Thomas & Ors v HP Mercantile Pty Limited

[2009] HCATrans 137

Replacement Transcript

[2009] HCATrans 137

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S560 of 2008

B e t w e e n -

ANDREW GETHYN THOMAS AND JAYE MAREE GODKIN AS EXECUTORS OF THE ESTATE OF THE LATE PETER GETHYN THOMAS

Applicant

and

HP MERCANTILE PTY LIMITED

Respondent

Office of the Registry
  Sydney  No S565 of 2008

B e t w e e n -

ANDREW GETHYN THOMAS AND JAYE MAREE GODKIN AS EXECUTORS OF THE ESTATE OF THE LATE PETER GETHYN THOMAS

First Applicant

ADRIAN HOBSON

Second Applicant

and

HP MERCANTILE PTY LIMITED

Respondent

Office of the Registry
  Sydney  No S566 of 2008

B e t w e e n -

ANDREW GETHYN THOMAS AND JAYE MAREE GODKIN AS EXECUTORS OF THE ESTATE OF THE LATE PETER GETHYN THOMAS

First Applicant

CHANDELLE NOMINEES PTY LTD

Second Applicant

and

HP MERCANTILE PTY LIMITED

Respondent

Applications for special leave to appeal

GUMMOW J
HEYDON J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 19 JUNE 2009, AT 9.36 AM

Copyright in the High Court of Australia

MR M.L.D. EINFELD, QC:   May it please the Court, I appear with my learned friend, MR J.H STEPHENSON, for the applicants.  (instructed by G J Gooden)

MR D.J. FAGAN, SC:   May it please the Court, I appear for the respondents in all three matters.  (instructed by Versace McKenzie Lawyers)

GUMMOW J:   Yes, Mr Einfeld.

MR EINFELD:   May it please the Court, the three summonses seek orders for substitution of the executors of the primary applicant, Mr Thomas, who has died since the institution of the proceedings.  And the orders we seek in each case are as stated in paragraph 1 of the summons, your Honour.  I understand there is no opposition to the order.

GUMMOW J:   Any opposition to that?

MR FAGAN:   No, your Honour.

GUMMOW J:   Very well.  We make the order in terms of order 1 of the summons filed on 9 June.

MR EINFELD:   If your Honour pleases.  There is a very minor variation also identified in paragraph 2 of the summons in the third of the proceedings.  That is in proceedings ‑ ‑ ‑

GUMMOW J:   It is the wrong ACN number.

MR EINFELD:   Yes, the wrong ACN number, your Honour.

GUMMOW J:   We make order 2 in the summons filed 9 June in matter S566 of 2008.

MR EINFELD:   May it please the Court.  Your Honours, the proposition that it is no consideration to refrain from a course of action which it was not intended to pursue is generally attributed by the text writers to the two English decisions which were cited in the courts below.  At first instance the trial judge sought to confine the principle to the circumstance of resolution of litigation or threatened litigation with which the English cases had dealt.  In the Court of Appeal the application of the principle was not addressed although the submission made in respect of it was recorded. 

Your Honours, the issues which, in our submission, are appropriate for consideration by this Court are the recognition as part of the law of contract in Australia of that particular principle, namely, that to refrain from a course of action which it was never intended genuinely to pursue is correct in law and if the principle be correct, whether it should be confined in the way suggested at first instance, that is, to circumstances of compromise of actual or threatened claims.  Or is it, as we posit, but one illustration of broader notions of consideration or of contract.

GUMMOW J:   Is the point encapsulated in paragraph 2.5 of your submissions on page 115:

namely that the consideration for the transfer of TROM’s assets was illusory.

MR EINFELD:   Yes, your Honour.  The argument is that the consideration was illusory because at the time of the first contract both parties never intended that the debt which the first contract created would ever be paid or enforced.  That concept sits, in our submission, squarely alongside concepts such as past consideration, promises to perform a contractual duty which is already owed, promises to do that which is illegal and the like.  They are all variants of consideration generally described as illusory.

GUMMOW J:   But it is said against you that there was a finding at first instance and in the Court of Appeal that this was a real and effective transaction.

MR EINFELD:   Yes, we accept that the creation of the debt was not a sham, that is, the first agreement created a debt of $18 million which was said to be expressed as consideration for the taking over one of the two related entities or obligations of the other and simultaneously with that contract was the second contract, as it was described, namely, an independent contract whereby the forgiveness of that debt was expressed to be consideration for the transfer of assets.  So we accept the findings below.  We accept that the first debt was a genuinely created debt.  The evidence was that the reason why the single transaction, or what might have been conceived as a single transaction, was split into two contracts was for perceived stamp duty advantages, real or imagined does not matter.

