Integral Home Loans Pty Ltd & Anor v Interstar Wholesale Finance Pty Ltd & Anor (No 2)

[2007] NSWSC 592

CITATION:	Integral Home Loans Pty Ltd & Anor v Interstar Wholesale Finance Pty Ltd & Anor (No 2) [2007] NSWSC 592
HEARING DATE(S):	23 May 2007
JUDGMENT DATE :	3 July 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Brereton J
DECISION:	Dismiss defendants’ oral application for leave to amend defence. Grant leave to defendants to file cross-claim. Declare that upon true construction of the Loan Origination and Management Agreements (LOMA), cl 20.3(c) is void. Declare that first plaintiff and second plaintiff respectively are entitled to be paid, and first defendant is liable to pay, originator’s fee referred to in cl 10.1(a)(ii) of LOMA, notwithstanding that LOMA may have been terminated under clause 20.1(c). Order that first defendant pay to first plaintiff and the second plaintiff respectively originator’s fee referred to in cl 10.1(a)(ii) of LOMA, as and when it falls due, notwithstanding that LOMA may have been terminated under clause 20.1(c). Give judgment that first defendant pay first plaintiff $163,053.81. Give judgment that first defendant pay second plaintiff $6,789.27. Reserve liberty to defendant to apply for a stay.
CATCHWORDS:	PROCEDURE – determination of separate questions – orders to be made consequential upon determination – where plaintiff prima facie entitled to judgment on claim – where defendant seeks leave to file cross-claim which is seriously arguable – whether judgment on claim should be given and if so whether execution should be stayed – PROCEDURE – set-offs and cross-claims – where plaintiff claims fees due under contract – where defendant seeks to set-off and/or cross-claim for damages for breaches of warranty in same contract – where alleged breaches of warranty caused lender to make loans which it would otherwise not have made – approach to measure of damages – whether claim for damages is liquidated or unliquidated – CONTRACT – damages for breach – where alleged breaches of warranty caused lender to make loans which it would otherwise not have made – approach to measure of damages
LEGISLATION CITED:	(NSW) Civil Procedure Act 2005, s 21 (NSW) Uniform Civil Procedure Rules 2005, rr 9.10, 13.2, 28.3, 28.4
CASES CITED:	AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Australia and New Zealand Banking Limited v Squires (NSWSC, Lusher J, 23 August 1982, unreported; affirmed, Court of Appeal, 6 December 1982 Buying Systems (Aust) Pty Limited v Tien Mah Litho Printing Co Pte Ltd (1986) 5 NSWLR 317 Caltex Oil (Aust) Pty Ltd v Miles [1958] QWN 7 Cebora SNC v SIP (Industrial Products) Ltd; [1976] 1 Lloyd’s Rep 271 Court v Sheen [1891] 7 TLR 556 Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938; 2 All ER 593 Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2007] NSWSC 406 Mersey Steamship Co v Shuttleworth (1883) 10 QBD 468 Mersey Steamship Co v Shuttleworth (1883) 11 QBD 531 Mobil Oil Australia Limited v Caulfield Tyre Service Pty Limited [1984] VR 440 Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713; 2 All ER 436 State Bank of New South Wales Limited v Yee (1994) 33 NSWLR 618 Swingcastle Limited v Alastair Gibson [1991] 2 AC 223
PARTIES:	Integral Home Loans Pty Ltd (first plaintiff) Integral Financial Pty Ltd (second plaintiff) Challenger Mortgage Management Pty Ltd (formerly Interstar Wholesale Finance Pty Ltd (first defendant) Challenger Non-Conforming Finance Pty Ltd (formerly Interstar Non-Conforming Finance Pty Ltd) (second defendant)
FILE NUMBER(S):	SC 4009/06
COUNSEL:	Mr N Cotman SC (plaintiffs) Mr M Cohen (defendants)
SOLICITORS:	Vosnakis & Associates (plaintiffs) Deacons (defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRERETON J

Tuesday, 3 July 2007

4009/06 Integral Home Loans Pty Limited & Anor v Interstar Wholesale Finance Pty Limited & Anor

JUDGMENT

1 HIS HONOUR: On 27 April 2007 I delivered a judgment [[2007] NSWSC 406], with which these present reasons should be read, in which I held that clause 20.3(c) of each LOMA was void as a penalty, and that the two preliminary questions ought to be answered as follows:

(1) Whether, on the true construction of the LOMA, clause 20.3(c) is void as a penalty: Yes.

(2) If the answer to (1) is in the affirmative, whether Integral is entitled to trailer commission, notwithstanding the termination of the LOMA by the defendants: Yes, without prejudice to any argument that Interstar is entitled to deduct the reasonable costs of a replacement manager.

