Lee v ATL (Australia) Pty Ltd

1. [1]

   MEAGHER JA: I agree with Gleeson JA.

2. [2]

   GLEESON JA: This appeal concerns the enforcement of a guarantee. The guarantee was given by several persons, including the appellant, Jeffery Tse Hung Lee (Mr Lee), for money owing under a commercial loan agreement including interest accruing from the date of the advance(s) under the facility. After the loan agreement containing the guarantee was executed by the borrower, Mr Lee and the other guarantors and returned by email to the lender’s solicitors, the lender and the borrower agreed in a side letter (without Mr Lee’s agreement or consent) that interest under the facility would accrue prior to the date of the advance to the borrower.

3. [3]

   The lender sued to enforce the guarantee. At trial, the lender limited its claim against Mr Lee to the principal sum and interest accruing from the date of the advance to the borrower; the lender did not press a claim for pre-drawdown interest. Mr Lee relied upon several defences, including that the guarantee was discharged because the alteration of the borrower’s obligations to pay interest in the side letter was made without his consent, referring to the variation rule discussed in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; [1987] HCA 15. The primary judge rejected all defences and concluded that Mr Lee was liable for the principal sum and interest claimed under the loan agreement as unaltered by the side letter. Judgment was entered against the guarantor in the sum of $16,737,057.68 and the guarantor was ordered to pay the lender’s costs of the proceedings: ATL (Australia) Pty Ltd v Cui [2023] NSWSC 336.

4. [4]

   Mr Lee appeals from that judgment. He contends that he is not liable to the lender because either (i) the borrower’s obligations in the loan agreement were amended by the side letter and are not within the scope of liability of the guarantee, or alternatively (ii) the alteration of the borrower’s obligations to pay interest in the side letter was made without his consent, and accordingly the guarantee was discharged by operation of the variation rule referred to in Ankar. The lender’s response to the discharge argument by notice of contention is that the variation rule does not apply because the guarantor’s obligation is, in substance, an indemnity, not a guarantee.

5. [5]

   For the reasons set out below, I have concluded that the borrower’s obligations in the loan agreement were amended by the side letter and are not within the scope of liability of the guarantee. The appeal should be allowed on that ground.

The parties and the contract guaranteed

1. [6]

   There is no dispute on appeal as to the facts. In November 2015, Gondon HLHS Epping Pty Ltd (the borrower) was incorporated for the purpose of conducting a real estate project involving the redevelopment and construction of apartment units on land at Epping. The borrower was appointed as trustee of a unit trust known as the Gondon HLHS Epping Trust (the borrower trust). The borrower completed the purchase of the Epping property in early 2016 and commenced the development project. It sought to refinance the initial funding borrowed from other sources by a borrowing of $14 million from ATL (Australia) Pty Ltd (the lender) in March 2017.

2. [7]

   Mr Lee was one of four proposed guarantors of monies to be borrowed by the borrower from the lender. He was a director of the borrower and through his family trust company, his beneficial interest in the borrower trust amounted to 16.7 per cent.

3. [8]

   On 2 March 2017, the first draft of the commercial loan agreement (the loan agreement) was provided by the lender’s solicitor (Ms Liu) to Mr Terence Tang, another proposed guarantor who acted as the “contact person” for the borrower and four guarantors. Mr Tang was also a director of the borrower and a director of Gondon HLHS Pty Ltd, which held units in the borrower trust. The lender’s solicitor, relevantly, stated that the enclosed documents, “are subject to final approval of our client and provided on the basis that no binding relationship exists prior to execution by our client”.

4. [9]

   Following negotiations between the parties, revised draft documents were sent by Ms Liu to Mr Tang on 8 March 2017. It is not necessary to refer to the detail of these documents. On 10 March 2017 at 6:26 pm, Ms Liu sent further amended documents to the borrower’s solicitors. The terms of the loan agreement are outlined at [15] below.

5. [10]

   On 13 March 2017, the borrower and four guarantors, including Mr Lee, executed the loan agreement. It was executed as a deed.

6. [11]

   On 14 March 2017 at 3:55 pm, the lender’s solicitors sent an email to the borrower’s solicitors enclosing a letter of the same date (the side letter) which those solicitors passed on to Mr Tang at 4:27 pm. The side letter stated:

7. [12]

   At 4:27 pm on 14 March 2017, the counterpart of the loan agreement executed by the borrower, Mr Lee and the other guarantors, was delivered by email to the lender’s solicitors. There is no evidence of any formal exchange, but it is not in dispute that the lender subsequently executed a counterpart of the loan agreement. The counterpart executed by the lender in evidence bears the date 15 March 2017, but the evidence does not disclose if this was the date of execution by the lender.

8. [13]

   At 5:46 pm on 14 March 2017, the borrower’s solicitors responded by email to the lender’s solicitors agreeing to the terms of the side letter stating:

9. [14]

   It is not in dispute that Mr Lee did not consent to the side letter.

