HEALEY v COMMONWEALTH BANK OF AUSTRALIA

Banker and customer - appropriation of payment - customer's liability for debt on credited account - liability as guarantor sufficient.

Practice - submissions in reply - raise unpleaded defence - not permitted - discretion.

Contract - agreement to negotiate in good faith - not made out on facts.

Giles JA Mr Gregory Healey and Mr John Morrissey practised in partnership as solicitors. In addition to their professional activities they engaged in real estate and other business ventures, sometimes through companies and sometimes with co-venturers: the co-venturers included Mr Healey's then wife Mrs Donna Healey. Both the legal practice and the business activities were financed by Commonwealth Bank of Australia ("CBA"), with Mr Healey and Mr Morrissey having personal liability as borrowers and guarantors. CBA sued to recover some of the money for which they were liable, being the balances due on account 0029 2950 ("the partnership account") and account 0017 1032 ("the mortgage account") in their names at its Coogee branch after realisation of secured assets. The claim against Mr Morrissey was settled. The claim against Mr Healey was litigated, and on 19 March 1998 Rolfe J found him liable for the amount claimed plus interest, a figure of $3,857,838.14.

Mr Healey appealed. Most of the grounds of appeal were abandoned, and in the end he contended that Rolfe J had erred - (a) in holding that CBA was entitled to appropriate the proceeds of sale of one of the secured assets to reduction of account 0016 4684 ("the Healey account"), an account in the names of Mr Healey and Mrs Healey at the Coogee branch, rather than to the mortgage account; and

(b) in failing to hold that CBA was in breach of an enforceable agreement between Mr Healey and CBA obliging CBA to negotiate with Mr Healey in good faith.

Strata title premises at Level 2, 49-51 York Street, Sydney ("the premises"), from which part of the legal practice was conducted, were mortgaged by Mr Healey and Mr Morrissey to CBA. The mortgage was dated 10 August 1990, was expressed to be given in consideration of advances and accommodation granted or to be granted to Mr Healey and Mr Morrissey, and secured the payment of "all moneys mentioned inn a Memorandum filed in the Land Titles Office ("the Memorandum').

The premises were sold as part of an asset realisation programme in June 1995. Mr Healey and Mr Morrissey signed a document dated 4 June 1995 by which they authorised and directed CBA -

"... to discharge mortgage No: E/18422 and all associated securities in respect of property known as Lot 4 in Strata Plan 16878 (Level 2, 49-51 York Street, Sydney) for the sum of $425,000.00 gross less deductions for statutory charges and strata levies."

On settlement on 5 July 1995 the purchasers provided a cheque in favour of CBA for $299,216.93 and an authority to account to CBA for the deposit (which it already held) of $42,500.00. In a letter to CBA dated 5 July 1995 the vendors' solicitor noted that this would mean that "the total sum directed to the Bank at or shortly after settlement" would be $341,714.93 plus 50 per cent of the interest which had accumulated on the deposit. On 6 and 7 July 1995 the total sum of $341,747.10 was credited by CBA to the Healey account, reducing its debit balance from $1,305,089.35 to $963,342.25.

In his defence to CBA's claim Mr Healey alleged that this sum had been remitted to CBA in reduction of the mortgage account but had not been so-applied: that is, his case was that the sum had been appropriated by the debtors to the debt on the mortgage account. Mr Healey acknowledged in his evidence that he gave no instructions specifically to his solicitor as to the account to which the proceeds of sale of the premises should be appropriated, and save to the extent that the authority and the letter of 5 July 1995 to which I have referred might have done so no direction was given to CBA that the $341,747.10 should be applied in reduction of the mortgage account. Rolfe J held, referring to Colonial Bank of Australasia v Kerr (1889) 15 VLR 314, that a customer's direction to his bank as to appropriation of a payment must be in clear terms, that there was not in this case a sufficient statement as to how the sum should be appropriated, and that the funds were furnished with no instruction to apply them in reduction of the mortgage account. There was no appeal from his Honour's decision in this respect.

