Haxton v Equuscorp Pty Ltd

[2010] VSCA 1

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No 3769 of 2008

IAN ALEXANDER HAXTON

v

EQUUSCORP PTY LTD (Formerly Equus Financial Services Limited) (ACN 006 012 344)

AND

No 3770 of 2008

ROBERT SAMUEL BASSAT

v

EQUUSCORP PTY LTD (Formerly Equus Financial Services Limited) (ACN 006 012 344)

AND

No 3772 of 2008

EQUUSCORP PTY LTD (Formerly Equus Financial Services Limited) (ACN 006 012 344)

v

IAN ALEXANDER HAXTON

AND

No 3773 of 2008

EQUUSCORP PTY LTD (Formerly Equus Financial Services Limited) (ACN 006 012 344)

v

ROBERT SAMUEL BASSAT

AND

No 3774 of 2008

EQUUSCORP PTY LTD (Formerly Equus Financial Services Limited) (ACN 006 012 344)

v

CUNNINGHAM’S WAREHOUSE SALES PTY LTD

AND

No 3775 of 2008

EQUUSCORP PTY LTD (Formerly Equus Financial Services Limited) (ACN 006 012 344)

v

CUNNINGHAM’S WAREHOUSE SALES PTY LTD

AND

No 3776 of 2008

EQUUSCORP PTY LTD (Formerly Equus Financial Services Limited) (ACN 006 012 344)

v

CUNNINGHAM’S WAREHOUSE SALES PTY LTD

AND

No 3777 of 2008

EQUUSCORP PTY LTD (Formerly Equus Financial Services Limited) (ACN 006 012 344)

v

CUNNINGHAM’S WAREHOUSE SALES PTY LTD

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JUDGES:	ASHLEY, NEAVE and DODDS-STREETON JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	18 and 19 May 2009
DATE OF JUDGMENT:	29 January 2010
MEDIUM NEUTRAL CITATION:	[2010] VSCA 1
JUDGMENT APPEALED FROM:	Equuscorp v Bassat [2007] VSC 553 (Byrne J)

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CONTRACTS – Investment schemes – Where investors’ loan agreements financed acquisition of licences and leases for blueberry farming investment schemes – Where schemes failed and investors’ interests lost – Most loan agreements illegal and unenforceable because not severable from transactions contravening prescribed interest provisions of the Companies Code.

RESTITUTION and UNJUST ENRICHMENT – Whether lender prima facie entitled to restitution for total failure of consideration – Whether investors’ retention of funds unjust – Relevance of terms of unenforceable loan agreements – Their relationship to schemes as a whole – Whether trial judge erred in construction of loan agreements and factual findings – Whether action on the sole enforceable loan agreement statute-barred.

ASSIGNMENT – Whether lender’s claim in restitution assignable – Whether rights effectively assigned by deed.

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APPEARANCES:	Counsel	Solicitors
For Equuscorp	Mr S S W Couper QC Mr G W Moffatt	Lander & Rogers
For the Investors	Mr M R Pearce SC Mr M J Campbell	Eales & Mackenzie as town agents for Shand Taylor

TABLE OF CONTENTS (Reasons for judgment of Dodds-Streeton JA)

Introduction

Principal Issues on Appeal

Principal Holdings on Appeal

Facts

The Judgment Below

Debt Claims

Assignment

Express Non-recourse Term – whether benefit lost

Implicit Non-recourse Term

Release

Limitation Defences

Illegality

Restitution

Was restitution available?

Relevance of Contractual Terms

Equus’ Restitution Argument

The investors’ principal arguments

Is restitution available?

Basis of restitutionary claim

Total Failure of Consideration

What is a total failure of consideration?

Why Equus cannot rely on total failure of consideration

The Prescribed Interest Cases

Was any restitutionary right assignable?

Did the deed of assignment transfer restitutionary claims alternative to the debts?

The Construction of Terms of the Loan Agreements and Factual Findings in Particular Cases

Haxton 5261

CWS 5223

Bassat 5084

Implied Non-Recourse Loan

CWS 4989 – The Guarantee

Conclusion

SCHEDULE

ASHLEY JA:

1. I have had the advantage of reading in draft the reasons for judgment of Dodds-Streeton JA.  I agree, for the reasons which her Honour gives, that the appeals by Equuscorp should be dismissed and that the appeals by the investors should be allowed.

NEAVE JA:

1. I have had the considerable advantage of reading Dodds-Streeton JA’s draft reasons.  I agree with her Honour, for the reasons she gives, that Equus’ claims in restitution against the investors in the failed blueberry scheme must fail[1] and that the investors’ appeals[2]  should be allowed.

   [1]Appeals No 3772 to 3777 of 2008.

   [2]Appeals No 3769 and 3770 of 2008.

1. As her Honour explains in her comprehensive reasons, unjust enrichment now provides the conceptual underpinning for defined categories of cases in which it has been established that a defendant has a prima facie obligation to make restitution for money, property or services received from a plaintiff.[3]  While these categories are now well-developed, the law of restitution is not frozen.  In the future case by case analysis is likely to result in the recognition of new situations in which a restitutionary remedy is held to be available.[4]

   [3]See for example Pavey & Mathews Pty Ltd v Paul (1987) 162 CLR 221, 256-7 (Deane J). See also his Honour’s similar comments about the basis for the imposition of constructive trusts in Muschinski v Dodds (1985) 160 CLR 583, 619-620.

   [4]Ibid and see also Roxborough v Rothmans of Pall Mall Ltd (2001) 208 CLR 516, 553-554 (Gummow J); Lumbers v W Cook Pty Ltd (in Liq) (2008) 232 CLR 635, 665 (Gummow, Hayne, Crennan and Kiefel JJ).

1. Equus relied on two lines of authority in support of its claim that Rural (and Equus as assignee of Rural’s rights) had an enforceable claim in restitution against the investors, for the balance of the loan moneys and interest.

1. The first line of authority relates to money paid under a contract in relation to

which the consideration has totally failed.  As Dodds-Streeton JA’s analysis shows,[5] neither English nor Australian courts have strictly applied the requirement to show a total failure of consideration.[6]  Moneys paid under a contract which has failed are sometimes recoverable even where the contract has been partially performed by the person from whom recovery is sought.[7]  Accordingly, the fact that a lender has received some repayments of capital and interest from the borrower under an unenforceable contract, will not necessarily be sufficient, of itself, to preclude a claim in restitution for the unpaid balance of the loan.

[5]See paragraphs [128] to [183] below.

[6]See for example David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Roxborough v Rothmans of Pall Mall Ltd (2001) 208 CLR 516 (Roxborough).  Compare the remarks of Nettle JA in Ovideo Carrideo v The Dog Depot Pty Ltd [2006] VSCA 6, [33] (Nettle JA).

[7]See for example Roxborough;  David Securities Pty Ltd v Commonwealth Bank of Australia (David Securities) (1992) 175 CLR 353.

1. The second group of cases (which Equus submitted were implicitly based on total failure of consideration)[8] include those in which contracts of loan have been made to finance an illegal prescribed interest transaction, where the contract cannot be severed from that transaction.  These cases indicate that the lender may have a claim in restitution against a borrower, in relation to loan moneys which the borrower has received,[9] for the purposes of investing in a scheme, despite a breach of the prescribed interest requirements, and the lack of severability of the loan contract.

   [8]For example Equus relied on Rowland v Divall [1923] 2 KB 500 and David Securities .

   [9]See particularly, O’Brien v Melbank Corporation Ltd (1991) ACSR 19, 57 where McGarvie J considered that the lender would have ‘an arguable claim for restitution’ and Fullagar J, who dissented on the issue of whether the loan contract was severable from the investment scheme, also considered that the question of restitution should be referred back to the trial judge and Australian Breeders Co-operative Societyv Jonesand Others (1997) 150 ALR 488, 541-542, where the lender was held to be entitled to restitution of the loan and Amadio Pty Ltd v Henderson (1998) 81 FCR 149.

1. Despite these two lines of authority, I agree with Dodds-Streeton JA, for the reasons she gives, that Equus has no prima facie right to recover the capital and interest moneys advanced by Rural.  Further, even if the lender has a prima facie right to restitution of money paid to a borrower, despite the breach of the prescribed interest provisions, Equus is not entitled to restitution in the circumstances of this

case.

1. The loan agreement was an integral part of a scheme for the growing and harvesting of blueberries.  The investors received no benefit from the failed scheme of which the loan formed part.  There was no evidence as to whether the investors in fact received the benefit of tax deductions.  The investors lost their right to receive a share in the proceeds of production of the blue berries, and their interests in the farm were extinguished by the enforcement of the security interests.  Further, in these circumstances  it was not unjust for the investors to retain the ‘benefit’ (such as it was) of the loans made to them.

1. It is therefore unnecessary to decide if a lender’s right of restitution arising after the failure of a loan contract is assignable.   In that regard I note only that the question whether a restitutionary claim is assignable may depend on the category within which the particular claim falls.  In some circumstances the question whether it is ‘unjust’ for a recipient to retain the benefit of moneys paid or services rendered may be so dependent on the particular relationship between the payer and the recipient that the purported assignment more closely resembles a claim in tort than a claim which should be treated as assignable. 

1. In any case,  I agree with Dodds-Streeton JA that, even if Rural had a right of restitution against the investors, the words of the deed of assignment, when read in conjunction with the Asset Sale Agreement, did not assign Rural’s putative rights in restitution (as opposed to the Rural’s rights under the loan agreements) to Equus.

1. Accordingly, I would join in the orders proposed by Dodds-Streeton JA.

DODDS-STREETON JA:

Introduction

1. Before the Court, there are eight related appeals which arise from eight cases representative of some 550 proceedings issued by Equuscorp Pty Ltd (‘Equus’)

against defendants who, through a series of schemes in the late 1980s, invested in a blueberry farm project at Corindi in New South Wales.  In the proceedings below, Equus sought to recover from the investors as a debt, or alternatively in restitution, the outstanding principal and interest allegedly due under the loan agreements they had each entered with Rural Finance Pty Ltd (‘Rural’) in order to finance their participation in the schemes.  In 1997, Equus had acquired for $500,000 Rural’s rights to loans totalling approximately $50 million under numerous agreements with scheme investors. 

1. In seven cases, the trial judge held that the loan contracts were illegal and unenforceable against the investors, because they were not severable from scheme transactions which breached the prescribed interest provisions of the Companies Code (‘the Code’) due to the want of any or any proper prospectus.

1. The trial judge dismissed Equus’s contractual claim in all eight cases.  His Honour upheld its alternative restitution claim in only two cases.  Equus is the appellant in six of the present appeals and the investors are the appellants in two of the appeals.  There are also a number of  notices of contention.[10]

   [10]See the schedule on page 117 of these reasons.

Principal Issues on Appeal

1. The appeals raise the following principal issues:

1.Did Rural as the lender under the illegal loan contracts which were unenforceable against the investors, have a prima facie claim to restitution of the loan funds as money had and received on the basis of total failure of consideration, subject to the set-off of payments received from the investors? If so, in the circumstances, was the investors’ retention of the funds unjust?  Did the trial judge err in having regard to the terms of the unenforceable contracts in determining whether the retention of the loan funds was unjust?

2.If Rural had such restitutionary claims, were they capable of assignment?

3.If such claims were capable of assignment, were they effectively assigned to Equus by the deed of assignment dated 30 October 1997?

