King v Smith
[2025] WASCA 6
•15 JANUARY 2025
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: KING -v- SMITH [2025] WASCA 6
CORAM: HALL JA
VANDONGEN JA
SMITH AUJ
HEARD: 14 OCTOBER 2024
DELIVERED : 15 JANUARY 2025
FILE NO/S: CACV 123 of 2021
BETWEEN: GLENICE BERYL KING
Appellant
AND
EDWIN GEORGE SMITH
First Respondent
LEVERAGED EQUITIES LTD
Second Respondent
TODD MICHAEL KING
Third Respondent
ACN 118 453 679 PTY LTD
Fourth Respondent
AUSTRALIAN STOCKBROKING AND ADVISORY SERVICES LTD
Fifth Respondent
FILE NO/S: CACV 124 of 2021
BETWEEN: TODD MICHAEL KING
Appellant
AND
EDWIN GEORGE SMITH
First Respondent
LEVERAGED EQUITIES LTD
Second Respondent
ACN 118 453 679 PTY LTD
Third Respondent
AUSTRALIAN STOCKBROKING AND ADVISORY SERVICES LTD
Fourth Respondent
GLENICE BERYL KING
Fifth Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: ALLANSON J
Citation: [2018] WASC 84
[2018] WASC 84 (S)
File Number : CIV 3124 OF 2009
Catchwords:
Practice and procedure - Lack of proof of service of writ - Stale writ is irregular but not a nullity - Unconditional appearance and filing a defence amounts to a submission to jurisdiction and waiver of irregularity
Practice and procedure - Abuse of process - Delay in bringing action to trial - Three year delay in seeking entry of judgment against the appellants - Plaintiff's purpose in not proceeding immediately to enter judgment following delivery of reasons in the primary proceedings was not vexatious or oppressive in the circumstances that plaintiff was pursing an appeal against other defendants and quantum of monetary orders sought was uncertain until that process was complete - Purpose of adjournments not foreign to the nature of the process
Guarantee and surety - Principal debtor a party to a margin lending loan with the creditor - Payment of debt by a guarantor - Guarantor's contractual right to an indemnity against a debtor and an equitable right of subrogation to stand in the shoes of the creditor - Principles for recovery against the debtor considered - No valid request by the principal debtor to give a guarantee - Principal debtor not party to the contract of guarantee - Agent's power of attorney not sufficient to find a valid request to give a guarantee - No contractual right to an indemnity - Claim in restitution for money paid to satisfy the debt owing under the margin loan - Preconditions for the grant of right of indemnity in equity could not have been found to be satisfied - Turns on own facts as found by the primary judge
Legislation:
Nil
Result:
CACV 123 of 2021
Appeal allowed in part
The orders made by the primary judge on 3 December 2021 set aside, and an order is made that the plaintiff's claim against the fifth defendant be dismissed
CACV 124 of 2021
Appeal dismissed
Category: B
Representation:
CACV 123 of 2021
Counsel:
| Appellant | : | In person |
| First Respondent | : | No appearance |
| Second Respondent | : | No appearance |
| Third Respondent | : | No appearance |
| Fourth Respondent | : | No appearance |
| Fifth Respondent | : | No appearance |
Solicitors:
| Appellant | : | In person |
| First Respondent | : | Solomon Brothers |
| Second Respondent | : | No appearance |
| Third Respondent | : | No appearance |
| Fourth Respondent | : | No appearance |
| Fifth Respondent | : | No appearance |
CACV 124 of 2021
Counsel:
| Appellant | : | In person |
| First Respondent | : | No appearance |
| Second Respondent | : | No appearance |
| Third Respondent | : | No appearance |
| Fourth Respondent | : | No appearance |
| Fifth Respondent | : | No appearance |
Solicitors:
| Appellant | : | In person |
| First Respondent | : | Solomon Brothers |
| Second Respondent | : | No appearance |
| Third Respondent | : | No appearance |
| Fourth Respondent | : | No appearance |
| Fifth Respondent | : | No appearance |
Case(s) referred to in decision(s):
ATCO Controls Pty Ltd (in liq) v Stewart [2013] VSCA 132; (2013) 31 ACLC 13-065
Awap Sgt 26 Investment Ltd v CN 2000 Holdings Ltd [2020] WASCA 74
Bank of England v Cutler [1908] 2 KB 208
Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269
Brealey v Board of Management of Royal Perth Hospital [1999] WASCA 158
Burness (as liquidator of Denward Lane Pty Ltd (in liq)) v Supaproducts Pty Ltd [2009] FCA 893; (2009) 259 ALR 339
Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad (1976) 136 CLR 529
Carey v Balfour [2021] SASC 79
City of Swan v McGraw-Hill Companies inc [2014] FCA 442; (2014) 223 FCR 295
Equity Trustees Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd [1940] VLR 201
Gauci v Briffa [2011] WASCA 20
GLJ v The Trustees of the Roman Catholic Church for the Diocese of Lismore [2023] HCA 32; (2023) 414 ALR 635
Hopper v DJ Sincock Pty Ltd [2021] NSWCA 305; (2021) NSWLR153
Ibrahim v Barclays Bank Plc [2012] 4 All ER 160
Miller v Miller [2018] SASCFC 40
O3 Capital Pty Ltd v WY Properties Pty Ltd [2016] WASCA 82; (2016) 49 WAR 517
Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247
Owen v Tate [1976] 1 QB 402
Patrick Jebb as trustee for The Trafalgar West Investments Trust v Superior Lawns Australia Pty Ltd [2019] WASC 121
Polodna v Mattiaccio [2017] WASC 294
Re Hoarey [1906] VLR 437
Robinson v Campbell [No 2] (1992) 30 NSWLR 503
Rogers v Australia and New Zealand Banking Group Ltd [1985] WAR 304
Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) (2005) 65 NSWLR 603
Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407
Sheldon v Brown Bayley's Steel Works Ltd [1953] 2 QB 393
Sisic v Krpo [2008] NSWSC 1086
Smith v Leveraged Equities Ltd [2020] WASCA 122
Staples v Baker [1999] 1 Qd R 317
Summit Rural (WA) Pty Ltd v Lenane Holdings Pty Ltd [2024] WASCA 122
Tobin v Broadbent (1947) 75 CLR 378
Van Leer Australia Pty Ltd v Palace Shipping KK (1981) 180 CLR 337
Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd)(in liq) [2022] HCA 3; (2022) 275 CLR 508
Table of Contents
Hall JA & Smith AuJ
Introduction and result of the appeals
Appeal in CACV 123 of 2021
Background facts found by the primary judge at trial relevant to the claim for indemnity against Mrs King
Mr Smith's case against Mrs King
Ground 1 ‑ submission to jurisdiction
Mrs King's submissions
Disposition ‑ Ground 1
By lodging an appearance and filing a defence, Mrs King had submitted to the jurisdiction of the court
Grounds 2 and 6 ‑ the right of a guarantor to an indemnity
Mrs King's submissions
Legal principles
Disposition ‑ Grounds 2 and 6
Appeal in CACV 124 of 2021
The parties' submissions to the primary judge
Primary judge's supplementary reasons
Disposition
Vandongen JA
Grounds 2 and 6
HALL JA & SMITH AUJ:
Introduction and result of the appeals
The appellant in CACV 123 of 2021, Glenice King (Mrs King), is the mother of the appellant in CACV 124 of 2021, Todd King (Mr King).
In 2006, Mr King was a licensed stockbroker, and a share trader. The first respondent in each of the appeals, Edwin Smith (Mr Smith), was also an active share trader and a client of Mr King, and had been so since 2001.
In August 2006, Mr King opened a margin loan account with the second respondent, Leveraged Equities Ltd, in the name of Mrs King. Although the account was in the name of Mrs King, it was used for trading by Mr King.
Following a 30 July 2007 agreement between Mr King and Mr Smith, Mr Smith provided 85,000 shares in Wesfarmers Ltd as collateral security for the margin loan account in the name of Mrs King.
A June 2008 rights issue saw a further 10,625 Wesfarmers shares, attributable to the initial 85,000 shares, credited to the account. Other Wesfarmers shares owned by Mr Smith were added as security for the margin lending account in January 2008 (25,000 shares) and March 2008 (15,000 shares). Those second and third share transfers were not authorised by Mr Smith. To the contrary, the transfers were made without Mr Smith's knowledge and by the use of false documents prepared by Mr King.
In due course, after becoming aware of Mr King's forgery, Leveraged Equities sold some of Mr Smith's Wesfarmers shares held by way of security. Mr Smith also made payments to Leveraged Equities to prevent the sale of further shares and to eventually obtain return of the balance of the shares on the discharge of the debt owed on the margin loan account in the name of Mrs King.
Mr Smith commenced proceedings in 2009 to recover his losses, and instituted proceedings against Leveraged Equities, Mr King, Stripe Capital Pty Ltd, Australian Stockbroking and Advisory Services Ltd (ASASL), and Mrs King. ASASL held an Australian Financial Services Licence. Mr King and Stripe Capital were authorised representatives of ASASL.
Mr Smith pursued claims in law and equity against Leveraged Equities for:
(1)misrepresentation and misleading or deceptive conduct in relation to the first share transfer of 85,000 Wesfarmers shares on 1 August 2007;
(2)unconscionable conduct in relation to the first share transfer;
(3) receipt of property which it knew was procured by the breach of fiduciary duty by either or both of Stripe Capital and Mr King;
(4)unjust enrichment (for shares transferred in the second share transfer and the third share transfer under two forged transfers, for shares issued as a rights issue on shares then held by Leveraged Equities, and for payments made by Mr Smith); and
(5)unlawful detention and conversion of shares and benefits received or receivable and rights that accrued to such shares held by Leveraged Equities after demand for their release.
Mr Smith also made claims against Leveraged Equities for breach of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), the Australian Consumer Law, and the Fair Trading Act 1987 (WA).
As against Mr King, Mr Smith claimed breach of fiduciary duties, breach of duty of care, breach of contract and claims under statute for losses caused by conduct that was misleading or deceptive in breach of the Fair Trading Act, the Corporations Act 2001 (Cth) and the Australian Securities Industry Act 1980 (Cth).
As against ASASL, Mr Smith claimed it was responsible pursuant to s 917A to s 917C, s 917E and s 917F of the Corporations Act for the conduct of Stripe Capital and Mr King, as its authorised representatives, related to the provision of a financial service.
Mr Smith's claim against Mrs King was for losses resulting from Mr Smith's provision of security to Leveraged Equities in support of the indebtedness she incurred, or which was incurred in her name (being a claim as a guarantor for an indemnity for his losses).
By the time of the commencement of the trial on 1 February 2016, Stripe Capital and ASASL were in liquidation. Mr Smith had leave to proceed against ASASL but had not applied for leave to proceed against Stripe Capital. ASASL filed a defence but did not appear at the trial. Only Mr Smith, Leveraged Equities and Mr King appeared at the trial.
Mrs King also did not participate in the trial. She filed an appearance and a defence on the last working day before trial.
Mr Smith was only successful against Mr King and Mrs King. The primary judge delivered reasons for decision on 29 March 2018, and made orders dismissing Mr Smith's claims against Leveraged Equities and ASASL, but did not at that time make any orders entering judgment against Mr King and Mrs King. His Honour concluded that judgment should be entered for Mr Smith against Mr King and Mrs King, and he would hear from Mr Smith further as to the proper measure of damages or compensation.
The matter was adjourned to a date to be fixed for the making of final orders against Mr King and Mrs King.
Mr Smith appealed the decision to dismiss the claims against Leveraged Equities and ASASL. The Court of Appeal heard the appeal on 11 and 12 November 2019. Mr King and Mrs King did not appear in the appeal.
The Court of Appeal allowed Mr Smith's appeal in part against Leveraged Equities, with orders made on 5 August 2020 remitting the action to the primary judge for determination of Mr Smith's claim for unjust enrichment for subsequent shares issued as a rights issue following Wesfarmers' two fraudulent shares transfers effected on or about 25 January 2008 and 10 March 2008. Mr Smith's appeal against the order dismissing his claim against ASASL was dismissed.[1]
[1] Smith v Leveraged Equities Ltd [2020] WASCA 122.
Following the decision of the Court of Appeal in Mr Smith's appeal, the matter was listed before the primary judge for directions regarding the claim which had been remitted for determination, and then repeatedly adjourned by consent over the following months. The solicitors for Mr Smith advised the court in May 2021 that it might no longer be necessary for the parties to seek programming orders with respect to the remitted proceedings.[2]
[2] Supplementary reasons [11].
Shortly thereafter, Mr Smith and Leveraged Equities entered into an agreement to settle Mr Smith's claim for unjust enrichment.
Following the settlement of Mr Smith's claim against Leveraged Equities, on 1 July 2021, Mr Smith and Leveraged Equities submitted a minute of consent orders for the claim against Leveraged Equities to be dismissed, with ancillary orders regarding costs between those parties. The orders were made by consent on 15 July 2021.[3]
[3] Supplementary reasons [12] ‑ [14].
