Supreme Court New South Wales Medium Neutral Citation: Adisan Pty Ltd v Irwin [2014] NSWSC 1043 Hearing dates: 23 & 24 June 2014 Decision date: 01 August 2014 Jurisdiction: Common Law Before: Nicholas AJ Decision: (1) The plaintiff's second further amended statement of claim be dismissed. (2) The plaintiff pay the first defendant's costs. (3) Pursuant to s 87(2)(ba) of the Trade Practices Act, order made that the plaintiff's claim be refused. (4) Direct that the orders be entered forthwith. Catchwords: GUARANTEE AND INDEMNITY - loan agreement contained guarantee by first defendant - principal not repaid according to loan terms - variation of loan agreement executed to provide extension of time in which to pay - variation agreement contained guarantee by co-guarantor - lender and co-guarantor agreed to cap liability of co-guarantor - first defendant not aware of capping arrangement - whether first defendant bound by variation of loan agreement Legislation Cited: Trade Practices Act 1974 (Cth) Cases Cited: Ankar Pty Ltd v National Westminster Finance (Australia) Limited (1987) 162 CLR 549; (1987) HCA 15 Category: Principal judgment Parties: Adisan Pty Limited (Plaintiff) Craig Irwin (First Defendant) James Vertzayias (Second Defendant) Representation: Counsel: A Di Francesco (Plaintiff) P Bolster (First Defendant) D Hand (Cross-Defendant/Second Cross-Claimant) Solicitors: Wood Marshall Williams (Plaintiff) Verekers Lawyers (First Defendant) Yates Beaggi Lawyers (Cross-Defendant/Second Cross-Claimant) File Number(s): 2012/101107 Judgment 1The proceedings as finally heard and determined concerned the plaintiff's claim against the first defendant, Mr Craig Irwin (Mr Irwin), under a guarantee in respect of a loan by the plaintiff to the sixth defendant, Globe Projects (Mclntyre) Pty Ltd (Globe), now known as Lamaison Gordon Pty Ltd, and the ninth defendant, Southern Cross Developments (Mclntyre) Pty Ltd (SCD). 2In 2007 SCD and Globe, were involved in a joint venture for the development of a property at Mclntyre Street, Gordon New South Wales. 3Under a loan contract made on 12 April 2007 (the loan contract) the plaintiff agreed to lend SCD and Globe the amount of $600,000 with interest at the rate of 18 per cent per annum, capitalised annually. The loan was guaranteed under a guarantee and indemnity of 12 April 2007 by Mr Irwin, the second defendant, Mr James Vertzayias, the third defendant, Mr Lewis Yazbek, the fourth defendant, Mr Richard Yazbek, the fifth defendant, Mr Andrew Box, and the seventh defendant, Southern Cross Constructions (NSW) Pty Ltd. 4On 19 March 2009 the loan contract was varied by an agreement entitled "Deed of Variation of Loan Contract" (the variation deed). The parties were the parties to, and guarantors of, the loan contract, and the eighth defendant, Bingemann Holdings Pty Ltd (Bingemann). The loan contract, as varied, was guaranteed by Bingemann under a guarantee and indemnity of 19 March 2009. 5Except as against the first defendant, the outcome of these proceedings with respect to the various defendants was as follows: "(a) 1 The 2nd Defendant (James Vertzayias) became bankrupt in 2012 and the Plaintiff has not sought leave of the Court to proceed against him. 2. The 7th Defendant (Southern Cross Constructions (NSW) Pty Ltd) was placed into creditors' voluntary liquidation on 28 November 2012. 3. The 6th Defendant (Lamaison Gordon Pty Ltd) is one of the 2 borrowers for the loan the subject of these proceedings. The Plaintiff has not served the 6th Defendant with the pleadings. The 6th Defendant was never joined to either of the First or Second Cross-Claims. (b) On 23 June 2014, the following orders were made: 1. By consent of the Plaintiff and the 9th Defendant (Southern Cross Developments (Mclntyre) Pty Ltd) (the other borrower), verdict and judgment was entered in favour of the Plaintiff against the 9th Defendant in the sum of $878,976.68; 2. By consent of the Plaintiff and the 3rd Defendant (Lewis Yazbek) and the 4th Defendant (Richard Yazbek), verdict and judgment was entered in favour of the Plaintiff, jointly and severally, against the 3rd and 4th Defendants in the sum of $600,000; 3. By consent of the Plaintiff and the 3rd, 4th and 9th Defendants, the Court ordered the 3rd, 4th and 9th Defendants to pay the Plaintiff's costs of its claim, up to the date of filing of the Defendants' submitting appearance, as agreed or assessed; 4. By consent of the parties to the First Cross-Claim, the First Cross-Claim, by which the 1st Defendant (Craig Irwin) sought contribution and indemnity from the 3rd Defendant, 4th Defendant, 5th Defendant (Andrew Box), 8th Defendant (Bingemann Holdings Pty Ltd) and the 9th Defendant, was dismissed with no order as to costs; 5. By consent of the parties to the Second Cross-Claim, the Second Cross-Claim, by which the 3rd, 4th, 5th, 8th and 9th Defendants sought contribution and indemnity from the 1st Defendant, was dismissed with no order as to costs; and 6. The Court noted the agreement of the 1st, 3rd, 4th, 5th, 8th and 9th Defendants that each releases the other for all liability arising from the subject matter of each of the First and Second Cross-Claims." Background 6At all material times Mr Christopher Roach was the sole director of the plaintiff; Mr Irwin and Mr Box were directors of SCD; Mr Box was a director of Bingemann. 