Asian International Acceptances & Capital Ltd v. Samuel Macomber Churn

CACV000057/1975

Coram: Briggs, C.J., Pickering, J.A. & McMullin, J.

Date of Judgment: 17th November, 1976.

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JUDGMENT

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1. In March 1973, one Philip Nicholson wished to borrow a large sum of money from the plaintiffs. The defendant gave an undertaking to the plaintiffs in the following terms:-

That letter was dated March 10th, 1973. It will be noticed that there was no express personal covenant given by the defendant to answer for the default of Nicholson. The sum of $500,000 was paid to Nicholson on March 13th, 1973. In furtherance of his undertaking the defendant caused to be delivered certain share certificates to the plaintiffs.

2. On May 7th, 1974 the plaintiffs and Nicholson agreed to a variation of the terms for the repayment of the loan. When the loan was made it was repayable on call and the interest was 10% per annum. By the variation agreement, Nicholson undertook to make certain definite payments by instalments, the whole amount was to be repaid by September 30th, 1974. And the rate of interest was increased from 10% to 1.2% per month as from May 1st, 1974.

3. On August 12th, 1974 the plaintiffs and Nicholson agreed to a second variation in the terms of the repayment of the loan. The whole amount of principal and interest then outstanding was to be repaid on or before August 31st, 1974; the interest being calculated at 1.2% per month as from May 1st, 1974.

4. Each of the two variations was reduced into writing in the form of a letter drafted by the plaintiffs and accepted by Nicholson. Each letter commences with this paragraph:-

"Without prejudice to our existing rights under your contract with us dated 13th March, 1973 and the undertaking given to us by Mr. S.M. Churn dated 10th March, 1973 and any other rights we have or may have in the future to recover principal and interest outstanding from time to time in respect of the loan advanced by us to you pursuant to the said letter dated 13th March 1973 and to obtain collateral for the repayment of the said loan pursuant to the undertaking given by Mr. S.M. Churn dated 10th March, 1973."

There then follows, in the first letter the new proposed arrangement of repayment, and in the second letter the undertaking to repay the balance outstanding before August 31st.

5. To these two variation agreements the defendant was not a party, nor was he consulted before they were entered into. Nor did he know that they existed until much later.

6. The point at issue in this appeal is simply this: Did the variation made on May 7th, 1974 discharge the defendant from this undertaking given on March 10th?

7. In the court below the plaintiffs asked for an order to sell the shares which had been deposited with them by the defendant to satisfy the amount of the loan to Nicholson still outstanding, he having defaulted in repayment. The shares in question had been registered in the name of the plaintiffs. The plaintiffs also asked for an order that the defendant should pay interest on the principal of the amount outstanding at the new rate of 1.2% per month and not at the old rate of 10% per annum.

8. Mr, Litton sought to abandon this last claim before us but it was clearly not abandoned in the court below.

9. In his counterclaim, the defendant asked for the recission of the contract made between himself and the plaintiffs on March 10th, 1973 and asked for an order for the return of the shares.

10. The trial judge dismissed the plaintiffs' claim and found for the defendant on the counterclaim. He ordered the return of the shares to the defendant. The plaintiffs have appealed against that order. And they also ask for an order that the shares be sold.

11. The case was argued in the court below on the basis that the defendant's undertaking created the relationship of guarantor and guarantee between the defendant and the plaintiffs. The defendant, by his under taking guaranteed the repayment of the loan by Nicholson, the principal debtor. The defendant mortgaged the shares to the plaintiffs as surety for the repayment of that loan, the mortgage being a collateral surety guaranteeing the principal debtor. That this was accepted to be the true construction of the undertaking by the parties appears from the evidence given in the court below and from the pleadings. There was, however, no express personal covenant given by the defendant to answer for the default of the principal debtor.

12. In Smith v. Wood⁽¹⁾ twelve persons deposited their title deeds of their respective properties to secure payment to the defendant of sums due for a company whose overdraft he was guaranteeing and they each charged their properties with the repayment of those sums. One depositor persuaded the defendant to hand her the title deeds of properties which she had deposited. In due course the defendant became liable on his guarantee. The deed charging the properties contained no personal obligation upon the depositors to pay nor did it create a joint liability. It was held that the release of one property affected the rights of the other depositors whose property might be taken in satisfaction of the sum payable by the defendant to have all the properties marshalled so that the debt would fall on the depositors rateably. And that the defendant had brought about a substantial alteration in the original contract and that therefore those depositors who had not consented to the alteration were released from liability.

13. Sankey, L.J. said, at page 25, that in strict law the depositors were not 'sureties' yet "the principles of law which have applied in the surety cases are applicable in the present circumstances." In his judgment he stressed that the 'surety' will only be discharged where the alteration is substantial.

14. The case of Re Conley ex parte The Trustee v. Lloyds Bank(2) is in point. It was a case which turned on the meaning of the phrase "sureties or guarantors" appearing in the Bankruptcy Act 1913.

