share Sale Agreement (Share Agreement). The Guarantee 3Fleming Jnr was not represented in the damages hearing and did not appear in person. Submissions on his behalf were, however, filed. The submission was raised in them that the terms of the lease on a proper construction limited Fleming Jnr's liability to three months' rent. 4Clause 13 of the lease from Padstow to Hamola Crochet Pty Ltd (Hamola) contained a guarantee that I held was effective. It was in the following terms: "CLAUSE 13 GUARANTEE What are the obligations of a guarantor? 13.1 This clause applies if a guarantor of the tenant is named in item 10A in the schedule and has signed or executed this lease or, if this lease is a renewal of an earlier lease, the earlier lease. 13.2 The guarantor guarantees to the landlord the performance by the tenant of all the tenant's obligations (including any obligation to pay rent, outgoings or damages) under this lease, under every extension of it or under any renewal of it or under any tenancy and including obligations that are later changed or created. 13.3 If the tenant does not pay any money due under this lease, under any extension of it or under any renewal of it or under any tenancy the guarantor must pay that money to the landlord on demand even if the landlord has not tried to recover payment from the tenant. 13.4 If the tenant does not perform any of the tenant's obligations under this lease, under any extension of it or under any renewal of it or under any tenancy the guarantor must compensate the landlord even if the landlord has not tried to recover compensation from the tenant. 13.5 If the tenant is insolvent and this lease or any extension or renewal of it is disclaimed the guarantor is liable to the landlord for any damage suffered by the landlord because of the disclaimer. The landlord can recover damages for losses over the entire period of this lease or any extension or renewal but must do every reasonable thing to mitigate those losses and try to lease the property to another tenant on reasonable terms. 13.6 Even if the landlord gives the tenant extra time to comply with an obligation under this lease, under any extension of it or under any renewal of it or under any tenancy, or does not insist on strict compliance with the terms of this lease or any extension of it or renewal of it or of any tenancy, the guarantor's obligations are not affected. 13.7 If an amount is stated in item 10B in the schedule the guarantor's liability under this clause is limited to that amount. 13.8 The terms of this guarantee apply even if this lease is not registered, even if any obligation of the tenant is only an equitable one, and even if this lease is extended by legislation." 5Item 10B in the Schedule did not state an amount, but was in these terms: "Limit of guarantor's liability: The Guarantors shall not be required to provide guarantees referred to in clause 13 during such time as the Lessee shall have paid the Security Bond referred to in clause 16." 6Clause 16 was in the following terms: "CLAUSE 16 SECURITY BOND The Lessee shall pay to the Lessee (sic) an amount equal to three (3) monthly instalments of Rent plus GST and which said sum shall be held by the Lessor as a bond and which shall be refunded to the Lessee at the expiration of the term of the lease and on vacation of the permises (sic) hereby demised to the Lessee PROVIDED THAT such amount shall not be payable until 1 January 2005 AND FURTHER PROVIDED THAT the Lessor shall be entitled to deduct from the said sum or apply the same towards the satisfaction of any amount that may be payable to the Lessor provided that if such amount is payable as a result of a breach of any of the terms conditions or covenants of the Lease then such deduction shall not be deemed to waive the breach." 7It was submitted on behalf of Fleming Jnr that reading cl 13.7 of the lease together with Item 10B of the Schedule as imposing a limitation on the amount of liability of the guarantor, consistent with the quantum of the bond, produced an harmonious outcome. It was submitted that in the event that the bond was paid, the lessor had no guarantee to call upon but had the capacity to access three months' rent in satisfaction of any claim. In the event that the bond was not paid, it was submitted that the liability of the guarantor was limited to the same amount. 8It was submitted that to read cl 13.7 and Item 10B as providing either a security bond of three months' rent and no guarantee, or no security bond but a guarantee without limitation under which the guarantor might be liable for an amount of approximately $2m, would amount to an absurd construction. It was submitted that such a capricious and unreasonable construction should be avoided and any doubt as to how the provision operated should be resolved in favour of the guarantor (Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549). 9The argument that if the bond is not paid the liability of the guarantor is limited to the same amount as if it were paid, defeats the whole purpose of the guarantee. In my view the guarantee is unlimited unless and until the bond is paid, in which event the guarantor is released from the guarantee. In this case, no bond was provided. It follows, in my view, that the liability of Fleming Jnr under the guarantee is not limited in the manner submitted on his behalf. 