2 I ordered that the defendants pay the plaintiffs’ costs of the separate questions, and I expressed the tentative view, without concluding any argument on the issue whether Interstar was entitled to deduct the reasonable costs of a replacement manager, that the holding of the majority in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 suggested that the consequence of clause 20.3(c) being a penalty was that it was absolutely void, so that there would be no room for its enforcement to the limited extent that recovery under it would not be disproportionate to the loss.

3 The parties did not agree upon what orders should be made consequent upon the determination of the separate questions. Integral proposed that Interstar be required to furnish an account of the trailer commission which ought to have been paid, with a view to obtaining a judgment for the unpaid arrears, and that directions be made for submissions on any claim by Interstar for deduction of the cost of a replacement manager. Integral also foreshadowed that, the preliminary questions having been resolved substantially in its favour, it might not be interested in further litigating the dispute as to whether or not Interstar was entitled to terminate the LOMAs. Interstar, on the other hand, simply proposed that it be given leave to file and serve an amended defence and cross-claim and directions be made for the further preparation of the balance of the claim and the cross-claim for final hearing. It opposed any suggestion that any final relief be granted at this stage.

4 As a result, on 2 May 2007, I directed that Interstar serve drafts of its proposed amended defence and cross-claim, an affidavit “setting out with particularity the fees payable pursuant to cl 10 of each LOMA in respect of all settled loans and loan balances to date, on the footing that there is no deduction from them of the type referred to in clause 20.3(b)”, and for written submissions on the question as to whether a deduction of that type should apply. Pursuant to those directions, Interstar has served an affidavit of its Chief Financial Officer, Andrew Loddington Hall, sworn 15 May 2007, which deposes that the fees payable pursuant to cl 10 of each LOMA in respect of all settled loans and loan balances in respect of the period from 1 April 2006 to 30 April 2007 on the footing that there is no deduction from them of the type referred to in clause 20.3(b), are, in respect of Integral Home Loans, $163,053.81, and in respect of Integral Financial, $6,789.27.

5 The following issues now require resolution:

· whether Interstar is entitled to deduct, from the trailer commission that it is otherwise obliged to pay, the reasonable costs of a replacement manager; and

· what orders should now be made consequent upon determination of the separate questions, including whether Interstar should have leave to file an amended defence and a cross-claim.

6 Integral contends that Interstar is not entitled in the circumstances to deduct the reasonable costs of a replacement manager from the trailer commission to which Integral is entitled, and that it should have a declaration that it is entitled to continue to receive trailer commission, an order that Interstar remit trailer commission to it as and when it becomes due in accordance with the terms of the LOMAs, and judgment for the outstanding balance of trailer commission unpaid to date. Interstar, on the other hand, submits that it is entitled to deduct the reasonable costs of a replacement manager, and that no final orders should be made at this stage, but merely directions for the future conduct of the balance of the proceedings, including a grant of leave to amend the defence and leave to file a cross-claim.

No deduction of costs of a replacement manager

7 Where a contractual provision is void as a penalty, it is absolutely void, and there is no room for its enforcement on a limited basis – for example, to the extent that recovery under it would not be disproportionate to the loss suffered [AMEV-UDC v Austin]. It follows that cl 20.3(c) is absolutely void.

8 Clause 25 of each LOMA provides that any provision of the LOMA that is held to be invalid, illegal or unenforceable shall be severed, and the remaining provisions not in any way affected or impaired. It follows that clause 20.3(c) is to be severed, and the remainder of the agreement construed without reference to it.

9 It is clause 20.3(b) that authorises, in the circumstances in which it applies, the deduction from trailer commission of the reasonable costs of a replacement manager. The circumstances in which it operates are where there is a termination of the LOMA “pursuant to clause 20.1(b) or (d)”. It does not purport to operate in the case of termination pursuant to clause 20.1(c). The severance of clause 20.3(c) – which did purport to operate in the case of termination under clause 20.1(c) – cannot authorise the reading into clause 20.3(b) of a reference to clause 20.1(c), to which it was not originally intended to apply (because such a termination was covered by 20.3(c)). Accordingly, if the termination was pursuant to clause 20.1(c), the operation of clause 20.3(b) is not engaged, and there is no contractual entitlement to deduct the reasonable costs of a replacement manager.

