RIESEN & ANOR v SST CONSULTING SERVICES PTY LTD

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40806/01

MASON P MEAGHER JA DAVIES AJA

Steven Charles RIESEN & ANOR v SST CONSULTING SERVICES PTY LTD JUDGMENT 1 MASON P: In my view this application raises issues suitable for the grant of leave subject to the filing of a notice of appeal. 2 The respondent (hereafter the plaintiff) sued the appellants (hereafter the defendants) in the Common Law Division by statement of liquidated claim. The claim relates to moneys lent by the plaintiff to AFS Freight Management (USA) Inc (AFS), a corporation incorporated in California of which the defendants were the directors. As pleaded, the plaintiff's claim is based upon a written guarantee whereby the defendants jointly and severally guaranteed the repayment of the loan with interest. The particulars refer to a letter dated 10 September 1999 from Mansfield Switzer to AFS and a deed of guarantee dated 23 December 1999 between the plaintiff as lender and the defendants as guarantors. The sum sued for is $797,263 plus interest at twenty per cent per annum from 19 March 2001. 3 On 29 June 2001 the defendants filed an amended defence which relevantly pleaded: 5. At all times material to this action: 5.1 The lender in the loan agreement who was undisclosed but is now asserted to be the plaintiff was a trading corporation within the meaning of the Trade Practices Act 1974 ("the TPA"). 5.2 The lending of money pursuant to the loan agreement was a service within the meaning of that term in the TPA. 5.3 The requirements pleaded in subparagraphs 4.4 and 4.5 were requirements whereby AFSL and AFSUS was required to acquire services (within the meaning of TPA) from those persons or corporations who provided those services at the Port Botany/MPG and Pitkin facilities in Sydney, Melbourne and Brisbane. 5.4 AFSUS and AFSL were related body corporates within the meaning of that term in the TPA. 6. In the premises, the loan agreement was: 6.1 An agreement to effect the illegal purpose of exclusive dealing as defined in s47(6) of the TPA ("third line forcing") proscribed by s47(1) of the TPA. 6.2 Void and unenforceable. 7. If, which is denied, the first and second defendants entered into any guarantee in favour of the plaintiff: 7.1 Such guarantee was provided as required by the terms of the loan agreement pleaded in subparagraph 4.3. 7.2 It was an event of default under the loan agreement giving rise to liability pursuant to the guarantee if the third line forcing was not maintained. 8. In the premises, the guarantee is void and unenforceable having been given to effect and maintain the illegal purpose of third line forcing. 4 In essence the defendants pleaded that the guarantee was unenforceable because the loan agreement to which it was pertinent had been entered into to effect the illegal purpose of third line forcing, which is a form of exclusive dealing proscribed by s47(1) and (6) of the Trade Practices Act. 5 Three notices of motion were heard by Sully J on 4 September 2001. In the first, the defendants applied to transfer the proceeding to the Federal Court of Australia pursuant to s6(1) of the Jurisdiction of Courts (Cross Vesting) Act 1987 (C'th) on the basis that the proceedings had become a special Federal matter. 6 In the second, the plaintiff applied to strike out the paragraphs of the defence invoking the defence based upon third line forcing. 7 In the third, the defendant sought leave to amend the relevant part of the defence so that para 7 would read: 7. If, which is denied, the first and second defendants entered into any guarantee in favour of the plaintiff 7.1 Such guarantee was provided as required by the terms of the loan agreement pleaded in subparagaraph 4.3 7.2 It was an event of default under the loan agreement giving rise to liability pursuant to the guarantee if the third line forcing was not maintained.

