The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 71 of 1996

 

(1) Robert Edwin Madden and

(2) Joan Maree Deans Appellants

v.

(1) UDC Finance Limited and

(2) Farry & Co. Respondents

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 30th October 1997

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Lloyd of Berwick

Lord Hoffmann

Lord Saville

Mr. Justice Gault

  ·[Delivered by Lord Saville]

 

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At the end of 1987 Mr. Madden, one of the two appellants, approached UDC Finance Limited ("the first respondent") for an advance to assist in the purchase of a drilling rig and truck.  This equipment was needed for the purpose of providing an offal hole and similar excavation service to farmers in the greater Otago districts.  In March 1988 Mr. Madden formed Madden Drilling Limited as the vehicle through which to provide this service.  The directors of this company were Mr. Madden, his eighteen-year-old son Kevin, and Mrs. Dean, the other appellant.  These three were the sole and equal shareholders of this company.

 

1. The first respondent agreed to provide finance to the company against security in the form of a charge on the equipment to be purchased, a first debenture over the assets of the company and the joint and several guarantees of the appellants and Kevin Madden.  On 8th July 1988 the appellants attested to the seal of the company on an Instrument by Way of Security over the equipment to be purchased and on a first debenture over the assets of the company.  The latter document also contained a guarantee which the appellants and Kevin Madden signed at the same time.

 

 Both these documents provided expressly that the advance was to be repaid by 36 consecutive monthly instalments of $5575.81.  As also appears from these documents, the amount to be advanced was $146,000 and the interest payable amounted to $54,729.16.  However, at the date the documents were signed it was uncertain when the equipment would be delivered and thus when the money would be needed.  Accordingly although the documents contained spaces for the due date for the first and subsequent instalments these spaces were left blank.  Thus in the schedule to the debenture as signed the repayment provision read as follows:-

"The Company will repay to the Lender the principal sum together with interest thereon as aforesaid totalling $200,729.16 by 36 consecutive monthly instalments of $5575.81 each due and payable on the     day of each month, the first of such instalments being due and payable on the       day of          1988."

The Security Instrument contained a similar provision.

The parties agreed at this time that the repayment dates could be inserted in the documents when the date of the advance was known.  The solicitors acting for all concerned in the transaction (the second respondent) informed the appellants and Kevin Madden on the same occasion that their attendance would be required when this was done.

 

2. The first respondent made the advance on 25th July 1988 and on 1st August 1988 the appellants and Kevin Madden duly attended at the office of the solicitors.  There in their presence the dates were inserted in the documents.  These were the 25th of each month with the first instalment due on 25th August 1988.

 

3. The venture was not a success, apparently because the equipment proved unsuitable.  The company defaulted on the instalment due on 25th October 1988 and made no further payments.  In 1989 the equipment was sold for $93,000 of which $90,000 was paid to the first respondent.  In July 1991 the  first  respondent  made an unsuccessful demand under the

guarantee.  In November of the same year the first respondent began proceedings against the appellants and Kevin Madden under the guarantee, though subsequently they discontinued as against the latter.

 

4. The appellants advanced a number of defences to the claim and also joined the solicitors as third parties, alleging that these solicitors had breached their professional duty of care.  On 19th April 1994 Fraser J. delivered judgment in favour of the first respondent.  The appellants then unsuccessfully appealed to the Court of Appeal and now bring the matter before their Lordships, where they advanced two arguments.

 

5. The first of these was to the effect that the insertion of the dates into the documents on 1st August 1988 amounted to a material alteration or variation of the terms of the advance since, as it was put, "the general obligation to repay was replaced by an obligation to repay specific sums on specific dates".  This, it was submitted, in turn altered the guarantees; and since this alteration was not evidenced in writing, section 2 of the Contracts Enforcement Act 1956 rendered the guarantees unenforceable, notwithstanding the three guarantors had (according to the findings below) consented to the insertion of the dates and impliedly if not expressly authorised the solicitors to fill them in.

