Ipsofactoj.com: International Cases [2001] Part 9 Case 14 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Benchmark Building

Supplies Ltd

- vs -

Weatherby

GAULT J

ANDERSON J

WILLIAM YOUNG J

19 JULY 2001


Judgment

Gault J

(delivered judgment of the court)

  1. This is an appeal from a judgment of Master Gambrill in the High Court at Auckland delivered on 7 December 2000 refusing summary judgment sought by the appellant, Benchmark Building Supplies Ltd (Benchmark) against the respondent, Mrs Weatherby, in the sum of $249,704.63 and interest. The issue for the Master was whether Benchmark had established that Mrs Weatherby had no arguable defence to enforcement of a guarantee she signed in favour of Benchmark guaranteeing indebtedness of Weatherby Developments Ltd (the debtor). The Master held that she did have arguable defences. The appeal to this Court is on the ground that that assessment was not correct.

  2. The debtor company was engaged in house building and was approached to obtain building supplies from Benchmark. As a result a standard Benchmark form was completed setting out the terms and conditions upon which Benchmark would supply. Mr J P Weatherby who operated the business of the debtor company completed the form which was, in effect, an application for the establishment of a credit account. It included, however, as a clearly identified separate section, a form of personal guarantee. In the first section there is stated the amount of credit sought and the figure of $120,000 was inserted along with certain details of Mr Weatherby and those of the company. The form was signed by Mr Weatherby and by his mother Mrs Weatherby who were the two directors of the company. In the separate section providing for personal guarantees those two people signed again. Though there is some dispute in the affidavit evidence, it may well be that Mrs Weatherby signed the document in the separate sections on different occasions. Whatever might eventually be established, we proceed on the basis that at least the guarantee form was signed by Mrs Weatherby when the form was taken to her at her place of work by her son and that she signed without independent advice and without any direct communication between her and representatives of Benchmark.

  3. The debtor company was working on a housing development being undertaken by a Mr Liao. In October 1999 the credit limit of $120,000 was exceeded and on 5 October Benchmark gave notice that no further credit would be allowed. Subsequently there was a meeting between Mr Weatherby, Mr Liao and a representative of Benchmark at which the credit limit was increased to $220,000 and Mr Liao promised to provide a personal guarantee. Mrs Weatherby was not party to this arrangement.

  4. When Benchmark sought summary judgment in the High Court Mr Weatherby and his mother filed a joint amended notice of opposition. Most of the grounds specified were directed to defences put forward on behalf of Mrs Weatherby as second defendant. For Mr Weatherby as first defendant there were defences by reference to the use of the incomplete name of the debtor company in the form and under the Fair Trading Act by reference to the misleading nature of the document in its reference in the first section to the credit limit of $120,000 whereas the claim under the guarantee was in respect of all indebtedness of the debtor company. Mr Weatherby also relied upon alleged failure by Benchmark to secure the guarantee from Mr Liao.

  5. The Master found that there was no arguable defence available to Mr Weatherby and ordered summary judgment against him for the full amount claimed. There is no appeal against that finding.

  6. In the case of Mrs Weatherby a number of grounds of opposition to the grant of summary judgment were advanced. They included the same grounds as had been relied on by Mr Weatherby and in addition there were the defences of discharge of the guarantee as a result of material variation to the contract without her agreement, and that the signing of the guarantee was induced by misrepresentations made by Mr Weatherby who was either an agent of Benchmark in procuring his mother’s signature or was known (constructively) by Benchmark to be likely to misrepresent the position to his mother so as to make the guarantee unenforceable against her.

