Thiess Infraco (Swanston) Pty Ltd, in the matter of National Express Group... [2004] FCA 1155 | Case summary

THE COURT DIRECTS THAT:

The defendants admit in full (but subject to valuation) the plaintiff's proof of debt lodged on 1 September 2003. THE COURT ORDERS THAT:
The defendants pay the plaintiff's costs of and incidental to this application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT 1 In 1999 the public transport system in Victoria was privatised. The Victorian Government awarded franchises to private organisations to operate the transport system. Three franchises were granted to subsidiaries through National Express Group (Australia) Pty Ltd of National Express Group PLC, a British publicly listed company. The "Bayside Trains" franchise was awarded to National Express Group Australia (Bayside Trains) Pty Ltd for fifteen years, the "Swanston Trams" franchise was awarded to National Express Group Australia (Swanston Trams) Pty Ltd for ten years and the "V/Line Passenger" franchise was awarded to National Express Group Australia (V/Line Passenger) Pty Ltd for ten years. Soon it was evident that the NX subsidiaries were unable to operate profitably. In December 2002 the parent withdrew its financial support. Within a week or so the NX subsidiaries went into administration and ultimately entered into deeds of company arrangement. The deeds make provision for the extinguishment of creditors' claims upon payment to them out of a fund of $30 million established by the Victorian Government and the British company of a sum less than the full amount of their claims. One group of creditors whose claims are to be compromised are those who have a "debt payable by, or claim against, [a franchisee] (based in contract, tort, statute or otherwise, present or future, certain or contingent, ascertained or sounding only in damages), being a debt or claim arising on or before" 23 December 2002, the day on which the administrators had been appointed. The plaintiff, Theiss Infraco (Swanston) Pty Ltd, claims to be a creditor of NX Swanston. It lodged a proof of debt with the defendants, who are the administrators of its deed. The proof was for unpaid services charges for work done before 23 December 2002 and for loss of profits. The administrators rejected the proof in so far as it claimed loss of profits. Thiess now challenges that decision. 2 The facts are not in dispute. Thiess' proof is for the profits it lost as a consequence of the termination of an agreement styled "Infrastructure Maintenance Agreement" to which Thiess and NX Swanston were parties. Under this agreement Thiess agreed to provide infrastructure maintenance services to NX Swanston for a period of three years extendable at the option of NX Swanston. It had no power to make an election in the sense that it could not terminate the IMA. That right was held in suspense waiting the directors' consent, unless, of course, before that consent was given, Theiss chose to go on with the IMA come what may regardless of the prior breach. Theiss' fee was to be paid monthly. Time was made of the essence by cl 43.10. Clause 34 set out the circumstances in which the IMA could be terminated in the case of certain defined "Events of Default". Curiously this provision gave only NX Swanston the right to terminate the IMA. This led to a submission that cl 34 was a "code" and only NX Swanston could terminate the agreement in the case of default. This is an untenable proposition as reference to cl 24, which expressly contemplates termination by Thiess, shows. Clause 24 is an important provision in other respects. It was concerned with contracts called "Key Contracts". By a complicated trail through definitions and other agreements, Key Contracts were defined to include the IMA. Principally, Key Contracts were agreements which were related to the franchises. Clause 24.4 limited the circumstances in which Thiess could terminate a Key Contract. Thus, cl 24.4 provided: "(a) Thiess must not, except as permitted by paragraph (b): (i) avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of; (ii) suspend the performance of any of its obligations under; or (iii) do or permit anything that would enable or give grounds to another party to do anything referred to in sub-paragraph (i) or (ii) in relation to, this Agreement. (b) Thiess may terminate a Key Contract if the Director is reasonably satisfied that: (i) it is no longer necessary [for] Thiess to have the benefit of the Key Contract; or (ii) Thiess has made adequate alternative arrangements for the continued operation of the Franchise Business. (c) If Thiess terminates a Key Contract in breach of this Agreement, Thiess must, at the request of the Director, enter into an agreement immediately following that request with each counterparty to the Key Contract on the terms set out in the relevant Direct Agreement." It is likely that the parties intended to refer to "Key Contracts" rather than "Agreement" at the end of cl 24.4(a). Clause 24 also referred to agreements styled "Direct Agreements". Thiess agreed to co-operate in the implementation of Direct Agreements: cl 24.2. The relevant Direct Agreement was between Thiess