Agricultural and Rural Finance Pty Ltd v John Edward Atkinson & Ors

JURISDICTION : Equity Division Commercial List

DECISION : Leave to amend to be granted. Parties to bring in short minutes of order.

CATCHWORDS : Practice and procedure - Discovery - Leave to amend pleadings - Indemnity agreement - Punctual payment - Anshun estoppel - Separate question

Corporations Act 2001 (Cth) LEGISLATION CITED : Trade Practices Act 1974 (Cth) Australian Securities and Investments Commission Act 2001 (Cth) Contracts Review Act (1980)

Agricultural and Rural Finance Pty Ltd v Atkinson [2006] NSWSC 202 Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 CASES CITED : Henderson v Henderson [1843] 3 Hare 100; 67 ER 313 National Mutual Life Nominees Ltd v Leisuremark Australia Pty Ltd (unreported, Supreme Court of New South Wales, Einstein J, 30 November 1998) Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Rahme v Commonwealth Bank of Australia [1991] NSWCA 230

Agricultural and Rural Finance Pty Limited (Plaintiff) John Edward Atkinson (First Defendant) Clayton Utz Parties (159 Defendants) PARTIES : Oceania Agriculture Limited (Second Cross-Defendant)

Mr B Walker SC, Mr C Bevan (Plaintiff) COUNSEL : Ms A Spencer (First Defendant) Mr R Smith SC (Clayton Utz 159 Defendants) Mr G Ellis SC, Ms F Salama (Second Cross-Defendant)

Evangelos Patakas & Associates (Plaintiff) SOLICITORS : Wright Patton Shakespeare (First Defendant) Clayton Utz (Clayton Utz 159 Defendants) Colin Biggers & Paisley (Second Cross-Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50063/03 Agricultural and Rural Finance Pty Limited & Anor v John Edward Atkinson & Ors JUDGMENT The parties to the proceedings 1 These proceedings involve 216 defendants, 159 of whom are represented by Clayton Utz ["the CU defendants"]. The first defendant, Mr Atkinson, was separately represented, but adopted the submissions put forward by the CU defendants as his own. 2 The plaintiff, Agricultural and Rural Finance Pty Ltd ["ARF"] and the cross defendant, Oceania Agriculture Ltd ["OAL"] were also represented in these proceedings. The matters before the Court 3 It is common ground that proceedings number 50063 of 2003 have now progressed:

i. by way of a test case ["the Gardiner Test Case"] through a separate question determination heard and determined by Young CJ in Eq: [2006] NSWSC 202;

ii. through an appeal heard and determined by the Chief Justice, Basten JA and Handley AJA: [2007] NSWCA 235;

iii. through the grant by the High Court of a limited form of special leave to appeal: [2008] HCAT Trans 168. 4 It is unnecessary to repeat the record save as strictly essential to the matters presently before the Court. Broad overview of the proceedings 5 The headnote to the Court of Appeal decision suffices for present purposes to identify the nature of the proceedings:

On 28 April 1997, Oceania Agriculture Ltd ("Oceania") filed a prospectus with the Australian Securities Commission in relation to a project identified as the "Port Macquarie Tea Tree Plantation". Investors in the project acquired rights in respect of particular allotments of land on which tea trees would be planted. The project was intended to run for 17 years.

The project was promoted by Gerard Cassegrain & Co Pty Ltd ("GCC"), of which Oceania was a wholly owned subsidiary. The land was owned by Endwise Holdings Pty Ltd, which was owned half by GCC and half by the managing director of GCC, Mr Claude Cassegrain. The plantations were managed by Oceania.

The Corporations Law, as in force in 1997, required the appointment of an independent trustee to protect the rights and interests of the investors. The trustee was Australian Rural Group Ltd. Endwise Holdings leased the land to the trustee, which in turn sub-let the land to Oceania.

The investment scheme involved a financing arrangement whereby a company known as Agricultural and Rural Finance Pty Ltd ("A&R Finance") provided finance such that, in the first year of the investment, the investors were only required to provide approximately one third of the investment in cash. In addition, investors were required to make two advance interest payments on the loans, the first at the time of application and the second at the commencement of the second year. Most investors also entered into an indemnity agreement under which Oceania agreed to indemnify their obligations of repayment under the loan contracts in particular circumstances.

A&R Finance received an initial capital contribution from GCC of $300,000 to cover the cost of the loans. Thereafter, it obtained further funds through a "round-robin" arrangement, whereby the application moneys lent to investors were paid to Oceania and then on-lent to A&R Finance, which lent the funds to further investors.

