Gibbons v Pozzan

[2007] HCATrans 422

[2007] HCATrans 422

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A13 of 2007

B e t w e e n -

KIRK GIBBONS

Applicant

and

DORIAN JUSTIN POZZAN

Respondent

GUMMOW J
KIRBY J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON WEDNESDAY, 8 AUGUST 2007, AT 4.30 PM

Copyright in the High Court of Australia

MR M.B. MANETTA:   May it please the Court, I appear for the applicant.  (instructed by Mark Esau)

MR M. KEITH:   May it please the Court, I appear for the respondent.  (instructed by Cowell Clarke Commercial Lawyers)

GUMMOW J:   Yes, Mr Manetta.

MR MANETTA:   There are three special leave points which correspond with three alternative findings of the Full Court that were against us.  The first is that the deed was properly executed under the Corporations Act.

HEYDON J:   Let me just get one thing straight.  Is your proposition that the money should not be repaid?

MR MANETTA:   Repaid by the borrower, your Honour?  If we are right and the deed is invalid, then there would be a restitutionary claim against the borrower for the moneys lent, but there would be no contractual claim against my client as a guarantor.

HEYDON J:   Your client though can be sued in contract under the mortgage.

MR MANETTA:   Well, no, your Honour, we say because the mortgage is a form of security for the default of the borrower and although it is in the form of a covenant to pay it is a covenant to pay which is security for the default of another and if there is no obligation on the part of a borrower under the loan agreement, then the mortgage is a security for nothing.  It secures no obligation and therefore is to be delivered up and cancelled.  There is an adverse finding in that respect ‑ ‑ ‑

GUMMOW J:   This is all very bold litigation, Mr Manetta, it seems to me.

MR MANETTA:   It may be bold, your Honour, but that is because we say the principles themselves are to be boldly stated and are clear.  If I can take your Honour to the finding at page 38 of the application book, paragraph 23, what the Full Court has done in respect of the mortgage in the middle of paragraph 23 of the reasons of Justice Duggan is to say:

The mortgaging of the properties was in accordance with the loan agreement.  The imposition of a primary obligation on the mortgagor to pay the loan ensured the effectiveness of the security which –

GUMMOW J:   What is the relationship between the borrower and the guarantor?

MR MANETTA:   None, your Honour, they are arm’s length parties.  The guarantor is not a director of the borrower or a shareholder.

GUMMOW J:   What was the commercial surrounding the circumstances that led to the grant of this purported guarantee?

MR MANETTA:   The respondent advanced moneys to Kangaroo Island Ferries for the purpose of a scheme of setting up a ferry service between Kangaroo Island and the mainland and my client, Mr Gibbons, who was also interested from a commercial point of view in the proposal, was prepared to pledge his properties to secure the outlay, and subsequently ‑ ‑ ‑

GUMMOW J:   When you say interested from a commercial point of view, what do you mean by that?

MR MANETTA:   It was a commercial undertaking which he was prepared to back.

GUMMOW J:   For some return, presumably?

MR MANETTA:   Presumably, yes, your Honour.  Ultimately from the operation of the ferry.  Once it was up and going I think there would have been an investment and a commercial return was what was anticipated but that never eventuated, because the funds advanced were for the purchase of the ferry and the ferry was never purchased.  So the mortgage although in the form of indemnity is still a security by way of guarantee, as it were, and perhaps it is easiest if I can take your Honours to the deed of loan agreement itself which is behind tab 1 of the combined book of authorities.  In recital C it is provided that:

In consideration of the Lenders making the advance the Guarantor has agreed to guarantee the Borrower’s obligations and performance under this agreement by providing security acceptable to the Lenders.

Security is defined down in paragraph 4 as including the ‑ ‑ ‑

GUMMOW J:   That consideration was performed?

MR MANETTA:   The advance of the moneys, yes, your Honour.  Now, the mortgage is in 4(b) “a registered second Bills of Mortgage over the Guarantors properties” and that is the security, because it is collectively defined as security under clause 4, that is referred to in the recital as security for the borrower’s obligations and performance under the agreement.

GUMMOW J:   At any time thereafter there was an agreement to grant the guarantee which could have been enforced, could there not?

MR MANETTA:   The loan agreement is the deed by which the parties agreed to provide – or my client agreed to provide the mortgage.

GUMMOW J:   But the recitals recite something?

MR MANETTA:   Yes, and the mortgage secures the obligations under the deed.

GUMMOW J:   Yes, I understand that.

MR MANETTA:   So if the deed is invalid, then there is no obligation which the mortgage secures, notwithstanding that the mortgage ‑ ‑ ‑

GUMMOW J:   To put it more accurately, that is not quite right.  The agreement has not been performed.