10. [15]

    The loan agreement established a loan facility with a Facility Limit of $14 million: cl 1.1, definition of “Facility” and “Facility Limit”. The lender agreed to make the Facility available to the borrower in one or multiple successive drawings, with each such advance being an advance of principal, up to the Facility Limit, on the terms of “this document”: cl 2.1.

11. [16]

    Clause 3.1 contained conditions precedent to the borrower’s entitlement to make a Utilisation Request in respect of the Facility, including the valid execution and delivery to the lender of each Transaction Document, which included the loan agreement.

12. [17]

    Clause 4, headed “Drawdown”, dealt with the procedure of the utilisation of the Facility. By cl 4.1, the borrower could utilise the loan facility by delivering to the lender a duly completed and signed Utilisation Request, being a document in substantially the same form as Schedule 3. In the event that there was no utilisation within three months from the date of the loan agreement, cl 4.3 provided that the borrower’s entitlement to utilise the Facility, if any, shall expire and the lender’s obligations would come to an end. Further, if there was no utilisation and the lender’s obligations under the loan agreement came to an end, the borrower would not be liable for any fees, interest or charges.

13. [18]

    Clause 5 dealt with interest. By cl 5.1(a)(i), “interest accrues daily and is capitalised during the Interest Period on a monthly basis starting from the 30th day after the first Utilisation of the Facility”. “Interest Period” was defined in cl 1.1 to mean the period commencing on the first Utilisation Date and ending on the earlier of the Project Pre-Sale Settlement Date or the Termination Date. It is not necessary to refer to the definitions of the Project Pre-Sale Settlement Date or the Termination Date. By cl 5.1(a)(ii), interest was to be calculated at the Higher Rate of 22 per cent per annum but the lender would accept interest at the Acceptable Rate, being 12 per cent per annum provided the borrower and the guarantors complied with their obligations imposed by any transaction documents and there was no event of default.

14. [19]

    The combined effect of cll 4 and 5 was that the loan agreement established a regime whereby the borrower was to sign a Utilisation Request in compliant form requesting an advance and interest started to accrue from the day of the advance being made.

15. [20]

    Clause 24.1 headed “Amendments” provided:

16. [21]

    On 15 March 2017, the borrower gave a utilisation request to the lender under the loan agreement for $14 million and the lender advanced the total facility of $14 million to the borrower. The primary judge held that this advance constituted an acceptance by the lender of the terms of the executed loan agreement: at [1].

17. [22]

    The borrower subsequently defaulted on repayment. Although $8 million was repaid on 17 April 2018, no further payments were made thereafter. On 20 September 2018, the lender sent a notice of demand addressed to Mr Lee claiming the amount of money owing of $12,993,284, not including the lender’s costs arising from the default. The calculation of this sum was made in accordance with the dates for accrual of interest based on the side letter.

18. [23]

    In the underlying proceedings, the lender sought to enforce the guarantee against several parties, including Mr Lee. By the time of the hearing, the lender limited its claim against Mr Lee to the monies owing under the loan agreement, including interest on the advance from 15 March 2017, but not interest due from 10 March and 13 March 2017 under the side letter.

Issues on appeal

1. [24]

   Although the notice of appeal contained six grounds, the issues were substantially narrowed at the hearing. Senior counsel for Mr Lee identified two issues as decisive on the appeal: (i) the scope of the guarantor’s liability, and alternatively, (ii) whether the guarantee was discharged by the variation rule. The first issue was described by counsel as “the simple and robust, and therefore superior way of analysing this case” in a way that the appeal should be upheld.

2. [25]

   It was ultimately not in dispute on appeal that (a) there was a contract of guarantee between the lender and Mr Lee, and (b) the loan agreement containing that guarantee was executed as a deed. Accordingly, grounds 4(a) and 6(a) fall away.

3. [26]

   It is convenient to address the issues in the following order:

   1. (1)

      the scope of liability: for what is the guarantor liable?;

   2. (2)

      the variation rule: alternatively to (1), was the guarantor discharged by reason of the agreement between the lender and borrower in the side letter with reference to the principal contract?; or

   3. (3)

      the indemnity issue: if otherwise applicable, was the variation rule ousted because the guarantee is, in substance, an indemnity?

Scope of liability: for what is the guarantor liable?

1. [27]

   The scope of the liability issue is a question of construction of the contract of guarantee. To this end, it is essential to identify the precise nature of the obligation or obligations guaranteed. The obligations may be those arising under a specific contract between debtor and creditor or obligations arising out of a contemplated course of dealings.

