Practice and procedure - Strike out application - Plea of sham agreement - Basis of plea an illegal agreement to deceive financier - Whether plea should be struck out

Practice and procedure - Strike out application - Plea of equitable estoppel - First strike out application in relation to similar plea unsuccessful - Case management considerations - Whether any basis to strike out plea - Plea should not be struck out

B McFarlane, 'Understanding Equitable Estoppel: From Metaphors to Better Laws' [2013] CLP 1, 5 11.

B Kremer, 'An "Unruly Horse" in a "Shadowy World"?: The Law of Illegality after Nelson v Nelson' (1997) 19 Sydney Law Rev 240, 240.

1 Character Design has brought a claim against Mr Kohlen arising from breach of an agreement between them involving the conversion of a joinery factory in Claremont into commercial and residential units. Character Design relies on five claims. Apart from the third claim, which is for around $49,000, each of the other claims, which are alternatives, is for roughly similar amounts of approximately $317,000 including interest.

2 In March 2013, Mr Kohlen applied to strike out the statement of claim. That application was dismissed by Master Sanderson. The statement of claim has since been substituted and amended.

3 As I explain in the conclusion to these reasons, as a matter of case management I had doubts about the proportionality of the cost and time of this application to the benefit it might achieve. But I concluded that it was appropriate to hear the application today in circumstances in which the new plea of a sham contract price raises a question whether the director of Character Design, by the pleading of his own company, is alleging that, subject to defences, he committed an indictable offence of conspiracy to defraud.

4 In all the circumstances of the case, none of the challenged paragraphs should be struck out.

5 The statement of claim in this matter has been through a number of iterations. This strike out application is brought in relation to the amended substituted statement of claim which was filed on 14 August 2013.

(1) a claim for breach of contract based on an allegation of a sham term, namely a sham contract price;

(2) a claim for 'an award on a quantum meruit basis' based also on an allegation of a sham term, namely a sham contract price;

(3) a claim asserting a debt based upon terms of the written agreement;

(4) a claim based on based on breach of a term of the agreement by Mr Kohlen delivering late possession of the Claremont property; and

(5) a claim based on equitable promissory estoppel.

7 Apart from claim (3), Character Design's position is that each of the other claims is for roughly the same quantum, $317,000 including interest. Claim (3) is quantified at $49,000.

8 The three claims advanced by Character Design which are relevant to this application are (1) and (2), the claims based upon the allegation of sham, and (5) the claim described as 'equitable promissory estoppel'.

9 Character Design performs building work. It has a single office holder and director, Mr Cottle.

10 Mr Kohlen, the defendant, was a joint tenant of a property in Claremont.

11 On 27 September 2006, Character Design and Mr Kohlen entered a written agreement. The written agreement was to convert a joinery factory on the Claremont Property into four commercial and three residential units.

12 The agreement comprised various documents including a document described as Medium Works Commercial Contract Conditions (the Conditions).

Character Design's first claim: breach of the 'true' agreement (pars 5, 6)

13 Character Design then pleads, in par 5 which is at the heart of this application, as follows:

In discussions between Cottle and the defendant in September 2006 the defendant and the plaintiff agreed that whilst the plaintiff and the defendant would enter into the Agreement providing that the contract sum payable by the defendant to the plaintiff was to be the contract sum specified in item 18 of the Schedule as $1,553,876.00 ('Contract Sum'), that would not be the true amount of the contract sum and that the defendant would pay to the plaintiff the actual cost of the Project to the plaintiff, plus a 10% margin for supervision and overheads ('Cost Plus Basis'), which the defendant would pay in accordance with the Agreement ('Common Intention') for the purpose of facilitating the defendant obtaining finance to fund the Project by enabling the defendant to represent to a financier that the cost of the Project was the Contract Sum whereas to the knowledge of the plaintiff and the defendant their true agreement was that the cost of the Project would be calculated on a Cost Plus Basis.

14 Character Design pleads in par 6 that the Contract Sum was a sham and that Character Design and Mr Kohlen's true agreement was their 'Common Intention' that Mr Kohlen would pay on a cost plus basis.

15 Character Design says that in breach of the 'true agreement':

(1) Mr Kohlen paid the eleventh invoice late. Character Design seeks interest at the contractual rate of 18% in the total amount of $14,342.16.

(2) Mr Kohlen did not pay all of the twelfth invoice. Character Design seeks payment of the outstanding amount, and interest, on that invoice for a total of $296,169.74

Character Design's second claim: A claim for a quantum meruit (par 8)

16 The second claim by Character Design is based on par 8 of the statement of claim. The claim is that if the Contract Sum is a sham but the Common Intention does not give rise to a binding agreement, or is unenforceable, then Character Design is entitled to an award on a quantum meruit basis.

17 A claim for a quantum meruit is, effectively, a plea of a form of action. It is Latin for 'as much as he deserved'. By the 19th century, prior to the abolition of the forms of action, quantum meruit had become a form of action within indebitatus assumpsit. Forms of action were abolished more than a century ago. But they are still commonly pleaded. Such a pleading might not be struck out if the basis upon which the entitlement to a fair value is clear. But it is not helpful today to plead forms of action, still less so in Latin.

18 The sole basis upon which Mr Kohlen seeks to strike out this paragraph of the statement of claim is that the paragraph depends upon the sham plea. It was common ground, and I accept, that the survival of this paragraph depends on the survival of the plea of a sham.