10 Until now, Interstar has accepted that its termination of the LOMAs was pursuant to clause 20.1(c) – which provides for termination immediately upon Integral having engaged in any proven deceptive or fraudulent activity in relation to an application for a settled loan, or where Interstar considers, in its reasonable opinion, that Integral has done so. That the purported termination was under clause 20.1(c) was asserted by Integral in its Statement of Claim [paragraph 18], and admitted by Interstar in the defence [paragraph 18]. Moreover, the defence in paragraph 19 asserted that “the termination was for cause within the meaning of sub-clause 20.1(c)”. The pleading contained not the slightest hint of any suggestion that the termination was pursuant to clause 20.1(b) – which provides for termination upon Integral breaching any term or condition of the agreement and the breach not being rectified within 14 days after written notice of the breach is given by Interstar to Integral. Had Interstar suggested that the termination was reliant upon clause 20.1(b), no question of a total forfeiture of trailer commission would have arisen, because clause 20.3(b) provides for a continued entitlement to trailer commission, albeit subject to deduction of replacement manager’s costs, in the case of such a termination.

11 Mr Cohen suggested that, in the course of his oral argument on the original application for an order that there be a determination of the separate questions, he had adverted to the possibility of reliance on clause 20.1(b). I am not prepared to doubt Mr Cohen’s recollection and, accordingly, I will proceed on the basis that the possibility of reliance on clause 20.1(b) had been foreshadowed, rather than refusing to allow that matter now to be raised on the basis that the Court would not have embarked on determination of a separate question had the prospect of 20.1(b) being invoked been raised. Rather, I will consider whether there is now an arguable basis for the engagement of clause 20.3(b) by a termination under cl 20.1(b).

12 The entitlement to terminate under cl 20.1(b) depends upon a combination of two events: first, breach of a term or condition of the LOMA; and secondly, failure to rectify that breach within fourteen days after written notice of the breach is given. There is an entitlement to terminate only when both of those events have occurred.

13 Interstar’s termination letter of 17 March 2006 did not purport to give notice of a breach of any term or condition of the LOMA antecedent to termination, but rather purported to communicate Interstar’s (already made) decision to terminate, stating the reasons for that decision. I accept that, ordinarily, a termination can be justified retrospectively by reasons not known or advanced at the time of termination, but that principle is not in point; it does not bear on a requirement to give notice of breach anterior to termination. Even if the reference in the termination letter to “the failure to satisfactorily follow the operational procedures for loan origination and management outlined in Interstar’s Originated Guidelines Manual” was sufficient to identify a breach, in the present context that is beside the point, because the letter purported to be a communication of a decision to terminate, not a notice anterior to a possible termination if the breach were not rectified. Moreover, there is no suggestion of any subsequent act of termination after the expiry of any fourteen day notice period.

14 The purported termination, the validity of which it seems Integral may no longer wish to dispute, was under clause 20.1(c). If Interstar effectively terminated the LOMAs forthwith under clause 20.1(c), it cannot terminate the same contract a second time 14 days later under clause 20.1(b): a contract is susceptible of being terminated only once.

15 The steps necessary to effect termination under clause 20.1(b) were not taken: 14 days notice of breach anterior to termination was not given. Accordingly, clause 20.3(b) was not engaged.

16 It will be necessary to consider, in due course, whether Interstar would be entitled to set off, against the trailer commission which it must pay, any damages occasioned by the breach on account of which it has terminated. However, assuming for present purposes that it is entitled to do so, the incurring by Interstar of the costs of a replacement manager is not damage occasioned by any relevant breach, but rather a result of Interstar electing to appoint a replacement manager.

17 It follows that the surviving obligation to pay trailer commission is not qualified by any entitlement to deduct, or set-off, the costs of a replacement manager. It is, therefore, unnecessary to embark upon resolution of the differences between the parties as to what would have been reasonable remuneration for a replacement manager.

What orders should now be made?

18 (NSW) Uniform Civil Procedure Rules 2005, r 28.3 provides as follows:

If any question is decided under this part, the Court must, subject to rule 28.4:

(a) cause the decision to be recorded; or

(b) give or make such judgment or orders as the nature of the case requires.

19 Rule 28.4 provides:

(1) This rule applies if the decision of a question under this division:

(a) substantially disposes of the proceedings or of the whole or any part of any claim for relief in the proceedings; or

(b) renders unnecessary any trial or further trial in the proceedings on the whole or any part of any claim for relief in the proceedings.
(2) In the circumstances referred to in the subrule (1), the Court may, as the nature of the case requires:

(a) dismiss the proceedings or the whole or any part of any claim for relief in the proceedings; or

(b) give any judgment; or

(c) make any other orders.

