In the matter of Elsmore Resources Ltd; Elsmore Resources Ltd v Ashley Grant Howard & 3 ors

Judgment 1Pursuant to an interlocutory process filed on 17 April 2014 the plaintiff company Elsmore Resources Ltd, whose principal is one Tong Hong (Joseph) Chung, seeks summary judgment for $1,859,035 against the third defendant Harry Fung, summary judgment for that amount having already, on 12 May 2014, been given against the first defendant Ashley Grant Howard, the second defendant Periwinkle Investments Pty Ltd and the fourth defendant HF Global Financial Solutions Pty Ltd. 2Elsmore instituted the substantive proceedings on 24 February 2014 against Mr Howard, claiming $2,209,000 held or controlled by Mr Howard, being share subscriber fees which, under the terms of an agreement between Elsmore and Periwinkle, were to be held in trust for Elsmore and remitted to it immediately upon its being listed with the ASX (which occurred on 23 December 2003), but were not so remitted. On 5 March 2014, the Court by consent made an order restraining Mr Howard from dealing with the share subscriber fees, and made additional orders in the nature of discovery. On 10 March, Periwinkle (of which Mr Fung is the sole director and shareholder) was added as second defendant, and Mr Howard was ordered to attend for examination on 13 March; in the meantime he was restrained from dealing with his assets in Australia up to the unencumbered value of $2,209,000. 3Elsmore and Mr Howard participated in a mediation on 11 March 2014. Periwinkle was served on or about that day. Mr Fung and HF Global were not then parties to the proceedings, but Mr Howard's solicitors suggested that it would be helpful if Mr Fung were available to attend the mediation. Late in the day, at their request, after the mediation had proceeded for some hours, he attended at Norton Smith's premises, where the mediation was conducted, but does not appear to have participated directly in the mediation, apart from side discussions with Mr Howard. Ultimately, however, he signed a handwritten document entitled "Deed of Terms of Settlement" ("the Settlement"), though it was not executed as a deed, which named him (along with Elsmore, Mr Howard, Periwinkle and HF Global) as a party, was expressed to be "immediately binding, further terms to be agreed and reduced to written agreement", and contained the following relevant terms: 1. Immediate release of $349,965.00 controlled monies. 2. Howard to pay ELR $1,550,000.00 within 120 days of today. 3. Minimum monthly payment of $200,000.00 (30 day period from today) ... 6. Howard, Fung, Periwinkle, HF Global guarantee and indemnify full performance ... 7. Mutual releases and confidentiality. 8. Pay own costs - ELR to pay Norton White Howard/Fund to pay MA Legal 9. Proceedings stayed/adjourned for 120 days. 10. If any default, for any reason or no reason, full unpaid/unperformed become immediately due. Howard, Fung, Periwinkle, HF Global acknowledge debt of $2,209,000 and agree to immediate entry of judgment, plus interest and legal costs (indemnity) for full amount, less any payments received by ELR. 4The sum of $349,965.00 referred to in clause 1, which had been advanced by Mr Fung to Mr Howard from his own moneys, was released and paid to Elsmore. As contemplated by the Settlement, Norton White, who acted for Elsmore, prepared a more formal typewritten "Deed of Settlement, Guarantee, Release and Indemnity". An electronic copy, apparently signed inter alia by Mr Fung, was returned by MA Legal (who acted for Mr Howard) to Norton White on 12 March 2014. On 13 March, by consent, the orders made on 5 March and 13 March were stayed and the proceedings adjourned to 25 July 2014. 5Mr Fung denies that he signed the typewritten Deed and says that what appears as his signature on it must have been affixed by Mr Howard using an electronic copy he had earlier been provided. Ultimately, Elsmore did not rely on the typewritten document and it is unnecessary to consider its terms further. 6Mr Howard defaulted in payment of the first monthly instalment of $200,000 when it fell due on 11 April 2014. That provoked the joinder (on 5 May 2014) of Mr Fung and HF Global, the termination of the stay, and the application for summary judgment against all four defendants for the outstanding balance. 7As required by (NSW) Uniform Civil Procedure Rules, r 13.1, there is evidence of the facts on which the plaintiff's claim is based, and evidence given by the plaintiff's director Mr Chung that in his belief Mr Fung has no defence. However, Mr Fung says that he has a defence under (NSW) Contracts Review Act 1980. (While other possible defences were mentioned, it seems to me that if he cannot succeed under the Contracts Review Act, he could not succeed on any other of the bases suggested). 8In short, Mr Fung's case appears to be that as he was not a party to the substantive proceedings at the time and not exposed to any risk that might be mitigated by the deed, there was no or little benefit for him in the Settlement and little reason for him to execute it; and that his execution of it was procured by or on behalf of Mr Howard late in the day, while he was unrepresented and did not fully comprehend what liability he was assuming (including that he was giving a personal guarantee), by threats (including that unless he signed the document the matter would not go away and he would be exposed to police and ASIC investigation and the likelihood of imprisonment). 