SNL Group Pty Limited v CMA Corporation Limited and Anor

Factual Background 8SNL conducts business as an owner of commercial property and a trader in iron products. 9SNL's business sometimes involved the purchase and arrangement of shipments of iron products for GX. GX is located in and trades from Nanning Guangxi, China. SNL acted periodically as GX's agent. 10Some time around the end of March 2008 Mr Wen Wu Su (Su) the managing director of SNL and Mr Johnny Chung (Chung) the general manager of ferrous trading at CMACo had a discussion about whether they might enter an arrangement whereby CMACo would finance the acquisition of iron products sourced by SNL in Indonesia for supply to China. Several meetings took place between the two, which culminated in a decision being made by CMACo that it would use its Singaporean company CMAP to advance funds for such shipments. 11Some time around the end of April or the start of May 2008 Su called Chung to indicate that he had arranged for a shipment of iron product to be sent from Indonesia to China and requested payment from CMAP. Following this initial transaction and indeed between May and July of 2008, SNL and CMAP entered into a series of short term financing arrangements whereby Su would send a direction to Chung for the payment of certain sums to third parties in respect of the purchase of goods or transport or other costs associated with a purchase. 12During that period CMAP advanced a total of US$4,415,341.59 to various parties at the request of SNL. 13These transactions appear to have been conducted in a relatively informal manner. No more than a text message or a fax directing payment was required for CMAP to remit what was often a large amount of funds. At this point there was obviously considerable trust between the parties. 14Chung was quite enthusiastic about these arrangements. He raised in one of his early discussions with Su the possibility of CMAP acquiring Su's business if arrangements proved fruitful. Both saw the potential for substantial profits. 15On or about 13 June 2008, CMAP and GX entered into a contract for the sale by CMAP to GX of 7,600 metric tonnes of iron concentrate. The price negotiated was US$220 per tonne, making a total price of US$1,672,000. The contract provided for delivery in June with a 50% down payment prior to loading with the balance payable upon receipt of the commercial invoice, the packing list and an inspection report. Any dispute between the parties if not otherwise settled was to be determined by arbitration in Singapore. The contract provided no specifications regarding the quality of the iron concentrate. 16The cargo was loaded on board the vessel Vietfracht 01 in Malaysia on 23 June 2008. On the same day CMAP raised an invoice directed to GX for the US$1,660,120 for what was now only 7,546 metric tonnes. 17At the time of shipping CMAP had not been paid the 50% deposit. The vessel had however departed. 18Understandably, CMAP was concerned that the cargo might reach its destination without it having received any payment. By now economies around the world were in a most uncertain state and there was a sudden and dramatic fall in commodity prices as a result. 19Chung tried on numerous occasions to make contact with Su. On 6 August 2008 a meeting finally took place between the two in Sydney. CMAP had it seems pragmatically decided to offer to renegotiate arrangements. Chung indicated to Su via a text message that due to the financial crisis CMAP was prepared to renegotiate the price and give a discount in order to continue the transaction. This was a buyers market par excellence. 20Following negotiations, a reduced price of US$100 per tonne was agreed. Su on behalf of GX and Chung on behalf of CMAP reduced the agreement to writing, in the mandarin language. 21That agreement reveals a number of salient differences between it and the June arrangements. The price per tonne had been reduced from US$220 to US$100. It was also now agreed that there would be a sliding scale for payment depending on quality. An additional US$4.00 per tonne would be paid for every percent of ferrous content greater than 65% on analysis. The price however was to be reduced by $4.00 per tonne for every percent within 65% and 62% inclusive and a reduction of US$6.00 per tonne for every percent below 62%. The agreement provided that the buyer (GX) was to pay US$700,000 to a nominated bank account of CMAP by 8 August. There was a term which provided a mechanism for the determination of the quality of the iron concentrate. 22On 11 August Su arranged for payment by international transfer of US$700,000 to CMAP into it's nominated account at HSBC Singapore via his bank in Sydney, the Commonwealth Bank. 23On 12 August a Mr Desmond Tan (Tan), the CFO of CMACo, sent an email to Su. The email required a refund of US$526,000 said to be owed as a result of a cancelled transaction. Attached to the email was a spreadsheet, which purported to be a reconciliation between amounts which had been remitted to SNL in respect of a number of transactions. The spreadsheet indicated that SNL owed US$525,888.38 as a result of the cancellation. 24The spreadsheet did not record the receipt of the US$700,000 transferred on 11 August. SNL however accepts the accuracy of the spreadsheet. 