SST Consulting Services Pty Limited v Riesen & anor

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION 10938/01 SULLY J

Thursday 13 September 2001 SST CONSULTING SERVICES PTY LIMITED v Steven Charles RIESEN & anor. JUDGMENT 1 HIS HONOUR: There are current in the Court principal proceedings that were commenced by the filing on 2 April 2001 of a Statement of Liquidated Claim in which SST Consulting Services Pty Limited, ["SST"], as plaintiff sues Mr. Steven Charles Riesen as first defendant and Mr. Scott Murray Bell as second defendant for the payment of almost $800,000, together with accruing interest. SST alleges that Mr. Riesen and Mr. Bell are liable as guarantors of loans made by SST to A.F.S. Freight Management (USA) Inc. ["AFS"], a company incorporated in the State of California in the United States of America. 2 On 7 May 2001 the two defendants filed a joint defence. No more need be said about it than that it does not plead any defence or cross-claim based upon the provisions of the Trade Practices Act 1974 (C'th). 3 On 29 June 2001 both defendants filed an amended defence. That amended defence pleads, relevantly: "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 the 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 s.47(6) of the TPA ("third line forcing") proscribed by s.47(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 On 17 August 2001 the two defendants filed a Notice of Motion claiming the following relief: "1. That these proceedings be transferred to the Federal Court of Australia at Sydney for further hearing and determination pursuant to section 6(1) of the Jurisdiction of Court (Cross Vesting) Act 1987 (Cth). 2. That the costs of these proceedings and all interlocutory steps taken in the Supreme Court of New South Wales be reserved to the Federal Court of Australia. 3. That the costs of and incidental to this application be costs in these proceedings. 4. Such further or other order as the Court my deem fit." 5 On 24 August 2001 SST filed a Notice of Motion claiming the following relief: "1. Pursuant to SCR Part 15 r 26(a) (sic), an order that paragraphs 5, 6, 7.2 and 8 of the Amended Defence be struck out. 2. An order that the defendants pay the costs of and incidental to this motion. 3. Such further or other orders as the court deems appropriate." 6 Both of these Notices of Motion were listed for hearing on Tuesday last 4 September 2001. At the commencement of that hearing, learned counsel appearing for the two defendants filed in Court, by leave, a further Notice of Motion claiming the following relief: "1. that leave be granted to the applicants to further amend the Defence as set out in annexure B to the affidavit of Gregory John Litster sworn herein 3 September 2001. 2 that leave be granted to the applicants to make a cross claim in the proceedings as set out in annexure B to the affidavit of Gregory John Litster sworn herein 3 September 2001. 3. such further or other order as the Court may deem fit." 7 The proposed further amended defence did not foreshadow changes to paragraphs 5, 6 and 8 of the amended defence previously filed on 29 June 2001. The proposed further amended defence did foreshadow, however, amendments to paragraph 7, such that paragraph 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 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 The proposed further Amended Statement of Claim foreshadowed, also, 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 s 47 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 s.93A of the TPA. 4. The provisions of the loan agreement and the guarantee were not authorised by the ACCC pursuant to s.88(8) of the TPA. The cross claimants Steven Charles Riesen and Scott Murray Bell claim: (1) A declaration pursuant to s.87 of the TPA that the guarantee is void and/or unenforceable. (2) An order refusing to enforce the provisions of the guarantee." 9 The Court, having discussed with counsel for SST and for the two defendants the most practical way of dealing with the three Notices of Motion then on foot, proceeded as follows:

[1] The Court made orders in accordance with the paragraphs numbered 1 and 2 in SST's Notice of Motion filed in Court; and reserved the question of costs.

[2] The Court gave leave to SST to amend its Notice of Motion filed on 24 August 2001 by deleting the claim for relief in the paragraph numbered 1 in that Notice of Motion, and by inserting in lieu a claim for relief as follows:

"1. Pursuant to SCR Pt 15 r. 26(1)(a) an order that paragraphs 5, 6, 7 and 8 of the further amended defence and the whole of the defendants' cross-claim be struck out."

The Court made an order dispensing with compliance with the Rules as to the formal notification and service of the said amendment to the Notice of Motion.

The Court granted SST leave to move instanter for relief in accordance with the Notice of Motion filed on 24 August 2001, as amended by the orders above referred to. 10 SCR Pt r. 26(1)(a), upon the basis of which SST moves to strike out the previously mentioned portions of the further amended defence and the cross-claim, provides, relevantly, that the Court may strike out the challenged pleadings if the Court is satisfied that they disclose no reasonable defence 11 It is trite that the power thus conferred is to be exercised with prudent reserve and only in plain and obvious cases. 12 The hearing in this Court proceeded upon the bases:

[1] That the matters of fact pleaded by the defendants in paragraphs 5, 6, 7 and 8 of the further amended defence and in the associated cross-claim are sufficient, if established by evidence at a final hearing, to make a case of third line forcing in the sense contemplated by, and proscribed by, the Trade Practices Act .

[2] That should it be held, contrary to the present submission of SST, that the two defendants are entitled in law to rely upon the matters pleaded in paragraphs 5, 6, 7 and 8 and in the associated cross-claim, then it would be appropriate to cross-vest the whole of the proceedings to the Federal Court of Australia. 13 In the result, the only remaining question for this Court is whether, in law, the two defendants are entitled to set up in answer to the claim against them made by SST in the principal proceedings, the matters pleaded in paragraphs 5, 6, 7 and 8 of the Further Amended Defence and in the associated cross-claim. 14 It is relevant to the discussion of this question to have regard to certain in particular of the provisions of the Deed of Guarantee upon the terms of which SST has brought its principal claim against the two defendants. 15 Clause 1 of the Deed of Guarantee is in the following terms: "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."

The Borrower there referred to is AFS Freight and Management (USA) Inc.; the Guarantors are the two defendants; and the Lender is SST. 16 The document of 10 September to which reference is made in clause 1 is a letter dated 10 September 1999, which contains what are described as Heads of Agreement. The principal provisions in that 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." 17 As earlier herein noted, it is agreed for present purposes that the stipulations contained in clause 3E and clause 4 of the letter of 10 September are unlawful as contravening section 47 of the Trade Practices Act. 18 The nub of the argument put in the submissions made by learned counsel for SST is that "the guarantee is illegal in that in order to avoid liability under the guarantee its terms require the continuation of the illegal practice of third line forcing……………………" in contravention of section 47. 19 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. 20 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. 21 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. 22 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. 23 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 me 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. 24 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. 25 For the whole of the foregoing reasons, I have come to the conclusion that SST is entitled to succeed in its present strike-out applications. 26 The Court orders;

[1] That paragraphs 5, 6, 7 and 8 of the Further Amended Defence and the whole of the defendants' cross-claim be struck out.

[2] That the defendants pay the plaintiff's costs of the plaintiff's Notice of Motion filed on 24 August 2001 as amended on 4 September 2001.

[3] That the Notice of Motion of the defendants filed on 17 August 2001 be dismissed with costs.

[4] That the plaintiff and the defendants pay respectively its and their costs of the defendants' Notice of Motion filed in Court on 4 September 2001.

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