2. The Borrower shall repay the principal from the sale proceeds of the units at 'La Provence' after repayment of moneys payable to Australian Guarantee Corporation Advances Pty. Ltd. secured over the home units or the Borrower shall repay the principal on the 31st December, 1990 whichever event shall occur first."

La Provence was the home unit building referred to in clause 1 which was in turn the building being constructed by the respondent for the appellants pursuant to the building contract. There was no evidence before the Court of the terms of the Australian Guarantee Corporation Advances' loan to the appellants.

Counsel for the appellants also referred us to the pleadings in the action on the building contract. The respondent's claim in that action was for $595,000.00 for moneys allegedly owing under that contract and interest. The appellants in their defence denied liability for approximately $170,000.00 of this sum alleging that various amounts claimed as variations were not in fact variations. The appellants' counterclaim was for the cost of remedying defective work. It was deposed to that that cost would exceed $1 million.

There was thus evidence of a reasonably arguable defence and counterclaim in that action, success upon which would result in a sum owing to the appellants by the respondent which exceeded the total of the amounts which the respondent would recover in the action upon the building contract and the action upon the deed of loan. It appears from a proposed defence and counterclaim in the latter action, which is the subject of this appeal, that, if the application for liberty to sign judgment had not been made, the appellants would have made the counterclaim in this action which they make in the action on the building contract.

The appellants in the present case thus demonstrated to the satisfaction of the judge a good arguable counterclaim which exceeded the total of the claim and the respondent's claim under the building contract. The question before us is whether it was fairly arguable that they were entitled to an equitable set off in respect of that counterclaim.

The usual starting point of any discussion of the doctrine of equitable set off is the judgment of Lord Cottenham L.C. in Rawson v. Samuel (1841) 1 Cr.& Ph. 161, 41 E.R. 451, and, though his Lordship's statement that the equity of the defendant's claim must impeach the title to the plaintiff's legal demand is unfamiliar to the modern lawyer, the examples which he gave where that has been the case give some guidance here. Dicta since Rawson v. Samuel have explained that it is the closeness of the connection between the defendant's claim and the subject matter of the plaintiff's claim which may

make it unfair for the plaintiff's claim to proceed without allowance being made for the defendant's claim. See for example Government of Newfoundland v. Newfoundland Railway Co. (1888) 13 App.Cas. 199 at 213, Morgan & Son Ltd v. Martin Johnson & Co. Ltd [1949] 1 K.B. 107 at 108, Hanak v. Green [1958] 2 Q.B. 9 at 31 and Federal Commerce & Navigation Co. Ltd v. Molena Alpha Inc. [1978] 1 Q.B. 927 at 975. And as Woodward J. pointed out in D. Galambos & Son Pty Ltd v. McIntyre (1974) 5 A.C.T.R. 10 at 26, the conduct of the parties may also be a relevant factor.

It is unnecessary in the present case to consider the criticism by Spry: Equitable Remedies 4th ed. p. 176 and Meagher Gummow & Lehane: Equity Doctrines and Remedies 2nd ed. para. 3710 of the decisions in Morgan and Hanak. On either view the necessary relationship between the two claims arguably exists here.

The following facts show a relationship between the two claims:

(1) the sum sued for by the respondent was lent by the respondent to the appellants for the sole purpose of assisting them in the construction of the home unit building and the appellants' counterclaim is for breach by the respondent of the contract for that construction;

(2) the deed of loan contemplated that the appellants might be able to use the proceeds of sale of those home units for the repayment of that sum and breach by the respondent of the construction contract would have been likely to impede the sale of the units and so impair that ability.

The building contract was not before the Court and there was thus no direct evidence of the date fixed for completion of the construction. However, it may be possible to infer from the facts that the respondent claims that final payment was due by 17 July 1990 and that the male appellant swore that the building was completed two months behind schedule, that it was due for completion by about May 1990. If that is so it may also be possible to infer that when the deed of loan was entered into in January 1990 the parties contemplated that the appellants would have more than six months after completion of the construction to the required standard and before the alternative repayment date in which to complete the sale of units.

