Bank of Western Australia Limited v O'Brien

The guarantees 6Mr O'Brien's guarantee was dated 28 October 2006. By cl 2.1, he guaranteed payment of the "guaranteed money". I set out that clause. 2.1 You guarantee the debtor's payment to us of the guaranteed money. Your guarantee continues until all guaranteed money has been paid in full orders you end this guarantee and indemnity under clause 6. If the debtor does not pay the guaranteed money on time and in accordance with any arrangement under which it is expressed to be owing, then you agree to pay the guaranteed money to us on demand from us (whether orders not we have made demand on the debtor). 7The relevant clauses of Mr O'Brien's guarantee included cl 5.2 (protection of the bank's rights); 5.5 (suspension of Mr O'Brien's rights); 8.1 (payment in full); 8.8 (certificates); and 8.20 (variation and review.) I set out those clauses. 5.2 Rights given to us under this guarantee and indemnity and your liabilities under it are not affected by any act orders omission by us orders by anything else that might otherwise affect them under law orders otherwise, including: (a) the fact that we vary orders replace any guaranteed agreement, such as by increasing the credit limit, increasing the amount of credit agreed to be provided orders extending the term. If this guarantee and indemnity is one to which a Code; (b) the fact that we release the debtor or give them a concession, such as more time to pay; (c) the fact that the debtor opens another account with us; (d) the fact that we release, lose the benefit of or do not obtain any security; (e) the fact that we do not register any security which could be registered; (f) the fact that we release any person who guarantees any of the debtor's obligations; (g) the fact that the obligations of any person who guarantees any of the debtor's obligations may not be enforceable; (h) the fact that any person who was intended to guarantee any of the debtor's obligations does not do so effectively; (i) the fact that rights in connection with any guaranteed agreement are assigned; or (j) the death (orders the receipt of notice by us of the death), mental or physical disability or insolvency of any person including you or the debtor. ... 8.1 Except to the extent you have a right of set-off granted by law which we cannot exclude by agreement (such as under a Code) you must pay us the guaranteed money in full without set-off, counterclaim orders deduction. ... 8.8 We may give you a certificate about a matter or about an amount payable in connection with this guarantee and indemnity. The certificate is sufficient evidence of the matter or amount, unless it is proved to be incorrect. ... 8.20 A provision of this guarantee and indemnity, or right created under it, may not be waived or varied except in writing signed by the party orders parties to be bound. 8The expression "guaranteed money" was defined to mean: ...the amounts payable under each guaranteed agreement. The maximum guaranteed money in connection with each guaranteed agreement is described in the details under "maximum amount." It is not necessary to go to "the details". 9The Bakota guarantee was also dated 28 October 2006. By cl 2 it provided for both a guarantee and an indemnity. I set out cll 2.1 and 2.2. Guarantee 2.1 You unconditionally and irrevocably guarantee payment to us of the guaranteed money. I the debtor does not pay the guaranteed money on time and in accordance with any arrangement under which it is expressed to be owing, then you agree to pay the guaranteed money to us on demand from us (whether or not we have made demand on the debtor). 2.2 The guarantee in clause 2.1 is a continuing obligation and extends to all of the guaranteed money. 10The Bakota guarantee contained provisions as to protection of the bank's rights, suspension of the guarantor's rights and the like, that were not materially different from the equivalent provision of Mr O'Brien's guarantee. 11The definition of "guaranteed money" in the Bakota guarantee was: Guaranteed money means, at any time, all money which the debtor owes us or will or may owe us in the future, including under an arrangement with us.

The charge 12The borrower gave to the bank a fixed and floating charge dated 25 October 2006. That charge provided, among other things, that the borrower would be in default if it did not pay the amount owing on time (cl 17(a)). The amount owing was defined to mean: "...at any time all money which one or all of you owe us or will or may owe us in the future, including under this charge or under any other arrangement with us."