2. [28]

   Here, the guarantee involves the former category. “Money Owing” was defined in cl 1.1 of the loan agreement to mean on any date the aggregate of all money owing or payable by the borrower to the lender under “this document” for any reason whatsoever, including the Outstanding Loan and Interest (emphasis added). Clause 1.2 headed “Interpretation”, provided in sub-cl (d) that:

3. [29]

   “Outstanding Loan” was defined to mean on any day at 5:00 pm, the aggregate amount of all Loans, including any capitalised Interest, Account-keeping Fees and Management Fees, less the aggregate of all principal repayments made by the borrower under this document for the Loans. “Loan” was defined to mean each advance of principal made under the Facility.

4. [30]

   By cll 10.2(a)(i) and (ii) of the loan agreement, each guarantor:

5. [31]

   The capitalised expression “Investors” in cl 10.2(a)(ii) was not defined in the loan agreement. At trial, the parties diverged as to whether this was an obvious error and should be read as a reference to the lender, as the lender contended, or to third parties, as Mr Lee contended. The primary judge did not make any finding on this issue.

6. [32]

   Addressing the scope of the guarantee, the primary judge referred at [67] to the definition in cl 1.1 of the expression “Money Owing”, in particular, the reference to “…moneys owing or payable by the Borrower to the Lender under this document for any reason whatsoever…” (emphasis in original), and found at [68]:

7. [33]

   Mr Lee submitted that the penultimate sentence in [68] contains error for two reasons:

   1. (1)

      the side letter did not give rise to a liability on the part of the borrower that was independent from the facility established under the loan agreement or outside the scope of the loan agreement; and

   2. (2)

      the side letter was an agreement about when and in what circumstances interest in respect of the facility created by the loan agreement was payable, and the change in obligations was not insubstantial or otherwise beneficial to the guarantor.

8. [34]

   The first submission is directed to the scope of liability of the guarantor. The second submission is directed to the scope of risk under the guarantee. This is addressed below in the context of the discharge argument based on the variation rule.

9. [35]

   In writing, Mr Lee referred to Adisan Pty Ltd v Irwin [2015] NSWCA 217 as a similar situation to the present case. Adisan does not assist the present case. As counsel for Mr Lee acknowledged in oral argument, the scope of the liability in each case turns on its own facts.

10. [36]

    It is common ground that the side letter is related to the loan agreement. It is also common ground that the lender and borrower had an agreement in the terms reflected in the side letter. Whether the parties intended the side letter would have effect even if they did not enter into the loan agreement was not addressed at trial or in this Court. Although not necessary to decide, the better view seems to be that since the side letter expressly linked the accrual of pre-drawdown interest under the facility with the borrower’s obligation to pay “interest under the Facility”, the parties intended the side letter would only apply if they entered into the loan agreement.

11. [37]

    The parties diverged as to whether the agreement in the side letter for pre-drawdown interest is an alteration or variation of the borrower’s obligations under the loan agreement, as Mr Lee contended, or “a supplementation of [the terms of the loan agreement] by way of additional or new agreement”, as the lender contended.

12. [38]

    Several matters favour the proper characterisation of the side letter as an alteration or variation of the borrower’s obligations under the loan agreement.

13. [39]

    First, the side letter contained four references which explicitly derived their meaning only from the loan agreement, relevantly: (i) the date from which “interest under the Facility” will start to accrue, (ii) the lender converting its funds into Australian dollars so as to be immediately available for drawdown will have the same effect as an “utilisation”, (iii) interest under the Facility “will start to accrue” “as and when funds under the Facility” are transferred to Australia in Australian dollars, and (iv) the entire “Facility Limit” amount had been transferred by the lender to its solicitor’s trust account in Australia on the specified dates: 10 and 13 March 2017.

14. [40]

    It is said by the lender that the side letter did not dispense with the need for a utilisation request by the borrower under cl 4.1 of the loan agreement. That can be accepted but is not determinative of whether the side letter is an alteration or variation of the terms of cl 5.1(a) of the loan agreement with respect to payment of interest on advances under the facility.

15. [41]

    Second, accepting that the accrual of pre-drawdown interest was a new and additional liability of the borrower to that contained in the draft loan agreement which the lender had proffered to the borrower, does not mean that the side letter was separate and independent from the loan agreement. The express references in the side letter to (a) the date from which “interest under the Facility” will start to accrue, and (b) the transfer of funds by the lender to Australia in Australian dollars as having the same effect as an “utilisation”, were plainly intended by the parties to alter or vary the borrower’s obligation in cl 5.1(a) of the loan agreement with respect to the date for the accrual of interest on advances under the facility.

16. [42]

    Third, it should be accepted, as counsel for Mr Lee submitted, that his Honour’s reference at [68] to amounts payable by the borrower “under the Agreement” begs the question what is meant by the words “under this document” in the definition of Money Owing in cl 1.1 and by the same words in the guarantee contained in cl 10.2(a)(i). That question is answered by reference to the interpretation provision in cl 1.2(d) that a reference to “this document” includes “the document … as amended, supplemented, varied or replaced”. The reference in cl 10.2(a)(i) to the Money Owing “under this document” is to be read as the Money Owing under the loan agreement, as amended by the side letter, with the consequence that the borrower’s obligation for Money Owing under the loan agreement included the accrual of pre-drawdown interest.

