Supreme Court of NSW|1997-05-27|Before: Young J

Commonwealth Bank of Australia v Cluness Matter No 3038/96 [1997] NSWSC 222 (27 May 1997)

The Supreme Court of New South Wales Equity Division

3038/96 - COMMONWEALTH BANK OF AUSTRALIA V CLUNESS**

The facts and circumstances are either agreed, or alternatively can be inferred from undisputed facts.

In 1985, Mr and Mrs Cluness established an engineering business at Warren. Mr Cluness says that his accountant advised him that Mrs Cluness should be a full partner though it would appear Mrs Cluness took no actual part in the running of the business. The business encountered financial difficulties largely due to the rural recession and they obtained additional funding by means of a second mortgage over their home. The home was registered in joint names. In due course the home belonging to Mr and Mrs Cluness was sold, but after paying the first mortgagee there were insufficient proceeds to satisfy the plaintiff Bank. In October 1988, the Bank commenced proceedings in this court for debt and obtained judgment on 28 November 1989 against both Mr and Mrs Cluness for the sum of $270,278.33.

The Bank had difficulty in recovering money despite the fact that it had a judgment, and it issued an examination order to examine Mr and/or Mrs Cluness as to their means. It would appear that both Mr Cluness and the solicitor for the Bank, took the view that the matter would not be reached. They had informal discussions outside the courtroom. The solicitor for the Bank took the view as a result of those discussions that the probabilities would be that Mr Cluness would have no assets to satisfy the judgment, so that he should do the best deal that he could. Mr Cluness offered to pay approximately $5,000 a year in monthly instalments of $416.66.

Had the examination actually proceeded before the Registrar, and had the solicitor for the Bank asked the right questions, he may have discovered that Mrs Cluness either had or was about to come into an inheritance. However, this information was not volunteered by Mr Cluness and the Bank's solicitor was unaware of it. Accordingly, the Bank took the commercial position that some money was better than none, and agreed to take $5,000 per year. It can readily be seen that if one was only paying the principal under this arrangement, it would take 54 years to pay off the amount in full.

I should note that there were other negotiations between the Bank and Mr and Mrs Cluness from 1989 and that the current offer, which was in due course accepted by the Bank, was not the only one that was made by Mr and Mrs Cluness.

There was then further correspondence between the parties. Mr Cluness sent his first payment to the Bank's Warren branch on 11 September 1990. However, in February 1991, Mr Cluness told the Bank that he would be making no further payments until the Bank had formally released Mrs Daphne Cluness from the debt, alleging that this had always been the arrangement. The Bank disputed this, but indicated a willingness to consider releasing Mrs Cluness provided repayments were resumed and maintained. After discussion and further correspondence, the parties entered into a deed (referred to in correspondence as a Deed of Release) on 13 February 1992. The deed is set out in Appendix 2 to these reasons.

As I have indicated, the Bank seeks to have this deed rectified. In the summons, the rectification sought was to insert in clause 3 the words "and conditional upon Scott Cluness' making and continuing to make the payments referred to in clause 2 until such time as the judgment is satisfied" immediately after the words "clauses 1 and 2;" and by deleting the word "forthwith" in clause 3.

I heard the argument in this case on 27 March 1997. I suggested that the Bank might like to reformulate the rectification it sought and in response to this invitation, after I had reserved judgment, counsel for the Bank indicated that the insertion in clause 3 should be made as noted above and also the words "will forthwith discontinue and forever abandon and forgo all of its rights" should be deleted from paragraph 3 and replaced with the words "covenants that it will not take any further action or bring further proceedings against Daphne Louise Cluness in respect of the judgment."

It would seem that after the deed was entered into, Mr Cluness made some payments but then stopped and no payments have been received since April 1994.

The Bank issued a bankruptcy notice against both Mr Cluness and Mrs Cluness. Mrs Cluness moved in the Federal Court to set the bankruptcy notice aside and her application came on before Foster, J who granted it for the reasons that his Honour gave on 7 May 1996. His Honour held that "The effect of clause 3 is to release Mrs Cluness from the time of execution of the deed.

"The reason for that is that the consideration referred to in that clause is the agreement of Scott Cluness to make the monthly payments referred to in clause 2, not the actual making of those payments. In those circumstances, I am not able as a matter of construction to hold that this deed makes the release of Daphne Louise Cluness conditional upon the actual continuance of those payments, apart from a mere agreement to continue.

"In those circumstances I must hold that the debt referred to in the bankruptcy notice is one from which she was released by this deed on the date of the deed."

The Bank proceeded to obtain an order against the estate of Scott Cluness, the order being made on 12 August 1996. The present proceedings were commenced two days later, on 14 August 1996.

Various very interesting legal points could have arisen in this case had I been given the information. I merely mention these because I do not wish it to be thought that I have overlooked them. One of the problems appears to be that there was a joint judgment against Mr and Mrs Cluness, and a release of one joint debtor releases all because of the doctrine of circuity of action.

As Bacon, CJ said in Ex parte Good; In re Armitage (1876) 5 Ch D 46, 55, "It is to prevent circuity of action, inasmuch as if the released debtor were still liable to an action for contribution by his co-debtor (who had been sued and had paid), he would not be in fact released." He referred to North v Wakefield [1849] EngR 465; (1849) 13 QB 536, 541; [1849] EngR 465; 116 ER 1368, 1370.