  7. The Master was not prepared to grant summary judgment against Mrs Weatherby. She held that there were defences arguable to the extent of requiring appropriate factual investigation. She held that Mrs Weatherby was entitled to argue that on a proper construction of the documents, notwithstanding that the form of guarantee was directed to all moneys from time to time payable to Benchmark by the debtor, the clear statement of the credit limit of $120,000 in section one of the form limited her guarantee to that figure. It was further arguable that on a proper construction of the guarantee, even though it included "principal debtor" obligations, the variation by which the credit limit was increased above the figure of $120,000 constituted a variation discharging her obligations as guarantor. The Master also considered that Mrs Weatherby should be entitled to the opportunity at trial to establish the necessary facts to attribute to Benchmark knowledge of misrepresentations concerning the guarantee made to her by her son who procured her signature. That would enable her to point to the failure by Benchmark to take any steps to ensure that she was appropriately and independently advised.

  8. It was submitted in this Court, in support of the appeal, that the Master erred in her construction of the guarantee and that in its terms it imposes upon Mrs Weatherby liability for the full amount claimed. It was submitted further that she erred in finding an arguable defence that Benchmark had constructive notice of misrepresentations made to her by her son. In addition to joining issue on these two grounds, Mr Stewart for Mrs Weatherby initially sought to argue also for breach by Benchmark of s9 Fair Trading Act 1986 but this was not pursued.

  9. We address first the issue whether Mrs Weatherby has an arguable defence that she is discharged from liability as a result of the variation of the terms of the credit account agreement extending the credit limit.

  10. Benchmark accepts as a matter of principle that a material variation of the main contract without a guarantor’s consent can discharge a guarantee, subject to the terms of the guarantee. The argument for Benchmark before the Master and before this Court was that there was no material variation of the contract between the debtor company and Benchmark or alternatively, if there was a variation, it was either consented to by Mrs Weatherby or irrelevant in light of the principal debtor clause in the guarantee.

  11. The terms and conditions of the contract of guarantee were said to create an "all moneys" obligation and not one limited to the stated credit limit of $120,000. Benchmark relies upon the express terms of the guarantee:

    .... you allow the Customer to purchase goods and services on the terms and conditions of trading set out overleaf, and in consideration thereof the Guarantor(s) and its/his/her successors or personal representatives hereby guarantees due and punctual payment of all moneys which from time to time become payable to Benchmark by the Customer.

  12. The key difficulty with this contention is that the guarantee was given in the context of an application for a credit account by the company to the specified limit of $120,000. The Master held, notwithstanding the wording of the guarantee, that the obligation of the guarantors was in respect of the indebtedness of the company up to that limit. She was satisfied that the subsequent agreement between Mr Weatherby and Benchmark increasing the limit constituted variation. That seems correct, particularly in light of clause 1.2 of the terms and conditions incorporated into the contract which reads:

    Where the Customer has already established credit facilities but anticipates further purchases it is recommended that the Customer reaffirm the amount of credit available and where necessary apply for an approved increase to cover the additional purchases being contemplated. Where such arrangements are not formally approved in writing the balance between the approved available credit limit and the purchases being made will be required to be paid in cash on or before delivery.

  13. Benchmark further submits that, in any case, it is entitled to rely on the principal debtor clause in the guarantee, the relevant part of which reads:

    .... as between Benchmark and the Guarantor(s), the Guarantor(s) shall be a principal debtor and shall not be released from liability by any act which would release one liable as a surety only and the Guarantor(s) declares that no indulgence, granting of time, waiver, forbearance to sue or any other act, omission, matter or thing which would otherwise affect or limit the liability of the Guarantor(s) as surety shall in any way release the Guarantor(s) or the successors or personal representatives of the Guarantor(s) from liability hereunder.

    (emphasis added)

  14. It is Benchmark’s submission that variation, although not expressly covered, would come within "any act" which would release a guarantor in this clause.

