J Inverarity Pty Ltd v Acn 008 705 Pty Ltd No. DCCIV-95-200 Judgment No. D3539

[1996] SADC 3539

Court

DISTRICT COURT OF SOUTH AUSTRALIA

Judgment of His Honour Judge Noblet

Hearing

21/02/96.

Catchwords

Equitable set-off by defendant - must impeach plaintiff's claim - must establish a relationship between the parties such that it would be unconscionable to allow the plaintiff to proceed without permitting a set-off - appeal dismissed.

Representation

Appellant ACN 008 705 PTY LTD:
Counsel: Mr J Cudmore - Solicitors: Ward &; Partners

Respondent J INVERARITY PTY LTD:
Counsel: Mr N Rochow - Solicitors: Gun &; Davey

DCCIV-95-200

Judgment No. D3539

20 December 1996

On Appeal from DISTRICT COURT MASTER KELLY

(Civil)

J INVERARITY PTY LTD V ACN 008 705 PTY LTD previously AUSWOOL INSULATION PTY LTD

Civil

Judge Noblet

This is an appeal from a decision of the Master.Despite some initial disagreement as to whether the order of the Master was interlocutory or final, counsel agreed that the matter before me should be treated as an appeal, rather than a re-hearing.

The dispute between the parties has had a fairly long and complicated history. In 1992, an agreement was made between Aussie Wool Enterprises Pty Ltd, A F Almenara and J C H Goh (these three entities being referred to collectively as "Almenara") and All Australian Products Pty Ltd trading as Aussie Wool Batts SA.The name of the latter company was later changed to Auswool Insulation Pty Ltd and then to ACN 008 705 Pty Ltd.It will be easier to refer to the company as "ACN", whatever its name may have been at any particular time.ACN is the defendant in the matter before me.

The essence of the 1992 agreement was that Almenara would arrange for J Inverarity Pty Ltd ("Inverarity") to manufacture and supply wool batts to ACN on behalf of Almenara.Inverarity is the present plaintiff.

In 1993, ACN (and two of its directors) sued Almenara in the Federal Court pleading various causes of action arising out of alleged deficiencies in the dimensions and thermal qualities of the wool batts that had been manufactured and supplied by Inverarity as agent for Almenara.Inverarity was not a party to that action.

The Federal Court action was settled.Almenara acknowledged misrepresentation in relation to the wool batts.The written terms of settlement included the following:

"2. [Almenara] hereby jointly and severally agree to indemnify and keep indemnified [ACN and its directors] against any judgment ordered by a Court of law against [ACN and its directors] such judgment being a final judgment and having been made after and as a result of a trial in relation to or arising out of the woollen batts manufactured and supplied by [Almenara] to [ACN and its directors] for any breach of statutory or common law duties relating to sale by description, fitness for purpose and merchantable quality.

6. That this within compromise and settlement is and shall be in full and final satisfaction, discharge and release of all rights, claims, actions suits and demands which we [two of the Almenara entities] respectively ... has or may have against [ACN and its directors] or any of them and which [ACN and its directors] or any of them has or may have against us [the two Almenara entities] in relation to or arising out of the above action including our claim against [ACN and its directors] in respect of wool batts manufactured and supplied by [the two Almenara entities] to [ACN and its directors] ...

9. That if [ACN and its directors] accept our above offer then the compromise and settlement reached by the making and acceptance of such an offer shall constitute a legally binding agreement between and upon [ACN and its directors] and [Almenara].

10. [Almenara] and [ACN and its directors] enter into and duly execute a Deed of Settlement incorporating all the terms and conditions of the settlement and compromise provided that if any of the parties thereto refuse, fail and neglect to duly execute the Deed of Settlement then such refusal, neglect or failure to duly execute the Deed of Settlement shall not effect the fact that [Almenara] and [ACN and its directors] have reached a settlement and compromise on the above terms and conditions and are legally bound thereby and that such refusal, neglect or failure to duly execute the Deed of Release will only constitute a breach of the term and condition of the compromise and settlement to duly execute the Deed of Settlement."

Almenara did not fulfil its obligations under the terms of settlement and its corporate entity (Aussi Wool Enterprises Pty Ltd) was eventually wound up in March 1994.

