Severability
35 The obligations of the Borrower guaranteed by Messrs Rieson and Hill are those arising under the arrangements evidenced by the letters from Mansfield Switzer of 10 September 1999. As I have said, there is some doubt as to whether both letters of that date were intended to be annexed to, and were, in fact, annexed to the Guarantee. For present purposes I do not consider that anything turns on that matter one way or the other. It is appropriate, in my view, to have regard to both letters for the purposes of determining whether or not the offending parts of the arrangement, whatever it was, are capable of severance.
36 Two quite distinct arrangements are contemplated by the letters. The first is the arrangement relating to the advances by SST to the Borrower and their repayment of those advances with interest. The second is the proposed arrangements between AFS and the Borrower, on the one hand, and the operators of the Port Botany/MPG facilities or other persons nominated by SST, on the other.
37 It is accepted on behalf of Messrs Rieson and Hill that each of those arrangements, taken separately, involves no contravention of the Act or any other illegality. Rather, it is the tying of the two together that constitutes a contravention of s 47(1). That must be so, since s 47(6) contemplates providing, or offering to provide, services on condition that the recipient of the services acquires services of a particular kind from another person. That is to say, it is the conditioning of the provision of money lending services upon the acquisition of pack and unpack services from another person that is unlawful. Once that tie or condition is removed, any unlawfulness would be removed.
38 There is no evidence that the terms of the advances were more favourable to the Borrower or to SST than they would have been had the condition of taking pack and unpack services from another person not been imposed. Further, the pack and unpack services were to be provided on commercial terms.
39 When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are, in substance, so connected with the others as to form an indivisible whole that cannot be taken to pieces without altering its nature. If the elimination of the invalid promises changes the extent only, but not the kind of the contract, the valid promises are severable. If the substantial promises were all illegal or void, merely ancillary promises would be inseverable. Where a consideration on one side is given as a quid pro quo for promises on the other side, some of which are lawful and some of which are unlawful, and it is not possible to apportion the first consideration, then severance will not be available :see McFarlane v Daniell (1938) 38 SR 337 at 345 and Humphries v The Proprietors Surfers Palms North Group Titles Plan 1955 (1994) 179 CLR 597 at 604 - 606, 609 and 618 - 619.
40 However, those rules will not decide all cases. It is necessary to have regard to each case as it arises and the particular circumstances of each case in order to determine whether severability is a possibility in relation to part of the contractual obligations. Questions of severability are often difficult and the test for deciding questions of severability that have been formulated as useful in particular cases are not always satisfactory for cases of other kinds (see Carney v Herbert [1985] AC 301 at 309).
41 One approach to severability is the approach sometimes described as the blue pencil test: is it possible to rule out parts of the contract without doing serious damage to the obligations of the parties? I apprehend that that is what Jordan CJ had in mind, in McFarlane v Daniell,in referring to the elimination of an invalid promise that changes the extent only, but not the kind, of the contract.
42 As a general rule, where parties enter into a lawful contract and there is an ancillary provision which is illegal but exists for the exclusive benefit of one party, the Court may, and probably will if the justice of the case so requires and there is no public policy objection, permit that party, if it so wishes, to enforce the contract without the illegal provision (see Carney v Herbert (supra) at 317).
43 The illegality involved in the present case was that the making of advances, and the continuation of those advances without calling them up, was conditional upon pack and unpack work being directed to the nominees of SST. One question that might arise, but has not been the subject of argument or discussion, is the extent to which it is necessary to identify the precise person to whom work was to be directed. The parties have proceeded on the basis that it is sufficient that unidentified members of the Mayne Nickless group were the subject of the condition for the purposes of s 47(6).
44 The offending provisions of the arrangement presently under consideration are those contained in Clauses 3(e) and 6 of the letter of 10 September 1999 to the Borrower, together with Clauses 2 and 3 of the letter addressed to AFS. It may be that, if Mr Rieson had not proposed to Mr Peter Sweeney in their initial discussion the incentive that 'you can have certainty in relation to the work', there would never have been any advances. Against that, however, must be considered the somewhat usurious nature of the money lending arrangement. The advances were to be made, in effect, for a maximum of four years and were to carry interest at the rate of 20 per cent, compounding monthly.
45 One could conclude that such terms would have been taken up by any lender, had they been offered. I would not infer that the advances would not have been made if the tying arrangements had not been offered by Mr Rieson as an inducement, bearing in mind that there was to be security given by both the Borrower and AFS as well as the Guarantee. On the other hand, I accept that the tying arrangements were regarded as being of significance so far as SST was concerned. It is not insignificant that, in the notes that Mr Sweeney made at the meeting in early June, the arrangements concerning pack and unpack work appeared first. While another handwritten note made no later than 3 September 1999, when a copy of it was sent by facsimile transmission, had that provision at the end, the Special Terms, which were actually signed on behalf of the parties, commenced with the reference to the pack and unpack arrangements.
46 Thus, it could not be said that the tying arrangements were insignificant or that they were not important to SST. Precisely what benefit accrued to SST, however, is by no means clear. The business that was to benefit from the tying arrangement was carried on by the Mayne Nickless group. On the other hand, it appears that there was some consulting arrangement between SST or Messrs Sweeney and Truman, on the one hand, and the Mayne Nickless group, on the other, such that some benefit may have flowed to SST or its principals by reason of increased business directed to the Mayne Nickless group.