That should have been an end to any question of appropriation, but in his submissions in reply Mr Healey contended for the first time, as recorded by his Honour, that "there is no principle of law which permits a bank to appropriate the money of one customer, namely Mr Healey and Mr Morrissey, to the account of another, namely Mr Healey and Mrs Donna Healey". The submission was not within the defence as pleaded, which alleged appropriation by the debtors and did not take issue with the appropriation by the creditor. Rolfe J said that the matter was not pleaded and had not been the subject of timely submissions; that CBA had not had the opportunity to investigate the underlying facts, although so far as appeared Mr Morrissey had not objected to the appropriation, Mr Healey had not been relevantly prejudiced, and Mrs Healey did not consent to reversal of the credit entry; and (with reference to Multicon Engineering Pty Ltd v Federal Airports Corporation (NSWCA, 10 October 1997, unreported) and Collings Construction Co Pty Ltd v The Australian Competition and Consumer Commission (NSWCA, 3 March 1998, unreported) that Mr Healey should not be permitted to raise the matter. He nonetheless added observations to the effect that on the particular facts he was not satisfied that CBA's appropriation was impermissible.

The contention on appeal sought to take up this late submission. History repeated itself, in that while the grounds of appeal included a ground going to the substance of the submission, they did not include a ground going to the exercise of Rolfe J's discretion in declining to permit the matter to be raised. Mr Healey applied for leave to amend the notice of appeal to enable him to appeal in relation to the exercise of discretion. CBA opposed the application, but properly indicated

URJ HEALEY v COMMONWEALTH BANK OF AUSTRALIA (Giles JA) 3

that it was in a position to argue the additional ground. The Court indicated that it would hear argument on the application and on the substantive grounds, and would determine the application when giving judgment.

The general principle as to appropriation of payments was not in dispute. When a debtor who owes distinct debts to a creditor makes a payment to the creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly; if the debtor does not direct an appropriation at the time he makes the payment, the right of application devolves on the creditor (see Cory Brothers & Co v Owners of the Turkish Steamship "Mecca" ("The Mecca') (1897) AC 286 at 293;

Leeson v Leeson (1936) 2 KB 156 at 161; re Walsh, ex parte Deputy Commissioner of Taxation (1982) 42 ALR 727 at 728-729; Knysh v Corrales Pty Ltd (1989) 15 ACLR 629 at 633; Farrow Finance Co (in liquidation) v ANZ Executors and Trustee Co Ltd (1996) 23 ACSR 488). Where Mr Healey and Mr Morrissey did not appropriate the $341,747.10 to the debt on the mortgage account, CBA was entitled to appropriate it to any other of their debts.

Mr Healey's argument was that the debt on the Healey account was not an available debt to which CBA could appropriate the payment. It was said that the debt on the mortgage account was a debt of Mr Healey and Mr Morrissey, while the debt on the Healey account was a debt of Mr Healey and Mrs Healey, and that CBA could not in exercising its right of application apply the payment made by Mr Healey and Mr Morrissey in reduction of the latter account.

CBA responded, in my view correctly, that the argument fell down in its assertion that the debt on the Healey account was a debt of Mr Healey and Mrs Healey. It was, but what mattered was whether Mr Healey and Mr Morrissey owed CBA the amount due on the Healey account. Mr Healey was undoubtedly indebted to CBA on the Healey account. By a guarantee dated 25 July 1986 Mr Healey and Mr Morrissey had given cross-guarantees of each other's indebtedness to CBA, and so Mr Morrissey was liable together with Mr Healey for the debt on the Healey account. Mr Healey and Mr Morrissey viewed together owed distinct debts to CBA, including for the amount of the Healey account, and in accordance with the general principle CBA was entitled to appropriate the $341,747.10 in reduction of that indebtedness.

When faced with this, Mr Healey suggested that Mr Morrissey's indebtedness for the amount of the Healey account by virtue of the guarantee was not an indebtedness on which the general principle could operate. Why this should be so was not satisfactorily explained. The guarantee contained the customary all moneys provision, and it was said that an all moneys provision should be read strictly, but on any view there were cross-guarantees whereby Mr Morrissey guaranteed Mr Healey's indebtedness and there was nothing in Mr Healey's indebtedness on the Healey account to take it outside the ambit of the guarantee. The suggestion had to involve not the ambit of the guarantee but a qualification on the general principle, and no reason was put forward for the origin of Mr Morrissey's indebtedness to affect the operation of the general principle. On the contrary, if Mr Morrissey could have joined with Mr Healey in an appropriation of the $341,747.10 in reduction of their indebtedness in the amount of the Healey account, as undoubtedly he could have, but they did not as debtors exercise their right of appropriation, why should CBA not have exercised its right of appropriation to the same end?

