Babaniaris v Lutony Fashions Pty Ltd

Having regard to the grounds on which the trial Judge made the orders, it is apparent that the parties were correct in regarding the orders as final rather than interlocutory: Port of Melbourne Authority v Anshun Pty Ltd (No.1) (1980) 147 CLR 35 (HCt/Gibbs J); compare Carr v Finance Corporation of Australia (1981) 147 CLR 246, at 253-257, per Mason J; Hall v Nominal Defendant (1966) 117 CLR 423, at 439-441, per Taylor J; In re Page [1910] 1 Ch 489. Accordingly, it is appropriate to address the substantive issues argued on the appeal. Pleadings The appellant filed its application and statement of claim on 6 October 1995. The statement of claim pleaded the making of the Credit Agreement and the terms of that Agreement which required the appellant to make payments to Citibank NA equivalent to IWT. It alleged that the appellant had paid interest totalling $2,325,531 to Citibank NA in Singapore over the period 1 September 1984 to 31 May 1986 and that, during the same period, $232,553 had been paid to the ATO in respect of IWT. The statement of claim continued as follows: "8. The payments of interest withholding tax that are referred to in the preceding paragraph were made by the Applicant in accordance with the provisions of Section [sic] 128B(5), 221YL and 221YM [sic: 221YN] of the Income Tax Assessment Act, 1936 (hereinafter referred to as the Act') on the basis of a mistake of law on the Applicant's part regarding its obligation under the terms of the [Credit] Agreement in that the Applicant through its directors and management wrongly believed, at all material times, that interest withholding tax was the liability of the Applicant and not the Respondent. 9. In the premises the Respondent has been unjustly enriched at the expense of the Applicant and therefore the Respondent is liable to make Restitution to the Applicant in respect of interest withholding tax in the sum of AUD232,562.15 paid by the Applicant on behalf of the Respondent. 10. To the extent that the [Credit] Agreement had the purpose or the effect of requiring the Applicant to pay the said amounts of interest withholding tax in respect of interest due is void and/or unenforceable pursuant to Section 261 of the Act." The Credit Agreement and the "Grossing Up" Provisions The Credit Agreement was signed by the parties under power of attorney, in Singapore. The proper law of the Credit Agreement was expressed to be that of the State of New York. The appellant submitted to the jurisdiction of the New York courts over any action or proceeding relating to the Credit Agreement. The moneys advanced to the appellant under the Credit Agreement were initially in Swiss francs. The Credit Agreement provided for interest to be calculated by reference to the rates prevailing in the Singapore Inter-Bank Market. Clause 1.08(b) of the Credit Agreement was the "grossing-up provision": "Any and all payments made by the Borrower hereunder or under any instrument delivered hereunder shall be made free and clear of and without deduction for any present or future taxes...or withholdings....If the borrower shall be required by law to make any such deduction from any payment hereunder, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Bank receives an amount equal to the sum it would have received had no such deductions been made...". The Guarantee and Security The repayment of the amounts due under the Credit Agreement was guaranteed by Citicorp Australia Ltd ("Citicorp Australia"). By an indemnity agreement dated 29 May 1984, the appellant and other associated parties indemnified Citicorp Australia against all liabilities it might have under the guarantee. As security for the indemnity, the appellant executed a bill of encumbrance over certain parcels of land to secure what the bill of encumbrance referred to as "the moneys hereby secured". That expression was defined so as to include all moneys payable under the indemnity agreement and all moneys which the "Citicorp Group" (which included Citibank NA) might advance or which the appellant might become liable to pay to either Citicorp Australia or the Citibank Group. Payment of Interest and IWT Each month, at least while the moneys advanced under the Credit Agreement were denominated in Swiss francs, the appellant was notified of the interest due in Swiss francs. The notification was made through a representative office maintained in Australia by Citibank NA. The notification advised the total amount of interest due and specified 10 per cent of that amount as the sum that should be deducted from the interest payable and forwarded to the ATO. The notification requested the appellant to remit the remaining interest by telegraphic transfer to the account of Citibank NA at a nominated bank in Zurich, Switzerland. The appellant's practice was to deduct 10 per cent of the amount of interest due to Citibank NA, pay that sum to the ATO and remit the balance to Citibank NA at its Swiss bank. The statutory scheme governing the payment of IWT is explained in the joint judgment in David Securities, at 362. By virtue of s.128B(5) of the Income Tax Assessment Act 1930 (Cth) ("ITAA"), liability to pay withholding tax is imposed on the person who derives the income. The rate of tax is fixed at 10 per cent: Income Tax (Dividends and Interest Withholding Tax) Act 1974 (Cth). Part VI, Div.4 of the ITAA requires the Australian resident making interest payments to deduct the amount of the tax and pay it to the Commissioner: ITAA, ss.221YL, 221YN. The effect of the statutory scheme, as the joint judgment points out, is that the non-resident lender receives less than the full amount of interest provided for in a loan agreement, although the payments made by the Australian borrower are credited against the lender's Australian tax liability. ITAA, s.261 Section 261 of the ITAA is designed to protect mortgagors. It provides as follows: "261(1) A covenant or stipulation in a mortgage, which has or purports to have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage - ... (b) ...shall be absolutely void. 262(2) A covenant or stipulation in a mortgage, whether entered into before or after the commencement of this subsection, which has or purports to have the purpose or effect of including in or adding to the interest payable, in any specified circumstances, by the mortgagor, any amount in respect of income tax payable by the mortgagee upon the interest to be paid under the mortgage, shall be void to the extent only to which it has or purports to have that purpose or effect. ... 