Kenneth George Houlahan and Shirley Bonita Houlahan v Australian and New Zealand Banking Group Limited [1992] ACTSC 103; (1992) 110 FLR 259 (16 October 1992)

SUPREME COURT OF THE ACT

KENNETH GEORGE HOULAHAN and SHIRLEY BONITA HOULAHAN v. AUSTRALIAN AND NEW
ZEALAND BANKING GROUP LIMITED
No. SC 551 of 1990
Number of pages - 12
Guarantee and Indemnity - Deed
[1992] ACTSC 103; (1992) 110 FLR 259

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Higgins J.(1)

CATCHWORDS

Guarantee and Indemnity - Contract of Guarantee - Construction - Guarantee for overdraft facility - Mutual mistake - Mistake as to terms of Agreement.

Deed - Construction - Breach of covenant.

Imperial Acts (Substituted Provisions) Act 1986, ss.3(1), 7(2)(a)

Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353

Corcoran v O'Rourke (1888) 14 VLR 889

Perrylease Ltd v Imecar A.G. (1987) 2 All ER 373

Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422

Solle v Butcher (1950) 1 KB 671

HEARING

CANBERRA
16:10:1992

Counsel for the Plaintiffs: Mr J Simkins

Instructing solicitors: Messrs Barrads

Counsel for the Defendant: Mr R Refshauge

Instructing solicitors: Messrs Macphillamy Cummins and

Gibson

ORDER

The Court orders that there be a declaration that
1. (a) the plaintiffs' liability be limited to guaranteeing an overdraft up to $10,000.00;

(b) the defendant will be entitled to recover $10,000.00 out of

the fund deposited by the plaintiffs with interest thereon. Interest is to be allowed from 12 August 1986 to 9 September 1986 calculated at usual overdraft rates.

2. Leave is granted to parties to make submissions as to quantum of interest to be allowed to the defendant and as to consequential orders.

DECISION

HIGGINS J. In 1983, the plaintiffs were interested in a business owned by a company known as Ostrack Pty Limited. That company traded as "Ultra Tune ACT". It was a "franchised" motor repair business. There was an "Ultra Tune" outlet in Phillip and one in Belconnen.

2. Before 1983, the plaintiffs had been customers of the Bank of Adelaide. Mr Lloyd Plueckhahn was its local manager. The latter then became an officer of the defendant after the defendant's merger with the Bank of Adelaide. There was, at that time, another Ultra Tune company in New South Wales. Mr Fraser Stephen and the firstnamed plaintiff were interested in that company.

3. During 1984, a proposal was put forward by Mr Stephen for the purchase of a company trading as "Ultra Tune (Queensland)".

4. A proposal was put to the defendant by Mr Stephen and the firstnamed plaintiff. The price of the takeover was to be $250,000.00. The firstnamed plaintiff was to offer $50,000.00 cash for the deposit. He requested a loan in that sum from the defendant. That was agreed to. It was covered by existing security.

5. Mr Plueckhahn was then further requested to allow $10,000.00 as a working overdraft facility for the Queensland business after its acquisition. A cash flow projection was provided to demonstrate the potential for that business. There is, it may be noted, no attack on the bona fides of that projection.

6. The proposal was acceptable to Mr Plueckhahn. He said, however, that he would require a personal guarantee to be executed by the plaintiffs to secure the overdraft. The firstnamed plaintiff agreed to that proposal. The viability of the proposal was also supported by the plaintiffs' accountant.

7. The guarantee, in the standard form then used by the defendant, was signed on 28 September 1984. Both Mr Rolla and Mr Plueckhahn were present on behalf of the defendant.

8. There was some dispute about the circumstances in which the guarantee was executed.

9. The plaintiffs gave evidence that was consistent with each other. The first plaintiff said that when the "Guarantee" was produced it was first given to the second plaintiff for signature. It was said to be the guarantee for the $10,000.00 overdraft facility sought.

