Elkhoury & Anor v Farrow Mortgage Services Pty Ltd (In Liquidation)

[1993] HCATrans 279

~	~
',;-•.	JA

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S89 of 1993

B e t w e e n -

LOUIS JOSEPH ELKHOURY and

BRENDAN PHILLIP TORPEY

Applicants

and

FARROW MORTGAGE SERVICES PTY

LIMITED (In Liquidation)

Respondent

Application for special leave

to appeal

BRENNAN J
DAWSON J

TOOHEY J

Elkhoury 1 17/9/93

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 17 SEPTEMBER 1993, AT 12.03 PM

Copyright in the High Court of Australia

MR D.P. ROBINSON: If Your Honours please, I appear for the

applicants. (instructed by Kemp Strang &

Chippendall)

MR J.D. HEYDON, OC:  I appear for the respondent, with

MR R.R.!. HARPER, if the Court pleases.

(instructed by Abbott Tout Russell Kennedy)

MR ROBINSON:  Your Honours, may I hand up a chronology and a

photocopy of the three cases I may refer to.

Your Honours, the chronology is more or less to get the sequence of events.

Your Honours, the matter comes to this Court

via the Full Federal Court where it dismissed an

appeal relating to the bankruptcy of the two

applicants. The judgment debt on which that

bankruptcy was ultimately found, it was a

guarantee, and the debt was $2.6 million, it being
the guarantee of corporations with which the

applicants were directors.

Your Honours, there has never been a hearing

on the merits and so, in the Full Court, there were

assumptions of fact made which were, in fact,

favourable to the applicants. But the application

of the law to those favourable assumptions raises a

question of contract law which I hope to attract

Your Honours with by saying and proving that it is

a question of public policy.

Your Honours, the applicants sought to go

behind the judgment debt in accordance with Wren v

Mahony.	The trial judge Mr Justice Ryan was
against them and so was the Full Court.	The case
turns on a narrow question of contract law.	The

only other point which was raised in the Full Court

below was the question of the applicability of

Edgar v Farrow Mortgage case and the doctrine that

was there developed by the trial judge which does	not appear to have found favour with Your Honours	in the previous case, and I do not rely on it in
this case.

That takes it back to the question of the

contractual position, and if I can tell you what

that was, Your Honours, by just going -

BRENNAN J: What is the contract point that you wish to

raise?

MR ROBINSON:  Upon the termination of a contract, it is

agreed that the accrued rights can be enforced.

The Full Federal Court found that upon the termination of the contract there was a right

accrued to the respondent. That was a right to

Elkhoury 2 17/9/93

make an election or exercise its option under

clause 42j of the contract.	May I take
Your Honours directly to -

BRENNAN J:	Do you challenge that?
MR ROBINSON:	I do not challenge that, that there was a

right to make that election. That election - - -

DAWSON J: Where does 42j appear?

MR ROBINSON:  42j is set out conveniently at page 25 of the application book. There was, at the time of this

case, a default in the payment of interest, that

is, prior to the contract being terminated.

Clause 42j reads:

The principal sum together with interest and

all other moneys owing and secured hereunder

shall, at the option of [Farrow] (and

notwithstanding -

matters, and -

without any demand or notice ..... become

immediately enforceable, upon the happening

of -

an event, and that was the non-payment of

interest.

The Full Federal Court recognized, as is the

case, that there was an accrued right under 42j.

That was, in the applicants' submission, a right to

exercise the option given by 42j under the

contract, thereby making the principal, which was

not then due, and the interest, immediately

payable. There is no complaint about that matter.

The Full Court said, however, that after the

termination of the contract, the accrued right

still subsisted, such that it could be invoked,

that is to say, the option could be exercised under
the contract after the contract had been

terminated.

TOOHEY J: When you speak of termination, Mr Robinson, you

are speaking of what, repudiation and - - -

MR ROBINSON: Repudiation and acceptance. If I can just

take Your Honours to the short chronology. The

loan was made on 1 December 1989 and it was staged

loans. By 1 May there is a default in the interest

payment. That would give rise to the option in

42j. On 22 August 1990, the assumed or agreed fact

in the Full Federal Court is that there was

repudiation and acceptance. Can I emphasize again

Elkhoury 3 17/9/93

that there has never been a trial on the merits,

but that is the manner in which the case has

proceeded.