9Contracts Review Act, s 7, provides that where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, decide (inter alia) to refuse to enforce all or any of the provisions of the contract. "Unjust" is defined, non-exclusively, in s 4(1) as including "unconscionable, harsh or oppressive". By s 9(1), in determining whether a contract or a provision of a contract is unjust, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of compliance or non-compliance with the provisions of the contract. And by s 9(2), the Court shall have regard, if relevant, to a number of listed matters, of which Mr Fung's case raises, in particular, (h) absence of independent legal or other advice for Mr Fung; (i) absence of sufficient explanation to and lack of adequate understanding by Mr Fung of the provisions of the Settlement and their effect; and (j) unfair pressure or unfair tactics by Mr Howard in telling Mr Fung that if he wished to avoid an ASIC or police investigation, prosecution and imprisonment he should sign the Settlement so that "it would go away", and that he had no real choice but to do so. 10Mr Fung is entitled defeat the application made against him unless his defence is so clearly untenable that it could not possibly succeed [Fancourt v Mercantile Credits Limited (1983) 154 CLR 87, 99; Hogan v Howard Finance Ltd [1987] ANZ ConvR 317; (1987) ASC 55-594; (1987) NSW ConvR 55-356]. Although it was once thought that the merits of a claim for relief under the Contracts Review Act should not be dealt with on a motion for summary judgment [Commercial Banking Company of Sydney Limited v Pollard [1983] 1 NSWLR 74], it is now well-established that the mere fact that a party to a contract can point to circumstances that fall within the words of one or more paragraphs in s 9(2) does not mean that there is an arguable case for relief under that Act [Hogan v Howard Finance Ltd (Hope JA)]. 11Drawing on the concise summary of Campbell JA in the Court of Appeal in Kowalczuk v Accom Finance Pty Ltd (2008) 77 NSWLR 205 (at [85]-[87]), which collects the earlier authorities on which it is based, the relevant principles concerning the application of the Contracts Review Act can for present purposes be summarised as follows. In applying the Contracts Review Act, two distinct steps are involved. The first is whether the contract was unjust in the circumstances in which it was made, having regard to the factors referred to in s 9. This is a conclusion of fact, albeit one of ultimate fact involving a broadly based value judgment. A contract can be unjust even if it is not unconscionable, harsh or oppressive. A contract can be unjust because of substantive unfairness (because its terms, consequences or effects are unjust) or because of procedural unfairness (the unfairness of the methods used to make it), but usually an unjust contract will be the result of the combination of substantive and procedural unfairness. A contract may be unjust even though the circumstances that give rise to that injustice are not known to the other party. 12The second step, which arises only if the first is resolved in the affirmative, is whether any and if so what relief should be granted; this involves the exercise of a judicial discretion. It does not automatically follow that, if the contract is found to be unjust, relief will be given to remedy that injustice. Whether the circumstances by reason of which the contract is unjust are known to the party against whom relief is sought is an important consideration in the exercise of the discretion. 13There are substantial obstacles to the case Mr Fung seeks to make. First, it is questionable whether there was no benefit to him in giving the guarantee, by which he procured releases in favour of himself and his company Periwinkle. Although he was not at the time of the mediation a party to the proceedings, he was the alter ego of Periwinkle, which was a party, and which had recently been served with notice of the proceedings as Mr Fung knew. What was apparently involved was a dishonest misappropriation of investors' funds, in which Mr Fung was arguably implicated, and the risk, if Elsmore were not placated, of civil proceedings against Mr Fung, and of investigation by ASIC, prosecution and punishment, was not unrealistic. If Elsmore could be placated, that would benefit Mr Fung by reducing the risk to him and to his company. All that said, it remains that at first sight the contract was one which involved little benefit but significant detriment for Mr Fung. Even accepting that the "mutual releases" were a benefit, he gained that release only at the price of exposing himself personally to liability for the whole of Elsmore's claim in the event of Mr Howard's default, which appears to involve a high risk for a relatively slight benefit. 14Secondly, it is questionable whether Mr Fung did not know that he was signing a personal guarantee: while that is what he said in cross-examination, and in the course of an examination on 2 June 2014, his affidavit evidence recites conversations with Mr Howard prior to signing the terms which are consistent with him knowing that a personal guarantee was involved; there is also some indirect evidence that Mr Howard's solicitor heard him berate Mr Howard for putting him in a position where Mr Fung had to "bail him out". Moreover, if he did not understand that a personal guarantee was involved, but that the settlement would placate the plaintiff and at least reduce his exposure, it is difficult to see why he would be reluctant to sign the document in the first place. And he had already advanced $350,000 of his own funds to Mr Howard to enable him to make the initial payment to the plaintiff - he says he was told, by Mr Howard, that if he could provide the money for a few weeks "this [that is, the dispute with the plaintiff] would go away". But Mr Fung, in cross-examination, said that the conversations recorded in his affidavit were reconstructions based on what he now knew, and maintained that he did not understand at the time that a personal guarantee was involved. While this seems unlikely, it is not impossible. 