Talga Ltd v MBC International Ltd

I also agree that, for the reasons my brothers assign, the appeal from the findings of my brother Gibbs fails.

These conclusions suffice to dispose of the matters. There is no need for me to express any view on any of the other matters raised and detailed in the hearing of the appeal or of the demurrer.

In this matter the Full Court heard first an appeal from my decision on the trial of certain issues arising in the action and then a demurrer by the plaintiffs to part of the defences of the defendants. I, of course, did not participate in the hearing of the appeal but was a member of the Court that heard argument on the demurrer.

The question raised by the demurrer was whether s. 5(1)(a) of the Banking Act 1974 Cth is beyond the power of the Parliament. The plaintiffs contended that the sub-section is invalid for three reasons. First it was said that it purports to confer on a court power which is not judicial power. The submission was that the sub-section does not involve the court in ascertaining, declaring or enforcing existing rights and liabilities but empowers the court to create new rights and liabilities in persons who are not in any existing legal relationship. Therefore, it was said, the court is required to act legislatively, or perhaps administratively, but not judicially. However, in my opinion it is quite unreal in fact, and wrong in law, to say that the parties in the present case were not in any legal relationship. The circumstances of the case are set out in my judgment on the trial of the issues [28] . The parties had entered into a number of transactions intended to have contractual force but said to be invalid or unenforceable by reason of a failure to comply with the Banking (Foreign Exchange) Regulations. Section 5(1)(a) in effect requires a court, in proceedings in which the validity of transactions has been called in question by reason of such a failure, to treat the transactions as never having been invalid for that reason only, if the court holds that it is just and equitable that they should be treated as being valid. Once the court holds that it is just and equitable that the transactions should be treated as being valid, the legal effect is that they never were invalid. It is wrong to regard the sub-section, or the sub-section operating in conjunction with the regulations, as first invalidating the transaction, and then rendering valid what was formerly invalid. It is true that s. 5(1)(a) gives the court a very wide discretion, but it is not an arbitrary one. Cominos v. Cominos [29] and the cases there cited strongly support the conclusion that when the court acting under s. 5(1)(a) applies to the facts of the case the standard imported by the words "just and equitable" it is exercising judicial power.

1. (1976) 50 A.L.J.R. 619. 2. (1972) 127 C.L.R. 588.

The next submission was that s. 5(1)(a) is a law with respect to contracts and not with respect to any subject upon which the Parliament of the Commonwealth has power to make laws. The assumption made by the plaintiffs is that the Banking (Foreign Exchange) Regulations are valid. On that assumption s. 5(1)(a) is valid, for if the Parliament can enact the regulations, it can validly provide whether, and under what conditions, a breach of the regulations will render a transaction invalid or unenforceable. If the regulations are invalid, of course, there is no necessity for the provisions of the sub-section and this branch of the plaintiffs' case falls to the ground.

The third submission of the plaintiffs (which cannot readily be reconciled with their first submission) was that the sub-section is beyond the power of the Parliament because it "constitutes an interference with judicial power which is outside the competence of the legislature and is inconsistent with the severance of power between the legislature, executive and judiciary which the Constitution ordains". This argument has no substance. It was said to be based on Liyanage v. The Queen [1] , but that case bears not the least resemblance to the present. It is impossible to agree that the legislature, in conferring upon a court a wide discretion to do what is just and equitable, has thereby in some way usurped or infringed judicial power.

I would overrule par. 20 of the plaintiffs' demurrer to the amended defence of the first defendant and par. 22 of the plaintiffs' demurrer to the amended defence of the second, third and fifth defendants.

In an action instituted in the Supreme Court of New South Wales Talga Ltd. and other companies associated with it sought a declaration that, despite its receipt of loans of a total of $5 million, Talga Ltd. was not indebted in that or any sum because the transactions involved in those loans required, but in the main did not receive, authorization from the Reserve Bank as required by the Banking (Foreign Exchange) Regulations. For want of this authorization the agreements, it was claimed, were illegal and unenforceable, giving rise to no obligation to repay.

Pleadings of considerable complexity were delivered and an inter se question arose which resulted in the removal of the action into this Court pursuant to s. 40A of the Judiciary Act. There then ensued before Gibbs J. a trial limited to the resolution of three questions thought to stand at the threshold of the dispute and the answering of which might either resolve all other issues or at least substantially narrow what appeared to be an otherwise extensive field of contention lying between the parties. When the matter came before Gibbs J. one of these three questions was in fact resolved by consent, an answer being mutually agreed upon; his Honour heard evidence and argument and determined the other two questions. It is from the answer given by his Honour to one of them that Talga Ltd. and the other associated plaintiffs have now appealed.

In addition to this appeal there is also before us for argument, upon the order of Gibbs J., one of a number of demurrers by the plaintiffs to the defendants' defence.

