Shalridge Pty Ltd & Ors v St George Bank Ltd & Anor

[2009] HCATrans 116

[2009] HCATrans 116

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M89 of 2008

B e t w e e n -

SHALRIDGE PTY LTD

First Applicant

COMBULK PTY LTD

Second Applicant

EIROS PTY LTD

Third Applicant

APADANA PTY LTD

Fourth Applicant

BOMAN IRANI PTY LTD

Fifth Applicant

and

ST GEORGE BANK LTD

First Respondent

THIRTEENTH CORP PTY LTD (IN LIQUIDATION)

Second Respondent

Application for special leave to appeal

GUMMOW J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 29 MAY 2009, AT 11.45 AM

Copyright in the High Court of Australia

__________________

MR C.L. PANNAM, QC:   If the Court pleases, I appear with my learned friend, MR C.T. MOLLER, on behalf of the applicant.  (instructed by Comlaw - Elsternwick)

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR P. KULEVSKI, for the first respondent.  (instructed by Allens Arthur Robinson Lawyers)

GUMMOW J:   I think there is no appearance for the second respondent which is in liquidation.

MR PANNAM:   That is so.  Your Honours, I think we can quickly identify the special leave point upon which we rely.  It comes up as follows.  This was an action by the bank for the collection of money under a guarantee against guarantors.  The moneys that were the subject of the claim arose under security documents that had been provided to the bank in respect of the loan of the client, a company called Pinnacle.  Those security documents provided for a complete indemnity for costs incurred in relation to the enforcement of those securities.  What then happened was that the bank sued, straightforward claim in contract, under the guarantee to recover those costs.

The defence was one of illegality and the defence was that – and it was a common law defence, it was not an equitable defence, it was not based on a statute – there was illegality in the performance of the contract because there was an intention at all relevant times by the bank to collect more by way of indemnity costs than in fact it had incurred.

As the Court has seen, that arose because of a peculiar arrangement whereby there was a volume discount at the end of the yearly period whereby the bank got back a percentage of the cost that had been charged to it by its client’s solicitor.  What the Court of Appeal did was to say, yes, there was illegality in performance and, to the extent that there would have been recovery of the excess costs, that is, there was no rebate of the total amount by reference to the volume discount, the court held, because that had been discovered at a late stage of the proceeding and there as no court order which gave effect to that obligation, in fact, quite the reverse, the court order below only gave the bank that to which it would have been entitled, absent the illegality, but in those circumstance, although legality was found in the bank, it was held that that was the end of the matter. 

The point that arises is this.  There being no claim to rely upon an equitable defence by the guarantors – so this was not a case where there was any equitable defence that would have attracted the jurisdiction of the court of equity to impose conditions – it was not a case where there was a statutory defence based upon some illegality there, there would have been attracted that body of authority in this Court that extends from Yango on through Fitzgerald, and cases like Nelson up until the case at the end of the last year in Master Education Services, whereby the Court has distilled principles in that context which enables some flexibility to be given to relief in cases of statutory illegality. 

This is a case of a different kind.  This was a case where there was reliance upon a common law illegality and, in our respectful submission, that set it aside from those cases that this Court has been concerned with in the context of statutory illegality.  The point of special leave and of general importance and public importance in this case is, in a case like this where the defence is based squarely on common law illegality, is there any discretion in the court to, in effect, modify the relief which would otherwise be attracted in the area of statutory illegality to a case of common law illegality?

Our submission below was that there was not.  The point on appeal will be, if leave was to be granted, the court would have to revisit that area of principle that deals with the extent to which the court, in a case where there is a defence of common law illegality, there is a capacity to mould relief appropriate to the facts of the particular case.  In our respectful submission, there is not such power in the court.  Indeed, the difference between the two areas has been recognised in decisions of the Court.  At the end of last year in Master Education Services – can I refer the Court to but a sentence in the judgment of the Court.  Does the Court have a volume of authorities?

GUMMOW J:   Yes, we do.