Mr Healey's argument included reference to s112 and s113 of the Conveyancing Act 1919 ("the Act"), but I do not think they advanced Mr Healey's position. $113(2) relevantly provided that money received by a mortgagee under his mortgage or from the proceeds of securities comprised in his mortgage should be applied in like manner as the Act directed respecting moneys received by the mortgagee arising from a sale under the power of sale conferred by the Act. S$112(4) relevantly provided that the money received by the mortgagee arising from the sale under the power of sale should be applied "in discharge of the money, interest, and costs, and other money (if any) due under the mortgage". The point of the reference, as I understand it, was that this might have required that the $341,747.10 be credited to the mortgage account. I do not think it did. At best it required that the $341,747.10 be applied towards any debt "due under the mortgage", that is, any debt secured by the mortgage, and the mortgage secured much more than the debt on the mortgage account. Via the Memorandum, it secured the indebtednesses of Mr Healey and Mr Morrissey for the amount of the Healey account. It may be that, in any event, Mr Healey and Mr Morrissey authorised the application of the money to reduce the Healey account because the guarantee of 25 July 1986 was an associated security within the authority, but it is not necessary so to decide.

In my view, therefore, Mr Healey's argument should not be accepted. But should he be permitted to put it at all?

Had CBA known that Mr Healey's defence included a challenge to its appropriation as creditor, as distinct from an allegation of appropriation by the debtors, it may have taken a different course in or in relation to the proceedings. As Rolfe J noted, with the new submission in reply CBA did not have the opportunity of considering whether any estoppel had arisen by virtue of Mr Healey failing to object to the crediting of the Healey account. Mrs Healey was released by CBA at some time after the commencement of the proceedings, and a challenge to CBA's appropriation may have affected what CBA then did. The settlement with Mr Morrissey may have been on different terms had the challenge been known. If the Healey account were debited with the $347,747.10 and the mortgage account, or at least some other account, were credited with that sum, Mr Healey's overall indebtedness to CBA would not change, and so CBA might have been moved to claim in these proceedings the amount of the Healey account. It is not known what might have happened in these respects, and CBA should not be required to speculate: because it was so late, CBA may have been prejudiced if Mr Healey were permitted to raise the matter.

It does not seem that Mr Healey made a formal application to amend before Rolfe J, and holding a party to the manner in which he has conducted his case and upholding the finality of litigation were compelling considerations towards the course taken by Rolfe J. His Honour was clearly alive to the possibility of prejudice to CBA, stating more generally that it had not had "the opportunity to chart its litigious course on the basis of any such objection [to the crediting of the Healey account] and to consider any matters which may be raised in relation to it at an evidentiary level". I see no error in his Honour's discretionary determination that Mr Healey should not be permitted to raise the matter the subject of the submission which it is now sought to take up on appeal.

Although, therefore, I have addressed the substance of the submission, and have declined to accept it, I consider that the appropriate course is to grant leave to amend the notice of appeal so as to enable Mr Healey to appeal in relation to the exercise of discretion, and to reject that ground of appeal; the rejection of the

URJ HEALEY v COMMONWEALTH BANK OF AUSTRALIA (Giles JA) 5

ground of appeal going to the substance of the submission is then an unnecessary but additional reason for the failure of the appeal so far as Mr Healey contended for error in relation to appropriation.

In his defence Mr Healey purported to repeat and incorporate the entirety of a cross-claim against CBA, alleging that as a consequence CBA was precluded from commencing or maintaining the proceedings against him and that the proceedings ought to be dismissed.

The cross-claim alleged that by early April 1992 Mr Healey and CBA "had agreed to enter into a workout agreement" under which, in consideration of Mr Healey agreeing amongst other things to realise assets and maintain the legal practice, CBA agreed amongst other things not to require payment of money due from Mr Healey and to -

"... negotiate a settlement of all liabilities of the Cross Claimant to the Cross Defendant on terms that such liability would be satisfied:

i. by the net proceeds of the sale of the non-core assets referred to in subpara(a) and subpara(b) above;

ii. by the net proceeds of the sale of equity in the legal practice referred to in subpara(d) and subpara(e) above; and

iii. in respect of any residual liability by the Cross Claimant making reasonable payments over a reasonable period of time, the quantum of such payments to be determined by the financial circumstances of the Cross Claimant from time to time as a partner in the legal practice,

and subject to the foregoing that all liability of the Cross Claimant to the Cross Defendant be extinguished."