25Su alleges that at some point prior to 20 August he had a conversation with Tan in which Su asserts he told Tan that the US$700,000 payment on 11 August was to fully discharge the SNL debt and partly discharge the GX debt. 26On or about 21 August 2008 Su sent CMAP another agreement in typescript. It dealt with the same shipment of iron concentrate but importantly the terms were much more extensive and materially different again from the handwritten agreement of 6 August. The background surrounding this agreement is not entirely clear but nothing ultimately turns on that for the purpose of these proceedings. CMAP and GX however executed the agreement on that day. 27First, the $4.00 additional per tonne had been replaced by an additional amount of $6.00 for every percent above 65%. For every percent now below 65% the price would be reduced by US$6.00 (the 65% to 62% range had been removed). In the event that the total ferrous percentage fell below 55% the contract provided that the "material will be rejected and returned to the seller." 28Most significantly, Article 3 of the agreement contained the following two paragraphs: "The seller acknowledges that seller has received US$174,111.62 by time of signing. Upon receipt of amount US$580,488.38 from buyer, seller agrees to release the final B/L in one working day from receipt of the amount." 29On 22 August CMAP issued a fresh tax invoice to GX for the sum of US$754,600. 30In late August or early September 2008 Su issued a post-dated cheque in favour of CMAP dated 16 September for US$580,488.38. 31The agreement of 21 August provided that upon receipt of the US$580,488.38 the seller agreed to release the final bill of lading. Su handed the cheque for the agreed amount to Ng Lay Leng (Ng)(a director of CMAP) at Singapore airport sometime in September. Thereafter a conversation between Ng and Chung took place. Chung instructed Ng not to release the original bill of lading until the cheque cleared. 32As a result of a dispute that had arisen in the meantime between GX and CMAP in relation to the quality of the iron concentrate, Su cancelled the cheque. 33On 9 April 2009 CMACo issued a notice under section 459E of the Corporations Act to SNL in respect of the amount of US$525,888.38. 34On 9 December 2009 an order was made winding up SNL. 35On 13 July 2010, GX commenced arbitration proceedings in Singapore concerning the quality of the shipment of iron concentrate. 36On 20 August 2010 SNL paid US$525,888.38 plus interest converted into Australian dollars into court as a condition for an order being made terminating the winding up. That amount remains in court pending the determination of these proceedings.

The Parties Contentions 37Mr Harris on behalf of the Plaintiff places considerable reliance upon the agreement of 21 August. He submitted that that agreement created contractual rights and obligations. Either there was no appropriation on 11 August or the later agreement of 21 August reversed the earlier appropriation so that either way the payment of US$700,000 discharged the SNL debt entirely. 38Mr Harris acknowledged that the amount paid on 11 August was clearly the amount referred to in the handwritten agreement of early August. He invited me to find however that Su had spoken with Tan at some point prior to 20 August after the payment was made confirming with him that the payment was to fully discharge at least the SNL debt. 39Mr Harris also relied upon the pleadings in the Singapore arbitration and the alleged admissions made in them. For reasons that follow it has not been necessary to decide the question concerning the status of those alleged admissions and questions concerning their purported withdrawal in accordance with the principles discussed by the Court of Appeal in The Nominal Defendant v. Gabriel & Anor . 40Mr McLure for CMACo/CMAP submitted that the payment made on 11 August 2008 should be treated as a payment made on behalf of GX. The payment he submits coincides with the payment made between the relevant parties on 6 August. By making that payment SNL as agent for GX impliedly appropriated the payment to GX's indebtedness. 41In support of that proposition Mr McLure points to the fact that Su conceded in cross examination that before receiving Tan's email of 12 August he did not know how much SNL was indebted to CMAP. He also pointed out that there was no credible evidence to suggest any discussion with anyone at CMAP about any changes to the 6 August arrangement. He submitted that Su's conduct was consistent only with him (on behalf of GX) appropriating the entire amount of US$700,000 to GX's indebtedness. Mr McLure also relied upon Su's email of 14 August 2008 to Tan in which he conceded his agreement with the spreadsheet provided to him on 12 August. 42Each of these propositions advanced by Mr McLure in my mind have much force and I consider them to be correct. However when it comes to the agreement of 21 August Mr McLure submits that any purported appropriation in that agreement could be of no effect because an appropriation had already occurred and the parties were incapable of rewriting history. For reasons which follow I do not consider that to be correct.

