Zhong v Guan

1. [1]

   PAYNE JA: I agree with Kirk JA.

2. [2]

   KIRK JA: The appellant, Mr Yuping Zhong, is a businessman residing in China. In September 2018 he became party to a poorly drafted deed (the Deed) providing for a loan of $2 million to Shield Resources Pty Ltd, a business run by Mr Feng Ye which traded in timber resources. The appellant in fact advanced some $1.15 million. That amount has not been repaid. The respondent is Mr Ye’s wife, Ms Ying Guan, who was also a party to the Deed. She was the second defendant at first instance. The appellant asserted that she was a guarantor of the loan and that properly construed (or alternatively as rectified) the Deed created a charge over a residential property that she (alone) owned in St Ives in Sydney as security for the debt (the Property).

3. [3]

   The appellant brought proceedings in the Supreme Court against Shield Resources, Mr Ye and the respondent. The primary judge, Fagan J, gave judgment for the appellant against Shield Resources but dismissed the claims against the respondent and Mr Ye: Zhong v Shield Resources Pty Ltd [2023] NSWSC 1611 (J). The appellant has appealed from his Honour’s dismissal of the claim against the respondent, although the claim in rectification has not been pursued.

4. [4]

   Two types of issue were raised by the parties on the appeal:

   1. (1)

      As a matter of construction did the Deed create a charge over the Property (amended notice of appeal grounds 1A-5)? The appellant put this in two ways, first as a matter of construction, then as a matter of “rectification by construction”. As explained below, there is no such separate doctrine – the issue is just one of construction.

   2. (2)

      If the Deed did create such a charge, was the respondent discharged from any obligation because the loan amount of $2 million provided for in the Deed was not advanced in full (amended notice of appeal grounds 4-5; notice of contention ground 2)?

5. [5]

   The primary judge was correct to conclude that the Deed did not create a charge. It is not necessary to address the various arguments raised with respect to the second issue. In what follows I set out the background to the appeal, address the relevant legal principles, then consider the proper construction of the Deed.

Background

1. [6]

   In August and September 2018 the appellant conducted business in the United States and in China, trading in agricultural and timber products (see J [19]). He had not up to that time conducted any business in Australia. In early August 2018 the appellant was introduced by Mr Dao Gao (by phone) to Mr Xiansi Qian. Mr Dao was a mutual acquaintance of the two. Mr Qian was the accountant of Shield Resources, based in Sydney. This and all other oral communications involving the appellant were in Mandarin, as he does not speak any English.

2. [7]

   The appellant spoke with Mr Ye on 10 September 2018, in which words in Mandarin to the following effect were spoken (see J [20]):

3. [8]

   In fact, Mr Ye did not ask a lawyer to prepare a loan agreement, but rather Mr Qian prepared a draft of the Deed using a “template agreement” he located online and which he amended (J [21]). No lawyers were involved in preparing the Deed at any stage. The primary judge observed, aptly, that the Deed is defectively worded in significant and obvious respects and has features that are inconsistent with it having been settled by a person competent in the applicable law of New South Wales (J [22]).

4. [9]

   The Property was already subject to a mortgage in favour of the National Australia Bank.

5. [10]

   The initial draft of the Deed – expressed in English – was sent to Mr Gao on 16 September 2018 for the appellant’s consideration. The primary judge found that Mr Gao provided at least an oral translation of the Deed to the appellant, and that a Mandarin written version prepared “informally” by Mr Qian was sent to the appellant prior to him executing it (J [24]-[27]). The appellant was sent the final version of the Deed on 18 September 2018 signed by Mr Ye on behalf of Shield Resources as “Borrower” and by the respondent as “Guarantor”. The appellant executed it and sent it back the same day (J [26]-[27]).

6. [11]

   The relevant terms of the Deed, after identification of the parties, are as follows:

7. [12]

   Despite the acknowledgement in cl 2 of the Deed that the full loan amount of $2 million had been received, in fact only $1,151,645.06 was transmitted by the appellant, with that occurring on 21 September 2018 (J [8]). Shield Resources has not repaid any part of that amount.

8. [13]

   The appellant initiated proceedings in March 2020. He sought judgment against Shield Resources for repayment of the loaned amount along with interest at the agreed rate. The company was initially represented in the proceedings but did not appear at the hearing. The appellant succeeded in his claim against the company. It can be inferred that this is not likely to lead to the appellant being repaid in full, if at all.

9. [14]

   The appellant claimed damages against Mr Ye for misleading and deceptive representations said to have been made in connection with the transaction. He did not succeed in this claim (see J [71]-[79]). He has not pursued it on appeal.