Character Design's third claim: A debt 'due and payable'

19 Alternatively, Character Design relies upon a clause of the Conditions which is pleaded as follows:

Within 7 days of [Character Design] giving [Mr Kohlen] a final payment claim [Mr Kohlen] must pay the final amount of the payment claim or, both give the plaintiff a final certificate evidencing [Mr Kohlen's] opinion of all monies due and payable between [Mr Kohlen] and [Character Design] on any account in connection with the Agreement and the reasons for any difference and pay that amount: Condition cl 28.1. If [Mr Kohlen] does not give the final certificate, within 7 days of receiving the final payment claim the amount of the final payment claim, if not paid, is deemed to be a debt due and payable: Condition cl 28.3.

20 Character Design says that it issued Mr Kohlen with a final written payment claim on 18 September 2009. That claim included the twelfth invoice ($224,476.18), interest payable on the eleventh and twelfth invoices ($11,391.98) and a claim for painting ($4,892). The total of these three amounts is $240,760.16.

21 Character Design says that Mr Kohlen 'did not within 7 days of receiving the final payment claim pay the amount of the final payment to [Character Design]'. Nor did Mr Kohlen give Character Design a final certificate evidencing Mr Kohlen's opinion of all monies due and payable between Mr Kohlen and Character Design on any account in connection with the contract and the reasons for any difference.

22 Character Design says that Mr Kohlen therefore owes it a 'debt due and payable' of $240,760.16 together with various contractual interest components.

23 Curiously, the prayer for relief does not include a prayer for payment of this debt. At the hearing of the strike out application, counsel for Character Design explained that this was an omission. Nothing turns on this omission and Mr Kohlen does not seek to strike out this debt claim.

Character Design's fourth claim: Failure to provide possession

24 The fourth claim by Character Design is that Mr Kohlen breached particular terms of the pleaded agreement because he failed to give Character Design possession of the site of the Claremont Property as required by the agreement before 27 October 2006.

25 Character Design says that it suffered a $49,000 loss due to the delay in obtaining possession until 12 February 2007.

26 This claim is also not relevant to the strike out application.

Character Design's fifth claim: promissory estoppel

27 The fifth claim by Character Design is for 'equitable promissory estoppel'.

28 Character Design relies upon the oral agreement about the 'true price' pleaded in par 5 (set out above at [14]). It relies upon that paragraph to assert that:

(1) It 'expected and assumed that it would perform work and invoice [Mr Kohlen] for work done by Character Design pursuant to the Agreement on a Cost Plus Basis' and that Mr Kohlen would pay Character Design on that basis. This is pleaded as the 'expectation'.

(2) Mr Kohlen actively induced Character Design to adopt the expectation in (1).

(i) the expectation could only be fulfilled by Character Design being paid by Mr Kohlen for work performed by Character Design on a cost plus basis.

(ii) Mr Kohlen knew that Character Design was performing work on the Project on a cost plus basis in reliance upon the expectation.

(iii) Mr Kohlen knew that Character Design's reliance on the expectation might cause detriment to Character Design if it were not fulfilled. See (3) below.

(iv) Mr Kohlen failed to deny to Character Design the correctness of the expectation on which Character Design conducted its affairs. See (5) below.

(3) In reliance upon the expectation Character Design performed work that it would not otherwise have performed and issued 12 invoices for work done, 11 of which were paid.

(4) Mr Kohlen knew or intended that Character Design would act in reliance on the expectation by reason of the oral agreement pleaded in par 5.

(5) There was no suggestion by Mr Kohlen to Character Design that it was not appropriate for Character Design to perform work on the project and to issue any invoices in accordance with the expectation until after work on the project had been completed and Character Design had rendered its twelfth and final invoice.

(6) Departure from the expectation would occasion detriment to Character Design by depriving it of payment for work on a cost plus basis performed by Character Design in relation on the expectation. This detriment is said to be the amount outstanding under the twelfth invoice, and interest arising from the eleventh and twelfth invoices.

(7) It would be unfair or unjust if Mr Kohlen were free to ignore the expectation.

29 The only evidence relied upon for this application was referred to by Mr Kohlen. He relied upon affidavit evidence from Mr Jacobson, filed in proceedings between the same parties relating to a caveat over several of Mr Kohlen's properties. Mr Jacobson's affidavit attaches a statutory declaration from Mr Cottle which refers to the building contract between Character Design and Mr Kohlen.[1]

30 Mr Kohlen submits that Mr Cottle 'relied on the written agreement it now calls a sham to support caveats lodged by [Character Design]'.

31 This evidence, and the submission, do not advance Mr Kohlen's case for three reasons.

32 First, Character Design does not say that the agreement between it and Mr Kohlen is a sham. It says only that the price contained in that agreement is a sham. There is a basic difference between an allegation that the whole of a transaction is a sham and an allegation that part of it only, such as one term, is a sham. Contrary to the submissions on behalf of Mr Kohlen, cases have recognised that a transaction can involve a sham only in part.[2]

33 Secondly, in another affidavit accompanying that to which Mr Kohlen referred, Mr Cottle says that he told Mr Kohlen that he thought that a costplus agreement was appropriate and that:[3]

... [Mr Kohlen] said to me words to the effect that the financier would not provide funding for a cost plus contract and would only accept a 'lump sum' contract. He then said words to the effect he and [Character Design] would sign a lump sum contract, but the parties agreed that the building contract between them was that the work would be performed, conducted and costed on a 'cost plus' basis. I was not entirely comfortable with this arrangement, however, nine months had elapsed since the First Building Contract had been signed and, during this period, [Character Design] had not worked on any other significant construction projects. I was desperate for [Character Design] to commence construction on the Development as soon as possible so I said words to the effect that I agreed to the proposal.

