The Submissions On Behalf Of The Plaintiff
30 Mr Bell submitted that the defendant cannot rely upon damages arising from breaches of fiduciary duty owed to the debtor either as an equitable set-off against its obligations to the plaintiff under the mortgages, or by way of cross-claim; and that reliance could not be placed upon allegations that implied and/or express terms of the mortgages were breached; nor upon an allegation that the mortgages are harsh and unconscionable. His submissions continued that the terms of the mortgages do not permit the defendant to raise such defences and cross-claims available to the debtor, which position would not be cured by the joinder of the debtor as a defendant. He relied on the provisions of the mortgages and what he described as a line of authority commencing with Cellulose Products Pty Limited v Truda & Ors (1970) 92 WN 561. In my opinion, there is no consistency in the various decisions to which he referred.
31 In Cellulose Products the directors of a purchaser company guaranteed its obligations to a vendor to it of certain goods and, in response to a claim by the vendor against them, raised breaches by the plaintiff vendor of warranties given to the purchaser company pursuant to the Sale of Goods Act 1923. The plaintiff sought an order striking out these pleadings "as being clearly demurrable". Two of the defendants sought leave to file additional pleas by way of cross-action at common law claiming damages for breach of warranties, and defences of set-off or cross-action on equitable grounds claiming breaches of warranty in various terms. It was held that a surety cannot defend an action on a guarantee by claiming by way of set-off or cross-action, whether at common law or in equity, unliquidated damages resulting either from a breach of contract between the principal debtor and the creditor, or arising out of any other claim for unliquidated damages which the principal debtor may have against the creditor.
32 Much of the judgment in that case, as one would anticipate, was directed to the precise point in issue, namely the rights a party has in respect of a breach of warranty under that Act and the true characterisation of damages under s.54 of it. Isaacs J drew together his conclusions on these points at pp.570-571. He referred to certain American authorities and, at p.577, dealt with a "set-off", which he defined as one in respect of a claim for a liquidated sum arising out of the same transaction, the claim of the plaintiff being also for a liquidated sum.
33 His Honour came to the view, p.585, that a certain passage in Halsbury was not authority for the statement in the text. He distinguished the position on the following bases:-
"In the first place, all the parties were before the Court, so that if the surety did have a right of exoneration by the principal, that right was able to be enforced in the proceedings. Secondly, the liquidation of the company raised a special equity because, as is seen from the last portion of the judgment of Stirling J, if the course there taken was not followed the contractors might recover fully against the trustee company (guarantor) and the latter could only prove in the liquidation for a dividend. This and similar cases which deal with a state of affairs where a debtor is insolvent, are of no value or assistance, except perhaps to demonstrate that such cases are exceptions to the general rule that a guarantor cannot avail himself of the remedies which otherwise may be open to the principal debtor as against the creditor. Thirdly, it will be recalled that there were special circumstances in Bechervais v Lewis which required a particular sum to be taken into account. The debtor had, as previously stated, purchased certain debts due to the creditor and the purchase price was guaranteed by the defendant in the action. The arrangement between the creditor and debtor was that the creditor was to collect the debts, although the purchaser had paid for them, and that prior to the action being brought by the creditor against the guarantor, the creditor had actually collected some of the debts, but nevertheless failed to give the debtor credit for them and sued the guarantor for the full amount. In these circumstances it may be correct to say, as did Stirling J, 'in that particular case the set-off arose out of the same transaction as that out of which the suretyship arose', but as I have already pointed out, this case is merely illustrative of the general rule that the surety when sued can always show that the amount of the debt for which he is sued has been in fact reduced by the principal debtor, either by a direct payment or by receipt of moneys by the creditor on the debtor's account and for which the debtor is entitled to be credited."