GRANT DOUGLAS GILLESPIE and ROSS & ANOR v RACHEL HELEN GILLESPIE and DENISE & ORS [2001] NZCA 358 (11 October 2001)

IN THE court of appeal of new zealand

ca 85/01

	between	GRANT DOUGLAS GILLESPIE and ROSS JAMES GILLESPIE
		First Appellants

	AND	RACHEL HELEN GILLESPIE and DENISE FRANCIS GILLESPIE
		Second Appellants

	and	ALGERT COMPANY INCORPORATED
		First Respondent

AND

ALGERT CO (NZ) LIMITED Second Respondent

AND

UNITED STATES IMPORTS LIMITED (In Liquidation) Third Respondent

Hearing:	30 August 2001 (at Auckland)
Coram:	Thomas J
	Anderson J Hammond J
Appearances:	J R Wain for Appellants P L Rice for Respondents
Judgment:	11 October 2001

judgment of THE COURT DELIVERED BY HAMMOND J

Introduction

[1] This is an appeal in a proceeding in which the appellant guarantors sought (unsuccessfully) to avoid liability on a guarantee given to secure certain commercial debts.

Background

[2] Algert Co. Inc ("Algert") is incorporated in California. It sells home appliances. Algert is not itself a manufacturer but purchases these goods for supply both to the United States domestic market and internationally. The goods are manufactured in the United States and Italy. Algert holds distribution rights for a number of international brands including Panasonic, General Electric, Frigidaire and Philco.

[3] In the late 1980s the Gillespie brothers (the first appellants) became interested in importing refrigerators into New Zealand. In 1990, they incorporated United States Imports Ltd ("USI"). This company began to import small quantities of refrigerators, which were financed by pre-selling them and receiving payment in advance. Both Grant Gillespie and his brother Ross were in full-time employment. This was a secondary form of income for them. Their wives Rachel and Denise (the second appellants) also became involved in the business to varying degrees.

[4] The driving force behind Algert is its President, Mr Aziz Banayan. He was interested in expanding the export of refrigerators to New Zealand. He encouraged the Gillespies to begin importing the Kenmore brand of appliances. The trial Judge (Salmon J) accepted that it was made known to Mr Banayan that USI was a small company and that orders would only be able to be paid for from the proceeds of sale in New Zealand.

[5] The business of USI expanded. Salmon J accepted that the general practice of the parties was that USI would place a written purchase for refrigerators with Algert. Algert would then obtain the goods from its suppliers. The goods would be shipped to New Zealand on what was loosely described as an FOB basis. USI was responsible for arranging freight and insurance and paying all duties and GST on arrival of the goods in New Zealand. The goods were invoiced on shipment. Payment was due 90 days from the date of the invoice. The exchange rate was calculated as at the date of disport in New Zealand. In 1993 Algert starting charging interest on outstanding purchases at the rate of 1% per month.

[6] USI established a standby Letter of Credit in favour of Algert to support its purchases. But the total amount of these purchases soon exceeded the amount of credit available to USI.

[7]Algert became increasingly concerned at the level of USI's debts. In 1995 it sent a personal guarantee to the Gillespies for their signature. Algert undertook, for its part, to return the guarantee when the amount under the Letter of Credit was increased. The guarantee was signed by the Gillespies, but returned to Algert unnotarised. Algert then insisted that the guarantee be notarised. And, as the Judge found, "[Algert also] made it clear that [it] would rely on the [collective] guarantees so long as there was a shortfall between the amount of the Letter of Credit and the debt to Algert". A notarised guarantee was then executed by both the brothers Gillespie, and their respective wives.

[8] This guarantee was in the following terms:

For valuation consideration, the undersigned (the "guarantors") jointly and severally guarantee to ALGERT COMPANY, INC., all obligations, including without limitation to all payment obligations arising from and related to the transactions related to Home Appliances (the "Products") purchased by UNITED STATES IMPORTS LTD (the "Company") from ALGERT CO., INC.