However, no-one has sought to advance that proposition, Mr Aldridge for the Bank saying that as the deed whose rectification I am considering was a joint deed, the point could not be taken. With respect, the fact that the present deed is a joint deed would make the point even easier to take. It is to be noted that the present deed is merely joint and not joint and several; see Glanville Williams on Joint Obligations (Butterworths London 1949) p 35. This rule will apply even though there is a covenant by two people of the one part that one of them will pay money to the party of the other part because the payment merely goes to performance not to the promise: Wilmer v Currey [1848] EngR 607; (1848) 2 De G & Sm 347; 64 ER 156.

It does not matter what was the original nature of the obligation of Mr and Mrs Cluness to the Bank, because whatever it was, it merged in the judgment of this court and a joint debt was created; see Glanville Williams op cit at p 76.

The deed, accordingly, might well be said to have released both Mr and Mrs Cluness of their obligation to the Bank. However, as I have said, this point has never been taken.

Mr Coles QC, who appeared with Mr B Skinner for Mrs Cluness, cross examined the Bank's solicitor severely criticising him as to his preparation of the deed. I indicated during the hearing that I thought this criticism might be a little too harsh as the Bank's solicitor had been asked to perform an almost impossible task. This is because it is an extremely complex operation to draft a document which operates as a release which is subject to a condition subsequent. The document has to be drafted as (i) a covenant not to sue until a certain event occurs, or (ii) a discharge of the judgment debt with a new promise to pay by instalments until non-payment and then to pay a lump sum, or (iii) to have a perpetual release which becomes void ab initio in the case of non-payment. If option (iii) is chosen, the drafter also has to make provision for non-repayment of instalments that have been paid before the release becomes void and to guard against the Limitation Act 1969 operating against the Bank. What one cannot have is a release which is operative for a time and then ceases to be effective. The reasoning process behind the statements I have just made is rather complex and, to make these reasons a little easier to read, I have set out why it is so in Appendix 1.

What I have just said is not only to be fair to the Bank's solicitor, but also because it goes to the heart of the case for rectification. Hodgson, J set out a crucial aspect of the law of rectification in Bush v National Australia Bank Ltd (1992) 35 NSWLR 390, 407, when he said that "It is necessary that the common intention be such that the court can conclude, with the appropriate clarity, both the substance and the detail of the precise variation which needs to be made to the wording of the instrument ... ". It is very difficult to see, if the deed is to be rectified, how the court could be clear as to what words the parties would have inserted to cover the situation that has arisen had their common intention been as the Bank suggests.

It is clear from the correspondence that what was being insisted upon by Mr Cluness was a release of Mrs Cluness. Furthermore, Mrs Cluness also swore that she believed she was getting a complete release from the Bank and that unless she was to get a complete release she could see no reason at all for her to sign the deed. She says that since signing the deed she has worked continuously and she has purchased a property at Berowra.

Mrs Cluness also says she left it to her husband to negotiate with the Bank. Mr Cluness says that in December 1991 he had a conversation with a lawyer in Newcastle and asked "What if I die, or for some other reason am unable to continue to make the payments to the Bank? Should we ask that the deed be amended to allow for such possibilities?" to which the lawyer replied, "There is no need to amend the deed. The deed releases Daphne from any obligation to pay the debt." Thereafter, Mr Cluness telephoned the Bank's solicitor that the draft was suitable. When the deed was received for signing, Mr Cluness said to his wife, "I have spoken to Andrew Bright about the deed. He has checked it with a colleague of his and advised me that it releases you from any obligation to the Bank." Mrs Cluness then said, "Okay I will sign it then."

The whole of the correspondence between the Clunesses and the Bank was in terms of "a formal release from debt of Daphne Cluness".

If the Bank's contention that the parties intended to create a conditional release is correct, then, for the reasons set out in Appendix 1, the common intention was to create a release which was valid for a time, but then terminated. It was attempting to do something that could not be done as a matter of law. Thus there is no point in ordering rectification.

Mr Aldridge put that if that is the case, then the parties intended to write down a form of words which the court would have construed as a covenant not to sue.

It may be that, if the deed had not been construed by Foster, J, this argument might have had some attraction. There are instances where deeds have been rectified so as to produce a legal formula which the courts would construe in a particular way. Thus, where the parties intended to confer a fee simple but omitted the vital words of limitation, "and his heirs", the deed has been rectified to include the words "and his heirs". See Kent v Brown [1942] NSWStRp 42; (1942) 43 SR (NSW) 124.

It is necessary, accordingly, to look to see whether the decision by Foster, J should be considered as being the final decision on all points of construction arising under the deed.

From what has been put before me, Foster, J was considering whether he should set aside a bankruptcy notice. Section 40(1)(g) of the Bankruptcy Act 1966 covers the case of setting aside a bankruptcy notice where the alleged debtor has a counterclaim etc. In Re a Debtor [1957] Ch 381, the English Court of Appeal held that the court had jurisdiction to set aside a bankruptcy notice where there had been satisfaction of the judgment after it had been entered. The reason for this is that, if a judgment had been satisfied, there was no judgment left on which to found a bankruptcy notice: Clissold v Cratchley [1910] 2 KB 244. The power of the Federal Court to deal with such a question is contained in s 30. Section 30 gives the court full power to decide all questions, whether of law or of fact, in any matter coming within the cognizance of the court.