Legal Principles 43Where several separate debts are due from a debtor to a creditor, the debtor may appropriate the money to a particular debt or debts. If a creditor accepts the payment, it must then apply it in the manner directed by the debtor. However, if a debtor does not make an appropriation when the payment is made then the creditor may be allowed to do so : Simson v Ingham . 44For the act of appropriation by a debtor to have occurred, it is essential that the debtor communicates its intention to appropriate to the creditor, so that the creditor knows that its right of appropriation has not arisen: Leeson v Leeson . However, it is not essential that the debtor be explicit that an appropriation is being effected at the exact time that the payment is made; it is enough that it was indicated - through words or conduct - that it is it's intention to appropriate the payment at a prior point in time. 45Intention by a debtor to appropriate can be ascertained from a variety of circumstances and will depend entirely on the particular circumstances of the case. 46An important question that arises is whether an appropriation that is once made can then be reversed through mutual agreement. 47It has long been held that where a debtor owes a creditor a certain amount, both parties cannot contract to reduce the size of the debtors debt. In Penny v Cole (Pinnel's Case), it was found that an agreement to take a lesser sum than that which is owed, of itself, will not amount to a binding obligation. 48The general law of contract is also clear that past performance cannot constitute valuable consideration. As such, a debt which has already been discharged cannot form the basis of the consideration in a new agreement. 49However, ancillary issues arise where there is an entirely new agreement that involves not merely agreement regarding the size or liability of the (previously discharged) debt, but also covers a range of additional matters. In this situation there is a basis for asserting that consideration has passed, as the consideration for the agreement may be found in other promises or sacrifices that the debtor and creditor have made. Here, a similar logic as that which was applied in Pinnel's case would apply, as the court found there that an agreement to reduce the size of the debtors debt would be binding where the monetary reduction was accompanied by some other form of proprietary compensation (the "gift of a horse, hawk, or robe", for example, to quote Sir Edward Coke). 50The exact question of whether a debt can be reversed through contractual negotiations was discussed in Foakes v Beer , which has since been followed in a number of cases: see Kelen v Vitamin Pty Ltd; Monsour Pty Ltd v Amos; Martech International Pty Ltd v Energy World Corporation ; N Ray v Deputy Commissioner of Taxation and Hennessey v Architectus Group Holdings Pty Ltd . 51In Foakes it was established that in an agreement between judgment debtor and creditor, where the debtor promises to pay down part of the judgment debt in return for the creditor not taking proceedings on the judgment the agreement is nudum pactum, or, without consideration. 52Whilst the parties in Foakes had made an agreement to alter the original debt owing, the court found that there was a live question as to whether that agreement was capable of being construed as legally binding. The Earl of Selbourne LC observed that: "if the question be (as in the actual state of the law, I think it is), whether consideration is, or is not, given in a case of this kind, by the debtor who pays down part of the debt presently due from him, for a promise by the creditor to relinquish, after certain further payments on account, the residue of the debt, I cannot say that I think consideration is given in the sense that I have always understood that word to be used in our law. It might be (and indeed I think it would be) an improvement in our law, if release or acquittance of the whole debt, on payment of any sum which the creditor might be content to receive by way of accord or satisfaction (though less than the whole), were held to be, generally, binding though not under seal; nor should I be unwilling to see equal force given to a prospective agreement, like the present, in writing though not under seal; but I think it is impossible, refinements that practically alter the sense of the word, to treat such a release or acquittance as supported by any new consideration proceeding from the debtor" (emphasis added). 53This reasoning has been applied in numerous subsequent cases, which have distinguished between the ineffective agreement to reduce or extinguish a debt owing and an alternatively binding agreement that purports to extinguish or reduce an existing debt whilst also providing fresh consideration. In Vanhergen v St Edmunds Properties Ltd , for example, the court applied Foakes to state that: "a creditor cannot bind himself by a simple agreement to accept a smaller sum in lieu of an ascertained debt of larger amount, such as an agreement being nudum pactum. But if there be any benefit, or even any legal possibility to the benefit of the creditor thrown in, that additional weight will turn the scale and render the consideration sufficient to support the agreemen t" (emphasis added). 