By their signatures below, Guarantors waive any right to require ALGERT COMPANY, INC. to proceed against UNITED STATES IMPORTS LTD., proceed against or exhaust any security held by UNITED STATES IMPORTS LTD or pursue any other remedy in ALGERT'S power whatsoever.

It is hereby acknowledged that this is a guarantee of payment, and not collection. Guarantors further acknowledge that ALGERT COMPANY, INC. is relying on this guarantee in agreeing to sell Home Appliances to UNITED STATES IMPORTS, LTD for distribution in New Zealand.

[9] The debt due from USI to Algert continued to grow. By the end of 1997 it stood at US$2.5 million. But the underlying Letter of Credit was for only US$350,000.

[10] In early 1998 Algert arranged for a close inspection of USI's financial records. The companywas found to be insolvent.

[11] In September of 1998 Mr Banayan and a fellow Director visited New Zealand and met with the Gillespie brothers, in an attempt to devise a "rescue" package.

[12] These four men agreed to form a new joint venture company. Each of the Directors would contribute certain capital and this new company would purchase the fixed assets of USI. In fact, the company was formed, but the capital was never taken up. Effect was not given to that agreement.

[13] It was further agreed that USI would attempt to sell off its stock by the end of the year and apply those proceeds in reduction of its debt. Algert agreed to purchase back unsold stock at book value. That in fact occurred, and Algert issued a credit note to USI for that stock. For tax reasons, Algert incorporated a New Zealand subsidiary, Algert Co (NZ) Ltd to receive this stock and sell it to the joint venture company, as and when it was required.

[14] Those steps in fact achieved a substantial reduction in indebtedness on the part of USI, to a sum of US$704,000. Algert maintains that the Gillespies acknowledged that this amount was owing by USI and also acknowledged their personal liability to repay it, but have not honoured their commitment.

[15] It was in this commercial context that these proceedings were then brought in the High Court against the Gillespies, on the guarantee, for that sum, as adjusted.

The Judgment in the High Court

[16] In the result, Salmon J held that Algert was entitled to judgment against the Gillespies jointly and severally for the sum of US$666,215 together with interest on that sum from the date of issue on the proceedings down to the date of judgment. The Judge also said "my initial view is that that interest should be equivalent to the 90 day Bill Rate over that period". He reserved leave to apply if counsel could not resolve that figure. Algert was awarded costs on what can shortly be referred to as a "2B" basis.

The Grounds of Appeal

[17] As routinely occurs in contests of this character, the Gillespies raised a wide variety of defences in the High Court to the proceeding which had been brought against them on the guarantee.

[18] In this Court they seek to rerun all those defences again and, in Mr Rice's view, have sought (inappropriately) to raise two fresh defences on the appeal.

[19] The six grounds of appeal which have been raised before us can conveniently be grouped in the following way:

(i) Discharge of Guarantee by Material Variation of Principal Contract - Supply of Goods without Purchase Order

(ii) Discharge of Guarantee by Material Variation of Principal Contract - Cancellation of Letter of Credit

(iii) Errors in Construing the Guarantee

(iv) Quantum not Proven

(v) Discharge of Guarantee by Giving of Time

(vi) Undue Influence and Misrepresentation

[20] We will deal with the issue of whether a particular ground of appeal can properly be advanced before us, or should be rejected as being "fresh", under the relevant head of appeal.

[21] Although it is not necessarily the logical order, as a matter of convenience we will follow the order in which these grounds were argued by Mr Wain and Mr Rice.

[22] Before doing so, however, it is convenient to note here that this is, in substance, an appeal on factual grounds. Although a number of authorities as to the law of guarantees were referred to, particularly by Mr Wain, what was before Salmon J was the application of settled law to disputed facts. Accordingly, the appellants face the difficult burden of satisfying this Court that the trial Judge could not appropriately have reached the conclusions he in fact reached, on the evidence before him. The applicable principles of law under this head are very well settled, and need not be further traversed on this occasion (see Powell & Wife v Streatham Manor Nursing Home [1935] AC 243; Wright v Powell [1982] 1 NZLR 473; Hutton v Palmer [1990] 2 NZLR 260; Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190).