4.If, in determining Equus’s entitlement to restitution, the trial judge was entitled to have regard to the terms of the unenforceable contracts, did he nevertheless err in his construction thereof and his related factual findings, on the basis of which he determined whether certain investors had the benefit of non-recourse provisions and whether certain debt claims were statute-barred.

Principal Holdings on Appeal

1. The cases of both Equus and the investors depended on a series of cascading arguments, any one of which, if accepted, was dispositive of at least some of the appeals.  For example, seven of the appeals could be determined on the basis of holding (as I do) that Rural’s restitutionary claims, if established, were not assigned by the deed of assignment.  In deference to the submissions of counsel, I have also considered the other principal arguments.

1. For the reasons set out in detail below, I have found:

1.Equus did not establish that on the facts Rural (its assignor) had a prima facie entitlement to restitution by reason of total failure of consideration. 

2.If (contrary to the above) the investors were prima facie obliged to restore the loan funds due to a total failure of consideration or otherwise, the obligation was displaced.  The investors’ retention of the loan funds was not unjust in circumstances where: 

·the loans were, in substance, integral elements of investment schemes conducted by a group of companies under common control, in which an entity related to the lender offered interests to investors without any complying prospectus, in breach of the protective prescribed interest provisions of the Code;  

·the loans funded the investors’ acquisition of interests, including blueberry farm licences and leases, in the scheme; 

·the loan agreements provided that following two initial payments of capital, the balance of the loans was to be paid with the guaranteed proceeds of the sale of blueberries over a five year term;

·it was neither pleaded nor established that the investors entered the schemes in order to obtain tax deductions;  there was no evidence that any investor had obtained any benefit by way of a taxation benefit or advantage; 

·under the investment schemes, Rural’s loans were secured by mortgages over the investors’ scheme interests, typically licences or leases[11] of the blueberry farm on which the blueberry crops (the proceeds of which were to be applied to the payment of their loans) were produced.  In 1991, when the scheme projects failed financially, the blueberry production and the guaranteed payments from the sale of blueberries ceased.  Rural charged its assets and undertaking (including its security interests in the investors’ licences, leases or other interests) to Equus.  Equus, in enforcing its charge over Rural’s assets, took possession of the investors’ interests, which they consequently lost.  The investors did not terminate the loan contracts until (the parties agreed) they filed defences to Equus’ proceedings.

[11]Byrne J stated ([2007] VSC 553, fn 2):

The interest in each year varied:  in 1987 it was a joint venture (Bassat 5084, CWS 5189,).  In January 1988 a leasehold (CWS 8277) and in 1988 and 1989 a licence (CWS 5233;  Haxton 5261;  Bassat 4540;  Haxton 5154;  and CWS 5989).

1. While the authorities provide no clear guidance on whether a restitutionary claim of the kind alleged is assignable per se, assignment may occur in the circumstances outlined in Trendtex Trading Corporation v Credit Suisse (‘Trendtex’).[12]

   [12][1982] AC 679. Considered in Brownton Ltd v Edward Moore Inbucon Ltd [1985] 3 All ER 499, 505-6 (Sir John Megaw); 507-9 (Lloyd LJ).

1. The deed of assignment dated 30 October 1997 was not, on construction, effective to assign rights of the nature alleged by Equus, had they been established.

1. Contrary to Equus’ submission, the terms of an unenforceable loan contract in a case of alleged total failure of consideration not only may but ordinarily must be considered when assessing whether the claimant has received none of the bargained-for benefit.  The terms may also, in an appropriate case, constitute circumstances relevant to the determination of whether a payee’s retention of moneys paid in connection with the unenforceable contract is unjust.  The observations in Pavey & Mathews Pty Ltd v Paul (‘Pavey’)[13] restricting reference to the contractual terms was, in my view, informed by the factual context of a quantum meruit claim for work performed under an unenforceable building contract.  The High Court made clear that the terms of the unenforceable contact in that case did not govern the recovery in restitution, but did not impose an inflexible bar in all contexts.

   [13](1987) 162 CLR 221; [1987] HCA 5.

1. I am not persuaded that the trial judge erred in his construction of the terms of the loan contracts or in his findings of fact.

Facts

1. The facts, as found by the trial judge and as set out in the agreed statement of facts amplified by oral submissions, were as follows.

1. From 1986, Mr Anthony James Johnson and his brother, Mr Francis Edward Johnson, promoted tax-driven investment in blueberry farming activity by a number of successive similar schemes in the financial years 1986/7, 1987/8 and 1988/9.  The schemes were designed to allow investors to deduct the expenses incurred in blueberry farm production from all their income.  The investors anticipated an immediate tax deduction[14] from their non-farm income, together with the prospect of future income and capital appreciation as the farm became productive.

   [14]Equus did not, however, plead that the investors invested in order to obtain tax advantages.

1. The Johnsons controlled, held office in or were associated with, a number of companies (collectively, ‘the Johnson Group’), each of which played a role in the implementation or maintenance of the schemes.

1. Corindi Blueberry Growers Pty Ltd (‘CBG’) acquired and developed the blueberry farm and tourist complex at Blueberry Hill, Corindi in New South Wales.  Messrs A J and F E Johnson were directors of CBG in 1987.  Investors, by paying CBG, purchased an interest (typically a licence for a 12 year term) in the blueberry farm project. 

1. The investors were responsible for maintaining and harvesting the blueberry crop.  They engaged another Johnson Group company, Johnson Farm Management (‘JFM’), to perform that role, in return for a management fee to cover maintenance and harvesting services.  Although prepayment of the management fee was not mandatory, it had the advantage of a discount and tax deductibility was expected.

1. Messrs A J and F E Johnson were directors of JFM in 1987.  According to the company search in evidence, the date of F E Johnson’s appointment was unknown.  He ceased to hold office on 24 June 1988.

1. Under the schemes, the investors owned the blueberry fruit produce, which they sold to another Johnson Group company ‘Kathleen Drive Store Fruit Growers Syndicate No 1’ trading as ‘Johnson Farms’ (‘the Buyer’) for a guaranteed price for five years, after which the proceeds of sale were to be shared between the investors and CBG, with the investor retaining the capital interest in the project.  According to a company search of the Buyer, A J Johnson was appointed as director on a date unknown and ceased to hold that office on 1 September 1995.  F E Johnson was also a director of the Buyer. 

1. Although it was not mandatory, the prepayment could be borrowed from another Johnson Group company, Rural, in which case the investor would endorse in favour of JFM the Rural cheque for the principal drawn in the investor’s favour.  Rural was registered in 1983.  In 1987, its directors were A J and F E Johnson.

1. The investors party to these appeals financed their investments by loans from Rural.  Rural lent the investors for five years the prepayable maintenance and harvest charges together with the interest payable under the loan, on advantageous terms.  The loan agreements relevant to the appeals, while not identical, were similar.  Pursuant to the loan agreements, Rural advanced funds to the investors as follows:[15]*

[15]Agreed Summary, dated 17 December 2008, [5].  * Note that the proceeding numbers at trial do not correspond to the proceeding numbers on appeal.  In order to avoid confusion, in these reasons, the trial proceeding numbers are used.

Defendant	Loan Amount	Date
Bassat 5084	$110,000	3 June 1987
Bassat 4540	$133,518	31 March 1989
CWS 5223	$445,060	28 June 1988
CWS 4989	$667,590	28 June 1989
CWS 5189	$220,000	29 June 1987
CWS 8277	$450,880	15 January 1988
Haxton 5154	$44,506	31 May 1989
Haxton 5261	$89,012	29 June 1988

1. The trial judge described the operation of the schemes as follows:

A particular feature of these schemes and the feature which gives rise to this litigation, is that the Johnson Group also offered finance to investors on very attractive terms.  In short, Rural Finance Pty Ltd, a company registered in 1983 whose directors in 1987 were Mr AJ Johnson and Mr FE Johnson, would lend to the investors for five years the amount of the maintenance/harvest charges to be pre-paid to JFM and the interest payable under the loan.  The only outlay required of the borrower personally was two relatively small capital repayments.  The loan also provided that the guaranteed proceeds of the harvest sales over the first five years would be applied to repay the balance of the loan, including the pre-paid interest.  The expected result of this was that the investor, for this modest outlay, would receive a tax deduction to the full value of the loan and interest and the prospect of further farm income after five years and, ultimately, the capital value of the interest in the project.[16] 

[16]Ibid [6].

1. His Honour found that the relevant investors made the following payments under the loan agreements:[17]

[17]Ibid [48].

Loan	Amount	Date Due	Receipt Date	Finding
Bassat 5084	10,000	30/9/87	28/9/87	In time
Bassat 5084	10,000	31/12/87	By 31/12/87	In time
CWS 5189	20,000	30/9/87	1/10/87	Late
CWS 5189	20,000	31/12/87	13/1/88	Late
CWS 8277	40,000	15/4/88	6/6/88	Late
CWS 8277	39,072	15/7/88	8/11/88	Late
CWS 5223	42,000	28/9/88	22/11/88	Late
CWS 5223	42,000	28/12/88	15/12/88	In time
Haxton 5261	8,400	29/9/88	29/9/88	In time
Haxton 5261	8,400	29/12/88	3/1/89 23/1/89	Late
Bassat 4540	12,600	30/6/89	30/6/89	In time
Bassat 4540	12,600	30/9/89	by 30/9/87	In time
Haxton 5154	4,200	31/8/89	31/8/89	In time
Haxton 5154	4,200	30/11/89	1/12/89	Late
CWS 4989	63,000	28/9/89	23/10/89	Late
CWS 4989	63,000	28/12/89	2/2/90	Late

1. His Honour described the failure of the schemes and the associated Johnson Group companies thus:

It seems that the Blueberry Hill project encountered financial difficulties, for the company extracts show that on 10 January 1991 the plaintiff, Equuscorp Pty Ltd (“Equus”), registered charges over the assets of CBG, JFM, Rural Finance and the Buyer.  On 29 August 1991, Equus appointed Phillip Arthur Hennessy of KPMG Peat Marwick in Brisbane and Michael Joseph Dwyer of McGrath Nicol + Partners in Adelaide receivers and managers of the assets of Rural Finance[18] and on 14 March 1993 Mr Hennessy and Alexander Robert McKay McIntosh of McGrath Nicol + Partners were appointed receivers and managers of the assets of JFM, CBG and the Buyer.[19] On 6 March 1996, Rural Finance was wound up pursuant to resolution of its creditors at a meeting convened under s. 439A of the Corporations Law.

On 30 October 1997, Rural Finance assigned to Equus its loan contracts with the investors.  The face value of these 638 loans as at 30/8/1997 was $52,584,005.  The consideration given for the assignment was $500,000.[20]

[18]Agreed fact 11.

[19]Agreed fact 13.

[20][2007] VSC 553, [7]–[8] (citations in original).

1. Surprisingly, given the nature of the claims, this Court had limited evidence about the failure of the schemes and the associated companies, and the financial consequences for the investors.  In the course of the hearing, counsel for both parties supplemented the evidence with unchallenged information.  Senior Counsel for Equus informed us that Equus obtained fixed and floating charges over the assets of all companies in the Johnson Group in order to secure advances made to Johnson Group companies. 

1. We were informed that the last proceeds of sale of the blueberries produced on the farms were paid in June 1991.  Thereafter, the proceeds of sale ceased to be applied to the reduction of the investors’ liability under the Rural loans. 