20 The intent of preliminary question and answer 2 was that the assumed fact of termination under cl 20.1(c) does not result in forfeiture of Integral’s right to receive trailer commission. It does not follow that Interstar must necessarily pay the trailer commission without any deduction, and Interstar advances three main reasons for contending that it is not presently liable to pay trailer commission, so that no order to that effect should be made at this stage.

· First, it contends that it has incurred losses on various of the settled loans originated by Integral, the subject of its proposed cross-claim, and that those losses may be set-off by it against any liability to pay trailer commission, either as “mutual debts” pursuant to (NSW) Civil Procedure Act 2005, s 21, or as a contractual set-off under cll 10.6 and 10.8 of the LOMAs.

· Secondly, it contends that “legal proceedings have commenced” within the meaning of the LOMA, so that Integral is not entitled to receive originator’s fees by operation of cl 10.5(a) of each LOMA; and

· Thirdly, it contends that any entitlement of Integral to trailer commission under cl 10 of each LOMA was subject to a condition precedent that the warranties of Integral contained in the LOMA remained true and correct.

21 The second and third of these contentions can be disposed of relatively shortly. As to the contention that trailer commission is not payable because “legal proceedings have commenced” within the meaning of the LOMAs, it can be assumed that legal proceedings have commenced, within the definition, in respect of some settled loans. Upon that assumption, trailer commission is not payable during the currency of those legal proceedings, for those loans in respect of which proceedings have commenced. But the commencement of legal proceedings in respect of a loan does not affect the entitlement to trailer commission for other loans. Quite plainly, commencement of legal proceedings in respect of one settled loan does not affect Integral’s entitlement to commission in respect of other loans. As to those loans in respect of which legal proceedings have commenced, originator’s fees in respect of them were not “payable pursuant to cl 10 of each LOMA” and, conformably with the direction made on 2 May 2007, should have been excluded from the calculation in Mr Hall’s affidavit. I assume that Interstar has correctly undertaken the exercise required by that direction, more so because it would have been in its interest to exclude commission that was not payable for any reason, and because it has not provided any detailed particulars of its calculation such as would enable the Court to review it.

22 As to the contention that Integral’s entitlement to trailer commission under cl 10 is subject to a condition precedent that the warranties in cl 9 of each LOMA remain correct, normally, the remedy for breach of warranty is damages equivalent to the difference between the actual position of the other party following the breach, and the position in which it ought to have been had the warranty been true. A mere breach of warranty by one party does not excuse the other from performing its contractual obligations. A misrepresentation may justify rescission by the other party, but absent rescission its contractual obligations are unaffected. Integral’s warranties did not amount to guarantees of the loans it originated. There is nothing in the terms of either LOMA that would lead to the exceptional result that the continuing accuracy of the warranties was a condition precedent to the entitlement to trailer commission, as distinct from their inaccuracy giving rise to a cross-claim for damages for breach of warranty.

23 The first contention, however, requires closer consideration. Interstar contends that it is entitled to set-off against any amounts due by it to Integral for trailer commission – either pursuant to Civil Procedure Act, s 21, or pursuant to cl 10.6 (in the case of the Integral Home Loans) or 10.8 (in the case of Integral Financial) of the LOMAs – losses incurred by it on certain settled loans, said to amount to $484,767.26 at present, and potentially to involve up to a further $1,552,234.20, which it contends were occasioned by breaches of the relevant LOMA, in respect of which it claims indemnity under cl 18 of the LOMA. By paragraph 24 of the proposed amended defence, Interstar contends that, by operation of cll 18.2 and 18.3 of the LOMAs, Integral is indebted to Interstar for sums exceeding the amount of outstanding trailer commission, and purports to set-off the outstanding commission against that indebtedness pursuant to Civil Procedure Act, s 21. The proposed amended defence also invokes cl 10.6 of the first LOMA and cl 10.8 of the second LOMA to plead a contractual entitlement to set-off the amounts to which Interstar says it is entitled under the indemnities contained in cl 18 of the LOMAs.

24 Civil Procedure Act, s 21, relevantly provides as follows:

21 Defendant’s right to set-off
(1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff’s claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set off was filed, whether or not the mutual debts are different in nature
...
(6) In this section, debt means any liquidated claim.

25 The statutory right of set-off under s 21 is limited to liquidated claims.

26 Clause 10.6 of the Integral Home Loans LOMA and cl 10.8 of the Integral Financial LOMA provide as follows:

A manager, may in its absolute discretion, deduct or set off any amounts required to be paid by the originator to that manager, the other manager or the trustee under any provision in this Agreement or any other account whatsoever from any amounts (including the up front fee and the originator’s fee) payable at any time by that manager or the trustee to the originator.