MR PANNAM:   It is behind tab 8 and it is in the left‑hand column under the heading “Conclusion”.  You will see there that this of course was a very different case, statutory illegality:

The detailed provision by the Act for the consequences of non‑compliance with an industry code, such as the Franchising Code of Conduct, does not support a conclusion that it was intended that the harsh consequences provided by the common law were to follow –

and the Court went on to apply the doctrine that was discerned from the earlier cases that the case could be determined without the harsh consequences of the common law.  Can we take the Court also to Fitzgerald and ‑ ‑ ‑

GUMMOW J:   Just before we get too much into the cases, what was the order at first instance, at page 15?  It was for an account, was it?

MR PANNAM:   Yes.

GUMMOW J:   What was the order in the Court of Appeal?

MR PANNAM:   The account resulted in a judgment.

GUMMOW J:   Just dismissed it?

MR PANNAM:   And the order of the Court of Appeal was to dismiss the appeal from that judgment.

GUMMOW J:   Where is the judgment?  The judgment is at 18, is it?

MR PANNAM:   Yes, 18, your Honour.  The account was taken before ‑ ‑ ‑

GUMMOW J:   So your proposition is that on taking the account, this matter could not be adjusted?

MR PANNAM:   Yes, that is right.  It could not be adjusted because the component that related to the indemnification for costs was, as was later found by the Court of Appeal, found to be illegal at common law in the performance of the original contract.

GUMMOW J:   In modern times, at any rate, the account is an equitable remedy, is it not?

MR PANNAM:   The claim was a breach of contract.  The matter was referred to the Master ‑ ‑ ‑

GUMMOW J:   It is an equitable remedy because common law accounts are a nightmare, as I understand it.

MR PANNAM:   It arose in this case because the judge would not act on a certificate.  That was successfully challenged and, therefore, he was not going to take up the time of the court by listening to the assessment and so he referred it to the Master to be assessed.  On our respectful submission, on that assessment, the argument that should have succeeded was that insofar as this lately discovered volume discount that created the problem for the bank that it did, that the bank should not have been entitled to enforce against the guarantors an illegal arrangement.

BELL J:   Dr Pannam, could you just take us to the particular finding in the Court of Appeal that you rely on?

MR PANNAM:   Yes, it starts at page 51, line 56:

In my view, when taken as a whole the relevant arrangements did contemplate the improper exaction of excessive legal costs from the bank’s customers, their guarantors and other third parties liable to indemnify the bank in respect of its legal costs.  The fact that the bank may have acted in the honest belief that it was entitled to be paid all of its legal costs without any credit in respect of the volume rebates attributable to legal costs debited to Pinnacle’s account –

that is the principle debtor –

is not to the point.  Viewed objectively, the conduct of the bank in seeking to retain the volume rebates for itself was wrongful and unjust.  If the guarantors had paid all of the legal costs demanded of them, I can see no good reason why they could not have recovered the excessive costs from the bank as moneys paid by mistake on principles of unjust enrichment.

In summary, although the bank sought to wrongfully exact excessive legal costs from Pinnacle and the guarantors, it did not do so.  The trial judge found that the bank was obliged to give credit to Pinnacle and the guarantors for the relevant proportion of the volume rebates received by it.  This aspect of the trial judge’s decision is not challenged on appeal.  Accordingly, although the trial judge did not accept it, the effect of his decision is to give full recognition to the submission before him that recovery of all of the legal costs claimed by the bank would be against public policy because such recovery would include the wrongful exaction of excessive costs, as explained in Hamilton v Haw.

It was the authority that was relied on for the excessive legal costs exaction point.  Then the sentence:

This is the commercial effect of the trial judge’s decision at the quantum hearing, when he found that the certificate of indebtedness contained a manifest error because it did not give credit for the volume rebates and ordered that an account be taken of the amount due after appropriate allowance was made –

They are the two paragraphs.  The point of general public importance that we say is attended upon that error is that the defence was not an equitable defence, it was not a statutory defence it was a common law defence and in that circumstance, the invalidity went to the whole of the obligation and not simply to a part of it.  Can I go just to one of the authorities.  The joint judgment we want to refer to was that of your Honour Justice Gummow and Justice McHugh in Fitzgerald’s Case, which is behind tab 9, and can we go to page 226 of the report.  This was the case of the driller requiring a permit under a statute to carry out the drilling work.  It was a statutory illegality case, but the last line on page 226 was where your Honours start and we go two paragraphs on:

The action by the driller to recover moneys owing to it by the owner was not an action by a party to a contract who had chosen to perform it illegally.  The penalty imposed by s 56(1) was directed at a party in the position of the owner rather than the driller.