It was alleged that Mr Healey had performed the workout agreement on his part but that CBA had not, and that if CBA had performed its obligations under the workout agreement -

".., then by reason of the Cross Claimant's performance of its [sic] obligations under the workout agreement contained in paral0 above, the parties would have entered into a binding settlement pursuant to which:

(a) all non-core real estate and business assets of Healey and entities in the Healey Group would have been sold and/or transferred or would have had any mortgage granted to the Cross Defendant discharged and after paying out prior encumbrances to other lenders the net proceeds of sale or of the discharge of mortgage would have been paid to the Cross Defendant;

(b) there would have been a sale in whole or in part of equity in the legal practice to solicitors recruited by the Cross Claimant by the requisition of a partnership interest in the legal practice and the proceeds of such sales would have been remitted to the Cross Defendant to further reduce indebtedness;

(c) The Cross Claimant and the Cross Defendant would have agreed upon the reasonable amount the Cross Claimant would have had to pay to the Cross Defendant and over what period of time and the amount of each payment in extinguishment of all residual liability of the Cross Claimant to the Cross Defendant;

(d) The Cross Claimant would have been in a position to have performed his obligations in this respect;

(e) The Cross Defendant would have had no right to bring these proceedings against the Cross Claimant in respect of either the Partnership Account or the Mortgage Account."

There was then an alternative pleading of a case of misleading conduct contrary to the Trade Practices Act 1974 (C'th) or the Fair Trading Act 1987 (NSW) and a case of estoppel, with neither of which was the appeal concerned.

The relief claimed did not include damages. The claims in the cross-claim were to an order restraining CBA from maintaining and continuing to prosecute its claim against Mr Healey in relation to the partnership account and the mortgage account, an order that the proceedings by CBA against Mr Healey be dismissed, and an order that CBA "specifically perform the workout agreement".

The agreement alleged was in its terms an incomplete agreement, in that it recognised that a settlement of all Mr Healey's liabilities to CBA was not reached and that reaching a settlement was part of making a complete agreement. This was reflected in the allegation that Mr Healey and CBA "had agreed to enter into a workout agreement", and gave rise to the issue of an agreement to negotiate in good faith. Rolfe J recorded that Mr Healey's case was not, as the defence might have suggested, that the parties had made an agreement to agree, but that there was an agreement to negotiate in good faith which should be recognised in law and enforced.

The agreement as pleaded did include agreement that the parties would negotiate a settlement of all liabilities of Mr Healey to CBA, but did not refer to negotiation in good faith. It was accepted before Rolfe J, and on appeal, that the additional integer of good faith was necessary to Mr Healey's case.

Rolfe J conducted a detailed examination of the dealings between Mr Healey and CBA from early 1991 to March 1995, and said:

"Tt is quite clear, from a review of the totality of this evidence, much of which was not in issue, that there was never any concluded agreement pursuant to which the Bank agreed to discharge Mr Healey from his total indebtedness upon the payment by Mr Healey to the Bank from the sale of assets and in respect of the residual indebtedness. The Bank was prepared to allow Mr Healey to proceed to a work-out situation and then, assuming that that was achieved in a manner and within a time satisfactory to it, it would determine the amount of the residual debt it required him to pay and, if need be, the terms upon which payment would be made. The manner in which Mr Healey's case is basically formulated is that there was a binding agreement to negotiate in good faith and pursuant to which the Bank would be obliged to conclude an agreement to discharge him from his liability to it. There was no such agreement, nor, in my opinion, could there have been as a matter of law. What occurred, in my opinion, was that as from at least 1991, and probably earlier, Mr Healey, Mr Morrissey and companies and entities associated with them owed the Bank and SBN substantial amounts, much of which was unsecured. The banks were demanding repayment and numerous efforts were made to reach a basis upon which this would occur. The banks accepted that the assets over which they held security would be insufficient to discharge the total indebtedness and, accordingly, they sought sales of the secured properties after which consideration was to be given to the amount of the "residual" debt, which they would seek to recover and the way in which that was to occur. Any agreement, of necessity, required the Bank to forebear from suing for moneys, which were owing, and to accept a smaller amount than that to which the Bank was legally entitled. Perhaps for that reason the parties seemed to have been agreed that any final agreement would have to be in the form of a Deed. There was a requirement for a written agreement before any concluded agreement was reached. A written agreement was never prepared and there could be no suggestion, on the evidence, that any of the parties, including Mr Healey,

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were prepared to accept anything less. Finally, parties, who were not parties to the negotiations and who had their own individual interests to pursue, which were by no means consistent with those of the Bank and Mr Healey, had to agree."