Accordingly, Foster, J had unlimited jurisdiction to decide all questions between the parties. His decision is res judicata. As Spencer Bower & Handley, Res Judicata 3rd ed (Butterworths, London, 1996) point out at paras 42 and 43, often decisions of the bankruptcy court or the companies court dealing with interlocutory matters in insolvency do not create res judicata. However, in the present case, Foster, J was asked to rule on the question of construction, though he was apparently not asked to enter into any questions of rectification. This was a tad unusual as the authorities show that a defence that the debtor was relying on equitable fraud by putting up an agreement otherwise than the one that was agreed upon (despite the terms in which it was written down), was one which could be dealt with on such an application. See Sullivan v Drake [1903] NSWStRp 100; (1903) 3 SR (NSW) 693, 695. However, Foster, J was asked to construe the deed and did so. Indeed, it seems to me that all other aspects of construction were dealt with by his Honour. Thus one has the typical res judicata situation described in Spencer Bower and Handley at para 19, an earlier edition of which was adopted by Oliver, J in Midland Bank Trust Co Ltd v Green [1980] Ch 590, 607.

If the deed has been finally construed by his Honour, then there is no point in rectifying it, because any question of construction has already been conclusively dealt with. As Owen, J said in Drake's case, once the deed is reformed it is reformed forever and it is always deemed to have been reformed.

In any event, before one can rectify a deed, one has to find a common intention of the parties. I cannot see in the evidence where either party directed attention to a covenant not to sue. The evidence of Mrs Cluness and indeed, Mr Cluness, was that a release of Mrs Cluness was what was wanted. The Bank also directed its mind to a release rather than a covenant not to sue. There was never any common intention to enter into a covenant not to sue, and the deed cannot be rectified to put it in. I have already dealt with Mr Aldridge's submission that one would put in an ineffective release on the basis that the courts would then construe that what the parties would have meant was a covenant not to sue. In the peculiar circumstances of this case, that submission just cannot succeed.

Mr Coles QC also submitted that it would be wholly unjust now to rectify the deed because -

(a) Mrs Cluness has acted in reliance upon the deed and acquired valuable property; and

(b) the Bank has made Mr Cluness a bankrupt, thus wholly preventing him from performing the obligations he undertook in the deed.

These matters really amount to a defence of laches. Although laches very rarely succeeds these days, it does seem to me that the factors which Mr Coles QC raises, together with the fact that there has already been a hearing before Foster, J on the true construction of the deed, means that it would now be wrong to rectify the deed. As Mr Cluness is bankrupt, he can now never make any of the payments under the deed because the Bank's right has been converted into the right to obtain a dividend from the sequestrated estate. As Deane, J said in Orr v Ford [1989] HCA 4; (1989) 167 CLR 316, 341, with respect to laches, "The ultimate test effectively remains that enunciated by Lord Selborne, LC ... speaking for the Privy Council in Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221 at pp 239-240, namely, whether the plaintiff has, by his inaction and standing by, placed the defendant ... in a situation in which it would be inequitable and unreasonable 'to place him if the remedy were afterwards to be asserted' ... ".

Dealing now with the remedy of rectification itself, it again seems to me that this is not the appropriate case for granting a remedy for a number of reasons.

The first reason is that the evidence does not seem to me to displace "the hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties" per Mason, J in Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23; (1973) 128 CLR 336, 351. As I have said earlier, the whole negotiations were in terms of a "release", not a covenant not to sue. Indeed, really the only matter which goes the other way is Recital D.

It is certainly true that Recital D says that the agreement to release is "provided that payments ... are maintained by Scott Cluness". As a matter of construction, "if both the recitals and the operative part of a deed are clear and unambiguous, but they are inconsistent with each other, the operative part is to be preferred," Norton on Deeds (Sweet & Maxwell London 1928) 2nd ed p 197.

The fact that the recital is there is of some assistance to the Bank in its case for rectification. However, on the evidence, the fact of the appearance of the recital is neutralized because Mr Cluness showed the deed in its present form to his legal advisor and was told that it constituted a complete release of Mrs Cluness.

Mr Coles QC also submits that it is significant that no officer of the Bank, including any superior officer who directed that officer to sign, was called. I agree with this submission. The only evidence from the Bank's perspective was the drafter of the document who was a solicitor within the Bank's organisation. This point is diminished in the instant case because it was the solicitors who carried out all the negotiations on behalf of the Bank. However, there are some internal memoranda within the Bank's organisation which are in evidence as Exhibit DX01. Mr Coles QC particularly attaches significance to a memorandum from the "Branches Officer" to the Warren Branch of 14 February 1992 which says, "We attach copy of a deed releasing Daphne Louise Cluness from her liability to the Bank". This would seem to suggest that, apart from the solicitors, the administration of the Bank had no doubt that there was a release involved.

Indeed, it would seem that it was only after boasts of Mr Cluness that he had outfoxed the Bank were noised around that the Bank became particularly interested in seeking to enforce its right against the Cluness family.

It is also unlikely, in the absence of any evidence to the contrary, that a document which seems to have taken two years to produce and was produced by the Bank's solicitors using language which was easy to understand, could have been subject to such a basic mistake; cf Australian Gypsum Ltd v Hume Steel Ltd (1930) 55 CLR 54, 66 and GPI Leisure Corp Ltd v Herdsman Investments Pty Ltd (No 4) - Young, J, 17 August 1990, unreported.