On 16 July 2021, Mr Smith lodged minutes of proposed orders to be entered against Mr King and Mrs King, for judgment in the amount of $2,087,493, with interest and costs.[4] Mr King appeared at the next directions hearing before the primary judge and objected to judgment now being entered on the ground, in substance, that it was an abuse of process. Mrs King provided an email to the primary judge's associate to the same effect, and also appeared. Mr King and Mrs King sought orders to permanently stay entry of judgment due to the delay between publication of reasons following the trial and Mr Smith seeking entry of judgment.
[4] Excluding costs against the other defendants.
In the unusual circumstances where there had been such a pronounced delay between trial and the entry of judgment, the primary judge made orders for the parties to file submissions.[5]
[5] Supplementary reasons [15].
After hearing counsel for Mr Smith and Mr King and Mrs King in person on 27 August 2021, the primary judge delivered reasons for decision and made orders entering judgment for Mr Smith against Mr King and Mrs King on 3 December 2021, and ordered that each of them pay Mr Smith the sum of $2,087,493.[6]
[6] Supplementary reasons [40].
His Honour also made orders requiring Mr King and Mrs King to pay Mr Smith interest at the rate of 6% per annum on the following amounts for the following periods:
(a)on the sum of $150,000.00 from 18 September 2008 to 26 October 2008;
(b)on the sum of $280,000.00 from 27 October 2008 to 4 December 2008;
(c)on the sum of $1,322,509.80 from 5 December 2008 to 8 September 2011; and
(d)on the sum of $2,087,493.00 from 9 September 2011 until the date on which judgment is entered.
Orders were also made that Mr King and Mrs King pay Mr Smith's costs of the action, excluding costs which related exclusively to the causes of action against the other defendants other than Mr King and Mrs King, inclusive of any reserved costs, to be taxed if not agreed.
Mr King and Mrs King lodged appeals against these orders.
Mr Smith did not participate in Mr King or Mrs King's appeals. His legal representatives filed amended notices of intention not to take part in each appeal on 19 September 2022. Nor did Leveraged Equities or ASASL seek to participate in the appeals.
In CACV 123 of 2021, Mrs King seeks to appeal the decision made on 3 December 2021 on eight grounds. In Grounds 1 to 7 of her Amended Grounds of Appeal, Mrs King contends that the primary judge erred in fact or in law in finding that Mr Smith was entitled to be indemnified by Mrs King for his losses. In the eighth ground of appeal, Mrs King argues that the primary judge erred in entering judgment against her on grounds that to do so was an abuse of process and that an order should have been made dismissing Mr Smith's claim on grounds of want of prosecution.
Mrs King seeks orders that her appeal be allowed, the orders made by the primary judge be set aside and instead an order be made that Mr Smith's claim against her be dismissed.
Grounds 5 and 7 are not open to be raised by Mrs King in this appeal, as an appellant is bound by the conduct of his or her case at trial. In each of these grounds an argument is sought to be raised that the primary judge ought to have found that Mrs King was under a 'special disability' that affected her ability to conserve her own interest and that she was incapable of managing her affairs in respect of the proceedings. Mrs King did not raise such a defence in the defence she filed, nor did she raise any positive defence to Mr Smith's claim against her. In the absence of a plea that she was under a special disability such a new point is not open to be raised on appeal.[7]
[7] Summit Rural (WA) Pty Ltd v Lenane Holdings Pty Ltd [2024] WASCA 122 [131] ‑ [136] (Buss P, Quinlan CJ & Lundberg J agreeing).
In Ground 3 Mrs King seeks to raise a claim that the primary judge ought to have found Mrs King was a volunteer. In Ground 4 Mrs King seeks to raise a claim that the primary judge ought to have found that she was not unjustly enriched in regards to the 25,000 and 15,000 Wesfarmers shares that were fraudulently transferred. Again, as the points raised in these grounds were not pleaded by Mrs King in her defence, and are new points, Mrs King is prohibited from raising these points on appeal.
As it is not open to Mrs King to raise Grounds 3, 4, 5 and 7 it is not necessary to deal with or consider the points raised by Mrs King in respect of these grounds.
In Ground 1 Mrs King raises as an issue whether the court had jurisdiction to enter judgment against her on grounds that she had not been personally served with the Writ of Summons or Statement of Claim in the primary proceedings. For the reasons that follow in [128] ‑ [138], Ground 1 is not made out.
Grounds 2 and 6 concern the issue of whether Mrs King was liable for the debt incurred in the margin loan account in her name, in circumstances where the primary judge found as a fact that the account was Mr King's personal trading account. Further, Mrs King questions whether it was open in law to find that Mr Smith was entitled to be indemnified by Mrs King under the guarantee given by Mr Smith on 30 July 2007.
For the reasons that follow below in [170] ‑ [228], Grounds 2 and 6 are made out, the appeal in CACV 123 of 2021 should be allowed, the orders made by the primary judge on 3 December 2021 against Mrs King should be set aside, and in their place an order made that Mr Smith's claim against Mrs King be dismissed.
Ground 8 concerns whether it was unsafe or unsatisfactory to allow Mr Smith to enter judgment against Mrs King after more than three years from the delivery of reasons in the primary proceedings.
Although it is not strictly necessary to deal with Ground 8 in disposing of Mrs King's appeal, for the reasons given in [229] ‑ [256] below in relation to Mr King's appeal, it is sufficient to note that Ground 8 had no prospects of success.
In CACV 124 of 2021, Mr King raises one ground of appeal, which is the same as Ground 8 of Mrs King's appeal. This ground is considered below in [229] ‑ [256].
For the reasons given, this ground of appeal is not made out, and Mr King's appeal against the orders made by the primary judge on 3 December 2021 against Mr King should be dismissed.
Appeal in CACV 123 of 2021
Background facts found by the primary judge at trial relevant to the claim for indemnity against Mrs King
For the purposes of this appeal, it is not necessary to set out in detail all of the background facts as found by the trial judge. Those facts were not disputed on the appeal and can be conveniently summarised as follows.
Mr King was a director of the third respondent, then known as Stripe Capital which operated as a stockbroker from 2006 ‑ 2008.
When Mr King moved to Stripe Capital, in 2006, Mr Smith engaged Stripe Capital as his stockbroker and Mr King continued to act as Mr Smith's broker.
Leverage Equities is a subsidiary of Bendigo and Adelaide Bank, and conducts business as a margin lender.
At the time of the relevant events, Mr King and Stripe Capital were authorised representatives of ASASL. ASASL held an Australian Financial Services Licence issued in accordance with pt 7.6 of the Corporations Act. The appointment of Stripe Capital and Mr King as authorised representatives was pursuant to an Authorised Representative Agreement.
Mrs King resides in Bundaberg in Queensland. In 2006, Mrs King entered into a margin loan agreement with Leveraged Equities by executing an application form for a margin loan facility dated 20 July 2006.
Mr King opened the margin loan account with Leveraged Equities in his mother's name in August 2006. Mrs King's application was received by Leveraged Equities on 14 August 2006. Her occupation was stated in the application form as a teacher's aide, and her date of birth together with a copy of her driver's licence provided with the application form indicated at the time of making the application she was aged 63. Stripe Capital and Mr King were nominated in the application form as her financial advisers and Mr King was nominated as her Authorised Representative.
In the July 2006 application, Mrs King was named as the sole borrower and no guarantor was nominated or referred to in the application to secure any of her borrowing on the margin loan account. Nor was there any evidence before the primary judge that when Leveraged Equities approved the application in August 2006 that they required a guarantor to provide a guarantee for the borrowings on the margin loan account in the name of Mrs King.
It appears from a Leveraged Equities file note dated 25 August 2006 that prior to making this application Mrs King had a margin loan account with BT Equity for an amount of $268,881.91 (with equity of $107,137.73 ). This loan amount appears to have been transferred to her Leveraged Equities margin loan account by way of refinance of an amount of $268,947.19 on 20 October 2006.[8]
[8] Exhibit A, TB 109, 117 and 126.
The first transaction in the account in Mrs King's name in October 2006, was the refinancing of the existing loan. There were few trades between November 2006 and January 2007, with the loan fluctuating between about $250,000 ‑ $310,000.
As well as acting as a broker advising clients, Mr King was a share trader on his own behalf trading in the name of Komplexity Capital Pty Ltd from October 2003. Mr King ceased high volume trading on the Komplexity account abruptly in March 2007, and he began trading on the account in the name of Mrs King. That trading was of a similar magnitude to that previously conducted on the Komplexity account.
Mr Smith opened his case on the basis that the margin loan account in the name of Mrs King was 'plainly' Mr King's. The primary judge was satisfied that the account was for Mr King's personal trading, and found that Mr King used an account in his mother's name to mask the extent of his personal trading activity from his fellow directors at Stripe Capital and from ASASL.[9]
[9] Primary reasons [61].
In late February 2007, Mr King began to trade heavily through the margin loan account in Mrs King's name, with the loan regularly exceeding $1 million. The primary judge found from this point in time Mr King appeared to have transferred his activity from the Komplexity account to the account in the name of his mother.[10]
[10] Primary reasons [62].
The primary judge also found Mr King was not a conservative investor. He traded in high volumes and borrowed heavily to do so. On occasions, he took positions in the market that left him very exposed when share values fell.[11]
[11] Primary reasons [66].
Mr King appears to have traded profitably until the end of July 2007.[12]
[12] Primary reasons [68].
The margin loan on the account in the name of Mrs King for the month of July 2007 had an opening balance of $91,563.23 and a closing balance of $205,859.38. As a result of Mr King's heavy trading activity through the month, the balance at the close of trade was as high as $1.5 million on two occasions, but falling to $11,050.99 at the close of trade on 23 July 2007.[13]
[13] Primary reasons [68].
Between 23 July and 26 July 2007, Mr King entered contracts to purchase securities on his mother's account. Three of the purchases were shares in Paladin Resources Ltd, the others were instalment warrants. Settlement (which was then three days after the trade) was required on 26, 27, 30 and 31 July 2007 (28 and 29 July being a weekend). The total payable on the purchases was $3,061,687. On 27 July 2007, Mr King had also placed four sale orders for the sale of securities. But even with the funds available from those sales at settlement, the funds in the account in Mrs King's name were not sufficient to settle the purchases. Leveraged Equities would not advance settlement funds on the value of current securities held ‑ some of which were assigned little or no security value.[14]
[14] Primary reasons [69].
On 24 July 2007, a Leveraged Equities account manager spoke to Mr King by telephone and advised him that there was a failed trade for 25 July 2007. Mr King said he would sell warrants the following day.[15]
[15] Primary reasons [70].
If Leveraged Equities did not fund the trades, they would still settle, as ASASL would be required to indemnify E*Trade for any losses it suffered in consequence of performing the trades. As guarantors under the Authorised Representative Agreement, Mr King and his fellow directors at Stripe Capital would be required to indemnify ASASL.[16]
[16] Primary reasons [71].
The primary judge found that to avoid personal liability and perhaps to conceal his personal trading from his fellow directors, Mr King needed to find cash or lodge security of sufficient value that Leveraged Equities would lend the funds required against the value of the security. Mr King knew that Mr Smith had sufficient Wesfarmers shares to provide collateral for the pending trades.[17]
[17] Primary reasons [72].
Early on 30 July 2007, Mr King sent several emails to Leveraged Equities. The first was received by Leveraged Equities at 9.43 am Eastern Standard Time. Mr King said he wished to establish a third party (a guarantor) to an existing account.[18] Mr King in another email identified Mrs King's account and Mr Smith as the guarantor, and requested the forms to be emailed so they could be signed and posted back.[19]
[18] Primary reasons [73].
[19] Primary reasons [74].
At about 7.50 am (9.50 am EST), Mr King rang Mr Smith at his home. He said he had a business proposition: he needed to borrow Wesfarmers shares owned by Mr Smith, as collateral, for a period of about six weeks. Mr King said he would put the proposal in writing, and bring it to Mr Smith's home.[20]
[20] Primary reasons [77].
The primary judge found Mr King was desperate. Initially, he asked to borrow 45,000 shares, and then raised the amount to 85,000. Mr Smith gave uncontradicted evidence that when they spoke Mr King 'seemed to be recalculating something while he was talking'. Mr King offered $50,000 in consideration for the use of the shares, then $100,000 ‑ a sum Mr Smith described as 'silly'. Then Mr King offered to pay the $50,000 to Mr Smith on 15 September 2007. Mr Smith asked what the risks were. Mr King assured him that there was no risk.[21]
[21] Primary reasons [78].
At 12.13 pm EST, a New Business Administrator from Leveraged Equities sent an email to Mr King, attaching documents. The documents included: an application form (that was in the same form as the application form signed by Mrs King in July 2006) for Mr Smith to be added as a guarantor to Mrs King's account; a Margin Lending brochure, which contained the margin lending terms; a First Option booklet and Master Priority Deed; and a Short Share booklet.[22]
[22] Primary reasons [80].