17. [43]

    That the parties contemplated there could be amendments to the loan agreement is confirmed by cl 24.1 which provided a power of amendment of the loan agreement, subject to the written agreement of all parties. It was not suggested by the lender that a variation which is in breach of cl 24.1, because the written agreement of a guarantor is not obtained, is somehow ineffective.

18. [44]

    Fourth, the formality of the alteration to the borrower’s obligations in the draft loan agreement which had been proffered to the borrower, was recognised by the lender’s request in the side letter for a written acknowledgment and consent by the borrower to the side letter.

19. [45]

    When read together with the loan agreement, the effect of the side letter on the legal relations between the lender and borrower was that the side letter altered or amended the borrower’s obligation to pay interest in cl 5.1(a) of the loan agreement by providing for the accrual of pre-drawdown interest. The variation was express and accommodated the circumstances in the side letter by adopting and treating the existing language of the loan agreement as applying to those circumstances.

20. [46]

    It is said by the lender that the scope of the anti-discharge clause in cl 10.2(c)(i) informs the scope of the guaranteed obligation in cl 10.2(a)(i). Clause 10.2(c)(i) provided:

21. [47]

    Nothing in cl 10.2(c)(i) informs the scope of the guaranteed obligation in cl 10.2(a)(i), referring to the Money Owing, as including the Money Owing under the loan agreement, as amended by the side letter, relevantly the accrual of pre-drawdown interest.

22. [48]

    It is also said by the lender that the entire agreement clause in the loan agreement shows an intention that if the lender and borrower were to enter into any other agreement, the parties intended that it be separate from the loan agreement. Clause 24.5(a) provided:

23. [49]

    I do not accept that cl 24.5(a) shows such an intention of the parties. The entire agreement clause records a tripartite agreement between all parties: the lender, the borrower and the guarantors. It says nothing of a private agreement made between the lender and borrower. Nor should it be accepted that in circumstances where the lender and borrower have accommodated the circumstances in the side letter by adopting and treating the existing language of the loan agreement as applying to those circumstances, that the side letter is a “previous agreement” within the meaning of cl 24.5(a).

24. [50]

    Finally, it is not to the point that the lender subsequently “trimmed” its claim against Mr Lee in the underlying proceedings by not seeking to recover interest predating the date of advance under the facility. The lender’s forensic decision cannot avoid the legal effect of the impact of the side letter on the borrower’s obligations to the lender. Mr Lee did not consent or agree to the side letter which amended the borrower’s obligations to the lender in the draft loan agreement to include pre-drawdown interest under the facility. The borrower’s varied obligations to the lender for the Money Owing under the loan agreement were outside the scope of the guarantee given by Mr Lee. As counsel for Mr Lee correctly submitted, Mr Lee “didn’t guarantee that which is the combination of the side letter and the commercial loan agreement”.

25. [51]

    My conclusion on the scope of liability issue is dispositive of the appeal, which should be allowed. Nevertheless, I will consider the alternative way in which Mr Lee put his appeal relying upon the variation rule.

The variation rule: discharge of the guarantor by reason of variation of the principal contract

1. [52]

   Mr Lee submits, in the alternative, that the primary judge erred in concluding that the variation rule referred to in Ankar did not apply in this case. The rule can be stated as follows: any variation of the underlying contract between debtor and creditor which is not manifestly insubstantial or incapable of prejudicing the guarantor, if not consented to by the guarantor, will discharge the guarantor from his or her obligations under the contract of guarantee.

2. [53]

   The primary judge gave two reasons why the variation rule was not engaged on the present facts. The first at [68] was that the side letter had no impact upon Mr Lee’s obligations as a guarantor. For the reasons given above, that cannot be accepted.

3. [54]

   The second at [69] was that the variation rule was only concerned with departures by a creditor from a surety contract that occurred after the suretyship contract had been made, and that since, the “additional agreement was made between the principal creditor and the principal debtor prior to the guarantee being executed, the situation is not governed by the High Court’s decision [in Ankar]” (emphasis added).

4. [55]

   It should be observed that [69] of his Honour’s reasons contains a slip. The agreement contained in the side letter was not made prior to the guarantee being executed by the guarantors. On his Honour’s findings, the guarantee was executed on 13 March 2017, and it was delivered to the lender’s solicitors by email at 4:27 pm on 14 March 2017 which was prior to the borrower’s solicitor’s email at 5:46 pm on 14 March 2017 accepting the side letter.