7Under the schedule to the loan contract the loan was secured by a charge over the land of Mclntyre Street, and the balance of the account and interest was to be repaid 21 months from the date the amount was advanced. It also stated the parties' requirement of a guarantee from each of Mr Box, Mr Irwin and the second, third, fourth, and seventh defendants. 8The terms of the loan contract provided relevantly, the following: "2.1 We will not lend you the Amount of Credit until, where specified in the Schedule the Guarantor gives us a guarantee in the terms of the Guarantee annexed". 9The guarantee of 12 April 2007 (the first guarantee) provided, relevantly, the following: "2.1 What are you guaranteeing? You guarantee to us: (a) the payment of the Guaranteed Moneys; and (b) the performance of the Borrower's obligations under the Loan Contract and any Future Loan Contract; and ... 2.2(a) the unpaid balance of the Loan Contract and any Future Loan Contract; (b) any interest (including any default interest) that the Borrower must pay to us in connection with the Loan Contract, any Future Loan Contract or any mortgage that the Borrower gives us; ... 3.1. We may ask you to extend Guarantee We may ask you to extend this Guarantee to cover any new loan contract between us and the Borrower. We will give you: (a) a copy of the new loan contract or proposed new loan contract; and (b) a form of written acceptance to extend this Guarantee to cover the new loan contract. 3.2. Accepting extension of Guarantee This Guarantee does not extend to cover the new loan contract unless you sign and give us the written acceptance. If you do: (a) the new loan contract is a Future Loan Contract; and (b) subject to clause 2.2, any amount payable by the Borrower under the Future Loan Contract is Guaranteed Moneys. ... 5.1 The Guarantee remains in full force and effect until: (a) we receive all of the Guaranteed Moneys; and (b) we give you a final release and discharge of this Guarantee. 5.2 We may release one Guarantee but not all (a) If there is more than one Guarantor, we may release or discharge any Guarantor without releasing or discharging any other Guarantor. (b) If we release any Guarantor, any remaining Guarantor continues to be liable to us until final release under clause 5.1. ... 12. Unconditional Nature of this Guarantee Your obligations under this Guarantee and any mortgage that you give us are not released, discharged, or otherwise affected by any of the following: 12(a) the grant of any time, waiver, covenant not to sue or any other indulgence; ... (c) the release or discharge of the Borrower, any mortgagor or any guarantor including yourself; (e) any transaction, agreement, arrangement, composition or compromise entered into by the Borrower, any mortgagor, ourselves or any guarantor; 13.2 Guarantee is binding on each Guarantor This Guarantee binds each Guarantor who signs this Guarantee even if one or more of the Guarantors do not sign it. 13.3 Joint Guarantors - Obligations are Separate and Together If there is more than one Guarantor, each of you is liable to us separately for the Guaranteed Money as well as together." 10On 12 April 2007 the plaintiff advanced the amount of $600,000 to SCD and Globe. 11By email of 7 April 2008 Mr Roach advised Mr Box that on the anniversary of the loan, 12 April 2008, the new principal would be $708,000 at 18 per cent per annum. 12On 12 January 2009 the time for repayment of the loan to the plaintiff had expired, but no amount had been repaid. 