Your Honours, the text often gives examples.  For instance, to pay to someone $10 to give up smoking when that person had no intention of smoking anyway is illusory.  In Australian Woollen Mills itself the example is given of the promise to pay a thousand dollars for a person to go from Melbourne to Sydney when that person was going to be travelling from Melbourne to Sydney anyway.  They are instances all of illusory consideration of which, we submit, the instant case is one because if, as was the accepted position, as we will come to in a moment, neither party intended to enforce the debt that was created by the first contract.  Forgiveness of it by a contemporaneous second contract, when neither party intended to enforce the debt, cannot be a real consideration.  It was illusory.

We submit the case is a particularly suitable one for consideration of the point.  This application raises no questions of disputed fact.  The applicant accepts the findings of fact below.  Two related companies, as we say, enter into the two agreements on the same day.  One expresses a consideration of a debt, the other expresses the forgiveness of it and there is no issue in this case that at the time the debt was created payment of the $18 million debt was not intended to be made or pursued.  So much is acknowledged, your Honours, by the respondent in its summary of argument at the foot of page 146 of the application book going over to 147 where that matter is acknowledged.  There was thus, in our submission, no more than an illusion of consideration in those circumstances.

HEYDON J:   In another sense there was a perfectly normal bargain.  One company was going to become the manager.  To compensate it for the burdens of that, it was going to get choses in action worth millions of dollars.

MR EINFELD:   Correct.

HEYDON J:   Now, this double contract approach to try and avoid stamp duty does not really undercut, does it, the substance of the transaction?

MR EINFELD:   No it does not, but that begs the question that is raised by the consideration issue.  There is no doubt it was accepted, and we accept the finding, that the overall intention was, as your Honour says, in effect, to swap the acceptance of the burden of conducting the investment schemes in return for the receipt of the assets.  So much is not in issue.  But the parties chose to create two separate contracts in order to implement that transaction.  The problem is that the receipt of the assets or the assignment of the assets was expressed to be in consideration for the forgiveness of a debt by a separate contract than that which created the debt.  That remains the undisputed fact.

Your Honour’s proposition involves reading the two agreements as if they were one and ignoring the creation of the debt in the one and its satisfaction in the other.  That is the way the parties chose to implement the transaction.  The question is whether the expressed consideration in the second, it never having been intended by either party to be fulfilled, can constitute a good consideration at law.  The submission would have required both courts below to find that, in consideration of the creditor company agreeing to undertake the management obligations, a debt or agree to transfer its assets. 

That is not what the courts below found and, indeed, was an approach which was expressly disallowed at trial and on appeal.  It was not argued on appeal.  The consideration which was said to support the assignment was the forgiveness of the debt, not the assumption of responsibilities.  That is the way the case was always conducted below.  Indeed, that is the rationale of the judgments. 

I was about to take your Honours in a moment, I will do so now, to the way in which the trial judge dealt with the matter.  What his Honour the learned trial judge did was to confine the operation of the principle, that it is no consideration to adopt a course of action which it was never intended to pursue, to circumstances of disputed claims in actual or threatened litigation.  He does that in the application book at page 17 referring to the first of the two English cases relied upon and usually cited as authority for the broad proposition.  In paragraph 45, having cited the reference to the proposition that:

unless there was a reasonable claim on the one side, which it was bona fide intended to pursue, there would be no ground . . . 

I think the reference to “bona fide intended to pursue” was specifically referable to claims in respect of which there was doubt, or even considerable doubt, as to their legitimacy, not rights which are indisputably available to a party, but which they agree not to pursue. 

And in the following paragraph referring to Arrale v Costain in the second sentence:

both cases are concerned with resolution of litigation or threatened litigation, and in my view this has no application to the present circumstances.  Here there is evidence of an agreement signed –

et cetera.  Now, your Honours, in the Court of Appeal – if your Honours would just briefly turn to page 87 of the application book – his Honour Acting Justice Sackville delivering the judgment of the court in which the chief justice and the other member of the court concurred, records the first submission that there was here no antecedent debt.  That is not now taken as a point in this Court:

Secondly, even if there were a debt, there had never been an intention by TPL to enforce it and it is no consideration to refrain from a course of action which it was not intended bona fide to pursue ‑ ‑ ‑

GUMMOW J:   All of this arises, does it not, if we go back to the primary judge’s careful reasons at page 14, these were presently existing in legal choses in action?

MR EINFELD:   No, the debt was a legal chose in action, correct.

GUMMOW J:   And there was a failure to comply with section 12 of the Conveyancing Act to observe all the formalities.  Therefore, if it is to be effective it is effective as an equitable assignment of a legal chose.  You then get into Milroy v Lord territory and equity looks to the presence of some consideration to stimulate its preparedness to enforce this.

MR EINFELD:   Correct, so there had to be consideration for the assignment, your Honours.

GUMMOW J:   I am not sure what equity regards as consideration for that.  It is limited by these 19th century common law cases in quite different circumstances.

MR EINFELD:   No, quite.  Certainly so.

