Person under disability - Settlement agreement approved by court - Agreement not performed in part - Whether one party able to terminate agreement - Effect of court approval

Fair Trading Act 1987 (WA), s 10(1)

Transfer of Land Act 1893 (WA), s 63

Arabian v Tufnall and Taylor Ltd [1944] 1 KB 685

Dey v Victorian Railways Commissioners [1949] HCA 1; (1948) 78 CLR 62

McDermott v Black [1940] HCA 4; (1940) 63 CLR 161

Wood v Public Trustee (1995) 16 WAR 58

1 MASTER SANDERSON: This is the return of two chamber summonses. The first in time is the defendant's chamber summons of 11 August 2010. The plaintiff's chamber summons was lodged 14 October 2010. Effectively, both chamber summonses seek to agitate the same question. Before going to the relief sought by the parties, it is necessary to explain the facts which led to these applications. These facts are not in dispute.

2 In this action, the plaintiff sought to enforce against the defendant a mortgage registered in favour of the plaintiff over the defendant's property in Joondanna. On the plaintiff's case, default under the mortgage occurred as at January 2008. The default went unremedied, despite a notice of default and the plaintiff claimed it was entitled to possession of the property under the terms of the mortgage.

3 The defendant lodged a defence. She alleged that she did not receive any of the money advanced pursuant to the mortgage and that she never signed the mortgage or related security documents. By par 3.4 of her defence, she alleges the signature which purports to be her signature on the mortgage documentation is a forgery.

4 The defendant also advanced a counterclaim. She said she suffered from a 'special disability' as she was not able to read, write or speak English properly and because she was elderly and commercially inexperienced. She alleged the plaintiff knew of these matters constituting the special disability, but did not take appropriate steps to properly inform her of the true import of the mortgage and its security implications. In its reply and defence to counterclaim, the plaintiff denied the essentials of the defendant's case and pleaded reliance on the indefeasibility of title guaranteed pursuant to s 63 of the Transfer of Land Act 1893 (WA).

5 In the third party proceedings, the defendant sued her son. Her third party claim against him is based on the grounds that the third party, in effect, granted the mortgage on her behalf without her knowledge and consent. It is alleged the third party forged his mother's signature on the relevant security documents. It is also alleged that his conduct amounted to misleading and deceptive conduct, contrary to s 10(1) of the Fair Trading Act 1987 (WA).

6 After a court-held mediation, the three parties to the litigation entered into a settlement deed. That deed was dated December 2009. A heads of agreement was signed by the parties' solicitors at the mediation conference and a formal settlement deed was subsequently executed. The deed appears at various places, most conveniently at annexure KLB 2 to the affidavit of Karen Lea Browne, sworn 10 August 2010.

7 The defendant is a person under a disability. As the title to these proceedings note, she is represented by the Public Trustee. She has been so represented throughout the course of these proceedings.

8 The primary obligation in the settlement deed is contained in cl 3.2. The clause provides that the third party must pay to the plaintiff $550,000 within 21 days of the date upon which the court approved the proposed compromise in respect of the involvement of the defendant. The settlement sum represents what the plaintiff was willing to accept to have the mortgage transferred or discharged. Such approval was required under O 70 r 10 of the Rules of the Supreme Court 1971 (WA) as the defendant is in the litigation a person under a disability. On 19 January 2010, Acting Master Chapman made the following orders:

1. The proposed compromise is in the interest of the Defendant.
2. The proposed compromise which is annexed to these orders to be given effect in the terms incorporated in the deed.
3. There be no order as to costs.

9 Under the terms of the deed, the third party had to pay the settlement sum within 21 days of 19 January 2010 - that is, by 9 February 2010. He failed to do so. The sum has still not been paid and is unlikely ever to be paid by the third party.