MR MANETTA:   Well, no.  Indeed, your Honour, because there is no obligation to perform it, because there is no binding obligation until the deed comes into existence.  Parties that contract by deed do not assume contractual obligations until the deed is properly executed.

GUMMOW J:   Recital C says the Lenders have agreed to advance, et cetera, and “the Guarantor has agreed to guarantee”.  That is reciting an anterior agreement which you say has not been yet fully performed because this instrument was not effectively executed.

MR MANETTA:   Yes, the guarantor has agreed to guarantee the performance under this agreement, under this deed, not under some anterior deed.  So our only covenant, our only promise, is to guarantee whatever the borrower’s obligations are under this deed, and if there is no deed and no obligation ‑ ‑ ‑

GUMMOW J:   Anyhow, you have better get to the points about execution.

MR MANETTA:   I want to go to the third of the points that in any event a defectively executed deed can take effect as a contract under hand, because if we are wrong on that, it seems that is an end to the matter.  That is the finding at paragraph 54.  The effect of the Full Court’s reasoning is to eliminate the distinction between solemn bargains by deed and contracts, parole contracts, which are ancient and important distinctions in the law.  The court has framed the rule moreover not as a finding of fact on an investigation of the party’s intentions but almost as a presumption of law, a legal principle that an attempted execution of a deed is ipso facto and are sent to be bound to a simple contract in the same terms. 

That, your Honours, is a novel proposition of law, in our respectful submission, and the correct principle to be applied is on the contrary that one should not assume the parties who have elected to contract by deed are therefore content to contract by parole, because the differences are important.  The most important difference is with a deed all of the terms of the agreement are contained in the document and there is no legal obligation arising until all of the terms are settled in the document and a formal signing of it has occurred.  There are other differences.  Adequacy of consideration becomes irrelevant because there are different time limitations applicable to contracts by deed.

It should not be assumed that anyone that has assented to the content of a deed but has ineffectively done so is content to contract by parole.  More importantly, for instance, parole agreements can be varied orally, whereas deeds cannot.  Parole agreements do not always necessarily contain the whole bargain of the parties, deeds do.  There are any number of reasons why commercial individuals and people generally elect to contract by deed, and a deed is not just a simple contract in ceremonial address, as it were.  The reasoning the Full Court undermines that principle so that effectively anywhere you have an attempt at executing a deed it is to be treated as a parole contract is erroneous in principle, and it could give rise to all sorts of unintended problems. 

It is not hard to imagine when draft deeds, for instance, pass between solicitors who agree to individual clauses, under the old law of the law relating to deeds there is no agreement until it is sealed, but under this rule one could inadvertently become bound to individual clauses that had been agreed to to the essential terms of a contract and find oneself bound to an incomplete agreement because one has individually assented to the essential terms of agreement of a parole agreement.  So there is any number of mischiefs that could arise in the world of commerce.

The next question, going back to the Full Court’s first fallback position, was that if the deed is – if it is incorrectly executed it can be relieved by section 41 of the Law of Property Act.  The court dismissed our argument that that was inconsistent with the Corporations Act on the basis that, in my respectful submission, is not compelling on the basis that at paragraphs 52 and 53 of the judgment of Justice Duggan that the Federal Act cannot be taken to have excluded general principles such as the law of estoppel.  That is not compelling we say, your Honour, because, as your Honours will be well aware, the technique of equity of estoppel is not to validate a deed in these sorts of circumstances but merely to prevent in personam an individual litigant from asserting ‑ ‑ ‑

GUMMOW J:   I would not start talking about equity too much in this situation.  Equity looks at substance, not form, and the substance of what is going on here is pretty clear.

MR MANETTA:   No, your Honour, in this respect the law should come to the assistance of my client because he has been presented with a mortgage in the form of an indemnity which is only intended to secure obligations which he elected to be bound by in a particular way and now the respondent relies on the form of the mortgage to try and subvert the substance of the matter, the form of the mortgage as an indemnity to subvert the substance of the matter, which is the parties elected to contract by deed and no deed ever arose, no obligation ever arose, so the respondent seeks to bind us to an obligation which never arose and to rely on the form of the document to do so, which is, in my respectful submission, contrary to the technique of equity in other circumstances.

But certainly the law of estoppel cannot be a basis on which to resist the clear inconsistency between section 41(4) and section 127 of the Corporations Act. The Corporations Act stipulates positive conduct.  It provides rules for how deeds are to be executed by corporations.  The State provision dispenses with those rules and validates deeds in certain circumstances irrespective of whether or not they have been executed.  The inconsistency is clear and if the ruling of the Full Court is permitted to prevail, what it means is that there is a separate rule for South Australia which has this dispensing provision as opposed to other States of the Commonwealth.  So that what is a deed in South Australia may not be a deed, or will not be a deed, in New South Wales and Victoria.  When you measure that against the Corporations Act as intended to implement a national scheme, it can be a recipe for mischief to have different validating laws in separate jurisdictions.