1. In October 1995, in reliance on its priority security, Equus caused the blueberry farm to be sold.

1. Counsel for the investors informed us (and it was not disputed) that the investors ‘lost their money, lost their investment’.  The investors’ interests under the schemes (usually a 12 year licence, or a lease over the land on which the blueberries were being grown) were lost, because ‘such interests as they had were charged to Rural [which] assigned those charges to Equus[corp], Equus[corp] has enforced them and it is all gone …’.

1. In summary, the investors were typically licensees or lessees whose interests in, and capacity to farm the land, were effectively determined when Equus enforced the charges it held over the assets of the relevant Johnson Group companies, including Rural, the lender/mortgagee.  Rural did not enforce its securities over the investors’ interests.  We were informed that the priority rights of Equus pursuant to the deed of charge over Rural’s assets precluded that course. 

1. Before us, there was also little evidence about the financial impact of the failure of the schemes on the investors.  Although it was common ground that the investors expected the schemes to secure, inter alia, the advantage of tax deductions against their non-farm income, there was no evidence of whether any investor received any and if so what taxation benefit from participation in the schemes.

1. On 16 May 1997, an agreement styled an Asset Sale Agreement was entered into between the Rural receivers on behalf of Rural as vendor and Equus as purchaser, whereby Rural sold the investor loans described in the schedule to the agreement.

1. On 30 October 1997, pursuant to the Asset Sale Agreement, Rural, by its receivers, executed a deed of assignment by which the rights of Rural in the loan agreements were assigned to Equus. 

1. In 1998, Equus commenced proceedings against investors, including those party to these appeals, to recover the principal and interest allegedly due under the loan agreements.

The Judgment Below

Debt Claims

1. Equus’s primary claim below was in contract for recovery of the balance and interest payable under the loan agreements.  The investors advanced both common and individual defences to the debt claims.

Assignment

1. First, the investors contended that the assignments of the debts were ineffective, as the schedule to the deed of assignment was illegible.  His Honour rejected that contention.

Express Non-recourse Term – whether benefit lost

1. Secondly, the investors contended that the loans were non-recourse and their liability was limited to the payment of two instalments of principal, either by reason of an express term in five loan agreements made prior to 1989 [Bassat 5084, CWS 5189, CWS 8277, CWS 5223 and Haxton 5261] or implicitly, in the three 1989 loan agreements [Bassat 4540, Haxton 5154 and CWS 4989].

1. Equus conceded that five loan agreements contained non-recourse provisions, but contended that the relevant investors had failed to secure the benefit thereunder, because they had not satisfied the precondition of timely payment of the two instalments of principal due by the specified dates.

1. His Honour found that in four of the five express non-recourse loan agreements, there was late payment, resulting in a failure to secure the benefit of the express non-recourse provisions.  His Honour concluded as follows:

·Bassat 5084 (June 1987 loan agreement):  the payments of principal were punctual, so the investors had the benefit of the non-recourse provision.

·CWS 5189 (June 1987 loan agreement):  the payments of principal were late.  The precondition of immunity under the non-recourse provision was not satisfied.

·CWS 8277 (January 1988 loan agreement):  the payments of principal were late.  The precondition of immunity under the non-recourse provision was not satisfied.

·CWS 5223 (June 1988 loan agreement):  one repayment was not made by the due date.  The precondition of immunity under the non-recourse provision was not satisfied.

·Haxton 5261 (June 1988 loan agreement):  one repayment was not made by the due date.  The precondition of immunity under the non-recourse provision was not satisfied.

His Honour rejected the investors’ alternative submission that (if the benefit of the non-recourse provision was not secured, due to late payment), Rural had nevertheless waived the late payment, through conduct including:  failure to notify the investor that the protection of the non-recourse provision was lost;  failure to enforce the security;  continued acceptance of payments from the sale of farm produce;  acceptance of a lower interest rate;  and sending letters to investors stating that they were not personally liable.

Implicit Non-recourse Term

1. His Honour also rejected the investors’ submissions in Bassat 4540, Haxton 5154  and CWS 4989 that although the loan agreements contained no express non-recourse provision, a non-recourse term was to be implied. 

Release

1. In CWS 5223 (entered into on 28 June 1988) and CWS 4989 (entered into on 28 June 1989), the investors alternatively contended that they had the benefit of a release.[21]

   [21](In CWS 5223, one payment was found to be late and the express non-recourse provision was lost;  and in CWS 4989, there was held to be no non-recourse provision.)

1. In CWS 5223, his Honour rejected the ‘remarkable’[22] argument that a statement in Rural’s letter to the investor (after the non-recourse entitlement had already been lost) that the relevant repayment was a ‘final loan repayment’ operated as a release from any other loan repayment if the December instalment were paid early.  That holding is the subject of a Notice of Contention by the investor.

   [22][2007] VSC 553, [79].

1. In CWS 4989, however, his Honour accepted that a document entitled ‘guarantee’ dated 29 June 1989, apparently executed with the common seals of JFM and Rural, operated as a release.  He rejected Equus’ argument that the guarantee was invalid because, inter alia, it was not executed by Rural and lacked good consideration.  That holding is the subject of an appeal by Equus.

Limitation Defences

1. The investors also argued that Equus’ causes of action were statute-barred in the five following cases:

CWS 5223	Expiry date 28 June 1993;	Commenced 27 March 1998
Haxton 5261	Expiry date 28 June 1993;	Commenced 27 March 1998
Bassat 4540	Expiry date 31 March 1994;	Commenced 25 February 1998
Haxton 5154	Expiry date 31 May 1994;	Commenced 27 March 1998
CWS 4989	Expiry date 28 June 1994;	Commenced 27 March 1998

1. The investors’ limitation defence depended on the acceleration of liability to pay the entire principal and interest under cl 7 of the loan agreements by reason of late payment of instalments of capital.

1. His Honour stated:

… The defence then depended upon the cause of action arising prior to 25 February 1992 or 27 March 1992.  In each case the loan fell due for repayment five years after the date of the loan so that the cause of action arose in 1993 or 1994, within the six year limitation period.  The point taken on behalf of the investors was that, in each of these loans, the late payment of one or both of the specified repayments of capital was a default which triggered the acceleration clause so that the principal and interest became immediately due and payable in 1988 or 1989 on the date of the default.  The relevant conclusions which I have reached with respect to each of these five loans are as follows:

CWS 5223The payment of principal due on 29 September 1988 was late. 

Haxton 5261            The payment of principal due on 29 December 1988 was late.

Bass[at] 4540 [sic]     No payment of principal was late.

Haxton 5154            The payment due on 30 November 1989 was late.

CWS 4989The payments due on 28 September 1989 and 28 December 1989 were both late.

In each case no payment of principal and interest from the proceeds of sale was made after 30 June 1991.[23]

[23]Ibid [114].

1. The acceleration provision, which was in similar language in each of the default clauses, provided as follows:[24]

Subject to all other provisions hereof should the Borrower make default hereunder as to payment of interest or the Principal Sum or any part thereof then the balance of the Principal Sum together with any outstanding interest shall thereupon immediately become due and payable by the Borrower to the Lender and may be sued for and recovered by the Lender in any court of competent jurisdiction.  PROVIDED HOWEVER that this Clause 7 shall apply to the following defaults and no others:

(i)a failure by the Borrower to repay to the Lender the sums referred to in (i) and (ii) in Part B of Schedule 2, and

(ii)a failure to repay or pay any balance of the Principal Sum and any interest out of the income received by the Borrower from the Farm during the first five (5) years of the Lease in accordance with Clause 3C(ii) hereof.

[24]The reasons for judgment inadvertently contained the non-recourse provision, rather than the acceleration provision.  The correct provision has been substituted.

1. The trial judge rejected Equus’s argument that, due to days of grace, there was no default activating the acceleration clause.  The word ‘immediately’ indicated, in his view, that there were no days of grace.[25]

   [25][2007] VSC 553, [116].

1. His Honour also rejected Equus’s following arguments against the limitations defence:

(a)The loan agreement was a speciality (deed) and thus had a 15 year limitation period.  (The trial judge held that the loan agreements did not bear the hallmarks of a deed.)

(b)Rural waived the default by its subsequent receipt of principal and interest. (His Honour held that such receipt was not inconsistent with default.)

(c)The investors had taken no steps to rescind the loan agreements and sought tax advantages therefrom, thereby affirming and ratifying the loan agreement, so that time did not run.  (The trial judge found that argument hard to understand, unsupported by submissions and dependent on unevidenced factual assertions.)

1. His Honour concluded that the obligation to repay was accelerated, so that the limitation defence was made out, in all save Bassat 4540 (in which he found no late payment).

Illegality

1. The trial judge also found that the investors’ interests in the Blueberry Hill blueberry project were prescribed interests within terms of s 5(1) of the Code, the offer of which to the public was prohibited by s 170 of the Code unless accompanied by a prospectus lodged with the National Companies and Securities Commission.  Only Haxton 5261 and CWS 5223 had a prospectus. 

1. The trial judge found that all the investments were offered to the public within the meaning of s 5(4) of the Code.  He found that in CWS 5223, the prospectus was ineffective, due to a discrepancy between the interest it described and the interests offered and purchased, the failure to appoint a trustee and the identity of the manager.  His Honour concluded that the offer of the investments in all save Haxton 5261 breached s 170 of the Code for want of any or any complying prospectus.  They were therefore illegal and unenforceable against the investors.  His Honour found that the unenforceability also attached to the loan agreements under which finance was provided for the schemes, because, on the basis of McGarvie J’s analysis in O’Brien v Melbank Corporation Ltd, (‘O’Brien’)[26] the loan agreements were not severable from the illegal transactions.  Each of the investors had prepaid and borrowed the management fee from Rural.  His Honour found that, although each loan agreement was technically severable, the loan would not have been offered or taken up unless it were part of the scheme, and it could not be inferred that ‘a fair and reasonable person in the position of the investor and Rural Finance respectively would intend that the loan might stand when the rest of the scheme fell away’.[27]

   [26][1991] 7 ACSR 19 (Fullagar, McGarvie and O’Bryan JJ).

   [27][2007] VSC 553, [112].

1. His Honour concluded that, because no loan agreement was severable, all (save for Haxton 5261) were unenforceable against the investors on the ground of illegality. 

1. Although Haxton 5261 was not unenforceable against the investor for illegality, his Honour found that it was statute-barred.  (That conclusion also applied to CWS 5223, CWS 4989 and Haxton 5154.) 

1. His Honour set out his conclusions on the debt claims as follows:

The result of this is that each of the debt claims has failed.  In summary, this is for the following reasons.

·Bassat 5084 investor is protected by the non-recourse agreement and, in any event, the loan agreement is unenforceable for illegality.

·     CWS 5189 the loan agreement is unenforceable for illegality. 

·     CWS 8277 the loan agreement is unenforceable for illegality.

·CWS 5223 the loan agreement is unenforceable for illegality and is statute-barred.

·     Haxton 5261 the loan is statute-barred. 

·     Bassat 4540 the loan agreement is unenforceable for illegality.

·Haxton 5154 the loan agreement is unenforceable for illegality and the claim is statute-barred.

·CWS 4989 the loan agreement is unenforceable for illegality, it has been released by the guarantee dated 29 June 1988 and the claim is statute-barred.[28]

[28][2007] VSC 553, [120].

1. The trial judge thus held that all loan agreements save Haxton 5261 were unenforceable against the investors for illegality and, in many cases, on additional bases.[29]  Haxton 5261, although not illegal, was statute-barred.

   [29]Bassat 5084 had a non-recourse provision.  CWS 4989 was released by the guarantee and was statute-barred.  CWS 5223 was statute-barred. 