Finally, I might note that one of the problems in the instant case is that it would take 54 years for the principal of the debt to be repaid by the instalments Mr Cluness was making. Thus at any time during those 54 or more years, the condition could have occurred and Mrs Cluness would have become liable. This, however, does not appear to be significant because the modern rule against perpetuities does not apply to contractual obligations. Indeed, the case of Walsh v Secretary of State for India [1863] EngR 562; (1863) 10 HLC 367; 11 ER 1068, is not dissimilar to the present case. However, as appears in Appendix 1, time in the guise of the Limitation Act 1969 may be significant.

Accordingly, no matter which way one looks at this case, the application for rectification must be dismissed with costs. The exhibits may be returned.

I said in the core part of these reasons that the Bank's solicitor was asked to perform an almost impossible task. I now give reasons for this view. I have separated these out from the core part of the reasons because they would otherwise disrupt its flow.

In Burton v Palmer [1980] 2 NSWLR 878 at 896, Mahoney, JA said, "...at law a release, as such, could not be made to operate subject to a condition subsequent ...". This statement was not part of the ratio of the case which dealt with what constituted financial assistance by a company for the purchase of its own shares. However, Samuels, JA at 882 indicated that he generally concurred in the reasons of Mahoney, JA and at the same page Hutley, JA also agreed with Mahoney, JA's construction of the relevant deed. Thus, it appears to have three strong Judges of Appeal concurring in the statement.

However, there is a directly contrary statement in leading textbooks.

In Chitty on Contracts 27th ed (Sweet & Maxwell 1994) para 22-007, the learned author says, "A release will be good although made subject to avoidance by the happening of a condition subsequent, as, for example, by the non-fulfilment of a compromise."

In Laws of Australia (LBC Melbourne, 1994) Vol 7 "Contract" s 7.8 "Discharge" para 28, the author (Pannam) says, "A release can be made subject to a condition precedent or subsequent. For example, the receipt of money may be stipulated as a condition precedent. It may be appropriate to subject the release to a condition subsequent, for example, that the release will cease to be effective on the happening or non-occurrence of some event."

Williston on Contracts 3rd ed (Lawyers Co-op Publishing Co New York 1972) Vol 15 at para 1824 says, "A release may be subject to the happening of a condition precedent, and it has been held that it may also be subject to a condition subsequent.

"There seems difficulty in this result, however. It was a settled doctrine of the common law that a cause of action once discharged was gone forever.

"If such a release can be successfully pleaded to the action before the condition subsequent happens, a court of law must give judgment for the defendant, and if after the condition subsequent has happened an action is again brought on the same cause of action, the plea of res judicata seems unanswerable."

How can these statements be reconciled? The answer is that they are using the words "release" and "condition subsequent" in different senses. However, it takes quite some time and effort and an understanding of how the law came into its present condition before one can reach this conclusion.

Williston at para 1820 properly sets out the definition of a release, namely, "A release, as the word is used technically in speaking of executory contracts, is a discharge under seal of an existing obligation or right of action." He goes on to say, "In the law of conveyancing, however, a release operates not only to destroy the right of the party executing the instrument but creates a similar right in the party to whom it is executed. In other words, it is a grant or a conveyance, and such was the early theory of a release even when it related to a right of action.

"But, however important it may be to remember this in order to understand early decisions, the instrument today is regarded in such cases as having merely a destructive function."

One must distinguish such a release from a covenant not to sue. If one follows through from the cases cited by Mahoney, JA in Burton v Palmer, one can see how the confusion of terminology came into being.

It is necessary to look closely at the decisions on which the learned authors of those text-books rely for their statements.

Mahoney, JA relies for his proposition on what was said by Treby, CJ in Buxton v Nelson (1699) 1 Lut 635; 125 ER 333. I will quote the passage that immediately follows what I have already quoted, omitting references to cases that are mentioned elsewhere in these reasons, "...as was said by the Chief Justice in Buxton v Nelson, a release might be given to operate upon, eg, a payment made subsequently and in my opinion, cl 3 may be construed as operating in this way. But, if this be not so, it does not follow that the purported release is invalid. The old rule is now avoided by construing such a release as being a covenant not to sue: Newington v Levy, per Blackburn J; Re Pilling; Ex parte Board of Trade [1903] 2 KB 50; and the covenant can be pleaded in bar to any claim by the releasor, see McDermott v Black."

It is a little difficult to assess Buxton v Nelson because it is written in Law French. The case was on demurrer before the Common Pleas in Banc. At ER 335, my translation of the report is as follows:-

"These exceptions were taken to the plea (1) the defendant ought to have pleaded that he had given notice of the composition to the plaintiff (2) that he ought to have made tender in court of the money to be paid to the plaintiff in accordance with the composition (3) that the said composition ought to have been pleaded as a release.

"Judgment was given for the plaintiff on the first two exceptions. And on that Powell, J said that the court would not determine how the matter ought to be pleaded and Treby, CJ said that a release on condition that the releasee would pay to the releasor so much money was no good. But if the release was made on condition that if the releasee would pay so much to such and such a day to come giving his release etc that is a good release. See for this 21 Henry VII 23 and 21 Henry VII 30 and notes."

Chitty cites three cases as authority for his proposition, namely, Newington v Levy (1870) LR 6 CP 180; Hall v Levy (1875) LR 10 CP 154 and Slater v Jones (1873) LR 10 Ex 186,192. Pannam relies solely on Hall v Levy. It is necessary to make a close examination of those authorities.

