Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : COMMONWEALTH BANK OF AUSTRALIA -v- PANKAJ OSWAL (IN HIS PERSONAL CAPACITY AND AS TRUSTEE OF THE BURRUP TRUST) [2012] WASC 128

Contracts - Construction of a loan agreement - Proper construction of clause prohibiting set­off or counterclaim - Turns on own facts

AD & JA Wright Pty Ltd v Custom Credit Corporation Ltd (1992) 108 FLR 45

Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation [1988] HCA 17; (1988) 164 CLR 662

Bechervaise v Lewis (1872) LR 7 CP 372

Coca Cola Financial Corporation v Finsat International Ltd [1998] QB 43; [1996] 3 WLR 849

Continental Illinois National Bank & Trust Co of Chicago v Papanicolaou [1986] 2 Lloyd's Rep 441

David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353

Hausman v Abigroup Contractors Pty Ltd [2009] VSCA 288; (2009) 29 VR 213

Langford Concrete Pty Ltd v Finlay [1978] 1 NSWLR 14

Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181

Murphy v Glass [1869] EngR 11; (1869) LR 2 PC 408

Norman v FEA Plantations Ltd [2011] FCAFC 99; (2011) 195 FCR 97

Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122

1 McLURE P: I have had the advantage of reading the reasons of Pullin JA, with whom Newnes JA agrees. I agree with Pullin JA that the primary judge erred in summarily rejecting the appellant's defence relating to the payment of $945,000 in break costs associated with a payment of principal under cl 10.1(s) of the loan agreement dated 25 October 2007 between Garuda Aviation Pty Ltd (Garuda) and the Commonwealth Bank of Australia (the Bank) (the Loan Agreement). Garuda paid those break costs (the paid break costs) to the Bank purportedly in discharge of an obligation under cl 3A.4(c) of the Loan Agreement.

2 The appellant guaranteed Garuda's obligations under the Loan Agreement pursuant to a deed of guarantee dated 25 October 2007 between the appellant (the guarantor), Garuda (the principal debtor) and the Bank (the creditor) (the Guarantee).

3 In my view, the appellant's claim based on the proper construction of cl 3A.4(c) of the Loan Agreement that the Bank was not contractually entitled to the paid break costs is reasonably arguable. That outcome is consistent with the primary judge's refusal to enter summary judgment for that part of the Bank's claim relating to outstanding break costs of $1.269 million (the outstanding break costs).

4 Unlike Pullin JA, I am satisfied it is reasonably arguable that the appellant is permitted to maintain in the Bank action under the Guarantee (the Action) his defence that the amount claimed by the Bank must be reduced by the paid break costs. These are my reasons for that conclusion.

5 The background is set out in Pullin JA's reasons and not repeated here unless required for an understanding of my reasons. The Bank pleads in its amended statement of claim in the Action that it formally terminated the Loan Agreement on or around 29 December 2010 (par 34). Garuda's indebtedness to the Bank for which the appellant is said to be liable under the Guarantee is pleaded as $US6.967 million and interest thereon. The Bank's summary judgment claim was for the sum of $US5,855,534.05, which figure is referred to in par 37(a)(iii) of the Bank's amended statement of claim as 'the capitalised principal debt as at 21 July 2011'. That capitalised principal debt includes the outstanding break costs.

6 As there is a reasonably arguable claim that the Bank was not contractually entitled under the Loan Agreement to the paid break costs, that leaves for consideration the Bank's contention that the appellant is prevented from answering the Bank's claim by way of any set-off or counter-claim that would not have been available to Garuda under cl 6.1(c) of the Loan Agreement. The Bank accepts that the Guarantee does not in terms or effect prevent the appellant from relying on a set-off or counter-claim that Garuda might have.

7 Clause 6.1 of the Loan Agreement concerns payments to the Bank. It nominates the date and time for making 'all payments under this Agreement' (cl 6.1(a)) and what is to happen if the due date is not a business day (cl 6.1(b)). Clause 6.1(c) provides:

All payments to be made by the Borrower under this Agreement will be made without set-off or counter-claim and free and clear of any withholding or deduction for any Tax, unless prohibited by law. If the Borrower is required to make any deduction or withholding from any payment made to the Bank, the Borrower must [pay] such additional amounts as are required to ensure that the Bank receives a net amount which is equal to the amount the Borrower was obliged to pay.

