SHANE MICHAEL FENTON v DOMINION FINANCE GROUP LIMITED [2001] NZCA 317 (27 September 2001)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca54/01

	between	shane michael fenton
		Appellant

	and	dominion finance group limited
		Respondent

Hearing:	19 September 2001
Coram:	McGrath J Anderson J William Young J
Appearances:	C J Orton for Appellant D J Clark for Respondent
Judgment:	27 September 2001

judgment of the court delivered by ANDERSON J

Nature of the appeal

[1] This is an appeal against a summary judgment entered in the High Court at the suit of the respondent.The cause of action was a written agreement for a loan facility which provided for the appellant and a Mr R P Dugdale to indemnify the borrowers' obligations to the respondent, and the amount sought, $505,444.50, was the borrowers' indebtedness under the facility.

[2] The borrowers were Lakeline Holdings Limited and Lakeline Developments Limited, of which the appellant and Mr Dugdale were directors. Mr Fenton has deposed that he was, in effect, a director largely in name and for the convenience of Mr Dugdale.

[3] The appeal is advanced on two grounds.First, that the extent of any liability on the part of the borrowers in accordance with the provisions of the agreement was not proved.Second, that Mr Fenton entered into the agreement under duress, in the nature of pressure of time and economic exigency.

Relevant provisions of the loan facility agreement

[4] The amount to be advanced under the loan facility is described in these terms:-

1. MAXIMUM AMOUNT OF FACILITY:

The lesser of One Million Dollars or;

the aggregate of:

- 66% of the valuation by a registered valuer of bare land owned by the Borrower and held by the Creditor as security; and

- 70% of the valuation by a registered valuer of a dwelling or dwellings which are being constructed, a completed dwelling or dwellings, but in respect of which dwelling is not subject to an unconditional sale by the Borrower; and

- 75% of the valuation by a registered valuer of a completed dwelling or dwellings in respect of which the dwelling has been sold unconditionally by the Borrower;

less the amount secured under any prior ranking mortgage, in any case.

[5] The agreement provided for other costs, such as an establishment fee of $10,000 and interest including a default rate.

[6] The appellant's liability was alleged to be founded on clause 17 of the agreement appearing under the heading "Guarantee", and providing as follows:-

(a) The Guarantors acknowledge that the sum will be advanced to the Borrower at the request of the Guarantors and upon the condition that the Guarantors execute this Agreement and the corresponding Deeds of Guarantee and Indemnity.

(b) The Guarantors shall be liable for the payment performance and observance of all moneys, covenants, conditions and agreements on the part of the Borrower contained in this Agreement or in the Mortgages and shall be obliged to pay, perform or observe the same upon demand by the Creditor and shall indemnify the Creditor in respect of any failure by the Borrower to pay the moneys or comply with the obligations imposed by this Agreement notwithstanding that the Creditor may not have called on the Borrower for payment of such moneys and may not have exhausted its remedies against the Borrower or against any other person or persons.

(c) The Guarantors' liability shall be that of principal obligors and not that of sureties so that the Guarantors shall not be released from the obligations hereunder by any lack of legal capacity or other reason whereby this Agreement may not be enforceable against or any moneys may not be recoverable from the Borrower or by any waiver giving of time, indulgence, compromise, failure or delay in exercising remedies, variation of security or of any collateral security or other dealing by the Creditor with the Borrower, any other Guarantors or any other person AND the Guarantors waive all defences which may be available to Guarantors or sureties.

(d) The right of subrogation of the Guarantors shall not arise until the Creditor has received payment in full of all moneys owing hereunder and all other moneys owing to the Creditor on any account whatsoever and secured by any security held by the Creditor and shall be a right to securities held by the Creditor and to the assets realised thereunder ranking in all respects subsequent to the rights of the Creditor.

(e) This clause is in addition to, and not in substitution for, any formal Deed of Guarantee and Indemnity or other security in support thereof which the Guarantors may enter into in favour of the Creditor in respect of the Borrower's obligations hereunder and in the event of any conflict the provisions of the formal Deed of Guarantee and Indemnity or other security shall prevail.

Judgment appealed from

[7] Various defences were advanced in the High Court and the Master does not seem expressly to have ruled on the argument indicated by the appellant's first point.The Master noted a submission by counsel for the appellant that the valuations referred to in paragraph 1 of the loan facility had not been obtained but appeared to accept the argument advanced by counsel for the respondent that it was absolutely clear that Mr Fenton knew the sum that was being borrowed and was already outstanding as $774,004.09 at the date the relevant loan documentation was signed.Reference was made by the Master to the Credit Contracts Act and issues of disclosure but, with respect, these do not seem relevant to the particular defence.