In Newington v Levy (1870) LR 5 CP 607, the plaintiff declared that the defendant was liable on a bill of exchange. The defendant put on a plea that the plaintiff had sued in a former action on the same cause to which the defendant had pleaded a deed of composition under the Bankruptcy Act 1861 which had released the debt. After some procedural interplay, the plaintiff confessed the plea and virtually discontinued. The plaintiff then commenced a fresh action. Again the composition was pleaded and a replication was then filed that as the defendant had not paid the instalment due under the composition on 6 April 1869, the deed had become null and void.

The Full Court of the Court of Common Pleas held that judgment in the first action was conclusive as the issue could have been raised in the first action. The judgment was delivered by Willes, J who said at 611-2, "We see no difficulty in upholding a release with a condition subsequent, in accordance with the suggestion of Maule, J in Gibbons v Vouillon [1849] EngR 1013; (1849) 8 CB 483, 491; [1849] EngR 1013; 137 ER 596, 600. It must have often happened that a voluntary payment good at the time as extinguishing the debt has been rendered void by matter subsequent, as in the event of bankruptcy of the debtor and an election by his assignees to treat the payment as a fraudulent preference; and it has never been successfully contended that the debt did not thereby revive. Indeed, the contrary is involved in the decision of Pritchard v Hitchcock [1843] EngR 760; (1843) 6 Man & G 151; 134 ER 844."

Maule, J's statement in Gibbons' case was made during argument. Willes, J probably remembered it because he was counsel for the demurring party. Maule, J said, "Littleton

s 467, and the commentary thereon (Coke on Littleton 274a, 274b) shew, that a man may release upon condition; though not for a limited period." Pritchard v Hitchcock is a preference case, which will be considered later in these reasons, but which did not involve a "revivor" of an obligation in any real sense of the word.

Willes, J also said at p 612, "We are also of opinion that the plaintiff might have replied to the plea in the former action that the release, which was itself after action, though operative when pleaded, had become avoided by non-payment of the composition."

The matter went to the Exchequer Chamber (1870) LR 6 CP 180. The decision of the Court of Common Pleas was affirmed. It was said that the plaintiff could have put up in the earlier action a replication that the deed of composition had become void through default of payment. Blackburn, J said that by the deed of composition the creditors had released the defendant, but it was also plain that should default be made in payment the release should be void.

His Lordship went on to say at p 191, "The question ... is, whether this is pleadable as a defence, where the matter which is to undo the release has not yet happened. I think it is. The old rule was that a right of action once suspended is gone for ever. To avoid that, where it was evidently contrary to what the parties intended, the Court of Exchequer Chamber, in Ford v Beech, construed the agreement, not as suspending the plaintiff's remedy on the promissory notes there sued upon, but as giving the defendant merely a right of action for breach thereof, if the plaintiff sued whilst the payments were continued, that is, as a covenant not to sue for a limited period. It must, however, be taken to be established that, where a covenant not to sue is in terms expressed to be intended as a release, and where the rights of a surety do not intervene, it is, in order to avoid circuity of action, an answer to the plaintiff's claim. A release which in terms is subject to a defeasance amounts to a covenant not to sue, except upon the happening of the event contemplated. Such a release is not open to the objection taken in Ford v Beech. It very rarely could happen that matter subsequent could undo that which had suspended the plaintiff's right of action, and therefore practically it was enough to say that a right of action once suspended is gone forever ...". In other words, the court was not dealing with a release, strictly so called, but with a covenant not to sue.

In Hall v Levy (1875) LR 10 CP 154, the Full Court of the Court of Common Pleas dealt with a third action on the same bill, but this time there was a different breach of the deed of composition alleged. The court gave judgment for the plaintiff on the demurrer saying that the replication was a good answer and stated at p 158 that it would be "most unjust if a debtor could be allowed to take advantage of a release only granted on a condition which he has not performed." It is clear that in Hall's case the same analysis of the situation was to be placed on it as was placed by Blackburn, J in Newington's case, that is, that there was not a release strictly so called but a covenant not to sue.

In Slater v Jones (1873) LR 8 Ex 186, a defendant put on a plea that he had entered into a composition and the plaintiff filed a replication that the defendant had not paid any money under the composition. The Full Court of Exchequer entered judgment for the defendant, but various comments were made during the various reasons of the members of the court. Kelly, CB said at 190, that it had been argued that Ford v Beech was an insurmountable difficulty because if the right of action for debt was barred for a time it would be gone forever. However, the learned Baron said, "According to the decisions I have just referred to (Edwards v Coombe (1872) 7 Ch App 723 and Edwards v Coombe (1872) LR 7 CP 519), it is clear that the right is not gone but exists if the debtor makes default." Martin, B said at 192 that Ford v Beech doesn't apply, but then went on to say, "Moreover, the principle has itself been the subject of much comment in recent cases, and it has been suggested by the late Mr Justice Willes that many of the difficulties caused by a rigid application of it are removed by construing covenants not to sue, except in certain circumstances, as releases with conditions subsequent." He referred to the passage I earlier quoted from Willes, J in Newington v Levy at 611 to 612. It would seem that Martin,B actually inverted what Willes, J was saying; a release is construed as a covenant not to sue, not the other way round.

Bramwell, B said at 194, "Either this resolution is equivalent to an accord and satisfaction defeasible by matters subsequent, and when the event happens whereby it is defeated (ie the debtor's default) a cause of action accrues, or else the composition resolution contains two implied terms, one by the creditors that all will forbear to sue until default, the other by the debtor that, in case he fails to pay the composition at the time agreed, he will pay the whole debt. And to insert these terms is strictly in accordance with Good v Cheesman [1831] EngR 580; (1831) 2 B & Ad 328; 109 ER 1165 where Parke, J expressed his opinion that upon default in performance of the terms of the agreement an action would lie, and also with the justice of the case."

