Farrow Mortgage Services P/L (in liquidation) v Edgar. J.S
[1993] FCA 359
•03 JUNE 1993
FARROW MORTGAGE SERVICES PTY LIMITED (IN LIQUIDATION) v. JONATHON SCOTT EDGAR;
TALEDI PTY LIMITED; EASTSIDE INVESTMENTS PTY LIMITED and TEKIKO PTY LIMITED
No. NG667 of 1992 FED No. 359
Number of pages - 20
Trade Practices - Contact - Equity
(1993) 114 ALR 1
(1993) ATPR 46-104
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Gummow(1) and Lee(1) JJ
CATCHWORDS
Trade Practices - misleading or deceptive conduct - financier of property developer - whether former contravened Trade Practices Act 1974, s. 52 - whether conduct of financier induced developer to enter into financing agreement.
Contact - illegality - effect of contravention of Building Societies Act 1986 (Vic.) upon validity of securities held by related corporation of building society.
Equity - imposition of terms upon relief by way of delivery up of void instruments - Mayfair Trading Co. Pty Ltd v Dreyer (1958) 101 CLR 428, considered.
Trade Practices Act 1974
Building Societies Act 1986 (Vic.)
Yango Pastoral Company Pty Ltd v First Chicago Australia Limited (1978) 139 CLR 410.
Mayfair Trading Co. Pty Ltd v Dreyer (1958) 101 CLR 428.
HEARING
SYDNEY, 8, 9 February 1993
#DATE 3:6:1993
Counsel and solicitors Mr Alan Archibald QC
for the Appellant: and Mr J. Beach
Instructed by Bruce Stewart Turton.
Counsel and solicitors Mr David Jackson QC,
for the Respondents: Mr C. Waterstreet and
Miss Mary Burke
Instructed by Gadens Ridgeway.
ORDER
THE COURT ORDERS THAT:
(1) The appeal be allowed.
(2) Declarations 1 - 10 inclusive made by Einfeld J on 14 September 1992, be set aside.
(3) Orders 1, 2 and 4 made that day also be set aside.
(4) Order 3 made that day be amended by deleting therefrom "to the Applicants" and inserting "to the first Respondent, Farrow Mortgage Services Pty Limited (In Liquidation)".
(5) The first respondent give the appellant possession of the Portsea property, being the whole of the land comprised in Certificate of Title Volume 8389 Folio 169.
(6) The appellant have leave to issue a writ of possession of the said Portsea property forthwith.
(7) Subject to order (8) hereof, the respondents pay the costs of the appellant of the appeal and of the proceeding at first instance.
(8) The first respondent pay the costs of the appellant of the cross-claim both at first instance and on the appeal.
(9) Otherwise, the application and cross-claim be dismissed.
Note: Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules.
JUDGE1
Introduction
LOCKHART, GUMMOW, LEE JJ The appellant ("Farrow") was incorporated in the State of Victoria in 1983. It was placed in liquidation by order of the Supreme Court of Victoria in April 1991. Farrow is a member of a group of some 40 companies. This group includes Pyramid Building Society ("Pyramid"), Geelong Building Society and Countrywide Building Society. Each of these 3 is a building society within the meaning of the Building Societies Act 1986 (Vic.) ("the Building Societies Act"). On 22 June 1990, an administrator was appointed to the 3 societies, pursuant to the Building Societies Act. They were placed in liquidation on 18 December 1990.
The Building Societies Act was significantly amended by the Financial Institutions (Victoria) Act 1992 (Vic.) ("the 1992 Act"). As a consequence of sub-s. 2 (2) and s. 71 of the 1992 Act, those provisions of the Building Societies Act which are relevant to the present litigation were repealed with effect on 1 July 1992. The litigation giving rise to the present appeal had commenced on 2 July 1991. The continuing application of the Building Societies Act appears to be governed by paras. (d) (e) and (g) of sub-s. 14 (2) of the Interpretation of Legislation Act 1984 (Vic.). This legislation is in the usual form, preserving rights, privileges, obligations and liabilities and things done under the repealed provisions. No submission to the contrary was made to us.
The trial took place, judgment was delivered and orders were made at Sydney. Sections 79 and 80 of the Judiciary Act 1903 "picked up" the laws of New South Wales and the common law of Australia. The majority of the securities, the validity of which was attacked, were mortgages over land in New South Wales. Issues of illegality by reason of contravention of the statute law of Victoria were at the forefront of the case.
Neither before the primary Judge nor before us was there any submission which asserted that any different result should follow by reason of the Court having exercised its jurisdiction in New South Wales rather than Victoria; cf Merwin Pastoral Co. Pty Ltd v Moolpa Pastoral Co. Pty Ltd (1933) 48 CLR 565.
By deed ("the first agreement") dated 13 December 1989 between the second respondent ("Taledi") and Farrow, Farrow agreed to advance $16.615m. to Taledi, upon guarantees and securities to be furnished by parties including the other respondents. The interest of $2m. was to be capitalised. The term of the loan was 12 months. Registered mortgages were provided by the first respondent ("Mr Edgar") in respect of a property at Portsea, Victoria ("the Portsea property"); by the third respondent ("Eastside") in respect of the properties 12-20 and 30 Albert Road, Strathfield, New South Wales; and by the fourth respondent ("Tekiko") in respect of the property at 24-28 Albert Road, Strathfield. By 24 January, a total of $15,008,700 had been advanced in 3 draw-downs.
On 9 May 1990, Taledi accepted a written offer by Farrow ("the second agreement) to advance a further $3.45m. Additional interest of $4.5m. was to be capitalised. The term of the whole facility was extended to 18 December 1991. In July 1990, after the appointment of the administrator to Pyramid, there were further revisions to the facility ("the third agreement"). Additional security provided on 30 July 1990 ("the Assignment Agreements") included two deeds containing assignments by Taledi to Farrow of its interests in options to purchase, and in the contracts of sale to be formed by exercise of the options, granted to Taledi by the registered proprietors of 7 and 9 Churchill Avenue, Strathfield and a deed assigning to Farrow the interest of Tekiko in a contract for the sale of 2 The Square, Strathfield made between Tekiko as purchaser and the registered proprietor as vendor. Mr A. Khoury was registered proprietor of 7 Churchill Avenue and he and Mrs R. Khoury registered proprietors of 9 Churchill Avenue.