10. [15]

    As regards the respondent, he asserted that the Deed granted him a charge over the Property as security for the loan, either as a matter of construction or because the Deed should be rectified to make that clear. He did not succeed in either respect.

11. [16]

    As regards the rectification claim, the appellant submitted that the Deed should be rectified as follows (quoting J [53]):

12. [17]

    The primary judge was satisfied that the appellant “intended he should receive under the deed security over the [Property] by way of charge” but was “not satisfied on the balance of probabilities that the [respondent] had any such intention” (J [56]). The rectification claim thus failed.

13. [18]

    As regards the construction argument, his Honour noted that cl 2 “contains no words of charge” by the respondent as the registered proprietor of the Property (J [45]). He indicated that an issue would arise as to whether the reference in that clause to the appellant obtaining a caveatable interest in the Property was sufficient to create a charge over the Property, referring to various authorities on the point (ibid). But his Honour did not get to that question (and nor is it necessary for this Court to do so). He observed:

14. [19]

    His Honour held that cl 2 could not be so construed:

15. [20]

    The primary judge then considered the appellant’s argument of “rectification by construction”, to the effect that “the word ‘Borrower’ [in cl 2] is so obviously a mistake that the Court could correct it by interpretation” (J [50]). His Honour, at [50], quoted Leeming JA stating that “[t]wo conditions are necessary in order to correct the contractual language in this manner: (a) that the literal meaning of the contractual words is an absurdity and (b) that it is self-evident what the objective intention is to be taken to have been”: Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In Liq) [2019] NSWCA 11; (2019) 99 NSWLR 317 at [8]. The primary judge concluded:

16. [21]

    The respondent made two distinct arguments below in further answer to the appellant’s claim, lest she lost on construction or rectification. The primary judge addressed both. First, she asserted that the promise to advance $2 million was an entire obligation and thus the advance of a lesser sum constituted a total failure of consideration. His Honour rejected the argument (J [14]-[15]). Secondly, she argued that if the Deed created a charge over the Property then the principle in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 entitled her to be discharged from honouring the obligation because of a material change in the transaction between the lender and borrower, namely the fact that less than $2 million was advanced. That change was effected without reference to or consent from her as guarantor. His Honour held that “the burden lies upon the principal creditor to establish there has been no adverse impact” on the guarantor, and the appellant had not discharged that onus (J [66]-[67]).

17. [22]

    The appellant challenges the latter determination on the Ankar issue (grounds 4-5) and the respondent sought to raise the entire obligation issue by way of ground 2 in her notice of contention (ground 1 of that notice was not pressed). The issues are not without complexity. As noted, it is not necessary to address them.

Relevant principles of construction

1. [23]

   In Seymour Whyte Leeming JA used a sub-heading “rectification by construction” which his Honour distinguished from “rectification in equity” (see at [6] and [12]). The term has also been used elsewhere: see the authorities gathered in James Adam Pty Ltd v Fobeza Pty Ltd [2020] NSWCA 311; (2020) 103 NSWLR 850 at [29] (Leeming JA). However, Leeming JA was not suggesting in Seymour Whyte that there was some doctrine of “rectification by construction” distinct from general principles of construction. So much was illustrated, for example, by his Honour’s quotation at [8] of his own earlier judgment in National Australia Bank Ltd v Clowes [2013] NSWCA 179; (2013) 8 BFRA 600 at [34]. He there said that “where the literal meaning of the contractual words is an absurdity, and it is self-evident what the objective intention is to be taken to have been” (emphasis in the original), then “ordinary processes of contractual construction displace an absurd literal meaning by a meaningful legal meaning” (emphasis added).

2. [24]

   The “‘correction of mistakes by construction’ is not a separate branch of the law, a summary version of an action for rectification”: Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 at [23]; see also Marley v Rawlings [2014] UKSC 2; [2015] AC 129 at [40]. A similar point was emphasised in the Australian context by Bell P, with the agreement of Macfarlan JA, in James Adam:

3. [25]

   Leeming JA himself has since commented extra-curially that “it would be clearer to avoid the label ‘rectification’. What is happening in these cases is merely an aspect of construing (which is to say, giving legal meaning to) a legal text”: “The Limits of Rectification” (2023) 17 J Eq 122 at 127.

4. [26]

   The process is not novel, nor does it inhabit a distinct enclave within the law of contract. The use of the label “rectification by construction” has the potential to mislead by suggesting to the contrary or distracting from the fact that what is involved is simply an exercise in construction. Statutory construction, too, may involve effectively reading in or ignoring words: see eg Taylor v Owners - Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531 at [35]-[40] and [65]-[66]. Yet there could be no suggestion of a court rectifying a statute. In my view – alike with that of the now Chief Justice and Macfarlan JA in James Adam and the later-expressed view of Leeming JA – the label should be avoided. The issue is always and only one of construction according to established common law principles.