One cannot fully understand these three cases without some background as to the substantive and procedural law of the nineteenth century.

A sacred rule of the common law was the rule in Pinnel's case [1572] EngR 290; (1602) 5 Co Rep 117a; 77 ER 237, that payment of a lesser sum cannot be satisfaction for the whole sum. It is plain that any system whereby debtors can effect a composition of their debts would contravene this rule. It was only through considerable contortion of the law that both the rule was maintained and also the exception to it by inventing mutual fraud on creditors if they received more than their dividend under the composition. The thinking of the lawyers involved is discussed by Stoljar in his A History of Contract at Common Law (ANU Press Canberra 1975) p 125.

Another ancient and sacred rule was, "A thing personal or suspended, or action personal suspended for an hour, is extinct and gone forever, when it is by the act and consent of the party himself who has the thing suspended," North v Butts [1794] EngR 1046; (1556) 2 Dyer 139(b), 140(a) (39); 73 ER 304. This rule was also inimical to the effectiveness of compositions.

Furthermore, the system of common law pleading under the Rules of Hilary Term, 1834 meant that any plea by way of traverse had to answer the whole cause of action. Thus, if there was a contract and a total failure of consideration, the defendant could plead that failure of consideration because that was a complete answer to the plaintiff's claim. If on the other hand there was merely a partial failure of consideration, then there had to be a cross action filed because the amount due to the defendant if his cross action was successful was less than what was due to the plaintiff on the action. Similarly, if the plaintiff alleged a debt and the defendant put on a plea that there was a covenant not to sue for that debt forever, that would be a good plea because it wholly answered the plaintiff's action. This was because there was a principle which still exists that there should be no circuity of action so that if the plaintiff can sue the defendant for $X and the defendant can sue the plaintiff for $X in the same transaction, then the defendant should be able to put on the matter by way of defence. On the other hand, if the promise merely was that the plaintiff would not sue the defendant for a certain period of time, breach of that promise was less than the value of the debt so it could not be pleaded as a defence to the action. What had to happen was that the defendant had to go to equity.

Stoljar, op cit at pp 126-127, summarizes the position thus:

"Suppose that a creditor agreed not to sue a debtor,

temporary suspension but extinguished the debt once

and for all. This rule was substantially accepted in

Ford v Beech (1848) 11 QB 842, 866-8; [1848] EngR 10; 116 ER 693,

698-9, where the Exchequer Chamber, speaking through

Parke, B concluded that, to avoid the extinction of

the debt, an agreement not to sue had to be construed

was to give the debtor a temporary bar and not a right

not to sue were shortly to be specifically enforced

through an injunction in equity, Beech v Ford (1848)

[1848] EngR 680; 7 Hare 208; 68 ER 85, while even covenants not to

sue for a time were construed as* releases subject to

made no default: Newington v Levy (1870) LR 5 CP

607; LR 6 CP 180; Slater v Jones (1873) LR 8 Ex

I have inserted an asterisk in the quotation because I believe I would agree with what the learned author says if the words "having the practical effect of" were inserted.

It was only when the English Bankruptcy Act, 1861 established a proper regime for the registration of Deeds of Composition, that the very real problem subsided.

Some reforms were effected to the common law system of pleading in 1854 so that a defendant at law "who would have become entitled to obtain equitable relief against a judgment at common law is given a statutory right to plead the facts showing that he has a right to obtain equitable relief against the enforcement of the common law judgment and to plead such facts at law by way of equitable defence" (per Evatt, J Cowell v Rosehill Racecourse Co Ltd (1937) 56 CLR 605, 644). However because the common law court had only limited forms of judgment it was only if the court of equity would grant a perpetual unqualified and continued injunction that a plea on equitable grounds was allowed.

Before drawing this excursus to a conclusion, I should mention the composition cases where the debtor had paid his money under the composition, but the payment had later been held to be void as a preference. Pritchard v Hitckcock (supra) was such a case. The Court of Common Pleas held that where a debtor pays money under a composition, he is to pay his own money. Thus, if he pays with money that is later found to be the money of his creditors under a bankruptcy, he has not paid his own money and thus, the condition of the composition has not been fulfilled and it cannot be pleaded as a bar to the original debt. This is, I believe the rationale of the decision, though there is considerable overlay of technical pleading matters.

In Hart v Smith (1868) LR 4 QB 61, a defendant, when sued for debt, mounted a plea that he had entered into a valid deed of composition which had been duly registered under the Bankruptcy Act. The plaintiff filed a replication that the defndant had not paid all his creditors under the composition. In analysing the pleading, Cockburn, CJ said at p 70 that what was involved was not a condition precedent, but "a condition that in the event of the covenants entered into by the debtor not being performed, that release shall become inoperative

... ." It is to be noted that in Hart v Smith, the deed contained a provision that on the avoidance of the deed, the creditors were at liberty to sue for their debts less the amounts they had received under the composition.

Although on a different aspect of the problem, Petty v Cooke (1871) LR 6 QB 790, 796 again focused on the fact that the payment, which at the time appeared to be a good payment, was not in fact or in law a good payment and followed Pritchard v Hitchcock.

