N4739

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS 1334 OF 2007

BETWEEN:

NATIONAL DEVELOPMENT BANK LIMITED
Plaintiff

AND:

JAMIE MAXTONE GRAHAM
First Defendant

AND:

PAUL TIMBI
Second Defendant

Waigani: Hartshorn J.
2012: 18th April
: 27th July

Deed of Guarantee – whether loan agreement novated – whether guarantor discharged under guarantee when principal debtor released under loan agreement

Facts:

The plaintiff National Development Bank Ltd (NDB) sues the first defendant Mr. Jamie Maxtone Graham under a deed of guarantee dated 7th September 1987. The guarantee was given to NDB by Mr. Maxtone Graham and the second defendant Mr. Paul Timbi, to guarantee the repayment of a loan by Kontpeng Kofi Pty Ltd) (Kontpeng). Mr. Maxtone Graham claims that he is not liable under the guarantee as Kontpeng has been released as principal debtor to NDB by novation. NDB denies that there was a novation of the loan agreement between Kontpeng and NDB to Trimstar and NDB, but if there was, it did not affect Mr. Maxtone Graham's liability to NDB under the guarantee.

Held:

1. 	It is implied from the conduct of the NDB and Trimstar that the loan agreement between Kontpeng and the NDB was novated with Trimstar being substituted for Kontpeng.

2. 	Mr. Maxtone Graham, as a guarantor of Kontpeng's obligation, is discharged as the obligation he guaranteed to be performed is no longer required to be performed. That obligation is now to be performed by Trimstar and Mr. Maxtone Graham did not guarantee that Trimstar would perform its obligations.

Cases cited: 
Papua New Guinea Cases

Nil

Overseas Cases

Commercial Bank of Tasmania v. Jones [1893] AC 313 
Tszyu v. Fightvision Pty Ltd & Anor; Fightvision Pty Ltd v. Onisforou & Ors [1999] NSWCA 323 
McMahon & Anor v. National Foods Milk Ltd [2009] VSCA 153 
Meritz Fire & Marine Insurance Co Ltd v. Jan De Nul NV & Anor [2011] EWCA Civ 827

Counsel:

Mr. J. Nalawaku, for the Plaintiff
Mr. W. Bigi, for the First Defendant

27th July, 2012

1. HARTSHORN J: The plaintiff, the National Development Bank Ltd (NDB), sues the first defendant, Mr. Jamie Maxtone Graham, under a deed of guarantee dated 7th September 1987. (I will refer to the NDB and all of its predecessors as NDB). The guarantee was given to the NDB by Mr. Maxtone Graham and the second defendant Mr. Paul Timbi, to guarantee the repayment of a loan by Kontpeng Kofi Pty Ltd) (Kontpeng). NDB has only pursued Mr. Maxtone Graham in this proceeding.

2. Mr. Maxtone Graham claims that he is not liable under the guarantee as Kontpeng has been released as principal debtor to NDB by novation. A company called Trimstar Travel Services Pty Ltd (Trimstar) is now the principal debtor to NDB and not Kontpeng. Mr. Maxtone Graham relies on the proposition that where a debtor has been released by novation, the guarantor is discharged.

3. The circumstances that give rise to Mr. Maxtone Graham's contention that novation occurred, include an agreement between Trimstar and NDB for a loan to be made to Trimstar in 1998, one of the conditions of that loan being that Trimstar pay Kontpeng's loan repayments until Kontpeng's loan was repaid and that Trimstar made monthly repayments from January 1999 to June 2001, as agreed.

4. NDB denies that there was a novation of the loan agreement between Kontpeng and NDB to Trimstar and NDB, but if there was, it did not affect Mr. Maxtone Graham's liability to NDB under the guarantee. Further Mr. Maxtone Graham was aware of the loan agreement between Trimstar and NDB and that Trimstar would take over Kontpeng's loan repayments, but he did not consent to it and so he remains liable to NDB. No authority was cited in support of this contention.

5. The law as to novation was concisely set out by the New South Wales Court of Appeal in Tszyu v. Fightvision Pty Ltd & Anor; Fightvision Pty Ltd v. Onisforou & Ors [1999] NSWCA 323:

"Novation is a transaction by which all parties to a contract agree that a new contract is substituted for one that has already been made (Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365 at 388 per Windeyer J, which Bainton J referred to). Novation involves the extinguishment of one obligation and the creation of a substituted obligation in its place. Intention is crucial to show a novation; see, for example, Vickery v Woods [1952] HCA 7; (1952) 85 CLR 336 at 345 per Dixon J as his Honour then was. A novation may be express or implied from the circumstances."