The primary Judge (Einfeld J) granted declarations that the first agreement, guarantees given by parties including Mr Edgar, Eastside and Tekiko, the four registered mortgages, and the Assignment Agreements were unenforceable. He also ordered delivery up to the respondents of the Certificates of Title for the properties 12-20, 24-28 and 30 Albert Road and for the Portsea property. An order also was made by the primary Judge for the completion and delivery of discharges of the above mortgages. Upon the grant of this relief, no terms were imposed, and it would seem none sought, which would have obliged Taledi to repay the moneys advanced as the price of relief.
Mr Edgar is an experienced property developer; he controlled Taledi, Eastside and Tekiko. Since 1979 he has completed some 9 major developments in Melbourne and 8 in Sydney. Mr Edgar had intended to acquire and use the Strathfield site for a large commercial office and retail development. The site comprised 11 separate titles with 6 owners. Before he approached Farrow for finance, Mr Edgar had spent some $1.276m. on the project.
The project was known as the "Strathfield Town Square" and was to be developed in two stages. Stage 2 was to be a 19 level tower with a nett lettable area of 16,147 square metres. It was to front Albert Road using the contiguous properties at 12-20, 24-28 and 30 Albert Road. Stage 2 was to be a 19 level tower with a nett lettable area of 16,421 square metres. It was to front Churchill Avenue using the contiguous properties at 2 The Square, 5, 7, 9, 11 and 13 Church Avenue. As recited earlier, Eastside, Tekiko and Taledi held proprietary interests in the properties to be used in the two stages, except the properties at 5, 11 and 13 Churchill Avenue. In respect of those properties, Mr Edgar had commenced negotiations to purchase them from the owner, Strathfield Municipality.
On 1 November 1989, when seeking approval from his superiors in Victoria, the officer of Farrow dealing with the matter in Sydney, Mr C. Poustie, stated:
"The Project is to be split into two (2) stages, the first being acquisition of 5 lots, being 12-30 Albert Road, and payment of option fees relating to the sites at 5-13 Churchill Avenue. The second stage would be acquisition under the option agreement for remaining sites at a price of $12.8 million and the Hookers building at 2 The Square. However, this may not be necessary as the client intends to sell the overall site upon rezoning of land/receipt of DA with/without precommit-ments to the retail/office space."
Farrow did not agree to fund Stage 2. In his cross-examination, Mr Edgar accepted that he would have needed additional finance of between $14.5m. and $15m. to complete the purchases of the properties the subject of Stage 2 if he were not to re-sell in advance of completion (Appeal Papers 532-533).
The first of the Assignment Agreements recited the first and second agreements and obliged Taledi to assign to Farrow the options to purchase held from Mr and Mrs Khoury should Farrow in its absolute discretion consider that it would be prudent to do so in order to safeguard or improve "its security or position" (cl. 4). Taledi was also required to exercise the options within the time limit and in the manner therein stated (cl. 3).
By notice of demand dated 3 June 1991, Farrow recited the breach of cl. 3 of the first of the Assignment Agreements as giving rise to default under cl. 4 (k) of the first agreement, and as thereby empowering Farrow to terminate the facility and demand payment thereunder of more than $24m. On the same day, other demands were made upon Eastside, Tekiko and Mr Edgar. As we have indicated, the present litigation commenced shortly thereafter, on 2 July 1991.
By their further amended statement of claim, the present respondents alleged contravention by Farrow of s. 52 of the Trade Practices Act 1974 ("the T.P. Act") and the making of negligent representations. It was also alleged that the instruments in respect of which the primary Judge later granted declarations as to unenforceability were void for illegality or so tainted with illegality as to be unenforceable at the suit of Farrow. The illegality was said to arise by reason of contravention of certain provisions of the Building Societies Act.
By its cross-claim, Farrow sought an order for possession of the Portsea property, in exercise of its rights under the mortgage from Mr Edgar. The mortgage had been given to secure the obligations to Farrow of Taledi and it was alleged by Farrow that the enforcement of that security had been "triggered" by the default of Taledi. The effect of the decision of the primary Judge was that there had been no such default. Farrow disputes that finding and seeks orders in its favour on the cross-claim, in addition to the setting aside of the orders made against it at the suit of the respondents.
The Trade Practices Act
15. The primary Judge rejected the submission that in May 1990, when the second agreement was negotiated, the directors and officers of Farrow knew sufficient about Farrow's financial difficulties to realise that it would be unable to provide further working capital thereunder to Taledi. But he held that they knew sufficient to realise there was a significant risk that in the future Farrow would not be willing or able to provide draw-downs to Taledi under the revised facility. The primary Judge concluded that failure to disclose the position to the respondents represented misleading or deceptive conduct, or conduct which was likely to mislead or deceive, within the meaning of s. 52.
His Honour also held that at the time of entry into the second agreement in May 1990, Farrow was under a duty to tell Mr Edgar that the risks of untimely draw-downs in the future were real, or more than minimal, and that by not doing so Farrow was in breach of a duty of care owed to the respondents.
Upon the appeal, the respondents relied upon the finding in their favour of contravention of s. 52, which provided a passport to the extensive relief available under s. 87. However, the respondents did not address submissions in support of the findings as to the existence and breach of a common law duty of care owed them by Farrow.
The finding of the primary Judge as to contravention of s. 52 in relation to the negotiation of the second agreement in May 1990 was to a significant degree founded upon findings as to the state of affairs at the time of entry into the first agreement in December 1989. His Honour found representations then to have been made by Farrow in the following form:
(a) that it was highly improbable that Farrow would not finance the development of the Strathfield site project; and
(b) that it was highly improbable that Farrow would not perform its financing obligations in a timely manner and so as not to jeopardise the Strathfield site project.