10The land the subject of the lease was sold on 26 February 2010 without the benefit of the lease to Hamola. The sale price was $3.6m, $90,000 below its core market value. Padstow claims the $90,000. Fleming Jnr did not oppose it. 11In addition, Padstow claims loss of bargain damages calculated as the rent due from 22 January 2008 to the end of the lease on 30 September 2012, less expected market rent during the residue of that term. 1222 January 2008 was the date the liquidators were appointed to Hamola. Fleming Jnr contends for 22 April 2008 when Padstow resumed possession of the property. 13It is the later date that is appropriate. Clause 12.1.2 of the lease provides that it ends if the landlord lawfully enters and takes possession. Clause 12.2.2 provides that the landlord may enter and take possession if the rent is 14 days overdue. Padstow did not take advantage of this entitlement until it entered into possession on 22 April 2008. 14It was submitted on Fleming Jnr's part that Padstow could not have the diminution in value on sale and lost rent until the end of the term of the lease. To do so would be double-dipping. Padstow is entitled to the loss of rent until the sale of the property. I agree with this submission. Padstow gets the diminution in the capital value of its asset on sale and the loss of rent until that date. 15There is a dispute about post-liquidation expenses incurred by Padstow. The submissions on behalf of Fleming Jnr objected to some of the expenses. I ordered Padstow to file further submissions dealing with those objections. 16One starts with Schedule C to the submissions on behalf of Fleming Jnr. They accept an amount of $42,992.03 as post-liquidation expenses. 17In a letter of 15 January 2008 from HML Lawyers, $3,855.05 was claimed with respect to a variation of the lease and a sale of the land. Fleming Jnr objects that those services pre-dated the liquidation of Hamola and were not referable to any breach by the lessee. Padstow argues that its only asset was the land and as a result of the failure to pay rent, which was in arrears of $137,348.38 when Hamola went into liquidation, it was unable to service the loan it took out to purchase the land. Padstow submits that these costs fall within the first limb of the rule in Hadley v Baxendale (1854) 9 Exch 341 at 354; 156 ER 145 at 151: "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it." 18In my view these costs arose naturally, in the usual course of things, from the breach of the obligation to pay rent and are recoverable. The costs fairly and reasonably arose from the breach of the guaranteed obligation of Hamola to pay rent. The fact that they were incurred before Hamola went into liquidation does not deprive Padstow of their recovery. 19On 21 February 2008, McCabe Terrill, Lawyers claimed $2,086.66. Fleming Jnr's objection was that there was no evidence of any work required from that firm and without more the court could not be satisfied that the expense was incurred as a consequence of any breach by the lessee. 20The tax invoice stated that the services were for acting on Padstow's behalf in relation to Hamola for the period from 24 January 2008 to 17 February 2008. I accept the submission on behalf of Padstow that it can be inferred from the face of the document that the costs arose as a consequence of the non-payment of rent by Hamola, the land being the only asset of Padstow and entirely the subject of the lease to Hamola. 21Fleming Jnr objects to a tax invoice from McCabe Terrill, Lawyers for acting in the matter of Hamola from 18 February 2008 to 17 March 2008. For the reasons expressed above I am of the view that Padstow is entitled to $1,180.30, the amount of the tax invoice. 22Adcorp Marketing Communications issued a marketing campaign estimate/tax invoice for $11,735.05 on 24 April 2008. The objection is that the court could not be satisfied that the amount had been incurred. 23I agree with that submission. I am not satisfied that it is other than an estimate and its inclusion in a submission for the sale of the property in February 2008 does not raise it above the level of an estimate. Nor does the fact that the documents were addressed to Falcon Ridge and it was appointed to coordinate the sale of the property. 24The total electricity bill in the 2008 financial year was $1,956.88. The objection was that Padstow claimed $1,317.73. Padstow accepts that the amount claimed should have been $1,956.88. It says that when the entire property was the subject of the lease to Hamola, the tenant met all electricity charges incurred. When Hamola vacated the property, electricity charges were incurred as the property was only partially let. Padstow claims them as naturally flowing from the breach of the lease. I agree with that submission. 25With respect to the 2009 financial year, Fleming Jnr points out that the total amount of electricity payable was $5,985.86 and not $12,972.53 claimed by Padstow. In conformity with my previous ruling, Padstow is entitled to $5,985.86. 26Colliers International issued a tax invoice to Padstow on 14 July 2008 in relation to a lease of the land to W K Granite & Marble. The amount of the tax invoice was $30,371. It contained writing that on 12 August 2008, $15,000 was made as a part payment. It also contained a stamp that it had been approved for payment in the total amount. 27It was submitted on behalf of Fleming Jnr that the court could not be satisfied that the balance of the tax invoice had been paid. But the total amount had been incurred and it related to the re-letting of part of the land in discharge of Padstow's duty to mitigate its loss. Padstow is entitled to the amount of the tax invoice. 