Discharge of Guarantee by Material Variation: Supply of Goods Without Purchase Order

[23] It has long been established that, as a general principle, if a creditor and debtor vary or alter the nature of the obligations guaranteed without the consent of the guarantor then that guarantee will be discharged unless the variation is not material or cannot be otherwise than beneficial to the guarantee (see, Egbert v National Crown Bank [1918] AC 903, 908; Nelson Fisheries Ltd v Boese [1975] 2 NZLR 233; Dunlop New Zealand Ltd v Dumbleton [1968] NZLR 1092).

[24] The appellants endeavoured to bring themselves within this principle by arguing that Algert "materially altered" the terms of the guarantee by shipping substantial quantities of Kenmore European goods to USI without a purchase order or other authorisation and without the consent of the guarantors. They maintain they were thereby discharged from further liability under their guarantees.

[25] The issue here was really a factual one: could Algert establish, to the civil standard of proof, that the relevant goods were purchased by USI from Algert? To reach a conclusion on that issue, the Judge was entitled to have regard to the commercial context of the dealings; the relevant documentation; and the oral evidence of the parties.

[26] As to the commercial context, it is significant that Salmon J found as a fact - and there was ample evidence to support the finding - that from the inception of this commercial relationship Algert knew that payment for goods purchased by USI would be made from the proceeds of sale. The methodology was that USI would place a written purchase order with Algert, which would then obtain the goods from its own suppliers. The significance of this finding for present purposes is that there was no commercial advantage to Algert in on-shipping appliances for which there were not purchase orders. On the contrary, if it did so, there was some risk of non-payment. The Gillespies therefore faced what Mr Rice rightly characterised as the "inherent implausibility" of the argument made for the Gillespies.

[27] As to the specific shipments, the heart of the problems which arose between the parties had to do with a 1997 range of products called Kenmore European. This range was manufactured in Italy "at huge cost exclusively for sale in Noel Leeming stores", as Mr Wain put it. This product had no market anywhere else in the world. The appellants claim was that Algert arranged for the shipment of large volumes of this product to New Zealand without first obtaining the required confirmed orders from USI.

[28] For its part, Algert maintained that the orders were properly documented, but that the real problem was that Noel Leeming did not in fact take the whole line. In the result, more goods were shipped than Noel Leeming in fact took up, thereby creating a substantial "overrun". It was this which caused most of the blowout in indebtedness. Algert further says that the Gillespies were the authors of their own misfortune, in that they did not exercise the rights of variation they undoubtedly had. They did not give timeous, or any, notice of cancellation of unwanted quantities to Algert. And, once the problem had become apparent, the Gillespies chose not to press whatever rights they had vis-à-vis the failure of Noel Leeming to take the entire line.

[29] At trial, there was extensive evidence on the issue of whether these orders were actually placed. The Judge was plainly alive to the importance of the issue. He had some initial concerns. He accordingly paid particular attention to this issue, to the extent of requesting distinct submissions on it, in closing addresses. He was satisfied there was nothing in this defence.

[30] In this Court we were also taken through the relevant documentation at some length. In the result, we are of the view that there was documentation on which the Judge was entitled to take the view he did: he "was satisfied.... that [the relevant] purchase orders were provided". When there is added to that documentation the inherent implausibility of the appellants' argument; the lack of protests as to the quantities which were actually being delivered; and the subsequent acknowledgement of indebtedness, the strength of the case for the respondents is such that there is no basis on which this Court can properly interfere with the conclusion reached by the trial Judge.

Discharge of guarantee by material variation: cancellation of Letter of Credit

[31] The contention for the Gillespies under this head is that in 1997, and without their consent, Algert cancelled the USI standby Letter of Credit with the Auckland Savings Bank ("ASB"). It was said that the maintenance of this Letter of Credit was a condition or condition precedent of the guarantee. But fresh arrangements were in fact made with the HSBC. It was argued that this step constituted a material variation of the underlying contract between Algert and USI, of such a character that the guarantors were wholly discharged.