Restitution

1. In the seven illegal loan cases, his Honour’s conclusions on the debt claims remained relevant to Equus’s alternative claim in restitution for money had and received, pursuant to which it sought to recoup (after making due allowance for repayments of principal) the money Rural advanced to the investors.  As discussed below, his Honour thought that the terms of the illegal contracts were relevant to whether retention of the loan moneys was unjust.

1. The trial judge held that the investors’ obligation to make restitution was independent of, and survived, the unenforceability of the loan agreements;  and, by cl 2 of the deed of assignment dated 30 October 1987, Rural’s causes of action in restitution (as well as the debts) were assigned to Equus for $500,000.

1. Clause 2 of the deed of assignment stated:

2.The assignment is an absolute assignment intended to take effect immediately as a legal assignment of, inter alia,

(a)the legal right to such debts, interests under the guarantors [sic] and its interests under the securities and all interest due and becoming due on the debts.

(b)all legal and other remedies for these matters in the preceding sub-paragraph (a).

(c)the power to give good discharge for those matters referred to in sub-paragraph (a) without the concurrence of Rural.

His Honour concluded that the terms of clause 2(b) were sufficiently broad to encompass restitutionary claims associated with the rights of Rural under the loan agreements.

1. At trial, it was not disputed, and his Honour assumed, that assignment was available as a matter of principle.  He did not address the possibility that such restitutionary claims were incapable of assignment, that any limitations applied to their assignment or consider whether an assignment (including its circumstances and terms) could have an impact on the availability or extent of restitution. 

Was restitution available?

1. At trial, it was common ground that the investors had terminated the loan agreements by filing defences to Equus’s claim in 1999.  His Honour did not, however, accept that contention.  He noted that the investors did not plead the right to terminate, or its exercise, by the filing of defences.

1. His Honour reasoned that the investors had obtained the benefit of the money advanced by Rural, which had suffered a corresponding disbenefit.  His Honour stated:

… I am satisfied that Rural Finance expressed in the deed of assignment its intention to pass to Equus all of its rights and remedies under and in connection with the loan agreements and that these include any right to restitution which may arise from the payment of the loans to the investors.[30]

[30][2007] VSC 553, [127].

1. The investors argued that Rural did not suffer a ‘disbenefit’ from making the advance, due to the ‘round robin’ nature of the scheme transactions.  His Honour dismissed that contention on the basis of the decision of the High Court in Equuscorp Pty Ltd v Glengallen Investments Pty Ltd (‘Equuscorp v Glengallen’)[31] which established that the legal effect of the loan transaction was determinative.

   [31](2004) 218 CLR 471; [2004] HCA 55.

1. The investors alternatively relied on Australia and New Zealand Banking Corporation v Westpac Banking Corporation (‘ANZ v Westpac’)[32] (in which a recipient bank disbursed a mistaken overpayment by ANZ to Westpac’s customer) to argue that they derived no benefit from the money advanced, because the loan moneys were destined for JFM in fact, and when they endorsed cheques to JFM, they changed their position to their detriment, in reliance on the validity of the schemes and the enforceability of their constituent agreements.

   [32](1988) 164 CLR 662; [1988] HCA 17.

1. His Honour considered that ANZ v Westpac (albeit a case of payment by mistake) established there is no obligation to make restitution if a party receives a payment either as agent for an undisclosed principal, or as principal, but as a ‘mere conduit pipe’,[33] in circumstances where the money is destined for another and is in fact passed on.

   [33][2007] VSC 553, [132].

1. The trial judge concluded that, while the principles of ANZ v Westpac could preclude the restitution of payments made under an unenforceable loan agreement, the present cases were different, because (although all parties knew that the cheques would be endorsed in favour of JFM) the investors were not contractually obliged to endorse them in that way.  The investors, in such circumstances, were not mere intermediaries.  Rather, they received the benefit of the receipt of the funds.

1. The trial judge considered that a ‘change of position’ defence sat uneasily with the facts of the case, ‘where money [was applied], as all intended, in pursuance of a transaction which was seen as beneficial’[34] as distinct from a case where the defendant was the innocent recipient of funds mistakenly paid.

   [34]Ibid [136].

1. The investors also argued that Equus’s restitutionary claim based on unjust enrichment was not made out, because their retention of the loan moneys did not offend equitable notions of ‘good conscience’ where the loan payments were made as part of an illegal transaction and the lender’s own illegal conduct lay behind Equus’s claims.

1. His Honour noted that the authorities disclosed  different views on whether restitution was available for loan moneys or other payments illegal due to breach of the prescribed interest provisions. 

1. He followed the approach of the Full Federal Court in Australian Breeders  Co-operativeSociety Ltd v Jonesand Others,[35] (‘Australian Breeders Co-operative Society’) which held that illegality under a provision analogous to s 170 of the Code did not preclude the lender’s claim for restitution of loan moneys from the investors. 

   [35](1997) 150 ALR 488.

Relevance of Contractual Terms

1. His Honour considered that the primary focus of attention was the circumstances at the moment of enrichment.  He held that the fact that the loan contracts were unenforceable (at the moment of the enrichment) could affect the determination of whether the benefit was conferred gratuitously.  Further, he considered that the terms of the unenforceable contracts (including whether the loans were non-recourse) were relevant.

1. His Honour stated:

In the present case the lender seeks restitution for the benefit of the loan accepted by the investors.  Whether the retention of that benefit by the investors is unjust cannot be determined without regard to the terms of the unenforceable contract.  If, for example, Rural Finance lent money on terms that the principal was not repayable, it could not be said that the borrowers' failure to repay was unjust.  And so, notions of fairness and good conscience in the investors must have regard to circumstances  such as those attending their receipt of the sum advanced.  But, if it is necessary to have regard to this, does this mean that the terms of the contract, which are not enforceable against them, may be brought to account in the restitution claim against the investors?  I think it must.[36]

[36][2007] VSC 553, [143].

1. His Honour concluded that (as a matter of principle) –

(a)If there were a non-recourse term (as in Bassat 5084) (the benefit of which remained on foot), then restitution was not available.

(b)If there were a non-recourse term, but its benefit had not been secured because a precondition such as timely payment was not fulfilled, nevertheless, the relevant investor was not liable to pay more than the two capital payments when it entered the loan agreement and received the benefit of the loan moneys.  Although such an investor subsequently lost the benefit of the non-recourse provisions, its conscience would not be affected if, at the time of receipt of the loan funds, there had been no obligation to repay them.  If subsequent events gave rise to a corresponding contractual obligation to repay the loan, the obligation would be seen as contractual, unless the circumstances gave rise to another right.

1. In the cases where the loan agreements had no non-recourse provision (Bassat 4540, Haxton 5154 and CWS 4989) his Honour concluded that Equus had a good claim in restitution.  In the case of CWS 4989, however, there was a release, so Equus’s claim failed on that basis.

1. His Honour concluded that the ‘guiding principle’ was that, where there was an advance conferring a benefit at the lender’s expense under an unenforceable contract, so much as remained unpaid was recoverable in restitution, unless the borrower could point to a term of the loan agreement which, (if enforceable), would make a failure to repay ‘not unjust’.

1. His Honour stated:

The solution which, as a matter of principle, I will adopt in this case is that a lender under an unenforceable contract, by paying the principal sum to or at the direction of the borrower, conferred a benefit upon the borrower at the lender’s expense and that this principal, or so much as remains unpaid, is recoverable in restitution unless the borrower is able to point to a term of the loan agreement which, if enforceable, would have the consequence that its failure to repay the principal is not unjust.[37]

[37]Ibid [146].

Equus’ Restitution Argument

1. Equus did not challenge the trial judge’s findings that:  seven of the eight loans at issue in the appeals were illegal and unenforceable, because they were not severable from transactions made in breach of the prescribed interest provisions of the Code;  the loans would not have been offered or taken up had they not been part of the schemes; and the parties did not intend the loan agreements to stand if the schemes fell away.

1. It was also common ground that authorities such as Amadio Pty Ltd v Henderson (‘Amadio v Henderson’)[38] established that a breach of the prescribed interests provisions did not necessarily preclude the restitution of moneys advanced on a loan contract which was illegal and unenforceable, because non-severable from transactions made in breach of the statutory requirements.

   [38](1998) 81 FCR 149 (Northrop, Ryan and Merkel JJ).

1. On appeal, Equus claimed in restitution the unpaid balance of the loan moneys together with reasonable interest, rather than interest at the rates specified in the unenforceable contracts.

1. At trial, Equus’ restitutionary claims were advanced as merely subsidiary and alternative to the debt claims.  Counsel acknowledged that the basis of the restitution claim was only loosely argued below, and no category or particular ground of unjust enrichment was identified.  The learned trial judge was not assisted by the detailed submissions and voluminous authorities advanced before us.

1. Before us, Equus acknowledged that restitution or unjust enrichment was not a recognised legal principle sufficient in itself to found a cause of action.  Rather, the authorities, while recognising the potential for extension to novel contexts, generally required the claim to be framed within an established category of vitiating factors.

1. In reliance on Roxborough v Rothmans of Pall Mall Ltd (‘Roxborough’),[39] Westdeutsche Landesbank Girozentrale v Islington London Borough Council (‘Westdeutsche’),[40] Australian Breeders Co-operative Society and Amadio v Henderson, and like authorities, Equus submitted that in the present case, the applicable category of restitution was a total failure of consideration.  Rural’s receipt of payments and interest before the failure of the schemes did not preclude reliance on total failure, because in the restitution context, the consideration bargained for was not performance but legally enforceable rights to be repaid principal and interest secured by enforceable securities according to the contractual terms.  Rural received no such rights, either because they never existed or because they ceased to exist ‘because of the avoidance ab initio’ by the borrower.

   [39](2001) 208 CLR 516; [2001] HCA 68.

   [40][1996] AC 669 (Lords Goff, Browne-Wilkinson, Slynn, Woolf and Lloyd) and [1994] 1 WLR 938 (Dillon, Leggatt and Kennedy LLJ).

1. Equus argued that (given that the investors could enforce the loan contracts under s 174(2) of the Code), until they terminated the loan contracts by the filing of the defences, they were obliged to fulfil the obligations thereunder.  When the investors elected to avoid the loan agreements, there was avoidance ab initio and the lender was therefore entitled to the return of its loan moneys, which was best accomplished by set-off.  Equus conceded that its advocated analysis had not been adopted in any relevant authority.  It relied, however, on Australian Breeders            Co-operative Society, where the Full Federal Court, in reliance on Westdeutsche, considered that, in principle, the lender was entitled to the restitution of its loans, the quantum of which should be calculated by deducting from the original loan the establishment fee and all capital repayments reducing the loan balance.  That approach was said to illustrate the Westdeutsche principle of restitution and counter-restitution, which, practically speaking, could be achieved in the present case by set-off. 

1. Equus submitted that as a matter of inference the courts in the prescribed interest cases analysed the unenforceable loan contracts as avoided ab initio because they embarked on the exercise of returning both parties to their pre-agreement position.  Further, those cases made clear that the receipt of some loan repayments were not inconsistent with a total failure of consideration.

1. Equus submitted that the avoidance ab initio analysis fulfilled the protective aims of the prescribed interest provisions, as otherwise, an illegal loan contract would be terminated only for the future.  The intended legislative protection would then not be secured.  The investor’s protection would depend on the time at which it realised that a breach had occurred, or on the extent to which it had fulfilled its own obligations. 

1. Equus nevertheless acknowledged that, on its analysis, the investors in this case gained no obvious advantage in terminating the loan agreements, as prior to termination they could not be compelled to restore or repay anything, while after termination they would be required to do so.

