Court of Appeal (WA)|2016-04-29|Before: Martin CJ

PALANIAPPAN -v- WESTPAC BANKING CORPORATION [2016] WASCA 72 (29 April 2016)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : PALANIAPPAN -v- WESTPAC BANKING CORPORATION [2016] WASCA 72

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : WESTPAC BANKING CORPORATION -v- PALANIAPPAN [2014] WASC 475

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : WESTPAC BANKING CORPORATION -v- PALANIAPPAN [No 2] [2015] WASC 227

Practice and procedure - Summary judgment - Demand under guarantee for shortfall on sale of secured land - Alleged breaches of duty in sale of secured land - Whether reasonably arguable claim for relief under Australian Consumer Law varying the guarantee or restraining enforcement - Equitable set-off - Whether suspension clause applied to an equitable set-off - Whether Master erred in granting summary judgment

Rules of the Supreme Court 1971 (WA), O 18 r 2, O 20 r 7

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99

Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2006] NSWCA 238; (2006) 67 NSWLR 9

Capital Finance Australia Ltd v Airstar Aviation Pty Ltd [2003] QSC 151; [2004] 1 Qd R 122

Coca-Cola Financial Corporation v Finsat International Ltd [1998] QB 43

Commonwealth Bank of Australia v MLD Financial Services & Management Pty Ltd [2015] NSWSC 1476

Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501

Daewoo Australia Pty Ltd v Porter Crane Imports Pty Ltd [2000] QSC 50

Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31

Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640

Elite Promotions & Management Pty Ltd v 5A Investments Pty Ltd [2011] NSWSC 590; (2011) 80 NSWLR 686

Fryer v Plucis [1967] WAR 161

GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250

Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689

Grant v New Zealand Motor Corporation [1988] NZCA 135; [1989] 1 NZLR 8

Hausman v Abigroup Contractors Pty Ltd [2009] VSCA 288; (2009) 29 VR 213

Hawes v Dean [2014] NSWCA 380

Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62

HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479; (2013) 306 ALR 53

International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151

J & S Holdings Pty Ltd v NRMA Insurance Ltd [1982] FCA 78; (1982) 61 FLR 108

James v Bank of Western Australia Ltd [2004] WASCA 234

James v Commonwealth Bank of Australia [1992] FCA 420; (1992) 37 FCR 445

Mottram Consultants Ltd v Bernard Sunley & Sons Ltd [1975] 2 Lloyd's Rep 197

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 89 ALJR 990

Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439

National Australia Bank Ltd v C & O Voukidis Pty Ltd [2015] NSWSC 185

National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785

Norman; Re Forest Enterprises Ltd v FEA Plantation Ltd [2011] FCAFC 99; (2011) 195 FCR 97

O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71; (2013) 16 BPR 31,705

Oswal v Commonwealth Bank of Australia [2013] WASCA 58

Primewest (Mandurah) Pty Ltd v Ryom Pty Ltd [2014] WASCA 28

Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323

Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122

Seven Network News Ltd v News Ltd [2007] FCA 1062

St George Bank Ltd v Field [2007] NSWSC 902

Stewart v Latec Investments Ltd [1968] 1 NSWR 432

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165

Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646

Westpac Banking Corporation v Helicopters Brisbane Pty Ltd [2012] QSC 263

Westpac Banking Corporation v Murray Riverside Pty Ltd [2013] WASC 433

Westpac Banking Corporation v Palaniappan [2014] WASC 475

Westpac Banking Corporation v Palaniappan [No 2] [2015] WASC 227

1 MARTIN CJ: Leave to amend ground 1 of this appeal should be granted, but leave to appeal should be refused and the appeal dismissed for the reasons given by Corboy J, with which I agree.

2 BUSS JA: The respondent as plaintiff commenced proceedings against the appellant as defendant in the General Division of the Supreme Court. The respondent claimed amounts allegedly due and payable by the appellant pursuant to a written guarantee and indemnity (the Guarantee) executed by the appellant on or about 9 July 2008.

3 The Guarantee secured, relevantly, all amounts owing or payable from time to time by Murray Riverside Pty Ltd (Murray Riverside) to the respondent.

4 The respondent applied for summary judgment on its claim. Ultimately, by orders made on 7 August 2015, Master Sanderson entered partial judgment in the sum of $15,184,557.75. See Westpac Banking Corporation v Palaniappan [2014] WASC 475; Westpac Banking Corporation v Palaniappan [No 2] [2015] WASC 227.

5 The appellant has appealed to this court against the master's decision.

6 I agree with the orders proposed by Corboy J (with whose reasons Martin CJ has expressed his agreement), but I will state my own reasons for judgment.

7 The background facts, the reasons of the master and the submissions of the parties are set out in Corboy J's reasons. I will not repeat them except to the extent necessary to explain my reasons.

8 Murray Riverside was the registered proprietor of three pieces of land near Pinjarra, which it intended to develop (the Properties).

9 In July 2011, a division of the respondent, St George Bank, provided Murray Riverside with a loan facility in an amount exceeding $18 million. Murray Riverside's obligations in relation to the facility were secured by equitable charges, registered mortgages over the Properties and the Guarantee. The appellant was a director of Murray Riverside.