27 That provision authorises the setting-off against outstanding trailer commission of “any amounts required to be paid” by Integral to Interstar under any provision in the LOMA or in any other account. In my view, there is an “amount required to be paid” for this purpose only if it is due and payable – which connotes a liquidated sum.

28 The indemnity provisions in cl 18 of the LOMAs, upon which Interstar relies for this purpose, are relevantly as follows:

18.1 The originator agrees to indemnify and keep indemnified each manager and the trustee from and against any damages, losses, outgoings, costs, charges or expenses suffered or incurred by each manager or the trustee directly or indirectly in respect of:
(a) any breach of the originator’s obligations, warranties, representations and covenants under this Agreement or a manual or any error or omission or misrepresentation whether innocent or fraudulent by the originator or the originator’s representative;
(b) any action, claim or demand made or brought in respect of or otherwise arising from or in connection with any breach of the warranties contained in this Agreement or the fact that any of those warranties if untrue at any time;
(c) any settled loan where an insurer fails to indemnify (or gives notice to any person of its intention to deny liability, either wholly or in part to indemnify) any obligator and/or the trustee under an insurance contract where a claim is or may be made under an insurance contract and such failure to indemnify results either in whole or in part from any fraud, negligence, misrepresentation, act, omission or default of the originator or originator’s representatives;
...
(e) the provision of any incomplete or inaccurate applicant data;
... .
18.2 Without limiting the provisions of clause 18.1, in the event of any breach or default under this Agreement by the originator or the originator’s representatives, the originator agrees to indemnify each manager and/or the trustee against:
(a) all fees (including legal fees and disbursements on a solicitor and own client basis) actions, claims, demand, losses, damages, proceedings, compensation, costs, charges and expenses whether during or after the term hereof incurred by each manager and/or the trustee in connection with or resulting from this Agreement consequent upon any breach or default under this Agreement by the originator or in rectifying such breach or default or procuring the rectification of such breach or default;
(b) any loss or damage suffered or incurred by each manager and/or the trustee as a result either directly or indirectly of any breach of or default by the originator under this Agreement including, without limitation, any consequential loss or damage including any financial loss or damage suffered by a manager under any Agreement between the trustee and that manager;
... .

29 Interstar contends that, as a result of alleged breaches by Integral of the LOMAs, Interstar has incurred the cost of loan management services, and losses in respect of a number of settled loans, in respect of which Interstar claims indemnity under cl 18. Unfortunately, the proposed amended defence does not descend to particularity in identifying the breaches relied on in respect of each loan, but, generally speaking, this can be worked out from some of the supporting evidence.

30 For reasons already explained, I do not accept that the incurring of the cost of loan management services is damage occasioned by any relevant breach; it was occasioned by Interstar’s decision to terminate the LOMAs and to engage alternative loan management services, and not by the relevant breaches.

31 As to the loans in respect of which Interstar claims it has incurred losses, the warranties said to have been breached are numerous. The more significant of them are:

· Clause 5.1 of the LOMAs obliged Integral to submit loan applications to Interstar, carry out checks of loan applicants through a credit bureau approved by Interstar, provide applicants with written correspondence setting out proposed terms of a loan, and arrange for the valuations of any property offered as secured security;

· Clause 6.1 obliged Integral to act, and to ensure that all its officers and employees acted, with a high degree of professional skill care and diligence and in accordance with good mortgage origination and management practice so as to protect the interests of Interstar;

· Clause 6.2 obliged Integral to ensure that all requirements contained in the Guidelines Manuals were complied with, to act honestly with their dealings with all parties and not engage in their dealings with all parties in misleading, deceptive, or unethical conduct, and to notify Interstar in writing once they became aware of any breach of any warranty or covenant in the LOMA and as soon as practicable rectify it;

· Clause 8.1 obliged Integral strictly to adhere to and comply with the obligations of the originator under the provisions of the Guidelines Manual;

· By cl 9.1, Integral warranted, represented, and undertook that (1) each settled loan complied with all of the terms, conditions and requirements of the Guidelines Manual, and (2) in respect of each settled loan, Integral had no knowledge of any facts, circumstances or conditions that may reasonably be expected to cause a prudent lender to regard a mortgage as an unacceptable investment or materially adversely affect the valuable marketability of the loan;

· By cl 9.2, the warranty and indemnities contained in the LOMA were deemed to be repeated at the time each loan was settled;

· Paragraph 5.8 of the Guidelines Manual stipulated certain documentation to be provided to Interstar in respect of each loan application;

· Paragraph 6.1 of the Guidelines Manual provided that if Integral used third party introducers it must verify all information provided to it; and

· Paragraph 6.3 of the Guidelines Manual required Integral to research and verify employment information on all loan applicants and to retain verification documents on its file.

