Rieson v SST Consulting Services Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Rieson v SST Consulting Services Pty Ltd (ACN 083 263 914) [2005] FCAFC 6

STATUTES – s 4L Trade Practices Act 1974 (Cth) – purposive or contextual construction – section enacted in response to a law reform recommendation – whether that purpose achieved

CONTRACTS – severance – illegality – loan agreement made on condition that borrower would acquire specified services from a third party in breach of s 47(1) of the Trade Practices Act 1974 (Cth) – whether offending provision severable – principles applicable to severance

Acts Interpretation Act 1901 (Cth) s 15AA
Trade Practices Act 1974 (Cth) ss 4L, 47, 87, 87A

SST Consulting Services Pty Ltd v Rieson [2004] FCA 937 reversed
News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 followed
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 applied
Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 205 ALR 1 cited
Isherwood v Butler Pollnow Pty Ltd (1986) 6 NSWLR 363 cited
Mills v Meeking (1990) 169 CLR 214 cited
Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 cited
Fox v Commissioner for Superannuation (No 2) (1999) 88 FCR 416 cited
IW v City of Perth (1997) 191 CLR 1 cited
Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 cited
McFarlane v Daniell (1938) 38 SR (NSW) 337 explained
Thomas Brown & Sons Ltd v Fazal Deen (1962) 108 CLR 391 cited
Carney v Herbert [1985] AC 301 considered
Humphries v Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 597 referred to
Brew v Whitlock (No 2) [1967] VR 803 considered
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1975) 133 CLR 331 cited
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 cited
Pacific Carriers Ltd v BNP Paribas (2004) 208 ALR 213 cited
Marshall v N M Financial Management Ltd [1997] 1 WLR 1527 referred to
SWB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd (1980) 48 FLR 445 cited

Pearce & Geddes, Statutory Interpretation in Australia (5th ed, 2001)
Carter on Contract (Butterworths, 2002-)
Cheshire & Fifoot’s Law of Contract, (8th Aust ed, 2002)

STEPHEN CHARLES RIESON and SCOTT MURRAY BELL v SST CONSULTING SERVICES PTY LTD (ACN 083 263 914)

NSD 745 of 2004

WILCOX, SACKVILLE and FINN JJ
SYDNEY
15 FEBRUARY 2005


IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 745 of 2004

BETWEEN:

STEPHEN CHARLES RIESON
FIRST APPELLANT

SCOTT MURRAY BELL
SECOND APPELLANT

AND:

SST CONSULTING SERVICES PTY LTD (ACN 083 263 914)
RESPONDENT

JUDGE:

WILCOX, SACKVILLE and FINN JJ

DATE OF ORDER:

15 FEBRUARY 2005

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.        The appeal be allowed.

2.The orders made by Emmett J on 21 April 2004 be set aside and, in lieu thereof, it be ordered that the application be dismissed with costs.

3.The respondent, SST Consulting…

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Details
Case
[2005] FCAFC 6
Decision Date

CaseChat Overview and Summary

In the case of Rieson v SST Consulting Services Pty Ltd, the appellants, Stephen Charles Rieson and Scott Murray Bell, challenged the decision of the trial judge, Emmett J, who severed an illegal contract term from the valid obligations under a loan agreement. The dispute centred on whether the illegal arrangement of directing business to a particular entity was so intertwined with the loan agreement that the entire contract should be deemed unenforceable. The appellants argued that the illegality was integral to the loan agreement, rendering severance impossible. Conversely, the respondent, SST Consulting Services Pty Ltd, contended that the illegal provision could be severed, allowing the loan agreement to stand. The court was required to decide whether the illegality was a fundamental condition of the loan agreement, which would render the entire contract unenforceable, or if the illegality could be severed from the valid loan agreement.

The court, after examining the principles of severance and the context of the Trade Practices Act, held that the illegality was not so integral to the loan agreement that it necessitated the entire contract's invalidity. The court found that the illegal provision could be severed from the valid obligations under the loan agreement. The reasoning hinged on the understanding that the loan agreement had a distinct character from the illegal arrangement and that the illegality did not alter the fundamental nature of the loan agreement. The court relied on the principle that if a contravening provision is severable, the balance of the contract remains valid and enforceable, subject to any orders under relevant sections of the Act.

The appeal was allowed, and the orders made by Emmett J were set aside. The court dismissed the application with costs, and ordered that the respondent, SST Consulting Services Pty Ltd, pay the costs of the appeal to the appellants, Stephen Charles Rieson and Scott Murray Bell.

Orders

Orders of the court

1. The appeal be allowed.

2. The orders made by Emmett J on 21 April 2004 be set aside and, in lieu thereof, it be ordered that the application be dismissed with costs.