10 The respondent was the successor to St George Bank's rights and interests as mortgagee of the Properties and as the beneficiary of the Guarantee.

11 In February 2012, the respondent issued notices of demand to Murray Riverside consequent upon Murray Riverside's default under the loan facility.

12 On 28 February 2012, the respondent sent the appellant a notice of demand under the Guarantee for $20,161,864.08.

13 In July 2012, the respondent appointed receivers and managers over the Properties and other property of Murray Riverside. The receivers and managers entered into a contract to sell the Properties for about $13.1 million.

14 On or about 4 October 2013, Murray Riverside lodged caveat M422576C (the Caveat) against the titles to the Properties.

15 On 23 October 2013, the respondent commenced proceedings in the General Division of the Supreme Court for the removal of the Caveat.

16 In November 2013, at a hearing before Beech J in relation to the Caveat, Murray Riverside alleged that the sale of the Properties by the receivers and managers was in breach of their duty and at an undervalue, and that the sale would increase Murray Riverside's liability to the respondent under the loan facility.

17 On 4 December 2013, Beech J ordered that the Caveat be removed. His Honour found that there was no serious question to be tried as to the alleged breach by the receivers and managers of their duty in the exercise of the power of sale. See Westpac Banking Corporation v Murray Riverside Pty Ltd [2013] WASC 433 [47] - [61].

18 On 12 December 2013, the sale of the Properties was completed and amounts totalling $11,107,553.31 were paid to the respondent at settlement.

19 On 23 January 2014, the respondent sent the appellant a notice of demand under the Guarantee for $14,683,764.37.

20 By a writ of summons, indorsed with a statement of claim, filed on 4 March 2014, the respondent claimed the amount it alleged was owing under the Guarantee as at 28 February 2014, being $14,966,604.82.

21 On 28 March 2014, the appellant filed a defence. It comprised bare denials.

22 On 20 June 2014, the respondent filed its application for summary judgment, including an application for an extension of time to apply for summary judgment.

23 On 6 October 2014, the appellant filed an amended pleading, being an amended defence, counterclaim and set-off.

The appellant's amended defence, counterclaim and set-off

24 In his amended defence, the appellant alleged, relevantly, that:

(a) The receivers and managers, by their conduct, constituted themselves as the respondent's agent (par 12).

(b) By reason of that agency relationship, the respondent was responsible for any breaches of the duty of the receivers and managers to act in good faith in exercising their power of sale of the Properties (par 12A).

(c) The duty of the receivers and managers to act in good faith arose 'as a matter of equity' under the common law and s 420A of the Corporations Act 2001 (Cth) (par 12B).

(d) Any shortfall from the proceeds of sale of the Properties against the amount allegedly due and payable by the appellant to the respondent under the Guarantee 'is to be reduced by such amount which reflects the consequences of the ... breach [by the receivers and managers] of their duty of good faith' (par 13).

(e) In breach of their duty of good faith, the receivers and managers:

(i) marketed and sold the Properties in one line rather than marketing and selling and/or selling the Properties individually;

(ii) between August 2012 and February 2013, failed to market the Properties with a listing price;

(iii) failed to engage consultants to pursue and address various conditions imposed by the Western Australian Planning Commission in granting approvals for a new outline development plan for Murray Riverside's development of the Properties;

(iv) failed to proceed and obtain the stages 9 and 10b subdivision approvals, based on Murray Riverside's planning applications, which had been lodged with the Western Australian Planning Commission on or about 21 March 2012;

(v) failed to proceed and obtain the super lot subdivision approval, based on Murray Riverside's planning applications, which had been lodged with the Western Australian Planning Commission on or about 21 March 2012;

(vi) failed to obtain a market valuation report to determine the market value of the Properties in the event that the super lot subdivision was completed;

(vii) failed to object to the rezoning of nearby land applied for by the Alcoa Pinjarra Refinery in or about November 2013;

(viii) having accepted an offer from entities associated with Paul Letari to purchase the Properties for $15 million subject to a due diligence condition, the receivers and managers failed to advertise the Properties at or around that reduced asking price in order to obtain alternative or competing offers from other potential buyers; and

(ix) having received an offer from another interested party in or about August 2013, being Sky Land Development, the receivers and managers failed to investigate that offer (par 13A).

(f) The respondent instructed the receivers and managers to act or fail to act in the manner pleaded in par 13A (par 13B).

(g) The respondent's conduct, as pleaded in par 13B, was contrary to the advice and/or recommendations of the receivers and managers and/or consultants engaged by the receivers and managers (par 13C).

(h) The sales price accepted by the respondent for the Properties was below their market value or, alternatively, the best available price (par 13G).

(i) By reason of, relevantly, the respondent's conduct as described above, and 'as a matter of equity', the respondent:

(i) is not entitled to enforce the Guarantee against the appellant; or, alternatively

(ii) is only entitled to enforce the Guarantee to the extent of the shortfall after deduction of the amount that reflects the consequences of the breach by the receivers and managers of their duty of good faith (par 16A).

25 The appellant had pleaded in par 15 of his amended defence that the amount claimed by the respondent in its notices of demand under the Guarantee included amounts that were, in effect, penalties at law. However, the plea in par 15 was abandoned (appeal ts 9).