261(5) For the purposes of this section, mortgage' includes any charge, lien or encumbrance to secure the repayment of money, and any collateral or supplementary agreement, whether in writing or otherwise, and whether or not it be one whereby the terms of any mortgage are varied or supplemented, or the due date for the payment of money secured by mortgage is altered, or an extension of time for payment is granted." The expression "income tax", as used in s.261(1), includes IWT: s.128A(4). It has been common ground between the parties in these proceedings that the grossing-up provisions of the Credit Agreement would, if contained in a "mortgage" as defined in ITAA, s.261(5), be void by virtue of s.261(1). The Deed of Waiver By 1987, a dispute had arisen between the appellant and Citibank NA. In consequence of the dispute, Citibank Ltd, an Australian company apparently associated with Citibank NA, wrote to the appellant on 8 September 1987 offering to provide a letter of credit facility of A$12,454,000 for a term of two years, to be applied "to repay the existing loan from Citicorp Australia Limited to [the appellant]". Special Condition 6 of the letter was as follows: "6. Torrens Aloha Pty Ltd and guarantors to enter into a deed of agreement with Citibank N.A. (Singapore), Citicorp Australia Limited and Citibank Limited wherein all parties will waive their rights to litigate on the matter of foreign exchange issues arising out of the conduct of the existing loan facility." On 8 October 1987 a deed was executed, to which the appellant, Citibank NA, Citibank Ltd and Citicorp Australia, among others, were parties. The deed recited the terms of the Credit Agreement, a bill facility agreement, the guarantee and the indemnity agreement. The recital also noted that disputes had arisen between the parties and that the "parties have agreed to settle all their differences as hereinafter provided". The operative clause of the deed provided as follows: "1. The [appellant] Company and each of the Guarantors hereby release each of [Citicorp Australia and Citibank NA],...and each of their respective servants and agents from all sums of money, actions, suits, causes of action, proceedings, claims, accounts, damages, demands, costs and expenses whatsoever which any of them now has in any way arising out of or incidental to: (a) The Multi Currency Credit Agreement; (b) The Bill Acceptance Facility Agreement; (c) The Guarantee; (d) The Indemnity Agreement; (e) ... or any matter or thing referred to therein or the exercise or purported exercise of any rights, powers or remedies or discretions thereunder." The Proceedings It appears that in September 1994 one of the directors of the appellant received advice that cl.1.08(b) of the Credit Agreement was void by reason of s.261 of the ITAA and that, in consequence of the High Court's decision in David Securities, the appellant could recover tax paid from Citibank NA. Correspondence then took place between the parties. The application and statement of claim were ultimately filed on 6 October 1995. This was over nine years after the date of the last payment of interest to Citibank NA, and of the last payment of IWT to the ATO as alleged in the statement of claim. The proceedings were instituted almost exactly three years after the date of the High Court's judgment in David Securities (7 October 1992). By a notice of motion filed on or about 15 December 1995, the appellant sought an order that service of the application and statement of claim be effected by service at Citibank NA's representative office in Sydney. Alternatively, the appellant sought leave to serve the application and statement of claim outside Australia, pursuant to Federal Court Rules ("FCR"), O.8, r.2. On 21 December 1995, Citibank NA filed a conditional appearance. On the same date it filed a notice of motion. The motion, without submission to the jurisdiction of the Court, sought various orders in the alternative. These included orders • setting aside the application and statement of claim or service of the application and statement of claim, pursuant to FCR, O.9, r.7; • striking out the statement of claim, pursuant to FCR, O.11, r.16; and • dismissing the proceedings, pursuant to FCR, O.20, r.2. The trial Judge recorded a concession by counsel for Citibank NA that, if its motion were unsuccessful, there would be no need for the appellant's motion to proceed, because Citibank NA in that event would accept that its appearance was unconditional. On that basis his Honour "proceeded to hear [Citibank NA's] motion". The Rules FCR, O.8, r.1 provides that originating process may be served outside Australia in certain cases, including where the proceeding is founded on a cause of action arising in the Commonwealth: FCR, O.8, r.2(1) provides that service outside the Commonwealth is not valid unless the Court grants prior leave or confirms the service under O.8, r.2(4), or the person served waives objection by entering an unconditional appearance. In order to grant the applicant leave, or to confirm service, the Court must be satisfied, inter alia, that the proceeding is one to which FCR, O.8, r.1 applies and that the applicant has a prima facie case for the relief sought: FCR, O.8, r.2(2),(4). A respondent may enter a conditional appearance: FCR, O.9, r.6. However, the appearance becomes unconditional unless the respondent applies under O.9, r.7 and the Court makes an order under that rule. Order 9, r.7 empowers the Court, on an application made before entry of an appearance or within 14 days of a conditional appearance, to make an order setting aside the originating process or service of the originating process. Order 11, r.16 allows the Court to strike out the whole or part of a pleading if the pleading discloses no reasonable cause of action or is an abuse of process of the Court. Order 20, r.2(1) provides that the Court may dismiss a proceeding if it appears that no reasonable cause of action is disclosed or the proceeding is an abuse of the process of the Court. Evidence may be received on an application for an order under r.1: FCR, O.20, r.2(2). The Judgment Below The trial Judge noted that, in an application under FCR, O.9, r.7, the Court could consider whether an applicant had a prima facie claim to the relief sought, since that is a matter which the applicant must establish to obtain leave for service out of the jurisdiction under O.8, r.2. The power conferred by O.11, r.16 and O.20, r.2 involved similar considerations. It was for the respondent to show that the action was bound to fail, in accordance with the principles stated in General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125, at 129, and for that reason should not be permitted to go to trial. The trial Judge accepted Citibank NA's submission that the case as pleaded claimed amounts that had been paid by the appellant, not to Citibank NA itself, but to the Commissioner of Taxation. He also accepted that the relevant mistake could not be in relation to the payments made to the Commissioner, since those payments