1. Equus further submitted that Rowland v Divall[41] and David Securities Pty Ltd v Commonwealth Bank of Australia (‘David Securities’)[42] supported an analysis of total failure of consideration in the present case.  Further, Westdeutsche had overruled the long criticised holding in Sinclair v Brougham[43] that a void contract could not be, in effect, enforced by allowing a claim for money had and received in quasi-contract.  Equus could therefore obtain restitutionary relief even if it were tantamount to enforcement of the illegal contract.

   [41][1923] 2 KB 500.

   [42](1992) 175 CLR 353; [1992] HCA 48.

   [43][1914] AC 398.

1. Equus argued that regard could be had to the terms of the unenforceable contract only to establish that a gift was not intended and the trial judge therefore erred in holding that the restitutionary claim could be determined by reference to whether, under the terms of the loan contracts, any moneys were payable at the date of the enrichment by receipt of the loan funds.  Equus submitted that his Honour’s approach ignored the restriction in Pavey.It was also inconsistent with Roxborough, in which (although the contract of sale was not avoided and there was no implied term that the retailer be repaid if the tax proved unlawful), recovery was permitted on the basis of total failure of consideration.  Equus further submitted that even if it were correct in principle to determine entitlement to restitution by reference to whether any sum were payable under the terms of the unenforceable loan contract, his Honour erred in holding that nothing was payable at the date of the advances in the case of the express non-recourse loans because immunity was not assured, but rather, dependent upon satisfaction of the condition of timely payment of the two instalments of principal.  Further, under the loan contracts a requirement for additional payments from the proceeds of sale of the fruit also applied. 

1. Equus submitted that Roxborough also supported the proposition that there was a total failure of consideration once the lender was found not to have a contract which entitled it to be repaid, because it had lost the rights which were the basis for payment.  Equus argued that in Roxborough, the High Court looked to severance only because the contracts in that case had not been avoided, terminated or fully performed.  Instead, the underlying substratum or contemplated state of affairs had fallen through, as in Muschinski v Dodds.[44]  Even where there was attributable blame, Roxborough permitted the application of the Muschinski v Dodds principle, as the analogy need not be complete.  It was therefore irrelevant if, in the present case, the party unlawfully promoting the scheme and the lender were essentially ‘one and the same’. 

   [44](1985) 160 CLR 583; [1985] HCA 78.

1. Equus submitted that the English ‘swap’ cases[45] also supported the analysis of a void agreement requiring restoration of the parties to their original condition, as in Amadio v Henderson.  It submitted that the Court of Appeal in Westdeutsche[46] held that, as the bank bargained for an enforceable right to have the entire agreement performed, there was a total failure of consideration, despite some payments of interest.

   [45]See, for example, Westdeutsche;  Guinness Mahon & Co Ltd v Kensington & Chelsea Royal London Borough Council [1999] QB 215;  Kleinwort Benson v Lincoln City Council [1999] 2 AC 349; Kleinwort Benson v Birmingham City Council [1997] QB 380.

   [46][1994] 1 WLR 938.

1. Equus ultimately submitted that it was entitled to restitution whether the loan contracts were void from the outset or subsequently avoided ab initio.  The investors did not receive the loan funds as a mere conduit[47] and were enriched even if their investment in a third party transaction turned out badly. 

   [47]See Goss v Chilcott [1996] AC 788.

The investors’ principal arguments

1. The investors submitted that Rural’s restitutionary claims, if established, were inherently unassignable or at least, were not effectively assigned by the deed of assignment.

1. The investors also submitted that Rural had no claim to restitution, whether in the category of total failure or otherwise, because the practical effect of the scheme transactions was that the investors received no benefit.  They did not effectively receive a loan, but, at most, gained entry into an investment which failed, resulting in a total loss of their interests.

Is restitution available?

Basis of restitutionary claim

1. In Pavey, the High Court made clear that restitution of money paid in connection with an unenforceable contract is not based on implied or quasi-contract but an obligation imposed by law.  The High Court re-evaluated the jurisprudential basis of actions for money had and received under unenforceable contracts.  It rejected the hitherto widely received view that recovery in actions of indebitatus assumpsit for executed work, payments or transfers of property made under unenforceable contracts was founded on quasi-contract.  Instead, Deane J (with whom Mason and Wilson JJ agreed) endorsed the opinion of Goff and Jones,[48] that ‘the obligation to make payment for an executed consideration given and received under an unenforceable contract should now be accepted as lying in restitution or unjust enrichment’.[49]

   [48]The Law of Restitution (2^nd ed, 1978) 320-1.

   [49](1987) 162 CLR 221, 255.

1. In Pavey, a licensed builder carried out building work for which, under an oral contract, the owner was to pay a reasonable remuneration based on prevailing industry rates.  The contract was unenforceable by, but not against, the builder, because it was neither in writing nor signed by the parties, as required by applicable legislation.  At first instance, the trial judge determined that the legislation did not preclude the builder from recovering recompense for its work on a quantum meruit.  The Court of Appeal held that such action would be to enforce the contract, contrary to the legislation.

1. The High Court (Mason, Wilson, Deane and Dawson JJ, Brennan J dissenting), held that the builder was entitled to recompense for its work in quantum meruit ‘on a claim to restitution or one based on unjust enrichment’.[50]  Deane J analysed the nature of the defendant’s obligation for benefits rendered under an unenforceable contract thus:

In such a case, the underlying obligation or debt for the work done, goods supplied, or services rendered does not arise from a genuine agreement at all. It is an obligation or debt imposed by operation of law which "arises from the defendant having taken the benefit of the work done, goods supplied, or services rendered...[51]

[50](1987) 162 CLR 221, 227.

[51]Ibid 255. See Phillips v Ellinson Bros Pty Ltd (1941) 65 CLR 221, 235 (Starke J).

1. His Honour stated:

To identify the basis of such actions as restitution and not genuine agreement is not to assert a judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate. The circumstances in which the common law imposes an enforceable obligation to pay compensation for a benefit accepted under an unenforceable agreement have been explored in the reported cases and in learned writings and are unlikely to be greatly affected by the perception that the basis of such an obligation, when the common law imposes it, is preferably seen as lying in restitution rather than in the implication of a genuine agreement where in fact the unenforceable agreement left no room for one. That is not to deny the importance of the concept of unjust enrichment in the law of this country. It constitutes a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognize such an obligation in a new or developing category of case: see Muschinski v Dodds   [125]; Goff & Jones, op cit, p 11ff. In a category of case where the law recognizes an obligation to pay a reasonable remuneration or compensation for a benefit actually or constructively accepted, the general concept of restitution or unjust enrichment is, as is pointed out subsequently in this judgment, also relevant, in a more direct sense, to the identification of the proper basis upon which the quantum of remuneration or compensation should be ascertained in that particular category of case.[52]

[52]Ibid 256-7.

1. It followed, his Honour said, that an implied contract analysis was fundamentally flawed and reflected, inter alia, discarded fictions, buried forms of action and the conventional tendency to characterise as contractual any common law claim that was not a tort.

1. Deane J observed that where there was either no genuine agreement or an agreement which was frustrated, avoided or unenforceable, the ‘agreement’ could provide the occasion for, and part of the circumstances giving rise to, the imposition by the law of the obligation to make restitution.  His Honour distinguished between a remedy for the independent obligation and enforcing the contractual terms, but considered that the fact that the restitutionary action was founded on an independent obligation ‘does not mean that the existence or terms of the [unenforceable] contract are necessarily irrelevant’.[53]  In such an action, the contractual terms could constitute evidence of whether the conduct in question was done gratuitously and in claims for money lent or paid ‘the obligation to make restitution’ would in many cases ‘plainly involve the obligation to pay the precise amount advanced or paid’.[54] 

   [53]Ibid 257.

   [54]Ibid.

1. Deane J thought that circumstances giving rise to an obligation arose had been explored in reported cases and commentary and it was unlikely to make much difference in practice whether it was founded in quantum meruit or restitution.

1. Mason and Wilson JJ stated:

Once the true basis of the action on a quantum meruit is established, namely execution of work for which the unenforceable contract provided, and its acceptance by the defendant, it is difficult to regard the action as one whereby the plaintiff seeks to enforce the oral contract. 

True it is that proof of the oral contract may be an indispensable element in the plaintiff’s success but that is in order to show that:

(a)       the benefits were not intended as a gift, and

(b)that the defendant has not rendered the promised exchange value …

The purpose of proving the contract is not to enforce it but to make out another cause of action having a different foundation in law.[55]

[55]Ibid 227–8.

1. While the High Court in Pavey articulated the fundamental principles of restitution and unjust enrichment underlying the diverse manifestations of the money counts, it recognised that ordinarily they operated in established categories.

1. In a series of subsequent cases the High Court confirmed that unjust enrichment and restitution do not themselves constitute a cause of action but rather explain the availability of relief in a number of different circumstances.

1. In ANZ v Westpac, the ANZ Bank, due to a clerical error, telegraphically transferred to Westpac Bank for the credit of an overdrawn customer the sum of $114,158.20, instead of the intended sum of only $14,158.  Westpac applied all but approximately $17,000 to reduce the customer’s overdraft, before being apprised of the error.   It recovered only a small amount from the customer, which went into liquidation. 

1. Westpac conceded that had it been alerted to the mistaken payment before dealing with the moneys, it would have been obliged to repay the entire $100,000 excess.  Before the High Court, Westpac contended that it received the money as agent for the customer prior to notice of the mistake.  In their joint judgment, Mason CJ, Brennan, Deane, Toohey and Gaudron JJ, in reliance on, inter alia, Pavey, noted that the common law action for money had and received for recovery of money paid under a mistake of fact was based not in implied contract, but in restitution or unjust enrichment.  Their Honours stated:

… [I]n other words, receipt of a payment which has been made under a fundamental mistake is one of the categories of case in which the facts give rise to a prima facie obligation to make restitution, in the sense of compensation for the benefit of unjust enrichment, to the person who has sustained the countervailing detriment.[56] 

[56](1988) 164 CLR 662, 673.

1. Their Honours recognised that although the contemporary legal principles of restitution or unjust enrichment could be equated with ‘seminal equitable notions of good conscience’[57] and the traditional language of trust was used, the action was nevertheless:

[A] common law action for recovery of the value of the unjust enrichment and the fact that specific money or property received can no longer be identified in the hands of the recipient or traced into other specific property which he holds does not of itself constitute an answer in a category of case in which the law imposes a prima facie liability to make restitution. Before that prima facie liability will be displaced, there must be circumstances (e.g, that the payment was made for good consideration such as the discharge of an existing debt or, arguably, that there has been some adverse change of position by the recipient in good faith and in reliance on the payment) which the law recognizes would make an order for restitution unjust.[58]

[57]Ibid.

[58]Ibid.

1. Their Honours also recognised that although the payee would ordinarily be the person unjustly enriched, if the money were received by an intermediary, there could be uncertainty about which party received the benefit at the moment of payment.  If the intermediary who initially received the benefit handed it on to a principal or other third party, the intermediary could be seen as a mere conduit whose prima facie liability was displaced.

1. Their Honours concluded that Westpac had a good defence to the extent to which, on its customer’s behalf, it paid out the proceeds of the payment before receiving notice of the ANZ’s mistake.  By that time, Westpac had irretrievably paid out a large proportion of the overpayment in honouring cheques drawn on it.