Then, leave out the next line and go to the critical paragraph:

The question then becomes whether, as a matter of public policy, the court should decline to enforce the contract because of its association with the illegal activity of the owner in, if not causing, then at least suffering or permitting the construction and drilling of bores, within the meaning of s 56(1), without the grant to the owner of permits pursuant to s 57.  The refusal of the courts in such a case to regard the contract as enforceable stems not from express or implied legislative prohibition but from the policy of the law, commonly called public policy.

Then if I can take you over to the last part at page 231 of the joint judgment where a comparison was made with the common law and other areas of the law that provide for some discretion in regulating the consequences of illegality, reading from the third line from the top of the page, what your Honour said was:

Where the plaintiff seeks equitable relief, whether in aid of a legal or equitable right, equity may impose terms.  For example, a borrower coming to equity seeking such equitable relief as orders for cancellation and delivery up of a written contract declared void by statutes against usury, would be put on terms that the defendant be paid what was really bona fide due after deduction of the excessive interest.  If the lender already had recovered judgment for the full amount, the borrower may have an equity to restrain enforcement of the judgment in respect of the amount representing excessive interest.

However, the flexibility attending the administration of equitable relief is not so readily available where what is claimed is a legal remedy in aid of a legal right and there is no equity to qualify or displace, wholly or partially, enforcement of that legal right.

Then your Honours go on to deal with other ways perhaps in which, by taking cases from the statutory illegality context, there can be a moulding that might be appropriate to a particular case of an order to achieve fairness.  What our submission is, and what the point would be if leave was granted, is that in a case where a purely common law defence is raised of illegality and succeeds, there is no room for modifying the impact of that illegality at all because here the clause in the guarantee that was sued on was simply a right to be reimbursed for all of the moneys that were due under the guarantee. 

The moneys due under the guarantee incorporated all of the indemnity cost provisions of the security instruments and those indemnity cost provisions stood alone.  They can be divorced from the security instruments themselves and what we say is, is that the consequence of the illegality as found by the Court of Appeal infected the whole of that obligation and not simply a part of it.

GUMMOW J:   What do you say, Dr Pannam, as to paragraph 11 on page 92 of your opponent’s submissions?  In particular the last sentence:

the only available argument [on illegality] for the applicants was that the mode of performance chosen by St George was alleged to contravene public policy, although the deed was capable of performance without “illegal” conduct.  On any view, the deed was not illegal when it was made.

MR PANNAM:   Because of the time sequence, perhaps this should be put in place.  The security documents came into existence, I think, in June 2000.  The volume rebate arrangements commenced in September 2002.  So it is

perfectly clear that, as at the date of the contract, there was no illegality contemplated by either party.  During the course of the performance of that contract, the volume discount arrangements came into force and it is perfectly clear from the finding below that as and from the date they came into force the bank intended to do what it did; that is to say, claim full reimbursement for legal costs and expenses as and when billed from the solicitor and then claim them from the guarantors, but never to give a rebate; that is, to be calculated by reference to the volume discount.

That that was so was evidenced by the following facts.  First of all, the existence of the rebate scheme only became clear at a very late stage of the trial when on discovery the documentation was found.  There was persistence in the point that was argued by saying we were entitled to get the whole and not adjusted by reference to the discount, that was persisted in before the trial judge.  It was persisted in, indeed, even in the Court of Appeal absent a notice of contention.  Counsel submitted that there was a perfect entitlement in the bank to do what it did.  So that it was perfectly clear that the bank took a decision to rely on the contract in order to, as the Court of Appeal found, improperly extract excessive amounts under the provisions of the contract, so that it became illegal in its performance on the part of the bank and that was the illegality that the Court of Appeal found.

It is our submission that having regard to that finding by the Court of Appeal of the failure of the Court of Appeal to implement the finding consistently with common law principle, is the point that should attract the grant of special leave in this case so that that the Court can consider whether the principles that have been adumbrated by the Court over many cases in the context of statutory illegality and the flexibility that the Court has been able to find in that area and, if so, to what extent those principles apply to common law illegality.  That is the point upon which we rely.  If the Court pleases.

GUMMOW J:   Yes, Mr Walker?

