Carpentars Fiji Ltd v Singh [2007] FJHC 30; HBC41.2004 (25 September 2007)

IN THE HIGH COURT OF FIJI
AT LABASA
CIVIL JURISDICTION

CIVIL ACTION NO.: HBC 41 OF 2004

BETWEEN:

CARPENTERS FIJI LIMITED
a limited liability company having its registered office at Suva and trading as
CARPENTERS HARDWARE and CARPENTERS MOTORS throughout Fiji.
Plaintiff

AND:

JAGDISHWAR SINGH
(father’s name Ramaser) of Qelewaqa, Labasa, Company Director.
Defendant

Counsels: Ms B. Narayan for the Plaintiff
Mr. C.B. Young for the Defendant

Date of Hearing: 27th August 2007
Date of Judgment: 25th September 2007

JUDGMENT

[1] Janit Construction Limited was incorporated on 5th April 2002. At the time the defendant was one of its directors. On 25th June 2002 the defendant executed a guarantee (document 13) to secure certain credit facilities provided to Janit Construction Limited. The plaintiff is claiming a sum of $118,387.46 under the guarantee. The defence is that the guarantee as worded does not render him liable because of lack of consideration and secondly the terms of contract between the principal debtors and the plaintiff were varied without the consent of the defendant so the guarantee is discharged.

[2] On 12th July 2002, the Managing Director of Janit Construction Limited made an application for a trade account in what appears to be on plaintiff’s standard form. According to the financial controller of the plaintiff, the plaintiff asks all its clients who seek credit terms to fill this form. Janit sought a monthly credit limit of $53,500.00, being $2,500.00 from Carpenters Motor Division, $1,000.00 from Carpenters Morris Hedstrom and $50,000.00 from Carpenters Builders Merchants. However, Carpenters approved a maximum monthly credit of only $20,000.00. The date of approval is 18th July 2002. Janit was informed of this approval by letter dated 25th July 2002 – Document 1 in defendant’s bundle.

[3] It is agreed between the parties that as at the date of execution of the guarantee, Janit had no debts with the plaintiff. Purchase of goods was first made on 17th October 2002.

A) Was it a valid guarantee?

The guarantee states what the consideration is. It reads:

"In consideration of your having at my request agreed to supply Janit Construction Limited (herein "the Principal Debtor") with goods and services as required by him from time to time: and/or in consideration of forebearance on your part to immediately demand and sue for payment of any monies now owing by the Principal Debtor to you to the intent that this Guarantee shall cover all monies due from time to time by the Principal Debtor to you on any account whatsoever."

[4] This guarantee is a commercial contract. The issue is one of interpretation of this guarantee by a reasonable person having the background knowledge of the parties. The approach in interpreting contracts was set out by Lord Hoffman in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1997] UKHL 28; (1998) 1 ALL ER 98 at 114 and adopted by the Court of Appeal in Hassan Din & Another v. Westpac Banking Corporation – ABU 66 of 2003 Lord Hoffman summarized the principles as follows:

"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] UKHL 19; [1997] 3 All ER 353, [1997] 2 WLR 945.

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v. Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:

‘... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’"

[5] This is a standard form guarantee prepared by the plaintiff. Mr. Young submits that the guarantee as expressed only covers past debt or past consideration and is therefore not binding. The words are "agreed to supply with goods and services as required by him from time to time". He stressed that "agreed to supply" could only refer to past conduct not future. He has not looked at the entire sentence or clause. What this clause means is the defendant requested and the plaintiff agreed to supply from time to time in the future. It is not confined to debts already existing. The consideration as expressed consists of two situations: forbearance to sue for existing debts which does not apply as there were no debts; secondly to supply goods in the future with promise to pay for these. Clause 1 of the guarantee also foreshadows future supply of goods to Janit and promise to pay by the guarantor. Clause 1 provides:

"I will guarantee and be answerable to you for the due payment by the Principal Debtor for all such goods and services as you may from time to time at his request supply (and deliver) to him and/or any monies now owing by the Principal Debtor to you, including any interest and other customary charges which the Principal Debtor shall be liable to you for notwithstanding that I shall not have notice of any neglect or omission on his part to pay for such goods according to the terms agreed on between you and him."

[6] Further Clause 2 states that this is a continuing guarantee and therefore it extends to series of transactions in the future. The Indemnity, Guarantee and Bailment Act Cap 232 provides that "Anything done or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee". The guarantee must be read as a whole and not piecemeal. I hold that there was consideration namely agreement to supply goods to Janit. In fact goods were supplied from October onwards. This guarantee was not for just one trade supply of $20,000.00 but a series of such supplies limited to $20,000.00 per month. So this ground fails.