8 The appellant relies on cryptic pleas in his defence that the paid break costs 'are to be taken' as having been paid against the debt (excluding the break fee) then owed by Garuda to the Bank or Garuda is entitled to repayment of that sum (par 71) and that in all the circumstances, the appellant is entitled 'to an account' of the amounts actually owed (if any) by Garuda to the Bank and/or is entitled to set-off the amount of $945,000 (together with interest thereon) against the Bank's claim (par 72).

9 The appellant does not cite any authority for the proposition that a creditor is under a duty to account to a guarantor. What little authority there is does not support the proposition: AD & JA Wright Pty Ltd v Custom Credit Corporation Ltd (1992) 108 FLR 45. However, the thrust of the defence is that there should be a direct or indirect reduction in the Bank's claim for the paid break costs.

10 It is reasonably arguable that (1) Garuda paid the paid break costs to the Bank under a mistake (of law or fact, it matters not in this State); (2) the Bank is liable in unjust enrichment to repay the moneys to Garuda; (3) that claim gives rise to a defence of equitable set-off, which has the indirect effect of reducing Garuda's indebtedness to the Bank; and (4) but for cl 6.1(c), the appellant as guarantor is also entitled to rely on the defence of equitable set-off to reduce its liability to the Bank under the Guarantee.

11 In concluding that there is an arguable equitable set-off, I have applied the test which requires that an equitable set-off impeach the title of the creditor, in the sense that it would be unconscionable for the creditor to enforce the guarantee: Norman v FEA Plantations Ltd [2011] FCAFC 99; (2011) 195 FCR 97 [135] - [179]. Equitable set-off operates so as to impugn the creditor's right to assert that the moneys are owing by the principal debtor to the extent of the debtor's cross-claim but does not affect the position at law: Derham R, Derham on the Law of Set-Off (4th ed, 2010) [4.30].

12 The question for this court is whether the appellant has an arguable claim that cl 6.1(c) does not prevent him from maintaining in the Action his defence that the paid break costs should directly or indirectly (by equitable set-off) reduce his indebtedness under the Guarantee.

13 It can be accepted for present purposes that cl 6.1(c) does not apply to a reduction in the claimed indebtedness under the common law doctrines of abatement or recoupment. As to which, see Derham on the Law of Set-Off [2.123] - [2.134], [5.77] - [5.80].

14 Whether as part of the common law of abatement or otherwise, there is authority for the proposition that if a liquidated amount has been paid by the principal debtor to the creditor and it is or should be appropriated by the creditor to the guaranteed debt, the amount of the guaranteed debt will be directly reduced and no issue of set-off arises: Murphy v Glass [1869] EngR 11; (1869) LR 2 PC 408; Bechervaise v Lewis (1872) LR 7 CP 372; O'Donovan J and Phillips J, The Modern Contract of Guarantee (4th ed), Loose leaf service [11.750]. In those circumstances, the debt is directly reduced or extinguished by the creditor's receipt of moneys for which the principal debtor is entitled to be credited.

15 This dispute relates to mutual debts as between the Bank and Garuda (which would also entitle the appellant to rely on a legal set-off but that would be caught by cl 6.1(c)). It is reasonably arguable that the paid break costs should result in a direct reduction of Garuda's indebtedness to the Bank. There is no evidence that Garuda's indebtedness to the Bank was or should be accounted for in separate categories.

16 Moreover, I would need to be persuaded that cl 6.1(c), on its proper construction, is not confined to simply identifying the scope of the borrower's obligation in relation to the making of individual payments due under the Loan Agreement. That is, it is arguable that cl 6.1(c) says nothing about the way in which the borrower (or derivatively the guarantor) can defend legal proceedings for damages for breach of the Loan Agreement or alternatively a claim in debt, particularly after the Loan Agreement has been terminated (albeit prospectively).

17 For these reasons, I conclude that the primary judge erred in giving summary judgment for an amount which did not exclude the paid break costs.