47 There is no suggestion that the tying arrangements constituted any benefit to the Borrower, or to AFS. Doubtless, because of the relationship between AFS and the Borrower, it was in the interests of AFS to give security in respect of the indebtedness of the Borrower but there was no basis, as I perceive the evidence, for suggesting that the tying arrangement, except to the extent that it ensured that the advances would be made, benefited the Borrower, AFS or Messrs Rieson and Bell as guarantors.
48 There was no evidence of the extent to which the tying arrangement was given effect to, following the making of the advances. It was not the failure to direct work pursuant to the tying arrangement that gave rise to the early demand for payment. Rather, it was the sale by the Borrower and AFS of their undertaking or the sale of the shares in those companies that gave rise to early repayment, as contemplated by Clause 9 of the letter from Mansfield Switzer to the Borrower. It may be that an inference should be drawn that there was, in fact, compliance with the tying arrangement, although there is no suggestion that that, of itself, caused any damage or loss to any of the parties. As I have said, the terms of the arrangement were that the pack and unpack services were to be provided on commercial terms and there was no suggestion that the terms were more favourable to the Mayne Nickless group than the terms on which it provided such services to other persons.
49 I consider that the tying of the arrangements for the advances to the direction of packing and unpacking business is not such that the cutting of that tie would in any way change the character or nature of the arrangements in relation to the advances. The elimination of the tie would not have been in any way prejudicial to Messrs Rieson and Hill and, indeed, may have been beneficial. The question of whether or not the overall arrangement is valid and enforceable as against the Borrower in its entirety, subject to the making of orders under ss 87 or 87A if an application were made by the Borrower, is not in issue. However, I consider that, to the extent that there was an unlawful provision in the overall agreement, SST is entitled to treat that provision as severed from the arrangement, so as to permit the enforcement, as against the Borrower, of its obligations in respect of the advances. It follows, therefore, that the obligations in respect of the advances that were guaranteed by Messrs Rieson and Hill under the Guarantee are valid and enforceable obligations.
50 I should mention a further argument advanced on behalf of Messrs Rieson and Hill. It was contended that the Guarantee does, by its terms, do something forbidden by s 47(1) of the Act, namely to ensure that the Borrower acquires services from a third party and that, therefore, the Guarantee is impliedly forbidden by the Act. It seems to me that the argument does not lead anywhere. As I have said, it is common ground that one of the provisions of the overall agreement was unlawful as being a contravention of s 47(1). To the extent that the Guarantee relates to that unlawful obligation it may well be that the Guarantee is unenforceable.
51 That conclusion however, follows from the fact that the principal obligation is unenforceable rather than asserting that any illegality so far as the Guarantee itself is concerned. I do not consider that the Guarantee of the obligation to repay the advances is unenforceable by reason of illegality. It may be, of course, that in so far as there was a contravention, the giving of the Guarantee might have had the consequence that Messrs Rieson and Hill were involved in the contravention. That, however, is not an issue before me. I do not consider that provisions such as s 75B of the Act, relating to the circumstances in which an individual will be involved in a contravention, renders the Guarantee itself illegal.
52 Messrs Rieson and Hill also filed a cross-claim, in which they sought relief under s 87(1) in the event that I held that the whole of the overall agreement was valid and enforceable by the operation of s 4L. In light of the concession made by SST, it is unnecessary to deal with that question. However, if the matter did arise, the observation should be made that there has been no attempt made to establish or prove any loss or damage on the part of Messrs Rieson and Hill in relation to the enforcement of the obligations of the Borrower in relation to the advances, by reason of the tying arrangement. There has not been any evidence of any loss or damage arising by reason of giving effect to the tying arrangement.
53 It may be that, if the Borrower were a party to the proceeding, relief might have been available under s 87, to the effect that those provisions of the overall agreement that constituted the tying arrangement would not be enforced. That, in substance, is the effect of the conclusion I have reached as to severance. That is to say, if the effect of s 4L was that the overall agreement was valid and enforceable subject to an order under s 87, the Court may well have made an order that the arrangements in relation to the directing of pack and unpack services would not be enforceable. Whether that relief would be available to the guarantors might be debateable, but it is not, as I have said, a matter that arises for my decision.
54 In all the circumstances, it seems to me that the result of my determination is that none of the defences raised on behalf of Messrs Rieson and Hill succeeds. It follows that there should be judgment for SST against Messrs Rieson and Hill in the sum that was due and owing as at the date of commencement of the proceeding, together with interest under s 51A of the Federal Court Act.
55 I raised the question of whether the respondents, as guarantors, would be liable for interest at the contractual rate up to the date of judgment. The schedule attached to Mansfield Switzer's letter of 10 September 1999 refers to interest at 20 per cent per annum, calculated on monthly rests, September 2003 being the date fixed for repayment. Clause 9 of the letter referred to the possibility of sale and said that SST would accept all principal and interest up to the date of settlement of the sale. On balance, I consider that a fair reading of the contractual arrangements between SST and the Borrower is that the Borrower was liable to pay the interest, at the rate of 20 per cent per annum calculated on monthly rests, up to the date of payment. Further, Clause 1 of the Guarantee provided that the guarantors were to pay, on demand, the principal amounts with interest at the rate reserved in the payment schedule, up to the time of payment under the Guarantee.
56 In the circumstances I consider that there should be judgment for SST of an amount calculated to include interest up to the date of judgment at the rate of 20 per cent per annum calculated on monthly rests. I will stand the matter over to next Friday for the purposes of making orders to give effect to my reasons, including orders as to costs. The parties are in agreement as to the orders for costs save for one matter and that relates to the amendment of the reply to the defence. I consider that it is appropriate that SST bear the costs, if any, thrown away by that amendment and by the unsuccessful application for further amendment that was heard on the first day of the hearing.
I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.