13On 29 January 2009 there was a meeting between Mr Roach, Mr Box, Mr Gerard Rockliff, representing Globe, and Mr Paul Jeffrey, an accountant of the plaintiff. According to Mr Roach (affidavit 18 April 2013, para 12) there was the following conversation: "Me: 'You are in default of the Loan'. Box: 'We are not in a position to pay it back at this stage so we request from you that the loan be extended. You are third mortgagee behind Greshams for the development site. Greshams is charging a higher rate of interest of 23 % if the joint venture defaults on that loan'. Given the difficult market, we are not in a position to repay the interest and so we ask that the extension includes as its principal amount the amount owing inclusive of interest but reduced to $810,000. If you did this we will provide extra security by adding a company of mine, Bingemann Holdings as a further guarantor and by giving you a first mortgage over a property in Noosa Queensland that is owned by Bingemann Holdings but that is provided that it is on the understanding that Bingemann Holdings' liability as guarantor is capped to the Noosa Queensland property. Me: 'I am happy for Adisan to extend the loan given the provision of the extra security but I want a higher rate of interest for Adisan on the extended loan'. Jeffery: 'Adisan would require an interest rate of at least 23% per annum on the extended loan'. Box: 'We are happy with that. We will go away and develop a proposal for your approval'." 14By email of 9 February 2009, Mr Box put to Mr Roach the following proposal: "We are proposing the following on the basis of a realistic outcome. As you are aware at the interest rate we have agreed it is very much in our interest to buy you out of the project but in recognition of the market I feel we need to be conservative. Our proposal is, Value of current debt is $810,000 The interest rate is 23% On the 30th July 2009 we will pay out all interest owing reducing the debt to the original value of $600,000. We will provide at that date an unencumbered Unit in Noosa which is owned by Andrew Box as security to the value of the principal debt. The principal will be paid out on the 30th September 2008 (sic) or sooner were we can refinance the current facility. We propose the current deed be extended with the personal guarantees of the shareholder." 15Mr Roach replied by email of 11 February 2009 to Mr Box which included: "... 1. We need to have the Noosa unit securatised up front. 2. A penalty interest should be incorporated upon default - in line with mortgages before us." 16On 19 March 2009 the variation deed was made to give effect to the request for an extension of the loan, and variations of the loan contract. In the document SCD and Globe were described as "Borrower", the plaintiff as "Lender", and the guarantors of the loan contract, collectively as "Guarantor". Relevantly, the terms included: "Background A. By the document specified in Item 1 (Loan Contract), the Lender provided financial accommodation to the Borrower upon the terms and conditions set out in the Loan Contract (Facility). B. The Guarantor guaranteed the obligations of the Borrower. C. The Borrower and Guarantor have requested the Lender to vary the terms of the Facility as specified in the Appendix (Variation). D. At the request of the Borrower, Bingemann Holdings Pty Limited has agreed to guarantee and grant additional security in respect of the obligations of the Borrower under the Facility as varied by the Variation. E. The Lender has agreed to vary the terms of the Facility as set out in this document. ... 3. Consent The Guarantor consents to the Variation and confirms that the whole of their guarantee and any security (including any document specified in Item 2) remain in full force and effect for the Facility as varied by the Variation. 4. Security Any security granted in connection with the Facility including the security specified in Item 2 (Collateral Security) stands as security for the Facility as varied by the Variation. ... 6. Ratification Subject to the Variation, the terms and conditions of the Loan Contract and the Collateral Security are ratified and confirmed and, as amended, continue in full force and effect. Nothing contained in or implied by this document abrogates, prejudices, diminishes, or otherwise adversely affects any rights, remedies, obligations, or liabilities of any of the parties arising with respect to any act, matter, or thing done or effected or otherwise arising before the execution of this document. ... Schedule Item 1. Loan Contact (a) Loan Contract between the Lender and the Borrower dated 12 April 2007. Item 2 Security (a) Charge creating a caveatable interest by the Borrower in favour of the Lender in respect of the property known as 1 Mclntyre Street, Gordon. (b) Guarantee by the Guarantor. ... Appendix 1. The parties agreed that on 31 January 2009 the balance of the account as calculated under clause 5 of the Loan Contract totals $810,000, being the Amount of Credit together with accrued interest. 2. The Annual Percentage Rate set out in the Schedule of the Loan Contract will be increased from 18% per annum to 30% ('Higher Rate'). Provided the Borrower is not in default of any provisions of the Loan Contract the rate used by the Lender to calculate interest under the Loan Contract will be 23% ('Lower Rate'). 