Both the appeal and this demurrer are concerned with s. 5(1)(a) of the Banking Act 1974. That section, so far as relevant, reads:

(1) No act or thing done, and no contract or other transaction entered into, before the commencement of this Act, shall be deemed to be, or even to have been, invalid or unenforceable by reason only that a provision of the Banking (Foreign Exchange) Regulations has not been complied with, but the foregoing -

(a) does not apply to any act, thing, contract or other transaction the validity of which, has, before 3 December 1974, been called in question, for that reason, in any proceedings, whether or not the proceedings have been completed before that date, except proceedings in which the court holds that it is just and equitable that the act, thing, contract or other transaction should be treated as being valid;.

The appeal concerns the affirmative answer given by Gibbs J. to the question, asked in the context of the concluding portion of par. (a) of s. 5(1): "If there was lack of compliance with the Banking (Foreign Exchange) Regulations, whether it is just and equitable that the transaction should be treated as valid?" To this question his Honour answered: "Yes, as to all agreements in question". Such an answer would prove fatal to Talga Ltd.'s reliance upon the failure to obtain the Reserve Bank's authorization to aspects of the loan transaction, unless s. 5(1)(a) be held to be itself invalid; it is the validity of s. 5(1)(a) that is called in question by the plaintiffs' demurrer, which asserts it to be ultra vires the legislative power of Parliament.

It will be convenient to deal first with the demurrer point; the appeal can then, we think, be disposed of quite shortly. We omit any recital of the facts surrounding the loan transaction; they are of very considerable complexity, are described in detail in the reasons for judgment of Gibbs J. at first instance and are largely irrelevant to the issues raised by the demurrer. To understand the plaintiffs' argument on the demurrer it will be enough to refer to facts as and when they become germane to that argument.

The plaintiffs' contention is essentially this: that the latter part of par. (a) of s. 5(1) attempts to confer upon a court a power to create for the first time new rights and impose new obligations and to do so in any case in which the court holds it to be just and equitable so to do. Such a power, being legislative rather than judicial in character, is not one that can validly be reposed in a court exercising the judicial power of the Commonwealth (the Boilermakers' Case [2] ). Hence s. 5(1) is ultra vires.

The route travelled by the plaintiffs in arriving at this conclusion is as follows: they point out that s. 5(1)(a) is concerned only with the effect of an infringement of the Banking (Foreign Exchange) Regulations and that the failure to obtain the authorization of the Reserve Bank to the various agreements concerned in the loan transaction involves contravention of provisions of those regulations. This contravention is then said to result not merely in the unenforceability of those agreements but has a more drastic effect, it renders wholly null the offer and the purported acceptance of it involved in those agreements. This invalidating effect, brought about by contravention of the regulations, is said to interpose an impenetrable barrier between offer and attempted acceptance so that no legal relationship can result and none did in fact result as between the parties in the present case although money to the tune of $5 million passed hands. The plaintiffs then turn to the concluding words of s. 5(1)(a) which, they say, then purport to operate upon this area, now void of all legal relationships, and to confer upon a court the power to create de novo legal rights and obligations where none existed; this is the legislative function which the plaintiffs identify as being sought to be vested, unconstitutionally, in a court.

This latter phase of the plaintiffs' argument necessarily involves that a strictly sequential interpretation be given to s. 5(1). Instead of treating the section as operating concurrently with the breach of the regulations, so helping to define, in conjunction with the regulations, the effect of the breach, they construe it as applying only at an immediately subsequent point of time and as either confirming the destruction of legal rights and obligations already caused by breach of the regulations or as resurrecting afresh those rights and obligations. This notion of temporal sequence is pursued still further; s. 5(1)(a) is read as if it involved three distinct steps, the last two arranged in a strict temporal order of operation. First comes the general provision that no transaction entered into before the commencement of the Act shall be invalid or unenforceable by reason only that a provision of the regulations has not been complied with; then follows the exception in the case of those transactions the validity of which has been called in question in any proceedings before 3rd December 1974; lastly there occurs what is said to be the exception to that exception, which excludes from it proceedings in which the court holds that it is just and equitable that the transaction should be treated as valid.

The plaintiffs then apply the sections, so interpreted, to the facts: the agreements in question are ones the validity of which was, before 3rd December 1974, called in question in proceedings; they are thus within the first exception and cannot be validated by the general provision with which s. 5(1) begins but are at that stage wholly invalid. Then, when the last part of par. (a), said to be an exception to the exception, comes to be applied the situation is one in which there is no existing transaction at all, nothing but a legal void. Hence the conclusion that for a court to have power to create out of that void new rights and obligations is incompatible with the exercise of judicial power.

The fallacy which we regard as at the heart of the plaintiffs' argument, and recognition of which is destructive of that argument, lies in its notion of this temporal sequence and in the associated treatment of the last part of par. (a) as an exception to an exception. So to construe the paragraph ignores its structure and the effect of its language. The proper construction of par. (a) is to regard it as containing but one class of exception to the general provision with which s. 5(1) opens and which saves transactions from invalidity. That class of excepted transaction is identified by reference to the existence of legal proceedings of a certain character, that is, proceedings as to which two things may be said; first that in the course of them, before 3rd December 1974, there has been called in question the validity of the transaction, secondly that in those proceedings the court has not held it to be just and equitable that the transaction should be treated as valid. Unless a transaction answers the above description it will not be taken out of the opening general provision of s. 5(1).