8 They also sought to raise a cross-claim pleaded as follows: 1. The plaintiffs by cross-claim repeat and rely upon the matters pleaded in paragraphs 3, 4, 5, 6 and 7 of the defence. 2. In the premises the guarantee: 1.1 was required by the cross-defendant in furtherance of the purpose of the third line forcing 1.2 in contravention of s47 of the TPA specified that an event of default pursuant to which liability would arise under the guarantee was that AFSL and AFSUS failed to comply with the requirement of the loan agreement to acquire the services of pack and unpack freight at Brisbane, Sydney and Melbourne from a person or corporation other than the cross-defendant. 3. The provisions of the loan agreement and the guarantee were not the subject of a notification to the Australian Competition and Consumer Commission (ACCC) pursuant to s93A of the TPA. 4. The provisions of the loan agreement and the guarantee were not authorised by the ACCC pursuant to s88(8) of the TPA. The cross claimants Steven Charles Riesen and Scott Murray Bell claim: (1) A declaration pursuant to s87 of the TPA that the guarantee is void and/or unenforceable. (2) An order refusing to enforce the provisions of the guarantee. 9 So that the true issue could be joined, Sully J made the orders as sought in this third notice of motion and he permitted the defendant to amend the relief sought in the second notice of motion so that it moved to strike out the now further amended defence and the cross-claim. The hearing proceeded on the basis that the matters of fact pleaded in the defence and cross-claim relating to the Trade Practices Act issue were sufficient, if established by evidence at a final hearing, to make a case of third line forcing as proscribed in that Act. 10 It was also common ground that, should it be held (contrary to the submission of the plaintiff) that the defendants were entitled in law to rely upon the Trade Practices Act matters, then it would be appropriate to cross-vest the whole of the proceedings to the Federal Court of Australia. Accordingly, the remaining question was whether, in law, the defendants were entitled to set up the trade practices issues in answer to the claim based on the guarantee. 11 The core obligation and the deed of guarantee was expressed as follows: In the event of the Borrower defaulting under any of its obligations, as set out in the 10th of September document both as to payment of interest and principal, as well as positive acts to be done, the Guarantors will pay on demand to the Lender the principal amounts advanced with interest at the rate reserved in the payment schedule up to the time of payment under the Guarantee.