34 Thirdly, if there is some contradiction between Mr Cottle's earlier evidence and the case he now advances, which is a matter upon which I need not and do not make any comment, that is a matter for crossexamination. It is not a matter for a strike out application.

35 Mr Kohlen's strike out application is brought under O 20 r 19 of the Rules of the Supreme Court 1971 (WA) or in the Court's inherent jurisdiction.

(1) Paragraphs 5 and 6 (the sham claim) and 8 (the pleading of a quantum meruit based on a sham) on the basis that they

(iii) are otherwise an abuse of the process of the Court.

(2) Paragraphs 23 to 29 (the estoppel claim) on the basis that they disclose no reasonable cause of action.

37 There is a distinction between a power to dismiss a proceeding, or part of a proceeding because it discloses no reasonable cause of action and a power to strike out a pleading, with leave to replead, because the pleading is plainly deficient or embarrassing.[4]

38 As to striking out part of a pleading on the basis that the action is frivolous or vexatious or an abuse of process, or discloses no reasonable cause of action, this is a power 'that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried'. [5]

39 The principles to be applied in considering such an application to strike out were summarised by Master Staples in Kimberley Downs Pty Ltd v Western Australia,[6] as follows:

(1) The rule is intended to apply only to cases which are really not arguable and not to cases where under the previous practice demurrer would have been the proper course: Packard v Transport Trading and Agency Co Ltd [1912] WALawRp 44; (1912) 14 WALR 191 per Burside J at 195.

(2) On the application, not only must all the facts alleged in the statement of claim be accepted as true, but it must be taken for granted that on all other points the pleading is unassailable: Niven v Grant [1904] VicLawRp 14; (1903) 29 VLR 102 per Holroyd J at 106;

(3) Great care must be exercised to ensure that the plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal: General Steel Industries Inc v Commissioner for Railways NSW [1964] HCA 69; (1964) 112 CLR 125 at 130.

(4) The rule should not be reserved for those cases where argument is unnecessary to show the futility of the plaintiff's claim. Argument, even extensive argument, may be necessary to demonstrate that the plaintiff's case is so clearly untenable that it cannot succeed: General Steel Industries Inc v Commissioner for Railways NSW [1964] HCA 69; (1964) 112 CLR 125 at 130.

(5) As a general rule, a plaintiff is 'entitled... as of right to have his case heard, to have the facts found and then to argue the question of law as it arises before the trial judge upon the facts as found. It is only in cases in which it can be seen from the outset that, however the facts be found, there is no basis for the legal conclusion contended for by the plaintiff that the pleading should be struck out: Dalgety Australia Ltd v Rubin (Unreported, WASC Full Court, Lib No 5485, 24 August 1984, per Burt CJ).

(6) A court at first instance should be careful not to risk stifling the development of the law by summarily rejecting a claim where there is a reasonable possibility that, as the law develops, it will be found that a cause of action will lie: Hospitals Contribution Fund of Australia v Hunt (1983) 44 ALR 365 per Master Allen.

40 These principles have been confirmed on numerous occasions in this jurisdiction by the Court of Appeal,[7] and at first instance.[8]

41 The plea in pars 5 and 6 of the statement of claim is a plea that the contract price in the agreement between Character Design and Mr Kohlen was a sham.

42 In Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation,[9] the plurality said of the term 'sham', after reference to the decision of Lockhart J in Sharrment Pty Ltd v Official Trustee in Bankruptcy,[10] that

the term is ambiguous and uncertainty surrounds its meaning and application. With reference to remarks of Diplock LJ in Snook v London and West Riding Investments Ltd,[11] Mustill LJ later identified[12] as one of several situations where an agreement may be taken otherwise than at its face value, that where there was a "sham"; the term, when "[c]orrectly employed", denoted an objective of deliberate deception of third parties.

The presence of an objective of deliberate deception indicates fraud. This suggests the need for caution in adoption of the description "sham".

43 At a strategic conference on 20 June 2013, counsel for Character Design suggested that this was, indeed, the sense in which the concept of 'sham' was being used. He alleged that Mr Kohlen[13]

had to keep two different parties satisfied. One was the plaintiff [who] obviously was going to do the work. The other was the bank who was providing the funds and the bank wanted a fixed price contract. So as between the plaintiff and the defendant, the plaintiff and the defendant had agreed on a costplus contract but they needed a document signed for the bank's purpose which provided for a fixed price contract.

44 The amendments to pars 5 and 6 appear to reflect this submission.

45 Counsel for Mr Kohlen submitted that although Mr Kohlen vigorously denies the allegation of sham, the amended pars 5 and 6 of the statement of claim are a pleading of an illegal purpose, namely an agreement made for the purpose of facilitating Mr Kohlen to deceive a financier into believing that the cost of the Project was the fixed contract sum when Mr Kohlen and Character Design had agreed that the cost of the Project would be calculated on a cost plus basis.