The demands 13The bank made demand on the borrower by letter (from its lawyers) dated 6 April 2009. That demand referred to the failure to pay on 15 January 2009 and stated, it would seem correctly, that this amounted to an "event of default". The demand; (1) terminated the facility; (2) required payment of the amount owing; and (3) stated that if payment were not made the bank would exercise its powers. 14The demand stated, in particular, that the default amounted to default under the charge, and that the bank might exercise its rights under the charge, including by appointing a receiver, if the amount due were not paid. 15The borrower did not pay the amount demanded. The bank appointed receivers under the charge. The receivers sold the property the subject of the charge. After that was done the bank made demand on each of the guarantors. Those demands did not place any reliance on cl 11.1 of the facility agreement. On the contrary, each stated that the borrower had failed to pay the amount borrowed, recited the terms of the guarantee, and demanded "pursuant to the terms of the guarantee" that the guarantor pay the balance said to be owed.

The proposed defences 16The guarantors filed, and amended, a list response, a cross claim summons and a cross claim list statement. After the bank filed its notice of motion for summary judgment, the guarantors provided draft further amended versions of those documents. The debate before me proceeded on the basis that the defences and cross claims that the guarantors wished to assert, and which should be treated as the subject of the application for summary judgment, were those sought to be advanced in the draft further amended documents. 17The list response, (as for convenience I shall call it) denied that the provisions of the documents on which the bank relied prevented the guarantors from raising any defences or from bringing any cross claim. 18The list response raised various other issues. However, the fundamental defences sought to be raised were that: (1) in the events that have happened, the bank was estopped from calling on the borrower to repay the amounts advanced and from seeking payment under the guarantees; (2) likewise, in the events that have happened, the bank was estopped from dealing with its securities and from calling on the guarantees; (3) there was no relevant failure to pay, nor any relevant default, because of the bank's alleged conduct amounting to breach of contract, or misleading or deceptive or unconscionable conduct and giving rise to an estoppel, in each case in relation to the exercise of the bank's rights, as (in substance) alleged in the cross claim list statement; (4) alternatively, by reason of that alleged conduct, the guarantors were entitled to injunctive relief to restrain the bank from enforcing the guarantees. 19By the cross claim summons, the guarantors seek a declaration that they are not liable to pay any amount to the bank under their guarantees; alternatively, relief under s 12GM of the Australian Securities and Investments Commission Act 2001 (Cth) or cognate legislation. The relief sought includes a permanent injunction restraining the bank from enforcing the guarantees. 20The cross claim list statement (as, again for convenience, I shall call it) alleges, in substance; (1) that the bank was seeking, in breach of an alleged implied term of the facility agreement, to exercise its powers other than in good faith and reasonably, and was seeking to exercise those powers for an improper and collateral purpose; (2) that the bank had made various representations to the borrower and the guarantors, the effect of which was that the bank would roll the debt over after 15 January 2009, on which representations the borrower and the guarantors relied, to their detriment, by not seeking alternative sources of funding; (3) that the bank did not give any adequate warning to the borrower or the guarantors of its intention to terminate the facility and call up the loan; and (4) by reason of those and other matters, the bank engaged in misleading or deceptive conduct, acted unconscionably, was estopped from enforcing its rights, and acted in breach of contract because it exercised its powers under the facility agreement for an improper and collateral purpose. 21Those suggested defences raised, in very broad outline (and I have given that the barest summary of the "pleadings") three areas of controversy; (1) the proper construction of relevant provisions of the facility agreement, in particular the so called "preservation" and "suspension" clauses; (2) the alleged improper use of powers under the facility agreement; and (3) the arguments based on estoppel, misleading or deceptive or unconscionable conduct, relied upon as an answer to what the guarantors characterise as the bank's attempts to exercise its powers under the facility agreement. 22Mr Gleeson of Senior Counsel, who appeared with Mr Yezerski of counsel for the guarantors, sought to support those suggested defences at three successive levels: (1) as a matter of construction, he submitted that the suspension clauses did not preclude the bringing of the cross-claims relying on federal law, and thus that, as a matter of discretion at least, the associated claims in the defence should proceed in any event; (2) alternatively, the claims under federal law provided for remedies that would sterilise the suspension clauses, because the operation or effect of those clauses formed part of the loss or damage which the application of remedies under federal law would alleviate; or (3) if and only if the suspension clauses should be given effect according to their terms, the result would be the impermissible splitting, contrary to Chapter III of the Constitution, of what was (and was agreed to be) one only "matter" that was wholly within federal jurisdiction; because the bank's case would be heard and decided before, and apart from, the cross claim that is inextricably linked with it.