5. [56]

   Mr Lee says that the equitable principle in Ankar is not constrained so as to only apply where a borrower and lender agree to depart from a “surety contract” after the contract was made, that is, after the contract guaranteed was made between the principals. It is said that the temporal distinction adopted by his Honour contains error because the timing issue is irrelevant. Rather, any departure from the state of affairs that the guarantor has “signed up to”, whether occurring before or after the guarantee becomes binding, is sufficient to attract the variation rule.

6. [57]

   Although Mr Lee did not formally abandon ground 6 which contended that the guarantee was binding on Mr Lee as guarantor when delivered to the borrower’s solicitors, as it was executed as a deed prior to the side letter amending the loan agreement, counsel for Mr Lee described this ground as “an extra when you don’t need an extra”. Given the lender’s objection to Mr Lee relying on this argument on appeal as it was not pleaded or run at trial, and that it was not otherwise referred to by Mr Lee in oral argument, it is appropriate to treat ground 6 as not having been pressed.

7. [58]

   As indicated, the variation rule addresses the scope of the risk, whereas the construction of the contract of guarantee addresses the scope of liability. The rule protects the guarantor from conduct of the creditor which might increase the risk that the guarantee will be called upon or effect the quantum of liability or the guarantor’s rights of subrogation, contribution or indemnity. The variation rule is derived from equity: Ankar at 559-600 (Mason ACJ, Wilson, Brennan and Dawson JJ).

8. [59]

   The rule is stated in Holme v Brunskill (1877) 3 QBD 495 at 505-506, where Cotton LJ (Thesiger LJ agreeing) said:

9. [60]

   The variation rule in Holme v Brunskill has been accepted in Australia, including in Hancock v Williams (1942) 42 SR (NSW) 252; Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703 at 707-709 (Kirby P), 711-712 (Mahoney JA agreeing); Corumo Holdings Pty Ltd v C Itoh Ltd; BNY Australia Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 at 404D-E (Meagher JA); Valstar v Silversmith [2009] NSWCA 80 at [28]-[29], [42] (Sackville AJA, McColl and Basten JJA agreeing); Geelong Building Society (in liq) v Encel [1996] 1 VR 594 at 599 (Tadgell J, Ormiston and Ashley JJ agreeing).

10. [61]

    In Hancock v Williams, Jordan CJ said at 255:

11. [62]

    The two cases cited by Jordan CJ at the conclusion of this passage at 255 (Egbert v National Crown Bank [1918] AC 903 at 908-9; and Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1939) 39 SR (NSW) 174 at 200), both approved the statement of Cotton LJ in Holme v Brunskill at 505-506, which has been set out at [59] above.

12. [63]

    Mr Lee’s argument that the timing of the alterations to the contract guaranteed is irrelevant for the operation of the variation rule involves the proposition that the phrase in Holme v Brunskill at 505, “if there is any agreement between the principals with reference to the contract guaranteed”, embraces not only variations to the original contract, but also alterations to the terms of the draft original contract before the contract of guarantee is made. No authority was cited for this proposition, although reference was made to several statements in Ankar which are addressed below.

13. [64]

    Hackney Empire Ltd v Aviva Insurance Ltd [2013] 1 WLR 3400; [2012] EWCA Civ 1716 involved the different issue of whether the variation rule applied to separate contracts made after the original guaranteed contract which affect the performance of the guaranteed contract. Addressing the judgment of Cotton LJ in Holme v Brunskill, Jackson LJ (Moses LJ and Sir John Thomas P agreeing) said at [68] that the phrase in Holme v Brunskill (“if there is any agreement between the principals with reference to the contract guaranteed”) refers only to variations made to the original contract for two reasons: first, the subject matter of Holme v Brunskill was a variation to the original agreement and that was the issue addressed by Cotton LJ, who was not undertaking a broader exegesis of the law; and second, the narrower construction of Cotton LJ’s judgment has been treated as the ratio of the decision in a long line of subsequent authorities.

14. [65]

    Accepting that the remarks by Jackson LJ in Hackney were the context of a subsequent agreement between the principals after the contract guaranteed had been made, they are nevertheless instructive as to the principle stated in Holme v Brunskill. Mr Lee submitted that statements in Ankar support a wider view of the “contract guaranteed”. For the reasons which follow that cannot be accepted.

15. [66]

    Ankar was not a case based on the variation rule; it concerned the circumstances in which a guarantor may be discharged because of a breach by the creditor of the contract of guarantee. It is convenient to reproduce what I said in Adisan at [57]-[59] concerning the decision in Ankar:

16. [67]

    The statements in Ankar to which counsel for Mr Lee referred in oral argument were carefully analysed by Campbell JA in Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 at [71]-[83]. What follows is based on his Honour’s analysis.