5. [27]

   Justice Leeming’s statement in Seymour Whyte at [8] quoted by the primary judge (see above at [20]), too, must be understood in context. To begin with, the issue does not only arise in cases of absurdity. His Honour acknowledged as much by quoting, at [10], Dixon CJ and Fullagar J in Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 at 426-427 referring to cases of absurdity or inconsistency. Meagher JA and Ball J noted in HDI Global Specialty SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296; (2020) 104 NSWLR 634 at [51] that “earlier authorities referred only to the presence of a ‘palpable’ or ‘obvious’ mistake”; see also James Adam at [55]-[56].

6. [28]

   Further, what may be “corrected” is not only language but punctuation: note JD Heydon, Heydon on Contract (Thomson Reuters, 2019) at [8.660], and generally at [8.640]-[8.680].

7. [29]

   There may also be issues of degree involved in terms of the extent to which words are read in, ignored, or otherwise “corrected”: see analogously Taylor at [38]. The greater the departure from the language employed, the greater the degree of persuasion needed to establish that such a departure is warranted.

8. [30]

   More generally, the notion of “correcting” contractual language involves the application of basic principles of contractual construction. The court does not make an order altering or correcting the language of the contract; it is simply construing what has been agreed. It is a purposive and contextual exercise. It reflects “trite law that an instrument must be construed as a whole”: Fitzgerald v Masters at 437.

9. [31]

   The central principles with respect to commercial contracts were summarised recently in J & P Marlow (No 2) Pty Ltd v Hayes & McCabe [2023] NSWCA 117; (2023) 112 NSWLR 29:

10. [32]

    Implicit in these principles is the notion that the court is seeking to identify the joint intentions of the parties, doing so by the objective standard of what a reasonable person in the position of the parties would understand that to be. The notion of intention here is used to describe “what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened”: Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 at [25]; see also Realestate.com.au Pty Ltd v Hardingham [2022] HCA 39; (2022) 277 CLR 115 at [17], [43], [82]-[83].

11. [33]

    The presumptive best guide to the intention of the parties who have adopted a written contract is the words that they have employed in that document. The “primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied”: ABC v APRA at 109 (Gibbs J). However, if the terms of a contract lead to absurd results or are inconsistent or otherwise seem clearly contrary to the parties’ mutual purposes such as to be an obvious mistake, as established objectively by permissible evidence, that fact suggests the objective common intention of the parties was not in fact as manifested by some particular words or punctuation employed: note Perry Herzfeld and Thomas Prince, Interpretation (3rd edition, Thomson Reuters, 2024), [22.130]-[22.160]. Thus “[w]ords may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency”: Fitzgerald v Masters at 426-427 (Dixon CJ and Fullagar J).

12. [34]

    The principle is of longstanding. Knight Bruce LJ, for example, said in Key v Key (1853) 4 De GM & G 73 at 84-85; 43 ER 435 at 439:

13. [35]

    Arguments of absurdity or such like might readily be made but are not easily established. Courts “have no mandate to rewrite agreements, so as to depart from the language used by the parties, merely to give a provision an operation which, as it appears to the court, might make more commercial sense”: Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297; (2011) 15 BPR 29,545 at [18]; Willis Australia Ltd v AMP Capital Investors Ltd [2023] NSWCA 158; (2023) 113 NSWLR 1 at [53].

14. [36]

    Moreover, the step of effectively supplying, ignoring or otherwise departing from the words or punctuation employed may only be taken if what the parties did intend – as ascertained according to established principles – is otherwise clear. The court is identifying the parties’ common objective intentions; it is not making its own choices as to what their contractual relations should be. That does not mean that any departures from the text must only be capable of being expressed by one possible formulation of words or punctuation. That will often not be the case. For example, in Fitzgerald v Masters the High Court concluded that the word “inconsistent” in a contract should be read as either “consistent” or “not inconsistent” (at 427 and 438). What is required is that the agreed position is clear (see eg James Adam at [57]-[61]).

15. [37]

    The argumentative steps of establishing an absurdity, inconsistency or other obvious mistake and of identifying the intended meaning are not entirely distinct. Whether or not there is such an obvious mistake (etc) may depend upon there being some other clear intention apparent which indicates that the literal meaning was not intended. As Meagher JA and Ball J said in HDI Global, the two criteria “are merely steps involved in reasoning to a conclusion” in the process of construction (at [53]).