3. Interest will continue accrue on the balance of the account from time to time from 29 January 2009 as calculated under the provisions of the Loan Contract. ... 5(a) The insertion of the following at the end of the Schedule. 'We will require Bingemann Holdings Pty Limited to grant a mortgage over the Queensland Property in favour of the Lender as specified below. QUEENSLAND PROPERTY The land known as Unit 4, 'The Hastings' 30 Hastings Street, Noosa Heads QLD and being all of the land comprised in Lot 4 GTP1154, Title Ref 16571204. 5(b) Bingemann Holdings Pty is inserted in the list of Guarantors set out in the Schedule of the Loan Contract. ... 5(h) The insertion of the following as Clause 6A. '6A. Calculating Interest at the Higher Rate 6A.1 If you do not make a repayment when due or if you are in default of any other provision of this Loan Contract, interest will be calculated at the Higher Rate as provided in this clause 6A. 6A.2. Interest under this clause 6A will be calculated on balance of account by multiplying the balance of account by the daily Higher Rate for each day you are in default of this Loan Contract. The daily Higher Rate is the Higher Rate divided by 365'." 17On 19 March 2009 Bingemann provided a guarantee for the loan contract as varied by the variation deed in terms substantially similar to those of the earlier guarantee. 18On 2 April 2009, Bingemann provided to the plaintiff the mortgage over its property at Noosa as required under the variation deed. 19On 20 April 2009 the plaintiff sent a letter to Bingemann as follows: "Pursuant to the terms of the documents listed below (Variation Documents), Bingemann Holdings Pty Limited agreed to guarantee and grant additional security in the form of a mortgage over the abovementioned property in respect of the obligations of the Borrower under a loan contract between the Lender and Borrower dated 12 April 2007 (Loan Contract) as varied by the Variation Documents. * Deed of Variation of Loan Contract dated 19 March 2009 * Guarantee & Indemnity dated 19 March 2009 * Mortgage over the Property dated 2 April 2009 Notwithstanding the provisions of the Variation Documents the Lender has agreed to limit the liability of Bingemann Holdings Pty Limited (Bingemann) under the Variation Documents as follows." 'Notwithstanding any provision to the contrary in the Variation Documents, Bingemann's liability to pay any amount under or in connection with the Variation Documents, may be discharged from, and the recourse of the Lender is limited to the sale of the Property only. The Lender shall have no further claim against Bingemann in connection with the Variation Documents or the Amount of Credit (as defined in the Loan Contract) and may not seek to recover any shortfall in the amounts owing to it under or in connection with the Loan Contract and the Variation Documents by bringing proceedings against Bingemann or applying to have Bingemann wound up'." 20Globe and SCD failed to pay to the plaintiff on 30 July 2009 interest then accrued, and failed to pay to the plaintiff on 30 September 2009 the balance owing and all accrued interest. 21On 26 May 2011 the plaintiff sent default notices to the guarantors under the first guarantee including Mr Irwin, requiring payment of the amount of $1,190,696.52 then owing under the loan contract and deed of variation, plus interest. 22On 12 April 2013 Bingemann sold its Noosa property to the plaintiff for the price of $450,000, which amount the plaintiff credited to the loan account. 23By its second further amended statement of claim (para 30), the plaintiff claimed from Mr Irwin, Mr Lewis Yazbec, and Mr Richard Yazbec, under the guarantee the amount of the loan payable as at 12 April 2013 namely, the amount of $1,058,777.51, including interest. 24Mr Irwin denies liability and contended his obligations under the guarantee should be discharged. His case was that, at the time he executed the variation deed which required the introduction of Bingemann as a co-guarantor, and under which he confirmed the guarantee would remain in effect for the loan facility as varied, the prior agreement between the plaintiff and Bingemann to cap Bingemann's liability as a guarantor had not been disclosed to him, and was not reflected in the terms of the variation deed and Bingemann's guarantee. It was put that as he had not consented to an arrangement whereby Bingemann's liability to the plaintiff was limited, and would not have executed the variation deed had he known of it, the situation attracted the application of the principles in Ankar Pty Ltd v National Westminster Finance (Australia) Limited (1987) 162 CLR 549; (1987) HCA 15. 