12 The document of 10 September therein referred to is the letter of 10 September 1999 referred to in the particulars. It contains what are described as heads of agreement. The principal provisions in the document are as follows. 3. Default events which render within 7 days of demand payment of principal and interest calculated to end of term in relation to the loan include: A. The non-repayment of any scheduled item of interest or principal ………………………………………… E. The failure to direct all pack and unpack in Sydney, Melbourne and Brisbane and Sydney air-freight to Port Botany/MPG facilities including transport or as the lender shall advise at agreed cost in line with market conditions. …………………………………………….. 4. AFA Freight Management (USA) Inc will direct all work of pack and unpack LCL nature in Sydney, Melbourne and Brisbane, together with Sydney air freight to the corporations that the lender shall direct. Such work shall include transport. 13 As indicated above, it is agreed for present purposes that the stipulations in cl 3E and cl 4 of the letter are unlawful as contravening s47 of the Trade Practices Act. Sully J held that the offending provisions of the deed of guarantee as incorporated into the deed in terms of the letter of 10 September 1999 were severable. On that basis he upheld the plaintiff's notice of motion and ordered that paras 5, 6, 7 and 8 of the further amended defence and the whole of the defendants' cross claim be struck out. There were consequential orders for costs. See SST Consulting Services Pty Limited v Rieson & Anor [2001] NSWSC 804. 14 His Honour's reasons are given in paras 19 to 24 of the judgment which I set out. The first practical question posed by that submission is whether the offending provisions of the Deed of Guarantee, as incorporated into the Deed in terms of the letter of 10 September, are severable. If they are, then the operation of section 4L of the Trade Practices Act would, without more, entitle SST to succeed in its present strike-out applications. The principles of law governing this question of severability are well established. They are summarised conveniently in the judgment of Wilcox J in Pont Data Australia Pty Limited v ASX Operations Pty Limited & Anor [1989] 21 FCR 385 at 425, 426. The correct application of those principles to the given facts of the present case entails, in my opinion, the following propositions: [1] The Deed of Guarantee assures, relevantly, to SST two advantages: (a) The advantage of being paid back, in the form of interest, a greater sum of money than the principal sum advanced by it to the principal borrower and guaranteed by the present defendants; and (b) The benefit flowing from the exclusive dealing provisions of the Deed of Guarantee and the incorporated terms of the letter of 10 September. [2] The advantage referred to in [1a] above is a normal and lawful commercial advantage deriving from a normal and lawful agreement to lend money at interest. The correlative obligation of the guarantors is, also, a normal and lawful obligation deriving from a normal and lawful commercial transaction. [3] The benefit noted at [1b] above is proscribed by section 47 of the Trade Practices Act . If SST were now suing the two defendants in the principal proceedings upon the basis of a default manifested by a breach of the proscribed exclusive dealing requirements of the Deed of Guarantee and its associated Heads of Agreement, then I would think as at present advised, that the better view would be that a Court should not lend its aid to the enforcement of a clearly illegal contractual term. [4] That situation does not, however, arise in the present case. It is clear from the terms of the Statement of Claim in the principal proceedings that the defaults alleged to give rise to liability in the two defendants are defaults unrelated to the unlawful provisions as to exclusive dealing. [5] The elimination of the unlawful portions of the Heads of Agreement from the Deed of Guarantee would not entail, in my opinion, a fundamental change to the kind of contract which is embodied in the Deed of Guarantee. One only of a number of unrelated default-triggering events would be excluded; and there would remain on foot a clear, coherent and normal commercial engagement for the advance of a large sum of principal on loan, and for its repayment with interest; such repayment being secured by a normal commercial guarantee. [6] In those circumstances, it is my opinion that the offending portions of the Heads of Agreement as incorporated into the Deed of Guarantee are severable; and that the balance of the obligations embodied in the Deed of Guarantee and the incorporated Heads of Agreement are valid and enforceable at the instance, relevantly, of SST. In the light of that conclusion it is, strictly speaking, unnecessary to consider the question whether, had I come to the view that the offending provisions of the Heads of Agreement as incorporated in the Deed of Guarantee were not severable, the inclusion of those offending provisions would have rendered the entirety of the Deed of Guarantee unenforceable at the instance of SST. I propose, however, and in deference to the extensive submissions made by both counsel on the point, to express briefly my opinion in that connection. The relevant guiding principles are to be derived, in my view, from the decision of the High Court of Australia in Yango Pastoral Company Pty Limited & Ors v First Chicago Australia Limited & Ors [1978] 139 CLR 410. The application of those principles to the given facts of the present case entail, in my opinion, the following propositions: [1] The proper construction of section 47 of the Trade Practices Act reveals a public policy that exclusive dealing of the kinds proscribed by section 47 ought not to be permitted because they tend to inhibit what Parliament regards as a proper level of economic competition in the community. [2] That public policy can be enforced, and enforced in very stringent ways, by the appropriate penalty provisions of the Act. Any breach of the law as to exclusive dealing can attract draconian pecuniary penalties and a wide range of injunctive and other remedial measures. [3] There is no reason to think that those remedies, if enforced resolutely according to law, will be inadequate, at least in a case of the present kind, to protect to the full all relevant and legitimate public interests. [4] As I have earlier said, there is in my opinion a difference between a case in which a lender in the position of SST is seeking to enforce the very provision which has been proscribed by the Act; and the case where such a lender is seeking to have normal and lawful recourse in order to enforce normal and lawful obligations to repay the loan of a large amount of money. To deny the lender any legal recourse at all in the latter type of case seems to be to be, as a matter of common sense, unconscionable, and to confer upon the guarantors a benefit that seems to me to amount, in a real and practical way, rather than in any pedantic technical sense, to unjust enrichment. Had it been necessary to do so, I would have concluded. Therefore, that on the given facts of the present case, the guarantors were not entitled as a matter of law to plead as a complete defence the offending provisions of the Heads of Agreement as incorporated into the Deed of Guarantee upon the basis of which they have been sued. 15 It can be seen that he held, in effect: first, that the offending provisions of the deed of guarantee were so clearly severable as to render the pleaded defence and cross-claim untenable; and secondly, that the inclusion of the offending provisions did not spell invalidity as distinct from exposure to the penal and injunctive sanctions of the Trade Practices Act. 16 In my view, the relevant portions of the pleadings should not have been struck out because they present triable issues. I respectfully disagree with his Honour's conclusions on both the matters referred to above. I say this in essence for three reasons, explaining that I am only concerned to show that the matter should not have been summarily disposed of. 17 First, the application of the law as to severability is contestable in its impact in the present case. The circumstances in which a term made illegal by statute may be severed from the remainder of the contract are usually expressed in the frequently approved test stated by Jordan CJ in McFarlane v Daniell (1938) 38 SR(NSW) 337 at 445. 18 It should, however, be observed that in the words of McHugh J in Humphries v The Proprietors "Surfers Palms North" Group Titles Plan 1955 (1994) 179 CLR 597 at 619: However [Chief Justice Jordan's test] is not an exclusive test. The test of severability is a flexible one. 'There are not set rules which will decide all cases. 19 The passage in single quotes is taken from the Privy Council decision in Carney v Herbert [1985] AC 301 at 311. In Carney the Privy Council said that there are two matters to be considered. First whether, "as a matter of construction" or intention the lawful part can be severed from the unlawful part and second, "whether despite severability there is a bar to enforceability" arising out of the illegality. 20 I say no more than that the severability issue is complicated in the present case by the possibility that the loan transaction itself might be tainted by the overarching impact of s47 of the Trade Practices Act. If the loan is thus affected then it is at least arguable that the guarantee is affected. All the more so since it refers in terms to the offending parts of the heads of agreement (see the reference to "positive acts to be done"). 21 Second, it is to my mind debatable whether s4L of the Trade Practices Act has the effect asserted by the plaintiff and implicitly found by Sully J. Section 4L provides;