18 I also wish to make some brief observations on the assumption that I am wrong in my conclusion that the appellant has an arguable defence in relation to the paid break costs that is not caught by cl 6.1(c) of the Loan Agreement.

19 On any view, cl 6.1(c) does not prohibit Garuda taking separate proceedings against the Bank in unjust enrichment for the recovery of the paid break costs. It would be an odd outcome if the guarantor's position was dependent upon Garuda, the principal debtor, having to voluntarily take legal proceedings to recover the moneys mistakenly paid to the Bank. Although a guarantor has a right of indemnity against the principal debtor for moneys paid under a guarantee, recovery of any judgment sum must often be unlikely, even if the principal debtor is not in liquidation. I would leave open the question whether the appellant as guarantor is subrogated to the position of Garuda as principal debtor for the purposes of a claim in unjust enrichment against the Bank as creditor or would himself have a claim in unjust enrichment against the Bank (with Garuda as a defendant if it is non-cooperative). These are all matters for another day.

20 Finally, if cl 6.1(c) does catch the appellant's defence in the Action, a stay of so much of the judgment corresponding to the paid break costs pending the determination of the separate action would be inappropriate. It would negate the purpose of the contracting out clause: Continental Illinois National Bank & Trust Co of Chicago v Papanicolaou [1986] 2 Lloyd's Rep 441.

21 For these reasons I would allow the appeal and set aside so much of the judgment that relates to the paid break costs.

22 PULLIN JA: This is an appeal against the judgment of Le Miere J who granted summary judgment for the respondent (the Bank) against the appellant (Mr Oswal) in the sum of US$4,821,655.46. The appellant contends that judgment should have been entered for $945,000 plus interest less than that sum.

23 The Bank sued Mr Oswal pursuant to a deed of guarantee (Facility Guarantee) by which Mr Oswal guaranteed the Bank payment by Garuda Aviation Pty Ltd (Garuda) of the secured moneys being, inter alia, all moneys owing or payable by Garuda to the Bank under a loan agreement dated 25 October 2007 (Loan Agreement) and all amounts which become payable under a chattel mortgage between the Bank and Garuda dated 25 October 2007 (Chattel Mortgage). The Facility Guarantee contained a provision (cl 11) which read:

As a separate and independent obligation, the Guarantor agrees that any of the Secured Moneys which are not recoverable from the Guarantor on the basis of a guarantee, because of:

(a) any legal limitation, disability or incapacity on or of the Debtor or the Guarantor; or

(b) any other fact, or circumstance,

in any case whether known to the Bank or not, are nevertheless recoverable from the Guarantor as the sole or principal debtor, and will be paid by the Guarantor as if any covenant or agreement by the Debtor to pay the Secured Moneys or any part of them had been a covenant or agreement of the Guarantor.

24 Pursuant to the terms of the Loan Agreement, the Bank advanced to Garuda the sum of US$27 million (the advance). Garuda used the funds to purchase an aircraft which was charged in favour of the Bank under the Chattel Mortgage.

25 In May 2010, Garuda repaid US$10.35 million in circumstances which are referred to below.

26 Subsequently, Garuda breached the terms of the Loan Agreement. Pursuant to the terms of the Loan Agreement, the Bank was entitled to make demand for repayment of the full amount of the advance. The Chattel Mortgage likewise became enforceable and pursuant to its terms the Bank was then entitled to appoint a receiver of the aircraft.

27 The Bank made demand on Garuda and when that was not complied with, the Bank made demand on Mr Oswal pursuant to the Facility Guarantee for payment of the outstanding amount of the principal and other moneys due under the Loan Agreement and all amounts payable under the Chattel Mortgage. The Bank also appointed a receiver of the aircraft, who subsequently sold it. The Bank also terminated the Loan Agreement.