Later that day, Mr King drove to Mr Smith's home in Waikiki. He took documents with him for Mr Smith to sign. Mr Smith's uncontradicted evidence was that Mr King told him:[23]
(a)he wanted to borrow the shares because his stepfather had set up a margin loan account for his mother, Mrs King, at Leveraged Equities, but his stepfather had to go to Canada on business for six weeks before the final arrangements for security could be completed, and his mother needed some collateral cover for those six weeks;
(b)it would only be a short term arrangement;
(c)the shares would only be held in Westpac Bank, ANZ Bank, and Paladin Resources through the margin loan facility; and
(d)that there was no risk in lending the collateral as he was the controlling broker.
[23] Primary reasons [81].
When they met that day at Mr Smith's home, Mr King provided and Mr Smith signed the following documents to give effect to the arrangement they had agreed:
(a)a 'Confidential Contractual Agreement' dated 3 July 2007 and signed as agreed to by Mr Smith and Mr King that was witnessed by Mrs Smith;[24]
(b)an application form dated 30 July 2007 for Mr Smith to be added as guarantor to Mrs King's account, bearing a signature of Mrs King and witnessed by Mr King;[25]
(c)a Form of Acknowledgement of a Master Deed of Priority between an entity named Australian Clearing House Pty Ltd and Leveraged Equities;[26]
(d)an 'Authority Letter' dated 30 July 2007 addressed to Leveraged Equities by which Mr Smith authorised the transfer of 85,000 Wesfarmers shares from his HIN (referring to 'Holder Identification Number' - a number which uniquely identifies a person as the holder of shares) to the margin loan account in the name of Mrs King.[27]
[24] Primary reasons [92] ‑ [93]; Exhibit A, TB 187.
[25] Primary reasons [96]; Exhibit A, TB 188.
[26] Primary reasons [96] ‑ [97].
[27] Primary reasons [104].
The primary judge found when first referring to these documents that the application form signed by Mr Smith and the Authority Letter both appeared to be also signed by Mrs King, and that her signature was purportedly witnessed by Mr King. Importantly, his Honour found that Mr King could not have witnessed her sign the documents as she was in Queensland, and if Mr King was authorised by his mother to sign documents on her behalf, he did not reveal to Mr Smith, or on the form, that he had done so.[28]
[28] Primary reasons [106].
In a subsequent part of his reasons the primary judge made a finding that Mr King signed his mother's signature on the Leveraged Equities form, purportedly signed by her on 30 July 2007.[29] It is noted that his Honour made no specific finding that Mr King forged his mother's signature on these documents. Although it is not entirely clear, the primary judge may not have found it necessary to do so. It appears that his Honour may have considered that Mr King had the authority to act on behalf of Mrs King as her agent, pursuant to the powers conferred upon him as an Authorised Representative, in respect of dealings on the margin loan account in her name.
[29] Primary reasons [231].
The primary judge found that Mr Smith transmitted those documents to Leveraged Equities no later than 31 July 2007, because an account manager from Leveraged Equities contacted Mr Smith on 31 July 2007 to make sure the guarantor understood how the margin loan worked and the risks involved.[30]
[30] Primary reasons [114] ‑ [115].
Following the processing of the application form and the Authority Letter the 85,000 Wesfarmers shares became collateral for the margin lending account in Mrs King's name.
On 31 July 2007, the loan balance for Mrs King's account was $205,859.38. Mr Smith's 85,000 Wesfarmers shares, now held as collateral, provided about 60% of the market value of securities held and over 80% of the security value.[31]
[31] Primary reasons [212].
Over the following three months Mr King continued to trade on the account, including a dramatic increase in trading in October 2007. On several occasions funds were transferred out of the account into other accounts associated with Mr King. By 26 October 2007, the loan balance had reached more than $25 million, although it dropped back to $4 million by 31 October 2007. At that stage the market value of security held was $8,015,985.14, with the security value of $5,438,167.57. The Wesfarmers shares were less than half the market value of the securities held, but a little more than half of the security value.[32]
[32] Primary reasons [244].
On 1 November 2007, Mr King sent an email to Mr and Mrs Smith advising that he had requested the release of 35,000 shares back to them that day and said '[w]ill do remainder after stock has gone ex div and [Paladin] sold. I was assured that it will not affect dividend identity'. The reference to the release of shares was false.[33]
[33] Primary reasons [245].
The primary judge found the volume of trading for the month of November 2007 was less dramatic. The total loan increased to $4,723,214.78, with the market value of securities held being $7,574,804.40. The Wesfarmers shares accounted for just under half of that market value and continued to provide more than half of the total security value of securities held.[34]
[34] Primary reasons [247].
No trades were made on the account in December 2007, the only changes being interest and movement in the market value of securities held.[35]
[35] Primary reasons [248].
On 21 January 2008, the account in Mrs King's name was in margin call; the security value left a shortfall of $333,421.37 as against the loan amount.[36]
[36] Primary reasons [251].
Mr King asked Leveraged Equities by email on 21 January 2008, to lodge further Wesfarmers shares against the account, sending Leveraged Equities an undated document purportedly signed by Mr Smith authorising the transfer of 25,000 Wesfarmers shares. Mr Smith's signature was forged by Mr King.[37] The transfer of the 25,000 Wesfarmers shares was completed on 25 January 2008.[38]
[37] Primary reasons [252].
[38] Primary reasons [254].
The primary judge found that, at this time, Leveraged Equities had no reason to suspect dishonesty on Mr King's part, or that Mr King was acting outside his authority.[39]
[39] Primary reasons [256].
Mr Smith travelled to Europe on 5 March 2008 and did not return until 12 April 2008.[40]
[40] Primary reasons [263].
As at 8 March 2008, three pending trades on Mrs King's account were due to fail because of insufficient funds in the margin lending account. On 10 March 2008, Mr King caused another 15,000 Wesfarmers to be transferred to the account in Mrs King's name. The circumstances of the transfer were much the same as the second transfer involving the 25,000 shares in January 2008. The transfer was implemented by a letter emailed to Leveraged Equities, purportedly signed by Mr Smith, authorising the transfer. Again the letter was forged by Mr King.[41]
[41] Primary reasons [264].
After Mr Smith returned from Europe, he saw CHESS Holding Statements recording that 40,000 Wesfarmers shares had been transferred from his account. On 21 April 2008, he demanded an explanation for the transfer of the additional 40,000 Wesfarmers shares. Mr King blamed the transfer on a clerical error.[42] It appears that Mr Smith at this point accepted this explanation. On or about 7 May 2008, 25,000 Wesfarmers shares were returned to Mr Smith.[43]
[42] Primary reasons [276].
[43] Primary reasons [279].
The primary judge found that until the issue was raised by Mr Smith in late June 2008, no one at Leveraged Equities was aware that the 21 January 2008 and 10 March 2008 authorities (as to the 25,000 and 15,000 Wesfarmers shares) were forged, or alleged to be forged.[44]
[44] Primary reasons [290].
On 2 June 2008, Wesfarmers made a rights issue. This resulted in an accretion to the Wesfarmers shares in an amount of 10,625 shares. The rights issue shares were held in Mrs King's Leveraged Equities margin lending account.[45]
[45] Primary reasons [281].
Mr Smith continued to be under the misapprehension that the transfer of the 40,000 shares the subject of the second and third transfers was a mistake. By letter dated 13 June 2008, Mr Smith sought return of 50,000 Wesfarmers shares, as originally transferred, and the rights issue shares.[46]
[46] Primary reasons [289] ‑ [291].
On 24 June 2008, Mr Smith made contact with Leveraged Equities and sought that all of his Wesfarmers shares be returned to him; however, the current account position did not allow their release.
In June 2008 telephone calls, Mr Smith informed Leveraged Equities of the agreement he had with Mr King to pledge only 85,000 shares. The primary judge found that Leveraged Equities was not previously aware of an agreement of that kind.[47]
[47] Primary reasons [294].
In June or July 2008, Mr King left Stripe Capital, and from then operated from, or as, Indian Ocean Private Wealth.[48]
[48] Primary reasons [303].
On 27 July 2008, Mr King wrote to Mr Smith with a proposed payment schedule that would see his debt to Mr Smith reduced over seven years. Mr Smith replied on 30 July 2008 seeking instead a replacement guarantor be found for Mrs King's margin loan, thus releasing his entire parcel of Wesfarmers shares.[49]
[49] Primary reasons [304].
During July 2008, the margin loan account in Mrs King's name was reduced to $2,875,138 with Mr Smith's 110,625 Wesfarmers shares the only remaining security.[50]
[50] Primary reasons [306].
On 4 August 2008, Mr King wrote again to Mr Smith advising that except for a tax refund of about $350,000 which he expected to receive within the next three months he did not have any other assets but that his partner was prepared to grant Mr Smith a mortgage over a property in an amount of $500,000. Mr King also suggested, again, a repayment schedule to pay off the loan over a seven-year period.[51] By 11 August 2008, Mr Smith agreed to this proposal and told Mr King to proceed to arrange the mortgage and have his legal person formalise the agreement and send a draft to Mr Smith.[52]
[51] Primary reasons [307] ‑ [308].
[52] Primary reasons [311].
A draft deed was prepared by a firm of solicitors and provided to Mr Smith. It had been signed by both Mr King and his partner. Mr King's partner signed the mortgage on or about 12 August 2008.[53]
[53] Primary reasons [316] ‑ [317].
The primary judge found that the terms of the deed required a grant of a registered mortgage and in the absence of the delivery of a registrable mortgage, the execution of the deed by Mr King and his partner was not sufficient for the deed to effect a release.[54]
[54] Primary reasons [319] ‑ [320].
By August 2008, Mrs King's margin loan account was suspended. As at 31 August 2008, the loan totalled $2,899,557.13 and there was a security value shortfall. Over the ensuing months the share price of the Wesfarmers shares dropped. Margin calls were made. Sometimes Mr Smith made payments to Leveraged Equities to reduce Mrs King's debt and avoid the sale of his Wesfarmers shares. On other occasions there was a transfer or sale of Wesfarmers shares.
On 5 September 2008, Mr King arranged a transfer of $100,000 from Leap Financial Services account to Mrs King's loan account, and on about 18 September 2008, Mr Smith advanced $150,000 to meet the margin call and protect his shares. He also authorised the sale of 10,000 Wesfarmers shares, for $290,060.61. The closing position of the account on 30 September 2008 was a loan of $2,381,531.08. With the Wesfarmers share price still falling there was still a shortfall in the account.[55]
[55] Primary reasons [325].
On 9 October 2008, Mr King transferred $375,000 from the Leap Financial Services account, and on 13 October 2008, another $200,000. Despite that injection of funds, Leveraged Equities made further margin calls on about 27 October 2008. Again Mr King advised Mr Smith by telephone. Mr Smith advanced the sum of $130,000 to Leveraged Equities and transferred 15,000 Wesfarmers shares to Leveraged Equities to meet the margin call. On 27 October, Mr Smith wrote to Ms Jones at Leveraged Equities, asking for evidence of efforts by Leveraged Equities to secure the necessary security from Mrs King, 'to whom this debt belongs and who is not without means'.[56]
[56] Primary reasons [326].
The position at the end of October 2008 was that the loan on Mrs King's account had been reduced to $1,712,981.12. Although the Wesfarmers share price had again fallen, the 115,625 Wesfarmers shares now held as security were sufficient for the security value to be greater than the loan.[57]
[57] Primary reasons [330].
On 11 November 2008, Mr Smith in a letter sent by email told Mr King that he would have to meet any further calls from either his own account or his mother's, and that he (Mr Smith) urgently needed the promised $350,000 from Mr King's tax return to help offset some of the $570,000 that he had laid out by way of cash and in the sale of the 10,000 Wesfarmers shares sold against the margin call. He also said that it seemed likely that he would have to ask for additional security by way of a registered first mortgage over Mrs King's property.[58]
[58] Primary reasons [335].
On 12 November 2008, Mr King responded suggesting 'a couple of strategies to consider that removes the risk of margin call'. The primary judge found that in substance, Mr King suggested further trading by the purchase of a put option, or short selling, or both, and that Mr King was proposing to again gamble with Mr Smith's money.[59]
[59] Primary reasons [336].
On 21 November 2008, Leveraged Equities advised Mrs King that it would no longer be able to receive instructions on her behalf from Mr King.[60]
[60] Primary reasons [339].
On 26 November 2008, the matter was referred to the Major Fraud Squad, WA Police.[61]
[61] Primary reasons [344].
On 1 December 2008, Mrs King's account again had a shortfall between the loan amount and value of securities, as a result of a further drop in the price of Wesfarmers shares. In total Leveraged Equities applied 68,000 Wesfarmers shares owned by Mr Smith. The shares were sold and applied to Mrs Smith's margin loan for a net amount of $1,125,248.67.[62]
[62] Primary reasons [345] ‑ [348].