6. Counsel for Mr. Maxtone Graham referred the court to the following passage of the Court of Appeal of the Victorian Supreme Court in the case of McMahon & Anor v. National Foods Milk Ltd [2009] VSCA 153:

"As a matter of law….. there is nothing to preclude a court from inferring the existence of a contract from the acts of the parties, as well as or in the absence of words, and so from the totality of the dealings between the parties. Hence, as a matter of law, there is nothing to preclude confirming the existence of a contract of novation from conduct such as, for example, the conduct of a creditor in apparently accepting the liability of a new debtor in substitution for the old. And as was pointed out by the New South Wales Court of Appeal in Tszyu v Fightvision Pty Ltd; Fightvision Pty Ltd v. Onisforou, the principle that no narrow or pedantic approach is warranted when searching for contractual intention in commercial arrangements applies equally when searching for an intention to novate."

7. In considering whether it can be implied from the conduct of NDB and Trimstar whether there was a novation of the loan agreement between Kontpeng and NDB, NDB does not challenge that Kontpeng was deregistered as a company in November 1996, that Trimstar and NDB both agreed that Trimstar would make K1,000 repayments per month of Kontpeng's loan until it was repaid, and that Timstar did make those payments monthly from January 1999 to June 2001.

8. On the evidence, I am satisfied that it can be implied or inferred from the conduct of NDB and Trimstar that the loan agreement between Kontpeng and NDB was novated with Trimstar being substituted for Kontpeng. NDB agreed to Trimstar taking over responsibility for the repayment of the Konpteng loan which in essence was the only responsibility that Kontpeng had to NDB under the loan agreement. Trimstar agreed to this. Kontpeng could not agree as it did not exist by then. Further, one of the directors of Kontpeng, Mr. Paul Timbi, a director of Trimstar, also agreed. Mr. Timbi and Ms Therese Timbi also gave further limited guarantees to NDB in respect of the loan advanced to Trimstar. I defer to the statement in McMahon (supra) that it can be inferred from the conduct of the creditor NDB, in accepting the liability of a new debtor, Trimstar, in substitution for the old, the existence of a contract of novation. In this regard, no doubt NDB was aware that Kontpeng no longer existed and this was an opportunity for NDB to make a commercial arrangement in an attempt to recover its money.

Whether guarantor discharged where debtor released by novation

9. As mentioned, no authority was cited for the submission by NDB that Mr. Maxtone Graham remains liable as he did not consent to Trimstar taking responsibility for repayment of the Kontpeng loan and I am not aware of any such authority. As to this submission, first, Mr. Maxtone Graham's evidence is that he was unaware of the Trimstar agreement. Secondly, even if Mr. Maxtone Graham was aware of the Trimstar agreement, to my mind as Mr. Maxtone Graham was a guarantor, not a direct debtor of NDB, I am unable to see why his consent would have been necessary, unless the new arrangement was to be adverse to him. I do not consider it necessary to consider this submission further.

10. Mr. Maxtone Graham relies on the proposition that where a debtor has been released by novation, the guarantor is discharged. This was held in the Privy Council case of Commercial Bank of Tasmania v. Jones [1893] AC 313. In the English and Wales Court of Appeal case of Meritz Fire & Marine Insurance Co Ltd v. Jan De Nul NV & Anor [2011] EWCA Civ 827, the Commercial Bank of Tasmania case (supra) was referred to by Longmore LJ as follows:

"In that case the principal debtor and creditor had, after the date of the guarantee, agreed that the sum owed by the debtor was no longer to be regarded as owing by the debtor but by a third party. The Privy Council held that the guarantor was no longer bound because he had guaranteed that the principal debtor would pay and, once the debtor was no longer bound to pay, he was no longer under any obligation to pay so he had not failed in any of the obligations which the guarantor had guaranteed. Lord Morris said (page 316):-

"It may be taken as settled law that where there is an absolute release of the principal debtor, the remedy against the surety is gone because the debt is extinguished, and where such actual release is given no right can be reserved because the debt is satisfied, and no right or recourse remains when the debt is gone. Language importing an absolute release may be construed as a covenant by the creditor not to sue the principal debtor, when that intention appears, leaving such debtor open to any claims of relief at the instance of his sureties. But a covenant not to sue the principal debtor, is a partial discharge only, and, although expressly stipulated, is ineffectual, if the discharge given is in reality absolute. In this case, the acceptance of Marshall as full debtor, in room and instead of Wakeham, which constituted a complete novation of the debt, necessarily operated as an absolute release of Wakeham, and it is therefore in vain to contend that such novation merely amounted to a covenant not to sue the debtor for whom the respondent was the surety."

11. I am satisfied, upon the above authority, that as the principal debtor Kontpeng, notwithstanding that it no longer exists, is no longer bound to repay its loan to NDB, by virtue of novation; as referred to, Mr. Maxtone Graham, as a guarantor of Kontpeng's obligation, is discharged as the obligation he guaranteed to be performed is no longer required to be performed. That obligation is now to be performed by Trimstar and Mr. Maxtone Graham did not guarantee that Trimstar would perform its obligations.

12. Consequently, the claim of the plaintiff is refused. Judgment is entered for the first defendant. The plaintiff shall pay the first defendant's costs of and incidental to the proceeding.
__________________________________________________________
Namani & Associates: Lawyers for the Plaintiff 
Henaos Lawyers: Lawyers for the First Defendant