In Fessard v Mugnier [1865] EngR 155; (1865) 18 CB (NS) 286; 144 ER 453, the plaintiff sued on a bill of exchange. The defendant pleaded a deed of composition including that he was ready willing and able to pay what was due under the deed. The defendant put on a rejoinder that he was not in England at the relevant time to which the plaintiff put on a surrejoinder that the plaintiff was not in England at the of the making of the deed. The Full Court of Common Pleas held that as the payment had not been made under the deed and the other matters pleaded were irrelevant, there should be judgment for the plaintiff on the demurrer. The deed actually provided that if the money was not paid under the composition, the release would be void and of no effect. That appears to have been treated by the court as a condition subsequent because Erle, CJ said, "The general averment at the end of the plea that, all things having happened necessary in that behalf, the plaintiff became and was bound by the deed as if he had been a party thereto and had duly executed the same, only relates to such conditions as are essential to make the deed binding upon the plaintiff as a non-executing creditor, but not to conditions to be performed subsequently by the debtor."

I should mention a couple more cases, though they are more peripheral.

In Kearsley v Cole [1846] EngR 1116; (1846) 16 M & W 128, the plaintiff had become a surety for the defendant for a loan the latter had received from a bank. The defendant entered into a deed of composition which deed purported to reserve the remedies against the sureties. The Full Court of Exchequer held that as the principal debt had been discharged so was the surety, though it was mooted that there might be some other result reached in equity. The same result was reached in New South Wales in Hancock v Williams [1942] NSWStRp 28; (1942) 42 SR (NSW) 252, 256. Had the composition become void, however, the remedies against the surety would have "revived"; see Pritchard v Hitchcock.

The facts in McDermott v Black [1940] HCA 4; (1940) 63 CLR 161 were that Black complained of McDermott's fraudulent misrepresentations on a sale of a night club business. Black then withdrew his allegations in consideration for the time for completion being extended. The contract was not completed, Black sued on the misrepresentations, succeeded at first instance, but lost in the High Court because the cause of action in deceit had been released by the contract to give time. Dixon, J, who gave the leading judgment on this issue, referred to the old rule in Ford v Beech at p 187 and then said, "But equity did not follow the law in its refusal to give effect to the agreement of the parties. At law an accord and satisfaction was not pleaded in bar of an action upon a specialty but in equity the debt was treated as discharged, and, before the Judicature Act, the creditor was restrained from proceeding at law for its enforcement. Webb v Hewitt [1857] EngR 652; (1857) 3 K & J 438, 444-6; [1857] EngR 652; 69 ER 1181, 1183, 1184. ... . A release, though not under seal, if given for consideration, was enforced by injunction, and so, too, was an agreement by simple contract not to sue. Accordingly they now constitute good equitable defences to legal demands: cf Edwards v Walters [1896] 2 Ch 157 at 168."

In Edwards v Walters at the page referred to by Dixon, J, Lindley, LJ actually said, "A release in equity is often spoken of as something easy to establish. But I am not aware of any circumstances which amount to a release in equity and not at law except an agreement for valuable consideration to give a release or not to sue. Such an agreement, unless there is some reason for not enforcing it, has in equity the effect of a release."

Recently compositions that fail because of avoided transactions have been considered by this court. In Star v O'Brien (1996) 40 NSWLR 695, 699-700; 22 ACSR 434, 437, Clarke, JA, said that where a payment to discharge a debt became void as a preference that "caused the original debt to revive". He cited as authority Newington v Levy at 611-2**.** Cole, JA said at NSWLR 706, ACSR 443, on the same authority that "The payment continues to be a valid and effective payment and the debt remains extinguished reviving only upon the election by the liquidator ... to treat the payment as a preference."

With great respect, the word "revive" is unfortunate. Indeed this sort of analysis was offered by counsel to the Full Court of Queen's Bench in Petty v Cooke and the court deliberately steered clear of it. The reason was that had it been applied, then one would have the situation where something had been suspended and then revived and it would have been struck down by the rule in Ford v Beech. As has been seen earlier, Willes, J used the word "revive" a debt rather loosely in Newington v Levy as denoting a debt which appeared to be discharged by a payment which was or appeared to be valid, but was actually invalid.

Clarke, JA by referring to the reasons of Barwick,CJ in NA Kratzman Pty Ltd v Tucker (No 1) [1966] HCA 72; (1966) 123 CLR 257, 277 shows that he had in mind the same situation, that is the position where a debt is affected by a payment which was temporarily valid, but which was later avoided ab initio.

This situation is virtually the same as that described in Fessard v Mugnier as a condition subsequent, and the situation described in Hart v Smith.

Indeed if one consults the text-books to find out what is a condition subsequent, one gets this answer. Thus, Chitty op cit at para 12-028 says that on the happening of a condition subsequent each party has a right to avoid the contract. An example is Head v Tattersall (1871) LR 7 Ex 7. In that case, the plaintiff bought a horse on 13 March 1871 which was warranted to have hunted with Bicester hounds. The contract provided that the plaintiff was at liberty to return the horse if it did not answer its description up to 15 March. The warranty was false, the plaintiff returned the horse on 15 March, but before he had done so, without default on the part of the plaintiff, the horse was injured. The Full Court of Exchequer held that the plaintiff must bear the loss. Only Cleasby, B deals with the question as to whether the contract was avoided ab initio or is terminated. He said at 14, "The effect of the contract was to vest the property in the buyer subject to a right of rescission in a particular event when it would revest in the seller."