28AAABA A Better Alternative Rubbish Removal issued an invoice on 14 July 2008 to Falcon Ridge for the removal of rubbish, one and a half loads for $539. It was submitted that it was not apparent that this cost was incurred in respect of Fleming Jnr's breach. 29Falcon Ridge had been engaged by Padstow to manage the sale of the land that was not fully let in July 2008. I agree with the submission on behalf of Padstow that it can be inferred that the rubbish removal was in respect of maintaining the vacant part of the subject land and making it fit for sale or re-letting. 30On the same basis an invoice for $660 for pest control work on the land is recoverable by Padstow. 31Objection to the other items in Fleming Jnr's submissions were not pressed. The total for the post-liquidation expenses is thus $89,626.78. 32It was submitted on behalf of Fleming Jnr that damages should not be calculated on the basis that GST is to be included because no liability to collect and remit GST will arise in respect of an award of damages. 33The Commissioner of Taxation accepts that an award of damages by a court and its payment is not a taxable supply by the court: GST Ruling GSTR 2001/4 at [60]. 34However, the Commissioner asserts in GSTR 2001/4 at [116] that if there is a sufficient nexus between an amount awarded and a supply, GST may be payable. 35In my view, that is wrong. An award of damages made by a court is payable solely in consequence of the court's order, not in consequence of the underlying dispute. I endorse the views expressed by M Y Bearman and DJ McInerney at p 11 of a paper published by the Victorian Tax Bar on 7 March 2008 entitled "CGT, GST on Judgments and Settlements". 36The damages payable to Padstow should be calculated on the basis that GST is not payable on the court's award. 37The interest schedule upon which Padstow relied will need adjustment in light of my findings. Interest has been charged at 12 per cent. That seems to me to be appropriate. Clause 5.1.5 of the lease provided that the tenant must pay to the landlord interest at the rates stated in Item 15 in the Schedule when payment was more than 14 days overdue. The rate in Item 15 was 12 per cent. 38Padstow received $375,000 to settle its claim against Fleming Snr. The submissions on behalf of Fleming Jnr suggests the figure is $425,000. Whatever the figure, it is to be deducted either in the judgment or by Padstow giving credit against the judgment amount. It is preferable to adopt the former approach as it finalises the matter. 39Padstow is entitled to an order for costs against Fleming Jnr. The Share Agreement 40Fleming Jnr made no submission in opposition to the written submissions of Fleming Snr with respect to Fleming Jnr's breach of cl 6.5 of the Share Agreement. 41It was between Fleming Snr, Fleming Jnr, Alan Maurice Sher, Hamola and a New Zealand company, Webbing & Trimming (NZ) Ltd. Fleming Snr had told Fleming Jnr and Sher that he was ready to retire and would give them his remaining shares for nothing so long as he had no further responsibilities and was "off" the guarantees. 42The Share Agreement describes Fleming Snr as the transferor, Fleming Jnr as the first transferee and Sher as the second transferee. Hamola is the company. Clause 6.5 was as follows: "The First and second transferee's (sic) agree to ensure the Transferor is removed from all current guarantees signed by him in his capacity as a director of the company and the NZ Company, including, but not limited to: a) all guarantees on leased and other financed motor vehicles registered in the name of the company and the NZ company; b) all guarantees on leased and other financed plant and equipment operated by the company and the NZ company; c) any guarantees provided to St George Bank Ltd in relation to the overdraft facility provided to the company; d) any guarantees provided to Scottish Pacific Ltd in relation to the invoice discounting facility provided to the company or the NZ Company; e) any guarantees provided to Bibbies in relation to the invoice discounting facility provided to the company or the NZ Company; f) any guarantees provided in relation to rent of the premises for the Company and the NZ Company." 43In my judgment on liability I found that Fleming Jnr was in breach of this clause in failing to take steps to have Fleming Snr removed as a guarantor. 44There was no opposition to Fleming Snr's claim that he was entitled to damages of $375,00, the amount he paid to Padstow to settle its claim against him, less a discount to reflect the possibility that Fleming Snr would not have been released from the guarantee even if Fleming Jnr had complied with cl 6.5. 45In light of my findings that there was every probability that Fleming Snr would be released, the amount of that discount is appropriately small. Fleming Snr submitted that it should not exceed 20 per cent so that the damages awarded would be no more than $375,000 and no less than $300,000. 46In my view, the discount should be 10 per cent and the amount to which Fleming Snr is entitled is thus $337,500. 47Fleming Snr is entitled to interest on that amount at Supreme Court rates from 20 October 2011 when the $375,000 was paid. 48He is also entitled to costs against Fleming Jnr. I direct the parties to bring in short minutes of order reflecting these reasons. ********** 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: 30 January 2013