IRM Pacific Pty Ltd v Nudgegrove Pty Ltd & Ors

[1] McMEEKIN J: This is an application by the plaintiff in the proceedings for judgement for the sum of $142,384 under r 190 of the Uniform Civil Procedure Rules 1999. Rule 190 gives the court power to make orders to which a party may be entitled on the basis of admissions contained in the opponents' pleading.

[2] The plaintiff claims $189,992 for hire charges said to be due and owing in respect of trucks leased to the defendants under five agreements.

[3] Whilst the defendants deny owing any monies to the plaintiff their pleading accepts that there were contracts for hire, accepts that the plaintiff's trucks were used by the defendants, alleges payment of the sum of $518,386 under those contracts, asserts that "the only amount that could have been due from the defendants to the plaintiff was the sum of $660,770.00", and then pleads, at paragraph 1(q) of the defence, in relation to the balance:

"Further any balance of $142,384 is not due and owing from the defendants to the plaintiff because the plaintiff was in fundamental breach of and repudiated the contracts (as particularised in the defendants' counterclaim) and the defendants sets-off against the amount claimed by the defendant (sic) the amount of the defendants counterclaim."

[4] In brief, by their counterclaim, the defendants assert that the contracts for hire came into being following conversations between a servant or agent of the plaintiff, a Mr Rhett Lennon, and Mr Colin Clark on behalf of the defendants whereby representations were made concerning the suitability of the trucks hired for the defendants' purposes, and particularly that the plant could perform at a minimum of 200 hours per month and that the plaintiff would undertake any necessary repairs to ensure that performance. The defendants allege that these representations induced them to enter into the contracts with the plaintiff, that the representations were negligently or falsely made, that in making the representations the plaintiff was engaging in conduct that was misleading and deceptive, and that as a result of the fraud, negligence, or misleading conduct the defendants have sustained losses amounting to $922,985.60. Those losses are particularised as losses resulting from prolongation of contracts - contracts that the defendants entered into on the assumption that the vehicles supplied by the plaintiff were as promised (of which the plaintiff was well aware), loss of profits in respect of those contracts and increased expenditure resulting from the faulty state of the trucks supplied.

[5] The plaintiff seeks judgement for that sum of $142,384 referred to paragraph 1 (q) of the defence, asserting that properly construed the pleading amounts to an admission that so much is due. As to the two matters pleaded in paragraph 1(q) the plaintiff asserts:

(a) that there is no pleading of any acceptance of a repudiation, that in fact the counterclaim makes plain that the contract continued to its conclusion, and that the application of the rules of pleading - particularly rules 154 (inconsistent pleadings) and 166(4) and (5) (deemed admissions) - result in a necessary conclusion that repudiation is not open as a defence; and

(b) that there is no entitlement to an equitable set-off, assuming the facts pleaded by the defendants be accepted; and

(c) that even if there is such an entitlement there is a discretion in the court not to permit the set-off and this is a case where the discretion should be exercised.

[6] Mr Arnold who appeared for the defendants concedes that repudiation is not available. He submits that the facts pleaded do amount to an equitable set off and a valid defence to the claim disentitling the plaintiff to a judgment, and that there is no secondary discretion to disallow such a set off at this stage.

[7] There is no doubt that if the facts pleaded do in truth amount to a set off then that can operate as a valid defence to a claim - see r 173 UCPR which provides:

"(1) A defendant may rely on set off (whether or not of an ascertained amount) as a defence to all or part of claim made by the plaintiff whether it is also included as a counterclaim."

[8] The issue agitated on the application requires a resolution of the question of when a defendants' cross claim for unliquidated damages, arising out of the same series of contracts relied on by the plaintiff for a claimed debt, can amount to an equitable set off.