(a) The appellant repeated his amended defence and alleged that, to the extent that the appellant had any liability to the respondent under the Guarantee (which was denied), the respondent was unable to enforce the Guarantee against the appellant 'by reason of [the respondent's] conduct pleaded below' (par 19).

(b) The appellant repeated pars 12 and 13A of his amended defence and alleged that the instructions to the receivers and managers, as the respondent's agent, to act contrary to the receivers and managers' recommendations 'were acts of prejudice to [the appellant] as guarantor, by reason that the Sales Price was less than it ought to have been if those acts of prejudice had not occurred' (par 20).

(c) The appellant alleged that he had suffered loss and damage in that, by reason of those instructions, there was a shortfall in the amount received by the respondent upon sale of the Properties and the amount received was insufficient to discharge the indebtedness secured by the Guarantee (par 21).

(d) The appellant claimed the amount of his alleged loss and damage from the respondent (par 22).

27 Further, in his counterclaim the appellant alleged, relevantly, that:

(a) In the period commencing on or about 3 July 2012 the appellant was in a position of 'special disadvantage' as against the respondent by reason that:

(i) the respondent instructed the receivers and managers as to how they were to undertake their role as receivers and managers; and

(ii) following 3 July 2013, and as a consequence of the conduct pleaded in par 13 of the amended defence, the receivers and managers, to the respondent's knowledge, were acting solely in the respondent's interests and did not have regard to Murray Riverside's and the appellant's interests, which were to ensure that the market value or, alternatively, the best obtainable price was obtained for the Properties (par 23).

(b) The respondent acted unconscionably against the appellant by reason of the matters pleaded in pars 13, 13A, 13C, 13D and 13G of the amended defence (par 24).

28 Further, in his counterclaim the appellant alleged, relevantly, that:

(a) The conduct of the respondent pleaded in par 21 was, in the circumstances referred to in par 20, conduct in trade or commerce, in relation to 'financial services' within s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), in connection with the supply or possible supply of 'financial services' within s 12CC of the ASIC Act (par 26).

(b) The respondent contravened s 12CA and/or s 12CC of the ASIC Act by its conduct pleaded in par 23 which was unconscionable in the circumstances referred to in par 20 (par 27).

(d) In the circumstances, the appellant is entitled to damages pursuant to s 12GF or s 12GM of the ASIC Act (par 29).

29 Further, in his counterclaim the appellant pleaded in pars 30, 31, 32 and 33 a cause of action for damages, to the same effect as the cause of action for damages pleaded in pars 26, 27, 28 and 29, in reliance on s 991A of the Corporations Act.

30 Further, in his counterclaim the appellant alleged, relevantly, that:

(a) The conduct of the respondent pleaded in par 23 was, in the circumstances referred to in par 20, conduct in trade or commerce (par 34).

(b) The respondent contravened sch 2 s 20 and/or s 21 and/or s 22 of the Competition and Consumer Act 2010 (Cth) (CCA) by its conduct pleaded in par 23 which was unconscionable in the circumstances referred to in par 20 (par 35).

(d) In the circumstances, '[the Guarantee] should be declared void ab initio and/or [the appellant] is entitled to damages pursuant to s 82 and sch 2 s 23(6) and sch 2 s 237 of the CCA' (par 37).

31 In his prayer for relief the appellant claimed, relevantly:

A declaration that the guarantee is unenforceable and that the notices of default purportedly issued pursuant to it are void and of no effect.
A declaration that [the respondent] engaged in unconscionable conduct under the common law and/or the Corporations Act, ASIC Act or CCA as pleaded above.

An order under the Corporations Act, ASIC Act or CCA and/or equitable relief that [the respondent] compensate [the appellant] [in] an amount equal to the diminution in value of the Properties by reason of [the respondent's] conduct in effecting a sale of the Properties at below their market value.

Further and alternatively, an inquiry and account of all monies paid and received by [the respondent] and the receivers and managers.

Damages.
Equitable damages and set-off.
An equitable set-off of any amounts due under the counterclaim against any amounts due on [the respondent's] claim against [the appellant].
Damages under s 12GF of the ASIC Act and/or s 991A of the Corporations Act and/or the CCA.
Such other relief as this Honourable Court thinks fit.

32 The master dealt with the appellant's allegations in relation to the receivers and managers having breached their duty of good faith and the respondent having engaged in unconscionable conduct, as follows:

The [appellant] maintains the receivers did not act in conformity with their duties in disposing of Murray Riverside's assets. This argument faces considerable difficulties given the fact Beech J found in the caveat proceedings there was no serious question to be tried. But for the moment it can be accepted the [appellant] has a case to put against the [respondent].

The second aspect of the [appellant's] claims might broadly be characterised under the rubric unconscionable conduct. The [appellant] says the [respondent] has acted in the provision of financial services in such a way the [appellant] has a right of action either under the Competition and Consumer Act 2010 (Cth), the Corporations Act 2001 (Cth) or the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). For present purposes I need not detail with precision these claims. Suffice it to say it can be assumed the [appellant] does have such a right of action [14] - [15].

33 The master then referred to the appellant's amended defence, counterclaim and set-off and said that the alleged rights of action had been 'properly pleaded as [a] counterclaim and set-off' [16].