28 The amount demanded of Garuda and Mr Oswal was not paid. The Bank then issued a writ against Mr Oswal. A statement of claim was filed by the Bank. The Bank pleaded the existence of the Loan Agreement, the Chattel Mortgage, the Facility Guarantee and the relevant terms in those documents. One of the terms of the Loan Agreement which was pleaded was cl 3A.4(c) which contained an agreement by Garuda to pay the Bank 'break costs'. The statement of claim pleaded the advance and that the US$10.35 million had been repaid. Breaches of the Loan Agreement by Garuda, the appointment of a receiver under the Chattel Mortgage, the demands made on Garuda and Mr Oswal, the termination of the Loan Agreement and the fact that the aircraft was sold were also pleaded. The Bank pleaded that as a consequence of the termination of the Loan Agreement, break costs of US$1.269 million were payable, along with the principal.

29 The Bank then applied for summary judgment. The application was supported by an affidavit as required by O 14 Rules of the Supreme Court 1971 (WA). The affidavit disclosed that the principal of US$27 million had been reduced by:

(a) the US$10.35 million payment referred to above;

(b) US$12,896,880 on or around 18 May 2011 as a result of the sale of the aircraft by the receiver; and

leaving a balance of US$5,855,524.05, which did not include costs and expenses claimed in the writ but not claimed in the application for summary judgment. The deponent deposed that the balance due included the break costs of US$1.269 million, calculated by reference to the amount payable by the Bank on the termination of an interest rate swap between the Bank and the Royal Bank of Scotland plc.

Le Miere J's decision on the summary judgment application

30 Le Miere J, in his reasons for decision, referred to three issues the parties had identified. They were:

(a) Mr Oswal said that the Bank's appointment of the receiver was beyond power or was for an improper purpose or was not in good faith;

(b) Mr Oswal said that the receiver sold the aircraft at grossly less than its fair market value;

(c) whether the Bank was entitled to the break costs of US$1.269 million.

31 His Honour decided the first and second issues against Mr Oswal and they are not raised again in this appeal.

32 As to the third issue about break costs due on termination, his Honour set out cl 3A.4(c) in the Loan Agreement which read:

(i) The Borrower may not repay any amounts under the Facility without the prior written consent of the Bank which, if given in its absolute discretion, may be conditional including the payment of Break Costs (if any).

(ii) The Borrower agrees to pay Break Costs where the termination of this facility or a payment by the Borrower pursuant to any provision of this facility results in the payment or satisfaction by indemnity of any amount on a date which is earlier than the date upon which such amount would otherwise be due to be repaid or satisfied by indemnity. Break Costs will be such additional amounts as may be necessary to compensate the Bank for the cost of re-employment of the funds prepaid at rates lower than the Cost of Funds provided that the Bank must use its reasonable efforts to minimise such cost.

(iii) The Advance, all interest and any other moneys (other than moneys referred to in clause 12) to become owing or payable by the Borrower to the Bank will be paid or repaid in USD.

33 His Honour also set out the definition of 'Break Costs' which appeared in cl 1.1 of the Loan Agreement and which applied unless the subject or the context otherwise required. It read:

Include any costs incurred by the Bank resulting from the termination of any currency derivative, option, interest rate swap agreement, forward interest rate agreement or similar arrangement entered into in connection with the Bank's obligations under this facility. Any determination by the Bank for the purposes of this definition will, in the absence of manifest error, be conclusive evidence of an amount of such break costs

34 His Honour said that the issue between the parties was whether the break costs Garuda agreed to pay under cl 3A.4(c)(ii) of the Loan Agreement included break costs falling within the definition of break costs in cl 1.1 of the Loan Agreement. The Bank submitted that it did. Garuda said that it did not and that the break costs which the borrower was required to pay under cl 3A.4(c)(ii) were confined to the break costs described in that clause. It was common ground that the sum of US$1.269 million paid by the Bank to the Royal Bank of Scotland constituted 'costs incurred by the Bank resulting from the termination of any ... interest swap agreement ... entered into in connection with the Bank's obligations under this facility' and hence was within the definition of 'break costs' defined in cl 1.1. His Honour also noted that it was common ground that the payment to the Royal Bank of Scotland was a payment not described by the second sentence in cl 3A.4(c)(ii). Mr Oswal's submission was that the second sentence in cl 3A.4(c)(ii) exhaustively stated the break costs which Garuda was obliged to pay by the first sentence of that clause.