On application, an investor was required to pay licence and management fees amounting to $24,060. Over the 17 years of the project, annual licence and management fees were to be paid to Oceania at an increasing rate, commencing at $1,854. It was anticipated that after the second year of the project, the licence and management fees would be met from the proceeds of the sale of the oil. This was based upon an anticipated increase in the price for tea tree oil. However, the price instead fell dramatically from $55 per kilogram in 1997 to $15 per kilogram by the time the project terminated in January 2003.

The project deed was an agreement between Oceania, the trustee, Endwise Holdings and GCC as "settlor". It provided that the project would continue in operation for 80 years, subject to earlier termination. The project deed provided that termination could occur if the office of trustee became vacant and a new trustee was not appointed within 60 days.

On 27 September 2002 an administrator was appointed to the trustee. The trustee retired on 5 November 2002. Pursuant to clause 46.4 of the project deed, the project terminated on 4 January 2003.

On termination, the First Respondent, A&R Finance commenced proceedings in the Equity Division against all of the borrowers, seeking payment of loan moneys which it claimed were repayable by each investor on cessation of the scheme. The proceedings involving the Appellant, Mr Gardiner, were pursued as a test case.

The borrowers argued that the indemnity agreement was effective and enforceable, thereby releasing them from any obligation to repay amounts under the loan agreements. Mr Gardiner also filed a cross-claim, asserting breaches of s 52 of the Trade Practices Act 1974 (Cth ), ss 995 and 996 of The Corporations Law and ss12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (Cth) .

Young CJ in Eq gave judgment in favour of A&R Finance and dismissed the cross-claim by Mr Gardiner.

On appeal, Mr Gardiner sought to reagitate each of the issues on which he was unsuccessful below. 6 The terms of the Indemnity Agreement stated that the indemnity "shall be effective and enforceable if… the Borrower has ceased to carry on the Business as a result of… any event described in Clause 31(a) of the Licence and Management Agreement…". Leaving aside the various arguments surrounding the construction of this clause, the ultimate ruling of the Court of Appeal was that the failure to replace the trustee within 60 days of a vacancy occurring was such an event [per Basten JA at [233], Spigelman CJ at [64], Handley AJA at [356]]. The punctuality issue 7 The indemnity agreement also provided that the indemnity would be "effective and enforceable" if the investor had punctually paid the amounts owing under the agreement [being a number of interest payments and payments in reduction of the principal falling due at various times pursuant to the agreement]. 8 A major issue which therefore arose in the proceedings was whether the payments of each individual investor had been made 'punctually'. The Court of Appeal divided over the appropriate construction of this term. Spigelman CJ [at 129] ruled that, in the peculiar context of this particular agreement, "the words "punctual payment" in the Indemnity Agreement extend to the situation where the Lender accepts payment as punctual." 9 Basten JA and Handley JA, in contrast, found that 'punctuality' required payments to be made on or before the due date [at 243 and 359, respectively], with Basten JA [but not Handley JA] going on to find that A & R Finance had waived its rights to rely on some of the particular instances of default [at 261 and 264]. 10 This issue of the appropriate construction of the word 'punctuality' in the above context has been granted leave to go on appeal before the High Court. The terms of the separate question order 11 For purposes which will be revealed below is necessary to set out the precise terms of the separate question order made at first instance:

The Court orders, by consent and subject to written undertakings by each of the Defendants for whom Clayton Utz acts to be bound on common questions by the findings of the "Gardiner Test Case", that:

1. Pursuant to Part 31 rule 2 of the Supreme Court Rules, there be decided separately from any other question in these proceedings all issues arising from the following:

(a) the claim by Agricultural and Rural Finance Pty Limited against Bruce Gardiner;

(b) the Cross-Claim filed by Bruce Gardiner on 19 September 2003;

(c) the Second Cross-Claim filed by Oceania Agriculture Pty Limited on 13 November 2003. (the "Gardiner Test Case") 12 At the same time the court noted:

"the agreement of the parties that, insofar as any question decided in the Gardiner Test Case extends to the proper construction of the Loan Agreements and/or the Indemnity Agreements sued on in the claim by [the plaintiff] against Bruce Gardiner, each of the Defendants is bound by the Court's determination of that question, subject to the Defendant seeking to rely upon surrounding circumstances, upon which the agreement entered into by that Defendant is to be construed, being different to the surrounding circumstances relied upon by Bruce Gardiner" 13 Further the defendants for whom Clayton Utz appeared ["the CU defendants"] provided undertakings to the Court "to be bound by the findings of the Gardiner Test Case".