34 The master held, however, that, whether or not the counterclaim and set-off had any merit, cl 9 of the Guarantee was effective 'to postpone the rights of [the appellant] to agitate [the] alleged [counterclaim and] set-off' [17]. He saw 'no basis upon which any claim [the appellant] may have can stand in the way of [the respondent] obtaining judgment' [18]. There was no defence on the merits [20].

35 The master granted the respondent an extension of time and, as I have mentioned, entered partial judgment on its claim in the sum of $15,184,557.75.

You unconditionally and irrevocably guarantee payment to us of the guaranteed money. If the customer does not pay the guaranteed money on time and in accordance with any arrangement under which it is expressed to be owing, then you agree to pay the guaranteed money to us on demand from us (whether or not we have made demand on the customer).

37 The term 'guaranteed money' was defined in cl 28. It is sufficient, for present purposes, to note that the definition included the amounts for which the master entered partial judgment.

38 By cl 2.2, the guarantee in cl 2.1 was 'a continuing obligation' and extended to 'all of the guaranteed money'.

39 Clause 3.1 provided for the appellant to 'unconditionally and irrevocably indemnify us against' and to 'pay us on demand for, liability, loss or costs we suffer or incur' if, amongst other things, 'the customer does not, is not obliged to, or is unable to, pay us the guaranteed money in accordance with any arrangement under which it is expressed to be owing' or 'you are not obliged to pay us an amount under clause 2'.

40 By cl 3.2, the indemnity in cl 3.1 and the other indemnities in the Guarantee were 'continuing obligations, independent of your other obligations under [the Guarantee]'.

As long as any of the guaranteed money remains unpaid, you may not, without our consent:

(a) reduce your liability under this guarantee and indemnity by claiming that you or the customer or any other person has a right of set-off or counterclaim against us; or

(b) exercise any legal rights to claim to be entitled to the benefit of another guarantee, indemnity, mortgage, charge or other security given in connection with the guaranteed money or any other amount payable under this guarantee and indemnity ... ; or

(c) claim an amount from the customer, or another guarantor of the customer's obligations, under a right of indemnity; or

(d) claim an amount in the insolvency of the customer or another guarantor of the guaranteed money (including a person who has signed this guarantee and indemnity with you).

You must pay us the guaranteed money in full without set-off, counterclaim or deduction.

43 At the hearing of the appeal, counsel for the appellant sought leave to amend the respondent's ground of appeal to allege:

The learned Master erred in law and found by reasons [sic] of a contractual suspension of the right to bring a counterclaim or set-off the respondent was entitled to summary judgment. The learned Master ought to have found that the appellant had an arguable claim that the terms of clause 9 of the guarantee relied on by the respondent (the 'Guarantee') did not prevent the appellant from maintaining a defence that the conduct of the respondent in relation to the circumstances by which the assets of Murray Riverside Pty Ltd were undersold gave rise to statutory causes of action pursuant to the Competition and Consumer Act entitling the appellant to seek relief pursuant to section 87 of the Competition and Consumer Act including at a trial of the within proceedings for this Honourable Court to make orders:

1.1 varying the contract of guarantee including clause 9 and clause 3.1 relied upon by the respondent;

1.2 refusing to enforce all or any of the provisions of the guarantee including clause 9 and clause 3.1 relied upon by the respondent.

44 The particulars of the proposed amended ground of appeal state:

(a) A finding was made to the effect that the appellant had a case to be put to the respondent arising out of the conduct of the receivership and the sale of Murray Riverside Pty Ltd's assets (PJ [14], [15]).

(b) The case was pleaded by way of defence to the respondent's claim, as well as by way of counterclaim and set-off (Amended Defence [13], [13A] to [13G] and [16A]).

(c) The learned Master should have found that on a proper construction of the Guarantee the contractual suspension in clause 9 did not apply in circumstances where the respondent interfered and directed the receivers of Murray Riverside how to conduct the receivership to the appellant's prejudice.

(d) Further, the learned Master should have found the appellant had an arguable case to the effect that even if the contractual suspension did apply, if the respondent had engaged in the conduct alleged, it would be unconscionable for the respondent to rely on clause 9 of the Guarantee.

(e) Further, the learned Master should have found that on a proper construction of the Guarantee the contractual suspension in clause 9 did not apply in circumstances where the appellant had a statutory entitlement to such orders pursuant to section 87 of the Competition and Consumer Act 2010, (Cth).

45 At the hearing of the appeal, counsel for the appellant acknowledged that the references in the proposed amended ground of appeal to s 87 of the CCA should have been to s 237 read with s 243 of the Australian Consumer Law (appeal ts 5, 8, 10).

46 The respondent was not relevantly prejudiced by counsel for the appellant's late application for leave to amend. I would therefore grant the appellant leave to amend in terms of the proposed amended ground.

47 The respondent filed a notice of contention in which it alleged that the master's decision should be upheld on the following additional grounds:

(a) the respondent had a claim pursuant to the indemnities in cl 3.1 of the Guarantee and that claim was not impeached by the causes of action asserted by the appellant in his counterclaim; and

(b) cl 13.1 of the Guarantee, in addition to cl 9(a), prevented the appellant from raising his claims against the respondent either as claims giving rise to a defence of equitable set-off or as a counterclaim.

