Hanna v O'Neill [2004] ACTSC 70 (20 August 2004)

Last Updated: 16 September 2004

WAGDY HANNA v JOHN O'NEILL

[2004] ACTSC 70 (20 August 2004)

MAGISTRATES COURT - appeal.

LANDLORD AND TENANT - written lease - reference to guarantor - oral agreement to guarantee payment of rent by company - effect of admissions by guarantor.

Land Titles Act, s 57

Codelfa Construction Pty Ltd v State Rail Authority of New south Wales [1982] HCA 24; (1982) 149 CLR 337

Deane v The City Bank of Sydney [1904] HCA 44; (1904) 2 CLR 198

Handbury v Nolan (1977) 13 ALR 339

Petreski v Cargill (1987) 18 FCR 68

Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242

ON APPEAL FROM THE MAGISTRATES COURT

No SCA 23 of 2004

Judge: Connolly J

Supreme Court of the ACT

Date: 20 August 2004

IN THE SUPREME COURT OF THE )

) No SCA 23 of 2004

AUSTRALIAN CAPITAL TERRITORY )

ON APPEAL FROM THE MAGISTRATES COURT

BETWEEN: WAGDY HANNA

Appellant

AND: JOHN O'NEILL

Respondent

ORDER

Judge: Connolly J

Date: 20 August 2004

Place: Canberra

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The parties be given leave to bring in minutes to give effect to these reasons and to be heard on costs.

1. This is an appeal from a decision of Magistrate Burns of 8 April 2004 in which his Worship entered judgment for the respondent defendant in a claim for damages arising from a commercial tenancy agreement. It was common ground that the appellant plaintiff had entered into two agreements for the lease of commercial premises situated at North Lyneham with a company Mercadier Pty Ltd (Mercadier). The first agreement was entered into in 1995 for an initial period of three years, with an option for a further term of three years. The premises were again leased to Mercadier by a lease with a five year term in 2001.

2. The respondent is a director and the principal behind Mercadier. He negotiated both leases with the appellant, and it is common ground that in each lease he is identified in the schedule as "guarantor". Nowhere in the lease, however, does it state what obligations the guarantor had assumed. As Magistrate Burns noted at AB 5, the lease -

... was poorly drafted. The plaintiff did not retain the services of a solicitor but apparently took upon himself the responsibility for drawing up the lease.

3. This case illustrates once again the perils of commercial arrangements involving substantial sums of money where a party chooses to save a modest amount by attempting to be a do-it-yourself solicitor.

4. In April 2002 Mercadier ceased paying the rent on the premises. The company ultimately failed and has since been placed into liquidation. The appellant obtained an order to retake possession of the premises in September 2002. The appellant brought an action in the Magistrates Court claiming from either Mercadier as the lessee, or from the respondent as the guarantor, the unpaid rent from April to September 2002, unpaid outgoings under the lease and to make good expenses and damages. By the time the matter came before the Court, Mercadier was in liquidation and the matter proceeded before the learned Magistrate as a claim solely against the respondent as the "guarantor".

5. The appellant plaintiff's case was that the agreement for the lease of the premises, both in 1995 and 2001 was partly in writing and partly oral, and that, while the lease itself only identified the respondent as the guarantor, there were conversations between the appellant and the respondent in which the respondent agreed that as part of the arrangement he would stand behind the company and be guarantor. The appellant asserted that the terms of this extended both to any rent payments that the company defaulted on, and to all other obligations under the lease.

6. Where a contract is partly in writing and partly oral, it is open to a court hearing the claim to receive evidence as to the oral terms and, it seems to me, that receiving such oral evidence in no way contradicts the proposition reaffirmed in Codelfa Construction Pty Ltd v State Rail Authority of New south Wales [1982] HCA 24; (1982) 149 CLR 337, per Mason J at 352 that -

... evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

7. The proper approach, where an agreement is said to be partly in writing and partly oral, as is the case here, is that -

... when a contract is partly in writing and partly verbal, all the circumstances may be looked at and considered for the purpose of construing the contract, and even to vary the written documents, and the whole matter is one for the jury.

