Westpac Banking Corporation v Gilio [2011] NSWSC 1309 | Case summary

The contract of guarantee and equitable set off 17The fundamental premise from which one approaches the issues in this case must be the right of parties in a democracy, such as Australia, to decide for themselves whether or not to contract and to decide the terms on which they will bind themselves: Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 133. The High Court of Australia has confirmed this approach and the underlying policy reasons behind it. It said: " [33] The respondents, each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. Yet fundamental to the respondents' case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be. That is not so. Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified. The respondents attempted neither. [34] There are reasons why the law adopts this position. First, it accords with the "general test of objectivity [that] is of pervasive influence in the law of contract". The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions. [35] Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, time-consuming, expensive and problematic. Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case. Different questions may arise where the execution of the written agreement is contested; but that is not the case here. In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules. They are not unbending. They allow for exceptions. But the exceptions must be proved according to established categories. The obligations of written agreements between parties cannot simply be ignored or brushed aside." ( Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 472 ; (2004) 211 ALR 101; (2004) 79 ALJR 206 ; (2004) 57 ATR 556 ; [2004] HCA 55 at [33] to [35]; references omitted) 18Notwithstanding the freedom of parties to contract and to contract on terms on which they agree, the law imposes obligations on which parties may rely in answer to a claim for damages. Thus, where a defendant is able successfully to rely on a countervailing claim against a plaintiff, that countervailing claim to the extent that it absolves him of the whole or part of the debt, may be successfully pleaded to negate or ameliorate the debt owing; Meagher, Gummow and Lehane, Equity Doctrines and Remedies , 3 rd edition (1992) at 3701. 19Secondly, an equitable set off is different from a cross claim in that it may be used defensively as well as offensively: Stooke v Taylor (1880) 5 QBD 569 at 575. 20Thirdly, the only requirement for an equitable set off is that the claim impeaches the title of the plaintiff. 21Essentially, equitable set off arises in circumstances where it would be unconscionable for a party to rely on the law to obtain damages, for which there is, in whole or in part, an answer arising from the same or different circumstances. The current practice arises from the historical position that, previously, equity would restrain common law actions for monies owing unless the plaintiff at common law set off amounts owing from other sources to the defendant: see AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705 at 710.F to 711.C per Giles J; see also Commonwealth Development Bank v Windermere Pastoral [1999] NSWSC 518 per Rolfe J. 22Given the foregoing principles, it may be impossible for a party to contract out of equitable set off. If it were possible to stay the enforcement of the contract pending the determination of a related ameliorating counter-claim then a contractual term excluding set off would be inoperative. 23Nevertheless, it is possible, by express words in a contract, for the contract to provide for payment of amounts that, bearing in mind rights to counter-claims, may not be owing in full and to delay the ascertainment of the rights of the other contracting party to the amounts in the counter-claims: see Batiste v Lenin [2002] NSWSC 233 at [105] per Bryson J; Bank of Western Australia v Hodgkinson [2011] NSWSC 96 at [15] and the cases cited therein, per Einstein J; GE Capital Australia v Davis [2002] NSWSC 1146 at [43], [56], [73], [83], [85] and [92] to [99] per Bryson J. 24All of the foregoing principles (and judgments) were concerned with final judgments of the court. The only judgment to which the Court, as presently constituted, has been referred, that deals with the issue on an interlocutory basis is St George Bank Ltd v Archer Philip Field [2007] NSWSC 902, per McDougall J. In the St George Bank case , supra, McDougall J struck out the Commercial List response and directed summary judgment for the Bank. In doing so he said: " [14] A consideration of this issue requires some reference to the terms