Pollak v National Australia Bank Limited

Federal Court of Australia (Full Court)|2002-01-01|Before: Madgwick J, Tamberlin J, Dowsett JJ

Introduction 1 The background to this appeal was accurately described by the learned primary judge (Madgwick J) as "somewhat tortuous". However the legal issue which requires determination is limited in scope. It is whether an agreement entered into between the appellant's sister, Ilana Elenka Stern ("Mrs Stern"), her husband, Harry Stern ("Dr Stern"), and Stern Nominees Pty Ltd on the one hand and National Australia Bank Limited ("the Bank") on the other ("the Agreement") operates as a release of a judgment debt owed jointly by the appellant and Mrs Stern to the Bank. 2 The primary judge concluded that the Agreement did not operate as a release but rather constituted a covenant by the Bank not to sue Mrs Stern in respect of the judgment debt. On this basis His Honour, having rejected an alternative argument advanced by the appellant which does not give rise to a live issue on this appeal, upheld the validity of a bankruptcy notice served on the appellant by the Bank which required payment of the judgment debt. His Honour made a sequestration order against the estate of the appellant. 3 The appellant by this appeal seeks to have the sequestration order made by Madgwick J set aside and in lieu therefore an order made dismissing the creditor's petition presented by the Bank.

background facts 4 Neither party to the appeal challenged the accuracy of the summary history of the proceeding which Madgwick J included in his reasons for judgment. At [3]-[9] of his reasons for judgment His Honour set out that history as follows: "In 1986 the Bank lent money in the USA to Mrs Pollak, Dr Pollak's mother. When Mrs Pollak died, Dr Pollak and his sister, Mrs Stern, after negotiations, agreed to assume liability for the debt. On 26 April 1996, the Bank obtained judgment in the Superior Court of the State of California for $US 3.8 million plus interest and costs against Dr Pollak and Mrs Stern. On 23 February 1996, Dr Pollak and Mrs Stern brought an application under s 52 of the Trade Practices Act 1974 (Cth) alleging misleading and deceptive conduct by the Bank in relation to the agreement which bound them to make good the debt. The Bank applied to this Court on 29 November 1996 to enforce the Californian judgment. The two sets of proceedings were heard together. On 21 December 1998, Tamberlin J granted an interlocutory application by the Bank for a Mareva injunction preventing Dr Pollak and Mrs Stern, along with their spouses and the trustee of a Stern family trust, from disposing of any property or assets in which they had an interest without giving the Bank's solicitor at least 28 days notice: see National Australia Bank Limited v Stern [1998] FCA 1665. (These orders were varied on 4 August 2000 to reduce the period of notice from 28 days to 19 days.) On 15 October 1999, Tamberlin J delivered his decision in the principal proceedings. His Honour dismissed the s 52 claim. On 19 November 1999, his Honour ordered, giving effect to his reasons, that judgment be entered in favour of the Bank against Dr Pollak and Mrs Stern jointly and severally in the sum of $US 4,910,562.76 and that interest accrue on the judgment at the rate of 10% p.a. from that date: see Stern v National Australia Bank [1999] FCA 1421. An appeal to the Full Court against Tamberlin J's decision was rejected on 27 March 2000. On 14 August 2000, Dr Pollak filed an amended application with the High Court Registry for special leave to appeal against the decision of the Full Court. Mrs Stern was named as an applicant in the application. However, the evidence was that Mrs Stern had no interest in pursuing her rights on appeal, was committed to reaching a commercial settlement with the Bank, and had only agreed to being named so as not to prejudice Dr Pollak's application. Special leave to appeal was later refused by the High Court on 24 November 2000. A bankruptcy notice was issued on 29 August 2000 at the behest of the Bank. It claimed $US 5,291,600.96, being the amount payable under Tamberlin J's orders, including the accrued interest. On 8 November 2000, Dr Pollak was served with a bankruptcy notice. The time for compliance with the bankruptcy notice was 29 November 2000. At the time of the expiry of the bankruptcy notice, no payment had been made by Dr Pollak on account of the judgment debt. … On 11 September 2000, the Bank and Mrs Stern had entered into "Heads of Agreement" ("the agreement") under which certain properties were to be sold and the proceeds, together with other funds, were to be paid to the Bank in satisfaction of Mrs Stern's share of the judgment debt. The principal dispute in these proceedings related to whether this agreement operated as a release of the entire judgment debt or only an amount equal to Mrs Stern's share. On 21 February 2001, consummation of the agreement occurred, with Mrs Stern, her husband Dr Stern and Stern Nominees Pty Limited entering into Terms of Settlement as the agreement had contemplated. On 22 February 2001, the Terms of Settlement were filed in this Court. Those terms evidenced an agreement to release Mrs Stern from liability for the judgment debt and otherwise arising under the related orders made by Tamberlin J." 5 The bank's claim against the appellant at the time of the hearing before Madgwick J was $A 5,417,958.80. This figure was calculated by deducting from $A 9,894,541.81, being the total debt due under the judgment, the sum of $A 4,476,583.01 paid by Mrs Stern to the Bank pursuant to the Agreement. It is not disputed that, if the judgment debt has not been released, the calculations placed before His Honour accurately reflect the appellant's indebtedness to the Bank.