The respondent's counsel pointed out correctly that the deed of loan does not require the appellants to use the principal in payment of the respondent under the building contract. The words "for the sole purpose of assisting [the appellants] in the construction of" the home unit building permit the use of the moneys for payment of others, if there were any, engaged in the construction of the building. There was no evidence as to whether there were any other persons who could reasonably have been contemplated. However, if it ultimately appears that it was the respondent who was intended to be paid with the money borrowed under the deed, then it will be found that the practical effect of the loan was merely to postpone payment under the building contract, and that would make the connection between the two claims seem even closer. There is some ground for thinking that this may have been the case. According to the respondent's statement of claim in the Supreme Court action, it had made a claim under the building contract for $351,491.00 on 21 December 1989 of which the appellants had paid only $240,000.00 on 8 January 1990 leaving a shortfall of more than $111,000.00. Yet shortly after the execution of the deed, on 19 January 1990, the respondent made its second claim under the building contract of $163,153.00 and the appellants on 25 January 1990 made a payment of $260,000.00.

Perhaps the appellants should have gone into evidence, or evidence in greater detail, on the possibilities raised in the last two paragraphs. But we do not think that from this failure to do so it should be inferred that there is nothing in them. And even without that evidence we think it is far from clear that there is no real question to be tried. Accordingly, we think the appellants ought to have been given leave to defend.

Mr Morrison Q.C. for the respondent referred us to four cases which he said were close to the factual situation here. They were Indrisie v. General Credits Ltd [1985] VicRp 20; [1985] V.R. 251, Cunningham v. National Australia Bank Ltd (1987) 15 F.C.R. 495, Eagle Star Nominees Ltd v. Merril [1982] VicRp 57; [1982] V.R. 557 and W. Pope & Co. Pty Ltd v. Edward Souery & Co. Pty Ltd [1983] W.A.R. 117.

The facts in Indrisie have a superficial resemblance to those in the present case, but in that case the only connection said to exist between the promise by General Credits to lend Indrisie money, breach of which Indrisie alleged, and the latter's failure to pay which gave rise to General Credits' claim was that the failure of General Credits to honour its promise contributed in a general way to Indrisie's unprofitability and so its inability to pay General Credits under its lease. Here, as we have endeavoured to show, the connection is closer because the deed of loan in terms contemplated that the appellants might be able to use the proceeds of sale of the units for repayment of the loan and successful sale would be likely to be impeded by breach of the construction contract; and the connection would be even closer if the parties, at the time it was made, contemplated that the loan was in effect a postponement of payment under the building contract. The facts in the other cases are remote from this and do not assist in the resolution of this question.

A case closer to factual similarity with this is Popular Homes Ltd v. Circuit Developments Ltd [1979] 2 N.Z.L.R. 642 to which we were not referred. The defendant sold a development site to the plaintiff, the balance of the purchase price to be repaid at the end of one year and secured by a mortgage. The agreement for sale also provided that the defendant would provide finance for the development of town houses on the site, such finance to be advanced progressively over the year upon the value of the work completed. The plaintiff was allowed to set off its claim for damages for default in making the advances against the defendant's claim under the mortgage, it being contemplated that the sale of the town houses would finance repayment.

We would allow the appeal and grant the appellants leave to defend. The appellants should have their costs.

1. The appellants be granted leave to amend the notice of appeal by adding in the fifth line thereof, after the word "the", the words "judgment entered consequent upon the";
2. The appeal is allowed;
3. The appellants have leave to defend; and
4. The respondent is to pay the appellants' costs of this appeal and of the application before Boulton D.C.J. on 10 May 1991.

CATCHWORDS: EQUITY - Equitable set-off - Appeal from liberty to sign judgment in action on deed of loan - whether appellants entitled to an equitable set-off of amount claimed in separate action on building contract - whether necessary close connection between plaintiff's claim and subject matter of defendant's claim

Mr. P.H. Morrison Q.C. and with him Mr. G.J. Radcliff for the Respondent

Solicitors: Primrose Couper Cronin & Rudkin for the Appellants

__________________________________________________

__________________________________________________

Reason of the Court delivered on the 6th day of March 1992

__________________________________________________

"APPELLANTS GRANTED LEAVE TO AMEND NOTICE OF APPEAL; APPEAL ALLOWED;APPELLANTS GRANTED LEAVE TO DEFEND; RESPONDENT TO PAY APPELLANTS' COSTS OF THIS APPEAL AND OF THE APPLICATION BEFORE BOULTON DCJ ON 10 MAY 1991."

__________________________________________________