32 There are eight loans in respect of which Interstar says there is a current quantified loss. (It is unnecessary to comment on the others, because on no view is there yet a quantified loss capable of being the subject of a liquidated claim in those cases).

· The Azar loan. There is a prima facie case that the employer’s letter evidencing the loan applicant’s salary had been fraudulently altered, and that at least that appropriate verification of employment information was not carried out. The outstanding balance on the account, after realisation of the security property and payment of the mortgage insurance claim, at the default interest rate, is $299.12 plus fees of $120.

· The Geagea loan. There is a prima facie case that the employment income material submitted in connection with the loan application was inaccurate, and thus that the appropriate verification had not been performed. Interstar claims the outstanding balance (after realisation of security and payment of mortgage insurance) of $24,797.85 plus fees of $160.

· The Opostolas loan. After realisation of security and of mortgage insurance, Interstar claims the outstanding balance of account (with interest at the default rate) of $31,071.01 plus fees $140. However, it is not apparent what breach of warranty is alleged in respect of this loan.

· The Nikolovski loan. There is a prima facie case that information provided about the loan applicant’s employment was false, and at least that there had been inadequate verification of employment information. Interstar claims an outstanding balance of $96,946.45, after realisation of the security and apparent rejection by the mortgage insurer of the claim, and including interest at the default rate.

· The Apoleski loan. Interstar claims an outstanding balance of $728,851.53 (including interest at the default rate), before any realisation of security and of any mortgage insurance; the security property was sold for $570,000 but it is unclear whether the sale would proceed to completion. It is not apparent what breach of warranty is alleged.

· The Chakour loan. There is some basis, falling short of a prima facie case, for thinking that false employment information was supplied and not detected. The security has been realised, and a mortgage insurance claim is pending in respect of the outstanding balance of $169,718.92.

· The Armani loan. After realisation of security and mortgage insurance, Interstar claims a loss (including default interest) of $184.28 and fees of $820.

· The Fenianos loan. There is no outstanding amount claimed.

33 Accordingly, I accept that in the cases of Azar, Geagea and Nikolovski, there is at least a prima facie case of breach of warranty. The losses claimed by Interstar in those cases total $122,323.42, which does not exceed the amount of the outstanding trailer commission, although the total potential losses may exceed it. Interstar’s claim of $484,767.26 results from inclusion of all the above loans, less provision for realisation of security and mortgage insurance.

34 However, in each case, the loss claimed by Interstar is the outstanding balance of the loan, in some cases after realisation of the security and a claim on mortgage insurance, and in most if not all cases including interest to date at the higher (default) rate provided for in the loan documentation. This is not the correct approach to quantification of Interstar’s warranty claims against Integral. Although speaking in generalities – because the pleading does not permit much closer analysis – those claims are, in essence, that Integral’s warranties and representations induced Interstar to make loans to borrowers which, had Integral’s warranties been true, Interstar would not have made. Integral is not a guarantor of the loans, and Interstar’s claims against Integral are properly quantified by reference to the difference between Interstar’s actual position as a result of having made the relevant loan, and the position in which it would be had it not made that loan. If Interstar is entitled to damages for breach of warranty, those damages are the amount that will restore Interstar to the position in which it would have been had it not made the relevant loans, as distinct from had the relevant loans been fully performed. The measure of that amount is not the outstanding balance of each relevant loan account, especially insofar as it includes interest at the default rate, and the recoverable damages do not include the contractual interest payable by the borrower but unpaid – since Interstar would not have been entitled to receive any interest from the borrower if the advances had not been made; Interstar may or may not have recovered equivalent interest from another borrower, but in any event that would not have involved default interest [Swingcastle Limited v Alastair Gibson [1991] 2 AC 223, 233-8, 239; State Bank of New South Wales Limited v Yee (1994) 33 NSWLR 618, 630-637 (Giles J)].

35 This analysis makes clear that whatever claims Interstar has against Integral for breach of warranty, they are not liquidated claims. It follows that there is no “liquidated claim”, nor “any amounts required to be paid” presently due from Integral to Interstar that may be set-off against the outstanding trailer commission, under Civil Procedure Act, s 21, or under the set-off clause in the LOMA.