the agreement 6 A copy of the Agreement as originally entered into is annexed to these reasons for judgment. 7 On 21 February 2001 the Agreement was varied by adding the following clause: "Nothing in this Heads of Agreement affects the Bank's rights against Dr Pollak or Mrs Pollak and Ilana Stern, Harry Stern and Stern Nominees Pty Limited acknowledge that the Bank expressly reserves all of its rights against Dr Pollak and Mrs Pollak." Although the consideration provided for the Bank in return for the agreement to vary the Agreement was slight in the extreme, it was not contended before the primary judge, or before this Court, that the consideration was not good consideration.

reasons of primary judge 8 His Honour noted the distinction drawn by the authorities between a mere accord executory, accord and satisfaction, and accord and conditional satisfaction. His Honour referred with approval to the decision of the Victorian Court of Appeal in Osborn v McDermott [1998] 3 VR 1 where Phillips JA, with whom Winneke P and Charles JA agreed, stated (at 10-11): "Thus there are three possibilities, not two. First, there is the mere accord executory which, on the authorities, does not constitute a contract and which is altogether unenforceable, giving rise to no new rights and obligations pending performance and under which, when there is performance (but only when there is performance), the plaintiff's existing cause of action is discharged. Secondly, at the other end of the scale is the accord and satisfaction, under which there is an immediate and enforceable agreement once the compromise is agreed upon, the parties agreeing that the plaintiff takes in satisfaction of his existing claim against the defendant the new promise by the defendant in substitution for any existing obligation. Somewhere between the two, there is the accord and conditional satisfaction, which exists where the compromise amounts to an existing and enforceable agreement between the parties for performance according to its tenor but which does not operate to discharge any existing cause of action unless and until there has been performance. Where there is a mere accord executory, no suit can be maintained upon the compromise unless and until there has been performance, and then suit is ordinarily unnecessary. Upon default in performance, the plaintiff's existing cause of action continues unaffected. With accord and satisfaction, either party may sue upon the compromise, but only on the compromise and for nothing else: the original cause of action has gone. Where there is accord and conditional satisfaction, the plaintiff is bound to await performance and accept it if tendered, but if there be no performance, then the plaintiff may proceed according to general principles called into play when any agreement is repudiated: the plaintiff may either treat the agreement (the accord) as at an end and proceed on his original cause of action; or he may, at his option, sue on the compromise agreement, in place of the original cause of action. Thus, the consequences should there be default in performance varies according to the case and…it would be surely in the best interests of the parties if their legal advisers saw to it, when settling litigation, that the intended consequence upon default was clearly expressed and not left to implication." 9 Madgwick J concluded that the Agreement, when entered into, was an accord and conditional satisfaction so that any variation of the legal rights between the Bank and Mrs Stern would come about only after - (a) Mrs Stern had discharged her obligations under pars 1‑4 of the Agreement; and (b) the parties had entered into a further agreement.