[32] Salmon J disposed of this contention summarily: "In fact it became apparent on the evidence that Grant Gillespie cancelled the ASB Letter of Credit when fresh banking arrangements were made with the Hong Kong Bank. I do not accept that this can have had any affect on the continuing obligations under the Deed of Guarantee". (Italics added).

[33] The background to this short finding was that the Gillespies had pleaded that the ASB Letter of Credit had been cancelled without their knowledge or consent. But in the course of cross-examination Grant Gillespie was shown a facsimile sent to Algert which had requested cancellation of the ASB Letter of Credit. He said that he had been in error and that he had forgotten about this document. The cancellation was at his request because the HSBC required it. It was in that context that the Judge came to his holding.

[34] The position becomes even plainer when it is appreciated that a month earlier the Gillespies had signed a trade finance facility with the HSBC which expressly contemplated the replacement of the ASB Letter of Credit with the larger facility of the HSBC.

[35] We accept Mr Rice's submission that the maintenance of the Letter of Credit was not a condition of the guarantee being given. The facsimile which accompanied the transmission of the guarantee expressly stated: " ... as we discussed today, Algert will rely on this guarantee so long as there is a shortfall between the underlying standby LC amount and the amount owed by US Imports to Algert". That is, there might be times when the Letter of Credit was insufficient or no Letter of Credit was in place. The guarantee (which was in very wide terms) could then be relied upon for the full amount owed.

[36] In the result, there is no force in this ground of appeal. It too is dismissed.

Errors in construing the guarantee

[37] The Gillespies contend that the Judge erred in construing the guarantee in three respects:

(a) The Judge failed to find that the guarantee was limited in time to when the underlying Letter of Credit was put in place.

(b) The Judge failed to find that the guarantee was limited to home appliances "purchased" by USI.

(c) The Judge failed to find that the guarantee was limited to guaranteeing payment to Algert of proceeds received by Bond & Bond.

(a) Time

[38] As to the argument of limitation of time it is necessary to say a little more about the facts. The Gillespies rely here on a facsimile dated 16 May 1995. That facsimile contained a statement: "As indicated and agreed we will return this original guarantee to you as soon as you have been able to develop and increase the underlying Letter of Credit". There would have been considerable force in the appellants' contention, but for the facsimile of 25 May 1995 which was entered in evidence. That was the facsimile to which we have already referred, which stipulated continuing reliance on the guarantee notwithstanding shortfalls in the Letter(s) of Credit.

[39] It followed that the appellants' case was really dependent upon their persuading the Judge that, as he maintained, Mr Grant Gillespie had not received the 25 May facsimile and that it was no part of the transaction. On this point the Judge concluded "On the balance of probabilities both facsimiles were sent and ... the extent of coverage of the guarantees relied upon by Mr Algert was also conveyed in telephone conversations between Mr Banayan and Mr Grant Gillespie".

[40] These findings (really that the 25 May facsimile superseded that of 16 May) were entirely open to the Judge. In part they amount to credibility findings. The Judge's response was hardly surprising in face of Mr Grant Gillespie's acknowledgement in cross-examination that he could not recall receiving the 25^th May facsimile. His evidence was therefore "neutral" in face of Mr Banayan's insistence that the facsimile had been sent. And the 25 May facsimile itself refers to a telephone discussion of the same day. That corroborates Mr Banayan's evidence that a telephone discussion took place, if not necessarily the terms of it.

[41] This issue was again entirely a trial issue. There is no warrant for this Court interfering in a finding of fact which was clearly open to the trial Judge.

(b) Purchases

[42] The appellant argues that the goods received were not "purchases" within the meaning of that term in the first paragraph of the guarantee (para. 8, supra).

[43] The parties seem to have thought that this was an FOB contract. In concept, such a contract involves a seller putting goods on board a ship for the account of the buyer, as opposed to a CIF contract, in which the buyer pays the cost of the goods together with insurance and freight. However, there are many different variations of these kinds of contracts. At the end of the day, each contract turns on its own terms. In this case, there is no dispute that USI was responsible for arranging freight and insurance, and paying all duty and GST on arrival of the goods in New Zealand. The goods were invoiced on shipment; payment was due 90 days later. The goods were accepted into USI's warehouse and included in its inventory (including the Kenmore European goods allegedly shipped without authority). Algert was then recorded as a creditor in USI's accounts for the value of the goods shipped.