  15. Benchmark is again faced with the problem that the guarantee is set in the context of, and refers back to, the main agreement. The liability of the principal debtor cannot be greater than the obligation to which the clause relates. The relevant principles were dealt with by Wild CJ in Nelson Fisheries Ltd v Boese [1975] 2 NZLR 233, 235:

    Moreover, the covenant that, as between himself and the plaintiff, the defendant’s "position and liabilities .... shall be those of a principal debtor in all respects" is qualified by the use of the word "hereunder". That word, in a document which begins with the recital "the advances hereinbefore referred to", plainly relates the defendant’s "position and liabilities" to the deed and, in my view, he cannot be held liable as a principal when, without his agreement or even knowledge, a substantial departure has been made from the contractual terms of that deed. The covenant does not provide, as it might have done, that the defendant shall not be released by any variation in the provisions of the deed or by any agreement relating thereto made between its parties.

  16. This Court, in Australian Guarantee Corporation (NZ) Ltd v Slade & Hooper CA256/91, judgment 24 August 1992, after referring to the earlier decision in Orme v De Boyette [1981] 1 NZLR 576, and other authorities, said:

    These were cases where the variation was as to the security, not the liability itself. They show that a principal debtor clause will bind the guarantor to the same extent as if he were the principal debtor himself. But they do not suggest that such a clause imposes on the guarantor a greater liability than he would have had were he in fact the principal debtor. Where the principal debtor cannot be bound without his assent, neither can the guarantor be bound without his. Thus a principal debtor clause will not bind the guarantor in respect of an additional advance the creditor may make to the principal debtor. To achieve that, the contract of guarantee must itself embrace further advances, or a fresh guarantee must be obtained.

  17. There is also a question of whether a principal debtor is entitled to the benefit of the general rule applying to a guarantor that a material variation of the obligation guaranteed discharges the guarantee. Counsel were unable to refer to any authority holding that a principal debtor similarly is to be discharged from all liability as a result of a variation. There seems no reason in principle why this should be so. The principal debtor should continue to be liable in respect of the obligation up to the point of variation where that can be established and is continuing.

  18. As an alternative argument it was submitted for Benchmark that, even if the contract was materially varied, Mrs Weatherby consented to the variation by delegated authority to her son. The submission was that Mrs Weatherby, a director of the debtor company, delegated authority to her fellow director leaving him to run the business so that she effectively acquiesced in, and must be regarded as having consented to, the increased credit limit. The strength of this argument may depend upon the nature of Mrs Weatherby’s interest in the company. It has greater strength if her twenty-five percent shareholding is held in her own right and if her history of participation in the company indicates concurrence by her in its operation by her son. They are matters which will require determination on the evidence. These points arise also in connection with the misrepresentation defence to which we now turn.

  19. The Master held that Mrs Weatherby has arguable defences requiring investigation of the facts at trial on the basis of the principles formulated in Barclays Bank Plc v O’Brien [1993] 4 All ER 417 and Wilkinson v ASB Bank Ltd [1998] 1 NZLR 676.

  20. For Benchmark the first submission was that any evidence of misrepresentation as to Mrs Weatherby’s contractual liability is inadmissible by virtue of the entire agreement clause which reads:

    Benchmark and the Customer acknowledge that these terms and conditions express the entire understanding and agreement between them and that there have been no representations made by either party to the other except such as is expressed in these terms and conditions.

  21. It is well established that such clauses are not conclusive. Section 4 of the Contractual Remedies Act 1979 permits the Court to look behind the exclusion clause to determine whether it is "fair and reasonable" for it to be relied upon: Ellmers v Brown (1990) 1 NZ ConvC 190,568.

  22. If this Court accepts that the evidence of misrepresentation can be adduced, Benchmark submits that the Weatherbys’ evidence is so lacking in inherent credibility that it should be rejected as being unsustainable. The challenge is particularly to Mrs Weatherby’s claim that she did not see or appreciate that she had signed a guarantee. This relied on evidence that she signed the guarantee on a separate occasion to the main agreement. Benchmark also asserts that the prominent heading on the guarantee in combination with the questions put to her son on matters of commercial risk lead to the clear inference that Mrs Weatherby knew what she was signing. While there are parts of the evidence, particularly that of Mr Weatherby, that are difficult to accept, the claims of Mrs Weatherby were not wholly rejected by the Master and we are not persuaded that was wrong. The eventual outcome may be influenced by the resolution of the conflict in the evidence as to whether Mrs Weatherby signed a guarantee on a separate occasion from that on which she signed the credit account agreement.