10. The first plaintiff says the second plaintiff asked him what the document was. The first plaintiff replied that it was a guarantee for the loan for the trading account in Queensland. Mr Plueckhahn agreed. The second plaintiff began to read through the document. Mr Plueckhahn (who was then on friendly terms with the plaintiffs) said words to the effect, "There's no need to read it Shirl, it's simply another standard document."

11. She signed as directed. So did the first plaintiff. He said he understood the effect of the document to be a guarantee for the $10,000.00 facility requested. He said he also signed another document which he did not read. He had not intended to sign an "unlimited" guarantee. He thought the second document was an "extension of mortgage". He denied, in cross-examination, a suggestion that the nature and effect of the guarantee had been explained in detail, including express reference to the obligation being "unlimited" so that he would be responsible for whatever sum the overdraft ended up at whether it exceeded $10,000.00 or not.

12. The second plaintiff, in evidence, said that the only explanation of the "Guarantee" that she could recollect was that it was to open an account for working capital for "Ultra Tune, Queensland".

13. She confirmed that she had commenced to read the document. She said that she got half-way down the first page when Mr Plueckhahn said "There's no need to read it, its the same standard form you've already signed". There was no reference, she said, to the guarantee being limited or unlimited, nor did she notice anything about the document to indicate that it was.

14. In cross-examination, the second plaintiff denied that Mr Plueckhahn had explained the effect of the guarantee agreement "for some time". She denied that it was suggested that they take it away for further advice or that she had said "There is no need to take it to a solicitor, we understand our obligations".

15. She said, further, that there was an additional document signed, not subsequently produced.

16. It may be noted that on 28 August 1984, Mr Killer, the then Manager of the Belconnen branch, noted

(p 4 exh C) "With relation to security for the $10000,
reference was made to Mr Houlahan and Mr Steven (sic), to
interview of 28/6/, wherein guarantee from Mr and Mrs Houalhan
(sic) would be required, supported by mortgage over there (sic)
home. After discussion, Mr Houlahan agreed to this and will
arrange for Mrs Houlahan to call in (due) course."

17. Mr Lloyd Plueckhahn gave evidence for the defendant. He could not recall the precise circumstances of the execution of this particular guarantee. There would have been, he said, no "extension of mortgage" document. However, he conceded, there might have been some form of "link" document referring to the mortgage. He said he "would have" advised on the nature and effect of the guarantee, in a general way" and explained it was "unlimited". He referred to a "note" taken of the signing of the guarantee document.

18. The note to which Mr Plueckhahn referred stated

(Exhibit E) "Mr Kenneth George Houlahan and Mrs Shirley
Bonita Houlahan called and executed an unlimited guarantee in
favour of Ultratune (Queensland Propriety Limited). The
guarantee was signed in the presence of Mr LD Plueckhahn and Mr
CR Rolla and prior to signing same Mr and Mrs Houlahan were
advised in a general way of their liability under the guarantee
in the presence of Mr Rolla. They were given the opportunity to
read the document or have its contents explained by an outside
party but they declined to do so stating that they were fully
aware of their liability under the guarantee. They then signed
the document in the presence of Mr CR Rolla and Mr LD
Plueckhahn."

Mr Rolla and Mr Plueckhahn signed that note.

19. In cross-examination, Mr Plueckhahn said that he "would have" followed the then current "instruction manual". If that manual required it, he would have conveyed to the plaintiffs that the guarantee was unlimited. He further conceded that it was "possible" that the second plaintiff was told that the "Guarantee" contained the defendant's "standard terms". He agreed that he did not go through the document of guarantee "clause by clause". He conceded that he might have said that it was not necessary for the guarantee to be explained to the plaintiffs by a solicitor, in contrast with South Australia. The manual was not before me. Nor was there any evidence as to its content.

20. Mr Colin Rolla, in evidence, said that he did have a recollection of the signing of the guarantee. He was asked to attend on Mr Plueckhahn to witness the signature of the plaintiffs thereto. He was the newly appointed manager of the Branch. He asserted that he was very impressed with Mr Plueckhahn's explanation of the document. He recounted that explanation in the following terms:-

Plueckhahn - "this is a legal document and I am not able to
explain it in detail. If Ultra Tune Queensland do not make
repayment you will be called upon to do so. I would suggest you
take it away for further explanation. Do you understand that?"