MR WALKER:   Your Honours, there should be no grant of special leave because there are insufficient prospects of success.  The reasons why there are insufficient prospects of success would involve an argument by us under a notice of contention.  So that were your Honours persuaded by us to refuse special leave, we accept that there are aspects of the reasoning in the Court of Appeal which are unsatisfactory, but they are unsatisfactory against us, not in favour of us.  That is no reason for a grant of special leave to enable us to vindicate ourselves better, as it were, in the High Court.  We do not seek special leave. 

This was a claim against guarantors which was litigated as thoroughly as one could possibly imagine.  The sequence of the crab‑wise progress towards actually getting a money judgment against them can be seen in the explanation of matters at first instance in application book pages 2 through 4.  I will not go to the detail, but it suffices to say that a number of judgments eventually produced a proceeding in which a sum – a sum certain was claimed with the assistance of certificates tendered on my client’s behalf – for the indemnification which included but was by no means restricted to legal costs and I need to emphasis that. 

In the usual way, the financier had extracted a promise – absolutely common in the industry and for a very long time – that it would not be out of pocket in the event that the borrower, or those guaranteeing the borrower, did not honour their promise to pay on time.  Legal costs, I stress, were only part of the indemnity.  Indeed, they were only part of, though by far the greater part of, the sum claimed in the proceedings which are at the foundation of the present argument.  You will see that on page 4 of the application book, the first sentence of paragraph 8 in his Honour’s reasons. 

I put that at the forefront because my learned friend talks about, in effect, the common law robustness by which something is wholly unenforceable and speaks as if there is a discrete compartment that prevents what he obviously does not wish to appal the Court with, namely, that the guarantor gets out of paying anything, including indemnity for failure to pay principle debt on the basis of this argument.  So he wants to be able to stop his success at the point of the legal costs, but we point out that is just part of the promise to indemnify for costs, expenses, charges, et cetera.  In our submission, the common law robustness to which he appeals does not in fact – unless there is a twist to the severance approach that has not been essayed by the application – permit that approach. 

With respect, the argument against us and the reasoning in the Court of Appeal is wrong for this reason.  As my friend has drawn to attention, when the promise to indemnify costs, charges, expenses, et cetera of enforcing was made, there was nothing wrong with it of any kind.  A promise perfectly legal in every respect.

GUMMOW J:   This is your paragraph 11 point?

MR WALKER:   Yes, partly, but the point is that what happened when at trial Justice Whelan declined to order more than had in fact been paid for the legal costs, this was a simple and proper enforcement against our honest but mistaken view that we were entitled to more of the contractual promise between the parties.  What was being enforced was the contract.  Indemnification for costs.  What is the factual content of that promise?  It is no more than you paid your solicitors.  Then came the controversy in which we wrong‑headedly persisted too long, namely, have you paid your solicitors something when they are going to give you back a rebate on account of the face value of the bill?  That has been determined against us and we enthusiastically accept that as correct.  We were wrong to have contended otherwise.

That brings us to the basal reason why the way the reasoning has been expressed in the Court of Appeal, though getting to manifestly the right result, is wrong and would be plainly, demonstrably wrong on an appeal.  There are insufficient prospects of the guarantors evading their freely undertaken responsibility to indemnify for costs by this argument and it is for this reason.  This was no arrangement like Hamilton v Haw where the debt collector and the solicitor entered into arrangement that there would be warrants issued for execution claiming sums, professional costs which, in fact, would never be paid, which there was an agreement, simultaneous agreement, would never be paid by debt collector to solicitor. 

It is easy to see why there is the element of fraud in such an arrangement.  But in this case, though there was a belated attempt to raise complaints about the way in which the bank had persisted in its demand for excessive costs, so‑called, actually for an amount in excess of the costs is a more accurate way of putting it, there is no ‑ ‑ ‑

GUMMOW J:   What Sir Alistair Adam said in Hamilton v Haw at page 219, line 38 was:

I would think it sufficient to taint the agreement with illegality that it contemplated –

the agreement contemplated –

the improper exaction ‑ ‑ ‑

MR WALKER:   Quite so.  The debt collector and the solicitor had put their heads together, this was a way of getting money from a third party on account of something which in fact was not genuine.  There is nothing like that in this case, no third party – indeed, relevantly the guarantor is not a third party, but do not worry about that at the moment.  Treat them as a third party, vis-à-vis, bank and debtor.  They agree directly contracting with the bank that they will pay a certain sum calculated in a certain way.  That was enforced in their favour.  They pray in aid, in other words, the contract.  Far from being illegal, it provided the limit of our legal entitlement.  So far no resemblance with Hamilton v Haw.