of the deed of loan and guarantee. It is expressed to be an unconditional and irrevocable guarantee, payable on demand (cl 2.1). The guarantor must not delay payment for any reason (again, cl 2.1). Payment is required to be made in full (cl 3.1). The inference available from those provisions is made explicit by cl 3.2 which reads as follows: 3.2 Payment without deduction or set-off Guaranteed Money must be paid in full without any deduction. The Guarantor waives all rights of set-off, combination or counterclaim in relation to payment of Guaranteed Money. [15] Clause 5.2.1 is also relevant. It makes it plain that the guarantor's liabilities and the rights of St George are not affected by a number of matters, including the granting of time, laches, acts omissions or mistakes, and anything else which might at law or in equity have the effect of breaching or discharging the guarantor's liability. [16] Further, there is a certification clause: cl 9.4. That is in the usual form, making a written statement conclusive evidence, except in the case of manifest error, of the amounts stated in it. Such a statement is in evidence. It certifies the liability of Mr Field to St George as at the date it was signed. There is no doubt that it was signed by someone authorised to do so under cl 9.2. [17] Against that background, it is therefore necessary to consider the issues that might be raised. I have set them out above. A number of those issues refer to conduct of St George, by its servants and agents, which has the effect of discharging the guarantee, or of relieving Mr Field of liability under it, or of making it unjust for St George to seek to enforce the guarantee. On the face of things, they are all rights that Mr Field has bargained away by the clauses of the guarantee to which I have referred. It is clear that the courts will give effect to such a bargain: see Mason CJ in The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 407. In the particular context of a guarantee, see the decision of Brennan J in Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 at 675. To the extent that Mr Field wishes to raise those issues, they are issues that are foreclosed by the terms to which I have referred. [18] There is an important distinction to be drawn between a defence that impeaches the guarantee itself, and a defence that impeaches the exercise of rights under the guarantee. Clauses of the kind to which I have referred may not prevent a defence being raised to liability under a guarantee where it is said (for example) that the taking of the guarantee was itself affected by some vitiating circumstance. But no such issue is raised in this case. There is no challenge to the validity of the guarantee. The allegations that I have summarised seek to attack the exercise of rights under it. In my view that is the kind of exercise prohibited by the terms of the guarantee which terms, as I have said, are to be enforced according to their wording." 25However, in the St George Bank Case , supra, there was no cross-claim and the issue before the Court was whether an equitable set off could be raised given the terms of the guarantee. 26The present proceedings are slightly different from all of the foregoing. First, like the proceedings before McDougall J, what is sought is an interlocutory order striking out the relevant paragraphs of the defence and issuing summary or default judgment as a consequence. Yet unlike the St George Bank Case , there is a cross-claim that Westpac does not seek to strike out and which must ultimately come before the Court and be determined, raising the same issue. 27As a consequence, the Court is not determining finally the issues between the parties as to their relative indebtedness, it is being asked to give force to Westpac's pre-emptive strike which may well have the effect of precluding the defendants from pursuing what might otherwise be just grounds in their cross-claim. The amounts involved are not insignificant. 28Moreover, there are other amounts owing, it is claimed, to Westpac and which Westpac would continue to claim under the amended statement of claim. The effect of this pre-emptive strike is to strike out only part of the defence and only obtain summary judgment in relation to one aspect of the monies Westpac claim are owed to it. 29Further, in essence, whatever be the contractual situation, Westpac seek to deny to the defendants the ability to diminish or extinguish the claims under the guarantee on the basis of statutory remedies in circumstances where to do so would not finally determine the issues between the parties or hasten the final resolution of those issues.