He said the plaintiffs agreed with that. He said Mr Plueckhahn then turned to Clause 13 of the document and said

"This clause is deleted because the account will have a
fluctuating limit. It will cover advances now and in the future.
Do you understand?"

He said that the plaintiffs said "Yes" and proceeded to sign the document. He could not recall any other conversation concerning it.

21. It was Mr Rolla's conclusion from the above conversation that the plaintiff's were "fully aware" of their liability under the guarantee. He could not recall any other conversation which would support such a conclusion. Nor could Mr Rolla recollect why it was considered necessary to express such a conclusion in the note he signed.

22. In cross-examination, Mr Rolla denied that the plaintiffs were told that the document contained "standard terms". However, he conceded that the plaintiffs were not given a copy of the document to read at leisure or to take away. He agreed that neither plaintiff had said expressly that they "fully understood" the terms of the document. He said that clause 13 was said to be deleted "to cover time to time advances", but he could not recall any other explanation of it or or its deletion.

23. It was my impression that each of the four witnesses who gave evidence concerning the execution of the guarantee document were endeavouring as best they could to recount what they believed that they could recall of it.

24. However, Mr Rolla's evidence was, I believe, somewhat over-confident. That is, I think, he, and to a lesser extent Mr Plueckhahn, confused what they now believe they would have done with what they did actually do. I also think that they tended to assume that, because the first plaintiff was a successful businessman and had signed such documents before, he understood the nature and effect of the terms of the "Guarantee".

25. I have no doubt that both plaintiffs were aware that clause 13 was being deleted.

26. I am satisfied, however, that none of the persons present had any real knowledge of the nature and effect of the guarantee document that was then being executed. It was even impossible for counsel appearing in the case to construe even the first clause of it when asked.

27. There are "explanatory" side notes to each separate clause of the document. The first is "Extent of Guarantee". There is opposite that note a single sentence of 57 lines in length couched in incomprehensible legal gobbledy-gook. That is, it must be conceded, the most extreme example. However, many of the other clauses would be understood only by a commercial lawyer with the time and patience to read them carefully. I think it was, probably, an accurate recollection of Mr Rolla's that Mr Plueckhahn conceded to the plaintiffs that he could not explain what the document meant. The general purpose of it, that is personally to guarantee repayment of the overdraft facility of $10,000.00, was, of course, clearly understood by all concerned.

28. I believe that Mr Plueckhahn probably said, expressly or impliedly, that the document contained the Bank's standard terms and effectively guaranteed the repayment by Ultra Tune (Qld) Pty Limited of the overdraft of $10,000.00 then under discussion.

29. Did the plaintiffs understand that the Guarantee would cover the excess of the overdraft over $10,000.00 should the defendant allow the account's debit balance to extend so far?

30. I am satisfied that they did not. Indeed, I doubt very much whether any person present had turned his or her mind to any such possibility.

31. I am also satisfied that the plaintiffs signed the "Guarantee" without reading it or fully understanding its import. They would have been little wiser had they attempted the exercise. On the other hand, I am also satisfied that neither Mr Rolla nor Mr Plueckhahn intended to mislead the plaintiffs. Nor did they expressly or overtly mislead the plaintiffs or misrepresent the document to them.

32. I do not accept that they expressly referred to the Guarantee as "unlimited" or conveyed in that or in any other manner that it would cover more than an overdraft limited to a maximum of $10,000.00. At the same time, although unable to construe or explain the actual terms of the document, I believe Mr Plueckhahn and Mr Rolla would have understood or expected that the form of the "Guarantee" was such as would protect the defendant should extensions of the overdraft be permitted by the defendant beyond the proposed limit of $10,000.00.