and the Director of Public Transport (Vic). Pursuant to the Direct Agreement, Thiess gave various undertakings designed to protect the public interest in the operation of the transport system. Clause 5.2 of the Direct Agreement restricted the ability of Thiess to terminate or suspend the IMA in terms different from cl 24.4 of the IMA. Clause 5.2(a) provided that Thiess could only terminate or suspend the performance of its obligations under the IMA for default on the part of NX Swanston if it had given notice of that default to the Director, and either the default was not remedied within thirty days or, if the default was not capable of remedy, if the obligations of NX Swanston under the IMA "[did] not commence and continue to be performed" within thirty days. Clause 5.2(b) provided that Thiess could not terminate or suspend the IMA if the Director notified Thiess that he would "step in" for NX Swanston under the IMA or that any security granted by NX Swanston to the Director had become enforceable, and the Director or (relevantly) a receiver and manager appointed under any such security was performing all of NX Swanston's obligations under the IMA. 3 Following the award of the franchise, Thiess provided maintenance services to NX Swanston as required. It received payment for those services until late 2002. On 16 December 2002, National Express announced that it had given notice to the Victorian Government that it would "stop providing funds to enable the train and tram subsidiaries to meet their liabilities as and when they fall due with effect from December 2002." Later that day the Minister for Transport (Vic) announced that the NX subsidiaries would hand back their franchises with effect from 23 December 2002. On 17 December 2002 Thiess sought clarification of NX Swanston's "position and intentions under the IMA, and in particular whether [it] remains ready and able to perform its obligations under the IMA prior to and after 23 December 2002." NX Swanston immediately replied that "we are currently in negotiations with the State for an orderly handover of the franchise businesses once NEG plc ceases to provide funding." 4 As at 17 December 2002 NX Swanston was indebted to Thiess in the sum of approximately $4 million for unpaid fees. An officer of NX Swanston told Thiess that he could not "advise as to whether it [NX Swanston] will pay to Thiess Infraco the amounts which are overdue, and which will become due, … under the IMA." A director of Thiess met the chief operating officer of National Express on 19 December 2002. He asked for an assurance that NX Swanston would keep paying the amounts due to Thiess. The chief operating officer said that no such guarantee could be given. 5 On 20 December 2002 Thiess served a default notice on the Director in accordance with cl 5.2 of the Direct Agreement. The default identified in the notice was the "failure by [NX Swanston], in breach of the IMA, to pay the sum of $3.989m currently due and payable to Thiess Infraco." On 22 December 2002 the Director, pursuant to certain securities which had been granted by NX Swanston to the Victorian Government, appointed receivers and managers over the company's assets. Thiess served a further default notice on the Director, relying upon the appointment of the receivers as a further event of default under the IMA. To secure the continued operation of the Swanston trams, the Director notified Thiess that it could not suspend or terminate the IMA and that Thiess was required to honour its obligations under the IMA. Thiess performed those obligations until 18 April 2004, when the IMA was terminated. It was paid for those services by the receivers. The receivers were by statute personally liable to make those payments: see s 419 of the Corporations Act 2001 (Cth). 6 The IMA was terminated in the following circumstances. On 9 September 2003, Thiess, NX Swanston, the Director, the receivers and other parties executed a so-called settlement deed. The settlement deed was intended to provide a basis for renegotiating the contracts concerning the franchise while in the interim preserving the original contracts. However, as no new contracts were made, most of the settlement deed never came into operation. Still, some provisions are important. Clause 2.2 of the settlement deed provided that the IMA was to be extended until a new maintenance agreement was entered into and that in the meantime Thiess would not seek to terminate the IMA by reason of an "Insolvency Event". An Insolvency Event was broadly defined and included the suspension of the payments of debts, actual insolvency, presumed insolvency, the appointment of an administrator and so on. Eventually a new operator was found and the franchise operation was transferred to the operator under a transfer agreement dated 17 April 2004 to which Thiess, NX Swanston and the Director, among others, were parties. By clause 2 of the transfer agreement Thiess and NX Swanston acknowledged that the IMA "will terminate on commencement of [a new franchise agreement with the transferee] for breaches by [NX Swanston] of the [IMA] which occurred before 22 December 2002." Thereupon the IMA came to an end. 