If this be the correct interpretation of the section there is no question of a transaction first being avoided and rendered a nullity, only later being resurrected by unconstitutional use of judicial power under the latter part of the paragraph. The opening words of that latter part, "except proceedings in which", to our minds make it clear that par. (a) contains one exception not two, and that there can be no application of the paragraph in two distinct steps. All that follows these opening words qualifies the ambit of the one exception contained in the paragraph by defining those proceedings to which the paragraph applies. By defining the transactions to which par. (a) applies by reference to proceedings and to the exercise or non-exercise of a judicial discretion in those proceedings the section is not involving the court in the creation of new rights and obligations but is, rather, providing for the discretionary demarcation of the boundary between transactions which are saved from invalidity by the general saving provision of s. 5(1) and those which, by par. (a), are excepted from that saving provision.

So viewed the terms of s. 5(1)(a) can involve no exercise of other than judicial power. No question of the creation of new rights or obligations is involved and the plaintiffs' only remaining ground of attack, the alleged lack of criteria in the phrase "just and equitable", loses its point once a situation is attained in which an existing legal relationship subsists, one to the circumstances of which a consideration of what is just and equitable may be applied. Assume a transaction which is declared by the opening words of the section to be neither invalid nor unenforceable unless it falls within the single exception in par. (a). When it comes before a court in proceedings in which its validity has been called in question the issue for the court will be whether it is just and equitable that the transaction should be treated as valid. The court will have before it an existing transaction replete with all its surrounding facts and circumstances and in their light will determine what is just and equitable. In doing so it will certainly be exercising a wide discretion but this is a commonplace of the curial process; the court will be bound to act judicially, exercising its discretion by reference only to such considerations affecting the transaction as, on an examination of the legislation, may be seen to be material to the decision which it is called on to make. Irrelevant matters, matters such as the plaintiffs instanced in the course of argument, which have no rational connexion with the policy of the regulations but would be expressive only of the personal predilections of the Court, cannot be allowed by it to play any part in its decision.

If this be the role assigned to the Court, as we think it is, s. 5(1)(a) confers no power upon the court other than judicial power. This conclusion is enough to dispose of the plaintiffs' demurrer.

The plaintiffs, for the purposes of their appeal against the decision of Gibbs J., had to assume the validity of s. 5(1)(a) and, as we understood the argument, the attack was principally concentrated upon two matters involved in his Honour's exercise of discretion; first that certain of the considerations to which his Honour had regard ought not properly to have been taken into account, and secondly, that his Honour gave no attention to two matters which should have weighed with him. As to the first of these contentions his Honour said of the discretion which he was called upon to exercise that the section conferred upon a court "the widest discretion to reach its decision in the light of all the circumstances of the case". With that we entirely agree and it was precisely to "all the circumstances of the case" that his Honour confined himself in the course of his careful exposition of the considerations which affected the exercise of his discretion. There is, in our view, no substance in this first contention. His Honour concluded that "every consideration of justice and equity is in favour of treating each of the agreements as enforceable". In our view this was a very clear case indeed for an exercise of discretion favourable to validity and enforceability; none of the criticisms sought to be made of this aspect of his Honour's reasons is in our view of any substance and they call for no detailed refutation.

We accordingly pass to the two matters to which the plaintiffs say that his Honour failed to give weight. The first was what was said to be a grossly unfair provision contained in one of the agreements involved in the loan transaction, a provision which operated to the great disadvantage of Talga Ltd. Of this it would be enough to say that the parties were in no unequal bargaining position; each group of companies had at the time substantial assets and was apparently provided with that degree of sophisticated legal advice to be expected in a transaction of such magnitude and complexity. There is no suggestion whatever of oppression or sharp dealing; indeed on the material before this Court it is impossible to say whether the precise effect of the provision in question was appreciated by, and perhaps even intended by, all parties, by some only of them or by none of them. It is, accordingly, hardly promising material upon which to found a conclusion that it was not just and equitable that the transaction should be treated as valid. Moreover no complaint was made concerning this provision either after execution of the agreement or even in the course of the trial before Gibbs J.; the matter is now raised for the very first time on the present appeal and in our view provides no ground for doubting the propriety of his Honour's exercise of discretion.

The plaintiffs also seek to attach importance to his Honour's statement at the outset of his judgment that the complex form which the loan transactions took was partly due to "a wish to avoid, as far as possible, attracting the operation of the laws relating to foreign exchange". His Honour having said this should, it is said, have given to it due weight when exercising his discretion. In fact his Honour did give careful consideration to the conduct of the parties in order to determine whether there existed, on the part of the defendants, anything in the nature of a desire to deceive the Reserve Bank or to withhold information from it. His conclusion was that any breaches of the regulations were neither flagrant nor deliberate; this conclusion, which has not been shown to be erroneous, in our view disposes of this particular attack upon the learned trial judge's exercise of his discretion.

For these reasons we would dismiss this appeal and, as already mentioned, would also overrule the demurrer.