 

6. Their Lordships take the view that this argument is unsustainable.  It rests on the premise that it was not until 1st August 1988 that the guarantors had agreed that the advance should be repaid with interest in equal consecutive monthly instalments starting one month after it was made; and that before this date they had agreed to something else.  In truth it is expressly clear from the documents signed on 8th July 1988 that the advance was going to be repaid with interest in 36 equal consecutive monthly instalments.  It seems to their Lordships that looking at the documents alone as they stood on 8th July 1988 shows that the agreement was that repayment would be consequential on and thus start one month after the advance was made.  The actual insertion of the dates in the documents was accordingly a matter of pure form and not of substance at all, since it in no way altered what had previously been agreed and reduced to writing. 

 

 

7. The second argument advanced by the appellants rests on the fact that, although they freely consented to the sale of the equipment (which in fact was arranged by Mr. Madden with the knowledge and approval of Mrs. Deans), the consent of Kevin Madden was neither sought nor obtained.  Thus, it was submitted, this guarantor was discharged, since the sale deprived him of a security to which he would have been entitled by way of subrogation had he paid the debt.  In turn, so the argument goes, the appellants are discharged, since they have been deprived of the right, which they would otherwise have enjoyed, to seek a contribution from Kevin Madden as a co-guarantor.

 

8. In their Lordships' view this argument too is unsustainable.

 

9. The guarantee is contained in Clause 39 of the Debenture and is in the following terms:-

"39.  THAT the Guarantor if any referred to in the Schedule hereto in consideration of the Lender at the request of the Guarantor making the advance aforesaid doth hereby covenant with the Lender that the Guarantor will pay perform observe and keep all and singular the moneys covenants conditions agreements and restriction contained or implied in this Debenture and will be bound thereby AND it is hereby agreed and declared between the Guarantor and the Lender that no indulgence granting of time waiver or forbearance to sue by the Lender or any other matter or thing which but for this provision would operate to discharge the liability of a surety shall in any way release the Guarantor from liability hereunder AND the term the `the Guarantor' shall include the executors administrators or successors of the Guarantor or each Guarantor if more than one both jointly and severally."

 

10. In the view of their Lordships the Court of Appeal was correct in holding that the words "or any other matter or thing which but for this provision would operate to discharge the liability of a surety" cover the present situation.  These words, read literally, are very wide indeed and there may well be extreme circumstances to which they could not sensibly be applied, but the present case does not fall into such a category.  The appellants consented to the release of the security and its sale.  Their Lordships can think of no good reason why, in those circumstances, the words should be construed  so  as  to  prevent  the first respondent from taking advantage of them to defeat the argument now advanced by the appellants.  Indeed, the proposition that the appellants were discharged because they freely consented to the release and sale would itself seem to lack any sense.

 

11. The appellants submitted that the quoted words should be read ejusdem generis with the immediately preceding part of the Clause, that that part would not encompass a material alteration to the contract with the principal debtor, and that the sale of the secured equipment amounted to such a material alteration.

 

 Their Lordships agree with the Court of Appeal that the words are not to be read ejusdem generis with what precedes them, but in any event do not see how it would help the appellants to do so.  By allowing the sale the first respondent could properly be said to be waiving Clause 6 of the Security Instrument (which prohibited the company from selling the equipment) and also the charge created by the debenture.  Indeed, allowing the release and sale could also be said to be an "indulgence" granted by the first respondent.  Even assuming that the release and sale of the security could be described as a material alteration to the contract with the principal debtor, it seems to their Lordships that whatever the position might be in the absence of the consent of the guarantors, the words are apt to cover a case where that consent has been given.

 

12. For these reasons their Lordships consider that the Court of Appeal came to the right decision and will humbly advise Her Majesty that the appeal should be dismissed.  The appellants must pay the respondents' costs before their Lordships' Board.

 

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