After the settlement and discontinuance of the Federal Court action, Inverarity continued to deal with ACN directly.It supplied wool batts to ACN in January 1994 in respect of which $14,031.40 remains owing.No objection has been raised by ACN at any time to the quality of these batts or as to any misrepresentation about them.

In September 1994, Inverarity commenced an action against ACN in the Magistrates Court claiming this $14,031.40.Inverarity obtained a default judgment, but ACN successfully applied to have it set aside.One of the grounds of the defence and counterclaim was based upon section 74H of the Trade Practices Act, involving a cause of action not within the jurisdiction of the Magistrates Court.The action was therefore transferred to this Court in February 1995.

The defence and counterclaim by ACN did not relate to the wool batts supplied in January 1994.It related to the earlier transactions that were the subject of the action in the Federal Court.

After a number of procedural skirmishes, Inverarity on 3 July 1995 made an application for the following orders:

1. That pursuant to District Court Rule 25.02 that the plaintiff be at liberty to enter judgment against the defendant for the sum of $14,031.40 together with costs and interest.

2. That pursuant to District Court Rule 3.01 that the defence and counterclaim of the defendant be dismissed and that costs be awarded in favour of the plaintiff against the defendant in any event.

3. In the alternative to paragraph 2 that pursuant to District Court Rule 46.18 the defence and the counterclaim be struck out and that costs be awarded in favour of the plaintiff against the defendant in any event.

4. In the alternative to paragraphs 2 and 3 and pursuant to District Court Rule 46.18 paragraphs 2.2, 5, 6, 7, 8 and 9 of the defence and paragraphs 1(a) and (b) of the counterclaim be struck out and that costs be awarded in favour of the plaintiff against the defendant in any event.

5. That the order of Judge Kitchen on 19th June 1995, that the time for the plaintiff to file a reply to defence and a defence to the counterclaim, be extended until the determination of this application.

6. That the costs of and incidental to this application be the plaintiff's costs in any event.

7. Such further or other orders as this Honourable Court deems fit.

On 22 August 1995, Master Kelly ruled that the defence and counter claim were deficient in at least three respects and did not comply with the rules as to pleadings.The learned Master struck out the defence and counterclaim pursuant to Rule 46.18 and made an order that the defendant within 21 days file a proposal for an amended more explicit defence and counter claim.In his reasons for decision, the learned Master briefly identified some other potential problems with the counterclaim.He said:

"The release in the Federal Court action embraced an indemnity sought by the plaintiff in that action (the defendant here) from the defendant in that action (a non-party here).That indemnity appears to be quantitatively identical to the subject indemnity sought by the present defendant in its Counterclaim.The identification appears from the pleadings, does it not?But, I understand the present defendant, first, to not admit that the commercial transactions ultimately giving rise to the respective indemnities were the same commercial transactions and, secondly, and in any case, to dispute that the release in the Federal Court action founds, as a matter of law, a defence to the set-off.I recall that the defendant argued that the indemnity now claimed has a different legal source (is it section 74H of the Trade Practices Act 1976 (Cth)?).

In view of the foregoing, I will, subject to amendment of the defence and counterclaim, require the defendant to take the following steps -

(a) file an affidavit stating the precise differences between the transactions said to give rise ultimately to the respective indemnities; and

(b) submit a written argument in response to the plaintiff's contention that in law there is a complete answer to the set-off based upon the quantitative identification of the indemnities and the effect of the release in the Federal Court action on the 2nd of the indemnities."

It seems clear to me that what the learned Master intended to do in the ruling on 22 August 1995 was this:

1. make an order in terms of paragraph 3 of the application;

2. grant leave to the defendant to file a proper defence and counterclaim within 21 days;

3. adjourn further consideration of the orders sought in paragraph 1 of the application (i.e. summary judgment);

4. intimate that if the new defence and counterclaim were based upon the same transactions as were the subject of the Federal Court action, the plaintiff's contention that the release in the Federal Court action was a complete answer to the counterclaim appeared to be correct and the defendant would have to establish its right to raise issues based upon those transactions notwithstanding the release.

There was no appeal from this decision.