Consideration 30Westpac claims it is owed over sixteen million dollars. It lent that amount to Stateland in order to facilitate a commercial development of property. The defendants guaranteed that loan. While all litigation should be concluded as expeditiously as possible, the need for expedition is particularly important in the resolution of commercial disputes. 31The Civil Procedure Act 2005 requires the Court to facilitate the just, quick and cheap resolution of the real issues between the parties. Those real issues are the issues defined by the pleadings. 32The terms of the guarantee to which the parties have agreed, at least on a preliminary view, require the guarantee to be paid in any case of default without set off. Westpac are entitled to their money. At the same time, in essence, the defendants argued that it would be unconscionable for Westpac to obtain the full amount of its money in circumstances where the debt that is guaranteed is not truly owed and or there is a significant breach of statutory duty and trust alleged against the bank in relation to the properties and their sale. 33Ordinarily, set off is a substantive defence to a claim for damages in contract and even where a common law set off is inapplicable (for example, where the rules relating to abatement do not apply) equitable set off is a full answer: see Lord v Direct Acceptance Corporation Ltd (Receiver and Manager Appointed) (in liquidation) (1993) 32 NSWLR 362 at 367 to 372 per Sheller JA (with whom Kirby P and Meagher JA agreed); Federal Commerce Navigation Company Ltd v Molena Alpha Inc [1978] QB 927; and each are substantive defences, Roadshow Entertainment Pty Ltd v ACN 053006269 Pty Ltd ( Receiver and Manager Appointed) (formerly CEL Home Video Pty Ltd ) (1997) 32 NSWLR 462 at 481; but as seen before each may be excluded by the terms of the contract. 34The requirement, particularly in commercial disputes, to expedite their final resolution must be understood in that context. The Court must ask itself the question; in what way does the exercise of the discretion to strike out facilitate the just, quick and cheap resolution of the real issues in dispute? It certainly would facilitate the resolution of one issue, but it may prevent and it will prolong, the resolution of any other issue in the proceedings. 35Moreover, it is difficult to see how the resolution of part of the dispute in a manner that precludes all of the issues between the parties being determined at the same time facilitates justice in any broader concept. 36The power to strike out pleadings on the basis that they disclose no reasonable cause of action, and to strike out part of a pleading on the same basis, is exercised only in circumstances where the absence of a cause of action is plain and obvious: General Steel Industries Inc v Commissioner for Railways (NSW) 1964 112 CLR 125; Brimson v Rockler Concrete Pipes [1982] 2 NSWLR 937. Plain and obvious in the foregoing expression does not preclude the determination of difficult questions of law: General Steel Industries , supra, at 130, per Barwick CJ. In that judgment, Barwick CJ, referring to the judgment of Latham CJ in Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91, said: "I agree with Latham CJ in the same case when he said that the defendant should be saved from the vexation of the continuance of useless and futile proceedings, in my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality the plaintiff is not improperly deprived of his opportunity for the trial of his case by the proper tribunal. On the other hand, I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed." ( General Steel Industries , supra, per Barwick CJ at 130) 37The same principle applies to the striking out of a defence as a preliminary step to achieving summary or default judgment. Ultimately, embarking upon an exercise such as determining arguable questions of law, that may themselves give rise to appeals, in circumstances where it will achieve only part of the resolution of the claims must be dealt with bearing in mind the overriding purposes of the Civil Procedure Act , to which reference has been made. 38If the application by Westpac is successful, each of the defendants will suffer judgment for something in excess of $410,000 each. As a consequence, some $2.4 million dollars of a total debt well in excess of $16 million dollars will have been the subject of judgment. The proceedings themselves will continue both for the purpose of determining the statement of claim and for the purpose of determining any cross-claims. 39Further, the effect of awarding damages of over $410,000 on some of the defendants, may, on the material before the Court, preclude the defendants from pursuing their claim. In the circumstances, it seems to me that determining the preliminary question of law and striking out those parts of the defences to the amended statement of claim will neither avoid the need for a subsequent trial, nor, it seems, substantially reduce the scope of any subsequent trial. As a consequence, determining the rather difficult issues associated with this strike out motion does not facilitate the cheap, quick and just resolution of the issues between the parties. Indeed, it may prevent the resolution of some of the issues. 40In those circumstances, the Court is not satisfied that it serves the overriding purpose of the Civil Procedure Act nor the interests of justice and expedition, for the Court to strike out those paragraphs of the various defendants' defences to the amended statement of claim. 41The Court makes the following orders:

The application to strike out paragraphs 31 and 32 in the first, second, fourth, fifth and sixth defendants' defence to the amended statement of claim filed on 5 August 2011 is refused;
The application to strike out paragraph 33 in the third defendant's defence to the amended statement of claim filed on 29 July 2011 is refused;
The application for summary judgment against the first, second, third, fourth, fifth and sixth defendants for the amounts owed in respect of the second and third banker's undertaking is refused;
Motion dismissed;
Costs of the motion will be the defendant's costs in the cause.

Westpac Banking Corporation v Gilio

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