3. The respondent, SST Consulting Services Pty Ltd, pay to the appellants, Stephen Charles Rieson and Scott Murray Bell, their costs of the appeal.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

We have referred to this last matter as the appellants have sought to rely upon McHugh J’s observations in this appeal. (iii) The trial judge’s decision Though the appellants sought initially to challenge Emmett J’s formulation of the principles applicable to severance in the end they conceded that they were correctly stated. However, they contended those principles were misapplied. We note that, save for the final matter on “inferred intention” referred to above, his Honour’s statement of principle reflects our own view. The reasons given by Emmett J for severing the illegal promise were as follows.(i)Two quite distinct arrangements were proposed and entered into: the first related to the loan advances and their repayment with interest; the second was the directing of the business of AFS and AFS USA to SST Consulting’s nominee (i.e. Mayne Nickless). (ii)Neither of these arrangements was separately illegal. The illegality resulted from making the first conditional upon the second.(iii)While it may be that the advances would never have been made if Mr Rieson had not made his initial proposal that “you can have certainty in relation to the work”, against that it needed to be considered that the money lending arrangement was, as Emmett J understatedly described it, “somewhat usurious”. Given the terms of the lending arrangement one could conclude that such terms would have been taken up by any lender, had they been offered. (iv)His Honour stated explicitly (at [45]) that:“I would not infer that the advances would not have been made if the tying arrangements had not been offered by Mr Rieson as an inducement, bearing in mind that there was to be security given by both the Borrower and AFS as well as the Guarantee. On the other hand, I accept that the tying arrangements were regarded as being of significance so far as SST was concerned. It is not insignificant that, in the notes that Mr Sweeney made at the meeting in early June, the arrangements concerning pack and unpack work appeared first.”(v)The precise benefit to SST Consulting from the tying arrangement was not clear. The business that was to benefit from it was the Mayne Nickless group. It was not suggested that the tying arrangement constituted any benefit to AFS or AFS USA. (vi)The terms of the tying arrangement were that the pack and unpack services were to be provided on commercial terms. (vii)The tying of the arrangements for the advances to the direction of packing and unpacking business was not such “that the cutting of that tie would in any way change the character or nature of the arrangements in relation to the advances”: [49].(viii)To the extent there was an unlawful provision in the overall agreement, SST Consulting was entitled to treat that provision as severed from the loan obligations and to enforce those obligations. As those obligations were guaranteed by Mr Rieson and Mr Bell, the guarantee was enforceable against them. (iv) The appeal The appellants’ contentions can be put shortly. First, they said that, in light of the concessions that s 47(1) applied to the parties’ contract and that the loan obligation was conditional upon the illegal tying arrangement, severance was never possible. The two arrangements were bound together by the parties. We would note in passing that at the hearing of the appeal counsel for SST Consulting reiterated the concession that the agreement to loan $1 million was conditional upon the tying agreement. Secondly, the appellants argued, in light of the findings made by his Honour, it was impossible to treat the tying arrangement as divisible or as an “insignificant” component of the overall arrangements. Counsel placed reliance upon the joint judgments in Humphries. They also referred to McHugh J’s test in Humphries (referred to above), for the purpose of establishing that Emmett J directed himself to the wrong matter when asking whether the advances would not have been made if the tying agreement had not been offered. They said the correct question was whether the advances would have been made absent the tying arrangement.

Ratio Decidendi

Legal Principle Established

The respondent’s contention, with one variant, mirrors that of Emmett J: (i) if a contravening provision is severable, the balance of the contract shorn of that provision will be valid and enforceable; (ii) if it is not severable, the entire contract including the contravening provision is valid and enforceable; but (iii) in either case, the enforcement of the contract is subject to any order made under s 87 or s 87A. This construction, it is said, not only gives effect to the ordinary meaning of the section, it reflects an appropriate legislative balance between penalising a contravention of the Act and avoiding the capricious, often unjust, consequences of invalidating contracts at common law. It leaves the contravenor exposed to penalties under s 76 of the Act. While it leaves the contract on foot and enforceable (whether or not shorn of the offending provision), the other party is entitled to seek orders under s 87 to protect itself from loss or damage suffered or likely to be suffered by the contravening conduct.Consideration This is one of those cases in which the provenance of the provision to be construed is of particular significance. The relevant principle was stated by Brennan CJ, Dawson, Toohey and Gummow JJ in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 (‘CIC Insurance’) in terms that were reiterated in the majority judgment of the High Court in Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 205 ALR 1 at 4. In CIC Insurance their Honours said (at 408):“It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses ‘context’ in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd [(1986) 6 NSWLR 363 at 388], if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent.” The circumstances leading to the enactment of s 4L in 1977 are well known. In 1976 the relevant portfolio Minister constituted the Trade Practices Act Review Committee (‘The Swanson Committee’) with wide terms of reference to review aspects of the operation and effect of the Act and to propose measures by way of its amendment. The original TP Act made no express provision for enforcement of a contract containing a provision that contravened the Act. The Swanson Committee drew attention to this in its Report (AGPS, 1976, Canberra) (“the Swanson Report”) at pars 4.31 and 4.32:“4.31A number of submissions requested the Committee to recommend amendment of the Act to deal with the problem known as ‘severance’. This problem relates to the enforceability of a contract which contains, as only a part of the contract, an unlawful term or condition, such as a term or condition that is prohibited by section 45 (or perhaps, section 47) of the Act. The issue is whether, assuming that the part of the contract that is in restraint of trade can be isolated from the rest of the contract, the rest of the contract is still legally enforceable. At common law, such severance is permissible provided that it does not alter entirely the scope and intention of the contract. The question is whether the Trade Practices Act permits of the operation of this doctrine of severance. 4.32The Committee agrees that there is, at least, a problem of uncertainty felt by the community at the present time, namely whether the common law rules of severance will be applied to contracts containing clauses made unlawful by section 45. We feel that it is too harsh a penalty for contracts to be made totally unenforceable in circumstances where the restraint of trade is merely ancillary to, and not the core of, the contract. Accordingly, we recommend that the Act should clearly provide an express power in the courts to apply the common law rules of severance in relation to such offensive clauses.”