33. When questions arose, as I accept they did from time to time, of meeting cheques presented on the Ultra Tune (Qld) Pty Limited account, those approving payment, though the account balance would then exceed $10,000.00, believed that the plaintiffs were also guaranteeing the extension of the company's indebtedness to the defendant. I accept that they advised the first plaintiff from time to time of the extension of that indebtedness and of requests to be conveyed to Ultra Tune (Qld) Pty Limited to reduce that indebtedness. I also accept, however, that the relevant officers of the defendant were operating under the misapprehension that the plaintiffs were directors or, at least, the first plaintiff was a director of, the Queensland company.

34. In fact, the first plaintiff was, with Mr Stephen, a shareholder only. Mr Stephen was the executive director. The first plaintiff was a secretary of the company.

35. I should add, because it was canvassed, that I do not accept that the plaintiffs were urged to obtain legal advice. I accept that the existence of such a requirement may have been adverted to as a feature of law or practice in South Australia from whence Mr Plueckhahn had come. There is a printed form of words on the document enabling a solicitor to certify that the document has been explained to the guarantors. I do not believe that anything said or pointed to could have been construed reasonably as a warning to the plaintiffs not to sign unless they had legal advice. I believe that the plaintiffs were given the impression, shared by all parties present, that they were being asked to sign a routine bank document to guarantee a proposed overdraft facility of up to $10,000.00. However, the Bank officers had a view about its legal effect in the event that limit was exceeded not shared by the plaintiffs.

36. Another complicating factor is that on the rear page of the "Guarantee", a statement appears, acknowledged by the signature of each plaintiff, in the following terms

"I HEREBY ACKNOWLEDGE that I have carefully read and
understand the purport of the within Guarantee. And I hereby
request the Bank to make such advances to the within-mentioned
Customer as the Bank may from time to time think proper."

37. It is obvious, of course, that the statement was false insofar as it asserted that the plaintiffs had read or understood the document they had signed. The officers of the defendant, however, knew the statement to be false. Indeed, neither of those officers could have truthfully signed such an acknowledgement.

38. It seems to me, therefore, that it is not useful or necessary to attempt to construe the guarantee document or any part of it. It can be regarded as having no more effect than an acknowledgement of an intention on the part of the plaintiffs, accepted by the defendant, to guarantee the repayment of an overdraft of $10,000.00 to be granted to Ultra Tune (Qld) Pty Limited.

39. But for the lack of understanding of the view of the defendant's officers as to the nature of the Guarantee agreement entered into by them, the plaintiffs would clearly be liable to pay the defendant the sum it seeks by way of counter-claim. So much is virtually conceded.

40. The plaintiffs seek to avoid that consequence by reference to a number of claims.

41. Before considering those matters, it may be noted that the defendant did not claim that the plaintiffs were estopped from denying that they were bound by the defendant's interpretation of the terms of the Guarantee agreement. There was no claim by the defendant that the parol evidence rule prevented the plaintiffs from asserting that the nature and effect of the Guarantee agreement, was not the same as the meaning contended for by the defendant.

42. It seems to me that such tacit concessions by the defendant were proper.

43. When the question of guarantee was raised as a requirement of the defendant, it was always contemplated that the agreement by the plaintiffs to provide such a guarantee would be reduced to writing.

44. That expectation might have evidenced an intention that the agreement would be wholly written and be constituted by that writing only. It might also have been intended that the writing would merely be evidence of the agreement in question. This is but a usual application of the well-known case of Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353.

45. I consider that the "Guarantee", though in form complete, was intended to be no more than a note or memorandum of the agreement that had been entered into by the plaintiffs to guarantee Ultra Tune (Qld) Pty Limited's overdraft facility of $10,000.00. That proposal was all that the plaintiffs were ever requested to guarantee. It was all that Ultra Tune (Qld) Pty Limited had asked for to that stage. I also conclude that it is unlikely that the plaintiffs or the defendant would or could have intended that a document neither of them had read or understood to vary or materially alter the agreement they had already reached.

46. A contract of guarantee was, in 1984, required to be evidenced in writing to be enforceable. That requirement was removed by the Imperial Acts (Substituted Provisions) Act 1986 s.3(1) but its effect in relation to prior agreements was preserved by s.7(2)(a) thereof.