The appellant criticises these findings as a step in its attack upon the further findings as to misleading or deceptive conduct by it in May 1990.
In order to appreciate these criticisms, it is necessary to refer to several of the provisions of the first agreement. Taledi is defined therein as "the Borrower" and Farrow as "the Lender". Clause 1.1 provides that the sum of $16.615m. is to be advanced progressively or in one single payment "in the absolute discretion of the Lender". The lender was to be under no obligation to advance any part of the loan to the borrower if, inter alia, the borrower was in breach of any of its covenants (cl. 1.2). The principal and interest would become immediately due and payable by the borrower if it defaulted in payment of any interest (cl. 4 (a)) or if there was any default under any of the securities provided in support of the loan (cl. 4 (k)).
A consideration of the evidence of Mr Edgar supports the conclusion, scarcely surprising, that he understood that Farrow only agreed to provide the $16.615m. facility on the terms of the first agreement, and that there was no such "open ended" commitment as would be involved in the first of the representations found by the primary Judge.
As to the second representation, there was oral evidence from Mr Edgar that (a) in November 1989, when discussing what became the facility provided for in the first agreement, he explained to Mr Poustie the timing of the Strathfield project, and (b) Mr Poustie agreed to periodic draw-downs of the facility. However, in evidence Mr Edgar later accepted that the provisions of cl. 1.1 of the first agreement, as to progressive advances at the absolute discretion of Farrow, "pretty much" accorded with what he had negotiated.
In those circumstances, there was, in our view, no adequate foundation for the finding by the primary Judge that either of the two representations in question was made by Farrow before the entry into the first agreement. Therefore, the context in which the primary Judge made his findings as to the misleading or deceptive conduct in May 1990 requires drastic revision.
Further, there was insufficient evidence to found any finding as to changed circumstances by May 1990 sufficient to support the conclusion that in the light of all relevant factual circumstances, constituted by acts, omissions, statements or silence, there was misleading or deceptive conduct of the kind considered in Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 and Warner v Elders Rural Finance Ltd (Full Court, 26 March 1993, unreported).
Counsel for Farrow submitted that no case had been made out that before entry into the second agreement, Farrow was unable to pay its debts as they fell due. He referred to payments for working capital made under the second agreement on 25 May ($68,024) and 22 June ($100,000). The latter payment was made after the request by Taledi's solicitors on 13 June 1990 for a further advance of $217,800. As we have indicated, this had not been supplied in full when, on 22 June, the administrator was appointed to Pyramid and the related building societies.
It was then notorious that the Farrow group was in financial difficulties. For example, the evidence included an item from an issue of a national newspaper for 28 June 1990 which, under the heading "The house Farrow built closes its doors" identified Taledi under a sub-heading "High-flyers in the books".
In a memorandum dated 14 July 1989 to his adviser, Mr Allen of Potter Warburg, Mr Edgar wrote that he wished to make the administrator aware of the present position of the Strathfield project, and of the importance "of the continued support of the financiers to ensure a successful completion". There was in this period no indication by Mr Edgar that had he known early in May of what came to pass later in June, namely the appointment of the administrator, Taledi would not have entered into the second agreement and would, instead, have endeavoured to refinance Stage 1 of the project or taken some other steps to extricate itself from its commitments under the first agreement.
Rather, the evidence in the period after the appointment of the administrator shows, on the one hand, Taledi pressing for the provision of further draw-downs under the second agreement and, on the other, the solicitors for Farrow pressing for further security which was required by the second agreement but the provision of which was still outstanding. On 24 July, Mr Edgar and Mr Allen met representatives of Farrow at a meeting in Geelong. They discussed further variations in the financing to be implemented in order to keep the Strathfield project viable.
Two days later Taledi's solicitors wrote to the solicitors for Farrow stating that at that meeting representatives of Farrow had acknowledged default on Farrow's part. Farrow's solicitors replied forthwith, categorically denying any default and stating that Farrow was not prepared to proceed to make any further funding available other than on the clear basis that Taledi withdrew any such allegations. Mr Allen's understanding was that it had been agreed that all parties would prefer to obtain "a commercial result which enhances the value of the project to both Farrow as lender and Taledi, as owner". In the result, on 30 July 1990, Taledi's solicitors wrote to the solicitors for Farrow withdrawing the allegations that had been made on 26 July, and waiving any claims in respect thereof. On that day, the further security documents were furnished.
On 13 August Farrow wrote to Mr Allen setting out a proposal for variation of the second agreement. It provided for the extension of the term of the facility to 18 June 1992, and for the application fee of $2.03m. not to accrue interest until 17 February 1991. This proposal was accepted by Mr Edgar on behalf of Taledi by letter dated 22 August 1990. In that letter he said:
"We confirm that we are doing everything possible within our power to ensure the continued viability and success of this project and in doing so are striving to achieve the necessary variations to the loan documentation by logical commercial means. We are only seeking the variations that will ensure the continued viability of the project as stated."
Further payments for working capital were provided on 27 July ($205,513.50), 27 August ($58,024), 24 September ($73,104) and 4 October ($56,467.22).
The events which occurred after the appointment of the administrator on 22 June 1990, and the negotiation and entry into the third agreement, together with the removal from the context of the representations found by the primary Judge to have been made before entry into the first agreement, show that even if Farrow had realised that there was a significant risk that it would not be able to provide draw-downs under the revised facility, its failure so to inform Taledi was not a real inducement to entry into the second agreement; see Gould v Vaggelas (1985) 157 CLR 215 at 251.
Furthermore, the evidence does not support the view that Taledi could have, or would have been likely to have, obtained refinancing from a third party. Rather, the evidence indicates that at all material times before and after entry into the second agreement what Mr Edgar was doing was seeking to extend the first and then the second agreement on the best commercial terms that could be negotiated with the management of Farrow, as that management existed before and after the appointment of the administrator.
The consequence of this is that the respondents should not have been held to have made out their case of contravention of s. 52, with consequent entitlement to relief under s. 87. Another consequence is that the source of the authority supporting the declarations and orders for delivery up and associated relief given by the primary Judge must be found in the general law, and in particular in the equitable jurisdiction to order delivery up and cancellation of instruments tainted by illegality.