were made pursuant to the obligations imposed on the borrower by ss.221YL and 221YN of the ITAA. The mistake, if there was one, lay in the payment of the grossed-up amounts of interest to Citibank NA. If such payments had been made by the appellant (assuming the credit agreement to be a "mortgage"), s.261 would apply to the obligation to pay them, and the moneys could be recovered from Citibank NA. His Honour considered, however, that the defect in the appellant's pleadings could be cured by an appropriate amendment. If this were the only difficulty in the appellant's path, he would not have struck out the proceedings. But he thought that the appellant faced other obstacles. The parties had accepted that the provisions in the Credit Agreement relating to the grossing-up of IWT would, if contained in a "mortgage", be void as contravening s.261. The Credit Agreement itself was not a mortgage; the question was whether it fell within the extended definition of a "mortgage" in s.261(5) of the ITAA, as a "collateral or supplementary agreement" to the bill of encumbrance. The trial Judge held that the "better view" was that the Credit Agreement was sufficiently related to the bill of encumbrance to be collateral to it. This was so notwithstanding that Citibank NA was not a party to the bill of encumbrance, which secured the indemnity given to Citicorp Australia in respect of its guarantee to Citibank NA. For reasons that will appear, it is unnecessary to consider whether the trial Judge was right on this aspect of the case. The trial Judge considered that s.14(1)(a) of the Limitation Act, which imposes a six year limitation period for a cause of action founded on "quasi contract", applied to the appellant's case by virtue of s.79 of the Judiciary Act 1903 (Cth). Alternatively, the limitation period fell to be determined in accordance with New York law which, in the absence of evidence to the contrary, was presumed to be the same as the law of New South Wales. However, his Honour held that a cause of action created by a decision of the High Court changing the common law of Australia, should be taken to accrue at the date the decision is handed down and not before. Thus, the appellant's cause of action to recover the grossed-up amounts of interest paid to Citibank NA first accrued on 7 October 1992, the date of the judgment in David Securities, only three years prior to the institution of the proceedings. Accordingly, the cause of action was not barred by the Limitation Act. Despite this conclusion, the trial Judge held that the deed of release executed in October 1987 was effective to bar the appellant's cause of action for moneys paid under a mistake of law. It was enough that the claim was held by the appellant at the date of the deed and rose out of the Credit Agreement. The fact that it had not been agitated at the time the deed was executed did not prevent the deed applying to it. The trial Judge also held that the appellant's case could not be brought within FCR O.8, r.1, since the facts giving rise to the cause of action did not occur in Australia. The ingredients of the cause of action were the payment of the money and the mistake of the payer, being a mistake causative of the payment. The mistake occurred in Australia, but the payment took place in Switzerland, in accordance with the directions given to the appellant by Citibank NA. Therefore, the cause of action arose outside Australia. The trial Judge concluded that the proceedings should be set aside. He did not identify the rule under which he was proceeding, but his earlier reasoning suggests it could have been either O.9, r.7 or O.20, r.2, or both. The order actually entered was that the application be dismissed. An order in this form appears to be authorised by O.20, r.2, but not O.9, r.7. Procedural Issues There are some curious aspects to the present case. Mr Walker SC, who appeared with Mr Bell for the appellant, did not seek to uphold the appellant's claim as pleaded. He accepted that, since the payments made by the appellant to the ATO were made pursuant to a statutory obligation, the statement of claim did not allege a mistake of law. Rather, Mr Walker proceeded on the basis that the essence of the appellant's "substantive case" was accurately summarised by the trial Judge in the following passage in his judgment: "I have no doubt that if what occurred in the present case was that in addition to paying to the Commissioner the withholding tax the applicant also paid an additional grossed-up amount as the terms of the credit agreement provided, the terms of s 261 operated and if the applicant was able to show a relevant mistake the applicant would have been entitled, subject to defences to which reference will later be made, to recover the moneys paid by mistake." Although the appellant applied to the trial Judge to amend para.8 of the statement of claim, his Honour characterised the proposed amendment as "ambiguous". Mr Walker did not put forward a draft of an amended statement of claim reflecting the "substantive case". There appears to have been no evidence adduced as to when, if at all, the grossed-up payments were made to Citibank NA, although argument proceeded on the assumption that such payments were made at about the time the IWT was remitted to the ATO. (It may be that the letters identifying the monthly instalments due by the appellant included the grossed-up amounts, but this does not emerge from the documentation and the issue was not elucidated in the evidence.) Nor was there evidence as to where the grossed-up payments were made. If the same practice was followed in relation to the grossed-up payments as applied to the interest payments, the appellant would have remitted the sums to Switzerland. However, it is not clear whether this practice was followed. In the absence of amended pleadings, there is no express statement of the mistake of law upon which the appellant relies. In David Securities, the Full Federal Court, in circumstances very similar to the present case, identified the mistake as being "the existence of s.261 and its operation to render void the purported contractual obligation in cl.8(b) [to pay grossed-up interest]. This was a mistake of law for the purposes of this particular field of discourse, or a mistake as to law mixed with fact". David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1, at 34. The High Court in David Securities proceeded on the basis that this was the mistake alleged, and the proceedings were remitted for a finding to be made as to whether moneys were in fact paid pursuant to the mistake alleged: 175 CLR at 367-368. Presumably, the appellant in the present case alleges that it acted under the same mistake as that identified in David Securities and that the mistake caused it to make the relevant payments