On 5 December 2008, Leveraged Equities made a demand to Mrs King for the total amount owing, then $1,727,883.04, with interest calculated on a daily basis.[63]
[63] Primary reasons [349].
Mr Smith commenced the action in 2009.
On 9 September 2011, Mr Smith paid Leveraged Equities the sum of $764,983.20 to clear the amount Mrs King owed to Leveraged Equities in relation to the Margin Loan Facility, without prejudice to any claims by Mr Smith against Leveraged Equities, including the claims made in the action.[64]
[64] Primary reasons [354].
Accordingly, in total Leveraged Equities applied 78,000 Wesfarmers shares owned by Mr Smith, and received an amount of $1,044,983.20 in cash payments from him.
The primary judge found that Mr King was seriously dishonest on several occasions (all of which resulted in the transfer of Wesfarmers shares belonging to Mr Smith).
His Honour found Mr Smith's claims of breach of fiduciary duty in making the 2007 guarantee agreement was not made out as there was no element of financial advice in Mr Smith's account of what had happened and what was said, and the transaction was carried out in a way that was inconsistent with any ordinary business relationship. The primary judge also found that Mr King did not purport to be acting on behalf of, or in Mr Smith's interests.
Although the primary judge found that Mr King owed duties to Mr Smith to exercise reasonable care, skill and diligence in carrying out his roles of stockbroker and adviser, the facts did not show any failure to exercise proper care and skill in carrying out those roles.
The primary judge did find that the conduct of Mr King on 30 July 2007 was misleading or deceptive in contravention of s 10 of the Fair Trading Act. He also found that the purchase of numerous securities by drawing on the margin loan facility in early September 2007 was in breach of the contract made between Mr Smith and Mr King on 30 July 2007.[65] In addition, his Honour found that Mr King breached the agreement to reimburse Mr Smith for the amount of any capital gains tax to which he was exposed by reason of the sale of the 68,000 Wesfarmers shares by Leveraged Equities in December 2008. However, his Honour found that the capital gains tax liability, if any, had not been proved but that the breach would entitle Mr Smith to be indemnified by Mr King against the amount of such tax liability.[66]
[65] Primary reasons [441].
[66] Primary reasons [442].
There were, however, no findings that Leveraged Equities knew of Mr King's dishonesty at the time of the transfers. Moreover, as to the 30 July 2007 agreement, the primary judge made an express finding that he was not satisfied that Leveraged Equities was involved in the contravention constituted by Mr King's conduct.
The primary judge dismissed the claims made against Leveraged Equities and ASASL.
The primary judge concluded that judgment should be entered for Mr Smith against Mr King and Mrs King, and that he would hear from Mr Smith further as to the proper measure of damages or compensation.
Mr Smith's case against Mrs King
The claim against Mrs King at trial was that Mr Smith had a right to be indemnified by Mrs King for losses resulting from his provision of security to Leveraged Equities as guarantor in support of the indebtedness she incurred, or which was incurred in her name.[67]
[67] Primary reasons [35].
In par 85 of the Ninth Amended Statement of Claim (Statement of Claim) Mr Smith pleaded that he had signed:
(a)the application form to be added as guarantor to Mrs King's account; and
(b)the Authority Letter addressed to Leveraged Equities by which Mr Smith authorised the transfer of 85,000 Wesfarmers shares from his HIN to the margin loan account in the name of Mrs King; and
(c)these documents having been induced by and in reliance of the collateral representations made by Mr King,[68] thereby he had incurred the risk of becoming liable to pay Leveraged Equities any amounts due to Leveraged Equities by Mrs King pursuant to the Margin Loan Facility.[69]
[68] Pleaded in pars 13 and 14 of the Statement of Claim.
[69] Pleaded in par 15 of the Statement of Claim.
The collateral representations pleaded in par 13 and the terms of a collateral contract pleaded in par 14 were the representations made by Mr King on 30 July 2007 and the terms of the 'Confidential Contractual Agreement' dated 30 July 2007 were agreed to and executed by Mr King and Mr Smith.[70]
[70] Exhibit A, TB 187.
In par 86 of the Statement of Claim Mr Smith pleaded that to the extent he had incurred any liability to Leveraged Equities, or suffered any loss for any amount, by reason of the application form or the Authority Letter, whether discharged by or on behalf of Mr Smith or outstanding (which was denied), such liability arose from Mr Smith's provision of the application form and Authority Letter to Leveraged Equities in support of the indebtedness incurred by Mrs King.
Mr Smith submitted in his written opening submissions dated 27 January 2016 that he was entitled to have judgment entered against Mrs King in default of appearance. That did not occur because on the last working day before the commencement of the trial, on 29 January 2016, Mrs King entered an appearance and filed a defence that essentially denied all of the matters alleged against her, and pleaded that the majority of matters were not within her knowledge.
In her defence Mrs King denied that she was the controlling personal beneficiary of the margin loan account during the material times outlined in the Statement of Claim, pleaded she did not know of and could not admit the contracts between Mr Smith and Mr King, and that she never required collateral to be provided by Mr Smith, nor did she ever seek or agree to Mr Smith providing such collateral.
Mr Smith's case at trial against Mrs King was the case that had been put in his written opening submissions, and was not substantively referred to in oral submissions.
In his written opening submissions Mr Smith claimed he was entitled to be indemnified by Mrs King for the payments he had made to Leveraged Equities as Mrs King was the primary debtor to debts which Mr Smith had discharged, in part from the proceeds of Leveraged Equities exercising a power of sale over the collateral he provided (Wesfarmers shares) and in part by direct cash payments.[71] Mr Smith also argued that his claim of indemnity against Mrs King extended beyond the amounts he had paid, and included all of the damage that he had suffered by reason of Mrs King not paying her debt to Leveraged Equities.
[71] Plaintiff's opening submissions for trial dated 27 January 2016, pars 236 to 238.
The primary judge appeared to accept Mr Smith's case as put in the written outline of submissions and found that as a guarantor of Mrs King's liabilities to Leveraged Equities any payments Mr Smith made were either required by the agreements he had entered as surety, or were necessary for the protection of his own interests or property. Those circumstances entitled Mr Smith to recoup from Mrs King the amounts he had paid on her behalf.
Ground 1 ‑ submission to jurisdiction
Mrs King's submissions
In Ground 1 Mrs King contends that the primary judge erred in fact or in law, or the decision of the primary judge is unsafe or unsatisfactory, in allowing for the matter to proceed against Mrs King when she had not been personally served with a writ of summons or statement of claim.
Mrs King says that she was never personally served or otherwise served by Mr Smith or his agent. In the absence of any evidence as to service, this court cannot have regard to this submission. However, the court can have regard to the fact that the record shows that no affidavit of service of the writ was filed by Mr Smith's lawyers.
Mrs King points out that the record shows she was added as a fifth defendant to the action on 31 March 2011 pursuant to a memorandum of consent orders (which she never consented to) filed by Mr Smith's lawyers. Mrs King concedes that she did lodge an appearance to the writ on 29 January 2016, and filed a defence on that day, which was the last working day before the trial.
Mrs King contends that her memorandum of appearance and defence were prepared by her son Mr King who instructed her to sign both and then send them to the court. She says that she did not know the purpose of these documents, but did not want the court to proceed without informing the court that she was not aware of any matters regarding the proceedings in which she was named the fifth defendant. Whether that is so is irrelevant to the disposition of this ground.
Mrs King argues that there was a lack of service of the writ of summons and irregularities in the receipt of the memorandum of appearance by the court. This includes a contention that the memorandum of appearance should not have been received as it was not dated, and the memorandum failed to provide an address for service within 66 km of Perth.
As a consequence of the lack of service of the writ and irregularities in the receipt of the memorandum of appearance, Mrs King contends that the action against her must be struck out or dismissed. Furthermore, Mrs King says that the writ had lapsed by the time the trial commenced as it was issued in 2011 and the trial commenced in 2016.
Disposition ‑ Ground 1
A stale writ is irregular but is not a nullity and is only invalid for the purposes of service, but otherwise remains valid.[72] An unconditional appearance by a defendant makes good the service of a stale writ.[73]
[72] Van Leer Australia Pty Ltd v Palace Shipping KK (1981) 180 CLR 337, 341 (Stephen J); applied in Brealey v Board of Management of Royal Perth Hospital [1999] WASCA 158 [10] (Malcolm CJ).
[73] Sheldon v Brown Bayley's Steel Works Ltd [1953] 2 QB 393, 400, 402 (Denning LJ).
As a general rule an unconditional appearance amounts to a submission to the jurisdiction of the court and to a waiver of irregularity, such as the manner of service.[74] Mrs King submits, referring to O 12, r 2(3) and O 12, r 2(5) of the Rules of the Supreme Court 1971 (WA), that her memorandum of appearance should not have been received by the court as it was not dated and failed to provide an address for service within 66 km of Perth. However, on 1 March 2007, by an amendment to O 12 , r 2, the requirement for a memorandum of appearance of a defendant appearing in person to specify an address for his or her place of residence, and an address for his or her place of service to be no more than 66 km from the Supreme Court, was removed.[75]
[74] Gauci v Briffa [2011] WASCA 20 [18] (Pullin JA, Newnes & Murphy JJA agreeing); applied Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad (1976) 136 CLR 529, 539 (Gibbs J).
[75] Western Australia, Government Gazette No 30 (21 February 2007) 535.
As to Mrs King's submission that her memorandum of appearance should not have been accepted by the court as it was not dated, the procedure on lodging of a memorandum of appearance under O 12, r 3 makes it clear that if the form is undated no irregularity arises. Order 12, r 3 provides:[76]
3.Procedure on receipt of requisite documents
On receiving the requisite documents the proper officer must in all cases affix to the copy of the memorandum of appearance an official stamp showing the date on which he received those documents, enter the appearance in the Cause Book, and then return the copy of the memorandum to the person entering the appearance and the copy memorandum so stamped shall be a certificate that the appearance was entered on the day indicated on the official stamp.
[76] Rules of the Supreme Court 1971 (WA) (as at 27 November 2015).
The court record reveals that the Form 6 Memorandum of Appearance lodged by Mrs King in the Central Office of the Supreme Court bears the date of 29 January 2016 on the official stamp placed on the document. Pursuant to O 12, r 3, this official stamp certifies that the appearance was entered on 29 January 2016. As a consequence, Mrs King's submission that the memorandum of appearance was not dated, and therefore should not have been received by the court and an appearance by her entered, is also unfounded.
Gibbs J in Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad[77] is often cited as authority for the general rule that an 'unconditional appearance amounts to a submission to the jurisdiction of the court and to a waiver of irregularity, eg, in the manner of service'.[78]
[77] Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad (1976) 136 CLR 529.
[78] Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad (1976) 136 CLR 529, 539; applied in Gauci v Briffa [2011] WASCA 20 [18] (Pullin JA, Newnes & Murphy JJA agreeing) and Polodna v Mattiaccio [2017] WASC 294 [9] (Master Sanderson).
In Brealey v Board of Management of Royal Perth Hospital,[79] an issue was whether the appellant had submitted to the jurisdiction of the court despite being served with a stale writ, as the writ had been issued more than 12 months before it was served on the appellant. Because the writ had not been served within 12 months it was invalid for the purposes of service. The question for the Court of Appeal in that matter was whether sufficient steps had been taken in the proceedings by the appellant so as to amount to submission to the jurisdiction of the court in circumstances where the appellant had not objected to the jurisdiction. In the appeal, Ipp J said:[80]
[W]hether the steps were necessary or useful to any action taken by the party other than in objecting to the jurisdiction. A step that is not consistent with or relevant to the challenge to the jurisdiction, will usually be a submission to that jurisdiction. The court must consider the matter objectively and, where the steps relied on are the actions of a solicitor, they must be considered in the context of all the relevant circumstances: Akai Pty Ltd v People's Insurance Company Ltd [1998] 1 Lloyd's Rep 90 at 97, Rein v Stein (1892) 66 LT 469 at 471, Williams and Glyn's Bank PLC v Astro Dinamico Compania Naviera SA [1984] 1 Lloyd's Rep 453; [1984] 1 WLR 438, Adams v Cape Industries Ltd [1990] Ch 433 at 459.
[79] Brealey v Board of Management of Royal Perth Hospital [1999] WASCA 158; (1999) 21 WAR 79.
[80] Brealey v Board of Management of Royal Perth Hospital [1999] WASCA 158; (1999) 21 WAR 79 [38] (Malcolm CJ agreeing); applied in Miller v Miller [2018] SASCFC 40 [150] (Bampton J).