10 In or about May 2010, case management for the action and the third party proceedings were reactivated by the consent of the parties. The proceedings had never been dismissed or discontinued, as the essential term of the settlement deed had not been performed. On 11 August 2010, the defendant took out her chamber summons. It sought the following orders:

1. This action, and all further steps in this action, be and are hereby permanently stayed, or alternatively stayed until further order;
2. A declaration that pursuant to clause 4 of the Deed of Settlement dated December 2009 the Plaintiff is barred and prohibited from taking any further steps in this action or any proceedings in connection with or related to the mortgage being registered dealing number J612805 or the subject matter of the dispute as defined in the Deed of Settlement;
3. Further and/or in the alternative, a declaration that unless and until the order of this Honourable Court made 19 January 2010 approving the compromise of the action and ordering that the comprise as set out in the Deed of Settlement be carried into effect, is revoked, recalled or otherwise rescinded by this Honourable Court, the Plaintiff is barred and prohibited from taking any further steps in this action or any proceedings in connection with or related to the mortgage being registered dealing number J612805 or the subject matter of dispute as defined in the Deed of Settlement;
4. The Plaintiff pay the Defendants costs of this application to be taxed and paid forthwith.

11 On 12 October 2010, the plaintiff purported to terminate the settlement deed by reason of the non-payment of the settlement sum. The purported termination occurred after the plaintiff made a written demand for payment and gave the third party a further seven days to pay the settlement sum. The third party was also given notice that the plaintiff intended to terminate the settlement deed if he (the third party) did not pay within this period of seven days. As I have said, the third party did not pay. The plaintiff then issued its chamber summons seeking, relevantly, the following relief:

1. ...
2. It be declared that the comprise and Settlement Deed entered into by all the parties in or about January 2010 and approved in respect of the Defendant being a party to the Deed pursuant to Order 70 rule 10 by order of Acting Master Chapman dated 19 January 2010, has been validly and effectively terminated by the Plaintiff by its notices of termination dated 12 October 2010.
3. Further or in the alternative, an order that the notice of termination in respect of the Settlement Deed issued to the Defendant alternatively the notices of termination issued to the Defendant and the Third Party, be approved and given effect in its or their respective terms.
4. It be declared the Plaintiff can proceed to progress the within action to trial and to judgment, and that the Defendant can proceed with Third Party proceedings to trial and to judgment.
5. Further or alternatively relief, including a declaration or declaration in some other form, be granted to the Plaintiff.
6. The costs of this application be costs in the cause of the action.

12 Before dealing with the arguments of the parties, it is appropriate to say something further about the terms of the settlement deed. The key to the whole settlement was the requirement that the third party pay the settlement sum to the plaintiff. By cl 3.3, within seven days of the payment of the settlement sum, the plaintiff was to provide to the defendant's solicitors either a transfer of the mortgage to the third party or a straight discharge of the mortgage. By cl 3.4, upon payment of the settlement sum, the parties were to draw up consent orders providing for dismissal of the action, the counterclaim and the third party proceedings, with no order as to costs.

13 By cl 3.5, upon payment of the settlement sum within the specified time - that is, within 21 days - each party would provide the other parties with release and discharges from all liability in relation to the claim, the counterclaim and the third party claim and any other matter.

14 Clause 4 of the settlement deed is headed 'Bar to Proceedings'. It is in the following terms:

4.1 Party not to take action

A Party must not at any time take or continue any action, suit or proceeding, or make any claim or demand of any nature against any other party or anyone else arising out of the circumstances that give rise to the Dispute.

4.2 Bar to proceedings

Other than in proceedings taken to enforce the provisions of this Deed, this Deed may be pleaded as a bar to any action or proceeding mentioned in clause 4.1.

15 There is nothing in the settlement deed which deals with a situation where the third party did not pay the settlement sum. That seems a remarkable position; but there it is - the settlement deed is silent on the question. There is also no provision in the settlement deed which allows for its termination. That is to say, there is no clause which allows a party to serve a notice of default on another party and where there is failure to remedy the default allowing for termination. Once again, that seems a remarkable omission.

16 The respective positions of the parties can be summarised in the following way. The plaintiff says the settlement deed is an agreement between the parties like any other agreement. They say the fact the settlement received court approval is of no consequence. They say there has been a breach of the fundamental term of the agreement, they have given notice of the default, the default has not been remedied and they were entitled to terminate the agreement, which they have done. They now say they are free to continue with the action.

17 On behalf of the defendant, it is said court approval of the settlement agreement has taken the settlement agreement out of what would be the normal contractual relationship between the parties with the effect the agreement cannot simply be terminated by the plaintiff for alleged breach of its terms. It is said despite the purported termination, the agreement remains on foot and the plaintiff's entitlement is to pursue the third party for the settlement sum. The defendant says it is not open to the plaintiff simply to seek to reactivate the action to enforce the mortgage.