1. The plurality in David Securities acknowledged that the decisions in both Pavey and ANZ v Westpac rejected the view that ‘unjust enrichment is a definitive legal principle according to its own terms and not just a concept’.[59]  Their Honours stated:

Accordingly, it is not legitimate to determine whether an enrichment is unjust by reference to some subjective evaluation of what is fair or unconscionable. Instead, recovery depends upon the existence of a qualifying or vitiating factor such as mistake, duress or illegality.[60]

[59](1992) 175 CLR 353, 378.

[60]Ibid 379.

1. The plurality recognised that before the prima facie obligation to make restitution was displaced, the recipient ‘must point to circumstances which the law recognizes would make an order for restitution unjust.  There can be no restitution in such circumstances because the law will not provide for recovery except where the enrichment is unjust.  It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of defence any matter or circumstances which shows that his or her receipt (or retention) of the payment is not unjust.’[61] 

   [61]Ibid.

1. In Roxborough, Gummow J acknowledged that it was difficult to identify the doctrinal basis of the action for money had and received because the common money counts had ‘occupied an uneasy position in the legal system between the three great sources of obligation in private law, tort, contract and trust’.[62]

   [62](2001) 208 CLR 516, 550.

1. Gummow J stated (citing Mason CJ in Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd[63]) that, unlike tort, the action was not compensatory for loss or damage and ‘was not defeated simply because the plaintiff had recouped the outgoing from others’.[64]  The doctrinal objection to a ‘passing on’ defence was, his Honour said, the unconscientious conduct of the defendant in refusing to account to the plaintiff.[65]

   [63](1994) 182 CLR 51, 78; [1994] HCA 61.

   [64](2001) 208 CLR 516, 542.

   [65]Ibid.

1. Gummow J acknowledged a need for ‘caution in judicial acceptance of any all-embracing theory of restitutionary rights and remedies founded upon a notion of “unjust enrichment”’.[66]  His Honour approved Justice Paul Finn’s extra-judicial caveat that the concept of unjust enrichment could ‘contrive legal analysis’ and adopted Justice Finn’s statement that:

[T]o the extent that [the concept of unjust enrichment] directs attention to outcomes and to the character to be attributed to them, it is capable of concealing rather than revealing why the law would want to attribute a responsibility to one party to provide satisfaction to the other. This is particularly so where, as is so often the case, it is conduct in a relationship or dealing -- an expectation created and relied upon; a mistake not corrected; etc -- which provides the focus of legal attention and which generates the issue of legal policy for which resolution is required. This, I suspect, provides the reason why “unconscionable conduct” and not “unjust enrichment” (a possible effect of that conduct) has achieved the currency it has in Australian law.[67]

[66]Ibid 544.

[67]Ibid 543. See P Finn, ‘Equitable Doctrine and Discretion in Remedies’, in W Cornish et al (eds), Restitution: Past, Present and Future (1998) 251, 252.

1. Gummow J observed that unjust enrichment was not a synonym for the refusal to pay money against conscience in money had and received cases, because clearly the action also lay against defendants who were not on any view enriched.

1. His Honour considered that a case-by-case evolution or development was preferable to ‘top-down’ reasoning, in which theory came first.[68]  In the light of such considerations, Gummow J stated that unjust enrichment should be regarded as a concept, rather than a definitive legal principle.  His Honour considered that preferably, the rules and remedies of restitution should develop in accordance with its auxiliary and gap-filling role to avoid unjust results in specific cases.

   [68]Ibid 544.

1. His Honour analysed Lord Mansfield’s judgment in Moses v Macferlan.[69]  His Lordship there described the action for money had and received as ‘lying in numberless instances’, the question being whether ‘the defendant may retain it with a safe conscience’.[70]  He stated that ‘the gist of this kind of action [is] that the defendant, upon the circumstances of the case is obliged by the ties of natural justice and equity to refund the money’.[71]

   [69](1760) 2 Burr 1005; 97 ER 676.

   [70](2001) 208 CLR 516, 548. See (1760) 2 Burr 1005, 1008–1012.

   [71](1760) 2 Burr 1005, 1012; 97 ER 676, 681.

1. Gummow J considered that Pavey had reinvigorated the flexible translation of equitable and civilian notions to common law actions.  His Honour stated:

Further, in deciding cases such as the present which question the boundaries of the established categories recourse, should be had to the general considerations referred to in Moses v Macferlan.[72]

[72](2001) 208 CLR 516, 553.

1. In Lumbers v W Cook Builders Pty Ltd (in Liq),[73] Gummow, Hayne, Crennan and Kiefel JJ, in their joint judgment, stated:

The second point to be noted is that unjust enrichment was identified as a legal concept unifying “a variety of distinct categories of case”.[74] It was not identified as a principle which can be taken as a sufficient premise for direct application in particular cases. Rather, as Deane J emphasised[75] in Pavey & Matthews, it is necessary to proceed by “the ordinary processes of legal reasoning” and by reference to existing categories of cases in which an obligation to pay compensation has been imposed. “To identify the basis of such actions as restitution and not genuine agreement is not to assert a judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate”.[76] On the contrary, what the recognition of the unifying concept does is to assist “in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise such an obligation in a new or developing category of case”[77].[78]

[73](2008) 232 CLR 535, 665.

[74](1987) 162 CLR 221, 257 (Deane J).

[75](1987) 162 CLR 221, 257.

[76](1987) 162 CLR 221, 256 (Deane J).

[77](1987) 162 CLR 221, 257 (Deane J).

[78](2008) 232 CLR 535, 665 (citations in original) (emphasis in original).

Total Failure of Consideration

1. The High Court’s post-Pavey elaboration of unjust enrichment signals a caveat against loose applications of overly general principles and associated ‘idiosyncratic notions of unfairness’.  It appears inconsistent with unjust enrichment as the independent category of law advocated by jurists exemplified by Professor Birks.[79]  In Australian law, no general principle of unjust enrichment permits restitution simply because the defendant retains a payment made without any legal basis.  Rather, generally speaking, the circumstances must invoke an established category or the claimant must make a case for the extension of relief to a novel context.

   [79]See P Birks, Unjust Enrichment (2^nd ed, 2005) and P Birks, An Introduction to the Law of Restitution (1^st ed, 1985).

1. In the present case, Equus relied upon total failure of consideration.  Although total failure of consideration is a well-established category giving rise to a prima facie entitlement to restitutionary relief, its ambit and pre-conditions are uncertain due, inter alia, to the wide variety of diverse cases in which it is invoked and the inconsistent use of central terms, including ‘consideration’ and ‘rescission’.  As Professor Birks observed ‘the ambiguities have produced something close to intellectual breakdown [as] again and again we slip from one meaning to another without noticing’.[80]  Further, the analyses or outcomes of some recent significant cases have challenged pre-existing orthodoxies.[81] 

   [80]P Birks, Unjust Enrichment (2^nd ed, 2005) 102.

   [81]For example, in Roxborough, restitution was permitted despite the existence of a valid or fully performed contract.  Also see C McLure ‘Failure of Consideration and the Boundaries of Restitution and Contract’ in S Degeling and J Edelman (eds) Unjust Enrichment in Commercial Law (2008) 209-236.

What is a total failure of consideration?

1. Australian courts have predominantly accepted Professor Birks’ view that ‘after discharge of a contract, the recoverability of any payment made before the completion of the contract is dependent on whether the “state of affairs contemplated as the basis or reason for the payment has failed to materialise or, if it did exist, has failed to sustain itself”’.[82]  In that context, consideration is the benefit the claimant bargained for under the contract or purported contract.[83]  While the traditional requirement that the consideration for the payment must have totally failed is frequently, if not universally restated, where the contract is ineffective, the payer’s only remedy may be in restitution.  In such a case, courts have tended to adopt a more liberal approach to total failure of consideration.  Where the payer has received some benefits, the expected consideration or bargain may be so construed that the received benefits do not constitute even a partial satisfaction.  Alternatively, the transaction and the consideration may be held to be divisible, leaving a discrete element of the bargain in relation to which consideration wholly failed, despite the claimant’s receipt of some payments or benefits relating only to a different component of the transaction.   English courts have analysed payments made under a void contract as an absence, rather than a total or partial failure, of consideration.[84]

   [82]P Birks, An Introduction to the Law of Restitution (1^st ed, 1985), 223, approved by McHugh J in Baltic ShippingCompanyv Dillon (1992) 176 CLR 344, 393 and by the plurality in David Securities (1992) 175 CLR 353, 382.

   [83]See David Securities (1992) 175 CLR 353, 382.

   [84]See Westdeutsche, discussed from paragraph [154] to [166] of these reasons.

1. In relation to total failure of consideration, Goff and Jones state:

The proper enquiry is whether the claimant who claims restitution has received any part of the bargained for performance (consideration).  If he has and he is not in a position to make counter-restitution, then his restitutionary claim must fail.  Conversely, if he has received no part of the consideration, or if it is still possible for him to make counter-restitution in respect of the part which he received, then his restitutionary claim should succeed.  In answering the question whether there has been a total failure of consideration, the court must look at the terms of the contract even though it is ineffective.[85]

[85]R Goff and G Jones, The Law of Restitution (7^th ed, 2007) [19-005] 492.

1. McLure JA has stated extra-judicially[86] that failure of consideration for a payment where the state of affairs contemplated as its basis has failed to materialise or sustain itself ‘requires a factual investigation as to the basis or reason for the payment … ordinarily, the basis would be the performance by the other party of its contractual obligations.  In such circumstances, the terms of the contract govern (a) the identification of the consideration for the payment and (b) whether the failure is total or partial’.

   [86]C McLure ‘Failure of Consideration and the Boundaries of Restitution and Contract’ in S Degeling and J Edelman (eds) Unjust Enrichment in Commercial Law (2008) 213.

1. Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Limited, (‘Fibrosa’)[87] concerned a claim for restitution of a deposit paid on an initially valid supply contract frustrated due to war.  Viscount Simon LC distinguished between consideration in the formation of contracts (where it meant the exchange of promises) and in the context of recovery of money for failure of consideration, where it ‘is generally speaking not the promise … but the performance of the promise.  The money was paid to secure performance and if performance fails the inducement which brought about the payment is not fulfilled’.[88]

   [87][1943] AC 32.

   [88]Ibid 48.

I’m asking you about your memory.  Do you have any actual memory about whether or not you received this letter dated 11 January 1988 - - - Let me read the letter and I will tell you.  I believe I did.

You believe you did? - - - Yes.

1. Albeit there was some ambiguity about the ultimate question and Mr Bassat’s response, in so far as the witness conceded a belief that he received the letter, in re-examination, he corrected himself.  The following exchange occurred:

MR PEARCE:  You told my learned friend that you did receive this letter.  Do you recall saying that?  - - -  I do.

Was that a correct answer?  - - -  I believe not.

Why not?  - - -  I just re-read the letter.  I got a lot [of] correspondence a very long time ago and I was confused about the letter, what it said.  I did not get this letter.

1. In cross-examination, Mr Lynch said that cheques came in and would often not be banked for a number of days.  He stated:

MR COUPER: … There was a good deal of incentive for Rural Finance to make sure that when a cheque came into the office it was immediately identified and banked as soon as possible; correct? - - - Not quite correct.  Unfortunately we got Tony involved in the middle of it, I’m sorry, but sometimes he could procrastinate a little bit and the controls and the whole lot of the systems would somehow fall out of bed and everything went through across his desk and he was aware of it.  Sometimes the cheques would come in and be delayed in banking.