Before turning to the issue of illegality as it arises on this appeal, it is convenient to consider the appeal against rejection of the cross-claim.
The Cross-Claim
34. The issue here turns upon the provisions of the first of the assignment agreements.
By its cross-claim, Farrow sought possession of the Portsea property pursuant to the terms of the mortgage held by it from Mr Edgar. This provided for enforcement of the security to be "triggered" by default of Taledi. Farrow contended that there had been a breach by Taledi of cl. 3 of the first of the Assignment Agreements by reason of the failure of Taledi to exercise the Khoury options before they expired. We have referred to cl. 3 earlier in these reasons.
The primary Judge accepted the submission for the respondents that on its proper construction (or perhaps with the addition of an implied term) the agreement obliged Taledi to exercise the options only if required and funded by Farrow. His Honour held that the result was that there had been no default by Taledi and Farrow was "not entitled to enforce its security agreements upon that basis".
The text of cl. 3 should be set out in full, noting that Taledi was "the Borrower" and Farrow "the Lender":
"3. The Borrower shall observe and perform all of the terms and conditions of the said Options to Purchase on the part of the Purchaser thereunder to be observed and performed. Any breach or default by the Purchaser thereunder shall be deemed to be a breach or default under these presents. The Borrower hereby covenants with the Lender that he shall duly exercise the said Options to Purchase and each of them within the time limit and in the manner therein stated and shall forthwith thereafter furnish written evidence of exercise to the Lender unless the Lender has prior to the event notified the Borrower in writing that he is released from this obligation to do so."
In our view, cl. 3 was clear and unambiguous in requiring Taledi to exercise the options; the obligation was not conditioned upon funding by Farrow. Even if regard be had be had to the "factual matrix", this was that the exercise of the Khoury options related to Stage 2 of the project and on 30 July 1990, the date of the Assignment Agreements, there was no commitment or agreement by Farrow to fund Stage 2.
There was no application for rectification of cl. 3, so as to give effect to any alleged common intention of Taledi and Farrow that cl. 3 be conditioned upon funding by Farrow. Insofar as reliance was placed upon an alleged implied term, two things may be said. The first is that such an implied term would have contradicted or been in conflict with the terms of cl. 3; the second is that the implication of such a term was not necessary to give business efficacy to the contract, the contract being effective without it: B.P. Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings (1978) 52 ALJR 20 at 26; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347, Moorgate Tobacco Co. Ltd v Philip Morris Ltd (No. 2) (1984) 156 CLR 414 at 435.
It follows that Farrow was entitled to succeed on its cross-claim.
We should add that in addition to concluding that Farrow wrongly terminated its contract with Taledi and was not entitled to enforce its securities on that basis, the primary Judge went on to say:
"The (respondents') failure to repay the loan should be interpreted as an election to terminate the contract, thus releasing the parties from further performance under the contract."
We accept the submission for Farrow that there was no evidence to support that finding of election nor to attribute to the failure to pay any significance other than that which marks the occurrence of default. In addition, the further amended statement of claim (which had been delivered by the respondents pursuant to leave granted by the primary Judge 5 days before the commencement of the trial) did not plead this matter nor seek to rely on or assert any such proposition.
We return to the issue of illegality.
The Principles As To Illegality
42. In his article "Restitutionary Recovery of Benefits Conferred Under Contracts in Conflict with Statutory Policy - The New Golden Rule" (1987) 25 Osgood Hall LJ 787 at 788-9, Professor McCamus describes the "continued and remarkable growth of regulation in the modern era" as having created an environment which is rather different from that in which the English courts formulated the approach of common law to illegality in contract; the commission of any offence then was perhaps more likely a signal of significantly anti-social conduct than it is today.
The learned author also points out that when agreements have been entered into which create a conflict with the letter or the spirit of a regulatory legislative scheme, two problems emerge for resolution by the law of private obligations. The first concerns the validity of the agreement itself. The second concerns the secondary consequences for the parties, and third parties, if the agreement is indeed held to be unenforceable or void. Statute may render the agreement unenforceable without being void, but if void it must, of necessity, be unenforceable; see Lejo Holdings Pty Ltd v Deutsche Bank (Asia) AG (1988) 2 Qd R 30 at 41.
In Australia, the relevant principles, as settled, are largely to be found in the expositions in the judgments in Yango Pastoral Company Pty Ltd v First Chicago Australia Limited (1978) 139 CLR 410. Counsel for both sides accepted that this was so. We have also been much assisted by the judgment of McPherson J in JC Scott Constructions v Mermaid Waters Tavern Pty Ltd (1984) 2 Qd R 413 cited by the respondents.
The position, so far as relevant to the issues that arise in the present appeal, may be summarised as follows:
(1) An express statutory prohibition against the making of a contract may fasten upon some act that is in an essential element in that formation; the prohibition may be absolute or subject to some qualification, such as absence of a licence or other official consent.
(2) However, the subject of the express prohibition may not be the formation of a contract, but the doing of a particular act; an agreement that the prohibited act shall be done is then treated as being impliedly prohibited by the statute and as illegal. Whether there is an implied prohibition is to be determined upon a consideration, in its context, of the express prohibition. In that regard, in Mermaid Waters (at 423) McPherson J said:
"The unspoken reason underlying this implication almost certainly is that the prohibited act is invariably made an offence and, quite apart from expressions in the statute, an agreement to commit even a simple offence itself constitutes a criminal offence, both at common law and (under statute law of the States)."