Elsewhere in his reasons his Honour said that the parties never suggested that they were entering into an agreement to negotiate in good faith and that, while they were in negotiation, they had not reached any agreement to negotiate, and he said that the mere fact that the parties entered upon negotiations can not, without more, be translated into an agreement to negotiate in good faith.

Within these statements, and from the detailed discussion in his Honour's judgment, at least three reasons can be seen for the conclusion that there was no binding agreement to negotiate in good faith. One is that the parties did not agree to negotiate in good faith as a matter of fact. Another is that in the circumstances there could not have been such an agreement as a matter of law. The third is that any agreement was subject to a formal deed (and, it would seem, the additional agreement of third parties). It is unnecessary to go beyond the first of these reasons.

Whether the law recognises an agreement to negotiate in good faith can not be regarded as settled. Kirby P and Waddell AJA were prepared to countenance such an agreement in Coal Cliff Collieries Pty Ltd v Sijehama (1992) 24 NSWLR 1, but Handley JA was not. The reasoning of Handley JA found support in the later decision of the House of Lords in Walford v Miles (1992) 2 AC 128, but in Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 this Court found it unnecessary to readdress the matter. Despite Mr Healey's urgings on this appeal to hold that there can be an agreement to negotiate in good faith, in this case also it is unnecessary to readdress the matter.

As was frankly recognised by Mr Healey, the status in law of an agreement to negotiate in good faith normally arises as part of a commercial agreement expressly providing that the parties will so negotiate in order to conclude outstanding aspects of what may otherwise be seen as an agreement: Coal Cliff Collieries Pty Ltd v Sijehama was such a case. There was no express agreement in this case. There was no written or oral exchange concerning negotiation in good faith: as Rolfe J recorded, and this was not in dispute, "It is important to note that in the case before me there was no statement of any intention by the parties that they would negotiate or negotiate in good faith. In other words there was no statement that for a specified consideration they would negotiate." So Mr Healey's first task was to establish that there was an agreement to negotiate in good faith as a matter of fact, even before the question of the recognition in law and enforcement of such an agreement arose.

On this appeal Mr Healey did not endeavour to construct from particular letters, statements, or things done between the parties an agreement to negotiate in good faith, and his argument came down to the submission that it should be inferred from the fact of a long course of negotiation that the parties had agreed to negotiate in good faith. In my opinion his Honour was correct in concluding that the parties had not reached any agreement to negotiate in good faith as a matter of fact. There was no other concluded agreement between the parties within which there could be implied a term that they would negotiate in good faith to conclude outstanding matters, particularly the settlement of all Mr Healey's liabilities to CBA, and that Mr Healey and CBA were in negotiation did not give rise to an agreement to negotiate in good faith. Were it otherwise, by entering upon negotiations a party would commit himself to continue with the negotiations in good faith, and inhibit action which might impinge upon the

continuance of the negotiations, when the essence of negotiation is that the party is not bound until the negotiations arrive at a concluded agreement. Mr Healey's case rose no higher.

It should be observed that, even if there had been an agreement to negotiate in good faith which would be recognised and enforced in law, it is far from clear that Mr Healey would have been entitled to the relief he claimed. There are many reasons for that, but it is sufficient to refer to one. The effect of such an agreement would have been that CBA bound itself not to withdraw from the negotiations so long as Mr Healey continued to negotiate in good faith. At the beginning of 1995 Mr Healey found certain of CBA's requirements unacceptable, and the negotiations from then on were marked by his failure to adhere to them. There were some further negotiations leading nowhere until, at the latest, mid-1995. CBA brought these proceedings at the beginning of November 1996. It is difficult to see why CBA should not have been able to do so when the negotiations had long been at an end. However, it does not matter, because there was no agreement.

(a) leave be granted to amend the notice of appeal to include a ground to the effect that Rolfe J was in error in declining to permit the appellant to raise the matter of appropriation by the respondent; but

Leave granted to amend the notice of appeal to include a ground to the effect that Rolfe J was in error in declining to permit the appellant to raise the matter of appropriation by the respondent; but the appeal dismissed with costs.

Solicitors for the appellant: G H Healey & Co with Graeme R Jensen & Co, Coogee

Counsel for the respondent: W H Nicholas QC & G K Burton