18 Two preliminary points ought be made before the position of the parties is analysed. First, both parties were satisfied for the purposes of this argument there was no ambiguity in the settlement deed. Each party reserved their position on this issue, but both were content I should deal with the matters raised in the respective chamber summonses on the basis the deed was clear in its terms. In my view, it is arguable that the settlement deed is ambiguous. For instance, by cl 3.5, each party offers the other release and discharge. But that release and discharge is said to be 'in consideration of payment of the settlement sum'. So presumably the release and discharge is not available until the settlement sum is paid. Yet, cl 4 offers a bar to proceedings and seems to operate irrespective of whether the settlement sum has been paid or not. It may be those two paragraphs can be reconciled. However, I wish to emphasise nothing in these reasons deals with the proper interpretation of the agreement itself.

19 Second, both parties are satisfied the issues raised in the chamber summonses can be dealt with in the context of these proceedings. Neither was of the view it was necessary to issue fresh proceedings to ventilate these proceedings. In my view, that is the correct approach. Other than assisting the court's financial position, it would serve no useful purpose to issue fresh proceedings.

20 It is convenient to deal first with the defendant's submission. The primary submission was approval of the settlement deed converted what would otherwise have been a contractual arrangement into an order of the court. Order 70 r 10(1) is in the following terms:

1. Compromise of action by person under disability

(1) No settlement or compromise, and no acceptance of money paid into court, whenever entered into or made, in any cause or matter (other than an appeal to the Court of Appeal) in which there is a claim by or on behalf of or against a person under disability, shall be valid unless it is approved by the Court.

21 The wording of the rule is curious. The settlement is not 'valid' until approved by the court. Presumably, that implies something different from 'effective'. It also embodies a different concept from 'void' or 'voidable'. The Australian Concise Oxford Dictionary defines 'valid' as 'sound and sufficient, executed with proper formalities; legally acceptable'. Clearly, there is no impediment to a guardian ad litem entering into a settlement. The question is what effect court approval has on the character of that settlement.

22 Before dealing with that question, it is appropriate to say something about the nature of the court's jurisdiction. In Wood v Public Trustee (1995) 16 WAR 58, 62 (Pidgeon J, Rowland & Franklyn JJ concurring) said:

As the plaintiff is under a disability, a person liable to pay damages could not be certain that an agreement to compromise is enforceable unless that agreement has the approval of the court. A court of equity has an inherent power to grant that approval which if will exercise if it is satisfied that it is for the benefit of the person under a disability. This power is inherent and is not dependent upon the Rules of Court. The rules merely provide a framework to enable the court to exercise the power it has.

23 After referring to a number of authorities, his Honour then went on:

It would be unsafe for a defendant to enter into a compromise with a plaintiff under a disability suing by a next friend as such a contract may well be voidable.

24 His Honour there uses the word 'voidable'. Other authorities go further and say any agreement is void without the approval of the court: see Dietz v Lennig Chemicals Ltd [1969] 1 AC 170 per Lord Pearson at 189.

25 It is unnecessary for the purposes of this case to determine what the correct position might be. The settlement deed had as a condition precedent approval of the court. That approval was obtained. So, to adopt the wording of the rule, the agreement was 'valid'. The defendant goes further. It says not only was the agreement valid, but on approval became an order of the court.

26 In his written submissions counsel for the defendant put the position this way (par 16):

The settlement in effect becomes the subject of a Court order and subject to the Court's supervision. Accordingly before any party can terminate the settlement (if any power to do so exists) or otherwise proceed with the action the subject of the court's order approving settlement, that party must seek and obtain the discharge or variation of the court's order approving a compromise.

27 That statement of principle is unsupported by authority. In the previous paragraph of his submissions, counsel did refer to the English decision of Arabian v Tufnall and Taylor Ltd [1944] 1 KB 685. The facts in that case as taken from the headnote were as follows:

An infant, who had received workmen's compensation from his employers under an agreement which was signed by himself and his next friend and registered in a county court, and so for all purposes was enforceable as a county court judgment, subsequently brought an action claiming damages from the employers for the same injury, alleging negligence and breach of statutory duty. The defendants took the preliminary point that the registered agreement was an estoppel by record.