17. [68]

    Campbell JA observed at [76] that starting with the final sentence on 557 the plurality in Ankar consider how the obligations in the contract between the creditor and guarantor are affected by the special character of a contract of suretyship. They start that discussion by considering:

18. [69]

    At 558 the plurality observed that “[o]ne of the problems with this special principle is that it has been expressed in a variety of ways”. (I interpose to observe that this statement cannot be read as embracing a wider view of the variation rule, such as that advanced by Mr Lee in this Court.) The plurality at 558 then set out various statements in English cases of the circumstances in which a guarantor is discharged, and recognised at 558 that the special circumstances in which a guarantor can be discharged are:

19. [70]

    After consideration of more English cases at 558-559, including Holme v Brunskill, the joint judgment said at 559 that the principle is the by-product of the special relationship between creditor and surety arising out of the suretyship contract upon which equity fastens to protect the surety when the creditor’s conduct affects the surety’s liability, referring to Holme v Brunskill at 505 (Cotton LJ). The plurality continued at 559-560:

20. [71]

    The obiter statements in Ankar concerning the variation rule to which counsel for Mr Lee referred the Court cannot be read as embracing the wider view of Holme v Brunskill for which Mr Lee contended. The submission that the variation rule embraces alterations to the contract guaranteed prior to the guarantor entering the contract of guarantee should be rejected. The relevant question is not whether there has been any departure from the state of affairs that the guarantor has “signed up to” before any binding contract of guarantee is made; the question is whether there has been any departure from the contract guaranteed, to which an existing guarantor has not consented.

21. [72]

    As the primary judge correctly observed at [69], the situation where a draft principal contract proffered by the lender to the borrower is altered before it is made, without notice to the proposed guarantor, may give rise to other questions such as whether the guarantor may have been induced to enter into the guarantee by material nondisclosure, which was not raised by Mr Lee, or the construction of the scope of the guarantee, which has been addressed at [36] above. The primary judge did not, relevantly, err in stating or applying the correct legal principles concerning the variation rule.

22. [73]

    One further matter should be mentioned. No argument was advanced by Mr Lee by reference to an orthodox view of the variation rule relying upon the existence of a scintilla temporis, which Lord Oliver of Aylmerton in Abby National Building Society v Cann [1991] 1 AC 56 at 93 described as “no more than a legal artifice”. Such an argument would have involved the proposition that the side letter was subject to an implied term in the nature of a suspensory condition or a condition subsequent that the side letter only came into effect immediately after the making of the loan agreement and thereby operated as a variation of the “contract guaranteed”.

23. [74]

    If it were necessary to decide, I would reject Mr Lee’s argument relying on a wider view of the variation rule, that the guarantee given by Mr Lee was discharged.

Is the guarantee an indemnity, and not subject to the variation rule?

1. [75]

   Given the conclusion on the discharge argument, the issue raised by the notice of contention does not arise. Against the possibility that I am wrong in rejecting the discharge argument, I will address the lender’s notice of contention.

2. [76]

   The lender says that the variation rule can have no operation in the present case because Mr Lee’s obligations under the loan agreement are primary obligations and, in substance, an indemnity rather than a guarantee. Mr Lee says that the special clauses in cl 10.2 do not change the nature of the obligation in the guarantee contained in cl 10.1(a)(i) of the loan agreement.

3. [77]

   Mr Lee did not dispute the premise of the lender’s contention – that the variation rule has no application to an indemnity. That premise is consistent with authority refusing to extend the variation rule to a contract of indemnity: see, eg, Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235; [2008] Aust Contract R 90-274 at [128] (Spigelman CJ); GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm) at [127]-[149]; ABM Amro Commercial Finance Plc v McGinn [2014] EWHC 1674 (Comm); [2014] 2 Lloyd’s Rep 333 at [37]; Associated British Ports v Ferryways NV [2009] EWCA Civ 189; [2009] 1 Lloyd’s Rep 595 at [1].

4. [78]

   However, it should be observed that there are possible contrary arguments. In Caltex Australia Petroleum Pty Ltd v Troost [2015] NSWCA 64 at [53], Emmett JA (Meagher and Barrett JJA agreeing) noted:

5. [79]

   Mr Lee did not seek to rely on such an argument in this case.

6. [80]

   The distinction between a guarantee and an indemnity is discussed in Canty v PaperlinX Australia Pty Ltd [2014] NSWCA 309 at [37]-[39] (Gleeson JA, Barrett and Emmett JJA agreeing). The distinctive feature of a contract of guarantee is the secondary nature of the obligation which is assumed by the guarantor: Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 254; [1988] HCA 11.

7. [81]

   In contrast, an indemnity is an independent obligation to make good a loss: Sutton v Grey [1894] 1 QB 285 at 288-289 (Lord Esher MR). A contract of indemnity is “a contract by one party to keep the other harmless against loss” and is not dependent on the continuing liability of the principal debtor: Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 830-831; Total Oil Products (Australia) Pty Ltd v Robinson [1970] 1 NSWLR 701 at 703.