Per Griffith CJ in Deane v The City Bank of Sydney [1904] HCA 44; (1904) 2 CLR 198 at 209.

8. That approach was reaffirmed by Barwick CJ in Handbury v Nolan (1977) 13 ALR 339 where, in construing the terms of a contract of sale said to be partly in writing, by way of conditions in a catalogue, and partly oral, he said at 341 that the matter -

... is not to be resolved, as it were, by construction of written documents, but as a matter of fact, ie what in substance was the subject matter of the sale and purchase.

9. The Magistrate, quite properly, adopted this approach. The lease itself was clearly inadequate to resolve the matter, as it clearly on its terms identified the respondent as "guarantor", but failed to identify what, if anything, he was guaranteeing. In order to succeed it was incumbent on the appellant, as landlord, to establish on the balance of probabilities that the oral agreement included the respondent's guarantee of all or part of the obligations assumed by the tenant under the lease.

10. The Magistrate in his reasons noted that the plaintiff gave evidence of the nature of the conversations that were in their terms contradictory. In [6] of his reasons (AB 7) he notes that the plaintiff at one point gave evidence that "He (Mr O'Neill) said he would guarantee the payments and I should not worry about the rental payments". Later, the plaintiff said, "He (Mr O'Neill) would guarantee the payment and the obligations under the lease". There are clearly two versions here of what is said to be guaranteed - the rent only, or all obligations under the lease.

11. The plaintiff was not the only person to give evidence that had internal contradictions. At one point the defendant denied any conversations with the plaintiff about guarantees. The Magistrate found, however, that there had been conversations. He said at [12] of his reasons (AB 9) -

I do not accept that no conversations took place between the plaintiff and the defendant on the general issue of guaranteeing the first defendant's obligations under the lease.

12. In his conclusion he said at [9] that -

I am satisfied that at some point of time there was a conversation or conversations between the plaintiff and the defendant concerning the provision of some form of guarantee by the defendant regarding the obligations of Mercadier. I am unable to say with any certainty whether those conversations, preceded the 1995 lease, the 2001 lease, or both. I am also unable to determine with any certainty the terms of any conversation or conversations.

13. A decision by the Magistrate that the appellant plaintiff had failed to discharge the onus to establish, on the balance of probabilities, the existence and relevant terms of an obligation assumed by the respondent to guarantee all or any of the obligations of Mercadier would of course be beyond appellable challenge. Although an appeal from a magistrate in this jurisdiction involves a rehearing, this Court has generally taken the view that it will not interfere with the decision of a Magistrate unless the Court finds an error of principle or fact (Petreski v Cargill (1987) 18 FCR 68 per Sheppard, Kelly and Neaves JJ). The error that it is said the Magistrate has fallen into is that he is said to not have properly had regard to certain admissions made by the respondent during the course of his evidence, and certain propositions put to the plaintiff by Mr Flint, counsel for the defendant, during his cross-examination. These admissions, it is said, amount to a concession by the respondent that there was, at least, a guarantee of the rental obligations. Accordingly, while the learned Magistrate was correct in saying that he could not be satisfied that the plaintiff had established that the guarantee extended to all the obligations under the lease, he erred in not finding, from the defendant's concession, that the obligation did extend at least to the rental payments.

14. The claimed admission is referred to by his Worship in his reasons at [17] (AB 12) where he says -

During the course of his evidence the defendant said that he understood that he was "guaranteeing something" with respect to the obligations of Mercadier. He went on to say that he understood that he had an obligation to meet late payments of rent should they occur.

15. In his conclusions the learned Magistrate said at [19] that he was satisfied that the defendant understood -

... that he had some undefined liability to meet arrears of rent owed by Mercadier. It is tempting to work backwards from the understanding of the defendant to attempt to find a contract based upon that understanding, to the extent that it corresponds with some part of the evidence of the plaintiff. However I am satisfied that were I to do so in this case I would be constructing a contract rather than reconstructing it.