[9] Traditionally it is said, in reliance on Rawson v Samuel (1841) 1 Cr & Ph 161, that an equitable set off arises when a defendant pleads matters which "impeach" the validity of the plaintiff's claim. Keane JA recently explained the principles in Forsyth & Anor (as trustees for the C & S Forsyth Superannuation Fund) v Gibbs [2008] QCA 103:

"[9]. Consistently with the technique of equity, which does not seek to define what an elephant is but knows one when it sees one, the principles governing the availability of equitable set-off of cross-claims are couched in open textured terms, such as "sufficient connection" and "unfairness". In some cases, it will be necessary to engage in an evaluation of a range of facts which might establish "sufficient connection" or "unfairness" of the relevant kind. But the principles to be applied are not so vague or subjective that it is never possible to determine, for the purposes of an application for summary judgment, that the facts alleged by a defendant simply fall short of what is required.

[10] It is important to emphasise that the availability of an equitable set-off between cross-claims does not depend upon an unfettered discretionary assessment of whether it would be "unfair" in a general sense for a plaintiff to insist on payment of the debt owed to it while the cross-claim remains unpaid. It is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim so as to make it unfair for the claim to be allowed without taking account of the cross-claim" (citing United Dominions Corporation Limited v Jaybe Homes Pty Ltd [1978] Qd R 111 at 116 - 117; Hill Corcoran Constructions Pty Ltd v Navarro & Anor [1992] QCA 017.)

[10] Mr Mills, who appeared for the applicant, submitted that there was not the necessary close connection between the defendants' cross claim and the plaintiff's claim nor the necessary quality of unfairness to permit there to be a set off in the circumstances pertaining here. He submitted that even if the defendants' allegations be established such claims do not "impeach" the plaintiff's claim for the payment of the hire charges - the contractual entitlement for the payment of the rental charges he says is not lost.

[11] That latter submission, with respect, misconstrues the nature of the impeachment test. It is not necessary that the fundamental underpinnings of the plaintiff's claim be impeached. A set off by its nature is not a denial of the debt but rather a plea against its enforcement. If successful the cross demands remain in existence at law but equity considers it unconscionable for the creditor to treat the debtor as in default to the extent of the cross demand: Recent Issues in Relation to Set Off by Derham [1994] HCA 13; (1994) 68 ALJR 331 at 337 citing Aries Tanker Corp v Total Transport Ltd [1977] 1 WLR 185.

[12] Mr Mills submitted that the defendants' claims did not arise, in terms, directly out of the contracts sued on by the plaintiff and that was fatal. That is not, I think, right. After an extensive review of the authorities Woodward J in D. Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10 held to the contrary (at p 26). The cases I refer to below at paragraph [15] are inconsistent with that submission. Hill Corcoran Constructions Pty Ltd v Navarro & Anor [1992] QCA 017, where a claim for damages for defective building work was set off against a claim under a deed, is directly contrary to the submission and binding on me. Galambos was cited with evident approval, albeit on another point, in Hill Corcoran.

[13] Mr Mills argued that whilst support for the defendants' position can be found in building cases this case concerned a lease and is in a different category. He attempted to support his argument by reference to authorities related to landlord and tenant arguing that whilst the contracts here were chattel lease contracts the same principles applied. There are two answers to that submission. First, in my view the peculiar features of a lease agreement relating to real property are very different to an agreement for the hire of chattels. Secondly, while it is true that support can be found for the submission that damages claims will not be allowed as a set off against a claim for arrears of rent, Fong v Cilli (1968) 11 FLR 495, a decision of Blackburn J, being an example, it is far from clear that there is, in truth, any different principle. As Woodward J observed in Galambos the line of authority on which Blackburn J relied does not sit comfortably with the early case of Beasley v D'Arcy (1800) 2 Sch & Lef 403 where a sum was deducted from rent due by a tenant for damage done in by the landlord in cutting timber. More recent authority does not support that there is any different principle in relation to leases: British Anzani (Felixstowe) v International Marine Management (UK) Ltd (1980) 1 QB 137_._ Whatever be the limits of the doctrine I am not persuaded that lease cases have any application in the circumstances pertaining here.