7 I will now deal with the applicable principles of law. Thiess is only entitled to maintain its proof for loss of profits if, as at 23 December 2002, it had a "contingent" debt or claim against NX Swanston. The deed of company arrangement does not define what is meant by a "contingent" debt or claim. The meaning of that expression must be determined by the application of the ordinary rules relating to the construction of instruments. In this case it is clear that the deed intended to pick up the meaning of "contingent debt" or "contingent claim" in the insolvency provisions in the Corporations Act: the definition of "claim" is taken directly from s 553. This provision has its genesis in bankruptcy law. So it is to that law that I now turn. 8 Before 1824 unmatured or contingent claims were not admitted against bankrupt estates. This caused great hardship. Long before, Lord Hardwicke had expressed the wish that the law should be altered to include contingent claims: Ex parte Groome (1744) 1 Atk 115, 120. So had Lord Eldon in Ex parte Barker (1803) 9 Ves Jun 110, 112. The position was partly remedied by section 56 of the consolidating Bankruptcy Act 1825, 6 Geo 4 c 16. This section admitted proofs for "any Debt payable upon a Contingency which shall not have happened before the issuing of [the] Commission" of bankruptcy. Where the contingency occurred after the commission the creditor could prove for and receive dividends, but not so as to disturb any former dividends. Where the creditor wished to prove before the happening of the contingency he could ask the commissioners to value the debt and prove for the amount valued. Still, it was not possible to prove for all future liabilities until the Bankruptcy Act 1869, 32 & 33 Vict c 71. As a result of section 31 of that Act, which allowed proofs for "all debts and liabilities, present or future, certain or contingent", "[e]very possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy … The broad purview of this Act is, that the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind.": Ex parte Llynvi Coal and Iron Co, In re Hide (1871) 7 LR Ch App 28, 31-32. 9 Since 1869 it has never been doubted that if at the date of bankruptcy the bankrupt was bound by an executory contract the creditor could prove as a contingent creditor for any losses that he might suffer from a past or future breach of that contract. This accords with the evident purpose of bankruptcy which is to permit all creditors to share in the distribution of the assets of the bankrupt and to leave the debtor thereafter free from the liability of previous obligations. As Lord Halsbury observed in Hardy v Fothergill (1888) LR 13 AC 351, 355: "[T]he legislature has been engaged in the effort to exhaust every conceivable possibility of liability under which a bankrupt might be, to make it provable in bankruptcy against his estate and relieve the bankrupt for the future from any liability in respect thereof." It would be most unfortunate if persons entitled to the performance of executory agreements on the part of bankrupts were excluded from participation from bankrupt estates and the bankrupts themselves as a necessary corollary were left still subject to action for non-performance in the future although without the property or credit often necessary to enable them to perform those obligations. The categories of claims which are admissible should be as wide as possible so that the financial affairs of the bankrupt are dealt with comprehensively. 10 The view that a future breach of contract could be proved as a contingent claim not only accords with principle, it conforms to the opinions of textbook writers and is supported by the cases. Hardy v Fothergill was a case which arose under the Bankruptcy Act 1869. There the bankrupt, an assignee of a leasehold estate, covenanted to indemnify the lessees against damages for breach of their covenants to repair with the lessors. At the time of the bankruptcy, the covenant to indemnify still had eight years to run. The lessees did not tender any proof as to the bankrupt's possible liability at the end of their covenant. When the lessor sued the lessee on the covenants for repair, the bankrupt resisted being joined as a third party on a claim for indemnity on the basis that he had been discharged from bankruptcy. The House of Lords agreed as the liability could have been proven in the bankruptcy. According to the Law Lords the only cases which fell outside the proof provisions were (1) those where the court considered that it was impossible to estimate in any way the amount of the claimant's damage and (2) possibly, contracts which had an object different from the payment of money and any others for which the proper remedy was an injunction or specific performance. The first exception was provided for in the statute itself but, as Lord McNaghten said (at 367) such a case "is one … very unlikely to occur". The second exception was furnished by a dictum of Lord Selborne (at 360) which was later applied in In re Reis; Ex parte Clough [1904] 2 KB 769; affirmed (by implication) in Clough v Samuel [1905] AC 442. It should be noted that the rule in Hardy v Fothergill did not allow a lessor under a subsisting lease to prove for future rent: In re New Oriental Bank Corporation (No. 2) [1895] 1 Ch 753. But if the lessor was willing to treat the lease as at an end he was entitled to prove for all obligations past and future: In re Panther Lead Company [1896] 1 Ch 978. 