16. [38]

    In sum, it is possible to construe a written contract in a manner which departs from some particular words or punctuation employed. This is an exercise in objective, purposive, contextual construction, giving effect to the court’s assessment of what the parties have actually agreed consistently with basic principles of construction. It is not a matter of rectifying – rewriting – the contract to prevent one party’s unconscientious behaviour by correcting a mutual mistake in the parties’ expression of their actual agreement. This constructional step will only be taken if it is clear, first, that the terms lead to absurd results or are inconsistent or manifest some obvious mistake as established by permissible evidence and, second, if the position intended to be agreed is clear. These matters may overlap. The greater the departure from the language employed then in general the more difficult it will be for the argument to be made out.

The proper construction of the Deed

1. [39]

   It is important clearly to identify the construction advocated for by the appellant: that the Deed created a charge over the Property owned by the respondent. That was the extent of the claimed liability of the respondent. Various ways of capturing the appropriate construction were identified in argument. One way of doing so was said to be as if the first paragraph of cl 2 of the Deed read as follows:

2. [40]

   The appellant did not assert either below or on appeal that the Deed also made the respondent personally liable as guarantor for the full liability, including principal and interest, of Shield Resources. Indeed, the appellant argued below that the absence of a personal guarantee clause itself supported the argument that the parties intended to pledge her Property as security (see J [48]). Thus the appellant’s case was that the Deed created a proprietary right, but not a general personal one, against the respondent. As senior counsel for the appellant accepted in argument in this Court, his client “claim[ed] a guarantee only to the extent of the interest in the property”.

3. [41]

   The appellant argued first that the Deed created such a charge simply based upon the words employed. The argument is unsustainable. The primary judge correctly observed at [45] that cl 2 contains no words of charge by the respondent, as owner of the Property, as opposed to purported promises by Shield Resources.

4. [42]

   The appellant argued that cl 6(a) “supported” construing cl 2 as an agreement by the Guarantor to the creation of a caveatable interest in the Property. Clause 6(a) is an odd provision. Its chapeau says that the “Borrower and Guarantor represents and warrants to the Lender that …”. Then, after the sub-heading “Charge”, it says that:

5. [43]

   The provision contains a representation and warranty that, first mortgage aside, nothing prevented the lodging of a second mortgage. The provision seems to equate the taking of that step with either the creation, or the further recognition or protection, of a charge. That step was not taken. And it is again said to be Shield Resources which consents to the charge being lodged. Clause 6(a) does not itself create a charge over the Property as security for the loan. Nor does it require that cl 2 be read as though the respondent was agreeing to the immediate creation of a charge.

6. [44]

   The primary judge was thus correct to conclude it was a necessary step in the appellant’s claim to persuade the Court that despite the absence of express words, the first paragraph of cl 2 should be read (or “corrected”) as if the respondent, rather than only Shield Resources, agreed that the loan gave the appellant a caveatable interest in the Property and she would not oppose him lodging a caveat over the Property (J [46]).

7. [45]

   The appellant’s main argument was that the Deed should be read as though “corrected” in that manner, as set out above at [39]. It was said that on its face the operation of the Deed was absurd. The argument might also have been put in terms of internal inconsistency. There is good reason to argue that something has gone awry in the (amateur) drafting of the Deed, noting the following:

   1. (1)

      The respondent is identified as “Guarantor” in the list of parties, suggesting that she was to play some role as such.

   2. (2)

      Recital B to the Deed refers to the Lender advancing the Principal Sum upon having that sum with interest being “secured in the following manner”, indicating that some security was intended to be provided.

   3. (3)

      The term “Property” is defined in cl 1.1(e) to mean the identified house owned by the respondent. That Property is then the subject of the promise about creation of a caveatable interest in cl 2, suggesting that the Property was meant to play some role as security for the loan. That could only occur with the agreement of the respondent. No other property is identified in the Deed as potential security.

   4. (4)

      Various representations and warranties are made by the respondent, together with Shield Resources, in cl 6. Apart from the warranty in par (a), already discussed, these include a warranty in par (c) that the Borrower and Guarantor were not “in default or difficulty” under any agreement or financial commitment (etc). There is also a warranty in par (e) that no litigation has “been initiated or threatened against the Borrower or any of the Guarantor’s assets which would or might have a material adverse effect upon the business, assets or financial condition of the Borrower”.

   5. (5)

      Clause 7 is drafted as an undertaking by Shield Resources to the appellant, but the clause again addresses the position of the respondent. Notably, par (e) involves the company undertaking “to not further mortgage or encumber the Property beyond the first mortgage and the loan under this Deed” without prior agreement of the appellant. The company was not in a position to encumber the Property; the respondent was. In any event, the provision indicates the appellant had an interest in the security value of the Property not being diminished.