36 As the proposed amendments to the defence are, in substance, directed to setting up termination under clause 20.1(b), and the set-offs, each of which I have found untenable, there is no utility in granting leave to file the proposed amended defence. No defence to Integral’s claim for trailer commission remains. In my view, the decision of the separate questions substantially disposes of the claim for trailer commission in the proceedings, and renders unnecessary any further trial on that claim. In those circumstances, the Court is authorised, by r 28.4(2)(b) to give any judgment, and by r 28.4(2)(b)(c) to make any other order, as the nature of the case may require. Alternatively, authority to make such judgment or order as the nature of the case requires is conferred by r 28.3.

37 However, although the cross-claim is long out of time, it has been foreshadowed for some time. The claims for breach of warranty asserted in it have not been shown to be unarguable; to the contrary, there is at least a prima facie of breach of warranty in respect of several of the loans. On the material presently before the Court, while I do not accept that it can be quantified by reference to the outstanding balance of each loan, the cross-claim is a seriously arguable and potentially substantial one. It is not necessary that I find that there is a seriously arguable case of fraud against Integral; it is sufficient that it is seriously arguable, on any view, that false employment information was provided to Interstar, and that if Integral had done the things that it warranted it had done, such information could not have been provided. No prejudice has been identified as arising from permitting the cross-claim to be raised at this stage. Accordingly, Interstar should have leave to file its proposed cross-claim.

38 A question then arises as to whether Integral should recover judgment for the amount of the outstanding trailer commission, and if so whether it should be at liberty to enforce any such judgment, pending determination of the cross-claim.

39 Universal Civil Procedure Rules, r 9.10, relevantly provides:

(1) A cross-claim may proceed even if:

(a) judgment has been entered on the originating process in the proceedings from which the cross-claim arises or any other cross-claim in the proceedings ...

40 Although not directly applicable to the present circumstances, Universal Civil Procedure Rules, r 13.2, which applies where summary judgment is given on a claim, is closely analogous. It provides:

If the Court gives judgment against a party under r 13.1, and that party has made a cross-claim against the party obtaining the judgment, the Court may stay enforcement of the judgment until determination of the cross-claim.

41 Where a triable cross-claim is pending, the Court may decline to give immediate judgment on the original claim, or stay execution of any such judgment, having regard to, inter alia, the nature of the competing claims, the parties against whom the cross-claim has been brought, the arguability of the cross-claim, and other discretionary considerations including hardship.

42 A stay will ordinarily not be granted where the original claim is on a cheque [Cebora SNC v SIP (Industrial Products) Ltd; [1976] 1 Lloyd’s Rep 271; Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713, 2 All ER 436; Mobil Oil Australia Limited v Caulfield Tyre Service Pty Limited [1984] VR 440; Buying Systems (Aust) Pty Limited v Tien Mah Litho Printing Co Pte Ltd (1986) 5 NSWLR 317], nor where the judgment is based on non-payment of an amount due under a mortgage [Australia and New Zealand Banking Limited v Squires (NSWSC, Lusher J, 23 August 1982, unreported; affirmed, Court of Appeal, 6 December 1982)], nor where payment is secured under a direct debit arrangement [Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938; 2 All ER 593]. The principle that underpins these cases is that it was implicit in the agreement or arrangement between the parties that the judgment creditor was entitled to be in a position equivalent to having the funds in its hands pending resolution of any dispute.

43 On the other hand, immediate judgment may be refused, or a stay may be granted, where the cross-claim is for damages for breach of the contract on which the plaintiff successfully sued, or for misrepresentation in connection with that contract. In Mersey Steamship Co v Shuttleworth (1883) 10 QBD 468; affirmed on appeal, Mersey Steamship Co v Shuttleworth (1883) 11 QBD 531, the plaintiff brought a liquidated claim for freight due under a contract for carriage of goods. The defendant admitted that the sum claimed was due and payable to the plaintiffs, but set up a counter-claim for unliquidated damages, exceeding the amount of the claim, for breach of the terms of the contract. The plaintiff applied for judgment on admissions and for payment of the amount claimed into court, to abide the result of the cross-claim. The Queens Bench Divisional Court refused to allow judgment to be entered, and its decision was upheld in the Court of Appeal. It was accepted that a counter-claim would not in every case prevent an order for payment into Court being made – for example, if the counter claim was frivolous or unsubstantial or there was some other “special reason” – but the flavour of the judgments, both in the Divisional Court and in the Court of Appeal, is that absent “special reason” a judgment on a claim for a liquidated sum under a contract will not be enforced pending determination of a triable cross-claim for damages for breach of the same contract.

44 In Court v Sheen [1891] 7 TLR 556, the plaintiff claimed £700 for money lent; the defendant admitted in excess of £100 but counter-claimed for a much larger amount. The Queens Bench Divisional Court affirmed a decision to grant the defendant unconditional leave to defend, holding that in such a case the plaintiff was not entitled to immediate judgment for the amount admitted, as it was not admitted unconditionally but only subject to the counter-claim, which might turn out to be for a larger amount.