The consensual matters falling which were the subject of agreement 14 It is plain that the defendants who can prove that they punctually paid the amounts referred to in clause 2 of the Indemnity Agreement should be entitled to do so as the proceedings pending in the High Court cannot affect that factual issue. 15 To that end the parties have agreed that:

i. Each of ARF and OAL give discovery on or before 19 August 2008 of all documents relevant to the question of whether any of the CU Defendants did, or did not, make punctual payments within clause 2 of the Indemnity Agreement.

ii. Each Defendant contending that it punctually paid the amounts referred to in clause 2 of the Indemnity Agreement:

a) Will on or before 9 September 2008 file and serve an affidavit in support of that contention;

b) The affidavit in (i) will give discovery of all documents relevant to the question of punctual payment. 16 Consent orders were made accordingly. 17 It is appropriate to note that Mr Walker SC, appearing for the plaintiff, made clear that an issue would arise in the shape of his client's contention that there was a sub-class of payer where funds were not cleared on cheques received. The proposition would be that 'punctual payment' within the meaning of the indemnity agreement required payment of 'cleared funds' rather than receipt of the negotiable instrument. The further issue 18 The further issue concerns pleading amendments proposed by the CU defendants by way of the application for leave to amend their cross-claims. The gravaman of the amendments is the contention that clauses 2(a) and 2(b) of the indemnity agreement were unjust in the circumstances relating to the indemnity agreement at the time it was made, within the meaning of section 7 of the Contract Review Act (1980) ["the Act"]. The proposed amendments [which have been formerly propounded and circulated] are best explained in the following terms put by counsel appearing for the CU defendants:

i. The substance of the Chief Justice's reasoning (110 - 126) was that if punctual payment was given its "strict interpretation" then payment which was late (but still accepted by ARF and OAL) meant that the benefit of the Indemnity which would operate for the 17-year period of the Project, would be lost, was not what the parties intended (paras 122 - 124).

ii. The object of clause 2 of the Indemnity Agreement was to secure performance of the obligation to repay on due dates under the Loan Agreement (paras 124 - 125).

iii. Late payment under the Loan Agreement did not provide any automatic consequence, but gave the Lender the option to declare the whole of the monies outstanding, payable (para 121).

iv. The proposed amendments which involve a defence and cross claim (the defence pleading the substance of what is pleaded in the cross claim) adopts the reasoning of the Chief Justice. It propounds the essential proposition that if the Basten JA and Handley JA construction is correct, then clause 2 operates unjustly because loss of the Indemnity was a provision not reasonably necessary for the protection of the legitimate interests of OAL within s 9(2)(d) of the Act, where the payments were made late but accepted by OAL as punctual payment.

v. The effect of clause 2 of the indemnity, if the majority construction is correct, is to impose on the Borrowers an obligation to repay the whole of the outstanding loan if the Project terminated whether at an early date or by effluxion of time.

vi. The liability to repay the Loan outstanding and interest is grossly disproportionate to the loss suffered by the payment being late.

viii. There is no discretionary reason why leave should not be granted. The fact that the High Court will hear the issues in paragraph 3(d) above on 31 July 2008 is no reason not to grant leave. 19 It is clear that the cross claim filed by Mr Gardiner [rejected at first instance] in effect involved three separate categories of claim:

i. a representational claim personal to Mr Gardiner to the effect that representations were made by a representative of the indemnifier as to the effect of the indemnity;

ii. a claim concerning a prospectus circulated for the Project, which is said to have been misleading and deceptive;

iii. a claim that in breach of OAL's obligations it engaged in conduct with ARF designed to terminate the project and hence to trigger liability under the loan agreement. 20 None of the cross claims by Clayton Utz clients which had sought to replicate Mr Gardiner's said cross claims are proposed to be further agitated. The Anshun proposition 21 It seems that between June and July 2006 [being after the orders had been made by Young CJ], cross claims were filed by approximately 140 of the defendants otherwise than Mr Gardiner, apparently for time limitation reasons. Apparently 18 of those cross claims included a Contracts Review Act claim, hence making it apparent that, at least at that time, Clayton Utz had given consideration to whether or not a claim under the Act should be made. 22 Mr Ellis SC, appearing for OAL, presented the Anshun argument for both his own client as well as the plaintiff. The gravaman of the contention may be shortly stated. The proposition is that:

i. a careful reading of, in particular, the Chief Justice's reasons at [110-126] makes clear that a question of fairness and/or of what was or was not reasonably necessary for the protection of different interests was litigated;