35 His Honour concluded that Mr Oswal's construction was arguable and said that the final determination of the proper construction of cl 3A.4(c) of the Loan Agreement should await fuller and more complete argument at the final hearing.

36 After the matter had been argued, his Honour published reasons for decision which were made available to the parties on an embargoed basis. When the parties received the reasons, they observed, and his Honour was notified, that another issue which had been raised by Mr Oswal had not been dealt with in the reasons.

37 As a result, his Honour then dealt with the issue by adding two further paragraphs to the reasons for decision ([48] and [49] under the heading 'Overpayment'). To understand this fourth issue, it is necessary to refer to some material contained within the affidavit of Andrew Ross Macpherson, filed by Mr Oswal in opposition to the application for summary judgment. It is also necessary to refer to cl 10.1(s) of the Loan Agreement, whereby Garuda agreed that the Bank may undertake an annual revaluation of the aircraft by reference to the:

aircraft industry's 'Blue Book' ... for that aircraft type, condition and age at that time. Should a material adverse change in value of the aircraft be evident at that time, when compared to Blue Book value in September 2007, the Bank may require the borrower to meet a principal payment in addition to its next half-yearly interest payment as a 'top up' payment.

38 Mr Macpherson's affidavit revealed that on 2 February 2010, the Bank wrote to Garuda's representative referring to the Loan Agreement and to the fact that the value of the aircraft had reduced and that as a result, a top up amount of US$10.35 million was payable. The Bank offered Garuda an alternative to making the top up payment to reduce the loan balance. That alternative was to provide US$10.35 million as additional security in which case no break costs would be payable. There was no written reply by Garuda to the Bank's offer. Nothing happened until May 2010 when there was then an exchange of emails in which the Bank informed Garuda that the break costs payable as a result of the required top up payment of US$10.35 million were 'in the order of US$900,000'. Later emails reveal that the amount paid was AUD$945,000. It was therefore clear that the Bank's offer concerning the payment of additional security was not accepted. The US$10.35 million was paid in reduction of the loan amount. The affidavits did not depose exactly when the payment of $945,000 was made, but it was accepted by the parties that it was paid and it may be assumed that the payment was in May 2010. The break costs were the costs to the Bank of unwinding an interest rate hedge. It is clear that the payment of $945,000 was paid by Garuda as break costs in relation to the payment of US$10.35 million. Garuda did not purport to pay the $945,000 as a reduction of the principal debt of US$27 million.

39 Mr Oswal submitted before Le Miere J that the $945,000 payment was not payable on termination and could only be payable under cl 3A.4(c)(i), however, that clause only applied to voluntary payments by Garuda. Mr Oswal submitted that Garuda did not make a voluntary payment. He submitted that the US$10.35 million was paid as a result of a demand made by the Bank with which Garuda complied.

40 Le Miere J rejected Mr Oswal's submission. His Honour accepted the Bank's submission about the proper construction of cl 3A.4(c), holding that the payment by Garuda was a payment of an amount on a date that was earlier than the date upon which the money would otherwise have been due to be repaid, and that Garuda was obliged to pay break costs to the Bank pursuant to cl 3A.4(c)(ii). As a result, his Honour concluded that Mr Oswal's attempt to raise an arguable defence that the judgment should be reduced by $945,000, failed. This conclusion was based on his Honour's view about the proper construction of cl 3A.4(c). This was a surprising conclusion in view of his Honour's earlier conclusion in relation to the issue about the US$1.269 million, which was that the proper construction of cl 3A.4(c) raised a triable issue which would have to await a final hearing.

41 The Bank also argued that in any event, by reason of cl 6.1(c) of the Loan Agreement (set out below), Mr Oswal was not entitled to answer the Bank's claim by way of a set-off or counterclaim that would not have been available to Garuda and that the claim to reduce the amount due to the Bank by $945,000 was, in effect, an attempt to raise such an unavailable set-off or counterclaim. Le Miere J said it was not necessary to consider that argument.