45 In Caltex Oil (Aust) Pty Ltd v Miles [1958] QWN 7, the plaintiff applied for summary judgment on a liquidated claim, where the defendant counterclaimed for damages for misrepresentation. The Supreme Court of Queensland (Townley J) gave leave to enter final judgment on the claim but stayed execution until the trial of the cross-claim or further order, expediting the trial of the cross-claim.

46 As Integral has made good its claim for trailer commission and no tenable defence to that claim remains, there is no good reason why judgment should not be given on that claim. The question then is whether there should be a stay. In favour of a stay weigh the considerations (1) that the cross-claim arises out of the same contract as that on which Integral sues; (2) that it appears more than seriously arguable and potentially substantial; and (3) that, as Interstar submits, Integral is not liable to pay its sub-originators, except to the extent that it receives trailer commission from Interstar: Integral’s standard form of Introducers Agreement for its sub-originators provides, by sub-clause 4.2(c), that Integral is not required to pay commission, including in the nature of trailing fees during the currency of a loan, to a sub-originator unless and until full payment has been received from Interstar. Against a stay are the circumstances (1) that the LOMAs authorised setting-off only of “amounts required to be paid”, not mere unliquidated claims – which suggests that the intention of the parties was that, unless and until there was an “amount required to be paid”, the obligation to pay originator’s fees prevailed; (2) that the cross-claim for breach of warranty, though it has been mentioned in the past, has only been formulated at a very late stage – indeed, after Integral had succeeded on the separate question; and (3) that there is no claim of hardship by Interstar.

47 To my mind, the circumstance that the parties address in their agreement the entitlement to set-off “amounts required to be paid”, but did not extend it to authorise withholding of amounts the subject of pending unliquidated claims, is telling – because it indicates a contractual intention that in the present circumstances Integral rather than Interstar should have the benefit of the funds. So is the circumstance that it has taken until after determination of the separate questions for Interstar to formulate its warranty claims: the case for a stay would have been far more compelling had those claims been brought promptly following the institution of proceedings, and it is unreasonable that Integral should be kept out of the funds to which it is entitled because of the time that Interstar has taken to formulate its cross-claim. Accordingly, I am not persuaded, on the current state of the evidence, that there should be a stay of execution pending determination of the cross-claim.

48 This is a provisional view, because although a stay was implicitly a fall-back position for Interstar’s submissions, and was adverted to in submissions on behalf of Integral, either party might reasonably contend that no formal application for a stay was ever made, and that it did not adduce evidence which it might have wished to adduce on such an application. Accordingly, I would reserve liberty to Interstar to apply for a stay, if so advised.

49 For the foregoing reasons, I make the following orders:

1. Order that the defendants’ oral application for leave to amend the defence be dismissed.

2. Grant leave to the defendants to file, by 10 July 2007, a cross-claim in the form of the draft first cross-claim initialled by me, dated this day and placed with the papers.

3. Declare that upon the true construction of the Loan Origination and Management Agreement (LOMA) between the defendants and the first plaintiff, dated 18 March 2003, and the LOMA between the defendants and the second plaintiff, dated 18 November 2005, clause 20.3(c) of each LOMA is void.

4. Declare that the first plaintiff and the second plaintiff respectively are entitled to be paid, and the first defendant is liable to pay, the originator’s fee referred to in clause 10.1(a)(ii) of each LOMA, notwithstanding that the LOMA may have been terminated under clause 20.1(c).

5. Order that the first defendant pay to the first plaintiff and the second plaintiff respectively the originator’s fee referred to in clause 10.1(a)(ii) of each LOMA, as and when it falls due, notwithstanding that the LOMA may have been terminated under clause 20.1(c).

6. Give judgment that the first defendant pay the first plaintiff the sum of $163,053.81.

7. Give judgment that the first defendant pay the second plaintiff the sum of $6,789.27.

8. Direct that the plaintiffs serve their defence to cross-claim by 24 July 2007.

9. Direct that each party serve on the other proposed categories for the purposes of discovery by 31 July 2007.

10. Direct that each party serve its verified list of documents by 14 August 2007.

11. Reserve liberty to apply in the event of any difficulty arising in respect of discovery.

12. Reserve liberty to the first defendant to apply for a stay of the order contained in paragraph 5 and the judgments contained in paragraphs 6 and 7.

13. Adjourn the proceedings to 24 August 2007 before me for mention.

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