(3) A contract associated with or in the furtherance of illegal purposes may not itself be directly contrary to the provisions of the statute by reason of any express or implied prohibition. As will become apparent, in our view this is the proper characterisation of the transactions between Farrow and the respondents which gave rise to the instruments the subject of the declaration and orders of the primary Judge. The present is, if anything, a "third category" case. In such a case, the courts may not enforce the contract in two instances. The first is where the contract can only be performed in contravention of the statute; that is not the present case. The second is where the party seeking to enforce it (here, Farrow) intended to perform the contract illegally or for an illegal purpose (i.e. contravention of sub-s. 133 (3) of the Building Societies Act). In our view, the present, if anything, is such a case. Here the courts act not in response to a legislative prohibition but from the policy of the law. In that regard, Jacobs J in Yango Pastoral (at 432-3) referred to what was said by Lord Wright in Vita Food Products Incorporated v Unus Shipping Co. Ltd (1939) AC 277 at 293 that "public policy . . . may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds".
(4) Jacobs J spoke as follows in Yango Pastoral at 432-3: "In other cases the prohibition against carrying on a business may not be able to be construed as either an express or implied prohibition against the making of a particular contract. Nevertheless in such a case the courts may not enforce such a contract but, if they do not, it is not because the contract itself is directly contrary to the provisions of the statute by reason of an express or implied prohibition in the statute itself but because it is a contract associated with or in the furtherance of illegal purposes, for instance, the purposes of a business being carried on illegally: McCarthy Bros. Pty. Ltd. v. Dairy Farmers' Co-operative Milk Co. Ltd. (1945) 45 SR (N.S.W.) 266. One then enters the field of contracts not themselves unlawful but made for an illegal purpose. Of these the classic case is Pearce v. Brooks (1866) LR 1 Ex
213. The refusal of the courts to regard such contracts as enforceable stems not from a legislative prohibition but from the policy of the law, commonly called public policy. It is of these contracts that Lord Wright said in Vita Food Products Inc. v. Unus Shipping Co. Ltd. (1939) AC 277: 'Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds.' I would take the reference to 'expressly forbidden' to comprehend the case of a prohibition implied as a matter of construction of the statute itself. In Archbolds (Freightage) Ltd. v S. Spanglett Ltd.
(1961) 1 QB 374 the Court of Appeal approached the question before them in the manner which I have indicated. Pearce LJ examined whether the contract was expressly forbidden by the statute, then whether it was impliedly forbidden by the statute and lastly whether, if the contract was neither expressly or impliedly forbidden, nevertheless on grounds of public policy the courts would not enforce it if it could only be performed in contravention of a statute or was intended to be performed illegally or for an illegal purpose. He concluded that the particular contract was not of this last kind. Devlin LJ approached the matter along much the same lines but it may be that he took a wider view of the power of a court to hold a contract valid even if it was an offence for one party to enter into it, a wider view than that expressed, for instance, by Buckley J in Victorian Daylesford Syndicate Ltd. v. Dott (1905) 2 Ch at 629-630. On the other hand it may be that he was dealing only with cases where as a matter of construction there was no express or implied prohibition in the statute and where the only question was whether the enforcement of the contractual rights would be contrary to public policy. In the context of this last question of public policy, but not in a context of construing the statute in order to determine whether it contained either an express or implied prohibition of the making of the contract, I respectfully accept his general enunciation of relevant factors which he expressed in relation to the statute in question as follows (at 390):
'I think that the purpose of this statute is sufficiently served by the penalties prescribed for the offender; the avoidance of the contract would cause grave inconvenience and injury to innocent members of the public without furthering the object of the statute. Moreover, the value of the relief given to the wrongdoer if he could escape what would otherwise have been his legal obligation might, as it would in this case, greatly outweigh the punishment that could be imposed upon him, and thus undo the penal effect of the statute.'"
(5) Where the contract falls within any one of the above three categories, issues arise as to whether, although direct enforcement is forbidden, other causes of action and remedies may still be available without contravention of the prohibition arising from the illegality of the contract. Two examples are in point for this appeal.
(6) The first concerns the availability of one or other of what formerly were known as the common money counts. Thus, in St John Shipping Corporation v Joseph Rank Ltd (1957) 1 QB 267 at 284, Devlin J said that if an unlicensed broker sued for work and labour, it did not matter that no express contract was alleged and the claim was based solely on the performance of the contract, that is to say for work and labour done. The claim rested in implied contract and this "as much unenforceable as an express contract made to fit the work done". It is now, in Australia, understood that claims to recover on a quantum meruit are based not upon an implied promise but upon the concept of unjust enrichment. It will be a question, in each case, to ascertain whether the statute expressly or impliedly ousts this type of action; see Pavey and Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 228, 244, 262, 269-70. And, in Australia, unjust enrichment is a concept and not a legal principle providing a separate cause of action which is dependent simply upon notions of fairness and justice; see David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 378-9, per Mason CJ, Deane, Toohey, Gaudron, McHugh JJ; Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649 at 669, per Hill J; Bryson v Bryant (1992) 29 NSWLR 188 at 222, per Sheller JA.
(7) The second concerns the operation of the maxim that those seeking equity must do equity. In Kasumu v Baba-Egbe (1956) AC 539, the borrower had brought an action seeking delivery up of the mortgage documents and the Privy Council rejected the moneylender's contention that such relief, as equitable relief, should be granted only upon terms that the principal amount of the mortgage be repaid. The moneylender had failed to comply with the requirements of the relevant statute. This stated that, in that event, the moneylender "shall not be entitled to enforce any claim" in respect of "any transaction in relation to which the default shall have been made". Their Lordships held that the imposition of a requirements of repayment, as the price of equitable relief would constitute "a claim in respect of the transaction" within the terms of the statutory prohibition. They were unimpressed by the contrary reasoning of Parker J in Lodge v National Union Investment Co. Ltd (1907) 1 Ch 300. The Privy Council decision much exercised the High Court, in Mayfair Trading Co. Pty Ltd v Dreyer (1958) 101 CLR 428 at 450-2, 465-6; see also White v Pacific Acceptance Corporation Ltd (1962) 62 SR (N.S.W.) 60 at 89-90, Dunn v Esanda Ltd (1978) 1 NSWLR 489 at 497-8, Mediservices International Pty Ltd (Receivers and Managers Appointed) v Stocks and Realty (Security Finance) Pty Ltd (1982) 1 NSWLR 516 at 523-4, Lejo Holdings Pty Ltd v Deutsche Bank (Asia) AG supra at 40-43, Pavey and Matthews at 226, 261-2, 269-70. In the lastmentioned case, Deane J explained Dreyer as being a case, like Kasumu, in which the legislation precluded the moneylender from recovering any compensation for the loan which had been made by it; it would follow that such compensation was not to be recoverable by means of the imposition of a term upon equitable relief sought by the borrower. The Canadian courts have been less critical of Lodge, and more attuned to the disquiet with Kasumu which Dixon CJ evinced in Dreyer; see Maddaugh and McCamus, "The Law of Restitution", 1990, pp 357-363.