47. Had it been pleaded, there may have been a question as to whether the signed document was sufficient as a note or memorandum of the agreement between the parties. Nowhere in it is there a reference to the proposed overdraft facility of $10,000.00 yet the document was presented as being related to that account and not to any other and, possibly, unrelated indebtedness of Ultra Tune (Qld) Pty Limited to the defendant (see, for example, Corcoran v O'Rourke (1888) 14 VLR 889). Of course, such identification of the indebtedness to be guaranteed might well be regarded as implied. I will assume that such a term is applicable and proved by the oral evidence in the case (see, for example, Perrylease Ltd v Imecar A.G. (1987) 2 All ER 373).

What was the Agreement?
48. Before questions of mistake or misrepresentation arise, it is necessary to determine what in fact the agreement was.

49. The plaintiffs, at the defendant's request, offered to guarantee repayment of the sums advanced to Ultra Tune (Qld) Pty Limited from time to time pursuant to an overdraft facility of $10,000.00. The defendant accepted that offer. It is evidenced by the "Guarantee". The deletion of clause 13 in the printed documents, exhibit A, does not as a matter of logic or as a matter of common sense, lead to a conclusion that there is inserted into the agreement between the plaintiffs and the defendant a term that the guarantee will extend to some different facility such as an overdraft or advance exceeding that sum.

50. Of course, that would not have prevented the parties later agreeing to vary their arrangement to extend its application to an extended overdraft limit. I need not consider whether the parties would have needed a further signed "note or memorandum". They did not cause one to be drawn or signed. The defendant mistakenly believed that it was a term of the agreement that the plaintiffs would be liable for whatever sum it might advance to Ultra Tune (Qld) Pty Limited. It believed that it was only necessary for it to inform the plaintiffs of new limits from time to time. It mistakenly believed that the plaintiffs had agreed to such a term.

51. The plaintiffs, however, believed that such notifications as were given were for the purpose of seeking their assistance (or, more particularly, that of the first plaintiff) in obtaining reduction of the overdraft and, perhaps, as a warning that, if the overdraft was not reduced or a new limit approved to the satisfaction of the defendant, their guarantee might be called upon. They did not, at any time, believe that the allowance by the defendant of an increased facility rendered them liable for more than the original guarantee.

Mutual Mistake
52. Where parties are mistaken about the other party's understanding of the agreement, the agreement has been entered into under a mutual mistake. It may arise spontaneously. It may be a result of a deliberate or innocent misrepresentation.

53. In this case, I have already concluded that neither party was aware of the other's mistake as to the understanding of the other party as to the terms of the agreement. I have also been persuaded that neither party induced the mistake of the other party by any misrepresentation. It follows that the plaintiffs' claims based on misrepresentation or on false or misleading conduct fail in limine.

54. That leaves the question of the effect, if any, of the mutual mistake I have referred to.

55. It was a mistake only as to the terms of the agreement of guarantee. Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422 clearly requires that, in such a case, the agreement can be avoided if, and only if, the mistake destroys the apparent assent by the parties to the agreement which appears, on an objective basis, to have been reached.

56. In such a case, as Lord Denning said in Solle v Butcher (1950) 1 KB 671, neither party -

(691) "... can rely on his own mistake to say it was a
nullity from the beginning, no matter that it was a mistake which
to his mind was fundamental, and no matter that the other party
knew that he was under a mistake."

57. If one party knew of the other's error, that mistake would then be described as "unilateral". Of course, such a mistake may in some circumstances be such that the agreement might be set aside on equitable grounds. That is not the case here. Indeed, it was the defendant that was mistaken about the nature and effect of the terms of the guarantee. Objectively, the agreement related only to an account with an approved overdraft limit of $10,000.00.

58. Clearly, however, the defendant would not seek to have that guarantee agreement set aside even though it is not as favourable to it as it believed it to be. It would be unconscionable for the plaintiffs to rely on the defendant's mistake to avoid the burden which they voluntarily accepted.