It is after the termination on 22 August,

namely in January and February of the next year,

that the Full Court found that the exercise of the

option had been made by the respondent. The short
contractual point is, applying the cases of

McDonald v Lascelles and Westralian Farmers, the

option which was an accrued right, even properly so

described, was not itself any valuable right after
the contract had been terminated and certainly it
was not able to be exercised. That is, the option
was not able to be exercised under the contract

after the termination of the contract to make the

full principal and interest owing. That is the

short point.

BRENNAN J:	Why not?
MR ROBINSON:	Because, Your Honour, the short point is that

42j gives an option to the respondent but that is

an option which must be exercised under the

contract. May I illustrate that by taking

Your Honours to the facts in Westralian Farmers, which is the principal - - -

TOOHEY J: Just before you take us to the illustration, what

do you say was Farrow's position upon termination,

using that in the sense that you used it of

repudiation and acceptance, in relation to

principal moneys?

MR ROBINSON:  They would not be able to obtain back the

principal moneys by suing on the contract.

TOOHEY J: Yes, that is not quite an answer to the question.

Is it implicit in that answer that they could

recover the principal in some other way?

MR ROBINSON:  Yes. Well, no doubt money had and received or

some restitutionary claim. Money had certainly

been advanced. It had certainly been advanced to

the benefit of the borrowers. It would be

seemingly unfair for them to be able to keep that

benefit.

TOOHEY J: Yes, it would rather.

MR ROBINSON:  But that is a different aspect, and it is the

contract under which, my submission is, they could

not recover that principal.

TOOHEY J: But does it reflect your position to say that the

mortgagor was obliged, if sued in restitution or on

some other appropriate basis, to return the

Elkhoury 4 17/9/93

principal moneys advanced but was somehow immune

from an action for recovery based upon

paragraph 42j?

MR ROBINSON:  Yes, Your Honour. It could not have exercised

the option in 42j after the termination of the

contract. That is my point. It is as stark as

that.

BRENNAN J: Are you going to take us to Westralian Farmers?

MR ROBINSON:  Yes, Your Honour. The facts in Westralian

Farmers are somewhat complicated but it is not

necessary to go into them all. The plaintiff in

that case had an agreement with an American

manufacturer of tractors.	The plaintiff also had
an agreement with the defendant.	The defendant

agreed to purchase, from the plaintiff, tractors

and the mechanism that they put into place was that

the defendant would take delivery of the tractors

actually in America and, as agent for the

plaintiff, he would pay a certain amount of money

to the manufacturer on behalf of the plaintiff in

America. And then when the tractors came back into

Australia, he would then be liable to pay the

balance of the purchase price. That is described

as a commission but it is the balance of the

purchase price.

Could I take Your Honours to page 379 of

Westralian Farmers. At about point 2, the joint

judgment of Mr Justice Dixon and Mr Justice Evatt

says:

The first ground upon which the

appellant company denies its liability to pay

the percentage upon these tractors is that

under the terms of the agreement no such

liability could arise until the goods arrived

at Fremantle and before this happened the

contract ceased to have any further executory

operation.

That was the argument. If Your Honours would then

go down the page to about point 9, beginning with
the sentence:

But primarily it remits the inquiry to a general consideration of what is involved in the sudden termination of an executory

agreement under which liabilities are accruing

from day to day. We are concerned only with a

liability to pay a liquidated demand. In

general the termination of an executory

agreement out of the performance of which

pecuniary demands may arise imports that, just

as on the one side no further acts of

Elkhoury 17/9/93

performance can be required, so, on the other

side, no liability can be brought into

existence if it depends upon a further act of

performance.

I emphasize those words.

BRENNAN J:  What is the further act of performance with

which we are concerned here?

MR ROBINSON:  The exercise of the option or the election in

42j.

BRENNAN J: Are you not then misreading that sentence, to

see on which side the further act of performance

has to be expected?

MR ROBINSON:  I think on both sides, Your Honour.