The case for summary judgment 23It was, I think, accepted that bank would be entitled to summary judgment only if it could show that the defences proposed showed no triable issue. It is not sufficient to say that the guarantors' prospects of success might be slight. The question is whether they have any prospects of success at all. That statement of the test is supported by cases such as Dey v Victorian Railway Commissioners (1949) 78 CLR 62; General Steel Industries Inc v Commissioner for Railways (New South Wales) (1964) 112 CLR 125; Webster v Lampard (1993) 177 CLR 598; Agar v Hyde (2000) 201 CLR 552; and Esanda Finance Corporation Limited v Peat Marwick Hungerford (1997) 188 CLR 241. 24I proceed on the basis that the test for summary judgment is as I have just stated it.

The effect of the suspension clauses 25In general terms, it is both clear and uncontroversial that a creditor and a debtor may agree that the creditor is entitled to be paid in full before the debtor may exercise any rights (including by way of set off or cross claim) against the creditor. Clauses having that effect are commonly referred to as "suspension" or "suspension of rights" clauses. 26Bryson J stated the principles, in my respectful opinion correctly, in Capital Finance Australia Limited v Davies [2002] NSWSC 1146. After a detailed examination of the cases, his Honour concluded at [93] that suspension clauses do not in principle oust the jurisdiction of the courts. At most, they suspend, but do no otherwise impair, the rights of, the relevant party. The party whose rights are suspended is, and remains able, to enforce those rights provided it conforms with its primary obligation of payment. 27At [95], Bryson J appeared to recognise that there might be a limiting case where a "colourable condition" produces a "practically insurmountable obstacle to resort to the courts". However, his Honour concluded, a clause which did no more than postpone the right of resort to the courts until the primary obligation was satisfied could not be so characterised. 28His Honour's views were, I think, summarised at [97]. His Honour said: 97 The jurisdiction of courts and the rights of parties to make claims before courts are not conferred by contract and cannot be ousted by contract. However there is in my opinion no infringement of this principle where parties agree that in stated circumstances a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them. In the contract of guarantee there is no infringement of the principle where parties agree to ensure that the guaranteed sum will be paid, and make this the more certain by postponing litigation raising any cross-claim or set-off. 29In St George Bank Limited v Field [2007] NSWSC 902, I concluded that a lender's contractual entitlement to be paid in full and without deduction prevented the guarantor from raising defences as to the conduct of the lender in (allegedly) impairing the value of the security, and acting (again, allegedly) in a way that was effectively equivalent to equitable waste. However, I said, there was a distinction between a defence that impeached the guarantee itself on the one hand, and a defence that impeached only the exercise of rights under the guarantee on the other. 30I remain of the view that I expressed in Field. 31White J expressed a similar view in Daewoo Australia Pty Limited v Porter Crane Imports Pty Limited [2000] QSC 950. In the circumstances where the defendant did not seek to impeach the contract, but sought damages under the Trade Practices Act for allegedly misleading or deceptive conduct in connection with the formation of that contract (on which the defendant relied as a source of its rights), her Honour held that the plaintiff was entitled to judgment, and that the defendant should be left to pursue its claims by way of cross claim. 32Holmes J expressed a similar view in Capital Finance Australia Limited v Air Star Aviation Pty Limited (2004) 1 Qd R 122. In that case, her Honour considered a clause in a guarantee which provided for the guarantor to pay in full without exercising any right of set off, counter claim etc. Her Honour concluded that such a clause would not preclude the guarantor from relying on matters which went to the invalidity or complete discharge of the guarantee. 33If I may say so with respect, my decision in Field would have been made very much easier had I had the benefit of being referred to, and considering, her Honour's reasons before I gave judgment in that case.