8. [82]

   As stated in Canty at [41], whether a document is a guarantee or an indemnity, or whether it imposes a secondary or a primary liability, will always depend upon the "true construction of the actual words used in which the promise is expressed": Moschi v Lep Air Services Ltd [1973] AC 331 at 349C (Lord Diplock). The task should be approached without any preconceptions as to what the document is. The description or heading of a document as a "guarantee" or "indemnity" is simply a label. The question is as to its effect.

9. [83]

   Whilst the use of the words "guarantee" or "indemnity" in the document itself may be an indication of the intentions of the parties, they are not decisive because the essential nature of the agreement must always be considered: Yeoman Credit Ltd v Latter at 833; Total Oil Products (Australia) Pty Ltd v Robinson at 703.

10. [84]

    The terms of the guarantee contained in cl 10.2(a) are set out at [30] above. It is of assistance to refer to the other provisions relied upon by the lender.

11. [85]

    Clause 10.2(b) was a principal debtor clause which provided that the guarantee and indemnity “is a principal obligation of the Guarantor and is not collateral to any other obligation”.

12. [86]

    Clause 10.2(d), (e), and (g), relevantly, provided:

13. [87]

    The lender referred to five matters in support of its characterisation of Mr Lee’s obligations in cl 10.2(a)(i) as, in substance, an indemnity rather than a guarantee. As explained below, none of these matters, either individually or in combination, lead to that conclusion.

14. [88]

    Although the lender referred to the expansive definition of “Guarantee” in cl 1.1 meaning a “guarantee, indemnity …”, in oral argument, senior counsel for the lender accepted that this is not a case in which the nomenclature assists greatly. That concession was properly made. Any reliance on the expansive definition in cl 1.1 of the capitalised term “Guarantee” is misplaced; the capitalised term “Guarantee” is not used in cl 10.2.

15. [89]

    It is said that the scope of the indemnity in cl 10.2(a)(ii) reinforces what is contained in cl 10.2(a)(i) that there is a principal obligation on the part of the guarantors.

16. [90]

    The difficulty with this submission is that it ignored the different subject matter of the obligations in cl 10.2(a)(i) (guarantee) and cl 10.2(a)(ii) (indemnity). The subject matter of the guarantee is the Money Owing and the performance of the borrower’s obligations under the loan agreement. The subject matter of the indemnity is any liability of the lender to the “Investors” arising directly or indirectly from any breach by the borrower of the loan agreement; that is, the indemnity concerns the liability of the lender to third parties.

17. [91]

    Contrary to the lender’s submission, the reference to “Investors” in cl 10.2(a)(ii) is not plainly a drafting error or “obvious mistake” which can be resolved as a matter of construction as a reference to the lender: Fitzgerald v Masters (1956) 95 CLR 420 at 426-428; [1956] HCA 53; Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; (2000) 9 BPR 17,521 at [34]-[37]. Given that the lender was obtaining the funds for the facility provided to the borrower from offshore, the reference to the Investors should not be construed as a reference to the lenders in the absence of a successful claim for an estoppel or a suit for rectification.

18. [92]

    Emphasis was placed by the lender on the several references to “guarantee and indemnity” in cll 10.2(b), (d) and (e). But the references in cl 10.2 to the phrase “this guarantee and indemnity” are consistent with the distinction drawn in cl 10.2(a) between the different obligations undertaken by Mr Lee qua guarantor in cl 10.2(a)(i) and qua indemnifier in cl 10.2(a)(ii). Further, there is no reason for reading the reference to “guarantee” in the phrase “this guarantee and indemnity” as embodying the wider meaning of the capitalised term “Guarantee” when the capitalised term is not used in that phrase in cl 10.2 and the lender acknowledged this nomenclature did not greatly assist: see [88] above.

19. [93]

    Reference was made to the lender’s entitlement in cl 10.2(g) to claim directly against a guarantor without having to institute or exhaust its remedies, against the borrower. Clause 10.2(g) does not exclude the variation rule. This provision operates to dispense with the need for either notice of default or previous recourse against the borrower or simultaneous recourse against other guarantors. Clause 10.2(g) makes explicit what would otherwise be the position at general law absent any special stipulation in the guarantee: see, eg, Moschi v Lep Air Services Ltd at 356-357, where Lord Simon said:

20. [94]

    It is said that the description of Mr Lee’s obligation as a principal obligation in cl 10.2(a)(i) and (b) is inconsistent with those obligations being in the nature of a guarantee.

21. [95]

    It is well-established that a principal debtor clause, if sufficiently broadly expressed, is capable of excluding the variation rule: Valstar at [44] (Sackville AJA, McColl and Basten JJA agreeing). That is because “[t]he principles of equity generally applicable to the relationship between creditor and surety, and between co-sureties, may be limited or qualified by the contract between those persons”: The Fletcher Organisation Pty Ltd v Crocus Investments Pty Ltd [1988] 2 Qd R 517 at 534-535 (Williams J, who was in dissent in the result).

