Agricultural and Rural Finance v Gardiner [2008] HCA 57

The borrower invested in an agricultural investment scheme growing tea trees in Port Macquarie. Under the scheme each investor was granted a licence over an allotment of rural land and would purchase seeds. The manager of the investment would then plant, maintain and harvest the trees and sell the oil on behalf of the investors.

The lender provided loans to many of the investors to allow them to invest in the scheme. The loan required ‘due and punctual payment’ of sums payable by the borrower. Investors who accepted finance from the lender also had the option of entering into a loan indemnity agreement with the manager. In return for a flat fee, if the investors made payments under the loan agreement punctually the manager would indemnify their obligations to the lender if the business ceased for a few specified reasons. If the indemnity was triggered, the lender would have recourse solely to the manger and not to the investor concerned.

The lender commenced proceedings against 215 borrowers who had invested in the scheme. This particular loan was run as a test case. The issue was whether or not the indemnity had been triggered (and the borrower released). This turned on whether or not the lender and the manager had waived the requirement for ‘punctual payment’.
 
At first instance the lender was successful (the Court held the indemnity was not triggered because the payments were not punctually made). The Court of Appeal overturned the decision on the basis that the payments were punctually made.

In the High Court the lender was successful with the majority of the Court deciding that “punctually” should be given its ordinary meaning. The Court held payment had to be made on the date contained in the agreement because:

  1. That interpretation is consistent with most dictionaries;
  2. Where there is a commercial document the Court usually gives the meaning which facilitates a business like approach;
  3. The Courts generally apply the definition of punctually in commercial context strictly.

The Court then considered whether there had been an election by the manager which meant that the indemnification was enforceable by the borrower. It was concluded that the lender had a choice between calling up the loan or accepting payment late. It was therefore the lender who elected not to enforce its right to accelerate the principal. This did not however alter the fact the borrower had breached the loan agreement. The indemnification agreement only attributed consequences if the obligation to make repayments was (or was not) met. Therefore, the manager had not elected to indemnify in circumstances where the payment was not made on time.

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