46 Section 409 of the Criminal Code provides as follows:

(1) Any person who, with intent to defraud, by deceit or any fraudulent means

(b) induces any person to deliver property to another person;

(c) gains a benefit, pecuniary or otherwise, for any person; or

(d) causes a detriment, pecuniary or otherwise, to any person;

(e) induces any person to do any act that the person is lawfully entitled to abstain from doing; or

(f) induces any person to abstain from doing any act that the person is lawfully entitled to do,

47 It is a criminal offence for any person to conspire with another person to commit an indictable offence.[14]

48 In oral submissions, counsel for Character Design was unable to point to any basis upon which, if Character Design's claim were upheld, the plea would not involve a finding, on the balance of probabilities, that, subject to defences, Mr Cottle had engaged in a conspiracy to defraud.

49 I proceed on the assumption that the conduct pleaded could amount to criminal conduct in contravention of s 409 of the Criminal Code. But it should be said that this assumption was never explored in any detail. For instance, even if the pleaded facts were found at trial, it might be necessary to consider further issues in order to determine whether, on the balance of probabilities, Mr Cottle had committed an indictable offence. It might be necessary to hear evidence concerning Mr Cottle's intention about how he understood that the sham Contract Sum in the written agreement would 'facilitate' Mr Kohlen to obtain finance by a false representation to a financier.

50 In written submissions, counsel for Mr Kohlen argued that if a plaintiff has to rely upon an unlawful transaction to establish a cause of action then the Court will dismiss the plaintiff's case. This is the 'reliance' doctrine espoused by a majority of the House of Lords in Tinsley v Milligan,[15] although counsel did not cite that case.

51 Counsel for Mr Kohlen relied upon the decision in Smith v Jenkins.[16] He quoted the following passage:[17]

That is wellsettled doctrine. If a plaintiff has to rely upon an unlawful transaction to establish his cause of action, the court will dismiss his case: see passage in the judgment of Denning LJ, as his Lordship then was, in Marles v Philip Trant & Sons Ltd; Mackinnon, Third Party.[18]

52 Immediately before this passage, Windeyer J explained that the wellsettled doctrine to which his Honour was referring was that the maxim, arising from the Roman law of contract, ex turpi causa non oritur actio, applied in the law of torts. It applied where a plaintiff's claim is so mixed with the illegal transaction in which he and the defendant were jointly engaged that it cannot be established without going into proof of that transaction and therefore cannot be enforced in a court of law.

53 Then, after the passage quoted by counsel for Mr Kohlen, Windeyer J continued:

But that is as far as that rule goes ... . Those who like to interlard English law with Latin may be pleased to remember at this point two further maxims, one from Coke (4 Inst. 279), the other from Hale (2 Pleas of the Crown 386): "Nemo allegans turpitudinem suam est audiendus" [noone alleging his own turpitude is to be heard]; and 'Frusta legis auxilium quaerit qui in legem committit" [vainly does he who offends against the law seek the law's help]. But, whether the talk be in Latin or English, it is important to remember that in the present case it was the defendant, not the plaintiff, who asserted the illegality of the proceedings in the course of which the negligence sued upon occurred. The plaintiff did not have to say that the defendant was driving the car in breach of the law, only that he drove it negligently.

54 The immediate difficulty with Mr Kohlen's submissions is that this case does not involve an alleged transaction which can be construed to be illegal per se, but only one which was arguably entered into for an illegal purpose. But, it is at least arguable that the illegal purpose surrounds the entry into the written contract, not the oral contract. There is nothing illegal about cost plus agreements or fixed sum agreements. The alleged illegality concerns the purpose of the entry into the written contract containing a fixed price term which was submitted to be in contravention of s 409 of the Criminal Code. In other words, it is arguable that there is no reliance upon illegality. As counsel for Character Design submitted, arguably the illegality would be constituted by the enforcement of the written contract with the fixed price term.

55 A further difficulty for Mr Kohlen was that although his counsel cited numerous cases in his written submissions, he neglected to cite any Australian decisions which have developed the law of illegality in the last 30 years since Smith v Jenkins.[19] There have been many such decisions. A small selection of the decisions only of the High Court of Australia includes Nelson v Nelson,[20] Fitzgerald v Leonhardt,[21] Miller v Miller,[22] and Equuscorp Pty Ltd v Haxton.[23]

56 I will refer below only two of those significant decisions of the High Court of Australia simply to make the point that the question in this case of whether the contract is unenforceable due to illegality is not as straightforward as counsel for Mr Kohlen suggests. The question in this case cannot be disposed of on a strike out application.

57 The first case is perhaps the origins of the modern Australian approach to illegality. It is the decision of the High Court of Australia in Nelson v Nelson.[24] In that case, Mrs Nelson paid the purchase price for a property and house in Petersham, Sydney. At her instruction, the Petersham property was transferred into the name of her son and daughter. She did this as part of a plan to purchase another property with the benefit of a subsidised loan from the Commonwealth by falsely declaring that she did not own or have an interest in any other 'house or dwelling other than the one for which a subsidy is sought'.

58 The High Court of Australia unanimously held that Mrs Nelson had rebutted the 'presumption' of 'advancement' and that a declaration should be made that she held the beneficial interest in the property. A majority of the Court (Deane, McHugh and Gummow JJ) held that a condition of the declaration was that Mrs Nelson should be denied the benefit of her unlawful conduct.