10 His Honour found that the Agreement immediately imposed upon Mrs Stern, for valuable consideration, obligations sufficient to characterise the Agreement as enforceable in itself, albeit that it did not thereupon discharge her liability to the Bank. His Honour further found that as at 21 February 2001, when the Agreement was varied, the Agreement was still an accord and conditional satisfaction but at that time subject to the Bank's express reservation of its position in relation to Dr Pollak. As His Honour took the view that the capacity of the Bank to enforce the payment against Mrs Stern was not extinguished until Mrs Stern had complied with the requirements of pars 1-4 of the Agreement, he adopted the approach that it was at that time that a determination was to be made as to whether the Agreement operated as a release or merely as a covenant not to sue Mrs Stern. 11 After reviewing relevant authorities Madgwick J concluded as follows: "These authorities make it clear that an agreement will not be construed as a release as opposed to a covenant not to sue unless it is plain that the agreement was intended to operate as a release. The inclusion of the clause providing for the reservation by the Bank of its rights against Dr Pollak and an acknowledgment of this by Mrs Stern, is a clear manifestation of an intention on the part of the parties to the agreement that there would not be a release of either Mrs Stern or Dr Pollak but rather that the Bank was, in substance, covenanting not to sue Mrs Stern. In addition to that specific clause there is a number of other factors which lend support to the conclusion that the agreement was a covenant not to sue. The agreement was between Mrs Stern and the Bank and the recitals made it clear that the purpose of the agreement was to avoid the necessity of the Bank initiating and prosecuting bankruptcy proceedings against Mrs Stern, that is to say, to sue in respect of its rights as a judgment creditor. Furthermore, the surrounding circumstances which are relevant in the construction of such an agreement support construing the agreement as a covenant not to sue. Mrs Stern was well aware that the Bank was seeking to have a bankruptcy notice served upon Dr Pollak. The Bank's solicitors had inquired from her solicitor whether she was aware of his whereabouts, in order to serve him. Mrs Stern was also aware that Dr Pollak had initiated proceedings seeking special leave to appeal in the High Court against the judgment of the Full Court of this Court which affirmed the decision of Tamberlin J, and she had indicated that, although she had agreed to be named as an applicant this was only done so as not prejudice Dr Pollak's position, she herself being committed to reaching a commercial settlement with the Bank. Finally, the Terms of Settlement contemplated by the agreement provided in clause 13 that the Bank "covenants not to take any step to enforce the Judgments" against Mrs Stern. These various factors, viewed in the light of modern judicial authority which propounds a need for caution in construing an agreement with one debtor as a release where there are other jointly and severally liable debtors, point to the conclusion that the agreement should be regarded not as a release in the strict sense but rather as a covenant not to sue."

contentions 12 The appellant argued that the primary judge erred in not finding that the Agreement was an immediate accord and satisfaction whereby the Bank accepted the promises made by Mrs Stern in satisfaction of its judgment. Reliance was placed on a number of factors including that - (a) There were parties to the Agreement (ie Dr Stern and Stern Nominees Pty Ltd) who had no relevant pre-existing liability to the Bank; (b) Mrs Stern came under an immediate and irreversible obligation to sell certain properties and to deal with the proceeds of sale in the way required by the Agreement while the Bank came under an immediate obligation to pay the costs of such sales in excess of specified sums and to receive the proceeds of sale in partial, and ultimately full, discharge of its debt; (c) the Agreement granted the bank an immediate equitable interest in certain properties "as a security against compliance 'with this agreement and in respect of the debt'"; (d) on execution of the Agreement, Mrs Stern gave up her right of appeal absolutely; (e) the only right of default given by the Agreement is that provided by par 7 (ie the exercise and enforcement of equitable interest given as security); and (f) the arrangement between Mrs Stern and the Bank was complicated and would take some time to implement thus leading to an inference that the consideration provided by Mrs Stern was her promise rather than the performance of her promise.