In City of Swan v McGraw-Hill Companies inc,[81] Rares J found that in bringing an interlocutory application 'on a wider basis than merely seeking the discharge of the order giving leave to serve it outside Australia',[82] the respondents had submitted to the jurisdiction. In determining that the respondents submitted to the jurisdiction and waived objection to the irregularity of service, his Honour said:[83]
If a defendant seeks relief from the Court wider than relief setting aside service or associated with such relief, such as relief on the merits of a claim, ordinarily, he, she or it will have waived the objection to jurisdiction: Laurie vCarroll (1958) 98 CLR 310 at 335-336 per Dixon CJ, Williams and Webb JJ; National Commercial Bank v Wimborne (1979) 11 NSWLR 156 at 176E-F, 177D-E, 182D-F per Holland J; Walker v Newmont Australia Ltd [2010] FCA 298 at [27] per Gordon J. In Re Dulles' Settlement (No 2); Dulles v Vidler [1951] Ch 842 at 847, Evershed MR put the issue pithily as follows:
It is, of course, plain that where a question of jurisdiction arises a man cannot both have his cake and eat it. He cannot fight the issue on the merits, and at the same time preserve the right to say, if the worst comes to the worst, that the court has no jurisdiction to decide against him. And he cannot, consistently with that principle, take any step unequivocally referable to the issue on the merits.
By lodging an appearance and filing a defence, Mrs King had submitted to the jurisdiction of the court
[81] City of Swan v McGraw-Hill Companies inc [2014] FCA 442; (2014) 223 FCR 295.
[82] City of Swan v McGraw-Hill Companies inc [2014] FCA 442; (2014) 223 FCR 295 [112]; applied Brealey v Board of Management of Royal Perth Hospital [1999] WASCA 158; (1999) 21 WAR 79 [38].
[83] City of Swan v McGraw-Hill Companies inc [2014] FCA 442; (2014) 223 FCR 295 [117]; see also Miller v Miller[2018] SASCFC 40 [150] (Bampton J).
By lodging a memorandum of appearance and defence on the last working day before the commencement of the trial, these steps were sufficient to constitute a submission to jurisdiction by Mrs King.
Unless the court gives leave, a defendant cannot take part in proceedings without filing an appearance. The effect of lodging a memorandum of appearance is that it provides notice that the defendant intends to contest the action. In filing an appearance and a defence, Mrs King took necessary steps to defend the action on its merits, rather than merely taking a step that is consistent or relevant to challenging the jurisdiction. If she had wished to reserve her position regarding jurisdiction she could have filed a conditional memorandum of appearance. However, she did not do so.
In submitting to jurisdiction, by the lodging of her memorandum of appearance and defence, Mrs King has also waived any claimed irregularities in relation to service of the writ.
For these reasons, Ground 1 is not made out.
Grounds 2 and 6 ‑ the right of a guarantor to an indemnity
Mrs King's submissions
Mrs King contends that the primary judge erred in not dismissing the claims against her where his Honour's findings were that the account that incurred the debts that Mr Smith is seeking indemnity from Mrs King for, was not Mrs King's account but plainly Mr King's account. She submits that the contract between Mr Smith and Mr King held Mr King solely responsible for any liabilities incurred.
Mrs King argues that the primary judge erred in fact, or in law in finding that the Leveraged Equity margin loan agreement she entered into on 20 July 2006 authorised Mr King to add a guarantor to her account. No liability of Mrs King to Mr Smith arose as the acts complained of which resulted in Mr Smith's losses were the acts of Mr King, which were beyond the scope of her authority and were the result of Mr King's wrongful conduct.
Mrs King also argues that the evidence established that Mr King was not authorised by Mrs King to transfer funds from her account to other accounts, to personally trade on her account, or assume the account as his own.
In support of Ground 2, Mrs King relies upon the basis which Mr Smith put his case as against Mrs King in his opening submissions which was as follows:[84]
(a)in July 2007, Mrs King was a 64 year-old teacher's aide and 'there will be no evidence adduced suggesting that Mrs King had the financial capacity to pay the purchase prices for the securities, or meet the shortfall that would be occasioned if the securities were all to be sold for their then market prices'; and
(b)if Mrs King did not have the means to fund the purchases or meet the losses - that were occasioned by the purchases, then the ultimate liability to do so would have fallen upon Mr King.
[84] Plaintiff's opening submissions for trial dated 27 January 2016, pars 24 ‑ 30.
Mrs King concedes that the primary judge was in part correct to have placed reliance on Mr King's supposed authority to use the margin lending account name in her name when he found that Mr King's use of the account 'lies at the heart of these proceedings',[85] but she says the fact that he did so was unknown to her at the relevant times from late February 2007. Accordingly, she claims that Mr King was not authorised to act by the terms of the margin loan agreement that she had with Leveraged Equities.
[85] Primary reasons [10].
The substantial difficulty with this submission is that there was no evidence before the primary judge as to what was or was not known by Mrs King, as Mrs King did not appear at the trial. However, for the reasons given below in [170] ‑ [228], the primary judge did make findings that one or more of the documents signed by Mr Smith on 30 July 2007 which appeared to bear Mrs King's signature, were in fact signed by Mr King. In addition, some inferences can be drawn as to the knowledge of Mrs King from the contents of the application form she signed in July 2006.
Mrs King also argues that Mr King did not have the authority nor was he authorised by her to transfer funds from her margin loan account to other accounts or to add a guarantor. In particular, Mrs King claims there was no acknowledgement that Mr King was an authorised representative or any details provided to her as to the authority he would have to operate her account.
The application form signed by Mr Smith on 30 July 2007, and the Schedule 2 Form of Acknowledgement by Client were required by Leveraged Equities to be executed to add a guarantor to the account in Mrs King's name. Mrs King argues that Leveraged Equities required her to execute these documents as the borrower and for the application form to be witnessed. Mrs King points out that, as the primary judge found, she could not have signed these documents before they were provided to Leveraged Equities the day after Mr Smith signed the documents, given the fact of her location in country Queensland. In addition, she contends that she had not authorised for another person to sign documents on her behalf.
Mrs King refers to the finding made by the primary judge that her signature on the application form executed by Mr Smith by which he became a guarantor and the Authority Letter could not have been witnessed by Mr King. Furthermore, as Mrs King did not sign these documents on 30 July 2007 they cannot bind her to the guarantee due to the principle that if an agent forges the principal's signature the transaction cannot be ratified by the principal because it could not be found that the agent purported to act on behalf of the principal. Accordingly, Mrs King argues that the primary judge could not have been satisfied that she had ratified the actions of Mr Smith by which he became a guarantor.
Mrs King also points out:
(a)the contract executed between Mr Smith and Mr King dated 30 July 2007 (Confidential Contractual Agreement) was only seeking to hold Mr King, not Mrs King, to account for any future adverse outcomes resulting from their agreement, including tax liability if any of the Wesfarmers shares were sold;
(b)Mr King made the payment of $50,000 to Mr Smith in accordance with the 30 July 2007 Confidential Contractual Agreement;[86] and
(c)Mr King made further payments against the margin loan account in Mrs King's name through Mr King's account with Leap Financial Services totalling $820,000 from 16 July 2008 to 13 October 2008,[87] Mrs King contends that these payments reduced the indebtedness of the margin loan account and aligned with the terms specified in the August 2008 deed executed by Mr King and his partner as the first two payments to be made to the margin loan in Mrs King's name by the end of February 2009.
[86] Primary reasons [222].
[87] Exhibit A, TB 490, 539 and 579.
In support of Ground 6, Mrs King says that if the primary judge has applied the principles of subrogation, then in doing so the primary judge has inflicted an injustice upon Mrs King because the purpose of subrogation is to compel the ultimate payment of a debt by the party who, in equity and good conscience, should pay it. In this matter, Mrs King says that is Mr King.
It was Mr King who sought that Mr Smith guarantee the margin loan account in Mrs King's name, not Mrs King. Further, Mrs King has not been unjustly enriched nor acted unconscionably through Mr Smith providing a guarantee to the debt on the Leveraged Equities' account in her name.
Had the agreement between Mr King and Mr Smith not been made on 30 July 2007, Mrs King argues that the debt owing on the account in her name would have been approximately $375,000, which loss was Mr King's as these were his trades and not hers.
Legal principles
A guarantor has a contractual right to an indemnity against the debtor and an equitable right of subrogation by which the guarantor is entitled to stand in the shoes of the creditor.[88]
[88] Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247 [78] (McLure JA) citing O'Donovan J and Phillips J, Modern Contract of Guarantee (English 3rd ed 2003) [1-30].
The learned authors O'Donovan and Phillips, in Modern Contract of Guarantee, explain the right of indemnity that arises in contract as follows:[89]
The legal foundation of the guarantor's right of indemnity usually depends upon the circumstances in which the guarantor assumed the burdens of suretyship. Where the guarantor provides the guarantee at the valid request of the principal debtor, there is, in the absence of an express right of indemnity, an implied contract of indemnity or an implied term in the contract of guarantee to similar effect … A guarantor's right of indemnity is not an instance of subrogation. Rather, it is a standalone equitable doctrine, often referred to as the 'equity of exoneration'.
…
The mere fact that a guarantor gives a guarantee is not enough to establish a request. However, a request may be inferred from the circumstances. It is sufficient that the principal debtor knew that the surety intended to guarantee its debts and acquiesced in the provision of the guarantee for the benefit of the debtor; in such case, the debtor is taken to have requested the guarantee, and the guarantor will have an implied right of indemnity.
[89] O'Donovan J and Phillips J, The Modern Contract of Guarantee (Thomson Lawbook Co Loose Leaf, September 2024) [12-100] (citations omitted) (emphasis added).
A request to give a guarantee may be inferred from the circumstances. For example, it suffices if the debtor knew that the surety intended to guarantee its debts and acquiesced in the provision of the guarantee for the benefit of the debtor. In such a case, the debtor is taken to have requested the guarantee, and the guarantor will have an implied right of indemnity.[90]
[90] Rogers v Australia and New Zealand Banking Group Ltd [1985] WAR 304, 313 (Burt CJ); applied in O3 Capital Pty Ltd v WY Properties Pty Ltd [2016] WASCA 82; (2016) 49 WAR 517 [74] and [92]; Hopper v DJ Sincock Pty Ltd [2021] NSWCA 305; (2021) NSWLR153 [26] (Brereton JA) (McCallum JA & Simpson AJA agreeing).
Mere knowledge of the guarantee by the principal debtor, without request by the principal debtor does not suffice to establish a contractual basis for relief, some element of concurrence is required (as distinct from an equitable basis which does not require knowledge). That element will be readily found where, at the time the principal obligation is incurred, the principal obligator (the debtor) is aware that the guarantor has given or will give a guarantee.[91]
[91] Hopper v DJ Sincock Pty Ltd [2021] NSWCA 305; (2021) NSWLR 153 [29] (Brereton JA) (McCallum JA & Simpson AJA agreeing).
Further, a guarantor will not be able to establish an implied request from the principal debtor to provide the guarantee by relying upon an implication in the guarantee itself if the principal debtor is not a party to the guarantee.[92]
[92] Sisic v Krpo [2008] NSWSC 1086 [15] (Ward J).
The question of whether there has been an express or implied request is a question of fact.[93]
[93] O3 Capital Pty Ltd v WY Properties Pty Ltd [2016] WASCA 82; (2016) 49 WAR 517 [78]; applying Bank of England v Cutler [1908] 2 KB 208, 235.
If a debtor did not expressly or impliedly request the guarantee, the guarantor's right of reimbursement can only be based on a restitutionary claim for money paid.
The test to be applied in order for a guarantor to succeed against the principal debtor based on a restitutionary claim for money paid was summarised by Hughes J in Carey v Balfour:[94]
The test to be applied in respect of claims for recoupment in restitution as outlined in the seminal texts of O'Donovan & Phillips's Modern Contract of Guarantee and Mason & Carter's Restitution Law in Australia may be summarised as follows:
●the guarantor must be legally compelled to make payment in relation to the debt and not merely morally compelled;
●the payment was reasonably necessary in the interests of the principal debtor or the guarantor or both of them;
●the guarantor's payment must have benefited the principal debtor by resulting in an absolute or pro tanto discharge of the debt that the principal debtor was primarily and ultimately responsible for; and
●enforcement of the right to indemnity must not be inequitable in the circumstances.
In light of the grounding of a claim of contribution in considerations of equity and justice, the similar restitutionary basis of both the claim of contribution and recoupment, and the High Court's preference for grounding restitutionary actions in the unifying concept of unjust enrichment, a claim for recoupment requires a consideration of the extent to which the principal debtor has obtained an unjust benefit from the guarantor's discharge of the liability against the circumstances of the parties' interactions. Accordingly, the factual circumstances surrounding the formation of the purported agreement, the giving of the guarantee and the extent to which a benefit was unjustly gained by the principal debtor determine whether a claim of recoupment is made out.
[94] Carey v Balfour [2021] SASC 79 [68] ‑ [69] (footnotes omitted); see also Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247 [78] (McLure JA).