59 As Deane and Gummow JJ observed,[25] counsel for one of the children relied upon the apparently pervasive effect of the dictum of Lord Mansfield in Holman v Johnson[26] (but not the result in that case which enforced the contract despite illegality) that: '[n]o Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act'. In the context of a claim for a resulting trust in Nelson v Nelson, their Honours then observed that the results in English cases such as Tinsley v Milligan which have applied the 'reliance' doctrine[27]

depend on the form in which a particular legal proceeding is cast and, unusually for equity, are achieved at the expense of substance. Further, they may operate indiscriminately and thus lead to harsh consequences as between particular parties.

60 Their Honours, and a majority of the Court, rejected the English 'reliance' approach. Speaking of this decision, Dr Kremer wrote that[28]

[a]lthough the ratio decedendi of this case concerns the effect of illegality on the ability to assert the existence of a resulting trust, four of the five Justices have laid the foundation for a cohesive doctrine of illegality in a form which is eminently suitable for application to contract and, possibly, to tort.

61 McHugh J in Nelson v Nelson[29] was explicit: '[t]he illegality principle is one of general application; it is not limited to proceedings in equity'.

62 In Miller v Miller,[30] the High Court of Australia considered the decision in Smith v Jenkins[31] in detail and the operation of the illegality in relation to the law of torts. Relevantly for this application, the plurality judgment of the Court explained that the same kinds of question that arise in relation to allegations of illegality in the constitution or performance of a trust (such as in Nelson v Nelson[32]) also arise in relation to illegality in making or performing a contract.[33]

63 In Miller v Miller,[34] the plurality approved comments from Deane and Gummow JJ in Nelson v Nelson[35] drawing distinctions between three different types of case involving illegality:

(i) an express statutory provision against the making of a contract or creation or implication of a trust by fastening upon some act which is essential to its formation, whether or not the prohibition be absolute or subject to some qualification such as the issue of a licence; (ii) an express statutory prohibition, not of the formation of a contract or creation or implication of a trust, but of the doing of a particular act; an agreement that the act be done is treated as impliedly prohibited by the statute and illegal; and (iii) contracts and trusts not directly contrary to the provisions of the statute by reason of any express or implied prohibition in the statute but which are 'associated with or in furtherance of illegal purposes'. The phrase is that of Jacobs J in Yango.[36]

64 In oral submissions, counsel for Mr Kohlen turned to a consideration of these more recent authorities and submitted that the pleading of par 5 was a pleading of a contractual agreement which was expressly or impliedly prohibited by s 409 of the Criminal Code.

65 I decline to strike out the plea of a sham contract price on this basis for three reasons.

66 First, there is nothing in s 409 which expressly prohibits all contracts made with an intent to defraud. It is also, at least, arguable that no implication can be made that s 409 prohibits all contracts made with an intention to defraud. Counsel pointed to no authority which suggested such an implication. Nor were any substantial submissions made on the point. For instance, if s 409 prohibited all contracts made with an intent to defraud, could a fraudster rely on that prohibition to refuse to tender counterperformance of a contract entered with an innocent party? It is highly undesirable to answer these questions without the assistance of a factual finding at trial. As the plurality judgment of the High Court in Miller v Miller[37] explained, quoting from McHugh J in Nelson v Nelson, the statement that ' "[n]o Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act", by its allembracing generality, fails to take sufficient account of the different ways in which questions of illegality may arise'.

67 Similarly, as Devlin J explained in St John Shipping Corporation v Joseph Rank Ltd[38] in a passage quoted by Heydon J (in dissent) in Equuscorp v Haxton,[39] 'A court should not hold that any contract or class of contracts is prohibited by statute unless there is a clear implication, or "necessary inference"...'

68 Secondly, as McHugh J explained in Nelson v Nelson,[40] an assessment of whether any statutory illegality precludes enforcement of a contract in the absence of an express or implied prohibition requires a consideration of (1) the proportionality between the seriousness of the illegality involved, as well as (2) the need to further the purpose of the statute.

69 The seriousness of the illegality involved requires consideration of the terms of the statute, here the Criminal Code, as well as the conduct which infringes that statute. An offence of conspiracy to defraud can occur in an extremely wide range and variety of circumstances.

70 So too, an assessment of the need to further the purpose of the statute may require a close consideration of the context in which the infringement occurred in order to determine the appropriate response consistent with the statutory policy. For instance, if the sham contract price is recognised or enforced, would the financier who Character Design says was defrauded have a claim against Mr Kohlen or Character Design or both? Would the issue of enforcement of the sham contract price be affected by whether the prime mover in an illegal scheme was Character Design (by Mr Cottle) or Mr Kohlen? Or which party benefitted from it or benefitted the most from it? The two latter considerations are sometimes described, again in Latin, as involving situations where the parties are non in pari delicto, that is, their acts are not of equal turpitude.

71 These considerations are exacerbated in the instance of an allegation of sham. As Kirby J explained in Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation,[41] 'where it is legally warranted, sham analysis affords the court a ground for ignoring, instead of merely construing, the primary documentary material in determining the rights and obligations of the parties'. An inquiry as to whether an act or document is a sham therefore 'requires careful analysis of the facts'.[42]

72 Thirdly, an agreement involving a sham, similar to this case, was enforced by the Full Court of the Supreme Court of South Australia in Pickersgill and Harvey v Tsoukalis.[43]

73 In that case, the appellants were a husband and wife who undertook the development of land. The respondent, a licensed general builder, carried out building work on the land. The respondent stopped work when the appellants refused to make further progress payments to him.

