Interpreting a personal guarantee for a ‘running account’
In FJ & SM Monaghan Pty Ltd v Slade [2018] NSWCA 79 (McColl, Meagher and Ward JJA), the Court of Appeal upheld a challenge to the interpretation of a personal guarantee and set aside the judgment of the District Court (Hatzistergos DCJ). The decision is instructive of the principles of contractual interpretation, particularly as they apply in a commercial setting.
Facts
The appellant was a supplier of petrol to a company on the basis of a running account. Their arrangement began in 2001. In 2006, it was varied, and an interest component was added for outstanding payments. In July 2008, the director and shareholder of the debtor company entered into a personal guarantee with the petrol supplier. It was in the form of a letter. It was expressed as guaranteeing the “debt … for fuel supplied”. Petrol continued to be supplied until April 2013, then, District Court proceedings were commenced for unpaid debt.
The District Court held that the guarantee covered only the pre-existing debt (including interest) as at July 2008 when the guarantee was entered into. This was reversed by the Court of Appeal. It held that the guarantee covered the balance (and interest) from time to time on the running account, not merely the debt as at July 2008.
Issues on Appeal
The two central issues before the Court of Appeal were:
- Did the guarantee apply to the debt owing at the time of the guarantee or thereafter from time to time?
- Did the guarantee cover interest?
Timing: Did the Guarantee apply to the pre-existing debt or the continuing debt
The Court of Appeal held that the guarantee applied to the continuing debt. The primary judge erred by holding that “the reference to ‘the debt’ for ‘fuel supplied’ presupposed an existing debt. The following reasons were provided:
Linguistic interpretation
- The past participle ‘supplied’ has a temporal significance in some contexts. But in the context of the guarantee, its use says nothing about the relation between the date of the guarantee and the date of supply. It merely conveys the fact that the action of supplying is done to, not by, the petrol. Its use is “neutral in temporal meaning and applies equally to the future as to the past” as in Mikasa (NSW) Pty Ltd v Festival Stores (1972) 127 CLR 617; New South Wales v The Commonwealth (The Incorporation Case) (1990) 169 CLR 482 at 482 (Deane J).
- The expression “debt … for fuel supplied” is equally capable of meaning “debt at present … for fuel already supplied”, “debt from time to time … for fuel already supplied”, or “debt … for fuel supplied from time to time”.
- Any temporal significance associated with a participle derives from its context. For example, the statement “Anyone caught shoplifting will be prosecuted” includes a past participle (“caught”) and a present participle (“shoplifting”) but contemplates three actions in the future from the perspective of the speaker or writer (namely, shoplifting, catching and prosecuting).
Commercial purpose
- The guarantee was “a continuing guarantee” for the balance due from time to time (as in Heffield v Meadows (1869) LR 4 CP 595 at 599).
- The evident commercial purpose was to secure the continued supply of fuel and credit on the terms of the existing running account. By those terms, there was, and would be, only one amount outstanding at any point in time, no distinct debt for fuel or credit supplied at or before particular times, and no express appropriation of future payments to any particular debit items.
Evidence of parties’ subjective intention
- The primary judge also erred in drawing inferences from evidence that one of the respondents had instructed his solicitor to prepare a guarantee for “the monies owing” and he understood guarantee as having that meaning. Evidence of the parties’ subjective intention is not relevant to construction (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]).
Interest: Did the guarantee cover interest?
The Court held that the guarantee included interest.
Business reality
- The Court considered that to exclude interest would put a meaning on the words of the guarantee they were “wholly divorced from business reality” (Fahey v MSD Speirs Ltd [1976] 1 NZLR 240) and the commercial setting makes clear that the language was intended to include interest.
Lesson
The case demonstrates the upmost importance of drafting contract terms with precision including the choice of words and the syntax.