MR COUPER:  As you seriously suggesting, Mr Lynch, that Mr Johnson had some interest in delaying the banking of cheque? - - - No, I don’t suggest it.  I’m just saying this is what had occurred.  I would strongly want the cheques or push the cheques in, but because of the type of day and the way that he personally operated, he was the be-all and end-all of the company and sometimes cheques and letters would be struck on his table for a few days.

…

MR COUPER:  Can you just explain to His Honour, if you would, what was the exercise that you actually performed? What were the steps involved? ---With Linda Tedd and myself?

MR COUPER:  Yes? - - - We went to – well, firstly we had to trace the payments.  That was difficult because of the accounting system and the inaccuracy in it being behind also in time was rather difficult.  We had to go back to deposit slips to verify who paid when and what date and then go to the loan agreements to work out when the payments were due because there were different dates between the various loan agreements…

…

... But essentially the payments were dug out from the deposit slips from the various notations that were around the office to trace them through.  You couldn’t just go to a bank statement because a lot of them were identical payments, so you would have a number of bankings of, say, $5,000.

… What I’m really saying is that the accounting records were not up to date and it was difficult to establish who was doing what to whom at what time.

…

1. Mr Bassat, whose testimony his Honour had the advantage of seeing and hearing, gave evidence that it was his usual practice to post a letter on the day of its preparation.  Mr Lynch’s unchallenged evidence established that Rural’s administrative practices were seriously defective and that incoming documents might not be processed for days.   

1. The weight attributable to the notation of the date of receipt on Mr Bassat’s letter was diminished by the lack of evidence of its author.  Mr Lynch’s evidence established that Rural’s record keeping, processing, correspondence and receipt of documents were in disarray, which would have been aggravated by the office move during the period of the letter’s probable receipt. 

1. In my opinion, the findings made by his Honour were open and not against the weight of the evidence.  His Honour was entitled to find as he did. 

Implied Non-Recourse Loan

1. In Bassat 4540, Haxton 5154 and CWS 4989, the investors contended that the trial judge erred in failing to hold that their liability to repay principal and interest was implicitly limited to the proceeds of sale of the farm produce, by reason of the ‘scheme‘ of the loan agreements, entered into in the context of the other concurrent scheme agreements.

1. In particular, the investors contended that their personal liability to repay principal and interest was limited to the payments referred to in clause 3C [of a typical loan agreement] which is set out at paragraph [337] above.

1. The non-recourse provision absent in the 1989 loan agreements, but included in the other loan agreements, was contained in clause 4(iii), set out in paragraph [339].

1. The investors argued that clause 3C(ii) in all loan agreements should be read as if the word ‘only’ were inserted after the words ‘repaid to the lender’ and before the words ‘by direct deduction’.

1. His Honour rejected that construction.  He concluded that in the Bassat 4540, Haxton 5154 and CWS 4989 loan agreements, there was no non-recourse term. 

1. The investors’ submission depended not only upon construing the clauses of the loan agreement as a whole, but also on construing together all the other scheme agreements between the investors and the entities in the Johnson Group.

1. While, as discussed above, the total effect of the interconnected agreements of related companies under common control was relevant to determining what the claimant bargained for in the context of an alleged total failure of consideration, in the contractual context, his Honour’s construction was not erroneous.  The guarantor of the quantum of the proceeds of sale was a separate company, albeit related to Rural, and clause 3 did not place a limit on the balance payable.  Indeed, clause 3 entitled the borrower to repay the entire principal sum at specified intervals.  Clause 3 assisted the lender by identifying a source of repayment and authorising the direct debit of the funds therefrom, but did not limit the borrowers’ liability to that source.

CWS 4989 – The Guarantee

1. In CWS 4989, Equus submitted that the trial judge erred in holding that the investor obtained a valid release pursuant to a document described as a guarantee, which was apparently dated 29 June 1989.

1. The loan agreement in CWS 4989 dated 28 June 1989 did not contain a non-recourse provision.  The guarantee was apparently executed with the common seal of JFM and Rural Finance.  The document was expressed to have been signed, sealed and delivered by A J Johnson.  Despite its apparent date, it was common ground that the guarantee was executed some time in August 1989.  It was received by CWS in mid-August 1989.

1. The common seal of Rural was stated to have been affixed to the guarantee by authority of a resolution of the board of Rural in the presence of two persons, A J Johnson and F E Johnson, whose signatures appeared.       

1. A historical company search of Rural showed that in August 1989, its directors were F E Johnson and Gregory Morris Johnson.  The company search showed that A J Johnson ceased to be a director of Rural on 29 June 1989 (the apparent but not the actual date of the guarantee document).  He did not become a director again until 3 October 1994.  The search did not show A J Johnson as a secretary of Rural in 1989. 

1. The trial judge found that, irrespective of his formal status and appointment, ‘Mr A J Johnson was the moving spirit behind the Johnson group of companies and that all of their significant decisions were his decisions’.[228]

   [228][2007] VSC 553, [83].

1. His Honour found that the apparent signature of F E Johnson was not his signature, as it did not resemble other signatures of F E Johnson in evidence and F E Johnson testified that he could not be sure that it was his signature.

1. The trial judge found that the guarantee was given by A J Johnson personally, JFM and Rural Finance.  In the place where A J Johnson signed, the execution clause read:  ‘signed sealed and delivered by A J Johnson in the presence of…’  There was, however, no attesting witness as contemplated. 

1. The trial judge found that the investor could rely on the assumption of regular execution pursuant to s 68A(3) of the Code, as Equus (although not ‘the company’ referred to therein) was its assignee and contested the assumption in that capacity.

1. His Honour held that the guarantee was effective, irrespective of whether the CWS investor gave consideration, because it was signed sealed and delivered by A J Johnson, albeit unattested by a witness and, pursuant to s 73A of the Property Law Act1958,[229] operated and took effect as a deed.

   [229]Section 73A of the Property Law Act1958 states:

   73A      Sealing of deeds

   An instrument executed by an individual on or after the date of commencement of section 4 of the Property Law (Deeds) Act 1977 expressed to be sealed by that individual but not so sealed shall for all purposes operate and take effect as if it had been so sealed.

1. The trial judge construed the ‘so called guarantee and indemnity’ as a promise to hold CWS harmless, if any of the Johnson Group companies or any other party made a claim for further payment.

1. His Honour did not consider it necessary to make findings on whether the execution of the guarantee was valid, as A J Johnson was a director or a de facto director within the definition in s 5(1) of the Code and, as such, even without the common seal, his signature was sufficient authentication.

1. His Honour concluded that the guarantee was effective to preclude Rural from bringing a proceeding against investor CWS in breach of its promise.  His conclusion was fortified because McPherson JA in Equuscorp Pty Ltd v Glengallen Investments Pty Ltd[230] considered that a similar ‘guarantee’ operated as a release in relation to a loan agreement without an express limited recourse provision. 

   [230][1994] QCA 157.

1. Both before the trial judge and on appeal, Equuscorp submitted that no valid release was granted, on the following bases:

(a)having found that the guarantee document had been executed some time in August 1989 when Anthony Johnson was not a director or secretary of Rural and that the purported signature of F.E. Johnson was in fact not his signature, the learned trial judge should have found that:

(i)there was no assumption which could be drawn by CWS based on s. 68A(3)(b) of the Code; and

(ii)as there was no evidence that in August 1989 Anthony Johnson was held out by Rural as being an officer or agent of the company, there was no basis for any assumption based on s. 68A(3)(c) of the Code; 

(b)accordingly, the learned trial judge should have found that CWS was not entitled to assume that the guarantee document had been duly sealed by the company under s. 68A(3)(e) of the Code;

(c)the learned trial judge should have found that in respect of execution of the guarantee, CWS could not rely on the assumptions set out in s.68A(1) of the Code as those assumptions are only relevant to proceedings where an assertion is made “by the company”. In these proceedings, the assertion was not being made by the company (Rural), but by Equus;

(d)the learned trial judge should have found that the guarantee was not in fact given by Rural in favour of CWS as:

(i)        Frank Johnson (a director of Rural) did not sign the guarantee;

(ii)       Anthony Johnson was not a director or secretary of Rural; and

(iii)there was no evidence that in August 1989 Anthony Johnson was authorised to execute the guarantee on Rural's behalf; 

(e)alternatively, the learned trial judge should have found that the guarantee was not a deed, there was no consideration for the guarantee and, therefore, the guarantee did not release CWS from its obligations pursuant to the loan agreement; and

(f)the learned trial judge erred in law in finding that on its proper construction the guarantee released CWS from its obligations pursuant to the loan agreement.[231] 

[231]Equus’ outline of submission, dated 3 February 2009, [32].

1. Before us, Equus contended that, on the evidence, the trial judge was not entitled to find that A J Johnson was a director or authorised to release an investor from liabilities under a loan agreement.  Further, the investor was not entitled to rely on s 68A(3)(e) of the Code to assume that the seal of Rural was properly affixed and that the document was that of Rural.

1. The investor contended that it could rely on s 68A(3) of the Code because:

(a)Equus, as an assignee, was bound by the equities which bound the assignee.

(b)The irregularity would be overcome by the rule in Royal British Bank v Turquand (‘Turquand’).[232]

(c)A J Johnson was ‘the moving spirit’ behind the Johnston Group and thus a director within the definition of s 5(1) of the Code.

(e)Gummow J did not hold in Australian Capital Television Pty Ltd v Minister for Transport and Communications & Ors (‘Australian Capital Television’)[233] that s 68A(1) of the Code did not apply to an assertion by an assignee standing in the company’s shoes and bound by the equities which bound it. 

(f)The investor could rely on the indoor management rule and the rule in Turquand independently of s 68A.

[232](1856) 119 ER 886.

[233](1989) 86 ALR 119.

1. Section 68A of the Code relevantly provides:

PERSONS HAVING DEALINGS WITH COMPANIES, &c.

68A(1) [Certain assumptions not to be denied by company]      A person having dealings with a company is, subject to sub-section (4), entitled to make, in relation to those dealings, the assumptions referred to in sub-section (3) and, in any proceedings in relation to those dealings, any assertion by the company that the matters that the person is so entitled to assume were not correct shall be disregarded. 

68A(2) [Persons entitled to assume good title from company]    A person having dealings with a person who has acquired or purports to have acquired title to property from a company (whether directly or indirectly) is, subject to sub-section (5), entitled to make, in relation to the acquisition or purported acquisition of title from the company, the assumptions referred to in sub-section (3) and, in any proceedings in relation to those dealings, any assertion by the company or by the second-mentioned person that the matters that the first-mentioned person is so entitled to assume were not correct shall be disregarded.

68A(3) [Persons entitled to make certain assumptions when dealing with company] The assumptions that a person is, by virtue of sub-section (1) or (2), entitled to make in relation to dealings with a company, or in relation to an acquisition or purported acquisition from a company of title to property, as the case may be, are –

(a)that, at all relevant times, the memorandum and articles of the company have been complied with;

(b)that a person who appears, from returns lodged with the Commission under section 238 or with a prescribed State authority[234] under the corresponding provision of a previous law of the State[235], to be a director, the principal executive officer or a secretary of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by a director, by the principal executive officer or by a secretary, as the case may be, of a company carrying on a business of the kind carried on by the company;

[234]Vic., Qld, W.A., Tas.:  For the words “a prescribed State authority” read “the Commissioner for Corporate Affairs or the Registrar of Companies”.

S.A.:  For the words “a prescribed State authority” read “the Corporate Affairs Commission or the Registrar of Companies”.