The merits of the proposed ground of appeal

48 The issues raised by the proposed ground of appeal are these:

(a) Did the appellant's plea as to the respondent's alleged conduct in relation to the sale by the receivers and managers of Murray Riverside's assets constitute a reasonably arguable defence under the Australian Consumer Law, including a reasonably arguable claim by the appellant for orders under s 237 read with s 243 of the Australian Consumer Law varying cl 9, cl 3.1 and cl 13.1 of the Guarantee or prohibiting the enforcement of those clauses?

(b) If so, was this defence able to be run despite cl 9 of the Guarantee?

49 The critical aspects of the appellant's pleaded case were, in summary, as follows:

(a) In par 13 of his amended defence, the appellant pleaded, in effect, an equitable set-off. The equitable set-off was based on the receivers and managers, by their conduct, having allegedly constituted themselves as the respondent's agent (par 12); the receivers and managers having allegedly breached their duty to act in good faith in exercising their power of sale of the Properties (par 13A); and the respondent having allegedly instructed the receivers and managers to act or fail to act in the manner pleaded in par 13A (par 13B) and in the circumstances pleaded in par 13C. The amount sought to be set-off was, in effect, the amount by which the appellant's liability to the respondent under the Guarantee had been increased by the receivers and managers' failure to sell the Properties for their market value or, alternatively, the best available price (the Set-Off Amount).

(b) In par 16A of his amended defence, the appellant pleaded, in effect, that, 'by reason of the conduct pleaded above and as a matter of equity', the respondent was not entitled to enforce the Guarantee or, alternatively, was only entitled to enforce the Guarantee after taking into account the Set-Off Amount.

(c) In pars 20, 21 and 22 of his counterclaim, the appellant pleaded, in effect, that the respondent acted to his prejudice, as alleged in pars 12 and 13A of the amended defence, and that consequently the appellant has suffered loss and damage, being the Set-Off Amount.

(d) In pars 23, 24 and 25 of his counterclaim, the appellant pleaded, in effect, that he was in a position of 'special disadvantage' as against the respondent, the respondent acted unconscionably against him by reason of the matters pleaded in the amended defence and that he has suffered loss and damage by reason of that unconscionable conduct, being the Set-Off Amount.

(e) In pars 26 - 36 of his counterclaim, the appellant pleaded, in effect, various causes of action against the respondent pursuant to the ASIC Act, further or alternatively the Corporations Act, further or alternatively the CCA. It was alleged, in effect, that the respondent engaged in unconscionable conduct by reason of the matters pleaded in pars 20 and 21 of the counterclaim and that the appellant has suffered loss and damage by reason of that unconscionable conduct, being the Set-Off Amount.

(f) In par 37 of his counterclaim, the appellant pleaded, in effect, that, '[i]n the circumstances', the Guarantee should be declared void ab initio pursuant to, in effect, s 237 read with s 243 of the Australian Consumer Law.

(g) In his prayer for relief, the appellant claimed, amongst other things, a declaration that the Guarantee is unenforceable, a declaration that the respondent engaged in unconscionable conduct and an equitable set-off of any amounts due under the counterclaim against any amounts due on the respondent's claim against the appellant.

50 An equitable set-off is available where the party claiming the set-off can establish a recognised equitable ground for being protected, to the relevant extent, from the other party's demand. The set-off must essentially be bound up with and go to the root of, challenge, call in question or impeach the title of the other party. The mere existence of a cross-claim or cross-demand is not sufficient to establish an equitable set-off. There must be a recognised ground for equitable intervention (beyond the mere existence of a cross-claim or cross-demand) so that the equity of the party claiming the set-off impeaches the title of the other party to the legal demand which it is seeking to enforce. See J & S Holdings Pty Ltd v NRMA Insurance Ltd [1982] FCA 78; (1982) 61 FLR 108, 127 (Blackburn, Deane & Ellicott JJ); James v Commonwealth Bank of Australia [1992] FCA 420; (1992) 37 FCR 445, 457 - 462 (Gummow J); Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62, 67 - 68 (Kennedy J, Malcolm CJ & Murray J agreeing); HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479; (2013) 306 ALR 53 [136] (Emmett JA, Beazley P relevantly agreeing & Meagher JA agreeing); Hawes v Dean [2014] NSWCA 380 [59] - [65] (Barrett JA, Bathurst CJ & McColl JA agreeing).

51 A set-off, including an equitable set-off, may be pleaded as a defence on the basis of misleading or deceptive conduct in contravention of a statutory provision such as s 18(1) of the Australian Consumer Law. See Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2006] NSWCA 238; (2006) 67 NSWLR 9 [11] (Hodgson JA, Tobias JA agreeing), [97] - [104], [124] - [127] (Basten JA, Tobias JA agreeing); HP Mercantile [135] - [139]. Similarly, in my opinion, a set-off, including an equitable set-off, may be pleaded as a defence on the basis of unconscionable conduct in contravention of a statutory provision such as s 20(1) of the Australian Consumer Law.