22. [96]

    In each case, it is a question of construing the terms of the suretyship to determine whether the variation rule is reserved or abrogated or altered by a special clause: see generally Perry v National Provincial Bank of England [1910] 1 Ch 464 at 471, applied in Bank of Adelaide v Lorden (1970) 127 CLR 185 at 191-193; [1970] HCA 59, where Cozens-Hardy MR said in the context of a special clause reserving the rights of a creditor against the surety:

23. [97]

    In CIMC Raffles Offshore (Singapore) Ltd v Schahin Holding SA [2013] EWCA Civ 644; [2013] 2 Lloyd’s Rep 575 at [57], Sir Bernard Rix LJ (Arden LJ and McCombe LJ agreeing) said of provisions of a guarantee that rendered the guarantor a “primary obligor”:

24. [98]

    For example, where a surety contract makes no provision for any variation of the contract guaranteed, a principal debtor clause may not constitute a waiver of what would otherwise be the effect of a material alteration to the terms of the surety: Bridgestone Australia Ltd v GAH Engineering Pty Ltd [1997] 2 Qd R 145 at 158 (Moynihan J).

25. [99]

    In this case, the description of Mr Lee’s obligation qua guarantor as a principal obligation in cl 10.2(a)(i) and (b) may operate to dispense with the need for a notice to the guarantors of the borrower’s default before any action is commenced against them. However, the clause does not go on to say that the guarantors waive all rights that they otherwise might be entitled to claim. There are no clear and unequivocal words ousting the variation rule in Holme v Brunskill.

26. [100]

    Further, whilst the loan agreement contained its own provision for variation, the requirement in cl 24.1 that the agreement may only be amended by written agreement between all parties, is inconsistent with the principal debtor clause constituting a waiver of what would otherwise be the effect of a material alteration to the terms of the guarantee: Bridgestone Australia v GAH Engineering.

27. [101]

    The language of cll 10.2(a)(i) and (b) is distinguishable from cases where it has been held that the wording of the guarantee was sufficient to oust the variation rule. There are no additional words in cl 10.2 to the effect that the obligations of the guarantors shall be deemed for all purposes “not that of a surety”: cf a special clause in a surety contract which provides that the surety’s liability “be deemed for all purposes that of a principal obligant and not that of a surety”, may be sufficient to oust the variation rule: Bank of New Zealand v Baker [1926] NZLR 462 at 474, 476 (Ostler J) and 487-488 (Sim J, Stringer, Reed and Adams JJ agreeing).

28. [102]

    Nor are cl 10.2(a)(i) and (b) similar to the provisions considered in CIMC Raffles. There the guarantee styled “Deed of Guarantee and Indemnity”, included section 1(a), which made reference to a guarantor being a “primary obligor and not merely as surety”, and that was developed in section 1(b), which stated that the guarantor agrees “as separate, independent and alternative obligations” that (see at [20]):

29. [103]

    Rix LJ accepted at [60], without needing to express any concluded view, that section 1(b) of the guarantee appeared on the face of it to be a powerful clause for the purpose of excluding the Holme v Brunskill doctrine. In this case, cl 10.2(a)(i) and (b) are not worded as broadly as section 1(b) in CIMC Raffles which provided for separate, independent and alternative obligations to that of guarantor, specifically an obligation as principal debtor if any sum was not recoverable on the basis of a guarantee, and an obligation as primary indemnifier if the creditor suffered any loss as a result of any sum or payment obligation becoming void, voidable or unenforceable for any reason.

30. [104]

    Fletcher Organisation involved a mortgage which contained the following provision:

31. [105]

    As Sackville AJA observed in Valstar at [44], the mortgage in Fletcher Organisation was held sufficient to exclude the right of a co-surety to contribution and to the benefit of every security held by the mortgagee. It was therefore held that a compromise between the mortgagee and the other co-surety did not release the first co-surety: at 527 (Shepherdson J); 537 (Williams J); 543 (Ryan J). By contrast, in this case, the guarantor did not waive all rights of contribution and subrogation.

32. [106]

    That Mr Lee accepted a primary obligation to the lender under the guarantee did not have the consequence that the guarantee was, in substance, an indemnity. If it was necessary to decide, the lender’s notice of contention should be rejected.

Conclusion

1. [107]

   The appeal has succeeded. There is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.

2. [108]

   I propose the following orders:

   1. (1)

      Appeal allowed.

   2. (2)

      Orders (1) and (2) made by Fagan J on 6 April 2023 be set aside.

   3. (3)

      In lieu thereof, order that:

   4. (4)

      The respondent to pay the appellant’s costs of the appeal.

3. [109]

   GRIFFITHS AJA: I agree with Gleeson JA.