[8] As to the defence of duress, the Master held that it was clear the borrowers were already in a financial mess; that there was no action attributable to the respondent or its solicitors other than a request for immediate execution of documents which might be relevant to the issue but in any event Mr Fenton chose to accept that request.Further, that he and his co-guarantor had knowledge of similar documents through the execution of previous loan facilities from the same lender.In the result there was no basis for declining to enter summary judgment on the grounds of duress.

Appellant's arguments

[9] It was submitted on behalf of the appellant that the intent of clause 1 of the agreement was to ensure that the amount advanced by the respondent was less than the value of the security provided and capable of being repaid by sale of such securities.The basis upon which the appellant accepted liability as an indemnifier was that liability for principal would be limited to the extent indicated in that clause.On a summary judgment application it was incumbent upon the respondent to prove the extent of the liability and to do so the respondent had to provide evidence of the valuations referred to in clause 1 so the formula which defined the advance or advances could be applied to determine the relevant lesser amount.

[10] As to duress, the argument was to the effect that the appellant was a director more in name than in practice; that he was aware that the debtor companies were in default under the previous loan facility and in jeopardy of forced sales of properties mortgaged to the respondent; that the refinancing offer by the respondent came with an urgently short time for acceptance which left him unable to obtain adequate advice from his own solicitor; and that in the result he assumed a significant liability under the duress of urgency, economic stringency, and inadequate independent advice.

Respondent's arguments

[11] Counsel for the respondent argued that the limitations imposed by clause 1 are for the benefit of the creditor, not the borrower or guarantor, to ensure that the creditor maintains a level of security for its advances.That submission is made in the light of the respondent's securities which included at least three mortgages over land with which the debtor's business was concerned.It was further submitted that it was not the creditor's obligation to obtain valuations.In addition, clause 17(b) guarantees observance of covenants, conditions and agreements in the mortgages, and there is sufficient evidence in the proceeding to show that such mortgages are all obligations mortgages, although the exact terms of the obligations are not shown.

[12] In relation to duress, it was submitted that the appellant could not disregard the fact that he had previously signed two similar credit facilities containing terms and conditions like those in the agreement in question. Further, the creditor's offer to advance funding was made by a letter dated nine days prior to the execution of the credit facility.The appellant's signature as guarantor was witnessed by his solicitor, and in all of these circumstances the Master was right to reject the defence of duress.

Decision

[13] In our view it was incumbent upon the respondent, as the applicant for summary judgment, to prove the extent of the liability of the appellant under the instrument sued upon.This was the loan facility agreement, not the memoranda of mortgage, the covenants in which were guaranteed by the appellant. Accordingly evidence was required to show that the principal component of the sum claimed did not exceed the limits defined in clause 1.There was no evidence to show whether the principal component was not greater than the product of the application of the clause 1 formula.Because under the loan facility agreement the appellant's liability in respect of principal, if any, could not be greater than that specifically contemplated by the agreement, the respondent was required to show that in respect of principal it was claiming no more than the contract envisaged.There was, in short, an evidential hiatus preventing the entry of summary judgment.

[14] That the borrower may have had an obligation under the agreement to produce valuations in support of advances is not relevant to the evidential requirements of the summary judgment proceeding against the appellant.

[15] That is not to say that if the principal component of the borrowers' debt should prove to be greater than the defined amount, the appellant would be entirely relieved from liability.As this Court observed in Benchmark Buildings Supplies Limited v Weatherby, CA278/00, 19 July 2001, paragraph 17:-

There is also a question of whether a principal debtor is entitled to the benefit of the general rule applying to a guarantor that a material variation of the obligation guaranteed discharges the guarantee.Counsel were unable to refer to any authority holding that a principal debtor similarly is to be discharged from all liability as a result of a variation.There seems no reason in principle why this should be so.The principal debtor should continue to be liable in respect of the obligation up to the point of variation where that can be established and is continuing.

[16] In the present case one might expect, in any event, that the appellant could be liable for the amount of principal envisaged by the terms of clause 1 of the loan facility together with other elements of debt such as interest, establishment fees and the like.And in any event, evidence at trial may show a state of knowledge, acquiescence, or estoppel capable of qualifying or negativing reliance on the principal definition point.

[17] Further, the appellant may be amenable to a claim based on the covenants in the all obligations mortgages, although it is to be noted that clause 15 of the loan facility agreement stipulates that to the extent there is any conflict between the terms of the agreement and the terms of securities, the terms of the agreement shall prevail.

[18] Given this Court's view on the first point it is not necessary to rule on the defence of duress, but if the evidence goes no further than that presented in opposition to summary judgment it would be surprising if it were taken seriously.

[19] For the above reasons the appeal is allowed, the summary judgment is set aside, and the matter is remitted to the High Court.

[20] The appellant shall have costs on this appeal in the sum of $5000 together with reasonable disbursements including counsel's travelling and accommodation expenses.

Solicitors

Corban Revell, Auckland, for Appellant

Wilson McKay, Auckland, for Respondent