Federal jurisdiction 34It was common ground that, because of the arguments raised under federal legislation, the entire controversy is one in federal jurisdiction, and that this Court was accordingly vested with federal jurisdiction to hear, and quell, that entire controversy. It does not follow, in my view, that this Court can or must do so in one hearing only. It is commonplace that a Chapter III Court may (for example) deal with certain issues in a proceeding by a separate and prior determination of those issues. 35What is the consequence where a defence arising under federal law is pleaded in answer to a claim arising under state law (including, for that purpose, the common law)? 36In Bitannia Constructions Pty Limited v Parkline Constructions Pty Limited (2006) 67 NSWLR 9, the Court of Appeal concluded that a provision of a state statute preventing certain defences from being raised to a claim in a state court, could not prevent the defendant from raising, in answer to that claim, a defence said to be available under federal law.

37The parties provided detailed written submissions, and supplemented them with extensive oral argument. In the interests of brevity, I will not repeat the detail of those submissions. 38In substance, Mr Gleeson submitted for the guarantors that the suspension and preservation clauses could not operate to prevent his clients from asserting their rights in respect of the alleged breaches of contract, alleged misrepresentation or deceptive or unconscionable conduct, or arising from the alleged estoppels. 39In my view there is a simple answer to the case that is put for the guarantors. That part of the case focuses on the alleged exercise by the bank of powers under cl 11.1 of the facility agreement. That exercise of powers, which is said to be susceptible to the defences of misleading or deceptive or unconscionable conduct and the like, was said to include: (1) termination of the facility; (2) making demand on the borrower for immediate payment of the amount due; (3) appointing receivers; and (4) making demand on the guarantors. 40The argument is predicated on the exercise of powers under cl 11.1 of the facility agreement. It is that exercise of powers which is said to be susceptible to the various defences that I have outlined. 41Certainly, each of the steps that were taken was a step authorised by cl 11.1. But it does not follow either that it was a step in fact taken in reliance upon cl 11.1 or a step (more accurately, perhaps, an act) that depended for its validity and effect upon cl 11.1. 42Mr Sheahan of Senior Counsel, who appeared with Mr Dowdy of counsel and Mr Flecknoe-Brown of counsel for the bank, submitted that cl 11.1 had nothing to do with the matter, and thus that a defence which in some way sought to impeach the exercise of powers under cl 11.1 must fail. On that basis, Mr Sheahan submitted, it mattered not that the defence was one articulated at least in part by reference to rights arising under federal law. 43Mr Gleeson replied that the bank's pleading expressly asserted reliance on cl 11.1, and that the reliance was not (as Mr Sheahan had put it) merely "adjectival". 44However, as Mr Sheahan submitted, it seems to me that the real question is not so much how the bank has framed its case, but rather how, if at all, the alleged wrongful conduct (if I may use that phrase comprehensively to summarise all the complaints made against the bank) contributed in some way to the position in which the guarantors now find themselves, and against which they seek relief under (among other things) federal law. 45If one examines the steps taken by the bank, it is apparent, in my view, that none of them depended for its validity upon cl 11.1. 46Thus, the facility came to an end because it had reached its termination date. There was no need for any step to be taken to cancel it. It terminated of its own accord, or by the force of its own provisions. There was no step necessary to be taken on the part of the bank to achieve that result. To the extent that the bank relied on cl 11.1(a) to cancel the facility, that was, having regard to the terms of the facility agreement, mere surplusage, and as a matter of law ineffectual. 47Of course, cl 11.1(a) authorised cancellation of the facility on default. Clearly, in my view, that was aimed at a situation where an event of default occurred prior to the termination date of the facility. In such a circumstance, there might be a valid reason for the bank to be in a position to terminate the facility: for example, to protect itself from any argument that it might be required to make further advances. 48I note, in passing, that Mr Gleeson submitted that this was indeed the reason why the bank purported to terminate the facility by its notice of demand on the borrower. I do not accept that submission. At that time, the facility having come to an end of its own force, there was no further obligation on the part of the bank to make any further advances. 49Again, cl 11.1(b) empowered the bank to make the amount due under the facility agreement payable on default. But again, in my view, that clause was directed to a situation where the default occurred before the facility had come to an end according to its terms. In the present case, the bank did not need to do anything to make the amount due under the facility payable. It became payable when, on the termination date, the facility expired without any extension having been renegotiated. 50In each case, the bank's act in purporting to terminate and in purporting to make the amount then due payable, was legally irrelevant and in that sense legally ineffectual. 51It must be borne in mind that the facility agreement was drafted to cover, so far as the parties could foresee them, events that might occur during the life of the facility as well as events that would become relevant only on termination of the facility. Thus, it is not at all strange that there is, to that extent, some possible tension between various provisions of the facility agreement. But that tension does not seem to me to be a reason for imputing to the bank either the need or the volition to act in a way that was ineffectual, or legally irrelevant, having regard to the particular terms of the facility agreement which governed the situation as of 15 January 2009. 52Again, it may be accepted that cl 11.1(c) authorised the bank to exercise its powers under the various security agreements. By definition, those security agreements included the charge and the guarantees. But again, cl 11.1(c) was not a necessary source of power for the exercise of rights given by those security agreements. Those agreements themselves furnished the necessary powers. 53Thus, by cl 17(a) of the charge, the borrower fell into default when it did not pay the amount owing under the facility agreement on the termination date. By cl 18.1, the amount owing became payable on demand upon the occurrence of that default, and by cl 18.2(b), on the occurrence of that default, the bank became entitled, among other things, to appoint a receiver. None of those things depended in any way, for its validity, on cl 11.1(c) of the facility agreement. 54Under the guarantees (and it is not necessary to consider them individually) the guarantors guaranteed payment of the specified money to the borrower. If the borrower did not pay on time (as in this case it did not), simply because of cl 5.1 of the facility agreement, the guarantors became liable to pay "on demand from" the bank. 55The liability to pay on demand arose whether or not the bank made demand on the borrower. Thus, first, the power to make demand on the guarantor follows from the terms of the guarantee; and secondly, it was not necessary for any demand to have been made on the borrower before the secondary liability of the guarantor could be enforced. 56In those circumstances, it is not necessary to consider the separate arguments raised in the case of Bakota, because it agreed to indemnify as well as to guarantee. 57It follows, in my view, that the matters suggested in the list response and list cross claim statement cannot afford any answer to the bank's claim for summary judgment. 58On that basis, it is not necessary to consider the various arguments raised as to the consequences of the undoubted fact that the court is exercising federal jurisdiction, or the arguments as to inconsistency between state and federal law.