There is also a fifth precondition for a guarantor to obtain recovery from the principal debtor. This precondition is that the payment of the principal debtor's debt by the guarantor must have been made on the debtor's behalf and the debtor must ratify the payment.[95] As McLure JA observed in Oakleigh Acquisitions Pty Ltd (in Liq) v Steinochr, this principle is consistent with the principle of agency that there can be no ratification of an un-authorised act if the person was purporting to act on its own behalf rather than on behalf of a purported principal.[96]
[95] Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247 [82] (McLure JA); applied in Burness (as liquidator of Denward Lane Pty Ltd (in liq)) v Supaproducts Pty Ltd [2009] FCA 893 [46] (Gordon J); see also O'Donovan J and Phillips J, Modern Contract of Guarantee (Thomson Lawbook Co Loose Leaf, September 2024) [12-110].
[96] Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247 [82].
As Hughes J in Carey v Balfour makes clear in her summary of the principles, a guarantor is entitled to a restitutionary remedy of recoupment if all of the preconditions for relief are made out, one of which is that the court must be satisfied that it was not inequitable in the circumstances to grant the remedy of recoupment in restitution. This principle emerges from the general equity doctrine that a 'party seeking equity must, do equity', or put another way, the party seeking equity must be ready to return equity to the other party, if the circumstances so require.
Although some of the authorities refer to the court being satisfied that it is equitable to grant relief, in Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq),[97] Windeyer J when adopting the doctrine of subrogation stated in the United States text, Sheldon: Law of Subrogation (2nd ed, 1892), aptly observed subrogation:[98]
[I]s broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience, should have been discharged by the latter; but it is not to be applied in favour of one who has, officiously and as a mere volunteer, paid the debt of another, for which neither he nor his property was answerable, and it is not allowed where it would work any injustice to the rights of others.
[97] Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) (2005) 65 NSWLR 603.
[98] Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) (2005) 65 NSWLR 603, 608 (our emphasis).
More recently, in ATCO Controls Pty Ltd (in liq) v Stewart, Redlich JA relevantly observed:[99]
Subrogation is an empirical doctrine, calling for the application of 'the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts.' It is a remedy which a court of equity will grant in order to prevent there being an unconscionable situation. It is an 'equitable remedy' which will not be granted as a right, but only where the circumstances make it appropriate to do so. The doctrine functions in a general way to avoid injustice. As Lord Salmon said in Orakpo v Manson Investments:
The test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be.
The doctrine of subrogation is thus guided by the principle that equity ought intervene to adjust the interests of the parties to avoid unconscionable results. As Gleeson CJ (as he then was) and Priestley JA (Mahoney JA agreeing) said in Registrar General v Gill:
The equitable principles relating to subrogation aim to adjust the interests of three parties, such as a creditor, a debtor and an insurer or surety, in such a way as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor.
[99] ATCO Controls Pty Ltd (in liq) v Stewart [2013] VSCA 132; (2013) 31 ACLC 13-065 [234] ‑ [235] (citations omitted).
In Bofinger v KingswayGroup Ltd, the High Court observed that '[s]ubrogation may be seen as preventing the unjust enrichment of the principal debtor who otherwise might escape carriage of ultimate liability,'[100] but the plurality went on to state:[101]
Lord Hoffmann, who gave the most detailed opinion, referred to the use of the term 'subrogation' 'to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived'. His Lordship then considered various cases in which securities were 'kept alive' on the footing that a third party who paid off the security was presumed in equity to intend that it be so retained for the benefit of that party. Lord Hoffmann concluded:
'I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff's expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy.'
However, there is difficulty in identifying the 'unjust' enrichment in subrogation cases, which necessarily involve multilateral, rather than bilateral, relationships.
[100] Bofinger v KingswayGroup Ltd [2009] HCA 44; (2009) 239 CLR 269 [88] (Gummow, Hayne, Heydon, Kiefel & Bell JJ).
[101] Bofinger v KingswayGroup Ltd [2009] HCA 44; (2009) 239 CLR 269 [88] (Gummow, Hayne, Heydon, Kiefel & Bell JJ) [96] ‑ [97] (footnotes omitted).
Their Honours in Bofinger v Kingsway Group Ltd endorsed the statement made by Lowe J in Equity Trustees Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd that:[102]
When a guaranteed debt is paid by the surety he is entitled, unless the right is excluded by agreement or his conduct makes it inequitable to enforce it, in respect of the amount he has paid under his guarantee to the securities which the creditor holds for the debt guaranteed. This right arises not from any agreement between the surety and the creditor, though it may be excluded by agreement between them. It rests on equitable principles.
[102] Bofinger v KingswayGroup Ltd [2009] HCA 44; (2009) 239 CLR 269 [52] (Gummow, Hayne, Heydon, Kiefel & Bell JJ).
The plurality in Bofinger v KingswayGroup Ltd went on to find there was nothing in the circumstances in the matter before the court rendering it inequitable for the appellants to enjoy the rights of subrogation.[103]
[103] Bofinger v KingswayGroup Ltd [2009] HCA 44; (2009) 239 CLR 269 [71] (Gummow, Hayne, Heydon, Kiefel & Bell JJ).
Consequently, a guarantor's claim for an indemnity in equity will usually succeed only where the guarantor was legally compelled to incur the obligation and where the court is satisfied it was not inequitable in the circumstances to provide relief to the guarantor by way of reimbursement of the contribution made by the guarantor to discharge the principal debtor's debt.
In most matters where a guarantor has satisfied the court that the first three preconditions for granting relief in equity have been made out, it would be unusual for it not to be inequitable to grant a plaintiff the remedy of recoupment in restitution.
Usually it will be unconscionable to allow the principal debtor to escape from bearing the burden of the debt to the creditor where a guarantor discharges the debt, and it is subrogation that equity engages to ensure the principal debtor is liable to the guarantor. In the usual case if subrogation is not allowed as a remedy the principal debtor would receive the windfall of the discharge of their liability to the creditor.
Disposition ‑ Grounds 2 and 6
Unfortunately, the primary judge did not specifically address the principles to be applied in order for a guarantor to succeed in contract or in equity. The liability of Mrs King appears to have been assumed because the account was in her name. However, this court is in a position to apply the principles to the facts as found by the primary judge and the uncontradicted evidence as found in the documents executed by Mrs King and Mr Smith.
2.4.3.1 Did Mr Smith have a contractual right to an indemnity ‑ Was a valid request made to Mr Smith to provide a guarantee?
The first issue to be determined is whether Mr King was authorised by Mrs King to make a request of Mr Smith to provide a guarantee of liabilities outstanding on the margin loan facility in Mrs King's name.
Mr King submitted that he now has no assets, and little income. His financial resources would not be sufficient to discharge the judgment orders. Had judgment been entered against him in 2018, he would have entered bankruptcy at that time. He also made a submission that Mrs King was a victim of Mr Smith.
As to the last point, as the primary judge observed in his supplementary reasons delivered on 3 December 2021, Mr King appears to have difficulty in understanding that the action against his mother was based solely on his conduct.[132]
[132] Supplementary reasons [28].
In responsive submissions dated 14 September 2021, Mr Smith submitted:
(a)having found that judgment is to be entered against Mr King and Mrs King, the entry of judgment must follow. There is no discretion to decline to enter judgment;
(b)the delay in seeking orders against Mr King and Mrs King was justified because if the appeal by Mr Smith against Leveraged Equities or ASASL had been successful this would have affected the quantification of judgment orders against Mr King or Mrs King, or even Mr Smith's entitlement to obtain judgment against each of them. This is because damages recovered against Leveraged Equities would have reduced (or possibly extinguished) Mr Smith's loss;
(c)neither Mr King nor Mrs King asked for the action to be listed for further orders, or otherwise took issue with the action not being listed for final orders until after July 2021;
(d)the entry of judgment had occasioned no material prejudice to either Mr King nor Mrs King where a plaintiff can enforce any judgment without leave for up to six years following entry, and with the leave of the court for up to 12 years following entry.[133] Pursuant to div 3 of pt IV of the Bankruptcy Act 1966 (Cth), a debtor may present a petition about themselves to the Official Receiver, and thereby make themselves bankrupt. If Mr King viewed bankruptcy as an inevitability and wanted to 'get on with it' rather than wait, it was open to him to do so; and
(e)deferring the entry of judgment against Mr King and Mrs King avoided the need for the parties and the court to engage with the question of quantification of Mr Smith's claims against them until the final position was known as against Leveraged Equities, and following the partial success of the appeal the amount by which Mr Smith sought that judgment be entered against Mr King and Mrs King has resulted in a reduction in the quantification of Mr Smith's loss.
Primary judge's supplementary reasons
[133] Civil Judgments Enforcement Act 2004 (WA) s 12 and s 13.
The primary judge did not accept the submission put on behalf of Mr Smith that there is no discretion to not enter judgment, and noted that no authority was cited for that proposition where such a limitation was imposed on the power of the court to stay proceedings if further steps in the proceedings would be an abuse of process.
Although the primary judge found that if he was satisfied that the application for entry of judgment was oppressive or made for an improper purpose he would be satisfied that the power of the court to stay further proceedings for an abuse of process would be enlivened,[134] his Honour was not satisfied that entry of judgment in favour of Mr Smith against Mr King and Mrs King would be an abuse.
[134] Supplementary reasons [34].
In making this finding, his Honour accepted that Mr Smith's purpose in not proceeding immediately to enter judgment following delivery of reasons in the primary proceedings was not vexatious or oppressive, and observed that had Mr Smith succeeded in the appeal against Leveraged Equities or ASASL (assuming that it had operative insurance cover) it may have been unnecessary for Mr Smith to pursue Mr King or Mrs King for the loss he suffered.
The primary judge also observed that it would have been preferable for judgment to have been entered immediately against Mr King or Mrs King, but even then enforcement would almost certainly have been delayed, as the 'hard fact' which was obvious to everyone was that Mr Smith's only realistic chance of recovering the loss he suffered was by judgment against those defendants who had assets or might be insured (Leveraged Equities or ASASL).
The primary judge also found that it was open to Mr King or Mrs King to ask for the matter to be listed.
His Honour rejected the contention by Mr King that the continuation of action against Mrs King was for an improper purpose and amounted to persecution in circumstances where Mrs King did not appear at trial and did not contest the allegation on which her liability was found that Mr Smith was entitled to be indemnified for discharging her liability to Leveraged Equities in circumstances where he was a guarantor of her liabilities and his property was the subject of a mortgagor security for her borrowings.
Finally, the primary judge found that although Mr King submitted that he would, at least potentially, have been better off had judgment been entered on an earlier occasion, he had not shown that that would have been the case. Nor had he shown that he had done anything or altered his position in reliance on an assumption that judgment would not be entered. To the contrary, Mr King's submissions and his affidavit spoke to the stress occasioned by expecting that there would be judgment against him.
Disposition
Where an application is made to stay proceedings, the onus is on the applicant to satisfy the court that such an order should be made.
The onus of satisfying the court that there is an abuse of process is a heavy one. The power to dismiss proceedings [or permanently stay proceedings] as an abuse of process should be exercised with caution, and only in the most exceptional or extreme case.[135]
[135] Patrick Jebb as trustee for The Trafalgar West Investments Trust v Superior Lawns Australia Pty Ltd [2019] WASC 121 [102] (Vaughan J).
The categories of what amounts to an abuse of the court's process does not consist of closed categories. However, there are three broad established categories. In Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd)(in liq), Edelman and Steward JJ recently referred to these categories and said:[136]
Although the categories are not closed, the doctrine of abuse of process has conveniently, but loosely, been divided into three overlapping categories. These are: (i) the use of the court's processes for an illegitimate purpose; (ii) the use of the court's processes in a manner that is unjustifiably oppressive to one of the parties; and (iii) a category which might better be described as concerned with the integrity of the court and not merely its processes, and which is sometimes described as concerned with bringing the administration of justice into disrepute.
[136] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd)(in liq) [2022] HCA 3; (2022) 275 CLR 508 [130]; see also the same point made by Gageler J at [93] (footnotes omitted).
In this matter, Mr King and Mrs King essentially argue that the conduct of Mr Smith and his solicitors invoked the first and second categories of abuse of process, by the oppressive length of delay in seeking entry of judgment. In this appeal, Mr King also seeks to invoke the third category.
However, it is established that the mere passage of time between the cause of action accruing and commencing proceedings (without more) is no longer a potential aspect of the interests of justice relevant to the exercise of the power to stay proceedings permanently. Thus, absent proof of a forensic decision by a plaintiff to obtain some advantage from delay or some other relevant potentially disentitling circumstance, the mere fact of the passing of time is of no consequence.[137] Although this point relates to delay in the institution of proceedings by a plaintiff from the time a cause of action accrues, there is no reason why this principle should not apply to a delay between the delivery of reasons for decision by a primary judge and the entry of judgment against an unsuccessful party.