BRENNAN J: Well, if, on one side, the contract is fully

executed, so that there is no need for any further

act of performance, then we are not concerned with

this problem, are we?

MR ROBINSON: That is right, Your Honour.

BRENNAN J:  Now, if there is no further act of performance

of obligations owed by the lender to the borrower,

then where is the further act of performance?

MR ROBINSON:  I do not think, Your Honour, it depends on

obligations owed by the borrower to the lender.

BRENNAN J: Well, the lender to the borrower. If there were

no further obligations owed by the lender to the

borrower, why are we concerned with any further act

of performance by the lender?

MR ROBINSON:  I am sorry, I may be not understanding

Your Honour's question.

BRENNAN J: Putting it in the terms of this case, if Farrow

had done all it had to do to discharge its

obligations to you, why do you say that the

exercise by Farrow of its right in its own interest

is an act of performance coming within this

principle?

MR ROBINSON: First, the factual basis of that is that at

this time it was the borrower who accepted the

repudiation, the lender not having allowed a

drawdown of funding. The liability, that is to

say,the requirement to repay the principal and

interest at that time, was brought into existence

by a further act of performance by the lender under

the contract.

Elkhoury 6 17/9/93

BRENNAN J: That is not an act of performance of any

obligation owed by the lender to the borrower.

MR ROBINSON:  No, Your Honour, nor, with respect, would it

need to be to come within the terms of Westralian

Farmers.

BRENNAN J: Would it not?

MR ROBINSON:  No, Your Honour, it would be my submission.

BRENNAN J: Yes. Well, I understand the submission.

MR ROBINSON:	Your Honour, just to complete the passage:
If the title to rights consists of vestitive
facts which would result from the further
execution of the contract but which have not
been brought about before the agreement
terminates, the rights cannot arise. But if
all the facts have occurred which entitle one
party to such a right as a debt, a distinct
chose in action which for many purposes is conceived as possessing proprietary
characteristics, the fact that the right to
payment is future or is contingent upon some
event, not involving further performance of the contract, does not prevent it maturing
into an immediately enforceable obligation.

The simple proposition, Your Honours, that I

advance in support of the application is that it

was a further act of performance by the lender

under the contract to exercise his option under

42j.

The dissenting judgment of Mr Justice Latham

at page 369 at point 9 illustrates the matter

again. The last paragraph:

It is, I think, clear that when a

contract has been determined, a party cannot,

by purporting to act under it, impose any

obligation on the other party the foundation of which obligation can be found only in the

terms of the contract itself.

With respect, the obligation to repay the principal

and interest could only be found in the terms of

the contract itself, and the lender, by exercising its option after the termination, has taken a step

under the contract. That is the step which has

founded the liability which it prosecutes.

TOOHEY J:  You are using "option" and, admittedly, it is the

language of section 42, it is only the exercise of

the option that brings a right into existence.

Elkhoury	17/9/93
MR ROBINSON: That is right, Your Honour.	Could I

illustrate it perhaps this way: on 21 August

TOOHEY J:  I am not - can I just ask you this. What do the

words "at the option of" add to clause 42 of the

document? Moneys become due and payable on the

happening of certain events, admittedly at the

option of but that is a right that had accrued by

the time the contract came to an end.

MR ROBINSON:  The right to exercise the option had certainly

accrued. The exercise of the option had not been

done prior to 22 August.

BRENNAN J:	And your proposition is that the exercise of the option was an act of performance which was too late
to perform at that stage and, therefore, no further rights could accrue?
MR ROBINSON:	Under 42j, yes, Your Honour.

BRENNAN J: Yes. Well, I understand. Is there anything you

can add to that?

MR ROBINSON:  No, Your Honour. If Your Honours are

unpersuaded in that, there is no further point.

BRENNAN J: Yes. We do not call upon you, Mr Heydon.

The decision of the Full Court in this case

was clearly correct. Special leave is refused.

MR HEYDON:	I apply for costs, if the Court pleases.
MR ROBINSON:	I cannot say anything, Your Honour.

BRENNAN J: Refused with costs.

AT 12.23 PM THE MATTER WAS ADJOURNED SINE DIE

Elkhoury 8 17/9/93