(8) Another example where the courts have construed regulatory legislation as ousting the operation of collateral equitable doctrines and remedies is provided by Orakpo v Manson Investments Ltd (1978) AC 95. The moneylender unsuccessfully claimed to be entitled to subrogation to the interests of vendors and other lien holders whose interests had been discharged with money borrowed under written contracts which failed to comply with the relevant moneylending legislation by, for example, misstating the date on which the moneys were advanced. Lord Diplock expressed the view that the right of subrogation was a "security given by the borrower" within the meaning of the statutory prescription and therefore could not be enforced if the statutory requirements were for any reason not met:
(1978) AC at 105. The decision is much criticised, see, for example, the article by Professor McCamus supra at 849- 851, Beatson, "Unjust Enrichment and the Moneylenders' Act"
(1978) 41 MLR 330, Goff and Jones, "The Law of Restitution", 3rd Ed., 1986, 49-51, 528, 562-3, Rajak, "Equity v Statute" in Goldstein, ed. Equity and Contemporary Legal Developments, 1992, 100 at 105-107. As the last of these learned authors points out (at 113), the cases dealing with the imposition of terms and the availability of subrogation illustrate the tensions that may arise between the giving of literal effect to statutory provisions and the importation of equitable principles which are designed to achieve what might generally be accepted as "substantial justice".
(9) Issues concerning the continued availability of restitutionary money claims and the operation of equitable doctrines and remedies upon the legal rights and obligations of the parties, will not appear in the same light where the court is dealing with what we have described as a "third category" case. There, the making or performance of the contract does not offend an express or implied statutory prohibition. The contract is not enforced on grounds of public policy, because it is associated with or in the furtherance of illegal purposes. The courts formulate the appropriate operation of public policy. This formulation will more readily accommodate what are independently subsisting general law actions, doctrines and remedies than was possible in cases such as Kasumu. This consideration is of importance for this appeal. As we have indicated, the primary Judge ordered delivery up of certain securities, but not upon terms.
The Application of Illegality Doctrines
46. The primary Judge approached the issues of illegality on the footing that Farrow was "the vehicle" through which Pyramid and related building societies made loans which, if made directly, would have contravened the requirements placed upon building societies by the Victorian legislation. His Honour said that Farrow prepared loan and security documentation and at settlement the mortgage which evidenced the advance was "purchased" by Pyramid so that the moneys which Pyramid advanced to Farrow to purchase the mortgage funded the advance to the borrower. In so concluding, his Honour referred, inter alia, to what we later describe as the Mortgage Management Agreement. Upon the appeal, counsel for Farrow submitted that the conclusion could not properly be reached that Pyramid purchased any of the securities from Farrow.
Whilst supporting the general findings in their favour on the issue of illegality, the respondents refined their position saying that the loan and the securities were illegal principally because:
(a) sub-s. 52 (1) of the Building Societies Act permitted the purchase by Pyramid of a mortgage only of freehold land in Victoria, whereas the principal securities were over the Strathfield site,
(b) Pyramid purchased the securities in contravention of sub-s. 57 (4) of the legislation because the loan, if made by Pyramid directly, would have breached the loan/security ratio of 66 2/3% contained in para. 57 (1) (b),
(c) there was no room for any operation in favour of Pyramid of para. 52 (1) (k) because sub-s. 57 (4) required the determination of whether Pyramid could have made a loan of the full amount advanced, being the purchase price of the securities,
(d) by entering into the arrangements with the respondents for the provisions of a loan facility and the taking of the securities, Farrow aided and was directly involved in assisting Pyramid to contravene the Building Societies Act, and thereby itself committed an offence under s. 133 thereof.
In argument upon the appeal, the contention was also advanced that para. 52 (1) (a) was subject to a territorial limitation of the same nature as para. (b), namely the making of advances secured over property in Victoria.
The immediately relevant provisions of ss. 52, 57 and 133 of the Building Societies Act are as follows:
"52 (1) Subject to sub-section (3), a building society may invest its funds only in the following ways if authorised by its rules:
(a) The making of an advance to a member, other person or a corporate body secured by mortgage of freehold or leasehold land or of a lease or licence issued under the Land Act 1958 or by the mortgage of a mortgage of freehold or leasehold land or of a lease or licence issued under the Land Act 1958;
(b) The purchase of a mortgage of freehold or leasehold land or of a lease or licence issued under the Land Act 1958. . . .
(k) The acquisition of any other asset or the making of any other advance (whether under a continuing credit contract within the meaning of section 48 of the Credit Act 1984 or otherwise) provided that the total of those assets or advances does not at any exceed 6% or any lesser percentage determined by the Minister and notified in the Government Gazette of the value of the total assets of the building society as at the end of the last preceding financial year.
(2) . . .
(3) The Minister may after consultation with the Council by notice published in the Government Gazette declare that as and from the date specified in the notice a building society cannot invest in the manner specified in the notice."
"57 (1) A building society must not lend on the security of a mortgage over land if the total value of the advance and any amount secured by any prior mortgages exceeds-
(a) 75% of the value of the land if there is erected or proposed to be erected a house to be occupied by the borrower;
(b) 66 2/3% of the value of the land in any other case.
(2) Sub-section (1) does not apply if the building society obtains an indemnity from a mortgage insurer for at least the value of the amount by which the advance exceeds the relevant percentage specified in sub-section (1).