25Alternatively, Mr Irwin contended that, by not disclosing the fact of its agreement to limit Bingemann's liability, and by representing in the documents that Bingemann would be jointly and severally liable to the plaintiff with Mr Irwin and the other guarantors, the plaintiff had engaged in conduct that was misleading and deceptive under s 52 Trade Practices Act 1974 (Cth) (the Act). The relief he sought included an order under s 87(2)(ba) of the Act refusing to enforce the provisions of the guarantee. 26It was also contended that the interest provision in the variation deed was a penalty, and unenforceable. The variation deed 27The parties to, and the structure of, the variation deed may be explained by clause 3 of the first guarantee, the relevant terms of which are set out in para [9] above. It provides for the guarantors' acceptance to extend the guarantee to cover a new loan contract between the plaintiff and the borrowers, Globe and SCD. Self evidently, the variation deed was a transaction which required the guarantors' consent if their liability was to remain. 28Under the variation deed the parties agreed to vary the terms of the loan contract of 12 April 2007 referred to therein as the "Facility". The terms of the variation were specified in the appendix and, to the extent relevant, are included in para [16] above. A new regime for the calculation and payment of interest was agreed. It was agreed that the balance of the account be reduced to $600,000 on 30 July 2009, and the outstanding balance, including interest, was to be repaid by 30 September 2009. 29Amendments to the schedule to the loan contract included the insertion of the requirement for Bingemann to grant a mortgage over its Noosa property as described, and the insertion of Bingemann in the list of "Guarantors". By inclusion in this list, Bingemann was required under clause 2.1 of the loan contract to provide the plaintiff with a guarantee in the same terms as the guarantee which the plaintiff had required of the other guarantors. 30The liability of the guarantors under the variation deed was provided by clause 3 as follows: "3. Consent The Guarantor consents to the Variation and confirms that the whole of their guarantee and any security (including any document specified in item 2) remain in full force and effect for the Facility as varied by the Variation." 31In my opinion, upon its proper construction, the clause records the guarantors' consent to the variation. It also operates as their agreement to extend the first guarantee to cover the new transaction as incorporated in the variation deed. It follows that, according to its terms, the guarantee was intended to operate prospectively to guarantee the specific transaction contained in the variation deed. It is convenient to refer to the agreement under clause 3 as the second guarantee. 32The variation covered by the extension under clause 3 is contained in the appendix. As contemplated by recital D and clause 5(b) of the appendix, Bingemann became an additional guarantor and provided a guarantee in terms similar to that provided by the other guarantors. Relevantly, each instrument contained a clause 13.3 in the following terms: "13.3. Joint Guarantors - Obligations are Separate and Together If there is more than one Guarantor, each of you is liable to us separately for the Guaranteed Money as well as together." Consideration 33Before turning to the competing submissions it is convenient to consider the evidence of the circumstances in which the variation deed was entered into. 34Mr Roach said that he had never met Mr Irwin. The negotiations for the variation to the loan contract were conducted only with Mr Box. He confirmed that Mr Box's proposal that Bingemann become a guarantor and provide a mortgage over its property at Noosa was conditional upon its liability being limited to the value of the property. Mr Roach arranged for his wife to prepare the variation deed and new guarantee but, although he read the documents, he did not notice that neither provided for the limitation of Bingemann's liability. He accepted that it was more disadvantageous to a co-guarantor that Bingemann's liability be limited rather than unlimited. He said that it did not occur to him to check whether the documents accurately reflected the deal reached with Mr Box. 35With reference to the letter of 20 April 2009, Mr Roach said it was sent to confirm and put into effect the agreement reached with Mr Box at the meeting on 29 January 2009. 