  23. For Mrs Weatherby, one of the arguments was that she had an arguable defence based upon her son procuring her signature to the guarantee as agent for Benchmark and so attributing to Benchmark misrepresentations said to have been made to her. This argument rests on a line of authority predating Barclay’s Bank v O’Brien and we can see little in the circumstances on which agency could be constructed in the present case merely because Mr Weatherby was asked, or required, by Benchmark to obtain the signature of his other director.

  24. As Mr Stewart correctly pointed out, the House of Lords decision in Barclay’s Bank v O’Brien, although generally regarded as a case of undue influence, involved misrepresentation constructive knowledge of which was attributed to the bank. Its application in New Zealand is subject to the Contractual Remedies Act, but we do not see that of significance in the present case. We proceed on the basis that if Mrs Weatherby can make out her claims of having had the nature of her obligations misrepresented to her by her son and of having misunderstood them, and if she can establish that Benchmark must be regarded as having had notice of the likelihood that would occur, she would have a defence. There is no issue of Benchmark having taken any step to ensure she was independently advised or otherwise fully understood the document she signed.

  25. It became common ground in the course of argument that the critical issue would likely be whether Mrs Weatherby had a financial stake in the debtor company and so, as a director, should be bound by the acts of her co-director. As between co-directors and shareholders there is little room for attributing to a company creditor alertness to a likely relationship of trust and confidence such that misrepresentations between them should be guarded against.

  26. It was submitted for Benchmark that there is insufficient evidential foundation for an arguable defence of this nature. As the contract sets out, Mrs Weatherby held 2,500 of the 10,000 shares in the debtor company and, on its face, this represented a financial advantage for her in the transaction which disqualified her from claiming that Benchmark should have known she was likely to have been affected by her co-director’s alleged misrepresentations.

  27. For Mrs Weatherby, Mr Stewart relied on the evidence in the affidavit of her son. He said:

    I told Mr Skipworth that my mother had no involvement or interest in the business and that I made all the decisions and that in those circumstances I did not see why my mother had to sign. Mr Skipworth said that the terms of the credit account were outside Benchmark’s normal terms and that he therefore required both directors to sign.

    The evidence of Mr Skipworth of Benchmark is contradictory of this.

  28. Strictly, the statement by Mr Weatherby can be construed as being confined to the involvement of Mrs Weatherby in the day to day operations of the company and is not inconsistent with a beneficial financial interest. However, we are reluctant to construe it so strictly in the context of a summary judgment application. The affidavit does not purport to state the precise words used and the matter is less than unequivocal. We think there is sufficient to leave open for oral evidence, tested in the usual way, whether Mr Weatherby conveyed to Mr Skipworth, in effect, that his mother was no more than a nominee shareholder and director with no personal interest in the company.

  29. In these circumstances we are not prepared to rule that the Master erred in declining to enter summary judgment.

  30. The appeal therefore is dismissed. The respondent is entitled to costs which we fix at $5,000 together with disbursements including the reasonable costs of travel and accommodation of counsel approved, if necessary, by the Registrar.


Cases

Nelson Fisheries Ltd v Boese [1975] 2 NZLR 233; Australian Guarantee Corporation (NZ) Ltd v Slade & Hooper CA256/91, 24 Aug 1992; Orme v De Boyette [1981] 1 NZLR 576; Barclays Bank Plc v O’Brien [1993] 4 All ER 417; Wilkinson v ASB Bank Ltd [1998] 1 NZLR 676

Legislations

Contractual Remedies Act 1979, s.4

Representations

K W Fulton for Appellant (instructed by Burrowes and Company, Wellington)
R B Stewart QC for Respondent (instructed by Kevin McDonald, Auckland)


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