(3) In this section, 'mortgage insurer' means:
(a) any corporation declared to be an authorised insurer under section 8A (2) of the Trustee Act 1958; or
(b) any corporation in respect of which there is in force an approval in writing given by the Registrar on the advice of the Council.
(4) A building society cannot purchase a mortgage under section 52 (1) (b) unless the building society could have made an advance under this Act to the mortgagor of an amount equal to the purchase price of the mortgage."
"133 (1) A building society which -
(a) does any act or thing that is forbidden by or under any provision of this Act; or
(b) does not do any act or thing that is required or directed to be done by or under any provision of this Act; or
(c) otherwise contravenes a provision of this Act - is guilty of an offence under this Act.
(2) . . .
(3) Any person who aids, abets, counsels or procures or by act or omission is in any way directly or indirectly concerned in or a party to the commission of an offence against this Act is deemed to have committed that offence and is liable to the penalty for that offence."
Section 135 provides that proceedings for offences are to be disposed of summarily and may be commenced within the period of 3 years after the commission of the alleged offence.
Sub-section 58 (2) of the Building Societies Act states, in terms, that any guarantee given by a building society, without the prior approval of the Registrar, of the due and proper performance by a subsidiary of its contractual obligations is void; the same is true of indemnities. Sub-section 71 (3) renders void certain management contracts by which the whole or any substantial part of duties or work ordinarily performed by the management or staff of a building society is performed by third parties, or by which the control or conduct of the affairs of a building society is vested in persons who are not directors or authorised employees. Further, sub-s. 71 (5) renders void any assignment, transfer or renewal of such management contract. These provisions support the proposition that where the legislature intended that a transaction should be void, the statute has provided so in terms.
The purpose of the Building Societies Act is stated, in s. 1, to be as follows:
"(a) to provide conditions under which building societies can compete efficiently with other financial institutions and meet the needs of their members and of members of the public; and
(b) to provide a system of prudential regulation to ensure that the deposits made with building societies by members of the public are safe; and
(c) to ensure that building societies provide a stable supply of reasonably priced housing finance to members of the public."
Farrow submits that this indicates that the primary concern of the legislation is the stability of the building societies themselves and thus with ensuring the safety of deposits by their members and the availability of reasonably priced housing finance to members of the public; the stability of the building societies would not be advanced by making irrecoverable moneys which were lent in contravention of the statute and for commercial development rather than housing finance.
We accept Farrow's submission that the evidence does not show that Farrow acted merely as agent for the Pyramid, so that a direct contractual relationship arose between Pyramid and Taledi, and the guarantees were taken and securities from the other respondents held by Taledi as agent for Pyramid. Rather, Pyramid made advances to Farrow which in turn lent moneys to Taledi on the security of guarantees and securities given by the other respondents to Farrow. These were held by Farrow on its own account. The liquidator of Farrow is also the liquidator of Pyramid. His evidence was that Pyramid provided funds to Farrow in respect of the loan facility the subject of this proceeding. The contractual and security documentation executed by Taledi shows the party with whom it was dealing as Farrow.
The Pyramid vouchers for cheques drawn on 13, 15 December 1989, and on 24 January 1990, for amounts respectively of $8,193,139.91, $4,663,195.01 and $2,152,365.44, show the payee as Farrow. The first of these sums was used to purchase 12-20 Albert Road, the second for 24-28 Albert Road, and the third for 30 Albert Road. All of these sites were required for Stage 1 of the project. Between them these payments consumed over $15m. of the facility under the first agreement of $16.615m. The balance largely was applied to an establishment fee of $1.4m. The evidence also shows that, in relation to the second agreement, Pyramid drew cheques with Farrow as the payee on occasions including 25 May ($68,024) and 22 June ($100,000).
There is no evidence that the Minister determined any lesser percentage than the 6% specified in para. 52 (1) (k) as the total by which the other assets and advances therein referred to might exceed the value of the total assets of Pyramid. The 6% referred to in this paragraph was known within the Pyramid group as the "free tranche". It was attributed to what was called a "free tranche trust", funding from which was provided by Farrow Holdings Pty Limited, as trustee of the Trust, or by Farrow Finance Company Limited, to Farrow for the "topping up of loans". There is no evidence that the "free tranche" was so utilised in relation to the Taledi facility.
There is in evidence an agreement made 12 March 1986 ("the Mortgage Management Agreement") between Farrow (then named "Combined Mortgage Services") and Pyramid, Farrow being defined as "the Manager" and Pyramid as "the Society". Sub-clause 2 (1) is as follows:
"The Manager will from to time offer to sell to the Society a mortgage or mortgages over real or leasehold estate as aforesaid in respect of which the Manager is registered or entitled or will become entitled to be registered. The Society may purchase such mortgage or mortgages by paying to the Manager the purchase price therefor and without the need for any further act acknowledgment or agreement between the parties the term of this agreement (sic) shall thereupon apply to such mortgage or mortgages ..."
Clause 6 provides that the Society may at any time request the Manager to execute a transfer in registrable form "of any one or more of the mortgages purchased", and clause 7 states that until such request is made the Manager shall hold "the mortgages purchased and any collateral securities . . ." in safe custody for the Society "as the Society's agent and not otherwise". There is nothing in the evidence to show, whether pursuant to cl. 2 or otherwise, the making of any offer by Farrow to Pyramid in respect of the securities given by the respondents.
One consequence of the relationship between Farrow and Taledi being that which we have stated as the correct characterisation is that Pyramid was not a necessary party to any application by the respondents against Farrow to have the security set aside.
Nor, these being the facts, is it necessary for the purposes of this appeal to determine the issues of law that have been agitated as to the suggested territorial limitation of paras. 52 (1) (a), (b) and (k) of the Building Societies Act, to advances secured by mortgages of freehold or leasehold land situated in Victoria (para. (a)), the purchase of mortgages over Victorian land (para. (b)), and the acquisition of other assets in Victoria (para. (k)). The same is true of the issues concerning contravention of sub-s. 57 (1) and sub-s. 57 (4). In particular, Pyramid did not "purchase" any mortgage from Farrow.