52 Section 24(2) of the Supreme Court Act 1935 (WA) provides:

If any defendant claims to be entitled to any equitable estate or right or to relief upon any equitable ground against any deed, instrument, or contract, or against any right, title or claim asserted by any plaintiff or petitioner in such cause or matter, or alleges any ground of equitable defence to any claim of the plaintiff or petitioner in such cause or matter, the Court, and every judge thereof, shall give to every equitable estate, right, or ground of relief so claimed, and to every equitable defence so alleged, such and the same effect, by way of defence against the claim of such plaintiff or petitioner, as the Court in its equitable jurisdiction ought to have given if the same or the like matters had been relied on by way of defence in any suit or proceeding instituted by the Court for the same or the like purpose before the commencement of the Supreme Court Act 1880.

53 By O 20 r 17 of the Rules of the Supreme Court 1971 (WA) (RSC):

Where a claim by a defendant to a sum of money (whether of an ascertained amount or not) is relied on as a defence to the whole or part of a claim made by the plaintiff, it may be included in the defence and set-off against the plaintiff's claim, whether or not it is also added as a counterclaim.

54 Order 20 r 17 did not displace the established principles of equitable set-off. See Hazcor (69).

(1) Subject to rule 5(2), a defendant in any action who alleges that he has any claim or is entitled to any relief or remedy against a plaintiff in the action in respect of any matter (whenever and however arising) may, instead of bringing a separate action, make a counterclaim in respect of that matter; and where he does so he must add the counterclaim to his defence.

(2) Rule 1 shall apply in relation to a counterclaim as if the counterclaim were a separate action and as if the person making the counterclaim were the plaintiff and the person against whom it is made a defendant.

(3) A counterclaim may be proceeded with notwithstanding that judgment is given for the plaintiff in the action or that the action is stayed, discontinued or dismissed.

(4) Where a defendant establishes a counterclaim against the claim of the plaintiff and there is a balance in favour of one of the parties, the Court may give judgment for the balance, so, however, that this provision shall not be taken as affecting the Court's discretion with respect to costs.

56 By O 18 r 5(2), if it appears on the application of any party against whom a counterclaim is made that the subject matter of the counterclaim ought for any reason to be disposed of by a separate action, the court may order the counterclaim to be struck out or may order it to be tried separately or make such other order as may be expedient.

57 In Fryer v Plucis [1967] WAR 161, Hale J (Virtue & Nevile JJ agreeing) said in relation to O 19 r 3 of the Rules of the Supreme Court 1909 (WA), which was the precursor to O 18 r 2 of the RSC, that the rule had not obliterated the distinction between set-off and counterclaim: 'set-off always has been and remains a defence to the claim, either wholly or in part, but a counterclaim is truly a cross-action' (163 - 164).

58 The provisions of O 18 r 2 and O 20 r 17 of the RSC, to the extent they confer rights on a defendant, are permissory and not mandatory.

59 I will assume, for the purposes of this appeal (favourably to the appellant but without deciding), that the appellant has a reasonably arguable defence in respect of his pleas of unconscionable conduct based on the receivers and managers having allegedly, by their conduct, constituted themselves as the respondent's agent; the receivers and managers having allegedly breached their duty to act in good faith in exercising their power of sale of the Properties; and the respondent having allegedly instructed the receivers and managers to act or fail to act in the manner pleaded in par 13A and in the circumstances pleaded in par 13C of the amended defence. On the basis of that assumption, it is reasonably arguable that the respondent's title to demand the amount secured by the Guarantee was impeached, in the relevant sense, at least to the extent of the Set-Off Amount.

60 By cl 3.1 of the Guarantee, the appellant, amongst other things, 'unconditionally and irrevocably' indemnified the respondent against, and promised to pay to the respondent on demand for, any liability, loss or costs the respondent suffered or incurred if Murray Riverside did not, or was not obliged to, or was unable to, pay the guaranteed money to the respondent in accordance with any arrangement under which it was expressed to be owing or the appellant was not obliged to pay to the respondent an amount under cl 2.

61 By cl 13.1 of the Guarantee, the appellant must pay the respondent the guaranteed money 'in full without set-off, counterclaim or deduction'.

62 Clause 9 of the Guarantee reinforces cl 3.1 and cl 13.1. By cl 9(a), '[a]s long as any of the guaranteed money remains unpaid', the appellant may not, without the respondent's consent, 'reduce [the appellant's] liability under this guarantee and indemnity by claiming that [the appellant] or [Murray Riverside] or any other person has a right of set-off or counterclaim against [the respondent]'.

63 The construction of a written agreement involves ascertaining what a reasonable person would have understood the parties to the agreement to mean. The rights and liabilities of the parties under a provision of the agreement are to be determined objectively. Consideration should ordinarily be given not only to the language of the agreement, but also to the apparent purpose and object of any transaction created by or evidenced in the agreement. See Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40] (Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ); International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 [8] (Gleeson CJ), [53] (Gummow, Hayne, Heydon, Crennan & Kiefel JJ); Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 89 ALJR 990 [46] (French CJ, Nettle & Gordon JJ).

64 It is necessary, in determining the meaning of the provisions of a commercial contract, to ask what a reasonable businessperson would have understood those provisions to mean. That inquiry will require consideration of the language of the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. See Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ); Mount Bruce Mining [47].

65 The words of a clause in a written agreement are to be given the most appropriate meaning which they can legitimately bear. A court must have regard to all of the provisions of the agreement with a view to achieving harmony among them. See Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109 - 110 (Gibbs J).