ii. this means that the so-called Anshun principle disentitles the relevant defendants from now seeking to litigate the Contracts Review Act claims. Dealing with the issue 23 There is no basis for the Court doing otherwise than permitting the application for leave to amend. The short position is that the party seeking to raise the so-called 'Anshun estoppel' may plead that very matter, hence leaving the issue for an informed decision in the usual way. 24 Mr Smith, appearing for the CU defendants, contended that there was no room for the application of any Anshun estoppel because such an estoppel does not run where a Contracts Review Act claim is sought to be raised as a defence: that is to say that this form of estoppel cannot apply to a defence. 25 I do not see that this is an occasion for a close analysis of the reach of the Anshun form of estoppel. This can be treated for determination on proper pleadings. 26 However the position being presently at an interlocutory stage and having been raised in an attempt to pre-empt the matter being litigated, the matter does call for some attention. 27 The so-called Anshun argument likely has considerable problems and this for the reason that the formulation of the separate question orders for the test case does not appear to have, at least expressly, closed out the possibility of other questions requiring determination. 28 Other likely problems for those who oppose the grant of leave to amend include the tenuous alleged connection between, on the one hand, comments by the Chief Justice and, on the other hand, the very different parameters raised in litigation concerning the Contracts Review Act. 29 It is appropriate to observe that in National Mutual Life Nominees Ltd v Leisuremark Australia Pty Ltd (Supreme Court of New South Wales, Einstein J, 30 November 1998, unreported) an examination was conducted of various parameters concerning when this form of estoppel may or may not apply. The Court considered the following extract from Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, noting [at 16] that an Anshun estoppel would operate if:

'. . . it appears that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it. Generally speaking, it would be unreasonable not to plead a defence if, having regard to the nature of the plaintiff's claim, and its subject matter it would be expected that the defendant would raise the defence and thereby enable the relevant issues to be determined in the one proceeding. In this respect, we need to recall that there are a variety of circumstances, some referred to in the earlier cases, why a party may justifiably refrain from litigating an issue in one proceeding yet wish to litigate the issue in other proceedings eg. expense, importance of the particular issue, motives extraneous to the actual litigation to mention but a few.' [ Port of Melbourne Authority v Anshun Pty Limited (1981) 147 CLR 589 at 602 - 603] 30 At the same time the Court noted the observations of Priestley JA in Rahme v Commonwealth Bank of Australia [1991] NSWCA 230, where his Honour [with whom Meagher and Hope AJA agreed] analysed Anshun to be authority for the following propositions [at 7]:

'1. That Wigram VCs extended principle as stated in Henderson [ Henderson v Henderson [1843] 3 Hare 100; 67 ER 313] is accepted as good law by the High Court;

2. That that principle applies inter alia, to category 3 cases, that is to a proceeding in which a party is asserting a cause of action which could have been raised, but was not, in a previous proceeding in which the same party was asserting a different cause of action based on substantially the same facts against the same party as the second proceeding is being brought; and

3. That the extended principle of Henderson will be applied to the second proceeding when it was unreasonable for the party asserting the cause of action in that second proceeding to refrain from raising it in the earlier proceeding against the same opponent party.' 31 Priestley JA said [at 8] that the relevant question was:

'. . . whether the claims sought to be raised in the Supreme Court under the Contracts Review Act : (a) could have been raised in the Federal Court proceedings, and

(b) raise matters so clearly part of the subject matter of the Federal Court proceedings that it was unreasonable on the part of the appellants not to have raised that claim in those proceedings.' 32 Priestley JA said that question (b) should not be answered by reference to any verbal formula. His Honour accepted a submission that the Court should ask itself:

'. . . was it unreasonable of the appellants to have refrained from raising the claims now made in the proceedings before the Federal Court?' 33 Answering this question in the affirmative, it followed that the appeal failed. Mr Walker's fallback contention 34 Mr Walker contended that the principled exercise of the Court's discretion would be to reject the grant of leave to now litigate a Contracts Review Act claim by cross claim. He was unable to point to any particular prejudice to the cross defendant save for referring to the necessary expenditure of time and money should the claim be permitted to be litigated. 35 There is no substance in this contention. The critical matter to be kept in mind concerns the undoubted fact that the separate questions were never framed in a fashion so as to close out the litigation of any matters other than the matters in respect of which the parties to the formulation of the separate questions undertook to be bound by the result. The test case nature of what was occurring left open the possibility that issues not determined by the separate question regime could later fall for determination. Decisions 36 For those reasons the leave to amend sought will be granted. 37 Parties are to submit short minutes of order accordingly. Costs may be the subject of written submissions to be furnished in soft copy to my Associate by Tuesday 20 May 2008.

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