[137] GLJ v The Trustees of the Roman Catholic Church for the Diocese of Lismore [2023] HCA 32; (2023) 414 ALR 635 [42] (Kiefel CJ, Gageler & Jagot JJ).
Also of importance to the disposition of this ground of appeal is the observation made by Gageler J in Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd)(in liq) that '[i]nvocation of a process of a court as a step in the pursuit of an ultimate purpose amounts of itself to an abuse of process only if pursuit of the ultimate purpose is "foreign to the nature of the process in question"'.[138] Edelman and Steward JJ effectively made the same point but observed that a better way of expressing this category of abuse of process is 'simply to ask whether the predominant means adopted and ends to be achieved by a litigant (in other words, the litigant's purpose) are inconsistent with the express or implied scope of the legal process'.[139]
[138] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd)(in liq) [2022] HCA 3; (2022) 275 CLR 508 [97] (footnotes omitted).
[139] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd)(in liq) [2022] HCA 3; (2022) 275 CLR 508 [134] ‑ [135].
Although this principle in Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd)(in liq) was considered in the context of the issue of a summons for the public examination of a former director of a company in circumstances where it was found the predominant purpose of the examination was not to confer a benefit on the company, its creditors or its contributories but rather to pursue a private benefit for a limited group of shareholders, this principle has a wider application to the use of the processes of the court generally.
Essentially the conduct complained of by Mr King and Mrs King in this matter is that Mr Smith through his solicitors abused the processes of the court by seeking and obtaining a number of adjournments of the action with the consent of the other defendants, Leveraged Equities and ASASL, before seeking entry of judgment against Mr King and Mrs King.
In circumstances where Mr Smith had a legitimate reason and purpose that was not foreign to the nature of the process of seeking adjournments prior to seeking final orders to enter judgment where there is uncertainty as to the final quantum of monetary orders sought, such a lengthy delay could not have been found by the primary judge to be conduct that constituted an abuse of process.
In addition, although prior to the hearing of Mr Smith's appeal against Leveraged Equities and ASASL, judgment had not been entered against either Mr King or Mrs King it was not open to either of them to challenge any of the findings made against either of them in the reasons delivered by the primary judge on 29 March 2018, as the primary judge effectively observed, it would have been open to either Mr King or Mrs King to have the matter brought back before him to seek final orders against them either prior to or immediately after the hearing of Mr Smith's appeal in CACV 40 of 2018 against Leveraged Equities and ASASL.
For these reasons, Mr King's ground of appeal fails, as does Ground 8 of Mrs King's appeal.
VANDONGEN JA:
I have had the significant benefit of having read the joint reasons of Hall JA and Smith AuJ in draft. These reasons assume familiarity with and use the terms defined in those reasons.
For the reasons given by their Honours, I agree that grounds 1, 3, 4, 5, 7 and 8 in CACV 123 of 2021 and the sole ground in CACV 124 of 2021 must be dismissed.
For the following reasons, I also agree with Hall JA and Smith AuJ that grounds 2 and 6 in CACV 123 must be allowed.
Grounds 2 and 6
As the primary judge's reasons demonstrate, the proceedings in the court below were focused almost entirely on Mr Smith's claims against Leveraged Equities and against Mr King. Mr Smith's claim against Mrs King did not attract any significant attention, presumably because Mrs King did not file a defence until the last working day before the commencement of the trial and then chose not to appear at the trial. Mrs King's defence amounted to a denial of all matters alleged against her.
Mr Smith's pleaded case against Mrs King is summarised in the joint reasons at [113] ‑ [116]. Mr Smith claimed that he had a right to be indemnified for liabilities he incurred as a consequence of guaranteeing Mrs King's indebtedness to Leveraged Equities, or indebtedness to Leveraged Equities incurred in her name.
In relation to his claim against Mrs King, Mr Smith's written opening submissions dated 27 January 2016 said only the following:[140]
[Mrs] King was the primary debtor to Leveraged Equities. Mr Smith has discharged [Mrs King's] indebtedness to Leveraged Equities - in part from the proceeds of Leveraged Equities exercising a power of sale over the collateral he provided, and in part by direct cash payments.
Mr Smith is entitled to have judgment entered against [Mrs] King in default of appearance. Alternatively, on the merits, Mr Smith has an indefensible claim for indemnity against Mrs King. Of course, double recovery under judgments for the same loss is not permitted but that is a rule concerning execution and not entitlement to judgment.
Mr Smith's claim to an indemnity against Mrs King extends beyond the amounts that he has paid to Leveraged Equities (from having his collateral sold and cash payments made) and includes all of the damage that he has suffered by reason of Mrs King not paying her debt to Leveraged Equities. (footnotes omitted)
[140] Blue appeal book, 63 - 64 [236] - [238].
In a footnote to those very brief submissions, counsel for Mr Smith referred to [12.100] ‑ [12.530] in O'Donovan and Phillips's Modern Contract of Guarantee[141] in support of a contention that Mr Smith had an 'indefensible claim for indemnity against Mrs King'. Those parts of that well‑known text describe several legal foundations supporting a guarantor's right of indemnity. However, at no point did Mr Smith's counsel condescend to explain the precise basis of the claim against Mrs King. In his oral opening address, counsel for Mr Smith simply asserted that Mrs King was
liable under the common law indemnity, the implied restitutionary indemnity which falls upon any principal debtor upon payment by a guarantor.
[141] O'Donovan J and Phillips J, Modern Contract of Guarantee (Thomson Lawbook Co Loose Leaf, September 2024).
Later, in his closing address, counsel told the primary judge that there was nothing further he wanted to say about the claim against Mrs King beyond what he had said in opening.[142]
[142] ts 1000.
As explained in Modern Contract of Guarantee, '[t]he legal foundation of the guarantor's right of indemnity usually depends on the circumstances in which the guarantor assumed the burdens of suretyship'.[143] Further, it is said that the relevant basis of the right of indemnity differs depending on whether a principal debtor did or did not request the guarantee.
[143] Modern Contract of Guarantee [12.100].
Where the principal debtor validly requests the provision of a guarantee, the guarantor's right to an indemnity from the principal debtor arises from the existence of an express right, from an implied contract of indemnity, or from an implied term in a contract of guarantee.[144]
[144] See Modern Contract of Guarantee [12.100] and the cases referred to by the learned authors.
However, as McLure JA pointed out in Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr,[145] where a principal debtor did not request a guarantee, a right of reimbursement (or 'recoupment'[146]) is based on a restitutionary claim.
[145] Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247 [78] (McLure JA).
[146] In Modern Contract of Guarantee [12.100], the remedy associated with a guarantor's right of indemnity is referred to as the guarantor's remedy of 'reimbursement'. In Mason K and Carter J W, Restitution Law in Australia (4th ed, 2021) [625] - [636] it is referred to as 'recoupment'. See also Edelman J and Bant E, Unjust Enrichment (2nd ed, 2016) 293 - 296 and Goff and Jones G, The Law of Restitution (7th ed, 2009) ch 15.
The primary judge did not articulate the precise legal basis on which he decided to uphold Mr Smith's claim against Mrs King. However, I am of the view that his Honour must have ultimately found that Mr Smith had a right of reimbursement from Mrs King based on a restitutionary claim, which arose in circumstances in which Mrs King had not requested the guarantee from Mr Smith.
I am of that view for the following reasons.
Firstly, the primary judge did not make any express finding, and no finding emerges from his Honour's reasons as a matter of necessary inference, that Mr Smith had contractual rights of indemnity against Mrs King that arose expressly or by implication based on a request for the guarantee made by Mrs King personally.
Secondly, a finding that Mrs King had personally requested the guarantee would have been inconsistent with other findings made by the primary judge, including findings that:
(a)It was Mr King who had overreached in his trading and was unable to complete trades he had booked on his mother's account. Mr King, and not Mrs King, then approached Mr Smith and asked him to provide shares to be held as collateral security for an account in the name of Mr King's mother. It was Mr King who lied to Mr Smith about why he needed the shares and how they would be returned.[147]
(b)After Mr Smith provided the shares, Mr King persistently and dishonestly deflected Mr Smith when he inquired about recovering his shares.[148]
(c)When Mr King needed further security in 2008, he forged two authorities to enable a further 40,000 shares to be transferred as security for Mrs King's account.[149]
(d)Mr King opened the account with Leveraged Equities in his mother's name in August 2006. Mr King and Stripe Capital were the named advisors and Mr King the authorised representative. The account was for Mr King's personal trading. Mr King used the account in his mother's name to mask the extent of his personal trading activity from his fellow directors at Stripe Capital and from ASASL.[150]
(e)To avoid personal liability and perhaps to conceal his personal trading from his fellow directors, Mr King needed to find cash or lodge security of sufficient value that Leveraged Equities would lend the funds required against the value of the security. Mr King knew that Mr Smith had sufficient Wesfarmers shares to provide collateral for the pending trades.[151]
(f)The Application Form and Authority Letter both appeared to be signed by Mrs King. Mrs King's signature is purportedly witnessed by Mr King. However, as the form was only forwarded to Mr King by Leveraged Equities when Mrs King was in Queensland, Mr King could not have witnessed her sign it. If Mr King was authorised by his mother to sign documents on her behalf, he did not reveal that to Mr Smith, or on the form.[152]
(g)Mr King signed his mother's signature on the Application form 'purportedly' signed by her on 30 July 2007.[153]
[147] Smith [19].
[148] Smith [20].
[149] Smith [21].
[150] Smith [61].
[151] Smith [72].
[152] Smith [106].
[153] Smith [231].
In addition, the unchallenged evidence was that it was Mr King and Mr Smith who entered into the Confidential Contractual Agreement on 30 July 2007, and not Mrs King and Mr Smith. Pursuant to that agreement, it was Mr King who assumed obligations to Mr Smith (including an obligation to pay Mr Smith $50,000) in exchange for collateral for the Leveraged Equities account in Mrs King's name. At the same time, Mr Smith signed the Leveraged Equities Application Form, which added him as a guarantor of Mrs King's account.
Thirdly, there is nothing in the primary judge's reasons from which it could be concluded that his Honour determined that Mr King had validly requested the guarantee on behalf of Mrs King, whether he was acting as her Authorised Representative pursuant to a power of attorney conferred under the Margin Loan Facility Agreements in Mrs King's name, or on any other basis. In any event, for the reasons generally given by Hall JA and Smith AuJ, it would not have been open to the primary judge to have been satisfied that the terms of the Margin Loan Facility Agreements in Mrs King's name authorised Mr King to make a request to Mr Smith on behalf of Mrs King to provide the guarantee.
Fourthly, in Oakleigh Acquisitions, and consistently with the views expressed by the learned authors in Modern Contract of Guarantee at [12.110], McLure JA explained that for a guarantor to successfully claim reimbursement from a principal debtor, where the debtor did not request a guarantee, the following must be established:[154]
(i)the payment was made under compulsion of law;
(ii)the payment was reasonably necessary in the interests of the debtor or the guarantor; and
(iii)the payment discharged the liability of the debtor to the creditor.
[154] Oakleigh Acquisitions [78].
To my mind, it is significant that the primary judge ultimately determined Mr Smith's claim against Mrs King by reference to those very same three matters:[155]
The plaintiff claims an indemnity from Mrs King for any liability he incurred to Leveraged Equities and discharged as the guarantor to her account.
Mr Smith cannot, in the circumstances, be regarded as a volunteer in discharging Mrs King's liabilities to Leveraged Equities. He was a guarantor of her liabilities to Leveraged Equities, and his property was subject to a mortgage as security for her borrowings. Any payments he made were either required by the agreements he had entered as surety, or were necessary for the protection of his own interests or property. Those circumstances are sufficient for him to be entitled to recoup the amounts he paid on behalf of Mrs King. Judgment should also be entered against Mrs King. (emphasis added)
[155] Smith [574] - [577].
Importantly, this passage of the primary judge's reasons also demonstrate that his Honour did not give detailed consideration to the third of the three matters identified by McLure JA in Oakleigh Acquisitions: the question of whether Mr Smith had in fact discharged Mrs King's liabilities to Leveraged Equities. That his Honour did not give detailed consideration to that question is understandable. As I have already observed, counsel gave perfunctory attention to Mr Smith's claim against Mrs King and instead concentrated on Mr Smith's other claims. The primary judge also did not have the benefit of any assistance from a contradictor to Mr Smith's claim for an indemnity from Mrs King.
In my view, the primary judge erred in concluding that Mr King was entitled to recoup the amounts he paid to Leveraged Equities 'on behalf of Mrs King'. His Honour should have found that Mr Smith had not established that he had discharged Mrs King's liabilities to Leveraged Equities.