16. Certainly a judge or magistrate must be careful not to take evidence of later understandings as the basis of re-defining or indeed filling in blanks in a written contract. So much is established by Codelfa Constructions v State Rail Authority. But it is said by the appellant that the respondent's evidence went well beyond an acknowledgement of a present understanding of some undefined obligation.

17. In cross-examination (AB 40-41) the respondent acknowledged that at the time the lease was signed on behalf of Mercadier he was identified in the lease as the guarantor. He acknowledged that "there might be something in the guarantee". He was asked what the nature of his understanding was of this, and he said -

My understanding at the time was that I would be meeting those late payments of rent should they have occurred.

18. It is significant that the respondent's evidence was not that this was a present or later understanding, but that this was his understanding at the time he signed the lease on behalf of his company.

19. He was later asked (AB 41) -

And that obligation, that you said, was to personally meet payments of rent if Mercadier failed to meet those payments, it that right? --- I'd have to say that I didn't regard it as being personal, but certainly I recognised as obligation to make payments on behalf of Mercadier in the event that there were late payments or missing rent.

20. At this point his Worship intervened and asked -

When you say that you didn't take it to be personal, what did you assume your liability was?

To which the defendant replied -

Yes I'm simply saying that it - in my mind at the time I was undertaking to meet those obligations as Mercadier. If they are personal then I accept that.

21. The Magistrate then asked the defendant what conversations took place between him and the plaintiff that gave rise to these understandings. The defendant denied that there were any conversations (AB 42), or -

the conversations, if there were any, of a nature that would be dealing with the lease was that this is how much it's going to cost and these are the outgoings and are you happy with it?

22. The Magistrate clearly did not accept this evidence, as he found that there had been conversations between the parties concerning the existence and nature of the guarantees ([19], AB 13).

23. Given that the Magistrate had found as a question of fact that there had been conversations between the appellant and the respondent concerning "the provision of some form of guarantee by the defendant regarding the obligations of Mercadier", it seems to me that the respondent's statement, which can be described as an admission, that at the time the 2001 arrangement was entered into he understood that there was a term in the document identifying him as a guarantor, and that he understood that he was guaranteeing the payment of rent should Mercadier have defaulted on rent payments, should have lead to a finding that the appellant had established this much at least of his case. The respondent's statements went to his understanding of the nature of the agreement at the time it was entered into, and it must have come from conversations between the appellant and the respondent, as found by the Magistrate. This was not a case of constructing a term in a contract from some later understanding or expectation of a party, but rather a case of finding what were the terms of the oral part of the contract. The respondent's evidence, it seems to me, clearly established that the oral part of the agreement extended at least to an undertaking by the respondent to meet the rent if his company was unable to pay, and this much at least should have been found to have been the terms of the guarantee.

24. In his evidence the defendant denied that the agreement went any further than the rent. It was put to him by Mr Arthur, for the plaintiff, (AB 42) -

You make a distinction, I think in your mind, between payments of rent on the one hand and other obligations in the lease on the other hand, is that so? --- That's true.

And its those other obligations of the lease that you don't regard yourself as responsible for ...? --- I don't regard myself responsible for them under the terms of the guarantee.

25. I note that in cross-examination of the plaintiff it was put to him that his understanding at the time of the lease was that the guarantee extended only to the rent. Mr Flint said (AB 34) -

Can I suggest to you Mr Hanna that your understanding as at the time of these conversations between July and September 2001 was that Mr O'Neill was saying to you that if Mercadier falls behind in the payment of its rent, I will make good that default. That was your understanding, wasn't it?

To which the plaintiff replied -

No Mr Flint, no. Mr O'Neill assured me that not only if Mercadier falls behind in rent he will make good, but he will honour the rest of the lease.

26. I note that the proposition was put to the plaintiff, presumably on instructions, that the terms of the guarantee, emerging from conversations prior to the September agreement, was that the defendant would guarantee the rent but nothing else. The plaintiff denied this, asserting that the guarantee extended to all obligations of Mercadier under the lease. The learned Magistrate clearly had conflicting evidence on this point, and was entitled to conclude that the plaintiff had not satisfied him, on the balance of probabilities, that the oral agreement went beyond a guarantee to pay the rent.