B) Guarantee not enforceable for variation of principal contract

[7] The plaintiff, Mr. Young submits, had initially agreed to supply credit limit of $20,000.00. However, he says that the plaintiff supplied goods in excess of $20,000.00 as can be seen from the amount of the claim. Mr. Young says this increased facility did not have the consent of the defendant. Variation of terms he says discharged the debtor.

[8] It is an established principle that any substantial departure made by a creditor without the surety’s consent from the terms of the principal contract will discharge the surety because it makes an alteration in the surety’s obligations: Holme v. Brunskill [1877] UKLawRpKQB 74; 1878 3 QBD 495 at 505. This principle was approved by the Privy Council in Egbert v. National Crown Bank (1918) AC 903 at 908. Volume 20 of Halsbury’s Laws of England 4th edition paragraph 253 states that

"Any material variation of the terms of the contract between the creditor and the principal debtor will discharge the surety, who is relieved from liability by the creditor dealing with the principal debtor (or with a co-surety) in a manner at variance with the contract the performance of which is guaranteed".

[9] This principle of law has been given statutory effect in Section 11 of the Indemnity Guarantee and Bailment Act. The discharge of surety by variance in terms of the contract is provided for by Section 11. The section provides:

"Any variance made without the surety’s consent in the terms of the contract between the principal and the creditor discharges the surety as to transactions subsequent to the variance." (underlining is mine for emphasis)

The rationale behind this principle is that a guarantor is responsible only for the obligations which he has guaranteed. Therefore if the principal debtor and the creditor without the guarantor’s consent agree between themselves to alter the nature of the obligation the guarantor is discharged because the obligation in its altered form is not what he guaranteed: Hancock v. Williams (1942) SR (NSW) 252, 255.

[10] The construction and meaning of the guarantee are of critical importance. One must examine the exact nature of the obligations which are guaranteed. There may be clauses in a guarantee which suggest exclusion of discharge on grounds of variation. As I have stated earlier, the guarantee is a continuing guarantee which in Clause 1 also includes "all such goods and services as you may from time to time at his request supply". At the time of the execution of the guarantee the credit trade agreement had not been finalized nor is there any evidence to say that any verbal discussions as to the limit of such account had been discussed. However, guarantees are not given in a vacuum; they are given in response to a principal agreement. In this case it was agreement to supply goods to a limit of $20,000.00 per month.

[11] The defendant’s argument that the variation released the defendant from liability counters difficulty in the face of Clause 8 that provides that the plaintiff could treat the defendant as if he were a principal debtor and he waives all his rights as guarantor. The relevant portion of Clause 8 reads:

"In order to give effect to this guarantee I declare that you shall be at liberty to act as though I were a principal debtor and I waive all and any of my rights as guarantor which may at any time be inconsistent with any of the above provisions."

[12] A similar provision came for discussion in Heald v. O’Connor 1971 1 WLR 497. It suggests that the guarantor’s obligation "as a primary obligator and not merely as a surety" prevents the guarantor being discharged from liability if the creditor gives further time or indulgence to the principal debtor. This would suggest that despite the variation, the effect of such a clause is to preserve the liability of the guarantor. However the question is not free from difficulty. There is authority to the contrary view as well. Dunlop (N.Z.) Ltd. v. Dumbleton 1968 NZLR 1092 held that an alteration of the terms of the guaranteed contract made without the consent of the guarantor including the giving of time, discharges the guarantor from his/her obligations unless the terms of the instrument of guarantee preserve them.

[13] In Dunlop the effect on a surety’s liability under a clause virtually identical to Clause 8 was discussed by Wilson J. He put the question as follows:

"Does a variation without the surety’s consent give the surety the right to avoid the guarantee or does it immediately have that effect without any act or election on his part".

He concluded that the common law provided an immediate discharge and not a right to be discharged. The wording of Section 11 of Indemnity Guarantee and Bailment Act supports the above view. The words in Section 11 are that any variance without surety’s consent "discharges the surety" and not merely gives him the right to be discharged. The section however provides that such discharge relates only to transactions subsequent to the variance. It does not extend to transactions prior to the variance.

[14] The departure here was substantial. The initial term of principal agreement only approved a purchase of $20,000.00 per month with time being granted for payment of thirty (30) days. Here the credit amount was allowed to escalate to close to nine times that sum. The defendant may have known about the increase but that is not consent. The total sales from 17th October 2002 to 21st October 2002 came to $45,262.00, a substantial change from the initial agreed sum of $20,000.00. The court was not told the exact date the variation was done but it must be round about this time.

[15] Accordingly I hold that once the $20,000.00 limit was surpassed the defendant was discharged as to his liability beyond $20,000.00. Trade facilities which exceed $20,000.00 do not bind the guarantor.

[16] Accordingly I enter judgment for the plaintiff against the defendant in the sum of $20,000.00 together with costs summarily fixed in the sum of $3,000.00.

[ Jiten Singh ]
JUDGE

At Labasa
25th September 2007