8. [46]

   Given these features of the Deed, a reasonable argument can be made that the parties did intend that the Property be provided as security for the loan in some way (subject to the first mortgage referred to in cl 6(a)). That being said, as the respondent argued, cl 6(a) muddies the waters. It is arguable that the Deed merely provided that a security interest could be created by the appellant subsequently lodging a second mortgage over the Property pursuant to cl 6(a), to which step the respondent agreed, but that no immediate charge was created by the Deed: note Roberts v Investwell Pty Ltd (in liq) [2012] NSWCA 134; (2012) 88 ACSR 689 at [29]-[30]. It is not necessary to resolve that point.

9. [47]

   Nor, in the end, is it necessary to determine whether the series of oddities in the drafting amount to a sufficiently obvious mistake. As explained, that issue can itself overlap with the need clearly to identify what the objective intention of the parties was. It is in that latter regard that the appellant’s case must fail, as the primary judge correctly held (at J [49] and [51]).

10. [48]

    The core problem with the appellant’s case is that it does not establish a clear objectively ascertainable intention that the respondent be liable as guarantor by way of creation of a charge over the Property only, but not by way of providing a full personal guarantee for the liability of Shield Resources for principal and interest. As explained, the appellant asserted only the former construction and not the latter. The aspects of the Deed emphasised by the appellant as pointing towards the creation of a charge only are those just identified. Yet there are aspects of the Deed pointing towards the provision of a full personal guarantee, despite the absence of any express promise to that effect. As senior counsel for the respondent put it, such a construction would be achieved if cl 2 were read not as the appellant suggested but such that each reference to “the borrower were read as the borrower and the guarantor, then one would have a promise which was a joint and several promise to repay given by the borrower and guarantor”.

11. [49]

    The following matters are consistent with or support that type of understanding:

    1. (1)

       It is consistent with describing the respondent as “Guarantor”. It is also consistent with the appellant being authorised under cl 6(a) to lodge a second mortgage over the Property, so as to give him a proprietary right as security for the obligations of Shield Resources and of the respondent as guarantor.

    2. (2)

       It is this understanding which is most consistent with the warranty in cl 6(c) that the respondent was not in default or difficulty in any identified respect. That warranty tends to imply that the financial position of the respondent generally – and not just as regards the Property – was relevant to the benefit that the appellant was obtaining by having the respondent as guarantor.

    3. (3)

       The same point is supported by the warranty in cl 6(e) about litigation relating to the respondent’s assets.

    4. (4)

       The point gains even clearer support from cl 7(d), (f) and (g). By par (d) the company undertook to ensure that “no assets of, or under control of, the Borrower and Guarantor are transferred, or otherwise alienated, to any person otherwise than in [certain identified circumstances]”. The provision suggests that the appellant had an interest in the asset position of the respondent generally, suggestive of her owing a personal guarantee. The same is true of par (f), which required the company to notify the appellant immediately of any litigation or other proceeding “initiated or threatened against the Borrower or any of the Borrower and Guarantor’s assets”. So, too, for the requirement in par (g) that the company notify the appellant immediately of “any event or change in the Borrower and Guarantor’s circumstances, the effect of which either would or might render any representation or warranty made in this Deed untrue or incorrect in any respect”.

12. [50]

    It might be said that it is harsh for the appellant to fail to establish any liability in the respondent because of ambiguity as to the extent of that liability. Yet, as explained, when dealing with issues of construction it is not for the Court to redraft the contract or to fill in gaps. The existence of the ambiguity means that it is simply not possible to identify objectively what the common intention of the parties was. This is not a matter of mere forensic choice made by the appellant as to how he put his case. Whether he had asserted just a charge or a full personal guarantee or both, the matters identified preclude the clear identification of any particular one of these options as being what the parties intended. As the primary judge put it, the Deed is “intractably equivocal as to any obligation that [the respondent] may have intended to assume and that the [appellant] may have intended to receive from her” (J [49]).

13. [51]

    The appellant has not made out his asserted construction. The Deed did not create a charge in his favour over the Property. The appeal must therefore be dismissed. There is no reason why costs should not follow the event.

14. [52]

    The orders of the Court should be as follows:

    1. (1)

       Appeal dismissed.

    2. (2)

       Appellant to pay the respondent’s costs.

15. [53]

    PRICE AJA: This appeal highlights the perils involved in not engaging a suitably qualified lawyer to advise on and to draft a contractual agreement. For the reasons comprehensively articulated by Kirk JA, I agree that the appeal should be dismissed.