28 It is important to note the registration was under a statute - Workmen's Compensation Act 1925. It was that Act that mandated the registration of the agreement became an order of the court. Insofar as the defendant relied on this case to submit approval of the comprise rendered the comprise agreement an order of the court, the case does not support that proposition. No other authority was quoted. In my view, the defendant's submission ought be rejected.

29 The Arabian decision does have some relevance to the present case. There was a registered agreement which was pursuant to the statute an order of the court. The plaintiff sought to walk away from that agreement. Wrottesley J was mindful of the difficulty occasioned by the plaintiff's action. His Honour said (at 688):

In this dilemma, which might conveniently be resolved by Parliament when it has time, I think that the governing principle is that laid down in Stephens v Dudbridge Ironworks Co Ltd [1904] 2 KB 225 that neither the exercise of an option nor the making of an agreement is binding in the case of an infant unless it is for his benefit. Parliament never meant by s 29 to alter the law relating to infants and contracts. It is the interposition of the court, charged with the duty to watch over the infant's interests, that lends sanctity to the judgment for or against an infant and binds him ... In workmen's compensation cases the same matter is taken care of by the provisions of s 25 of the Workmen's Compensation Act, 1925, but nowhere is there anything to enable the county court, still less to compel it, to investigate the question whether it is in the infant's interest that his right at common law should be put an end to by a recorded agreement.

Until some such provision is made, I must give the infant the benefit of the general law, if I can without manifest injustice. In this case I can for (1.) I can allow the amounts he has received in assessing his damages, should he succeed, and (2.) I can accept his counsel's undertaking not to take any steps after judgment to enforce his agreement, for the reason that I should, if he succeeds before me, be of opinion that on the whole it is in the infant's interest that he should abandon his rights under the Workmen's Compensation Acts in order to assert his rights at common law. Turning to the authorities:- Ware v Whitlock [1923] 2 KB 418 ... is authority for saying that, if an agreement signed by a next friend is recorded, it must stand like any other judgment and is binding in the same way and to the same extent as if it were a formal agreement actually entered into by persons themselves competent to agree, for the formalities laid down in the Act for the protection of an infant have been complied with. It could, therefore, be impeached only on the ground of fraud or some improper means. At first sight this decision presents a real difficult in the way of the plaintiff, but what was decided there was that, so far as his remedies under the Workmen's Compensation Act were concerned, the infant was bound. If it could be suggested that the country court before recording such an agreement had either the right or duty to consider whether the facts disclosed a case at common law against employers, the case would be very different, but it is clear from s 25 sub-s 4 of the Workmen's Compensation Act, 1925, that the county court judge shall have regard to the question whether or not liability to pay compensation under the Act is doubtful, and this by implication seems to me to disable a judge from considering the infant's rights at common law. In other words, the estoppel by record relied on here is limited to proceedings under the Workmen's Compensation Acts and the case must proceed.

30 Care must be taken with this decision. It was clearly bound up with the Workmen's Compensation Acts. Both decisions mentioned by his Honour also relate to those Acts. But the decision does suggest once an agreement receives the approval of the court it 'is binding in the same way and to the same extent as if it were a formal agreement actually entered into by persons themselves competent to agree'.

31 This would seem to be the position in Australia. In Dey v Victorian Railways Commissioners [1949] HCA 1; (1948) 78 CLR 62, the High Court considered whether or not infant beneficiaries whose case was purportedly settled by their mother were bound by the terms of the settlement. No next friend was appointed and the infants were not made party to the proceedings. The court unanimously agreed the infants were not bound by the purported compromise. In his judgment, Williams J said (at 112):

In Gregory v Molesworth (1747) 3 Atk 626, at p 627 ... Lord Hardwicke LC said:

'it is right to follow the rule of law, where it is held an infant is as much bound by a judgment in his own action, as if of full age; and this is general, unless gross laches, or fraud and collusion appear in the prochein amy, then the infant might open it by a new bill.'