27. But it seems to me that the learned Magistrate has fallen into error in dealing with the admissions of the defendant as though they were merely a post-agreement understanding, or perceptions of a written contract of the nature described by the High Court in Codelfa Constructions. It seems to me that, absent the admissions and the question put to the plaintiff by Mr Flint, the Magistrate could not have been criticised for finding that plaintiff had failed to make out his case. But once this evidence was given, it seems to me that the Magistrate has erred in saying that despite the defendant's clear admission that he understood, on the basis of conversations that he denied but the Magistrate found must have occurred, that the reference in the written contract to him as guarantor extended to an obligation to make good rent default by his company, should it occur, he cannot be satisfied as to the terms of the guarantee. The Magistrate quite properly cannot be satisfied as to the asserted extended form of guarantee, said by the appellant to extend to all obligations of Mercadier but said by the respondent to extend only to the obligation to meet rental payments. However, it seems to me, the Magistrate was required, on the evidence, to have found that the agreement did include a guarantee to meet rent payments. It seems to me that, in holding that to have had regard to the admissions of the respondent he would have fallen into error, presumably the error referred to by the High Court in Codelfa, his Worship did err, and I should allow the appeal on this point.

28. Mr Mossop, for the respondent, made submissions that, even if I was against him on the substantive matter of the admission, the appellant would inevitably have failed because, it is said, there was no consideration for the guarantee, and the lease itself was never executed. It seems to me that nothing in truth turns on these points. On the question of consideration, Mr Mossop acknowledged that while the absence of any identified consideration is not fatal to the guarantee (Mercantile Law Act 1962 s 12), there must have been some consideration for the guarantee to have been effective. To the extent that some consideration must be established, it seems to me that this is met by the evidence of the respondent (AB 41) who, when asked whether at the time the lease was executed he had any understanding of what the appellant was going to do in exchange for the guarantee, said -

I guess if I thought about it at the time it was to ensure that the lease was effective.

29. It stands to reason that a landlord might wish for such a guarantee in order to lease valuable commercial premises to a company with limited assets.

30. The learned Magistrate found, correctly, that the 2001 lease had never in fact been registered, although it was in registrable form and indeed duty had been paid. It is true that a lease cannot be effectual to pass an interest in land unless registered under the Land Titles Act, s 57, but that of course does not mean that the tenant did not have an equitable lease or common law tenancy. It was held by the High Court in Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 that a guarantee in a lease or the obligations under the lease was not binding on the guarantor when the lease itself had never been registered, but this was because the guarantee itself was, on its face, limited to the obligations "under the lease", and the failure to register the lease meant that the obligations of the tenant to the landlord arose, not under the lease, but under an equitable lease or a common law tenancy. In the present case, it seems to me that the oral term of the guarantee extends to the obligation to pay the rent, however arising. Nothing turns on the failure to register the lease.

31. I am satisfied that the appeal should be allowed as the Magistrate erred in the way he treated the evidence concerning the admission of an obligation by the respondent to meet rent payments should his company Mercadier default on those payments. The effect of this is that the appellant would be entitled to judgment for the unpaid rent from April to September. The amount of this rent could be agreed by the parties, or may need to be resolved by remitting the matter to the Magistrate to deal with it in accordance with these reasons. It seems to me that I should hear the parties on the question of the final disposition of the matter, as there could well be costs savings in avoiding another hearing to determine only the quantum of the unpaid rent for the defined period which would commence when the rent was first defaulted and end when the landlord regained possession.

32. The appeal is allowed. I give leave to the parties to bring in minutes to give effect to these reasons, and to be heard on costs.

I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Connolly.

Associate:

Date: 20 August 2004

Counsel for the appellant: Mr R Arthur

Solicitor for the appellant: Donohue & Co

Counsel for the respondent: Mr D Mossop

Solicitor for the respondent: Bradley Allen

Date of hearing: 6 August 2004

Date of judgment: 20 August 2004