66 In The 'Fedora' [1986] 2 Lloyd's Law Rep 441, a bank held, as security for three loans, personal guarantees of the defendants. The bank sued the defendants as guarantors of the indebtedness of the principal debtors under the loan agreements. It was not in dispute that the amounts claimed were properly due from the defendants under their guarantees. However, the defendants contended that they had valid cross-claims for damages in respect of the loan agreements on the ground that the bank had negligently or unreasonably failed to carry out its duties as the holder of mortgages granted by the borrowers in respect of vessels owned by them and, consequently, had failed to realise a proper value for the vessels either on sale or pending sale and, in addition, in the case of one of the loan agreements had acted recklessly. The guarantees in question were not in identical terms but each of them included a provision to the following effect:

All payments by the Guarantor under this Guarantee shall be made without set-off or counterclaim and without deductions or withholdings whatsoever.

67 The primary judge, Evans J, held that the cross-claims asserted by the defendants were reasonably arguable and that they should proceed with them by way of counterclaim. However, by reason of the clause in the guarantee that I have reproduced, the cross-claims were not available by way of set-off. The Court of Appeal (Parker & Nourse LJJ & Sir Roger Ormrod) dismissed the defendants' appeal.

68 Parker LJ, who delivered the judgment of the Court of Appeal, rejected a submission by the defendants that the clauses in question should be treated in the same way as exclusion clauses. His Lordship said:

[T]here is no good reason for treating such clauses in the same way as exclusion clauses. The latter purport to exclude liability altogether. These clauses do not touch liability. The guarantors can still prosecute their claims to judgment. They are, if the clauses are effective, merely prevented from holding up payments admittedly due under the guarantees whilst disputed cross-claims are litigated. This being so the principle which lies behind the narrow construction given to exclusion clauses, that specific words or the use of all embracing words such as 'whatsoever' are necessary to enable a party to exclude liability for his own negligence has no application (444).

69 In Norman; Re Forest Enterprises Ltd v FEA Plantation Ltd [2011] FCAFC 99; (2011) 195 FCR 97, a Full Court of the Federal Court (Jacobson, Nicholas & Yates JJ) construed a covenant by a lessee to pay the rent 'without any deductions whatsoever' in accordance with the ordinary principles applicable to the construction of commercial contracts [197] - [198]. See also Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122 [35] - [36] (Murphy J, Pullin & Newnes JJA agreeing); Elite Promotions & Management Pty Ltd v 5A Investments Pty Ltd [2011] NSWSC 590; (2011) 80 NSWLR 686 [82] - [95] (Brereton J).

70 Two features of cl 9(a) of the Guarantee may be noted.

71 First, the words '[a]s long as', in the chapeau of cl 9, impose a temporal limitation on the period during which the appellant's 'right of set-off or counterclaim against [the respondent]' is suspended.

72 Secondly, the requirement in the chapeau of cl 9 that the guaranteed money 'remains unpaid' (and continues to be unpaid) conditions the circumstances in which the suspension of the appellant's 'right of set-off or counterclaim against [the respondent]' operates.

73 Subject to any statutory provision to the contrary, a right of set-off, including a right of equitable set-off, may be excluded by express or implied agreement. See National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785, 803 - 805 (Viscount Dilhorne), 808 - 809 (Lord Simon of Glaisdale), 817 - 818 (Lord Cross of Chelsea), 821 - 824 (Lord Kilbrandon); Coca-Cola Financial Corporation v Finsat International Ltd [1998] QB 43, 51 - 53 (Neill LJ, Morritt & Hutchison LJJ agreeing); St George Bank Ltd v Field [2007] NSWSC 902 [17] (McDougall J); Hausman v Abigroup Contractors Pty Ltd [2009] VSCA 288; (2009) 29 VR 213 [17] - [30] (Weinberg & Bongiorno JJA & Williams AJA); Oswal v Commonwealth Bank of Australia [2013] WASCA 58 [45] (Pullin JA, Newnes JA agreeing).

74 A suspension provision of the kind embodied in cl 9 of the Guarantee does not oust the jurisdiction of the courts. It suspends, but does not otherwise impair, the rights of the party bound by the provision. That party is entitled to enforce the rights in question provided it conforms with its primary obligation to make payment to the other party. See GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250 [93] (Bryson J); Westpac Banking Corporation v Helicopters Brisbane Pty Ltd [2012] QSC 263 [24] (Martin J).

75 The apparent purpose or object of cl 9(a) of the Guarantee is to ensure immediate payment by the appellant to the respondent, if Murray Riverside does not pay, of the whole of the amount due and payable by Murray Riverside to the respondent, without any deduction on account of any set-off or counterclaim. In The 'Fedora', Parker LJ said 'the commercial purpose of the [guarantee] transaction [in question] is that, upon default by the borrower the bank should be paid quickly, and ... that all set-offs and counterclaims are excluded' (444). A little later, his Lordship observed:

We can see no relevant distinction between the guarantee in [Intraco Ltd v Notis Shipping Corporation [1981] 2 Lloyd's Rep 256] and the guarantees presently under consideration. The purpose of both was to ensure immediate payment if the principal debtor did not pay. Indeed the present cases make it the more necessary that the Court should not interfere, for here the parties have specifically provided both in the loan agreement and the guarantees that payment should be made free of any set-off or counterclaim. It would defeat the whole commercial purpose of the transaction, would be out of touch with business realities and would keep the bank waiting for a payment, which both the borrowers and the guarantors intended that it should have, whilst protracted proceedings on the alleged counterclaims were litigated (445).