Then we go to the other part of the tendentiously aggregated arrangement that you see referred to in the draft notice of appeal at page 59.  The arrangements, as defined, within that document for the applicant’s purposes combine in an unexplained way the perfectly unexceptional guarantor’s promise to indemnify for costs on the one hand and the perfectly unexceptional rebate agreement; each operating in its own sphere, perfectly legal.  No one has ever suggested that there is some public policy against solicitors giving discounts on their fees, to the contrary.  What was wrong, factually, and therefore outside and beyond our legal entitlement, was to claim face value of invoices rather that what I will call real value of invoices.

Your Honours, that, as I say, reveals the basal fallacy here.  It is saying to a person who claims more than the law, the law of contract, permits them to recover, the law of contract being a contract which is enforced in that argument, far from being vesicated, it is being enforced.  It is been referred to by the applicants as the source of their entitlement to pay no more.  A person who seeks too much is to be placed at peril under a misunderstood use of the doctrine of illegality, of getting nothing.  That is perverse.  You start by saying the contract says you can only have X, not X plus Y, but because you have asked for X plus Y, you cannot have X either, but you started that argument by saying that the contract says you can have X.  True it says you cannot have any more than X, but that ‑ ‑ ‑

GUMMOW J:   I think we have grasped that, Mr Walker.

MR WALKER:   We made an excessive claim.  We said this is the money we have paid for costs and it was not the money we had paid for costs because wrongly, though honestly, I stress, though honestly had failed to take into account the rebate.  This was not a case of fraud.  That was attempted late to be raised and it was rejected.  There is no application for special leave against that.  This is a case where there was an honest but wholly mistaken attempt to characterise as costs factually sums which were not costs.  That provides no reason for failing to enforce the promise, which after all is the basis of that argument, namely, “I owe no more than that”, that you should pay what you do owe.  By the very argument of the applicants, they demonstrate what they did agree to pay and all the court did was say “And that is all you do have to pay” because the bank has belatedly ‑ ‑ ‑

GUMMOW J:   The bank unsuccessfully tried unilaterally to vary the contract, that is what it comes to ‑ ‑ ‑

MR WALKER:   Quite, and suffered the fate that ought to be suffered by persons who do that.  It is complicated factually by the discovery controversy which is settled and would never be a subject of special leave obviously, and by the use of the certificate provisions which again have been dealt with because the manifest error has been exposed.  So that whatever the criticisms that have been publicly expressed in relation to the form of conduct, we stand here now saying we were wrong under the contract.  There is no doctrine that prevents us from getting what we were entitled to under contract and it is not illegally to perform a contract to claim more than you are entitled.

Practically every day in a commercial list in supreme courts around this country someone is claiming more than they are eventually held to be entitled to under a contract.  It would be a fearsome and ridiculous proposition to defend that that renders their conduct illegal performance of a contract.  Even worse would it be if one were to extend that to the appellant level and to say, what is the position in relation to doctrine of illegality when a person is held by a Court of Appeal overturning a decision to have at first instance successfully sought more than they were entitled to under a contract?  It is for those reasons, in our submission, that though there are errors of reasoning and thus of expression in the Court of Appeal, the result is resoundingly correct and therefore there should not be a grant of special leave.

I have referred to a notice of contention.  Perhaps I should call to attention some of the passages, not all of them, which would be targeted by that.  In Justice Neave’s reasons at page 34 of the application book, could I draw to attention the way her Honour refers to the arrangements – that does not include any reference that that must be a mistake – with the solicitors.  There is nothing about the guarantee as an arrangement which contemplated any excess costs at all.  To the contrary, it provided by its terms the limit on costs.  In paragraph 3, of course, her Honour recognises that by saying, at line 31, “the trial judge found that St George was obliged to give credit”; that is, the terms of the contractual relationship set the legal limit.  One cannot, in our submission, in the one breath say here is an obligation, but because somebody has wrongly contended for something in excess of that obligation, the whole becomes illegal. 