In Crib v Kynock Ltd (No 2) (1908) 2 KB 551, at p 561 Buckley LJ said:

'The point was taken that the workman in this case was an infant ... There is nothing in the point ... the litigation, duly commenced in the name of the infant by a next friend, was prosecuted to judgment. In such case an infant is just as much bound by the proceedings as if he were an adult. If authority be needed, Neale v Electric & Ordnance Accessories Co Ltd is authority for the proposition.' See also Condon v Mudgee Council (1945) 45 SA (NSW) 258. Accordingly, if the infants have duly applied for and obtained an award of compensation under the Workers' Compensation Act in the manner prescribed by the rules, they would have been barred like the widow from suing for damages under the Wrongs Act. But, apart from a direction by the Board under the proviso to rule 8, the infants could only have duly applied, if the application had been commenced in their names by a next friend, and their interests had been protected by the presence of a next friend who would have been responsible for the proper conduct of the proceedings on their behalf, and subject to the supervision which the court exercises over a next friend in a conduct of proceedings.

32 In my view, once the compromise agreement receives the approval of the court, it operates in the same way as any other commercial agreement. If, of course, it was obtained by fraud or there was some misconduct on the part of the next friend which compromised the court's approval, then equity might act - perhaps by granting an injunction to prevent a party seeking to enforce the agreement from taking action. There is no suggestion in this case the approval by the court was in any way compromised. But there is a difficulty with the agreement. It did not contemplate what would happen in the event the third party did not fulfil his obligation.

33 It was the plaintiff's position where there was no express term in the contract which allowed for termination for non-performance, the common law rights applicable to all contracts applied. In particular, the plaintiff relied upon what was said by Dixon J (as he then was) in McDermott v Black [1940] HCA 4; (1940) 63 CLR 161 at 184 - 185:

The distinction between accord executory and accord and satisfaction remains valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one. ... The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed.

34 It was the plaintiff's position in this case any compromise only became effective on actual payment of the settlement sum, not merely when the third party promised in the settlement deed he would pay. The act of payment was required for satisfaction, not the mere making of a promise to pay. To support this proposition, counsel referred to cl 3.3 of the settlement deed. That clause required the plaintiff 'within 7 days of receipt of the Settlement Sum' to either transfer the mortgage to the third party or to provide the defendant's solicitor with a discharge of mortgage. That meant if, and only if, the third party paid the settlement sum would the mortgage be discharged.

35 Counsel also referred to cl 3.4. This clause required the parties to file consent orders subsequent to payment being made by the third party. It was counsel's submission this clause further indicated the plaintiff retained its rights unless and until payment was made by the third party. Counsel submitted this position was further reinforced by cl 3.5 of the settlement deed. The release and discharge anticipated by that clause was said to be 'In consideration of payment of the Settlement Sum within the time stipulated in clause 3.1 of this Deed'. Counsel highlighted the fact there was specific reference to actual payment, not merely the giving of the promise to pay on the part of the third party. Further the release and discharge only became effective if such payment was made within the 21-day period.

36 On behalf of the defendant, reference was made to cl 4 of the settlement deed. It was submitted continuation of proceedings were prohibited by that clause. All any party could do was take proceedings to enforce the provisions of the settlement deed. It was said the effect of the deed was to convert the plaintiff's right of action against the defendant into a right to recover from the third party the amount he undertook to pay. Effectively, what was submitted on behalf of the defendant was the agreement fell into the first category of the two discussed by Dixon J in the McDermott decision.

37 In my view, the submissions put on behalf of the plaintiff ought be accepted. This settlement deed clearly contemplated payment by the third party being a precondition to discharge of the mortgage and termination of legal proceedings. If that were not so, on signing of the agreement a discharge of the mortgage should have been provided, together with signed consent orders. The interpretation of the agreement advanced by the defendant is simply unworkable. As I mentioned early in these reasons, applying the defendant's interpretation would mean the mortgage would remain on the property and proceedings would remain on foot. That would mean the defendant or her estate would only ever be able to sell the property subject to the mortgage or upon its discharge. There was no suggestion pursuant to the agreement or otherwise the defendant could force the plaintiff to discharge its security. The only way that could occur was if the third party made payment pursuant to the agreement.

38 Once that point is reached, it is a question of whether the plaintiff has taken the proper steps to bring the agreement to an end. In my view, it has. There is nothing more that it should have done or could have been required to do. The defendant did not argue otherwise. In the circumstances, then, I am satisfied the agreement has come to an end and the defendant should have the declarations it seeks. Subject to hearing from counsel, I would propose to make orders in terms of the plaintiff's application and dismiss the defendant's summons. I will hear the parties as to costs.