54The same reasoning has been applied in a range of general (non debt related) situations, where a similar conceptual situation arises: see, for example, Fortune Food Manufacturer Pty Ltd v Young Trading Pty Ltd ; Combins v Jenson and Hewitt v Garder for recent applications of the principle. However, where there are new terms within the agreement, signifying fresh consideration, contracts have been upheld and the original act already done has been subsequently enforced (or, in the case of appropriation of debts, effectively reversed). In Hennessey v Architectus Group Holdings Pty Ltd , for example, Slattery J found that there was in fact a lawful and binding agreement despite the fact that some of the promises made in the agreement had previously been satisfied on the basis that there were also ancillary terms in the agreement providing fresh consideration. 55On this basis, whilst a discharged debt cannot form the basis of consideration in a contract, there is no reason why an agreement that derives its consideration from another promise or set of promises cannot involve enforceable provisions regarding a reappropriation of a previously discharged debt. As long as there is valuable consideration (be it related to the debt or otherwise), the reasoning Pinnel's case and Foakes v Beer and their more contemporary enunciations are satisfied.

Discussion 56It is difficult to conceive, given the close connection in time between the agreement of 6 August and the transfer of funds on 11 August, that Su as agent for GX was doing anything other than implementing the agreement of early August. Indeed there is nothing to suggest that on or before 11 August Su had any contact with anyone at CMAP in which it is suggested that there be any change to that agreement. There is little doubt that CMAP was prepared to dramatically reduce the price of the iron concentrate but on the basis that US$700,000 be paid up front as it were as the vessel was already underway. 57However, by 21 August the relevant parties had signed yet another agreement. That agreement was prepared or so it seems by Su. 58When Su and Ng met at Singapore airport in early September and when Su handed over the cheque for the amount of US$580,488.38 there is again little doubt in my mind that he was doing so on behalf of GX and consistently with Article 3 of the agreement. It is plain that CMAP likewise understood what was happening as Mr Ng and Chung were discussing the timing of the release of the bill of lading, which was a feature of the 21 August agreement. It simply makes no sense for the parties to conduct themselves in that way unless they were in fact purporting to implement the new payment terms of the agreement of 21 August. 59Su asserted in his evidence during cross examination that he had prior to 20 August (but not prior to 11 August) told Tan that the US$700,000 had been paid to discharge the plaintiff's debt and partly to discharge the GX debt. This conversation was not included in either of his affidavits filed in the proceedings. 60In re-examination he was even more explicit. He asserted that he had discussed the payment of the US$700,000 before 20 August in which he asserted he told Tan he was paying the debt of US$525,888.38 and the balance was to be offset against the GX debt. He asserted that Tan indicated that he would report that to his director. Tan of course was not called to give evidence but the first time that this conversation was referred to was when Su gave evidence before me on 7 April. I am by no means convinced that the conversation happened as asserted by Su but there must have been further communications between the parties leading to CMAP and GX executing the new agreement of 21 August. 61Ng said he received the typed contract around about 21 August. He agreed that his signature does appear on the first two pages and that a Mr Jaiswal's (Jaiswal) signature appears over his name on the third page of the contract. Ng agreed that when he received the typescript he read through the document and he also gave it to Chung and Chung's brother Joseph to read. 62Chung was asked about the agreement of 21 August. He agreed that although the original typescript came from Su, Chung himself might have suggested the addition of (c) to Article 2(1). He agreed that he instructed Ng to sign the contract. He claimed that he did not however instruct Jaiswal to sign the document. Jaiswal was however a director of CMAP at the time. 63Chung agreed that once the agreement was signed on 21 August, it in fact replaced the earlier handwritten agreement of early August.