The hearing to which this appeal relates was on 2 November 1995.At that hearing, an oral application was made by the defendant for leave to file and deliver a more explicit defence and counterclaim.Presumably leave was sought because the 21 day period referred to in the order dated 22 August 1995 had expired and because of the intimations by the learned Master in his reasons for that order.The learned Master seems to have treated this hearing also as a further hearing of the application dated 3 July 1995, for an order to strike out the defence and counterclaim.Strictly speaking, that was incorrect, because the defence and counterclaim had already been struck out.It seems to me that what was really before the learned Master on that day was the oral application for leave, which was opposed by the plaintiff for the same reasons as set out in affidavits filed in support of its application made on 3 July 1995, plus the remaining portions of that application that had not yet been dealt with, namely orders for summary judgment for the plaintiff and costs. However, I do not consider that this incorrect identification of the nature of the proceedings has any major significance, except possibly as to the question of which party should bear the onus of proof.

In any event, on 21 November 1995, Master Kelly made the following orders:

1. Declining to allow the proposed set-off;

2. Declining (at present) to allow the proposed counterclaim;

3. Granting leave to the plaintiff to sign judgment for the amount of the claim, together with interest and costs to be taxed if not agreed;and

4. Staying execution of the judgment on the claim to a date to be fixed."

The learned Master adjourned the application for further consideration on 8 November 1995 to enable the defendant to make further submissions regarding the counterclaim.However, on that date, as a result of an intimation that an appeal was to be instituted, Master Kelly ordered that the stay of execution of the judgment continue to a date to be fixed and granted liberty to apply.

The matter now before me is an appeal from the order of the Master made on 21 November 1995.

The two substantive questions before the learned Master were:

1. Should the defendant have leave to file the amended more explicit defence and counterclaim;

2. Should judgment be entered against the defendant for the amount claimed plus interest and costs.

The grounds of appeal are:

1. The learned Master erred in finding that the release given by the defendant, as applicant, in Federal Court Action SG61 of 1993 rendered its Counterclaim in this action an abuse of process;

2. The learned Master erred in finding that the cause of action pleaded in the said Federal Court action was the same cause of action as proposed to be pleaded in the Counterclaim in this action.

3. The learned Master erred in considering that the onus was on the defendant to demonstrate that its proposed Counterclaim in the within action was distinct and separate to the subject matter of the claim in the said Federal Court action: the onus in summary proceedings ought to have been on the plaintiff as applicant.

4. The learned Master erred in preventing the defendant in its Counterclaim from relying on the statutory indemnity conferred by Section 74H of the TradePractices Act 1974 (C'wth).

5. The learned Master erred in failing to find that the plaintiff having consented to the lodgment of the Defence and the filing of the Counterclaim on 4th November 1994 was prevented from proceeding with the application the subject of the orders.

6. The learned Master erred in failing to find the defendant's Counterclaim could amount to an equitable set-off and that judgment on the plaintiff's liquidated claim should therefore be refused or alternatively stayed pending a trial of the counterclaim.

It is convenient to deal with these grounds in different order from that in the notice of appeal.

As to ground 3, the appellant seems to have fallen into the same error as the learned Master in relation to the nature of the application.The plaintiff was not the applicant in the application relating to the counterclaim; the defendant was seeking leave to file it, and was seeking that leave in the face of intimations by the learned Master that the plaintiff appeared to have a good answer to it.The hearing to which this appeal relates cannot be considered separately from the previous hearing at which the learned Master gave the intimations to which I have referred.

The ground of appeal says that "the onus in summary proceedings ought to have been on the plaintiff as applicant".However, in the context of the proposed counterclaim, the defendant was the applicant.

There is no substance in ground 3 of the notice of appeal.

Ground 6 depends entirely on the availability of the set-off.The set-off forms the only basis for the defence.The matters pleaded as giving rise to the set-off relate to the woollen batts supplied by Inverarity between May 1992 and July 1993 and to representations made by Inverarity during that time.It has no connection whatsoever with the plaintiff's claim.

The learned Master stated a general rule that "an equitable set-off will not be allowed unless the claim for damages included in the set-off arose out of the same transaction as the liquidated claim".That statement is taken from Lunn on Civil Procedure under the heading R 47.03.15, but it seems to me to go further than some of the authorities cited by the author.I prefer the following general statement from Spry on Equitable Remedies (3rd Edition) pages 174-175;

"Indeed, if an otherwise sufficient equity can be found, it does not matter whether or not the material claim of the defendant is for an unliquidated amount, nor does it matter whether or not the opposing claims may properly be described as mutual.But a defendant can establish an equity only by bringing forward a claim that impeaches that of the plaintiff.For this purpose it is not sufficient merely to prove a countervailing claim;nor, indeed, is it necessarily sufficient to prove a countervailing claim arising out of the same contract as that on which the plaintiff is bring suit.What generally must be established is a relationship between the respective claims of the parties which is such that the claim of the defendant has been brought about by, or has been contributed by, or is otherwise closely bound up with, the rights that are relied on by the plaintiff and which is such that it would be unconscionable that he should proceed without permitting a set-off."