In Justice Hargrave’s reasons at page 51, paragraph 56, the phrase when taken as a whole, which is taken up by our learned friends in their description of the arrangements to which I have drawn attention, invites error because it means that instead of asking, is there is anything illegal about the guarantee, is there anything illegal about the rebate arrangement, notwithstanding the finding that this must be decided on the basis of our honest but mistaken pressing of excess claims, his Honour has somehow ‑ ‑ ‑

GUMMOW J:   What was the source of the notion of contemplation of improper exaction from the arrangement?

MR WALKER:   There is no contemplation in the guarantee; to the contrary it is held, and there is no contemplation that guarantors would be battened upon in the rebate agreement.  It is for those reasons, in our submission, that once one sees the course of these tortuous proceedings, precluded the late attempted allegation of sharp practice, then, in our submission, there is nothing here which provides any vehicle for the Court to consider any possible refinement or delineation between common law and equity or delineation, if it truly be necessary, between a common law approach an approach interpreting a statute for illegality.  In our submission, when one looks at the reasoning on page 52, paragraph 57, though the errors we have identified still dominate the reasons, that paragraph correctly concludes the controversy between the parties.  Again, his Honour finds, line 5 or so, “:

The trial judge found that the bank was obliged to give credit –

in other words, enforced the contract with its limits.  That is not challenged on appeal, quite so.  Then:

the effect of his decision is to give full recognition to the submission before him that recovery of all of the legal costs claimed by the bank –

Now, this is like fake diamonds, they are not legal costs because they go beyond the legal costs –

the legal costs claimed by the bank would be against public policy because such recovery would include the wrongful exaction of excessive costs ‑

That was an unnecessary or decorative extra to the reasoning by which the bank was simply held to its contractual limit.  Then his Honour refers to commercial effect and refers to the manifest error in the certificate.  That is an argument that can proceed only by saying, “I am going to enforce the contract.  You were right, guarantors, you do not have to pay all that is claimed under the head of legal costs because that is more than the legal costs which were incurred”.  Your Honours it is really just the same, as one could well imagine in commercial lending, as if there was a dispute between guarantors and bank as to whether all the proceedings in respect of which the bank was claiming costs were in fact sufficiently connected, under the contractual description, to the recovery, if there had been, say, some mad‑cap constitutional about some aspect of recovery.

GUMMOW J:   Am I right in thinking, Mr Walker, that the order at page 18 did make allowance to credit the volume rebates?

MR WALKER:   Yes, fully.  In other words, the position between these parties is financially exactly as the contract entered into by the guarantors, self‑unexceptional, required and, indeed, that was the ratio of the decision at

first instance and, as you have seen in paragraph 57, in truth, notwithstanding the errors of approach, it is also the ratio in the Court of Appeal.  The errors of approach in the Court of Appeal are against us; that is, they are adverse to our position and as such, in our submission, they provide absolutely no occasion for this Court to look when we have no complaint against it.  May it please the Court.

GUMMOW J:   Yes Dr Pannam?

MR PANNAM:   Your Honour, just two points.  First of all, my learned friend attributed to us an argument that has never been put and that is that the consequence of the submission we made would be not only that the costs would not be recoverable, but also the principle debt would not be recoverable.

GUMMOW J:   Yes, he fears your appetite will grow.

MR PANNAM:   If you look at paragraph 18 of our outline on page 66 of the application book, you will see that is the very thing that is eschewed.  Where we refer in that paragraph to the difference between the cost obligation and the rest of the obligations of the security documentation which would be fully enforceable and we say that the reason for that is that the cost obligation is severable in accordance with the principles in the cases to which we referred and the Court I think was most recently referred in the SST Case.  So that that is a straw man beaten to death, but it is a straw man. 

So far as the second argument is concerned, it has a deceptive simplicity about it.  Our learned friend says, look, you start off with a contract of guarantee which is perfectly good, no one questions it.  Then the next step is you have a volume discount scheme.  Of course solicitors can enter into such a scheme.  There they are, two perfectly lawful contracts.  The problem about that is this and they are linked.  Step one, if at the time the parties enter into a contract, one or other of them or both of them intend to perform it in an illegal way, the contract is illegal, and we go no further to find support for that proposition – old though it is, dating back to the 19th century – at page 226 of Fitzgerald’s Case in the joint judgment to which I referred, where there is a reference to a passage of Lord Devlin in Archbolds v Spanglett which states in a few sentences that principle. 