Conclusion
59. In my opinion, the plaintiffs are entitled to a declaration that the scope of the original guarantee agreement was only in respect of an overdraft facility of up to $10,000.00.

60. There is, additionally, a claim for damages pursuant to the Deed referred to in the agreed documents.m

The Deed
61. It is dated 9 June 1989. Pursuant to its terms, the plaintiffs deposited $71,000.00 with the defendant. That was the sum the defendant was then claiming under the "Guarantee". It was paid without prejudice to the plaintiffs' contention that their liability was less than that.

62. It was a term of the Deed that the plaintiffs would not be entitled to interest on any part of the sum so deposited. Of course, it would never have been intended that the plaintiffs would have been entitled to interest on sums then due to the defendant.

63. There was a further term of the Deed that

"6. The Bank will commence the ACT proceedings in the Court for
recovery of the debt, being the amount of $71,000.00 and no
more, plus costs and Mr and Mrs Houlahan will instruct their
solicitors, Messrs Barrads, to accept service of a writ of
summons commencing the ACT proceedings on their behalf."

The "proceedings" referred to were proceedings in this Court in which the indebtedness of the plaintiffs to the defendant would be ascertained.

64. Proceedings were not "commenced" by the defendant. The plaintiffs sued on 7 September 1990. Their claim is to have it declared that their liability is limited to guaranteeing a limit of $10,000.00. The defendant counter-claimed by its pleading of 9 October 1990. The defendant has not explained its failure to take proceedings as it had covenanted to do. Although the Deed makes no express reference to a time limit within which the defendant should commence proceedings, it is necessarily implied that it would be as soon as practicable after execution of the Deed.

65. It seems to me, however, that the breach by the defendant of that covenant can be met by an appropriate order as to interest.

Orders to be made
66. It seems to me that the plaintiffs are entitled to the declaration to which I have referred.

67. It follows that the defendant is entitled to recover $10,000.00 out of the fund deposited with it by the plaintiffs.

68. The defendant is, in my view, entitled to interest at its usual overdraft rates on that sum of $10,000.00. The commencement date for such award of interest is not entirely clear. It seems to me that it should be from the date on which the defendant demanded repayment from the plaintiffs of the overdraft amount they had guaranteed, following default by the Queensland company. It seems to me that it is reasonable to regard that date as that of delivery of the notice of default from the defendant. That seems to coincide with the date of receipt of the defendant's letter of 12 August 1986.

69. The closing point is the date of refusal by the defendant to accept that the plaintiffs' liability was limited, so far as the principal sum due was concerned, to $10,000.00. From the agreed documents that seems to be 9 September 1986.

70. The formal demand for payment of $37,920.10, the debit balance of the bank account of the Queensland company, was made on 11 September 1986. The demand recited $3,350.56 as the total amount of interest then due and also $258.76 for "fees" accrued. Obviously, some part, or perhaps all, of those latter figures related to the $27,920.10 by which the overdraft, as at the date of default by Ultra Tune (Qld) Pty Limited, exceeded the limit guaranteed by the plaintiffs.

71. I consider that the best course is to give leave to the parties to make submissions as to the quantum of interest to be allowed to the defendant.

72. The plaintiffs claim interest on the sum the defendant is required to refund to them from the deposit of $71,000.00. That figure will be ascertained only when the interest due to the defendant on the principal sum of $10,000.00 has been fixed. However, the period for which interest is payable can only represent that caused by the delay of the defendant in taking proceedings. That was a delay of about 15 months. Had the defendant complied with the Deed, it may be assumed that the result I have come to would have been ascertained 15 months earlier. The damage suffered by the plaintiffs can therefore be calculated as being represented by interest at commercial rates over the last 15 months on the balance in question less an allowance for the additional income tax which may have been levied thereon if it had been earned over that period.

73. I will hear the parties also on the quantification of this item as well as on costs or any other directions which may need to be sought.

74. Presently I make only the declaration referred to above as to the true construction of the guarantee agreement.