The Singapore Arbitration 64CMAP has made some surprising assertions in the arbitration proceedings in Singapore that are worth noting. 65In those proceedings GX in its statement of case dated 13 July 2010 pleaded reliance on the 21 August agreement and in particular Article 2, which provides for the rejection and return to the seller if the ferrous percentage content fell below 55%. It asserted that tests conducted revealed that the ferrous percentage content was only 47.59%. In those circumstances it was entitled to a refund of the US$174,111.62. 66In its statement of defence dated 13 September 2010 CMAP admitted that the parties' relationship was governed by the agreement of 21 August. It denied that it was in breach of the agreement and in particular denied that the correct analysis showed a ferrous content of 47.59%, instead asserting that it showed upon analysis a content of 69%. 67The defence also asserted that the amount of US$580,488.38 was outstanding pursuant to the contract. 68However by 31 March 2011 CMAP filed a statement of amended defence and counter claim. The amended pleading is a somewhat remarkable document. There is an assertion that GX was in breach of the agreement dated 13 June 2008 by failing to make any payment pursuant to that agreement. It pleads reliance on the early August agreement and the payment of the US$700,000 as effectively part payment of the $754,600 outstanding under that agreement. As to the agreement of 21 August it is now asserted that there were no prior negotiations to settle the terms or wording of that document and whilst CMAP noticed the clause indicating the receipt of US$174,111.62 and "the inaccuracies in that agreement" were pointed out they were under some pressure to sign the agreement because Su informed CMAP that no further payments would be made unless CMAP signed it. 69This is in effect some sort of claim of duress. I should note that no such claim has been advanced in these proceedings. Nor has there been any claim of unconscionability, or even mistake, nor of course is a claim for rectification made. Although I do not believe I have the full story before me as to how the 21 August agreement came to be signed, it was nonetheless undoubtedly signed after several persons at CMAP considered their position carefully and had renegotiated arrangements yet again. The changes reflect that. Equally Chung and Ng impressed me as sophisticated and experienced persons and that Ng knew precisely what he was doing when he signed the 21 August agreement.

Conclusion 70There is little doubt upon the authorities that if an appropriation occurs the person paying the money has the primary right in electing which debt in part or in whole is to be discharged by such payment. If the debtor makes no appropriation then the creditor has the right to appropriate the payment to a particular debt. But once the appropriation has occurred it has occurred once and for all and a creditor cannot unilaterally seek to vary the appropriation. However, there is nothing in the cases dealing with appropriation nor in my view in the wider class of cases dealing with contract that prevents parties agreeing to reverse the effect of an appropriation when there is fresh consideration. 71I am satisfied that when Su remitted the funds on 11 August he was purporting to implement the agreement of early August and CMAP were entitled to regard that conduct as an appropriation of the entire amount of US$700,000 on behalf of GX. 72However, the agreement of 21 August is materially different in the respects already identified, which in my view amounts to fresh consideration. It is in this context that a new appropriation has occurred with the intended effect: the parties can and did agree to reverse the previous appropriation so as to entirely discharge the SNL debt and partly discharge the GX debt. 73I am therefore satisfied that the Plaintiff has made out its claim for relief. I propose to make the declarations in accordance with the statement of claim as follows: (a)Declaration that the plaintiff was not, on 8 April 2009 or any subsequent occasion, indebted to the first defendant in the sum of US$525,888.38, or any sum; (b)Declaration that the plaintiff was not, on 8 April 2009 or any subsequent occasion, indebted to the second defendant in the sum of US$525,888.38, or any sum; (c)Order that the first defendant and the second defendant repay to the plaintiff any money paid by it to either of them in respect of the debt asserted in the statutory demand dated 8 April 2009 issued by the first defendant or the plaintiff under section 459E(2)(e) of the Corporations Act. (d)Order that the first defendant and the second defendant pay interest to the plaintiff on any money paid by the plaintiff as set out in Order 3. (e)Order that the defendants' pay the plaintiff's costs of these proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 May 2011