[44] Against that evidence, Salmon J had "... no doubt that all the stock that arrived in New Zealand became the property of USI upon arrival". With all due respect to the appellants' arguments, the findings of fact of His Honour as to the elements of the transactions between the parties (which were not in this respect materially challenged) could lead, as the Judge said, to no other conclusion than that this stock upon arrival in New Zealand was the property of USI.

(c) Bond & Bond limitation

[45] The third argument under this head really reduces to a submission that the appellants were guaranteeing (only) payment to Algert of sale proceeds received from Bond & Bond.

[46] It is trite that what the Gillespies understood by the guarantee is quite irrelevant. The issue is one of construction of the guarantee, of course, in the commercial context of the transaction. This guarantee was in the most general terms (viz., of "all obligations"). And the words "this is a guarantee of payment and not collection", in their ordinary commercial meaning, and in the context of this transaction can surely not convey anything other than that the guarantors obligation is not somehow conditional (as was contended) on Algert first attempting to collect monies owing from the principal debtor. As Salmon J put it, "the guarantors are guaranteeing payment of the money owed by USI to Algert whether or not Algert has attempted to recover the money from the principal debtor".

[47] We are not at all persuaded that the Judge's construction of the contract was inappropriate. The contention now sought to be advanced by the guarantors is little more than an attempt to engraft onto a simple, and simply expressed, commercial document an interpretation which favours their cause. This ground of appeal is also dismissed.

Quantum

[48] Under this head the appellants argue that "Algert failed to discharge the onus of proving and establishing the amount and nature of the debt owed by USI so as to enable proper determination of the guarantors' liability".

[49] Salmon J concluded that the amount owing to Algert was "clearly established" and that "the defendants' challenges to the amount owing are not supported by the pleadings or the evidence".

[50] For Algert, Mr Banayan gave some evidence. But the principal evidence for the respondent was by Teresa Rooney, Algert's Financial Controller. She had made a detailed review of the accounting position between the parties. As Mr Rice correctly said, there was no real challenge to her evidence in cross-examination. Algert further relied on the fact that Grant Gillespie signed off the relevant accounts showing the debt owing (admittedly subject to audit), and both the Gillespie brothers admitted a debt of $704,00 was owing in the agreement dated 16 December 1998. There was also confirmation by Ross Gillespie in cross-examination that there was a debt of $704,000 owed by USI to Algert.

[51] The appellants placed great stress on Salmon J's observation that it was "not entirely clear" from the evidence "how it was that USI had ended up owing such a large amount of money to Algert". However, it does not at all follow that Algert "failed to discharge the onus that was upon it", as Mr Wain contended. It is elementary that a Court has to do the best that it can with the evidence which is actually adduced in a civil cause. The appellants' own books had plainly got into some disarray. The Judge was perfectly entitled to prefer (as he did) Ms Rooney's evidence, coupled with the subsequent acknowledgements and admissions.

[52] Again, there is no warrant in this Court to justify it interfering in a finding of fact which was clearly open to the trial Jude. This ground of appeal is also dismissed.

The giving of time

[53] The argument under this head is that the arrangements made in late 1998 between the Directors of USI and Algert to form a new joint venture company, and the promisory note given to Algert's Directors, amounted to a giving of time to USI without the guarantors consent. Accordingly the guarantors were consequently released. (See Ward v National Bank of New Zealand (1883) 8 App Cas 755, 763; and Moschi v Lep Air Services [1972] 2 All ER 393).