The equivalent passage in an earlier edition of Spry was cited with approval in Pope & Co Pty Ltd v Edward Souery & Co Pty Ltd [1983] WAR 117 and in Westwind Aircharter Pty Ltd & Mullins Investments Pty Ltd v Hawker D D Havilland Ltd (1990) 3 WAR 71.In the latter case, Murray J. also cited with approval a very similar passage from "Equity: Doctrines and Remedies" (2nd Edition) by Meagher, Gummow & Lehane, which concludes with these words:

"The defendant, in order to make out an equitable set-off, had to establish that he possessed some equitable right to be protected from the plaintiff's claim."

In any event, whichever statement of the law one chooses to rely upon, I am satisfied that the learned Master was correct in disallowing the set-off. Certainly the set-off arises from completely different transactions than the claim.But it goes further than that.The relationship between ACN and Inverarity at the time the debt claimed by Inverarity was incurred was completely different from the relationship between them at the time of the transactions to which the set-off relates.In 1992 and 1993, Inverarity was acting as an agent for Almenara under a contract between Almenara and ACN.In January 1994, Inverarity was dealing directly with ACN as principal.I find it impossible to say that the claim in the set-off"impeaches" that made in the claim.I find nothing "unconscionable" in permitting Inverarity to make its claim without permitting a set-off in relation to transactions that, as far as Inverarity was concerned, had been the subject of legal proceedings that had settled on terms that included a release to Inverarity's former principal. Indeed, if there is any unconscionability in these circumstances, it is more likely to be on the part of ACN than Inverarity.

I agree with the Masters decision on the set-off.That being the case, and there being no other defence pleaded, it was perfectly correct for the learned Master to enter judgment for the plaintiff on the claim but then to stay execution of that judgment pending the determination of any counterclaim that the defendant may be permitted to file.

As far as the other grounds of appeal are concerned, I have come to the conclusion that the appeal is premature.The other grounds all relate to the counterclaim.The learned Master's consideration of this issue is not yet complete;he declined for the time being ("at present") to allow it, but gave the defendant a further opportunity to make submissions about it.I think it was inappropriate for an appeal to be instituted in relation to the counterclaim until the defendant had availed itself of this opportunity.

In particular, in relation to ground 1, it seems to me that the learned Master has not made a final decision that the counterclaim involved an abuse of process.At page 10 of his reasons for decision he said:

"So far as one can tell on the available material, the defendant is attempting to recover the same loss a second time and also to obtain other legal remedies a second time.It is fair to say, from what I have been told, that the present action smacks of abuse of process." (my emphasis).

On page 12 the learned Master said:

"Whether I should allow the proposed counterclaim must depend upon the answers to the questions raised in relation to release by way of accord and satisfaction and alternatively the doctrine of abuse of process.

... the counterclaim should within itself demonstrate that the alleged representations made by the plaintiff were distinct and separate and that they gave rise to losses which were not part of the subject matter of the claim in the Federal Court action.

... I will, however,stay execution of the judgment to enable the defendant to make a last attempt to establish the genuineness of the allegations that misrepresentations made by the plaintiff were, using Mr Cudmore's words again, "distinct and separate"."

It is clear from these passages that the learned Master had adjourned for further consideration the question of whether the counterclaim should be allowed, including the question of whether the counterclaim involved an abuse of process.

It may assist the parties for me to intimate that if I were to exercise my own discretion without regard to the manner in which the discretion was exercised by the Master (Rule 97.01) I would find that the release of Almenara in the Federal Court proceedings also operated as a release of Inverarity and that the counterclaim made in the present action by ACN involved an abuse of process.I doubt that I would have given to the defendant yet another opportunity to establish the propriety of the counterclaim.However, if I am to treat this as an appeal, I find it quite impossible to say that the learned Master was wrong in the approach that he took.

The appeal is dismissed.I see no reason why the appellant should not pay the costs of this appeal, but I shall hear any submissions that counsel wish to make.