42 Although the defence in the proceedings before Le Miere J is not strictly relevant in relation to the summary judgment application, it does reflect Mr Oswal's contention on this appeal. Mr Oswal pleaded in the defence that on a proper construction of cl 3A.4(c), the Bank had no right to require the payment of break costs when the US$10.35 million payment was made. The defence pleaded that in the circumstances, the payment of $945,000 'is to be taken' as having been paid against the debt then owed by Garuda to the Bank or that Garuda 'is entitled to repayment of that sum'. Paragraph 72 pleaded that in all the circumstances, Mr Oswal 'is entitled to an account of the amounts actually owed (if any) by Garuda to [the Bank] and/or is entitled to set off the amount of $945,000 (together with interest thereon)' against the Bank's claim against Mr Oswal.

(a) on a proper construction of cl 3A.4(c) and the definition of break costs in cl 1.1, the amount paid to unwind the interest rate hedge was not break costs; and

(b) break costs were not payable because the US$10.35 million payment was not a voluntary payment. This ground also depends on the proper construction of cl 3A.4(c).

44 The Bank filed a notice of contention relying on the argument which had been advanced before Le Miere J and which his Honour said it was not necessary to consider. It is appropriate to deal first with the notice of contention. The Bank, by its notice of contention, relied on cl 6.1(c) of the Loan Agreement. Clause 6.1(c) read:

All payments to be made by the Borrower under this Agreement will be made without set-off or counterclaim.

45 If the proceedings to recover the loan moneys had been against Garuda, Garuda would have been bound by cl 6.1(c). Clauses of this kind are enforceable: Coca Cola Financial Corporation v Finsat International Ltd [1998] QB 43; [1996] 3 WLR 849, 857 - 858; Hausman v Abigroup Contractors Pty Ltd [2009] VSCA 288; (2009) 29 VR 213. The purpose of such a clause is to prevent the holding up of payments while disputed cross-claims are litigated: Hausman [24]. Clauses of this kind are important to financiers and they frequently appear in contracts used in the banking industry, in international financing agreements and in building contracts.

46 Mr Oswal cannot ignore or alter the fact that as between Garuda and the Bank, the $945,000 was paid as break costs relating to the US$10.35 million payment. If, on a proper construction of cl 3A.4(c) and cl 1.1, the Bank had no entitlement to the $945,000 as break costs and it was paid by Garuda under the mistaken belief that it was obliged to pay that sum as break costs, then that is a matter for Garuda to raise. A mistaken payment may be recovered by an order for restitution: David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353, cf 383, 385, 391; Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation [1988] HCA 17; (1988) 164 CLR 662, 673. Such a claim would have to be made by Garuda.

47 Sometimes a guarantee may, by its terms (and without a clause like cl 6.1(c)), oblige a guarantor to pay only what a principal debtor is obliged to pay. In such a case, it may be possible for a guarantor to seek to prove a set-off or counterclaim which the principal debtor may have, subject to joining the principal debtor in the proceedings so it is bound by the outcome. See Langford Concrete Pty Ltd v Finlay [1978] 1 NSWLR 14; see also Derham R, The Law of Set-Off (4th ed, 2010) [18.24, fn 88] and [18.26].

48 However, a set-off or counterclaim would not have been open to Garuda in this case. If Garuda (or Mr Oswal if he is entitled to do so) wished to recover the mistaken payment, it would have to do so in separate proceedings. This is because cl 6.1(c) prohibits Garuda from raising a set-off or counterclaim in defence of proceedings to recover the secured moneys under the Loan Agreement.

49 As a result, Le Miere J's dismissal of Mr Oswal's submission that the debt should be reduced by $945,000 was correct, not for the reasons given by his Honour, but for the reasons set out above. Ground 2 of the Bank's notice of contention must be upheld.

50 Mr Oswal's grounds of appeal must be dismissed. The arguments advanced in support of them are claims in support of a set-off or counterclaim by Garuda. Clause 6.1(c) does not allow such a set-off or counterclaim. After the court reserved its decision, the respondent sought and was granted leave to make further submissions about this clause. The written submissions were brief and read:

An analysis of the authorities as to whether 'no set-off or deduction' provisions are a complete answer to those defences demonstrates a complete lack of uniformity in approach across various jurisdictions including Western Australia.