11 Turning to the textbooks, Yate-Lee and Wace in The Law and Practice of Bankruptcy,3rd edn (1887) (at 206) state that s 37 of the Bankruptcy Act 1883 (which substantially reproduced s 31 of the Bankruptcy Act 1869) gave "a right to prove for damages sustained by reason of a breach during the continuance of the bankruptcy of a contract made prior thereto". The authors note, on the same page, that in In re Sneezum; Ex parte Davis (1876) LR 3 Ch Div 463, it was held that if the trustee of a bankrupt did not disclaim a continuing contract but carried it on for the benefit of the estate, "he was at liberty when he found it unprofitable to cease to perform it, and in that case the other party to the contract was entitled to prove against the bankrupt's estate for the damages occasioned by the breach of the contract, and that was his only remedy." James LJ explained (at 473) that s 31 of the 1869 Act "says in effect that, where there is a breach during the continuance of a bankruptcy of any contract which was made by the bankrupt before the bankruptcy, proof for the damage may be made exactly as if the breach had taken place before the bankruptcy." To similar effect is In re Northern Counties of England Fire Insurance Co (McFarlane's Claim) (1880)LR 17 Ch D 337, where the insured under a fire policy was entitled to prove in the winding-up of the insurer for the full amount of its loss through a fire which had occurred after the date of the winding-up. 12 Baldwin, in A Treatise upon the Law of Bankruptcy and Bills of Sale, 8th edn (1900), states (at 540): "Although unliquidated damages for the breach of most contracts would appear to be capable of estimation and so provable, even before breach, it may be that there is an exception in the case of contracts, which have some different object than the payment of money in any contingency, such as a contract to marry … And probably contracts in which an injunction or specific performance is the proper remedy for breach, are excluded from the operation of s. 37(l)." 13 The English provisions allowing proofs by contingent creditors were adopted in Australia with little change from their English counterparts: see eg the Insolvency Statute 1871 (Vic), s 112. See now Bankruptcy Act 1966 (Cth), s 82. The Australian textbook writers took the same view of the meaning of "contingent" creditor as had been taken in England. For example in Robertson and Tait, Federal Bankruptcy Law and Practice (1928), (at 179) wrote of the relevant provision (then s 81(6) of the Bankruptcy Act 1924-1927 (Cth)) that: "… all demands arising out of contract or breach of trust are provable, however unliquidated or uncertain the amount of the claim, including therefore consequential damages, and damages in cases where the amount has not, and even cannot, be ascertained by fixed rules. It is immaterial whether any breach, which may give rise to the claim, has or has not or could not have occurred before the discharge of the debtor." 14 The statutes which regulated the winding up of companies adopted the bankruptcy practice. The first English insolvency statute simply applied the law and practice in bankruptcy in relation to proofs: Winding Up Act 1844, 7 & 8 Vict c 111, s 11; see also Winding Up Act 1848, 11 & 12 Vict c 45, s 74. The Companies Act 1862, 25 & 26 Vict c 89, the first modern Companies Act, provided by s 158 that "all Debts payable on a Contingency, and all Claims against the Company, present or future, certain or contingent, ascertained or sounding only in Damages" were admissible. This was the predecessor of both state and federal legislation with the present provision to be found in s 553 of the Corporations Act. 15 The effect of s 158 of the Companies Act 1862 was considered in In re Asphaltic Wood Pavement Co (Lee & Chapman's case) (1885) LR 30 Ch D 216. Before it went into liquidation, the company had entered into a construction contract, but had not completed the work. Cotton LJ held that in those circumstances there was a provable claim for damages for breach of contract. He said (at 224): "It is argued that this is not a liability at the time because there was no breach. At the time when the company commenced its liquidation, it was under a contract which implied a liability to maintain these streets if it were required. It is now rendered impossible by the winding-up for the company to do that, and in my opinion … that is properly a liability the damages for which are capable of being proved". 16 It is necessary to mention the obiter opinion of the Full Federal Court in Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 which suggests a different rule. According to that case, a right to sue for damages for a future breach of a contract when looked at before the breach is not a contingent claim; it is a mere expectancy and therefore not provable. I do not propose to apply that dictum. It is contrary to both the purpose of the legislation and authority. 