74 The respondent accepted that he had signed a document with the appellants which was a fixed price contract for the construction. But he said that the contract was a sham. He said that his real agreement with the appellants was an oral 'costs plus' agreement under which he would charge them the costs that he incurred in building plus an agreed margin of 10% with credit given for a separate payment by a third party.

75 The trial Judge found that the written contract was a sham. However, his Honour was not satisfied that the parties had agreed upon an oral costs plus arrangement. He found that the appellants had agreed with the respondent that the appellants would pay the respondent the amount by which the costs of construction exceeded $115,000 which was the amount of credit for a payment from the third party. The respondent was awarded the amount of his claim on a quantum meruit (as much as he deserved) basis.

76 As the Full Court of the Supreme Court of South Australia explained, in upholding the trial Judge's decision, '[t]he plaintiff's claim ... was that the [contract] had been drawn as a fixed price contract for the purpose of assisting the defendants in a deception of their bank but not to reflect their true agreement'.[44]

77 It does not appear from the decision, or from the trial judgment,[45] that any defence of illegality was raised in that case. Its authority as a precedent is therefore limited. Nevertheless, it is a further reason why caution should be exercised before striking out this claim.

78 Although I do not strike out the plea of sham, I say nothing about the strength of the plea or its prospects of success beyond surmounting the hurdle for strike out. It is noteworthy that in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd,[46] a joint judgment of the High Court of Australia said:

If there was an earlier oral agreement providing for limits to the respondents' liability to repay the sums lent, why did the respondents execute the written loan agreements? They could not say that those written loan agreements were shams. If they said that, the inference that the written agreements were executed to deceive the taxation authorities would be all too readily available, and no other competing inference appears to be open.

The 'equitable promissory estoppel' claim: pars 2329

79 Nothing in this application turns upon the language of the 'promissory estoppel' which is pleaded or its consequences. In oral submissions, counsel for Character Design confirmed that the 'estoppel' upon which he relied was to enforce positive rights in the same manner as was sought in Giumelli v Giumelli.[47] This doctrine is one in which the language that has developed over the last century is of very little assistance. In Van Dyke v Sidhu,[48] Barrett JA (Basten JA and Tobias AJA agreeing) said that 'the doctrine of proprietary estoppel enables a court to grant positive relief to a promisee by, for example, ordering a transfer of promised property by the promisor. Promissory estoppel, by contrast, entails restraint upon enforcement of existing legal rights inconsistently with a promise'.[49] This means that the use of the French 'estoppel', and the metaphor of stopping, in the context of proprietary estoppel is inapt.[50]

80 There are three reasons why I decline to strike out the estoppel claim.

1. The estoppel claim is not necessarily dependent upon the sham plea

81 The first basis upon which it was submitted that the estoppel plea should be struck out is the dependence of the estoppel plea upon the plea of sham which counsel argued should also be struck out. For the reasons above, the sham plea should not be struck out.

82 In any event, even if the sham plea had been struck out this would not necessarily mean that the estoppel plea should be struck out without leave to replead. The estoppel plea was not dependent upon the pleaded (and allegedly illegal) purpose for the alleged oral cost plus price agreement.

83 Even apart from my refusal to strike out the plea of sham, there are significant case management considerations which would have led me to refuse to strike out the estoppel claim. Those considerations are threefold.

84 First, a substantially similar estoppel plea was the subject of an earlier strike out application this year before Master Sanderson. His Honour declined to strike out the plea.[51] Counsel for Mr Kohlen said that the only significant change to the estoppel plea was that the pleaded 'active inducement' for Character Design to perform the work was previously that Mr Kohlen had proposed, and Character Design agreed, to enter into a written agreement with a fixed contract sum. The amendments removed the element concerning the 'proposal'.

85 Surprisingly, the written submissions by counsel for Mr Kohlen made no mention of the earlier application before Master Sanderson. After an email was sent to the parties by my associate prior to the oral hearing today, counsel said that he had omitted to make any submissions on this matter because he assumed that I was aware of it due to discussion of the previous strike out application at the strategic conference. Counsel then informed me that there were matters which did not appear from the written decision on the prior strike out application which, he accepted, meant that the issue of 'inducement' was a live issue at that hearing. Those matters included an email which had been exchanged between the parties but not copied to the Court.

86 Secondly, even if the concern about the cost and time of a further strike out application raising overlapping concerns could be overcome, the strike out of the estoppel claim would have only a marginal benefit in terms of the length of trial. Several other claims, including the claim for debt which Mr Kohlen accepts cannot be struck out, would still be litigated and all of those except one seek recovery of the same quantum.

87 In Barclay Mowlem Construction Ltd v Dampier Port Authority,[52] the Chief Justice made the following observations, which have been applied in cases subsequently but which it appears must still be repeated:[53]

[6] ... pleadings today can be approached in [the context of contemporary case management techniques and pretrial directions] and therefore in a rather more robust manner, than was historically the case; confident in the knowledge that other systems of pretrial case management will exist and be implemented to aid in defining the issues and appraising the parties to the proceedings of the case that has to be met.

[7] In my view, it follows that providing a pleading fulfils its basic functions of identifying the issues, disclosing an arguable cause of action or defence, as the case may be, and appraising the parties of the case that has to be met, the Court ought properly be reluctant to allow the time and resources of the parties and the limited resources of the Court to be spent extensively debating the application of technical pleadings rules that evolved in and derive from a very different case management environment.