Other matters 59The bank sought, in the alternative, an order that certain paragraphs of the cross claim list statement be struck out. It did so on the basis that they were predicated on the proposition that the bank had acted pursuant to cl 11.1. For the reasons that I have just given, those paragraphs should be struck out if it is necessary to do so. 60The bank sought also an order that a certain notice to produce be set aside. That notice to produce sought the production of a document which was said to be, and which I am content to assume is, highly confidential. The bank submitted that the document was irrelevant because it could go only to the case, however articulated, based on an improper exercise of powers under cl 11.1. 61Again, it follows from what I have said that the notice to produce should be set aside. I note however that the parties agreed that, had I come to a different view, the Court should leave it to the parties to reach some agreement as to protection of confidentiality. 62The guarantors submitted that, if I were to come to the conclusion that I have, the judgment to be entered should be stayed while they prosecute their cross claim. That submission was not argued in full. In my view it is one that should be dealt with by way of separate application, once judgment has been entered pursuant to the reason I have just given.

Orders 63I am not sure that the evidence is sufficient to enable me to quantify the judgment to which the bank is entitled. Accordingly, I stand the matter over until tomorrow morning (3 May 2012) at 10 am before me for the parties to bring in short minutes of order to give effect to these reasons. If there is any argument as to the orders to be made, I will deal with it at that time.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 May 2012