[54] Because the argument was not put to the trial Judge we are unable to say what view he might have taken of this issue. However, in our view, if there was an extension of time at least Ross and Grant Gillespie were involved in those agreements. It is difficult to see how they could be heard to take advantage now of their own actions. But more importantly, the agreements relied upon never came into effect. Salmon J specifically found "in fact while the company was formed, the capital was never taken up and effect was not given to the agreement". There is no challenge to that finding of fact. It is difficult, to say the least, to see how reliance can be placed on an agreement which did not proceed, as a basis for the alleged "giving of time".

Undue influence and misrepresentation

[55] No claim of undue influence or misrepresentation was raised on the pleadings, or for that matter in counsels opening at trial. It was raised for the first time in closing. Mr Rice understandably and properly objected to the issue being raised at the close of the trial. As he said, had undue influence been a live issue he would have run his client's case differently "and would certainly have cross-examined the witnesses on the issue". He also submitted that the case itself might well have had to have been run quite differently as to parties "because the wives, with different interests to their husbands, would have required separate representation".

[56] The Judge dealt with this issue concisely. He confirmed there had been no relevant pleading, but he said, "in any case undue influence is not established on the evidence. Each wife signed because their husbands persuaded them it was necessary if supplies of produce were to continue. That cannot constitute undue influence either directly by the husbands or indirectly by Algert".

[57] The law of undue influence has undergone considerable development in recent times. See Barclays Bank v O'Brien [1994] 1 AC 180; Royal Bank of Scotland v Etridge (No. 2) [1998] 4 All ER 705 (CA); Barclays Bank PLC v Boulter [1999] 1 WLR 1919 (HL); and in New Zealand; Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 (CA). Broadly speaking there are now two classes of cases. The law recognises a category of persons who are potentially vulnerable to undue influence or misrepresentation (as for instance, wives/girlfriends and other cohabitees). These are the kind of relationships where a lender is aware that the surety reposes trust and confidence in the principal debtor. These cases can give rise to situations of presumed undue influence. Once a relationship of that sort of character has been proved, the burden shifts to the alleged wrongdoer to prove that the complainant entered into the impugned transaction freely - as for example, by showing that the complainant had independent advice. (The same is true of relationships implied by law (e.g. parent/child)). In cases of actual undue influence it is for the person asserting undue influence to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction which is impugned.

[58] This law has implications for the pleading point which was raised by Mr Rice, but counsel did not explore these implications before us, and no authority was cited.

[59] The learned authors of Bullen & Leake, Vol. 1 (14^th ed.) at para. 17-09 suggest that where there is not a relationship by law, or a presumed relationship, "the burden is on the person seeking to avoid the transaction to plead and prove that undue influence existed". (Italics added).

[60] In this case, the appellants' case was put on the footing (which as we have observed was never pleaded and never even argued until this Court) that "[this] case is one of those rare occurrences in which the debtor was acting as agent for the creditor in procuring the signatures of the guarantor" (Mr Wain).

[61] An argument of that kind should surely have been pleaded and particularised. And there is great force in Mr Rice's argument that it would then have had to be dealt with in evidence. Without the benefit of pleadings, and full evidence, and the views of the Judge in the Court below, this Court is being asked to superimpose - in the abstract, as it were - a consideration of the potential application of a (much criticised) agency argument, when no foundation for it was laid at trial.

[62] In any event, on what is before us, the appellants were drawing a very long bow. Denise Gillespie at least was actually employed by USI in its accounting department; all of the guarantors received Directors remuneration from USI in the relevant period; and we take Salmon J's finding (of "necessity") to be an acknowledgement that the appellants appreciated that there was a commercial advantage (commercial "necessity" even) to their actions. And, even assuming there to have been a malignant influence (by one or other or both of the husbands), how is that to be imputed to Algert? The appellants were all in on the transaction together, and for their economic advantage. Finally, on the agency question, on the facts, Algert required USI to procure the guarantee of the appellants. USI was not acting for Algert; it was a separate corporate entity, acting on its own behalf.

[63] This ground of appeal is also dismissed.

Conclusion

[64] The appeal is dismissed.

[65] The respondents will have their costs in this Court in a sum of $5000, together with their disbursements.

Solicitors:

Penny Patel Law, Auckland for Appellants

Grove Darlow, Auckland for Respondents