[8] ... the advent of contemporary case management techniques in the pretrial directions to which I have referred should result in the Court adopting an approach to pleading disputes to the effect that only where the criticisms of a pleading significantly impact upon the proper preparation of the case and its presentation at trial should those criticisms be seriously entertained.

88 In any event, a third reason why I decline to strike out the estoppel claim is because the submissions of counsel for Mr Kohlen do not justify the estoppel claim being struck out.

89 Counsel for Mr Kohlen accepted that the plea could not be struck out on the basis that it was sufficient for the plea of 'active inducement' in par 24 to plead, as in the plaintiff's previous pleading,[54] that Mr Kohlen proposed the alleged oral agreement about price. But he said that it was not sufficient merely to plead (as the amended substituted statement of claim now does) that the parties agreed. In other words, merely agreeing to contract in the circumstances pleaded can never be sufficient to amount to active inducement.

90 I do not accept this submission. Whether conduct, including agreement, will constitute 'active inducement' will be highly fact dependent. It is possible that the plea in par 5 of the oral agreement might not amount to sufficient active inducement. But, depending upon the evidence about the circumstances and facts surrounding the alleged oral agreement it might also be possible that the plea could suffice. It is not necessary to say any more than that it is not appropriate to assess the content of questions of inducement as raised in this case in the absence of evidence.

91 Counsel for Mr Kohlen also submitted that the plea of Character Design, raised as an alternative to the element of active inducement, should also be struck out. That plea is set out above at [29]. Counsel argued that Character Design had not pleaded any detriment, such as 'any increase in the defendant's obligations that had to take place if the defendant was to pay the plaintiff on the alleged cost plus basis', or knowledge of that detriment by Mr Kohlen.

92 Counsel submitted that the plea in par 24(c) is insufficient. That plea is that Mr Kohlen 'knew that [Character Design's] reliance on the Expectation may cause detriment to [Character Design] if it was not fulfilled' (emphasis added).

93 Counsel quoted from the decision of Brennan J in Waltons Stores (Interstate) Ltd v Maher[55]

For the purposes of the second element a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant's property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff's reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conduction his affairs.

(Italics and bold typeface added).

94 It suffices to dispose of this point simply to say that the quotation from Brennan J does not support the submission by counsel for Mr Kohlen. As counsel for Character Design succinctly put it, the word 'may' does not mean 'had to take place'.

95 For these three reasons the estoppel claim should not be struck out.

96 Strikeout applications which would not substantially dispose of a proceeding are no longer common in circumstances of intensive case management.

97 Even less common is a second strike out application being made which raises matters which overlap with those raised on the first occasion. Even though the statement of claim in this case was amended after the unsuccessful first strike out application, the new plea of sham concerning the contract price was still based upon a factual substratum which involved overlapping matters. A previous claim for rectification, considered at the previous strike out application, involved an assertion that the written contract could be rectified to conform to the alleged agreed oral cost plus price.

98 Still less common is a strike out application in circumstances in which, even if it were entirely successful, there would remain a contractual claim for the same quantum where the length of trial would not be substantially affected by the presence of the additional 'sham' claim or estoppel claim.

99 For these reasons, I had real concern about the case management benefit of hearing this application, especially in light of the proportionality between the mounting legal costs of this action and the amount claimed. But, in light of the seriousness of the allegations, the fact that the parties both sought that the application be heard, and the potential for a trial to involve consideration of allegations of criminal conduct, it was desirable to hear from the parties as they had requested.

100 In the particular circumstances of this case, it is not appropriate to strike out either the plea of a sham contract price (or the associated quantum meruit claim) or the plea of estoppel.

101 There may be other issues with the pleading which were not agitated on this strike out application, but which may nevertheless require attention. One of those is the basis for, and utility of, various matters of declaratory relief sought by Character Design.

102 I will hear from the parties concerning any consequential orders if they cannot be agreed.

[1] Affidavit of Mr Jacobson sworn 3 July 2012, JHJ 1.

[2] Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516, 562 [148] (Kirby J); Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2007] FCAFC 4 [76] [78] (Edmonds J, Dowsett & Conti JJ agreeing).

[3] Affidavit of Mr Cottle sworn 26 June 2012 [16] - [17].

[4] Spencer v The Commonwealth [2010] HCA 28; (2010) 241 CLR 118, 131 [23] citing White Industries Australia Ltd v Federal Commissioner of Taxation [2007] FCA 511; (2007) 160 FCR 298, 309 [47]

[5] Spencer v The Commonwealth [2010] HCA 28; (2010) 241 CLR 118, 131 [24] (French CJ and Gummow J) in the context of the Federal Court of Australia Act 1976 (Cth) s 31A(2), citing Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87, 99 [27] (the Court).

[6] Kimberley Downs Pty Ltd v Western Australia (Unreported, WASC, Lib No 6414, 25 August 1986) 6 - 7.

[7] Kirika v Zurich Australian Insurance Ltd & Anor [2002] WASCA 233 (Wheeler J, Murray & Miller JJ agreeing); Neilson v City of Swan [2006] WASCA 94 [18] (Buss JA, Wheeler & Pullin JJA agreeing); Talbot & Olivier (A Firm) v Glenys June Witcombe & Anor [2006] WASCA 87; (2006) 32 WAR 179, 186 [22] (Steytler P, Pullin JA & Buss JA agreeing).