GUMMOW J:   Why would not equity lean towards facilitating this ‑ ‑ ‑

MR EINFELD:   The respondent conducted its case below upon an accepted basis that consideration for the promise was required, as a matter of contract.  That is the way he conducted the case at first instance and on appeal and the sole question for determination below and on appeal on this question was whether or not the forgiveness of an antecedent debt which ‑ ‑ ‑

GUMMOW J:   I know that, but the question is why we should get involved in this on special leave?

MR EINFELD:   The proposition, your Honour ‑ ‑ ‑

GUMMOW J:   It is really a question of what the attitude of equity was as to what was the adequacy of consideration in these circumstances?

MR EINFELD:   That, of itself, would be a question of significance, your Honour.

GUMMOW J:   I suspect the answer is adverse to you.

MR EINFELD:   Well, your Honour, we would submit not.  The consideration ‑ ‑ ‑

GUMMOW J:   In regard, in particular, to the practical realities of this situation.

MR EINFELD:   Your Honour, with respect, that is to align two concepts.  Equity requires that there be consideration for the assignment.  The respondent says here is an agreement which identifies that consideration.  It runs its case below at first instance and on appeal upon the basis that the consideration for the assignment is the forgiveness of the debt.  The

forgiveness of the debt is of a debt which was never intended by either party to be paid.

GUMMOW J:   It is this phrase “illusory”, you see.

MR EINFELD:   Yes.  That is why it is illusory, your Honour.  It becomes illusory if neither party intended to perform it.  The proposition itself is not one that has been identified as part of Australian contract law, even though sensibly, with respect, it would be because it is but an instance of a general principles of past consideration, consideration to perform a legal conduct, et cetera.  The second point is, should it be confined to the narrow circumstances identified at first instance and not disputed above, and in the Court of Appeal, mainly to circumstances of disputed claims in the context of actual or threatened litigation.

Our submission is that this is an appropriate case.  The acceptance of the findings below throw up a true question of law which, in our submission, warrants consideration of this Court because the statement of principle itself is one which is important as a matter of general contract law.  Whilst it is true, in answer to what your Honour, the presiding judge says, that the question has to be considered as one in equity, nevertheless, it is well established both in English and Australian law that to support such an assignment consideration is required.  That consideration is generally expressed in terms of consideration as part of the ordinary law of contract so that it is consideration in its true sense, in our submission, which is required for the promised assignment.  In circumstances, in our submission, where there was no submission below, nor here, that the debt was ever intended to be performed, in our submission, that constitutes a sound basis upon which the assignment fell.

Your Honours, as an instance of the general law of contract, in our submission, the point remains an important one.  It ought to be declared by this Court to be a relevant principle in Australian contract law and for those reasons, in our submission, special leave ought to be granted.

GUMMOW J:   Thank you, Mr Einfeld.  Yes, Mr Fagan.

MR FAGAN:   Your Honours, the management company with the name that has been abbreviated to TROM transferred book debts which had an agreed value of around 18 million and the consideration said to be given was that TPL, the assignee, transferee, forgave this debt of 18 million.  Now, the 18 million is not said to be a sham.  The use of the word “illusory” is to try to steer a course around the problem of showing it to be a sham, which could not be shown and the way that is sought to be done is to say that there was something ineffectual about the consideration because TPL had not intended to enforce the debt. 

The debt arose, as we know, from the document at page 142 in the application book.  It was agreed that TROM, the management company, would be paying TPL 18 million for TPL taking over the management responsibilities for these orchards, which were onerous.  Now, the concept of not intending to enforce simply means that the parties did not intend that that debt that was created would be enforced in the sense that TPL would sue for it or would issue a statutory demand or the like.  What was intended, however, was that that debt be real.  It was intended that that debt be traded for the transaction of assigning the book debts which in fact took place.  So the consideration was not illusory at all.  It was a real obligation that was really created.  It is just that the obligation was always intended from the outset, apparently, to be used in a second stage of the party’s dealings. 

Now, that means that there is not a sham, as is acknowledged, and there is nothing illusory about it at all and the case was correctly decided, in my respectful submission, on the basis of principles that are well understood.  For those reasons, it is our respectful submission that special leave ought to be refused.

GUMMOW J:   Yes, Mr Einfeld.

MR EINFELD:   The point we make by way of response to that is that in light of our friend’s acknowledgement that there was a bipartite transaction, not a single transaction, our submission is that it is not permissible to uphold the two contracts, for which our friend contends, by finding consideration moving from (a) in the first agreement and from (b) in the second agreement without also finding the consideration moving from (b) in the first agreement and (a) in the second.  Our friend confirms, in our submission, that the resulting position is that, albeit the overall transaction was a genuine one, once a party asserts as consideration forgiveness of a debt it never intended to enforce and the other party never intended to pay, that puts an end to that as being appropriate or proper consideration for the transfer of assets.  May it please the Court.

GUMMOW J:   We are not satisfied that any point of general importance respecting the so‑called doctrine of illusory consideration arises on the facts and circumstances of this case.  Nor do the interests of justice require a grant of special leave.  Special leave is refused with costs.

AT 9.56 AM THE MATTER WAS CONCLUDED