to Citibank NA. This is not an entirely satisfactory state of affairs, particularly as the limitation point assumed considerable significance in argument. However, the parties have debated the issues at some length, including the limitation point. Mr Bloom QC, who appeared with Mr Street for Citibank NA, argued that any cause of action available to the appellant, even if not yet precisely formulated, is statute barred. Since the case has been conducted on this basis, in my opinion the better course is to address the issues on the assumption, expressly adopted by the appellant, that its substantive case is that identified by the trial Judge, if not by the pleadings as presently framed. It is convenient to commence with the limitation point, which was raised on the appeal by Citibank NA's notice of contention. The Limitation Act Section 14(1)(a) of the Limitation Act provides as follows: "An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom he claims: (a) a cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed." Section 63 extinguishes the right and title of the person formerly having the cause of action: "63(1) ...on the expiration of a limitation period fixed by or under this Act for a cause of action to recover any debt damages or other money, the right and title of the person formerly having the cause of action to the debt damages or other money is, as against the person against whom the cause of action formerly lay and as against his successors, extinguished." Under the general law, a defendant had to plead a Statute of Limitation if it merely barred the plaintiff's remedy. If the plaintiff's right and title was extinguished, it was sufficient for the defendant to deny the plaintiff's right: De Beauvoir v Owen (1850) 5 Ex 166, at 177; 155 ER 72, at 77. Section 68A of the Limitation Act specifically addresses this question: "68A(1) Where in proceedings before a judicial tribunal a question arises as to extinction under this Division of a right or title, a party to the proceedings shall not have the benefit in those proceedings of any such extinction of that right or title unless, as part of the proceedings, he has pleaded or otherwise appropriately claimed in accordance with the procedures of the tribunal that the right or title has been so extinguished." Although not specifically cited in argument, reference should be made to s.56(1) of the Limitation Act: "(1)...where there is a cause of action for relief from the consequences of a mistake, the time which elapses after a limitation period fixed by or under this Act for the cause of action commences to run and before the date on which a person having (either solely or with other persons) the cause of action first discovers, or may with reasonable diligence discover, the mistake does not count in the reckoning of the limitation period for an action on the cause of action by him or by a person claiming through him." Application of the Limitation Act Section 79 of the Judiciary Act 1903 (Cth) (the "Judiciary Act") provides as follows: "The laws of each State or Territory, including the laws relating to procedure, evidence, and the competency of witnesses, shall, except as otherwise provided by the Constitution or the laws of the Commonwealth, be binding on all Courts exercising federal jurisdiction in that State or Territory in all cases to which they are applicable." As I have noted, the trial Judge held that s.14(1)(a) of the Limitation Act applied to the present proceedings, either by the direct operation of s.79 of the Judiciary Act or by the conflict by law rules operating in New South Wales (which would apply New York law which is assumed, in the absence of contrary evidence, to be the same as the law of the forum). Mr Walker did not dispute that s.14(1)(a) applied to the present proceedings. This Court therefore did not have the benefit of argument on the point. However, I think it correct to proceed on the basis that s.14(1)(a) does apply. Section 14(1) of the Limitation Act is a procedural provision dealing with the maintenance or commencement of proceedings: Commonwealth of Australia v Dixon (1988) 13 NSWLR 601, at 605 per Hope JA. Section 63, by contrast, extinguishes rights and, in accordance with the dichotomy recently reaffirmed by the High Court in McKain v R W Miller & Co (SA) Pty Ltd (1991) 174 CLR 1, at 40-44, is substantive in character: Dixon, at 610. Section 14(1) is to be construed as prescribing a time limit in respect of actions commenced in New South Wales: Dixon, at 606. Section 14(1) and s.63 do not run in tandem and need to be considered separately: Dixon, at 610. Section 79 of the Judiciary Act does not pick up a State law which, like s.14(1), applies only to actions commenced in that State, if the proceedings are commenced in another State: Pedersen v Young (1964) 110 CLR 162, at 166. This is so notwithstanding that the proceedings are subsequently remitted or transferred to a court in that State exercising federal jurisdiction: Bargen v State Government Insurance Office (Queensland) (1982) 154 CLR 318; Fielding v Doran (1984) 60 ALR 342, at 346, per Dawson J. The present proceedings, however, were instituted in New South Wales. The appellant's claim is based on a cause of action said to arise under the general law. The proposition that, in these circumstances, s.79 of the Judiciary Act picks up s.14(1) of the Limitation Act, as a procedural law of New South Wales, is supported by the observations of Walsh J in John Robertson & Co Ltd v Ferguson Transformers Pty Ltd (1973) 129 CLR 65, at 83: "When s.79 applies it does not purport to do more than pick up State laws with their meaning unchanged': see Pedersen v Young [(1964) 110 CLR 162, at 165], per Kitto J. The extent of the operation of State laws governed by s.79 is, of course, changed. Its purpose is to extend their operation so that they apply in courts exercising federal jurisdiction in that State. If a State law imposes a time limit for the commencement of action of a kind which may be heard by the court of that State, and if s.79 is held by a court exercising federal jurisdiction in that State to apply, then the law of the State operates in the same way in whichever court the action comes on to be heard and whether the court hearing it is exercising federal or State jurisdiction." See also Cohen v Cohen (1929) 42 CLR 91, at 99, per Dixon J. In Commonwealth v Dixon, at 622, Mahoney JA said this: "I am inclined to the view that, in any event, the Judiciary Act (Cth), s 79, would cause a State statute of limitation to apply in an appropriate case where the plaintiff's claim was determined by a court exercising Federal jurisdiction.... If a general statute of limitation is not a law relating to procedure' within that section, then it will be applied by operation of the section. If it is