4L. Severability If the making of a contract after the commencement of this section contravenes this Act by reason of the inclusion of a particular provision in the contract, then, subject to any order made under section 87 or 87A, nothing in this Act affects the validity or enforceability of the contract otherwise than in relation to that provision in so far as that provision is severable. 22 Whatever the meaning of the concluding words commencing "nothing in this Act" I think it arguable that those words are qualified by the phrase "subject to any order made under s87 or 87A". 23 The plaintiff submits that one reaches for s87 only if severability becomes impossible. This seems to be the approach favoured by the learned author of Miller's Annotated Trade Practices Act, 22nd ed at [1.4L.5]. This could be right, but it is not unarguably so. An alternative position is that resort to s87 is available even if severance is not available at common law. Section 87(2) allows contractual modification as well as a wide range of remedial responses to proven contravention of inter alia Pt 4. 24 In this Court the plaintiff advanced the submission that on the proper construction of s4L inclusion in a contract of a provision contravening the Trade Practices Act does not affect the validity or enforceability of the contract as a whole, regardless of whether or not the contravening provision is severable. Senior Counsel for the plaintiff accepted that this submission was contrary to the reasoning of the Full Court of the Federal Court of Australia in News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 at 581-3. This concession alone is sufficient ground for this Court to refrain from stating that the contrary view is unarguably correct. I would simply add this. As Davies AJA pointed out, in argument, there may well be a difference between a contract that is tainted by the inclusion of a particular provision on the one hand and a transaction which, as pleaded in the present case, is said to be tainted root and branch by the presence of an improper purpose of third line forcing. 25 As indicated already, Sully J said that in any event the application of the principles in Yango Pastoral Company Pty Limited v First Chicago Australia Limited (1978) 139 CLR 410 meant that the contract was not affected by illegality and voidness. My third point is that there is, with respect, difficulty with this approach in light of the express provisions of s 47(1) of the Trade Practices Act. It is sufficient to refer to what the High Court said in Carlton and United Breweries Ltd v Castlemaine Tooheys Ltd (1986) 161 CLR 543 at 554-5. 26 For these reasons, in my view, the orders below should be set aside. I propose the following orders:

1. Subject to the filing of a notice of appeal grant leave to appeal.

2. Uphold the appeal and set aside the orders made by Sully J on 13 September 2001. In lieu thereof make the following orders: (a) The notice of motion filed by the plaintiff on 24 August 2001 as amended on 4 September 2001 is dismissed. (b) The plaintiff is to pay the defendants' costs of the notice of motion filed on 24 August 2001 as amended on 4 September 2001. (c) The proceedings are ordered to be transferred to the Federal Court of Australia at Sydney for further hearing and determination pursuant to s 6(1) of the Jurisdiction of Courts (Cross Vesting) Act Commonwealth . (d) The costs of the proceedings and all interlocutory steps in the Supreme Court of New South Wales not previously dealt with are reserved to the Federal Court of Australia. (e) The costs of the notice of motion filed by the defendants on 17 August 2001 are to be costs in these proceedings. 3. The respondent is to pay the costs of the appellants of the appeal and to have a certificate under the Suitors Fund Act if qualified. 27 MEAGHER JA: I agree. In my mind it must be just arguable that the Federal Court's decision in the News Limited case was correct. 28 DAVIES AJA: I agree with the President. 29 MASON P: The orders of the Court will be as indicated.

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