The state of the law is such that it would be inappropriate to determine such a question on a summary basis, rather the matter raised by the respondent's notice of contention should be dealt with at a final hearing by the trial judge.

The authorities in support of these two propositions are helpfully gathered together by Brereton J in Elite Promotions and Management Pty Ltd v 5A Investments Pty Ltd [2011] NSWSC 590; (2011) 80 NSWLR 686 [81] through to [95].

51 The submission noted that Brereton J referred to the decision of this court in Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122 [35] - [36].

52 The authorities gathered together in Brereton J's judgment were cases dealing with clauses in leases which provided that rent was to be paid without 'deduction' or without 'deduction whatsoever' or without 'abatement'. Some cases concluded that these words did not preclude an equitable set-off and others concluded to the contrary. In this court in the Sandbank case, an issue arose concerning a commercial lease which contained a covenant to pay rent 'without set-off (whether arising at law or in equity)' in addition to the words 'free and clear of all deduction whatsoever'. Murphy J, Pullin and Newnes JJA agreeing, noted the debate about whether phrases such as 'without deduction' exclude all rights of set-off, for example equitable set-offs. Murphy J concluded at [36] that it was unnecessary to resolve the divergence of authority because the clause in question contained the words 'without set-off (whether arising at law or in equity)' and therefore was unambiguous and precluded a set-off by the tenant for money had and received against the liability to pay rent.

53 Construing cl 6.1(c) requires the application of business commonsense. See Norman v FEA Plantations Ltd [2011] FCAFC 99; (2011) 195 FCR 97 [197] - [199]; Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 [43]. Applying that approach leads to the conclusion that cl 6.1(c) is unambiguous. Garuda promised that all payments made by it under the Loan Agreement would be made 'without set-off'. Mr Oswal guaranteed such payment. Also, by cl 11 of the Facility Guarantee, if the Secured Moneys was not recoverable on the basis of guarantee, then Mr Oswal agreed to pay the Secured Moneys as if any covenant or agreement by Garuda was a covenant or agreement by Mr Oswal. Thus Mr Oswal guaranteed or independently covenanted that the Secured Moneys would be paid 'without set-off'.

54 The expression 'without set-off' excludes all form of set-off, no matter what jurisprudential basis might exist for the set-off. Thus it excludes statutory set-off and equitable set-off. It excludes all of the four kinds of equitable set-off that the authors of Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed, 2002) have detected: see [37-035]. Therefore, the divergence of authority relied upon by the appellant does not affect the outcome of the appeal.

55 There is no doubt that rights of equitable set-off, including substantive equitable set-off (as described by Derham [4.29]), can be excluded by contract. See Derham [5.95], [18.34] (and the authorities there cited) and Meagher, Gummow and Lehane [37-090]. There was no suggestion from the parties that the bank was suing on a running or current account. Neither Garuda nor Mr Oswal claim that the $945,000 was a payment in reduction of a running balance. The payment made by Garuda was a payment made as break costs and not in reduction of the advance by the Bank. Mr Oswal contends that Garuda paid under the mistaken belief that it was obliged to pay that sum as break costs and is entitled to restitution. Such a claim is not a claim, and was not at any

stage asserted to be a claim, by way of the 'tightly confined' principle of abatement, as to which see Derham [2.123].

56 Mr Oswal said that he was concerned that the reasons given by Le Miere J in [48] and [49] would give rise to an issue estoppel, but that will not be so. Once Le Miere J decided that the proper construction of cl 3A.4(c) and cl 1.1 had to go to trial, then that is what will be decided at trial. His Honour erred in embarking on the process of construing cl 3A.4(c) when considering Mr Oswal's contention that the amount of the judgment should be reduced by $945,000. These reasons for decision give another explanation for dismissing Mr Oswal's contention which stand in place of Le Miere J's reasons. In any event, it is difficult to envisage circumstances where questions of issue estoppel could arise. If Garuda wishes to claim it made the payment of $945,000 under a mistake of fact, it will not be bound by Le Miere J's reasons because Garuda was not a party to the proceedings.