a law relating to procedure' then prima facie it is applied directly by the terms of s 79 (including the laws relating to procedure...').... And, in my opinion, the State limitation law would apply even if, on its proper construction, it was intended to apply only to proceedings brought in State courts.... However, if the State limitation statutes be so construed, the effect of s 79 is, in my opinion, to apply them, appropriately extended, in proceedings in the relevant Federal courts: see the John Robertson case (at 83-84) per Walsh J and (at 87-89) per Gibbs J and Maguire v Simpson [(1977) 138 CLR 362, at 402], per Mason J." I agree with Mahoney JA's observations. They lead to the conclusion that s.14(1) applies to the present proceedings. Section 14(1)(a) establishes a limitation period for a cause of action founded in "quasi contract". As Mason and Carter point out, this language is not entirely apt to cover restitutionary claims, which now depend on notions of unjust enrichment: Restitution Law in Australia, para. 2714. Nonetheless, it has been applied to a cause of action for the recovery of money paid under a mistake. Mr Walker did not suggest that the expression "cause of action founded on...quasi contract" did not embrace the cause of action underlying the appellant's claim. In my view, it is appropriate to proceed on the basis that s.14(1)(a) is intended to cover a case where the plaintiff or applicant seeks to recover moneys paid under a mistake, including a mistake of law. Judicial Law-Making and New Causes of Action The appellant submitted that its action to recover the grossing-up payments made to Citibank NA was not barred by s.14(1)(a) of the Limitation Act because the cause of action did not "first accrue" until the High Court changed the law in David Securities to allow restitutionary claims based on a mistake of law. Mr Walker contended that it was now virtually universally accepted that judges make law. The "fairy tale" that judges simply declare the law had been discarded. (Lord Reid characterised the declaratory theory of law as a fairy tale in his influential article "The Judge as Law Maker" (1972) 12 JSPJL 22, at 22.) As Brennan J said in O'Toole v Charles David Pty Ltd (1991) 171 CLR 232, at 267: "Nowadays nobody accepts that judges simply declare the law; everybody knows that, within their area of competence and subject to the legislature, judges make law". Until the High Court delivered judgment in David Securities, an action to recover moneys paid under a mistake of law was doomed to failure. By holding that a restitutionary claim could be based on a mistake of law, the High Court in effect created a new cause of action. Had the appellant instituted proceedings within six years of making the grossed-up payments to Citibank NA, the proceedings would have been summarily dismissed. Since the appellant could only have succeeded in its claim once the High Court had altered the law, the appellant's cause of action should be regarded as having "first accrued" on 7 October 1992, the date of the High Court's decision. It is, perhaps, a little curious that the appellant's argument appears not to have been authoritatively considered in Australia. There is plainly nothing novel about courts making new law, whether by overruling previous decisions or by developing new or modified principles. It was not until 1966 that the House of Lords pronounced itself capable of overruling its own decisions: Practice Statement (Judicial Precedent) [1966] 1 WLR 1234. But the High Court has not been so constrained and from an early stage has been prepared to depart from its own decisions: Australian Agricultural Co v Federated Engine-Drivers and Fireman's Association of Australia (1913) 17 CLR 261, at 275-279, per Isaacs J. In a constitutional context, the Engineers' Case provides a striking example: Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1928) 28 CLR 129. More fundamentally, there is nothing novel about judges and legal commentators acknowledging that courts make law. It is true that the acknowledgments have become more frequent as courts grapple with the difficult task of defining or identifying the limits of the judicial law-making function: see, for example, Dietrich v The Queen (1992) 177 CLR 292, at 319-320, per Brennan J; at 329, per Deane J; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, at 167-172, per Toohey J; Mabo v Queensland (No.2) (1992) 175 CLR 1, at 38-43, per Brennan J; at 109, per Deane and Gaudron JJ. But rejection of the "fairy-tale" is not, as Mr Walker's submissions rather implied, a recent phenomenon. In State Government Insurance Office v Trigwell (1979) 142 CLR 617, at 650-651, Murphy J pointed out that in 1873 John Austin had characterised the theory that the judiciary does not make the law as a "childish fiction": Lectures in Jurisprudence (4th ed, 1873) at 655. Indeed in the same judgment, Murphy J noted (at 650) that Bracton had accepted that the growth of the law through judicial decisions was inevitable and that Sir Francis Bacon, later Lord Chancellor, in The Advancement of Learning (1605), had recognised that the law grew consciously through decided cases. Recognition of the law-making function of appellate courts has provided the rationale for the technique of prospective overruling, which has been applied by United States courts since at least the mid-nineteenth century: Bingham v Miller (1848) 17 Ohio St 455; 49 Am Dec 471; Great Northern Railway Co v Sunburst Oil and Refining Co (1932) 287 US 358; Linkletter v Walker (1965) 381 US 618. Some commentators have expressed support or at least sympathy for this approach to ameliorate the consequences of judicial law-making: A G L Nichol, "Prospective Overruling: A New Device for English Courts?" (1976) 39 Mod LR 542; K Mason, "Prospective Overruling" (1989) 63 ALJ 526. The concept of prospective overruling has been referred to in judicial decisions in Australia, but has not generally found favour: see Babaniaris v Lutony Fashions Pty Ltd (1987) 163 CLR 1, at 15, per Mason J, referring to concerns expressed by Lord Devlin that prospective overruling "turns judges into undisguised legislators": "Judges and Law Makers" (1976) 39 Mod LR 1, at 11; John v Federal Commissioner of Taxation (1989) 166 CLR 417, at 450-451, per Brennan J. Compare Bropho v Western Australia (1990) 171 CLR 1 at 23, where the majority acknowledged that a new principle of statutory construction could apply differently to legislation, depending upon whether the legislation had been enacted before or after publication of the Court's decision. In the absence of a doctrine of prospective overruling, changes in the law effected by judicial decisions are not confined to events or transactions occurring after the date of the decision changing the law. Doubtless, from