13 The Bank submitted as follows: (a) the provision regarding a release did not take effect until after the Agreement had been varied to include an express reservation of rights against the appellant, with the consequence that it operated only as a covenant not to sue; alternatively, (b) the Agreement from the outset was not intended to be an unqualified release, but contemplated a reservation of rights against the appellant; in the further alternative, (c) the Agreement called for a release by a subsequent instrument (see pars 8 and 11) and in the result, the Terms of Settlement contained only a covenant not to enforce, as opposed to a release.

CONsideraTION 14 In Walker v Bowry (1924) 35 CLR 48 the High Court applied the common law rule that the release of a number of co-debtors jointly or jointly and severally liable for the same debt releases all. Although, as McLelland CJ in Equity observed in Dorgal Holdings Pty Ltd v Buckley ("Dorgal v Buckley") (1996) 22 ACSR 164 at 167, the rule seems impossible to justify as a matter of principle, the decision of the High Court is binding on all other Australian courts. Neither party suggested to the contrary. 15 However, as Judge Paul Baker QC observed in the context of a contractual debt in Deanplan v Mahmoud [1993] Ch 151 at 170: "A covenant not to sue is not a release. It is merely a contract between the creditor and the joint debtor which does not affect the liabilities of the other joint contractors or their rights of contribution or indemnity against their co‑contractor. It is a question of construction of the contract between the creditor and the joint debtor in the light of the surrounding circumstances whether the contract amounts to a release or merely a contract not to sue." Moreover, even where an instrument purports to release one of two or more joint debtors, if it discloses an intention to reserve rights against the other joint debtor, it will be construed merely as a covenant not to sue (see Dorgal v Buckley at 167). 16 The authorities support the proposition that an agreement may constitute a covenant not to sue, rather than a release, even where there is no express reservation of rights against debtors. In Murray-Oates v Jjadd Pty Ltd (1999) 76 SASR 38 at 54 Wicks J, with whom Doyle CJ and Mullighan J agreed, said: "The question of whether we are concerned with a release or covenant not to sue should be approached as being one of construction having regard to the words used. At the same time one has to bear in mind the possibility of an implied reservation of rights. The fact that the plaintiff might not have intended to release the defendant, or did not realise the legal consequence of a release to one joint debtor, is not of itself of any particular significance …." 17 In Johnson v Davies [1999] Ch 117 at 127-128 Chadwick LJ, with whom Ward and Kennedy LJJ agreed, in considering the issue of whether a voluntary arrangement effected a release of joint debtors, found that the words used in certain paragraphs of the voluntary arrangement, construed in the light of the whole of the proposals made by the debtor the subject of the voluntary arrangement, were inconsistent with any intention to effect an immediate or absolute release of the debts owed to creditors. His Lordship found that the release of which the voluntary arrangement spoke was not to take effect, if at all, until the debtor's obligations under the proposals were fulfilled. In Deanplan v Mahmoud at 170 Judge Paul Baker QC considered whether there was anything in the surrounding circumstances which would rebut the prima facie meaning of the agreement. 18 It is therefore necessary to give consideration to the true construction of the Agreement. It is appropriate in the first instance to do this without reference to the variation effected on 21 February 2001. 19 The opening recital to the Agreement defines the expression "the debt" as, in effect, the judgment debt owing by the appellant and Mrs Stern to the Bank. Paragraph 8 of the Agreement provided that: "Upon the matters in paragraphs 1 to 4 of this agreement being completed, the Bank will immediately execute Terms of Settlement with Ilana Stern and the Vendors and release Ilana Stern from the debt and any other related orders arising from the conduct of the Federal Court proceedings." 20 The matters referred to in pars 1-4 of the Agreement are the sales of certain properties and the payment of moneys to the Bank. The language of par 8, and particularly the use of the expressions with temporal significance (ie "Upon the matters …"; "the Bank will immediately execute ….") are strongly suggestive of an intention to postpone the release of which the paragraph speaks until the matters referred to in pars 1‑4 of the Agreement are completed. Nothing in the rest of the Agreement, in our view, tends to indicate that the intention of the parties to the Agreement was otherwise. Rather it would appear that, where the parties intended that a right or obligation was to arise immediately, language appropriate for this purpose was chosen. So, for example, par 5 provides: "The parties hereto agree and acknowledge that the Bank is, by virtue of execution of this agreement by the Vendors or any of them, granted an equitable interest in the properties …." Another example is to be found in par 6 which provides: "In consideration of execution of this Agreement, Ilana Stern agrees to forego …." 