[14] Mr Mills referred me to the decision of Young CJ in Eq in Blacksheep Productions Pty Ltd v Waks [2008] NSWSC 488 as supporting his argument but the cross claims there were in no way similar to the situation here. The plaintiff sued on a deed under which monies were owed. The defendant sued for damages related to water damage to premises occupied under a lease, damage that occurred later in time to the obligation to pay under the deed. Thus both the source of the respective obligations and the timing of the alleged indebtedness were different. His Honour held that the necessary closeness of connection was not present. As well what was in issue there concerned the landlord's right to re claim possession for non payment of rent - an issue that has no relevance to the case here, and which was of considerable relevance to the equities.

[15] No case directly in point was cited to me but examination of decided cases shows that equitable set offs have been allowed in cases not so different from the circumstances here:

(a) in Young v Kitchin (1878) 3 Ex D 127 a set off was allowed of damages for delay or defective work against monies due under a building contract;

(b) in Government of Newfoundland v Newfoundland Railway Company (1888) 13 App Cas 199 the Privy Council allowed a cross claim for damages for failure to complete construction of a railway line against a claim for payment of a subsidy in respect of that part of the construction that was completed under the contract to build the railway line. The test was whether the damages were "flowing out of and inseparably connected with the dealings and transactions" which gave rise to the original claim.

(c) in Morgan & Son Ltd v Martin Johnson & Co Ltd [1949] 1 KB 107 a claim for damages for the loss of a stored vehicle was allowed to be set off against the charges for storing a number of vehicles. Tucker LJ observed that the defendant's claim was one "arising out of the subject matter of the plaintiff's claim... and closely interwoven with it";

(d) in Hanak v Green [1958] 2 QB 9 a builders' claim for extras and for damages for refusal of access to the site was allowed as a set off against the client's claim for damages for defective work;

(e) in Hill Corcoran Constructions Pty Ltd v Navarro & Anor [1992] QCA 017 the plaintiff sued for a debt owing under a deed of loan. The purpose of the loan was to facilitate the construction by the plaintiff of a home unit building for the defendant under an existing building contract. A claim for damages for defective building work in respect of that construction was allowed to be set off against the plaintiffs' claim.

[16] There is no question but that the cross claims here arise out of the same series of contracts. Whilst it is well established that that is not enough (eg Re KL Tractors Ltd [1954] VicLawRp 70; [1954] VLR 505) the connection between the claims made by the parties goes much deeper. Here the claim made is that the defendants were induced to enter into the contracts, which are the basis for the claim made against them, by the negligence, misleading conduct or fraud of the plaintiff's agent. The losses claimed are alleged to arise directly from the conduct of the plaintiff's agent, conduct which won for the plaintiff the hire contracts which are the basis of the claimed debt. To my mind the cross claim brought by the defendants is inseparably connected with the plaintiff's claim for the hire charges. To permit the one claim to proceed without regard to the other would in the relevant sense be unfair. If the defendants' claims be established equity would regard it as unconscionable that the defendant be treated as a debtor of the plaintiff.

[17] I am reinforced in that view by the comments of Keane JA in Forsyth where, in obiter, he pointed out circumstances in which an equitable set off may have been available in that case:

"[14] In this regard, there is no suggestion that the respondent was induced to accept the loans provided by the appellants by reason of the misconduct alleged against G & S Forsyth Pty Ltd and the male appellant. There is no evidence that the respondent's loan indebtedness to the appellants arose, or was increased, by reason of any misconduct on the part of the male appellant or G & S Forsyth Pty Ltd or even by reason of the liabilities or losses incurred by the respondent consequential upon that misconduct.

[15] That the misconduct relied upon by the respondent might have contributed in a general way to the respondent's failure to make profits or to its inability to make repayments of the loans is clearly an insufficient connection to give rise to a set-off. So much was indicated by this Court in Hill Corcoran Constructions Pty Ltd v Navarro & Anor [1992] QCA 017 at 8 - 9. The point is that there must be a connection between claim and cross-claim beyond the mere fact that the payment of the claim has been rendered more difficult than would have been the case had it not been for the matters the subject of the cross-claim."