an historical perspective, this owes a good deal to the declaratory theory of law: compare the comments of McHugh JA in Love and Peters v Attorney-General (NSW) (1988) 16 NSWLR 24, at 39-40 (aff'd Love and Peters v Attorney-General (NSW) (1990) 169 CLR 307), relating to the principle that statutes held to be unconstitutional are void ab initio. However, the retrospective operation of judicial law-making also reflects views as to the nature and limits of the judicial law making function. Lord Devlin, for example, dismissed the retroactive objection to judicial law-making on the ground that "a judge-made change in the law rarely comes out of a blue sky. Rumblings from Olympus in the form of obiter dicta will give warning of unsettled weather". Devlin, 39 Mod L Rev, at 11. The need for judicial changes to the law to accord with what Brennan J has described as the "skeleton of principle" (Dietrich at 330) provides some justification for such changes to operate retrospectively. In the Wik Peoples Case (Wik Peoples v Queensland) (1996) 141 ALR 129, at 228, Gummow J referred to Lord Radcliffe's speech in Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555, at 591-592, where his Lordship said that no one really doubted that the common law is a body of law which develops over time in response to developments in society. Gummow J characterised this as "a broad vision of gradual change by judicial decision, expressive of improvement by consensus, and of continuity rather than rupture". Whatever the limits of judicial law-making, the retrospective operation of judicial decisions does not imply, in modern times, an uncritical acceptance of the declaratory theory of law. The Accrual of a Cause of Action In my opinion, the fact that judicial law-making operates retrospectively does not mean that a person is or should be free to rely on the novel principle or doctrine to establish rights in relation to events or transactions occurring in the distant past, free from the constraints that would otherwise be imposed by statutes of limitations. The authorities do not support any such contention. The classic formulation of a "cause of action" is that of Brett J in Cooke v Gill (1873) 8 LR CP 107, at 116: "'cause of action' has been held from the earliest time to mean every fact which is material to be proved to entitle the plaintiff to succeed - every fact which the defendant would have a right to traverse." This formulation was adopted by Lord Esher MR in Read v Brown (1888) 22 QBD 128, at 131; see also Trower and Sons Ltd v Ripstein [1944] AC 254, at 263, per Lord Wright. In Do Carmo v Ford Excavations Pty Ltd (1984) 154 CLR 234, at 245, Wilson J said that the "concept of a `cause of action' would seem to be clear. It is simply the fact or combination of facts which gives rise to a right to sue. In an action for negligence, it consists of the wrongful act or omission and the consequent damage.... Knowledge of the legal implications of the known facts is not an additional fact which forms part of a cause of action. Indeed, a person may be well appraised of all of the facts which need to be proved to establish a cause of action but for want of taking legal advice may not know that those facts give rise to a right to relief." See also Carter v Egg and Egg Pulp Marketing Board (Vic) (1942) 66 CLR 557, at 600, per Williams J. There is nothing in these formulations which suggests that a cause of action does not accrue until the courts acknowledge the existence of the right to sue. The statements focus on the facts which a plaintiff must establish. Knowledge of the right to sue is not an essential ingredient of a cause of action. It would seem to follow that recognition of the right to sue by the courts is also not an essential ingredient. If it were otherwise, many cases would have been decided differently. In the present context Commonwealth v Dixon provides an example. This conclusion is consistent with the principles governing the accrual of a cause of action to recover money paid by mistake. In a common law action for the recovery of money paid under a mistake of fact, the rule was that time ran from the date of payment of the money and not the date of discovery of the mistake: Baker v Courage & Co [1910] 1 KB 56; In re Mason [1929] 1 Ch.1, at 9, per Lord Hanworth MR. Where equitable remedies were sought, the relevant statute of limitation was applied by analogy, but lapse of time was no bar for such relief until the mistake was discovered or ought reasonably to have been discovered: Brooksbank v Smith (1836) 2 Y & C Ex 58; 42 ER 346; Denys v Shuckburgh (1840) 4 Y & C Ex 42; 54 ER 446; Preston and Newsom on Limitation of Action (3rd ed 1953), 253-255. The Limitation Act 1939 (UK), s.26 resolved the conflict between law and equity by providing that, where there is a cause of action for relief from the consequences of mistake, time does not begin to run until the person having the cause of action discovers, or could with reasonable diligence have discovered, the mistake. That provision was ultimately adopted in New South Wales by s.56(1) of the Limitation Act, implementing the recommendation of the New South Wales Law Reform Commission Report on Limitation of Actions (LRC, 1967), para.271. Section 56(1), like its United Kingdom counterpart and the pre-existing rules of equity, addresses the circumstances in which the commencement of the limitation period should be postponed. In a case where the plaintiff seeks relief from the consequences of mistake, the period is postponed only until the plaintiff discovers or could with reasonable diligence have discovered the mistake - that is the mistake giving rise to the cause of action. (It is not necessary to consider the precise significance of the words "relief from the consequences of a mistake": compare Phillip-Higgins v Harper [1954] 1 QB 411, aff'd [1954] 2 All ER 51n; Mason and Carter, para 2741.) Neither the rule of equity nor the language of s.56(1) of the Limitation Act is apt to postpone the commencement of the limitation period until the courts recognise a novel cause of action for recovery of payments made under a mistake. The authorities to which I have referred suggest strongly that a cause of action for recovery of moneys paid under a mistake of law accrues on the date of payment. Indeed, this was the view taken by Brennan J in his concurring judgment in David Securities. His Honour said this (at 389): "If under a mistake, money is paid to and unjustly enriches a payee, the payer's right to recover the amount paid accrues at the moment when the payee received the money." [Emphasis added.] At the very least, the authorities provide no support for the contention that the cause of action does not accrue until the courts acknowledge that the facts alleged give rise to a cause of action.