In our view, the following are the consequences, in law, of the facts:
(a) The advances from Pyramid to Farrow were acts or things forbidden by s. 52, because they were not investments in one of the ways specified in that provision; there was no advance upon any security granted Pyramid over any land in any State, nor was there an advance otherwise within the 6% formula permitted by para. 52 (1) (k).
(b) Therefore, it may be taken that Pyramid committed an offence under sub-s. 133 (1).
(c) Farrow was directly concerned in the commission of that offence, and apparently with the necessary knowledge; see Yorke v Lucas (1985) 158 CLR 661 at 666-7; Hamilton v Whitehead (1988) 166 CLR 121 at 129-130. The result was contravention by Farrow of sub-s. 133 (3) of the Building Societies Act.
(d) In contrast to the position between Pyramid and Farrow, the transactions between Farrow and the respondents, the lending of money and the taking of guarantees and securities, were not caught by sub-s. 133 (1).
(e) These transactions were of themselves lawful in their formation; however, Farrow entered into and performed these transactions so as to assist action by Farrow itself and Pyramid which contravened s. 133. Accordingly, as suggested above, this is a "third category" case. The respondents were ignorant of these circumstances and the facts which attracted s. 133. Any decision of the Court to regard as unenforceable or void the contracts and securities negotiated between Farrow and the respondents would not be the result of any express or implied statutory prohibition operating upon the dealings between the respondents and Farrow; rather, it would be the result of the application of public policy as understood at common law. What then should be the decision upon this issue?
Conclusions as to Illegality
58. In our view, the public policy referred to above does not require a result in the present case which renders void or unenforceable the contract for the loan facility or the securities held by Farrow. First, the terms of the statute itself support the proposition that where the legislature intended a transaction to be void it so stated. It did not so stigmatise dealings of the description of those between Pyramid and Farrow, nor between Farrow and the respondents. Where the legislature has stayed its hand, why should the public policy of the common law go further? cf Lamb v Cotogno (1987) 164 CLR 1 at 11.
Secondly, it would not assist the pursuit of the purpose of the statute to render irrecoverable by the liquidator of Farrow (who is also the liquidator of Pyramid) moneys lent in contravention of the statute. The primary Judge described the objects of the Building Societies Act as including:
"(T)he development of an efficient building society industry in Victoria as a major source of reasonably priced housing finance, and the prudential regulation of societies so to ensure that deposits made by members of the public are safe."
However, to render irrecoverable moneys lent by Farrow, a member of a group of companies comprising 3 building societies, all in liquidation, would not promote the development of an efficient building society industry in Victoria, and the prudential regulation of building societies, by ensuring the safety of deposits made with societies by members of the public.
Thirdly, to adapt an observation of Mason J in Yango supra at 428, to uphold the orders made against Farrow by the primary Judge would be to provide a windfall gain to the respondents and others in similar position and would, although indirectly, impose substantial hardship on those who originally made available to Pyramid the funds which it furnished to Farrow.
Fourthly, this is a case within the class identified by Lord Wright quoted by Jacobs J in Yango Pastoral supra, where there are lacking the "serious and sufficient grounds" which would indicate that public policy is better served by nullifying rather than upholding a transaction.
For these reasons we conclude that there was lacking not only under the T.P. Act, but also at general law, the necessary foundation to support the declaratory other orders made by the primary Judge.
The Imposition of Terms
63. As we have indicated, the orders in question, although equitable in nature, were made without terms being imposed upon, or, it seems, sought by, Farrow. In the event, it is unnecessary to determine the significance for a case such as the present of decisions such as Kasumu and Dreyer. However, as the point was agitated in the oral submissions, we should indicate our view.
In Kasumu supra at 551-2, the Judicial Committee said:
"When the governing statute enacts that no loan which fails to satisfy any of these requirements is to be enforceable it must be taken to mean what it says, that no court of law is to recognise the lender as having a right at law to get his money back. That is part of the penalty which the statute imposes. There is no room to reform the terms of the loan, since the statute is not concerned with the vice of its content but with the vice of the conditions under which it was made. . . . If a court therefore were to impose terms of repayment as a condition of making any order for relief it will be expressing a policy of its own in regard to such transactions which is in direct conflict with the policy of the Acts themselves."
In Dreyer at 456, Dixon CJ said that one might perhaps be permitted to believe that had the plaintiffs "depended for relief upon an application to a court exercising an equitable jurisdiction and nothing else the same result could not have ensued . . ." Where the illegality in question is not of consequence of infringement of any express or implied prohibition in the statute itself, and the courts act not in response to a legislative prohibition but from the policy of the law, then the reasoning by which, in Kasumu, the power in equity to impose terms was excluded, will not apply. In such a "third category case", there is no reason why the submission of the plaintiff to appropriate terms will not constitute part of the title of the plaintiff to equitable relief; cf Dreyer at 466, per Taylor J. The existence of the ordinary requirement that a plaintiff seeking equity must be prepared to do equity, would be a factor to be considered in the formulation and application by the court of the policy of the law.
Accordingly, in our view, if, contrary to the conclusion we have reached, the present case correctly could have been characterised as falling into the third category of illegality so that public policy impugned the contracts and securities held by Farrow from the respondents, it would then have been appropriate, if urged by Farrow to do so, for the primary Judge to have considered the imposition of terms upon the respondents as the price for equitable relief by way of declaration and orders for delivery up and associated relief.
Orders
66. Declarations 1 - 10 made by the primary Judge on 14 September 1992 should be set aside. Orders 1, 2 and 4 made that day also should be set aside. Order 3 should be amended so as to provide for the respondents to account to Farrow for all funds referred to therein. Farrow should have in its favour against Mr Edgar orders in terms of paras. 7 (i) and (ii) of the cross-claim. The respondents should pay the costs of the appellant of the appeal and the proceeding at first instance. Farrow as cross-claimant should have its costs of the cross-claim, both at first instance and on the appeal, against Mr Edgar as cross-respondent. Otherwise, the application and the cross-claim should be dismissed.
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