HEYDON J:   What do you say about section 5E and 5G of the Corporations Act?

MR MANETTA:   Section 5E does not apply because by its own provision it does not apply to direct collisions.  Section 5G, which is raised for the first time in this Court, there are two answers to that.  The first is it only applies under 5G(3):

if the [relevant] State provision meets the conditions set out in the following table –

and the relevant table is Item 1 and the relevant condition is:

the State provision operated, immediately before this Act commenced, despite the provision of:

(i)the Corporations Law of the State –

Section 41(4) is inconsistent with section 127 of the Corporations Act. It is equally inconsistent with section 127 of the previous Corporations Law of the State and would be impliedly repealed as an earlier inconsistent legislative enactment of South Australia. So the short answer is that section 41(4) was not operative in this State in the terms of that section. In other words, it did not survive the enactment of the Corporations Law and after the Corporations Law was repealed it did not spring back to life because it is now inconsistent with the Corporations Act.

The second answer is I have some diffidence about the constitutional validity of the procedure that is used in section 5G.  It is a curious method whereby the Commonwealth effectively prescribes, makes laws and then because it provides almost a proviso that these laws shall be superseded by inconsistent State legislation.  In terms it retreats, but in substance what it is saying is that State legislation shall prevail ‑ ‑ ‑

GUMMOW J:   It contracts the field, that is the theory.

MR MANETTA:   Yes, but it is for the avoidance of a direct collision, your Honour.  What it effectively says is that State laws shall prevail in these circumstances and that seems to me to subvert the intent of section 109 and must be of doubtful constitutional validity.  But we do not need to jump that high, as it were, because of the inconsistency with the original provision.

GUMMOW J:   And the section 78B notices were given in the Full Court, were they not?

MR MANETTA:   Yes, your Honour.

GUMMOW J:   We have a note from the Registrar about that?

MR MANETTA:   Yes, your Honour.

KIRBY J:   I have a note from the Registrar saying that you had defaulted in some respect with that section.  Do you remember what that was?

MR MANETTA:   Yes.

KIRBY J:   It did not seem a very serious default.

MR MANETTA:   No, the appeal came on for hearing, it had not been done.  The non-constitutional issues were heard and then there was an adjournment to allow the attorneys to respond and no one wished to intervene, so the argument was resumed.  The attorneys were notified for this proceeding.

GUMMOW J:   Thank you.

MR MANETTA:   So the inconsistency is a matter of general public importance for that reason, that it means that South Australia becomes anomalous in the national scheme.  The first point of a special leave point, which is the finding by the Full Court, that executed as a deed it does not require the importation of those particular words.  Whilst we accept that that is a question of construction of a statute, it is not just a mere construction point of some idiosyncratic local statute.  It is a fundamental provision that is to receive this construction for the first time in a statute that provides uniform and fundamental rules for the conduct of commerce in Australia and it provides the fundamental rules which companies must observe in order to execute deeds.

So for that reason, although it is a point of construction, it is a very important point of construction and the Full Court has got it, with respect, clearly wrong by treating the words “expressed to be executed as a deed” as if it read “expressed to a deed”.  There is no doubt that the deed at Bar used all the general language of a deed right up until the execution clause where there is none.  The purpose of section 127 we say is to relieve against the old extravagant rituals of the common law and to provide more convenient alternatives, modern alternatives, but not to do away with the rituals themselves.  They are still rituals, they are still a solemnity that has to be observed.

The effect of the Full Court’s reasoning is there is no special way that is necessary to execute a deed any more.  It is really a matter of construing the intention of the parties in all the circumstances and that, your Honour, blurs in what we say is an unprincipled way the distinction between solemn bargains and parole contracts.  So if left uncorrected by this Court there is again a recipe for mischief and uncertainty in the world of commerce.  I have nothing further.

GUMMOW J:   Yes, Mr Manetta.  We do not need to hear from you, Mr Keith. 

We are not convinced that the applicant has demonstrated an error in the reasons of Justice Duggan given for the Full Court of the Supreme Court of South Australia.  That court dismissed an appeal by the applicant from a decision of Justice Perry in the Supreme Court.  In our view, there are no prospects that if special leave were granted the appeal would succeed.  We add that in particular we are unconvinced that the constitutional point raised by the applicant if it were to arise would be resolved in the applicant’s favour.  Special leave to appeal is refused with costs. 

We will adjourn to 9.30 am tomorrow morning to take applications 4 and 5.

AT 4.51 PM THE MATTER WAS CONCLUDED