Policy Questions In my view, there are sound policy reasons supporting this conclusion. There is a tendency to modify by statute the rigid application of limitations provisions by permitting extension of the limitation periods in certain cases: see, for example, Limitation Act, Part 3, Div.3, applying to personal injury cases. But these provisions do not detract from the important social purposes served by statutes of limitation. The objectives of such statutes have been recently summarised by McHugh J in Brisbane South Regional Health Authority v Taylor (1996) 139 ALR 1, at 8-9 "The effect of delay on the quality of justice is no doubt one of the most important influences motivating a legislature to enact limitation periods for commencing actions. But it is not the only one. Courts and commentators have perceived four broad rationales for the enactment of limitation periods. First, as time goes by, relevant evidence is likely to be lost. Secondly, it is oppressive, even cruel', to a defendant to allow an action to be brought long after the circumstances which gave rise to it have passed. Thirdly, people should be able to arrange their affairs and utilise their resources on the basis that claims can no longer be made against them. Insurers, public institutions and businesses, particularly limited liability companies, have a significant interest in knowing that they have no liabilities beyond a definite period. As the New South Wales Law Reform Commission has pointed out: The potential defendant is thus able to make the most productive use of his or her resources and the disruptive effect of unsettled claims on commercial intercourse is thereby avoided. To that extent the public interest is also served. Even where the cause of action relates to personal injuries, it will be often just as unfair to make the shareholders, ratepayers or taxpayers of today ultimately liable for a wrong of the distant past, as it is to refuse a plaintiff the right to reinstate a spent action arising from that wrong. The final rationale for limitation periods is that the public interest requires that disputes be settled as quickly as possible. In enacting limitation periods, legislatures have regard to all these rationales. A limitation period should not be seen therefore as an arbitrary cut-off point unrelated to the demands of justice or the general welfare of society. It represents the legislature's judgment that the welfare of society is best served by causes of action being litigated within the limitation period, notwithstanding that the enactment of that period may often result in a good cause of action being defeated." [Footnotes omitted.] If the appellant's argument was to be accepted, it would mean that whenever the law is changed by judicial decision to permit a novel cause of action, transactions going back many years - perhaps decades or more - could be reopened. Mr Walker sought to counter this difficulty by asserting that such a "floodgate" was unlikely to eventuate. But there is no way of testing such an assertion. If one were to make a prediction it would be necessary to take into account the entitlement of lawyers to advertise both their services and the availability of novel causes of action in relation to past transactions. As the present case itself suggests, there is no reason to think that either lawyers or litigants would be reluctant to take advantage of the opportunity to reopen old transactions. In any event, the policy arguments against acceding to the appellant's argument do not depend on the volume of litigation that might be unleashed, but on the factors identified by McHugh J in Brisbane Health Authority v Taylor. The appellant's submissions also encounter a formidable practical difficulty. Mr Walker stressed that the principle for which he was contending applied only in limited circumstances, that is where a judicial decision "truly changes the law". In such a case the cause of action would not accrue until the decision is handed down. However, if a decision, although novel in some respects, merely "synthesises" the law without changing it, or corrects error, the cause of action would accrue at an earlier time, in accordance with orthodox principles. It would therefore be necessary to distinguish between incremental changes and those which changed the law by reason of deliberate policy choices. The discussion in the course of argument about the classification of cases such as Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL), Trident v McNiece and Mabo (No.2) illustrates the difficulty of applying the suggested distinction. But the point can be made more directly by reference to David Securities itself. The joint judgment in David Securities pointed out (at 370) that until the nineteenth century no distinction was drawn between mistake of fact and mistake of law. The distinction flowed from the decision in Bilbie v Lumley (1802) 2 East 469; 102 ER 448, which was itself founded on dubious reasoning. Cases accepting the distinction in the High Court, with the exception of comments in one judgment, were explicable on other grounds, notably the principle of voluntary submission (at 372). There was therefore no decision which constrained the High Court to maintain the distinction said to have been established by Bilbie v Lumley. Moreover, there had been much criticism by commentators of the artificiality of the distinction and calls in Australia and elsewhere for its abolition. The criticism had gained impetus from the recognition by the High Court in Pavey v Matthews Pty Ltd v Paul (1987) 162 CLR 221, at 256-257, of the "unifying legal concept" of unjust enrichment. Accordingly, their Honours considered (at 376) that the "rule precluding recovery of moneys paid under a mistake of law should be held not to form part of the law in Australia". In view of the reasoning in David Securities, it might be said, with the benefit of hindsight, that the rejection of the distinction between mistake of fact and mistake of law was inevitable, since the distinction was itself contrary to principle and led to injustice. Doubtless for this reason, Mason CJ in Commissioner of State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51, at 67, referred to the "belated recognition in David Securities that moneys paid away as a result of a causative mistake of law are recoverable". It is arguable that an informed adviser, at least after the decision in Pavey and Matthews v Paul, was better able to predict the demise of the distinction between mistakes of fact and law than to predict the outcome of other cases effecting what Mr Walker might characterise as "incremental change". Compare Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 (HL), decided on 20 July 1992, which recognised a prima facie right of recovery of moneys paid pursuant to an ultra vires demand by a public authority. The Cause of Action is Barred In Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, at 533, the joint judgment warned that it was "undesirable that limitation questions of the kind under consideration should be decided in interlocutory proceedings in advance of the hearing of the action, except in the clearest of cases". However, the issues in the present case are different from those considered in Wardley, which turned on when the applicant had suffered loss or damage. Moreover, the