21 The Agreement contains other features which suggest against an intention that the release of which par 8 speaks was to take effect upon the execution of the Agreement. First, the Agreement requires the proceeds of certain future sales of property to be paid to the bank "in partial discharge of the debt". These requirements are inconsistent with the immediate release of the debt; they indicate that the debt survived the execution of the Agreement. Secondly, the equitable interest in the properties given to the Bank by par 5 of the Agreement is expressed to be by way of security not only against compliance with the Agreement but also as security in respect of the debt. This paragraph also indicates an intention that the debt survive the execution of the Agreement. 22 We agree with the primary judge that the Agreement does not disclose an intention that the Bank's promise to release Mrs Stern from the debt should take effect immediately upon execution of the Agreement. Like His Honour we conclude that the Agreement, when entered into, was an accord and conditional satisfaction rather than an immediate accord and satisfaction. That is, the Agreement, on its execution, was an existing and enforceable agreement between the parties for performance according to its tenor but it did not operate to discharge the debt unless and until there was performance (Osborn v McDermott - see [8] above). The fact that, as the appellant rightly contends, Mrs Stern came under an immediate and irreversible obligation to sell certain properties and to deal with the proceeds of sale in the way required by the Agreement, does not in any way compel a conclusion that the Agreement is an immediate accord and satisfaction. It is simply one of the factors to be taken into account in identifying the true construction of the Agreement. The same may be said of the other factors relied upon by the appellant (see [12] above). Their impact, whether looked at individually or together, is insufficient to counteract the clear intention revealed by the factors identified in [20] and [21] above. 23 Before performance of the Agreement was completed, and therefore before the Bank came under the contractual obligation imposed on it by par 8 of the Agreement, the Agreement was varied by the addition of the clause set out in [7] above. By that clause, the Bank expressly reserved all of its rights against the appellant. At the time that the variation was effected, it became clear beyond argument that the Bank reserved its rights against the appellant. That is, before the contractual obligation arose to grant the release for which par 8 of the Agreement provided, it was plain that the parties did not intend that the release should operate to the benefit of the appellant. In the circumstances we find it unnecessary to reach a concluded view as to whether the Agreement had, even without the variation, disclosed an intention to reserve the Bank's rights against the appellant. 24 Moreover, in the events that happened, the Bank did not release Mrs Stern from liability for the judgment debt. The terms of settlement signed by the solicitor for the Bank on the one hand, and by the solicitor for Mrs Stern, Dr Stern and Stern Nominees Pty Limited on the other, include a covenant not to take any steps to enforce the judgment debt against Mrs Stern and a term to the effect that the terms of settlement do not affect the Bank's rights against the appellant. For present purposes a covenant not to enforce is to be equated with a covenant not to sue. Understandably, no argument was advanced by the appellant to suggest that he had any right to compel the Bank to release Mrs Stern from liability for the judgment debt. 25 In our view, the primary judge rightly rejected the appellant's contention that the petition seeking the making of a sequestration order against his estate should have been dismissed on the basis that the appellant had been released from the judgment debt.

26 The appeal will be dismissed. There will be an order that the respondent's costs be taxed and paid from the estate of the appellant in accordance with the Bankruptcy Act 1966 (Cth). I certify that the preceding twenty-six (26) numbered paragraphs and the Annexure are a true copy of the Reasons for Judgment herein of the Court.

Associate: Dated: 14 March 2002 Counsel for the Appellant: Mr M Aldridge SC

Solicitor for the Respondent: Mallesons Stephen Jaques

Trade Practices Act 1974(Cth)

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Judgment (11 paragraphs)

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Cases Cited (5)