In Gange v Sullivan [1966] HCA 55; (1966) 116 CLR 418, 441, when the High Court was dealing with a condition in a contract for the sale of land providing for council approval to be granted by 31 May 1965, "Whilst the effect of a condition must in every case depend upon the language in which it is expressed and a decision upon the meaning of one condition cannot determine the meaning of a different condition, the authorities cited do show a disposition on the part of courts to treat non-fulfilment of a condition such as that here under consideration as rendering a contract voidable rather than void in order to forestall a party to a contract from gaining some advantage from his own conduct in securing, or contributing to, the non-fulfilment of a condition bringing the contract to an end."

What has happened is that twentieth century lawyers have come to use the term, "condition subsequent" in two different ways. First it can mean a provision in a contract which nominates an event, the happening or non-occurrence of which will enable a party to avoid the contract ab initio. I will call this "Condition Subsequent, Type A". Secondly, it can mean such a provision which enables a person to terminate a contract in futuro. I will call this "Condition Subsequent, Type B." One can see this confusion in cases such as North Western National Life Insurance Co v Ward 155 P 524, 526 (Oklahoma)(1915) where the court, following the Restatement, defined a condition subsequent as, "one which follows the performance of the contract and operates to defeat or annul it...".

The proposition in Chitty and the other text-books, is correct for Conditions Subsequent Type A only. The proposition in Burton v Palmer is correct for Conditions Subsequent Type B only.

Perhaps it is only in the composition type cases that the distinction is vital. Unless the condition subsequent is of Type A, the composition will fall foul of the rule in Ford v Beech.

Thus, in the instant case, if the deed was to carry out the intention noted in Recital D, the deed would have had to take one of three forms, viz:-

(a) A release subject to a condition subsequent Type A;

(b) A covenant not to sue to cease if there was default;

(c) A discharge of the judgment debt with two new contracts, one containing a new promise by Mr Cluness to pay $5,000 a year and the second a joint promise by both Mr and Mrs Cluness to pay the whole debt on default by Mr Cluness.

When drafting the deed, the problems caused by the Limitation Act 1969 would have to be taken into account. As I have said, releases subject to a condition subsequent are not now controlled by perpetuity rules, but are affected by the Limitation Act, 1969. An action on a judgment is limited to 12 years by s 17 of the Limitation Act 1969. If the condition subsequent Type A is triggered more than 12 years after the last payment under the judgment, the creditor may not then be able to enforce the judgment. The argument could be put that one does not take into account the period during which the cause of action was asleep because of the conditional release. It is not necessary to decide this point, but I would not like to have to support that argument.

A further problem with a release subject to a condition subsequent Type A is that, unless the deed makes provision for the creditor to keep the instalments, on the deed becoming void ab initio, the debtor may be able to recover them back as money had and received; see Hunt v BP Exploration Co (Libya) Ltd [1979] 1 WLR 783, 835. The danger of including such a term is that it may make the condition subsequent into a Type B condition, which is void. The drafting may not be impossible, but it is extremely difficult. These same problems probably occur, at least to some extent, with a covenant not to sue.

This discussion seems to me to lead to the result that the law as to releases has been tremendously complicated by the procedures of the courts in England from the Middle Ages until the end of the 19th century. There would be a case for just cutting through all of this old law and saying, as the Americans appear to have done, that any agreement subject to the consideration that an old cause of action would be released has the effect of a release which could be made subject to a condition precedent or a condition subsequent.

However, there are very good reasons why, at least a single judge of this court, should not be that venturesome. The first is that there are many situations where the "old law" is still useful. For instance, the distinction between a release of one joint debtor and a covenant not to sue one joint debtor is still of great importance. Secondly, the law of accord and satisfaction still requires both accord, that is agreement, and satisfaction, that is payment. The mere promise to pay is insufficient. Most of the awkward problems with compositions have been remedied by statute so that this branch of the law does not call for any restatement.

Having had this long dissertation, it seems appropriate to state what the rules are in this area.

(1) A release must be by deed at law. It forever releases the cause of action. It may be subject to a condition precedent, but not a condition subsequent if the effect of the condition subsequent is that the contract is to operate for a time then terminate.

(2) A release subject to a condition subsequent will be valid if it is to become void ab initio in certain circumstances. One common case is where the release is part of a scheme of composition subject to the debtor making a payment and the payment either is not made or subsequently becomes void because of the law of preferences.

(3) A release of one joint debtor releases all the debtors.

(4) A covenant not to sue may be given affecting some only of the joint debtors with or without a condition that it becomes void on the happening or non-occurrence of an event.

(5) A cause of action can be discharged by accord and satisfaction. This means both an agreement to discharge the debt and also the actual payment of the consideration.

(6) In equity there can be a release without a deed provided that there is an agreement to give a release for consideration.

(7) A covenant not to sue for a period was no defence at law, but equity would grant an injunction to prevent action being brought during that period.

Applying the principles to the present case, it would have been extremely difficult to draft a valid release which would operate so as to "revive" the judgment debt upon the condition subsequent of failure of Mr Cluness to keep up his instalments. Certainly, the drafting suggested in the summons or in argument would not be sufficient.

Commonwealth Bank of Australia v Cluness Matter No 3038/96 [1997] NSWSC 222

At a glance

Court

Decision date

Before

Source

Judgment (133 paragraphs)

Commonwealth Bank of Australia v Cluness Matter No 3038/96 [1997] NSWSC 222 (27 May 1997)

Parties

Legislation Cited (2)

Cases Cited (9)