15Thirdly, whether the threats about "jail" were made is questionable, as he referred to no such threats in his examination on 2 June, saying only that he had been "conned" by Mr Howard, and agreeing that "no one held a gun to your head" - although his answer was "not exactly, no". That said, while one might have expected him then to volunteer that there were threats, the answer "not exactly" is not inconsistent with something just short of a "gun to the head", and he did describe being "coerced". And a file note of the mediation made by the plaintiff's solicitor did record a statement by one of Mr Howard's solicitors to the effect "everyone will be put in jail". The significant possibility that Mr Fung's signature was forged by Mr Howard on the typewritten document prepared to incorporate the Settlement increases the likelihood that his assent to the Settlement was less than willing. 16In my judgment, notwithstanding that Mr Fung's case faces significant obstacles, it remains arguable that the imbalance of benefit and detriment inherent in the contract involved substantive unfairness, so far as concerning Mr Fung. It also remains that he was summonsed to the mediation late in the day at short notice; that he entered into a contract with very serious implications without legal or other representation or advice (I think it is quite clear that MA Legal were acting for Mr Howard, and not for Mr Fung, although that might not have been so obvious to the plaintiff's solicitors at the mediation); that it is at least arguable that he was subjected to considerable pressure by Mr Howard, including the threat that he might well go to prison if he did not do what was necessary to make the dispute go away; and that it is possible that he did not understand that he was giving a personal guarantee. Those aspects could amount to procedural unfairness. In those circumstances, it is not impossible that a court could conclude that the Settlement, so far as it concerns Mr Fung, was unjust in the circumstances in which it was made. 17Even if the Settlement be found to be unjust, that does not mean that the court would refuse to enforce it; the second stage is the question of discretion. As appears from Kowalczuk v Accom Finance [see [11] above], it is a significant factor in the exercise of that discretion that the other party was not implicated in the matters that create the injustice. Indeed, in Hogan v Howard Finance Ltd, the summary judgment application succeeded essentially because there was nothing to implicate the mortgagee in responsibility for the Hogans' loss. As Hope JA put it: The Hogans having been apparently induced by fraud to put their money into the control of Kaye-Furrer and having lost it, they seek to obtain relief against the mortgagee and Mr. Moloney neither of whom in my opinion were in any way responsible for their most unhappy loss. It was the Hogans who were gulled, and so effective was the deception that they neither wanted nor sought any further advice about the investment. 18But when Hogan v Howard Finance Ltd was decided, there was a notion that a contract would be unjust only if it were unjust "against" the other party, so that it was necessary that that other party be somehow implicated in or responsible for the injustice. That notion has since been dispelled, so that a contract may be unjust notwithstanding that the other party is entirely innocent, though its innocence may be highly relevant on the exercise of the discretion to grant relief [Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256, 277; Nguyen v Taylor (1992) 27 NSWLR 48, 71 (Sheller JA); Perpetual Trustee Company Ltd v Albert and Rose Khoshaba [2006] NSWCA 41; (2005) 14 BPR 26, 639, [94]-[96]; Kowalczuk v Accom Finance, [85]-[87] (see [11] above)]. 19While the absence of matters to implicate Elsmore in any injustice would undoubtedly be relevant and possibly decisive on the exercise of the discretion, it would be a bold step to hold, on an application for summary judgment, that the discretion could reasonably only be exercised by declining relief. That is moreso the case where Elsmore did not negotiate directly with Mr Fung for the guarantee, but left it to Mr Howard to do so, especially in circumstances where Mr Fung was unrepresented. The risks associated with a creditor leaving it to the principal debtor to negotiate and procure execution of a guarantee are well-established, and while they are at their highest in the context of relationships of influence or akin to them (as in Yerkey v Jones (1939) 63 CLR 649), the statutory jurisdiction under the Contracts Review Act is not constrained by the strictures that apply to general equitable relief. It is not unarguable that Elsmore was not entitled to assume that MA Legal were acting for Mr Fung as well as for Mr Howard; and that by leaving it to Mr Howard to negotiate the guarantee with Mr Fung, assumed the risk that Mr Fung might be the subject of "unfair tactics" by Mr Howard, or at the least might not understand the nature and extent of the risk he was assuming by signing the terms. 20It follows that in my judgment it cannot be said that, as a matter of discretion, relief under the Act would inevitably de declined. Accordingly, while the difficulties that face Mr Fung's proposed Contracts Review Act defence are considerable, I am unpersuaded that it cannot possibly succeed. 21The Court therefore orders that the application for summary judgment against the third defendant contained in paragraph 3 of the Interlocutory Process filed 17 April 2014 be dismissed with costs.