limitation point was squarely raised and debated both before the trial Judge and this Court. The only argument relied on by the appellant to resist the application of s.14(1)(a) of the Limitation Act was that its cause of action, based on payment of money under a mistake of law, did not accrue until the decision in David Securities recognised that mistake of law was no barrier to recovery. The appellant was content to argue the case on the basis that the last of the grossed-up payments to Citibank NA was made more than six years prior to the commencement of proceedings. Nor did the appellant place any reliance on s.56(1) of the Limitation Act. Indeed, no evidence was directed to the issues which might arise under that sub-section. In these circumstances, it seems to me appropriate to make orders giving effect to the conclusion I have reached, namely, that any cause of action available to the appellant in respect of the grossed-up payments made to Citibank NA by reason of a mistake is barred by s.14(1)(a) of the Limitation Act. The Deed of Waiver In view of the conclusion I have reached on the limitation point, it is not necessary to deal with the other issues argued on the appeal. However, as the construction of the deed of waiver was argued at some length, it is appropriate to express briefly the view I have formed on this question. Mr Walker's principal argument was that the language of cl.1 of the deed of waiver was inapt to cover a cause of action which had not yet accrued. It will be recalled that cl.1 released Citibank NA from "all...actions, suits, causes of action, proceedings, claims,...demands, costs and expenses whatsoever which [the appellant] now has in any way arising out of or incidental to [the Credit Agreement]". [Emphasis added.] If the appellant's cause of action did not accrue until the decision of the High Court in David Securities in 1992, I think this argument would be correct. With respect to the trial Judge, to hold that cl.1 applies to a cause of action not yet accrued seems to me to pay too little regard to the words "now has" in cl.1. However, for the reasons I have expressed, the appellant's cause of action had accrued before the date the deed of waiver was executed. Mr Walker submitted, in the alternative, that the general words in the deed of waiver should not be read as applying to a cause of action or claim that was not in the contemplation of the parties in 1987, when the deed was executed. He pointed out that the deed recited that there had been differences between the parties. The letter of 8 September 1987, which preceded the deed, expressly provided that the parties would "waive their rights to litigate on the matter of foreign exchange issues arising out of the conduct of the existing loan facility." The undisputed evidence was that officers of the appellant were unaware of any cause of action for moneys paid under a mistake until 1994 and that no such claim had been made on behalf of the appellant before then. It followed that the release should be construed as applying only to the claims or causes of action actually in dispute between the parties, or otherwise within their contemplation. I think that this construction of the deed is correct. In Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112, the joint judgment, after a review of the authorities, stated (at 129-130) that "equity proceeded upon the principle that a releasee must not use the general words of release as a means of escaping the fulfilment of obligations falling outside the true purpose of the transaction as ascertained from the nature of the instrument and the surrounding circumstances including the state of knowledge of the respective parties concerning the existence, character and extent of the liability in question and the actual intention of the releasor." [Emphasis added.] As McLelland J observed in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766, at 818, the review of authorities undertaken by the High Court showed that a similar rule applied at common law. The High Court quoted with apparent approval the principle stated by Lord Westbury in London and South Western Railway Co v Blackmore (1870) LR 4 HL 610, at 623: "The general words in a release are limited always to that thing or those things which were specially in the contemplation of the parties at the time when the release was given". The joint judgment in Grant v John Grant also quoted (at 125-126), with apparent approval, the comments of Sir Frederick Pollock, in his Principles of Contract (13th ed, 1929), at 412. After referring to the statement of principle by Lord Westbury, Sir Frederick Pollock said that "[t]his includes the proposition that in equity a release shall not be construed as applying to something of which the party executing it was ignorant'. There is at least much reason to think that it matters not whether such ignorance was caused by a mistake of fact or of law". It is clear in the present case that the dispute between the parties in 1987 did not relate to the terms of the Credit Agreement requiring the appellant to make grossed-up payments of interest to Citibank NA. That issue did not arise between the parties until 1994. The principle of construction to which I have referred strongly suggests that the deed should not be construed as applying to a claim which was not the subject of any consideration by any of the parties at the time it was executed. This view is reinforced by the language of the deed itself. The recital refers to the fact that disputes had arisen between the parties, indicating that the release was intended to relate to the disputes and differences between the parties. Clause 1 itself is limited to causes of action and claims which the appellant "now has". While the language of cl.1 is literally capable of applying to a cause of action in existence but not adverted to by the parties, the absence of broader language often found in releases militates against a sweeping construction of the release.

It follows that I do not construe the deed of waiver as barring the appellant from pursuing the cause of action upon which it wishes to rely. Conclusion In my opinion, the appeal should be dismissed, although for reasons different from those given by the trial Judge. The appellant should pay Citibank NA's costs. I certify that this and the preceding 38 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. Associate: Date: 21 February, 1997

IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) GENERAL DIVISION ) No. 230 of 1996 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: TORRENS ALOHA PTY LIMITED Appellant AND: CITIBANK N.A. Respondent CORAM: Foster, Sackville, Lehane JJ PLACE: Sydney DATE: 21 February 1997 REASONS FOR JUDGMENT LEHANE J: I have had the advantage of reading a draft of the judgment delivered by Sackville J. I agree with what his Honour has written and with the orders which he proposes. I certify that this page is a true copy of the Reasons for Judgment of the Honourable Justice Lehane. Associate: Dated: 21 February 1997 Heard: 25 September 1996 Place: Sydney Decision: 21 February 1997 Appearances: Mr B W Walker SC and Mr A S Bell of counsel instructed by Verekers appeared for the appellant Mr D H Bloom QC, Mr A W Street and Mr M Condon of counsel instructed by Dibbs Crowther & Osborne appeared for the respondent.