Valstar v Silversmith; Valstar v Van Veizen  NSWCA 80
- A creditor agreed with the debtor to increase the principal of the loan, without the consent of the guarantors. The creditor argued that the guarantors were liable as principals, and that they had agreed that variations to the mortgage would not release the sureties. The NSW Court of Appeal applied analysis of Lord Denning MR in Stadium Finance to hold that the agreement was one of guarantee, not of indemnity, and that the guarantors had not agreed to waive an increase in the principal loan.
Mr Valstar ("the lender") loaned a company A$240,000, secured by mortgage over property owned by the company, and guaranteed by the three directors of the company ("the guarantors"). In April and September 2004, the company and the lender executed two variations to the mortgage, which extended the term of the mortgage and varied the interest rate. As well as witnessing execution by the company, each director also signed as guarantor.
In October 2004, two of the directors ("the respondents") resigned as directors of the Company.
Thereafter, three more variations were executed by the company, on 9 February 2005, 19 April 2005 and 30 January 2006, however the respondents did not sign as guarantors. Unlike the earlier variations, each of these increased the principal sum (the last taking it to A$500,000).
The company defaulted on the loan and the security proved insufficient to satisfy the debt. The lender sued the guarantors in the District Court of NSW for the outstanding balance. The trial judge found for the respondents, at least partly on the basis of novation, i.e. that the lender and the remaining director had created a new agreement between themselves via the later variations which had the effect of discharging the obligations of the respondents. The lender appealed to the NSW Court of Appeal.
The Court of Appeal1 held that the primary judge's conclusions based on the doctrine of novation could not stand, as all parties to an old agreement must also be parties to the new agreement2. However, they upheld the primary judge's decision on the Ankar principle, i.e. that, "...any departure by the creditor from the suretyship contract 'which is not obviously and without inquiry quite unsubstantial, will discharge the surety from liability, whether it injures him or not...'".3 The court noted that this is an equitable principle which is applied strictly.4
The lender argued two reasons why the Ankar principle did not apply in this case:
- The Ankar principle is available only to sureties, and the defendants in this case were liable as principals. The Court of Appeal rejected this argument, noting that the lender at first instance had not pleaded that the guarantors were principal debtors. The guarantors would be prejudiced in two ways if the lender were allowed to raise this point now:
- They had lost the opportunity to invoke equitable or statutory defences (including unconscionable conduct by a corporation under section 51AA of the Trade Practices Act 1974 (Cth));
- They had lost the opportunity to bring further evidence indicating the nature of their obligation. The Court of Appeal noted the judgment of Lord Denning MR in Stadium Finance Co Ltd v Helm (1965) 109 Sol J 471, that in construing whether a clause of this nature was a guarantee or an indemnity, it was not appropriate to rely on a literal construction of the clause but to consider the "whole burden" of the agreement, in particular whether one party had a primary obligation and the purported guarantor had a secondary obligation, or whether there were two primary obligations. The mortgage agreement on its face appeared to be of the former kind, and the respondents should have been afforded the opportunity to bring evidence of surrounding circumstances in relation to this issue.
- The lender argued that the parties had agreed that a variation
of the principal amount would not amount to a release of the
surety, relying on the following clause in the mortgage agreement:
"The said Guarantors will not be released from any obligations by reason only of any extension of time granted or any other act or omission by the Mortgagee favouring the Mortgagors. The Mortgagor will be in default under the Mortgage if the Guarantors are made bankrupt or assign or attempt to assign to any other person the obligations of the Guarantor to the Mortgagee."
The Court of Appeal agreed that it was open to a lender and guarantor to so agree5. However, construction of such an agreement is subject to the principles that liability of the surety is strictissimi juris and ambiguous provisions must be construed in favour of the surety6. Construed as a whole, the court held that this clause contemplated that acts or omissions that did not necessarily favour the company may release the guarantors, and such would include an agreement between lendor and debtor to increase the amount of the loan secured by the mortgage.
The Court of Appeal distinguished the case of Fletcher Organisation v Crocus Investments7, where a similar clause had been held sufficient to exclude the right of a co-surety to contribution, and therefore a compromise between the mortgagee and the other co-surety did not release the first co-surety8. The clause in the instant case was not worded as broadly, and in particular did not state that the guarantors waived their rights.
Accordingly the lender's appeal was dismissed with costs.
1 Sackville AJA; McColl and Basten JJA agreeing
2 Tito v Waddell (No 2)  1 Ch 106 at 287 per Megarry V-C; HAG Import Corpn (Aust) P/L v Krosnienskie Huty Szkla "Krosno" SA  FCAFC 97 at  per Branson and Hely JJ
3 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd  162 CLR 549 at 558 per Mason ACJ, Wilson, Brennan and Dawson JJ, citing Halsbury's Laws of England, 4th Ed, vol 20, para 259.
4 Referring to J Donovan and J Phillips, "Modern Contract of Guarantee", para 7.100
5 Wood Hall Pty Ltd v Pipeline Authority  141 CLR 443 at 455 per Gibbs J; Barwick CJ and Mason J agreeing
6 Ankar (supra) at 561; Andar Transport P/L v Brambles Ltd  217 CLR 424 at 433, per Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ
7  2 Qd R 517
8 The clause in that case read: "... In order to give full effect to the provisions of this instrument the Guarantor agrees and declares that the Mortgagee shall be at liberty to act as though the Guarantor were the principal debtor and the Guarantor hereby waives all rights in connection with such provisions that it might otherwise be entitled to claim or enforce."
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