17 In any event, as it turns out, as at 23 December 2002 NX Swanston was in breach of the IMA. It had failed to pay the fee due on 17 December 2002 and this was a breach of an essential term of the IMA, time being of the essence. Ordinarily this would entitle Thiess to bring the IMA to an end: Holland v Wiltshire (1954) 90 CLR 409, 418-419; Tropical Traders Limited v Goonan (1964) 111 CLR 41, 53-55; Mehmet v Benson (1965) 113 CLR 295, 305-306; Neeta (Epping) Pty. Limited v Phillips (1974) 131 CLR 286, 297-298; Bunge Corporation, New York v Tradax Export S.A. Panama [1981] 1 WLR 711, 716. 18 Not only was NX Swanston in breach of an essential term of the IMA, before being placed into administration it had repudiated the IMA in the sense that it informed both the Victorian government and Thiess that it was no longer able to perform its obligations. That this amounted to a repudiation cannot be doubted: Peter Turnbull and Company Proprietary Limited v Mundus Trading Company (Australasia) Proprietary Limited (1954) 90 CLR 235, 246-248; Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401, 437; Mahoney v Lindsay (1980) 55 ALJR 118, 120; Foran v Wight (1989) 168 CLR 385, 394-395, 421, 434. 19 The administrators point out that Thiess did not terminate the IMA shortly after its breach and repudiation. So they contend that the IMA should be treated as if the breach had never occurred and as if the IMA had never been repudiated: Bowes v Chaleyer (1923) 32 CLR 159, 169, 192, 197-198; Peter Turnbull and Company Proprietary Limited v Mundus Trading Company (Australasia) Proprietary Limited (1954) 90 CLR 235, 250, 261; Howard v Pickford Tool Co. Ld. [1951] 1 KB 417, 421; Fercometal S.A.R.L. v Mediterranean Shipping Co. S.A. [1989] AC 788, 799-801. The foundation for this submission lies in the doctrine of election. According to that doctrine if a person has two inconsistent rights (eg the right to rescind a contract for breach and the right to affirm the contract and sue for damages) when he has chosen one course he cannot afterwards choose the other: United Australia, Limited v Barclays Bank, Limited [1941] AC 1, 30. 20 In my view, the mere fact that the IMA remained in force until 2004 should not be treated as an affirmation or an election not to discharge that agreement. As I have pointed out Thiess was not entitled to terminate the contract for breach or repudiation without the consent of the Director, and it did not obtain that consent until it entered into the transfer agreement; the Director's consent is to be inferred by his execution of the transfer agreement. To that point Thiess had no choice but to go on with the IMA. To that point it had no power to elect to terminate the IMA. That right was held in suspense and could only be exercised on the Directors' consent, unless, in the meantime, Theiss chose to go on with the IMA come what may. That is a critical point because, as I see it, there can only be an election if the wronged party is in a position to choose between inconsistent rights. In William W. Bierce, Limited, A Corporation v Hutchins 205 US 340 (1907) at 346, Holmes J, delivering the opinion of the US Supreme Court, said: "Election is simply what its name imports; a choice, shown by an overt act, between two inconsistent rights, either of which may be asserted at the will of the chooser alone … He may keep in force or avoid a contract after the breach of a condition in his favor … In all such cases the characteristic fact is that one party has a choice independent of the assent of anyone else." That election does not cover the involuntary acceptance of the benefit of contract finds some support in theory in English cases: see for example Forman & Co. Proprietary, Limited v The Ship "Liddesdale" [1900] AC 190, 204-205. 21 This brings me to the final point upon which the administrators rely to support their rejection of Thiess' proof. The usual rule is that when a contract is terminated for breach the contracting parties are discharged from their obligations to perform the contract in the future, but accrued rights, including any claims for damages, are unaffected: McDonald v Dennys Lascelles Limited (1933) 48 CLR 457, 476-477; Johnson v Agnew [1980] AC 367, 396. Here the administrators say that as the IMA was terminated by the agreement of the parties any accrued rights (which would ordinarily include loss of bargain damages: see Dominion Coal Company, Limited v Dominion Iron and Steel Company, Limited [1909] AC 293, 311; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 849) were lost. I accept that an action in damages may be bargained away. What is necessary, however, is to show something in the nature of an accord and satisfaction. "The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim.": McDermott v Black (1940) 63 CLR 161, 183-184. Here there was no accord, express or implied. There is, therefore, no need to inquire into its satisfaction.

Thiess Infraco (Swanston) Pty Ltd, in the matter of National Express Group Australia (Swanston Trams) Pty Ltd v Smith

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