36Mr Irwin's evidence may be summarised as follows: 37With respect to the circumstances in which Mr Irwin signed the variation deed, he deposed to a meeting with Mr Box on about 9 March 2009 during which Mr Box said (affidavit 30 August 2013): "AB: 'I've got a document agreed with Roach to vary the loan ("the Adisan Variation Deed'). It's been agreed and you need to sign it.' Me: 'Andrew I'm not signing anything until I have a chance to look at it.' AB: Listen it is straightforward. We have 6 months to pay, I don't want any delaying.' Me: 'I'm not happy to sign this. There is a significant chance in 6 months that we can't pay. The sales won't be completed by then! ING and Gresham have issued default notices. Besides James is out and Lewis is somewhere in the US. I can tell you now I don't have the capacity to pay anything as a guarantor I'm effectively out of a job anytime in the next few weeks.' AB: 'I'll be getting James to sign. He told Rick he would do it.' Me: 'What would be the point in that?' AB: 'So Chris Roach doesn't know that anything has changed. But you'll be happy I'm putting my property in Noosa up as a first ranking security and adding my family company, Bingemann Holdings Pty Ltd, as a guarantor. Roach wants it anyway as he is worried about our capacity to pay. This should make you happy because if John Scott-Thompson doesn't come through the property value will be enough to repay the loan.'" (at [75]) 38Mr Irwin said he read the variation deed before signing it, and noted the security provided by Bingemann. He said (affidavit 30 August 2013): "I would not have agreed to sign the Adisan Variation Deed if I had known at the time that the guarantees provided by Andrew and his family company, Bingemann, were limited because it would have signalled to me that there was substantial risk that those guarantees would not be enforced as Andrew had done all the dealings with this and at this stage I was very concerned about the ability of the joint venture to repay Adisan at all." (at [84]) 39Until reading Mr Roach's affidavit of 18 April 2013, Mr Irwin said he was not aware that the liability of Bingemann under its guarantee was limited to the sale value of its property at Noosa. Had he been aware of this limitation he would not have agreed to, or signed, the variation deed. His evidence included: "A. It was presented to me in discussions with Mr Box that it was going to be in the documents. So when it was in the documents, that was okay. But if it hadn't been in the documents, no I wouldn't have signed it. Q. When you say it was presented to you that it was going to be in the documents, what was going to be in the documents? A. The Bingemann guarantee. Q. But Bingemann did give a guarantee, is that correct? A. Yes, but he didn't tell me it was going to be capped. Q. What I suggest to you is that had you been told by Mr Box that the Bingemann guarantee was capped to the value of the Noosa property you still would have signed the deed of variation; what do you say to that? A. No, because that's not how he presented it to me." (T 50:24-39) 40In cross-examination, Mr Irwin rejected the suggestion that he would have signed the variation deed regardless of its contents. He demonstrated, to my satisfaction, that he signed on the understanding that, as a guarantor, Bingemann's liability was the same as his. In my opinion, his evidence should be accepted. It was not undermined in cross-examination. This conclusion is supported by his account of what appears to have been the strained relationship between him and Mr Box, and differences as to the future management of SCD. I find it highly improbable that Mr Irwin would have provided a guarantee under which the exposure of himself and other guarantors may have been greater than Bingemann's. In other words, I find that if Mr Irwin had known that the plaintiff had agreed to cap Bingemann's liability he would not have executed the variation deed. 41Mr Box gave no evidence. For the plaintiff it was accepted that in his dealings with Mr Roach, Mr Box was not acting as Mr Irwin's agent. It was also accepted that there was no evidence that Mr Irwin had been told of the cap. 42It was common ground that the documents did not disclose the prior agreement between the plaintiff, Mr Box, and Bingemann that Bingemann's liability under its guarantee was limited. No disclosure was made that the provision of extra security by Bingemann was conditional upon the limitation of its liability as a guarantor. 43It is against this background that the plaintiff's claim to enforce the guarantee against Mr Irwin is to be considered. 