So, if at the time, which is not this case, the parties intended, one or other of them intended to perform it in an illegal way, the contract would unenforceable at the suit of the party who had that intention.  We are one step away.  The step away is this.  If after a perfectly lawful contract is entered into, one of the parties determines to perform it in an unlawful way, does that render the obligation that otherwise would stand enforceable, does that render it illegal?  What we have done is we have extracted passages from Williston’s Law of Contract, which appear behind tab 10. 

This two‑step analysis is rather masked in the way in which the Court of Appeal approached it because they approached it not in terms of a formal jurisprudential analysis, but rather having regard to the overall effects of the arrangements that were in place, I think was the phrase that Justice Hargrave used.  If I can take you to the passages at paragraph 19:38 in Williston’s Law of Contract, there it is provided that:

When a buyer’s unlawful purpose is relevant to a determination whether an apparently legal agreement is connected with an illegal scheme or transaction, it has been said that it must be shown that such was the intention of the parties at the time of making the agreement.

The correctness of this rule, however, seems questionable.  Public policy certainly requires that the illegal intent whenever conceived should not be carried into execution.  Otherwise, according to the rule stated, an innocent party may be bound to aid in the execution of an illegal purpose or be liable for breach of contract.

There seems no theoretical difficulty in saying that the change of purpose subsequent to the formation of the contract gives rise to a defense which did not previously exist.

That is supported by the decision of the New York Court of Appeals which appears next in the volume of authorities. McConnell v The Commonwealth Pictures, and can we take the Court to page 497, top right‑hand corner of the text, right‑hand column, after discussing earlier authorities, the New York Court of Appeals said this, just towards the end of the first paragraph on the right‑hand column:

Consistent with public morality and settled public policy, we hold that a party will be denied recovery even on a contract valid on its face, if it appears that he has resorted to gravely immoral and illegal conduct in accomplishing its performance.

Our submission is simply this, that if it be accepted that – and we accept that Hamilton v Haw is not on all fours – if at the time that the arrangements were entered into the bank intended to claim excessive amounts of costs under the terms of the documentation, if that was illegal, our submission is that if it formed that intention subsequent to the entering into the perfectly legal contracts that our learned friend has referred to, the volume discount and the original guarantee, the formation of that intention made that part of the contract which was severable unenforceable at the suit of the bank.

GUMMOW J:   What was the conduct that was attracting criticism in McConnell?

MR PANNAM:   It was the payment of a bribe in that case.

GUMMOW J:   Yes, I think so.

MR PANNAM:   It is the principle to which we refer which we would submit is unexceptional.  When you can demonstrate ‑ ‑ ‑

GUMMOW J:   Wait a minute, at 497 they are saying:

It is not every minor wrongdoing in the course of contract performance that will insulate . . . There must at least be a direct connection between the illegal transaction and the obligation sued upon.  Connection is a matter of degree.

et cetera.

MR PANNAM:   Here there is a direct connection.

GUMMOW J:   Then  they get worried about corruption.

MR PANNAM:   The point, and it is the last point I make, is this.  The point that we say would ‑ ‑ ‑

GUMMOW J:   In other words, once the bribe was paid, there was an irreversible corruption involved in the whole process.  But here there has been an attempt to wash their hands.

MR PANNAM:   Your Honours, the point we would wish to agitate if leave was to be granted is simply this, that if a party subsequent to the entry into a perfectly lawful contact forms an intent and acts on that intent to perform the contract in an unlawful way, that renders the contract itself unlawful.  If the Court of Appeal found illegality, in our respectful submission, it did not go far enough and prevent the enforcement of the costs obligation.  If it please the Court.

GUMMOW J:   Thank you.

We are not satisfied that any point of general public importance respecting principles of illegality in contract law arises from the taking of the account in this case so as to make allowance as it did for the credit in respect of the volume rebates.  Special leave will be refused with costs.

MR PANNAM:   If it please the Court.

MR WALKER:   If it please the Court.

AT 12.29 PM THE MATTER WAS CONCLUDED