[18] Here it is alleged that there was an inducement resulting in the contracts being entered into and the losses claimed do arise, so it is said, from the misconduct of the plaintiff's agent.

[19] I am therefore satisfied that the facts pleaded do amount to an equitable set off.

[20] Mr Mills submitted that I had a discretion to not permit the set off to proceed even if I was satisfied that an equitable set off was properly available. He pointed to r 173(3)(b) UCPR which provides:

(b) If the court considers a set off should not be allowed, the court may set aside a defence or counterclaim by way of set off."

[21] Plainly the rule permits discretionary considerations to be weighed in the balance. Whether the rule goes beyond the preservation of equities' requirement that all relevant factors be looked at before permitting an equitable set off (eg Blacksheep (supra), Abignano v Wenkart (1998) 9 BPR 16,765) is unclear to me.

[22] The principal consideration that seems to me to be relevant here is the conduct of the parties. The matter of greatest concern to me is that the defendants used the plaintiff's trucks for a long period of time after they were well aware of the alleged defects in the vehicles. So much is plain from the defence where it is said that a variation was negotiated in December 2004 relating to the payments due for November and December 2004 (the pleading refers variously to 2004 and 2005 but I assume the latter is in error as the contract I was told continued only until July 2005 - see paragraph 1(n)) because of the "serviceability" issues and the impact on the defendants' ability to perform its contractual obligations. Mr Mills' point as I understood it was that it was unfair for the defendants to persist in the hire contracts, use the plaintiff's vehicles to complete their contract presumably to gain a profit, yet not pay the relevant hire charges as they fell due.

[23] Whilst there is some force in that submission the difficulty is that it is equally puzzling to my mind why the plaintiff persisted in the hiring arrangements if the defendants refused to pay the hire charges. According to the plaintiff's statement of claim the failure to pay persisted for some 3 months (see paragraph 4). It is clear that the defendants do not accept that analysis of the case. According to the defendants' defence the payments made from 4th February on bore no relation to the amounts charged in the plaintiff's invoices (compare paragraph 1(j) of the defence with 1(p)). I have no evidence from either side as to what in fact happened through this period.

[24] The lack of any evidentiary basis to assess the conduct of the parties seems to me to be fatal to the exercise of any discretion. This lack of evidence I should point out has come about because of the way in which the application came on for hearing. As the application was originally framed the plaintiff sought judgment both under r 190 and under r 292 (the summary judgment provision), the latter normally requiring an affidavit going to the merits. On the return date the defendants complained that they were yet to receive the plaintiff's affidavit referred to in the application and hence had not prepared their own material, not anticipating that the application would proceed until the affidavit mentioned in the application was served. To avoid a more lengthy adjournment, and because he anticipated that his argument turned entirely on admissions, Mr Mills consented to the application for summary judgement under r 292 being dismissed. I then allowed only a short adjournment of 10 days to enable the defendants to consider their pleadings and to respond to the set off argument, the counsel then appearing not being familiar with the pleadings and the application not having put him on notice of the point. Thus it was effectively common ground that the argument would depend on the pleadings, not on any affidavit material.

[25] Finally Mr Mills submitted that the appropriate course was to allow his client judgement in the amount of hire charges conceded in the defence and stay execution of that judgement pending the outcome of the counterclaim.

[26] As this application depends entirely on the plaintiff establishing that it is entitled to judgement based on the defendants' pleading it seems evident that I must assume, for the purposes of the application, the validity of the allegations set out in the defence. As I have said fundamental to equitable set off is the notion that equity would consider it unconscionable that the defendants be treated as a debtor of the plaintiff. Having reached the conclusion that a set off is available to the defendants I can see no good reason why they should bear the undoubted stigma that a judgement of the court against them must inevitably have.

[28] The costs of the application will be reserved to the trial judge. At that time it will become evident whether the defendants were indeed justified in the claimed defence.