15. A person who was insolvent was indebted to a bank. His wife and mother deposited War Loan and other shares as collateral security for his indebtedness. He subsequently paid large sums into his account which then was in credit. The wife and mother then demanded and were granted the release of the securities. A few days later his business closed and he was made bankrupt. No covenant or undertaking to pay any sum to the Bank had been given by the wife and mother. It was held that despite this the wife and mother were "sureties or guarantors" and that there had been a fraudulent preference.

16. Luxmoore, J., in giving his judgment in that case, considered the history of the contract of surety. He quoted the case of Perry v. National Provincial Bank of England⁽³⁾ to which case we were also referred and he said this at page 138:-

"The conclusion to which I have come is that there is no warrant for the view that the words 'surety' or 'guarantor' are, in their use in legal documents, confined to those persons only who undertake personal liability in respect of the debt of a third party to his creditor, and that the words in their prima facie legal sense include persons who pledge mortgage or charge their property for the debt of another, as well as those who pledge their personal credit."

17. In the event and on this authority the undertaking given by the defendant in the present case was clearly an undertaking to act as a surety for the repayment of the loan or to guarantee the repayment.

18. As we have said, the terms of the plaintiff's loan to Nicholson was later varied without the defendant's knowledge. The contention of the defendant is that the variation discharges him from his undertaking as he never consented thereto.

19. The rule is stated in a famous passage in the judgment of Cotton, L.J. in the case of Holme v. Brunskill⁽⁴⁾:-

"The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged."

This has been approved in several other cases notably in Smith v. Wood⁽¹⁾.

20. The role is clearly set out in paragraph 929, page 506 of Vol.18 of Halsbury (3rd Ed.) thus:-

"Any departure by the creditor from his contract with the surety without the surety's consent, whether it be from the express terms of the guarantee itself or from the embodied terms of the principal contract, which is not obviously and without inquiry quite unsubstantial, will discharge the surety from liability whether it injures him or not, for it constitutes an alteration in the surety's obligation."

21. By its variation in the terms of the repayment of the loan the parties converted a loan on call to a loan which was to be paid by instalments. In addition, the rate of interest was raised from 10% per annum to 1.2% per month.

22. It is with the latter part of the variation with which we are here concerned. Is an agreement to pay increased interest sufficient to discharge the surety? As to the giving of time. we think it is settled law that if the surety has given a personal undertaking to pay the loan to the creditor, an agreement between him and the principal debtor would operate to discharge the surety if it were made without his knowledge and consent. But where no such personal undertaking has been given as is the case here, the giving of time by the creditor to the principal debtor would not discharge the surety. (See para.931 page 508 of Vol.18 Halsbury (3rd Ed.)).

23. The case of the General Financial Corporation of Canada v. Le Jeune)⁽⁵⁾a Canadian case, is very much in point.

24. In 1912 the defendant sold to one Melville and others, the purchasers, certain land on certain terms and at a certain price. The agreement provided for interest at the rate of 8%. For good consideration the defendant assigned the agreement of sale to the plaintiff. One of the terms of that assignment was that the defendant guaranteed the sums due from the purchasers under the agreement of sale if they defaulted. Later, the purchasers asked the plaintiff for an extension of time for payment of the principal and interest due under the contract of sale. The plaintiff agreed to give the purchasers an extension upon payment of interest at 15%. The original interest was 8%. It was held that the defendant was discharged.

25. The facts of that case are very similar to those in the case before us. Elwood, J. in his judgment in that case quotes with approval that part of the judgment of Cotton, L.J. in Holme v. Brunskill⁽⁴⁾ which is quoted above.

26. He also says this:-

"As I stated above, I think the fair inference to be taken is, that there was an agreement with Maddaford to extend the time and to receive a higher rate of interest. If there was an agreement by him to pay and by the plaintiff, in consequence of that agreement, to extend the time, then, it seems to me, that the surety is discharged. There was an alteration in the terms of the original contract of sale which, at least, might be and probably would be, prejudicial to the defendant."

27. In the present case there is a possibility that Nicholson might not be able to pay the higher rate of interest and would therefore default although he has been given an extension of time in which to pay. This, we think, must be a matter of prejudice to the defendant so as to bring him within the rule in Holme v. Brunskill⁽⁴⁾ and therefore to discharge him from his undertaking.

28. It follows from the above that this appeal must be dismissed with costs.

Representation:

Litton, Q.C. & Eddis (Slaughter & May) for appellant/Plaintiff.

Zimmern, Q.C. & R. Mayne (D' Almada Remedios & Co.) for respondent/Defendant.

(1) (1929) 1 Ch.14.

(2) (1938) 2 All E.R. 127.

(3) (1910) 1 Ch. 464.

(4) (1877) 3 Q.B.D. 495 at p.505.

(5) (1918) 39 D.L.R. 33.