44The plaintiff's primary claim was under the variation deed. Alternatively, if it was found that the variation deed was unenforceable, it was claimed that Mr Irwin remained liable under the first guarantee for the loan contract. It was put that clauses 5, 11 and, particularly, clause 12(a), 12(c), and/or 12(e) of the first guarantee entitled the plaintiff to cap the liability of any guarantor, existing or future. It was put: "In my submission what cl 3 in the 2009 deed actually does is incorporate the 2007 guarantee terms because it is simply extending the original guarantee to the new position. Therefore under the new position in the deed of variation there is a new guarantor who then becomes one of the parties with a capital G. The original terms, in effect, cross over to capture that new party. That's, in my submission, how the two deeds should be interpreted to correspond with each other." (T 79) 45It was submitted that the agreement subsequently documented in the letter of 20 April 2009 to Bingemann was, at the very least, an arrangement envisaged under clause 12(e) of the first guarantee. It was put that clauses 5 and 12 were confirmed by clause 3 of the variation deed with the effect that the arrangement with Bingemann was not in breach of the terms of the guarantee. It was put: "...In my submission on the face of it Mr Irwin doesn't get what he bargained for. He doesn't get Bingemann unrestricted, but this is in a circumstance where he has already agreed in the 2007 guarantee extended by cl 3 of the deed of variation that at any time the plaintiff can enter into a compromise to restrict the liability of any guarantor." (T 86) 46For Mr Irwin it was submitted that the agreement to cap Bingemann's liability was not reflected in the terms of the variation deed, and was altogether a different arrangement which was unknown to Mr Irwin. It was submitted that the effect of the agreement to limit Bingemann's liability was to subject Mr Irwin to the risk of detriment or disadvantage inconsistent with his second guarantee which was provided on the basis that the liability of all guarantors was the same. It was put that in these circumstances the failure to disclose the agreement to cap liability attracted the application of the principles in Ankar. 47Analysis of the terms of the variation deed demonstrates that under clause 3 Mr Irwin and the other guarantors provided what, in substance, was a fresh guarantee for the new transaction by which the loan contract was varied. Accordingly, the question whether this guarantee was enforceable against Mr Irwin turns on the circumstances existing when the variation deed was made. 48In my opinion, the effect of clause 3 was that the second guarantee incorporated the terms of the first guarantee. It thus included the agreement in clause 13.3 thereof that the guarantors were liable to the plaintiff, separately as well as together, for the guaranteed moneys (as defined in clause 2.2). It demonstrates that the agreed guarantee included a term which provided that the extent of liability of each other to the plaintiff was the same in that each accepted liability for the whole of the guaranteed moneys, as well as a joint liability. 49The following principles relevant to the discharge of a surety's liability were stated in Ankar by the plurality (p 561): "At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. The doctrine of strictissimi juris provides a counterpoise to the law's preference for a construction that reads a provision otherwise than as a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety and so the provision should be interpreted as a condition, or perhaps as an innominate term, instead of a mere warranty. If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety's obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred. If on its true interpretation the term is not intended so to operate, it is not easy to understand why the surety should be discharged by its breach. Of course, in construing the contract the court is entitled to look to the general setting in which the contract has come into existence: see, for example, the discussion in Reardon Smith Line Ltd v Hansen-Tangen (1976) 1 WLR 989, at 996-997; (1976) 3 All ER 570, 574-575." 50In the same case, Deane J said (pp 569-570): "Obviously, a creditor could not "without the surety's consent" effect a "departure" from the contract with the surety in the sense of effecting a unilateral variation or alteration of its terms. The reference to a "departure" by the creditor from his contract with the surety constituting an "alteration in the surety's obligations" is a reflection of the fact that the obligations of a surety are strictly confined to what he has undertaken in the contract which constitutes him a surety; ... a relevant failure by the creditor to perform the terms of his contract with the surety will "discharge" the surety for the reason that the creditor's failure to perform the terms of his contract would otherwise result in a situation where the surety was held liable in circumstances other than those in which he had agreed to be bound. As senior counsel for Ankar pointed out, this reading of the proposition in the 4th edition of Halsbury derives support from de Colyar KC's original article on Guarantees (in the 1st edition of Halsbury) from which the proposition