[8] Aquital Holdings Pty Ltd v Marlin Group Pty Ltd [2012] WASC 198 [11] (Pritchard J); Fairworld Holdings Pty Ltd v Burrup Fertilisers Pty Ltd (No 2) [2011] WASC 136 [21] - [22] (Allanson J); Boase v Axis International Management Pty Ltd [2009] WASC 331 [3] (Beech J); Joyce v Palassis [No 4] [2008] WASC 45 [33] (Le Miere J).

[9] Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516, 531 - 532 [35] - [36] (Gleeson CJ, Gummow & Crennan JJ).

[10] Sharrment Pty Ltd v Official Trustee in Bankruptcy [1988] FCA 179; (1988) 18 FCR 449, 453.

[11] Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802.

[12] Hadjiloucas v Crean [1988] 1 WLR 1006, 1019; [1987] 3 All ER 1008, 1019.

[15] Tinsley v Milligan [1993] UKHL 3; [1994] 1 AC 340.

[16] Smith v Jenkins [1970] HCA 2; (1970) 119 CLR 397.

[17] Smith v Jenkins [1970] HCA 2; (1970) 119 CLR 397, 414.

[18] Marles v Philip Trant & Sons Ltd; Mackinnon, Third Party [1954] 1 QB 29, 38.

[19] Smith v Jenkins [1970] HCA 2; (1970) 119 CLR 397.

[20] Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538.

[21] Fitzgerald v Leonhardt [1997] HCA 17; (1997) 189 CLR 215.

[22] Miller v Miller [2011] HCA 9; (2011) 242 CLR 446.

[23] Equuscorp v Haxton [2012] HCA 7; (2012) 246 CLR 498.

[24] Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538.

[25] Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538, 557.

[26] Holman v Johnson [1775] EngR 58; (1775) 1 Cowp 341, 343; [1775] EngR 58; (1775) 98 ER 1120, 1121.

[27] Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538, 558.

[28] B Kremer, 'An "Unruly Horse" in a "Shadowy World"?: The Law of Illegality after Nelson v Nelson' (1997) 19 Sydney Law Rev 240, 240.

[29] Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538, 608.

[30] Miller v Miller [2011] HCA 9; (2011) 242 CLR 446.

[31] Smith v Jenkins [1970] HCA 2; (1970) 119 CLR 397.

[32] Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538.

[33] Miller v Miller [2011] HCA 9; (2011) 242 CLR 446, 457 - 458 [24] - [26].

[34] Miller v Miller [2011] HCA 9; (2011) 242 CLR 446, 458 [26] (French CJ, Gummow, Hayne, Crennan, Kiefel & Bell JJ).

[35] Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538.

[36] Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd [1978] HCA 42; (1978) 139 CLR 410, 432; see also at 430 per Mason J.

[37] Miller v Miller [2011] HCA 9; (2011) 242 CLR 446, 458 [27] (French CJ, Gummow, Hayne, Crennan, Kiefel & Bell JJ).

[38] St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267, 288.

[39] Equuscorp v Haxton [2012] HCA 7; (2012) 246 CLR 498, 547 [121].

[40] Nelson v Nelson (1995) 184 CLR 538, 612 - 613.

[41] Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516, 561 [142].

[42] Hitch v Stone [2001] EWCA Civ 63 [64] (Arden LJ, Sir Martin Nourse & Kay LJ agreeing).

[43] Pickersgill and Harvey v Tsoukalis [2009] SASC 357.

[44] Pickersgill and Harvey v Tsoukalis [2009] SASC 357 [37].

[45] Tsoukalis v Pickersgill and Harvey [2008] SADC 32.

[46] Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471, 485 [39] (the Court).

[47] Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101.

[48] Van Dyke v Sidhu [2013] NSWCA 198 [39].

[49] Saleh v Romanous [2010] NSWCA 274; (2010) 79 NSWLR 453, 462 [74] (Handley AJA); DHJPM Pty Ltd v Blackthorn Resources Ltd [2011] NSWCA 348; (2011) 285 ALR 311, 333 [93] (Handley AJA), cf Meagher JA 323 [48].

[50] B McFarlane, 'Understanding Equitable Estoppel: From Metaphors to Better Laws' [2013] CLP 1, 5 11.

[51] Character Design Pty Ltd v Kohlen [2013] WASC 112.

[52] Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82, 84 (Martin CJ).

[53] 3 Oceans Wine Company Pty Ltd v Heyshott Pty Ltd [2011] WASC 12 [40] (Allanson J); Fairworld Holdings Pty Ltd v Burrup Fertilisers Pty Ltd (No 2) [2011] WASC 136 [14] (Allanson J); Bonney v Ngunythju Tjitji Pirni Aboriginal Corporation [2009] WASC 209 [11] - [14] (Beech J); Londsdale Investments Pty Ltd v OM (Manganese Ltd) [2009] WASC 188 [2] (Beech J); MacMahon Contractors Pty Ltd v Woodside Energy Ltd [2008] WASC 271 [20] (Templeman J); Commodore Homes WA Pty Ltd v Goldenland Australia Property Pty Ltd & Anor [2007] WASC 146 [24] - [25] (Beech J).

[54] Second further reamended statement of claim filed 31 May 2013 [5].

[55] Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387, 429.