The general rule is that where a person pays another person's debt, the debt is not discharged unless it is made on behalf of the debtor and with the debtor's authority. As Dawson, Gaudron and Gummow JJ observed in Sheahan v Carrier Air Conditioning Pty Ltd,[156] a case in which payments were made by a receiver out of the receiver's own funds to discharge debts owed to subcontractors by an insolvent company, TOC:[157]
The established pattern of English authority indicates that, at least as a 'general rule', if a payment were so made by the receiver to a creditor of TOC and accepted by the creditor in satisfaction of the debt of TOC, nevertheless the payment would not discharge the liability of TOC to the creditor, unless made as agent for and on behalf of TOC and with the prior authority of or subsequent ratification by TOC. … In any event, … [it has been held that] the creditor could not later maintain an action for the debt. This was because a subsequent action by the creditor against the debtor would be classified as an abuse of the process of the court. (citations omitted) (emphasis added)
[156] Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407.
[157] Sheahan (430 - 431).
This general rule was also considered by all members of this court in Oakleigh Acquisitions, although without specific reference to what was said in Sheahan.
In Oakleigh Acquisitions, the court was required to determine an appeal against an order for summary judgment. The respondent borrowed money from four investors. A separate entity, R, entered into a 'Cashflow Guarantee' with each of the four investors and thereby guaranteed the respondent's monthly repayments. However, the respondent had not requested the guarantee.
When the respondent missed some monthly repayments, R paid to the investors an amount equal to what they would have received had the respondent made the monthly repayments, and R did so in accordance with the guarantee. Despite R having made those payments, a demand was later made on behalf of the investors for the respondent to make those payments.
On the application for summary judgment, the primary court was required to determine whether the respondent was entitled to a credit for the payments made by R. On appeal, this court concluded (by majority) that the respondent was entitled to a credit.
In arriving at that conclusion, Wheeler JA (with whom Miller AJA agreed) said:[158]
Whether an unrequested payment in respect of another's debt will discharge the debt will depend upon the answer to two questions. The first is sufficiently stated for present purposes as whether the payment is made 'for and on account of' the debt or the debtor; that is, with the intention of discharging the debt either in whole or in part. The second is whether the debtor has adopted the payment.
[158] Oakleigh Acquisitions [49].
By reference to the second identified question, Wheeler JA found that R's payments to the investors discharged the respondent's debt because they had been 'adopted' by the respondent by the time the matter came before the primary court.[159]
[159] Oakleigh Acquisitions [51].
Although McLure JA reached a different conclusion in relation to the question of whether R's payments discharged the respondent's debts, her Honour identified the two requirements that must be satisfied when a debtor has not known of, or requested, a payment in similar terms to those that were referred to by Wheeler JA:[160]
The appellants relied on statements of principle in Goff and Jones, The Law of Restitution, 6th ed (2002) at [1-018]. The authors note it is not easy to discharge another's debt in English law and that it will occur only if the debtor authorised, or subsequently ratified, the payment. In a footnote containing the authorities relied on to support that proposition, the learned authors continue:
' ... it is probably now settled that if A, a stranger [to B], pays B's debt to C, such payment will not of itself discharge B's liability to C, unless it has been made on B's behalf and has been subsequently ratified by him ... .' (bold in original)
Thus, Goff and Jones identify two requirements when the debtor has not known of, or requested, the payment. Firstly, the payment must have been made on B's behalf and secondly, B must ratify the payment. This formulation of the law suggests that agency is the basis for the rule. Goff and Jones' statement of principle has been approved in recent Australian cases: Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281 at 287; Emdon Investments Pty Ltd v Schelfhout Holdings Pty Ltd (in liq) [1998] FCA 1151. (emphasis added)
[160] Oakleigh Acquisitions [81] - [82].
These passages from Oakleigh Acquisitions were applied by Gordon J in Burness (as liquidator of Denward Lane Pty Ltd (in liq)) v Supaproducts Pty Ltd.[161]
[161] Burness (as liquidator of Denward Lane Pty Ltd (in liq)) v Supaproducts Pty Ltd [2009] FCA 893; (2009) 259 ALR 339 [45] - [47].
In Mason and Carter's Restitution Law in Australia, the learned authors observe that recognition of the general rule that the payment of another's debt does not discharge it unless made on behalf of the debtor and with the debtor's authority has triggered a 'lively debate' amongst English commentators.[162] This debate concerns questions about whether a person seeking recoupment (or contribution) must demonstrate the formal discharge of a principal debtor's obligations, or whether a compelled payment is sufficient to have the legal effect of triggering a discharge.[163]
[162] Mason K and Carter J W, Restitution Law in Australia (4th ed, 2021) [636].
[163] Restitution Law in Australia [636].
In that regard, the Court of Appeal (England and Wales) held in Ibrahim v Barclays Bank Plc[164] that a payment by a third party made under legal compulsion on account of a debt owed by a debtor will automatically discharge the debtor's debt, even if the legal compulsion arises out of a contractual obligation voluntarily assumed by the third party.[165]
[164] Ibrahim v Barclays Bank Plc [2012] 4 All ER 160.
[165] Ibrahim [49].
Ibrahim was recently cited by this court in Awap Sgt 26 Investment Ltd v CN 2000 Holdings Ltd.[166] However, the outcome of the appeal in Awap did not depend on the application of what was said in Ibrahim. In any event, it appears from the reasons for decision in Awap that the court may not have been referred to Oakleigh Acquisitions.
[166] Awap Sgt 26 Investment Ltd v CN 2000 Holdings Ltd [2020] WASCA 74 [57].
In circumstances in which this court did not have the benefit of any submissions about the correctness or otherwise of Oakleigh Acquisitions and Ibrahim, I am of the view that Oakleigh Acquisitions should be followed.
The relevant difference of opinion in Oakleigh Acquisitions concerned whether the respondent had adopted the payments made by R. However, all members of the court agreed that when a debtor did not know of or did not request a payment, the debt will not be discharged unless the payment was made on the debtor's behalf (or 'for and on account of' the debtor[167]) and that it was made in circumstances in which the debtor adopted or ratified the payment.
[167] McLure JA noted (but did not decide the correctness of) the views expressed by Birks P and Beatson J in 'Unrequested Payment of Another's Debt' (1976) 92 LQR 189 that it is sufficient if the payment is made on account of the debt rather than on account of the debtor: Oakleigh Acquisitions [83].
It is unnecessary to consider whether Mr Smith's payments to Leveraged Equities were made on Mrs King's behalf. This is because I agree with Hall JA and Smith AuJ that there was no evidence that Mrs King had ever ratified or adopted the payments made by Mr Smith to Leveraged Equities. In those circumstances, it was not open to the primary judge to find that Mr Smith had established that those payments discharged Mrs King's liabilities to Leveraged Equities.
In my view, it follows that it was not open to the primary judge to conclude that Mr Smith was entitled to recoup the amounts he paid to Leveraged Equities or that judgment should be entered against Mrs King on that basis.
I would allow grounds 2 and 6 on this basis.
Given that conclusion, it is strictly unnecessary for me to determine whether, as Hall JA and Smith AuJ have found, the primary judge also erred by failing to consider whether, and to then find that, enforcement of Mr Smith's right of indemnity against Mrs King would have been 'inequitable' in the circumstances.
As Hall JA and Smith AuJ have observed, in Carey v Balfour,[168] Hughes J said that:
[t]he test to be applied in respect of claims for recoupment in restitution as outlined in the seminal texts of O'Donovan & Phillips's Modern Contract of Guarantee [[12.110]] and Mason & Carter's Restitution Law in Australia [[642] - [647]] may be summarised as follows:
•the guarantor must be legally compelled to make payment in relation to the debt and not merely morally compelled;
•the payment was reasonably necessary in the interests of the principal debtor or the guarantor or both of them;
•the guarantor's payment must have benefited the principal debtor by resulting in an absolute or pro tanto discharge of the debt that the principal debtor was primarily and ultimately responsible for; and
•enforcement of the right to indemnity must not be inequitable in the circumstances.
(footnotes omitted)
[168] Carey v Balfour [2021] SASC 79 [68].
However, it is not entirely clear to me whether the fourth limb of the test summarised by Hughes J is a matter that Mr Smith was required to establish in order to succeed on his claim for an indemnity, or whether it was a matter that only arose for consideration upon it being raised by Mrs King. As has been seen, Mrs King did not raise any issue at the trial about whether Mr Smith's enforcement of the right to indemnity was inequitable in the circumstances. Mrs King's defence amounted to a denial of all matters alleged against her and she did not appear at the trial in any event.
To the extent that the test summarised in Carey relies on what is said in [12.110] of O'Donovan and Phillips's Modern Contract of Guarantee, only the first three limbs of that test are referred to in the commentary under that paragraph. I cannot discern anything else in that paragraph that supports the existence of the fourth limb of the test in Carey. I also note that in Oakleigh Acquisitions McLure JA referred only to the first three limbs of the test as matters the guarantor in that case was required to prove in order to obtain reimbursement from the principal debtor.
There is reference in Modern Contract of Guarantee to the well known case of Owen v Tate,[169] which suggests that a claim of recoupment 'will succeed only where the guarantor was compelled by some necessity to incur the obligation and whether it was just and reasonable in all the circumstances for the guarantor to be reimbursed'.[170] However, when the relevant excerpt from Owen v Tate is considered in its entirety, questions about whether reimbursement is 'just and reasonable' relate to the second limb of the test:[171]
Not every case will be so clear-cut: the fundamental question is whether in the circumstances it was reasonably necessary in the interests of the volunteer or the person for whom the payment was made, or both, that the payment should be made - whether in the circumstances it was 'just and reasonable' that a right of reimbursement should arise.
[169] Owen v Tate [1976] 1 QB 402.
[170] Modern Contract of Guarantee [12.110].
[171] Owen (409 - 410).
The reference in the summary of the test in Carey to Mason & Carter's Restitution Law in Australia, is to various paragraphs of that text in which the 'Detailed Rules of Liability' common to non-contractual contribution, recoupment and subrogation are summarised. At [647] of that text, 'Loss of right of contribution or recoupment' is dealt with, beginning with a statement that '[t]he law will not permit legal rights of contribution or recoupment to be enforced were it would be inequitable to do so.' However, the learned authors do not discuss this topic in terms that suggest that in order to succeed on a claim for recoupment, it is necessary for a claimant to establish that enforcement of that right would not be inequitable in the circumstances.
The question of whether it was incumbent on Mr Smith to establish that enforcement of his claim for an indemnity from Mrs King would not have been inequitable in the circumstances was not raised before the trial judge. That question was also not raised before this court. In circumstances in which Mrs King was unrepresented at the hearing of the appeal and Mr Smith declined to participate in the appeal, the court did not have the benefit of any submissions about this issue from the parties.
In those circumstances, and as I would allow Mrs King's appeal in any event, I am not prepared to decide this appeal on the ground that the trial judge erred in failing to consider whether Mr Smith's enforcement of a right to indemnity would not be inequitable in the circumstances.
In any event, I would also not be prepared to find that on the facts found by the primary judge, his Honour must have been satisfied that enforcement by Mr Smith of his right to indemnity from Mrs King would have been inequitable in all the circumstances.
It is clear that equity will not permit a right of indemnity (or recoupment) or contribution to be enforced if it would be inequitable to do so. In that regard, the learned authors of Restitution Law in Australia cite Robinson v Campbell [No 2][172] and Staples v Baker[173] in support of that proposition.[174] In Staples, the Queensland Court of Appeal observed that:[175]
[A] right to contribution will be lost or reduced where it would be inequitable to enforce it; such a proposition exemplifies the general equitable doctrine that a party 'seeking the assistance of a court of equity … must do equity (Cheese v Thomas [1994] 1 WLR 129 at 136). The Court must look at what is practically just for both parties': Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102, 115.
[172] Robinson v Campbell [No 2] (1992) 30 NSWLR 503, 508.
[173] Staples v Baker [1999] 1 Qd R 317.
[174] Restitution Law in Australia [647].
[175] Staples (327 - 328).
Further, and as Hall JA and Smith AuJ have noted, in Bofinger v Kingsway Group Ltd[176] the High Court endorsed as 'plainly correct' the following statement of principle expressed by Lowe J in Equity Trustees Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd:[177]
When a guaranteed debt is paid by the surety he is entitled, unless the right is excluded by agreement or his conduct makes it inequitable to enforce it, in respect of the amount he has paid under his guarantee to the securities which the creditor holds for the debt guaranteed. This right arises not from any agreement between the surety and the creditor, though it may be excluded by agreement between them. It rests on equitable principles. (emphasis in original)
[176] Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269.
[177] Equity Trustees Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd [1940] VLR 201, 205.
However, the issue of whether enforcement by Mr Smith of his right to indemnity from Mrs King would or would not have been inequitable in all the circumstances was also not in issue at the trial. Although Mr Smith elected not to take part in these appeals, I would not be prepared to resolve Mrs King's appeal in her favour on a basis which Mr Smith never had the opportunity to contest.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
SO
Associate to the Judge
15 JANUARY 2025
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