A.C.T.:For the words “a prescribed State authority” read “the Registrar of Companies”.

[235]A.C.T.:   “Territory”,

Tas.:For “the State” read “Tasmania.”

(c)that a person who is held out by the company to be an officer or agent of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by an officer or agent of the kind concerned;

(d)that an officer or agent of the company who has authority to issue a document on behalf of the company has authority to warrant that the document is genuine and that an officer or agent of the company who has authority to issue a certified copy of a document on behalf of the company has authority to warrant that the copy is a true copy;

(e)that a document has been duly sealed by the company if –

(i)it bears what appears to be an impression of the seal of the company; and

(ii)the sealing of the document appears to be attested by 2 persons, being persons one of whom, by virtue of paragraph (b) or (c), may be assumed to be a director of the company and the other of whom, by virtue of paragraph (b) or (c), may be assumed to be a director or to be a secretary of the company; and

(f)that the directors, the principal executive officer, the secretaries, the employees and the agents of the company properly perform their duties to the company.

1. By s 68A(3)(e), the investor was entitled to assume that the guarantee was duly sealed by the company (and thus its document) if it bore what appeared to be an impression of the seal, and if the sealing appeared to be attested by two persons, one of whom could be assumed to be a director and the other a director or secretary, either because, relevantly under s 68A(3)(c), the persons were held out by the company to be an officer or agent or, under s 68A(3)(b), they appeared to be a director or secretary from returns lodged with the Commission under ss 238 or 263 or with a prescribed state authority under a corresponding provision of a previous law of the State.

1. F E Johnson appeared from the historical company search in evidence to be a director of Rural, so despite the finding that his signature was not genuine, it was not disputed that s 68A(3)(b) applied in relation to it.

1. In contrast, the trial judge accepted that as at August 1989, A J Johnson was shown to have ceased to be a director on 29 June 1989.  Before us, however, Equus acknowledged that there was no return of directors in evidence, but only an historical company search, which did not show the date on which the records of the Commissioner for Corporate Affairs were changed to show that A J Johnson had ceased to act.  Equus submitted that, as the historical company search of Rural listed as a ‘pre-ASIC document’ a Form 61 [viz ‘Particulars and Changes of Particulars in Register of Directors, Principal Executive Officer and Secretaries’] it should be inferred that the relevant received form was a notification of A J Johnson’s cessation as a director.

1. Assuming that to be so, there was no evidence as to the practices and time-lags, if any, involved in the transferral of the information contained in notification forms to the public record in 1989.  The evidence as to whether the public record showed A J Johnson as a director of Rural as at August 1989 was therefore equivocal.

1. It is, however, unnecessary to determine that issue, as in my opinion, the evidence established that (as the trial judge held) A J Johnson was ‘the moving spirit’ of the company.  Further, it established that he was not only a de facto director, but also had implied (if not express) actual as well as ostensible authority to execute releases or vary loan contracts.

1. A J Johnson did not give evidence, but Mr Lynch (the secretary of Rural until 29 June 1989) and F E Johnson gave evidence at trial.  Mr Lynch’s evidence included the following:

MR COUPER:  Are you seriously suggesting, Mr Lynch, that Mr Johnson had some interest in delaying the banking of cheques? - - - No, I don’t suggest it.  I’m saying this is what had occurred.  I would strongly want the cheques or push the cheques in, but because of the type of day and the way that he personally operated, he was the be-all and end-all of the company and sometimes cheques and letters would be stuck on his table for a few days.

…

MR COUPER:  You had no discussion with Mr Frank Johnson about that topic?  - - - No.  If I could just explain the answer.  There was one boss in the Johnson group.  It was Tony Johnson.  So the directions and discussions were all with Tony on the Equus sale of loans et cetera, non-recourse, again with Tony.  Frank didn’t come into it.  He ran the farms.  All he wanted to do was keep his budgets operative and his farm operational. 

1. Mr F E Johnson said in evidence:

MR COUPER:  Mr Johnson, at paragraph 8 of that statement you say, “At an early date in the blueberry project we did discuss our respective roles” – that’s you and your brother, Tony – “in the company and we agreed that Tony would have the power to run Rural on a day to day basis.  Tony did, however discuss with me any matters of importance, particularly in relation to farm operations.”  It is right to say, isn’t it, that if a decision was required that would substantially affect the financial position of the company, it would require an agreement of you and Tony Johnson before that decision was made? - - - No, not entirely.  I really had nothing to do with the overall running of the financial side of the companies at all.  I was based in, call it, the paddock.  I operated and done [sic] all the development work and controlled that side of the operations.  I really had no day to day operations [sic] in the financial or the day to day management of the company.  

1. Although Mr Lynch ceased to be the secretary of Rural from the date of A J Johnson’s formal cessation as a director, he was an employee of the Johnson Group until late 1989[236] and neither his nor F E Johnson’s testimony was restricted to an earlier time.  The evidence entitled his Honour to find that A J Johnson publicly exercised authority as Rural’s directing mind and will. 

   [236]Mr Lynch’s evidence was as follows:

   HIS HONOUR:  … You say you became the company secretary in March 1988 …, right?

   MR LYNCH:  Yes, Your Honour.

   HIS HONOUR:  So you joined the group in October 1987, …

   MR LYNCH:  That’s correct.

   HIS HONOUR:  You became secretary [of Rural] in March 1988.  In 29 June 1989 you resigned as secretary?

   MR LYNCH:  Correct.

   HIS HONOUR:  Did you remain on with the Johnson group after 29 June…?

   MR LYNCH:  Yes, I did.

   HIS HONOUR:  How long did you remain in whatever capacity with the Johnson organisation … ?

   MR LYNCH:  I think three or four months.

   HIS HONOUR:  So to the latter part of 1989?

   MR LYNCH:  Yes.

   HIS HONOUR:  What was your position after you resigned as secretary?

   MR LYNCH:  I was probably the general factotum, sales, manager.

1. As such, A J Johnson fell within s 68A(3)(c).  Equus nevertheless submitted that it was not subject to the assumptions in s 68A(3) because it was not itself the relevant company but only an assignee therefrom.  It relied on Gummow J’s statement in Australian Capital Television that the second limb of s 68A(1) (which dealt with proceedings in relation to a company) was concerned with disregarding assertions by the company.[237]

   [237]See (1989) 86 ALR 119, 156.

1. In my opinion, his Honour’s observation, when taken in context, was not intended to render an assignee immune from the assumptions when it was asserting a company’s rights in a proceeding.  Rather, it was directed at excluding assertions contrary to the assumptions in s 68A(3) by a ‘stranger’ in a proceeding to which the company, the other party or parties to the relevant dealings and the stranger were all joined.  Gummow J also thought that the limitations in the scope of s 68A were supplemented by the rule in Turquand’s case, which continued to develop independently of the statute and would apply in such circumstances to uphold the regularity and validity of the relevant transaction.

1. Moreover, reliance on s 68A was unnecessary, where A J Johnson was, on the evidence, ‘the moving spirit’ of the company, with actual implied authority to perform the functions of the board, including the execution of a release or variation of the loan contract.

1. Section 80 of the Code relevantly provided:

SECTION 80 CONFIRMATION OF CONTRACTS      AND AUTHENTICATION AND EXECUTION OF DOCUMENTS

80(1)    [Power to make, vary or discharge contract]        In so far as the formalities of making, varying or discharging a contract are concerned, a person acting under the express or implied authority of a company may make, vary or discharge a contract in the name of or on behalf of the company in the same manner as if that contract were made, varied or discharged by a natural person.

80(2)    [Effectiveness]        The making, variation or discharging of a contract in accordance with sub-section (1) is effectual in law and binds the company and other parties to the contract.

…

80(7)    [Authentication by signature of officer]    A document or proceeding requiring authentication by a company may be authenticated by the signature of an officer of the company and need not be authenticated under the common seal of the company.

1. In Equuscorp Pty Ltd v Glengallen Investments Pty Ltd,[238] Jerrard JA dealt with the absence of a corporate seal on a guarantee signed only by the signature of             A J Johnson by concluding:

Nothing really turns on the absence of that seal, because the provisions of s 80(1), (2), and (7) of the Companies Act 1989 (Cth), then applicable as part of the Companies (Code) of Queensland by virtue of s 6 of the Companies (Application of Law) Act 1981 (Qld), made the absence of a seal irrelevant.[239]

That conclusion is equally applicable in the present case. 

[238][2006] QCA 194.

[239]Ibid [71].

1. Equus further contended that the guarantee was not under seal and that there was no consideration for the release. While the affixing of the corporate seal does not render a document a deed, in the present case, the guarantee was signed, sealed and delivered by A J Johnson. As the trial judge held, although it was unattested by a witness, by s 73A of the Property Law Act 1958 (insofar as that provision applied), it operated and took effect as a deed.

1. Further, the guarantee, on its face, stated that the consideration was CWS’s entry into the acquisition of 10,500 blueberry trees in the Blueberry Hill Development and applying for a loan from Rural for $667,590.  It is not clear that the total number of trees were acquired as at the date of the guarantee’s execution.  The guarantees therefore contemplated the performance of ongoing or future obligations, which also constituted consideration.

1. I am also satisfied that, as the trial judge found, on a proper construction, clause 2 of the loan agreement confined the payments to those specified and no others.  Albeit imperfectly drafted, apparently by lay persons, the import of the guarantee (whether it be more accurately a release or a variation) was that the investors’ liability under the loan contract was limited to the two capital payments.

Conclusion

1. In my opinion, the appeals by Equus should be dismissed.  The appeals by the investors should be allowed.

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SCHEDULE

Proceeding	Notice of Appeal	Notice of Contention
Haxton 3769/2008 (5154/1998 below) (appellant Haxton)	·   Second payment made by due date (withdrawn) ·   Construction of cl 3C(ii) of loan agreement ·   No assignment of restitutionary claim ·   Appellant not liable to make restitution to Equus	Not applicable
Bassat 3770/2008 (4540/1998 below) (appellant Bassat)	·   Construction of cl 3C(ii) of loan agreement ·   No assignment of restitutionary claim ·   Appellant no liable to make restitution to Equus	Not applicable
Haxton 3772/2008 (5261/1998 below) (appellant Equus)	·   Limitation defence not made out, therefore claim not statute barred	·   No assignment of restitutionary claim
Bassat 3773/2008 (5084/1998 below) (appellant Equus)	·   Equus entitled to be repaid the amount of advance as a matter of restitution ·   Appellant entitled to restitution against Bassat ·   Second payment was made after due date	·   No assignment of restitutionary claim
CWS 3774/2008 (4989/1998 below) (appellant Equus)	·   Equus entitled to be repaid the amount of advance as a matter of restitution ·   Appellant entitled to restitution against CWS ·   ‘Guarantee’ document did not act as release for CWS	·   No assignment of restitutionary claim
CWS 3775/2008 (5223/1998 below) (appellant Equus)	·   Equus entitled to be repaid the amount of advance as a matter of restitution ·   Appellant entitled to restitution against CWS	·   No assignment of restitutionary claim ·   Letter of 16 Nov 1988 was a release
CWS 3776/2008 (5189/1998 below) (appellant Equus)	·   Equus entitled to be repaid the amount of advance as a matter of restitution ·   Appellant entitled to restitution against CWS	·   No assignment of restitutionary claim
CWS 3777/2008 (8227/1997 below) (appellant Equus)	·   Equus entitled to be repaid the amount of advance as a matter of restitution ·   Appellant entitled to restitution against CWS	·   No assignment of restitutionary claim