was derived: see Halsbury's Laws of England, 1st ed, vol 15, pp 550-552, pars 1034-1035; and see also de Colyar, A Treatise on the Law of Guarantees, 3rd ed (1897), p 405). That general proposition accords with the long-standing statement of high authority that a "claim as against a surety is strictissimi juris, and it is incumbent on the plaintiff to shew that the terms of the guarantee have been strictly complied with": see per Lord Ellenborough, Bacon v Chesney (1816) 1 Stark 192, at p 193; 171 ER 443, at p 443. So understood, and subject to what is said hereunder, it represents a correct statement of a special rule which prima facie (in the sense that it may be excluded by express or implied agreement to the contrary) governs the particular relationship of guarantor and principal creditor. ... That special rule is that, in the ordinary case where a surety agrees to be liable for the default of another upon the terms of the contract of suretyship, a significant departure by the creditor from the terms of that contract will, in the absence of agreement to the contrary, operate to preclude the existence or continued existence of the circumstances in which the surety has agreed to be bound. That being so, there is no need for the surety to rescind the contract for repudiation or breach of an essential or fundamental term. In the absence of any question of waiver or estoppel, the situation is simply that the circumstances of his liability as surety do not exist." Conclusion 51The evidence was that at the time when Mr Irwin executed the variation deed the plaintiff had not disclosed to him the prior agreement with Bingemann, the effect of which was inconsistent with clause 13.3 of the guarantee which Mr Irwin was required to provide. Thus, the plaintiff had failed to ensure that the true position was made known to Mr Irwin. In my opinion, the inevitable conclusion is that had Mr Irwin been informed of the plaintiff's agreement to cap Bingemann's liability he would have known the true nature of the potential risk in providing the guarantee under clause 3 of the variation deed, and would have declined to enter into that transaction. 52In my opinion, the agreement with Bingemann, absent Mr Irwin's knowledge and consent, was a significant departure from the terms of the second guarantee which precluded the existence of the circumstances in which Mr Irwin had agreed to be bound (Ankar at 569, 570). Accordingly, I find that Mr Irwin is entitled to have the guarantee provided under the variation deed set aside in toto, and to be discharged from all liability under it. 53In reaching this conclusion I have not overlooked the plaintiff's submissions. It may be accepted that under clause 12(a) and/or clause 12(e) of the first guarantee the plaintiff was entitled to make the agreement with Bingemann without releasing or discharging the guarantor. In my opinion, however, the rights of the plaintiff under the first guarantee to deal separately with the co-guarantors or anyone else expired upon execution of the variation deed under which the second guarantee replaced it. Although, without deciding, it was open to the plaintiff to make the agreement with Bingemann, I am unpersuaded that this consideration relieves the plaintiff of the consequences of its failure to disclose its existence to Mr Irwin before he signed the variation deed. 54For the same reasons I uphold Mr Irwin's claim for an order under s 87(2)(ba) of the Act refusing to enforce the provisions of the second guarantee against him. In my opinion, the variation deed, taken as a whole, and with particular regard to recital D, and clause 5(b) of the appendix, and to clause 13.3 of the guarantee, conveyed the representation by the plaintiff that Bingemann would be jointly and severally liable with each of the other guarantors for the whole of the guaranteed moneys. The existence of the prior, undisclosed, agreement with Bingemann establishes that the representation was misleading and deceptive within the meaning of s 52 of the Act. The appropriate relief by way of defence to the plaintiff's claim under the second guarantee is to make an order refusing enforcement of its provisions. 55With regard to these conclusions, it is unnecessary to decide the issue as to whether the interest provision in the variation deed was a penalty, and unenforceable. Orders 56For the above reasons, I make the following orders: (1) The plaintiff's second further amended statement of claim be dismissed. (2) The plaintiff pay the first defendant's costs. (3) Pursuant to s 87(2)(ba) of the Trade Practices Act, I order that the plaintiff's claim be refused. (4) Direct that these orders be entered forthwith. ********** 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: 01 August 2014