76 Clause 9(a) of the Guarantee refers, relevantly, to the appellant claiming 'a right of set-off or counterclaim against [the respondent]'. It does not specifically refer to a right of equitable set-off. However, the ordinary and natural meaning of the expression 'a right of set-off', in the context of a contractual provision that suspends the making of a claim of 'a right of set-off' by a party to the contract, includes all forms of set-off. See The 'Fedora' (444); Norman [181] - [202]; Oswal [54]; O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71; (2013) 16 BPR 31,705 [94] (Ward JA, Beazley P agreeing). In my opinion, the reference to 'set-off' in cl 9(a) includes an equitable set-off.

77 In O'Brien, the bank advanced money to a borrower under a facility agreement. The amount owing from time to time by the borrower to the bank was secured by securities provided by the borrower. The repayment of the borrower's indebtedness was also guaranteed by two guarantors, namely Mr O'Brien and Bakota Holdings Pty Ltd. The borrower did not repay when the bank made demand. The bank enforced the securities provided by the borrower and applied the proceeds of enforcement in partial repayment of the outstanding indebtedness. The bank then made demand on the guarantors for the balance. The guarantors did not comply with the demands. At first instance, the bank obtained summary judgment against the guarantors. The Court of Appeal of New South Wales (Beazley P, Macfarlan & Ward JJA) allowed the guarantors' appeal.

78 Each of the guarantees included a suspension clause which provided, relevantly:

As long as any of the guaranteed money remains unpaid, you may not, without our consent:

(a) reduce your liability under this guarantee and indemnity by claiming that you or the debtor or any other person has a right of set-off or counterclaim against us.

79 The guarantors argued that the bank had represented to the borrower and to them that the bank would maintain the loan facilities after the repayment date specified in the facility agreement. The guarantors also argued that the bank had agreed to advance additional money to enable the borrower to complete a property development it had undertaken. Consequently, so the guarantors argued, neither the borrower nor the guarantors had sought refinancing from another lender. According to the guarantors, the bank had known that the borrower and the guarantors had relied in that manner on the bank's alleged representations. The guarantors asserted that, in the circumstances, the bank had acted unconscionably in enforcing the securities provided by the borrower.

80 The guarantors submitted, on appeal, that summary judgment should not have been entered against them because the bank was not entitled to claim repayment of the loan facilities made available to the borrower and was therefore not entitled to make demand under the guarantees. No event of default that would have entitled the bank to make demand for repayment had occurred; alternatively, the bank was estopped from relying on any such event of default. By reason of the bank's conduct, the loan facilities were not due and payable. The guarantors claimed relief in equity and under the ASIC Act and the Trade Practices Act 1974 (Cth) (now repealed).

81 Macfarlan JA (Beazley P agreeing) held that the suspension clauses were not applicable because the guarantors' defences were not confined to asserting set-offs or counterclaims which did not impeach the indebtedness claimed by the bank. The guarantors asserted in their defences that at material times the indebtedness was not due and payable. Suspension clauses do not protect a creditor against such a defence. They are concerned with 'reliance by a guarantor on claims of its own to meet a creditor's claim for an undisputed debt' [14] (emphasis added).

82 Macfarlan JA also held that summary judgment should not have been entered because it was at least reasonably arguable that the suspension clauses did not apply in that they were expressed to operate only when the guaranteed money 'remains unpaid' and this meant, arguably, 'unpaid and due'. If so, the guarantors' defences that the indebtedness was not, for various reasons, payable at material times would, if established, indicate that the suspension clauses were inapplicable [15].

83 Ward JA (Beazley P agreeing) held that the suspension clauses did not operate if, as the guarantors contended, no indebtedness was due and payable at the relevant time. If no indebtedness was due and payable at the relevant time then the suspension clauses did not operate to preclude the guarantors raising a defence based on the indebtedness not being payable at the relevant time by reference to the matters pleaded in their defence [91].

84 In Capital Finance Australia Ltd v Airstar Aviation Pty Ltd [2003] QSC 151; [2004] 1 Qd R 122 [17] - [19] (Holmes J), Field [18] and Helicopters Brisbane [22] - [26] it was said that a suspension provision of the kind embodied in cl 9 of the Guarantee may not preclude the guarantor from defending the plaintiff's claim by impugning the validity of the guarantee or asserting the complete discharge of the guarantor's liability under the guarantee. See also Daewoo Australia Pty Ltd v Porter Crane Imports Pty Ltd [2000] QSC 50 [9] - [11] (White J); O'Brien [75] - [77].

PALANIAPPAN -v- WESTPAC BANKING CORPORATION [2016] WASCA 72 (29 April 2016)

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PALANIAPPAN -v- WESTPAC BANKING CORPORATION [2016] WASCA 72 (29 April 2016)

Legislation Cited (5)

Cases Cited (17)