White & Anor v State Bank of NSW

[2003] HCATrans 669

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S278 of 2002

B e t w e e n -

LESLEIGH WHITE and D.S. & L. WHITE CARRYING PTY LIMITED

Applicants

and

STATE BANK OF NEW SOUTH WALES LIMITED

Respondent

Application for special leave to appeal

GUMMOW J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON WEDNESDAY, 16 APRIL 2003, AT 9.02 AM

(Continued from 11/4/03)

Copyright in the High Court of Australia

MR P.L.G. BRERETON, SC:   May it please the Court, I appear with my learned friend, MR A.J. McQUILLEN, for the applicant.  (instructed by McKells Solicitors)

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR P.J. DOWDY, for the respondent.  (instructed by Abbott Tout Solicitors)

GUMMOW J:   Yes, Mr Brereton.

MR BRERETON:   May it please the Court, I propose to address the Court chiefly on the second of Mr Reynolds’ two arguments, which is the ‑ ‑ ‑

GUMMOW J:   Well, he abandoned the first lot, so you cannot get them back, I do not think, Mr Brereton.

MR BRERETON:   No, I am sorry, not the first summary – on Mr Reynolds’ summary of argument which contained, as I understand it, two arguments and in the time ‑ ‑ ‑

GUMMOW J:   Yes.

MR BRERETON:   ‑ ‑ ‑ I have been able to come to grapple with this case I am not aware that he had abandoned the first of those two arguments.

GUMMOW J:   No, no.  You are quite right.

MR BRERETON:   However, notwithstanding that, I propose to focus on the second argument.

GUMMOW J:   Yes.

MR BRERETON:   The construction argument, which is advanced as the first argument, speaks for itself and there is probably not much that can be said to elaborate it.

GUMMOW J:   Yes.

MR BRERETON:   So far as the second argument is concerned, clause 5.1.2.1 in the contract of guarantee ‑ ‑ ‑

GUMMOW J:   Whereabouts in the supplementary outlines ‑ ‑ ‑

MR BRERETON:   It is extracted, your Honour, in paragraph 3.4 of our supplementary outline ‑ ‑ ‑

GUMMOW J:   Thank you.

MR BRERETON:   ‑ ‑ ‑ and, for that matter, clause 5.1.2.2 on which our learned friends rely, and that is extracted in their supplementary outline at paragraph 4 at the top of page 2.  They are both conveniently set out in the application book at page 60.  To the extent that that second clause is relevant, what I am about to say about the first applies equally to it.

Those clauses do not merely confer on the creditor authority, for example, to extend time or to vary the principal contract.  They do not simply address circumstances specifically contemplated by the parties which might otherwise not be caught by the guarantee and extend the liability of the guarantee to cover those circumstances.  To the contrary, by providing that:

The Mortgagor shall not be released, nor shall the Mortgagor’s liability hereunder be affected by any . . . thing whatsoever, whereby the Mortgagor would, under the law relating to suretyship, have been so released and/or his obligations under this Mortgage affected –

those clauses purport to exclude the whole of the law relating to suretyship protective of the guarantor.  Exactly the same can be said of 5.1.2.2.  Contractual freedom has always been subject to limits imposed by public policy.  Public policy has no fixed definition.  Justice Isaacs in Wilkinson v Osborne described it as some definite and governing principle which the community as a whole has already adopted ‑ ‑ ‑

GUMMOW J:   Where do we see this in Mr Reynolds’ outline?  This indication of public policy?

MR BRERETON:   In 3.12, 3.13 and 3.14.

HEYDON J:   It is a pretty heroic construction of it.

MR BRERETON:   In paragraph 3.14 the contention is that for a contract to exclude the operation of equitable principles the courts will require any exclusion be by clear words and not by general words, and that is the argument which I am now seeking to elaborate.

GUMMOW J:   Thank you.

MR BRERETON:   Public policy is not locked in time, nor inflexible, and may change over time.  As recently as last year, Justice Barrett in the Supreme Court of New South Wales in a case called Taylor v Burgess 29 Fam LR 167 held that a contract by a mother not to make allegations of paternity was unenforceable on grounds of public policy.

GUMMOW J:   What is the public policy here?

MR BRERETON:   The public policy here is that which avoids contracts to the extent that they exclude the jurisdiction of courts.  The contract as void is contrary to public policy to the extent that it attempts to oust the jurisdiction of courts to determine rights of the parties.

GUMMOW J:   It does not oust the jurisdiction, does it?

MR BRERETON:   Well, it ousts the ability of a party to enforce ‑ ‑ ‑

GUMMOW J:   It provides a defence to an action.

MR BRERETON:   In my submission, it goes further than it.  Because it does not merely extend the operation of the guarantee to certain specific circumstances but in effect excludes the whole of the protective provisions of the law of suretyship, it in effect does the same thing as a contract which purported to exclude a right to claim maintenance or purported to exclude a right to pay a provision under the Family Provision Act would have.

Now, this doctrine of pertaining to excluding the jurisdiction of courts has developed side by side in respect of common law rights, or, I should say, general law rights in the present context, and statutory rights.  A party may not contract to surrender rights if they are to be seen as not purely private but conferred for the benefit of the public.  That has been held to be so, for example, in respect of the right of a spouse to claim maintenance, the right of a dependant to claim provision from a testator’s estate, the right of an employee to complain of discriminatory treatment and the right of a consumer to claim relief for a contravention of section 52 of the Trade Practices Act.

GUMMOW J:   That is a statutory matter.

MR BRERETON:   All four of those instances which I have advanced I accept are statutory, but the common feature of all of those cases is that the legislation in question or the right in question was intended to be protective of a vulnerable person or class of persons.

In the area of the common law, as distinct from statute, the rule against excluding the jurisdiction of the courts has generally been developed in cases dealing with arbitration and the like.  But, in my submission, the principle to be derived from the cases dealing with statutory rights is apt to be applied to equitable rights, particularly if those equitable rights have been developed for the purposes of protecting the position of vulnerable persons.

GUMMOW J:   These equitable rights had become, by absorption, common law rights as well.  They just have legal rights, have they not?

MR BRERETON:   The answer to the first question is ‑ ‑ ‑

GUMMOW J:   I am just looking at the third edition of de Colyar published in 1897, page 363.  Mr Jackson referred to the second edition but ‑ ‑ ‑

MR BRERETON:   My learned friend has referred to this line of authority and says that they became part of the common law at an early stage.  If, for the purposes of the evolution of the common law, the early 1800s is an early stage, that might be right.  But, in my submission, there are still two bodies of principle, one common law, one equitable.  They happen now to mirror each other but the equitable rights have not become common law rights by absorption.  Both the common law ‑ ‑ ‑

GUMMOW J:   Assume you are wrong about that, where does it leave your principal submission?

MR BRERETON:   It does not affect it, because the equitable rights survive.  They have not ceased to be equitable rights and, indeed, many of the cases to which my learned friend refers say you can still get this relief pre‑judicature in a court of equity even if though you could also get it at law.

GUMMOW J:   Well, that is a case of concurrent jurisdiction, you see.

MR BRERETON:   Which means that there is still a separate body of equitable principle.  What all of this amounts to is that the principles of equity relating to suretyship have been evolved over the years for the purpose of protecting the interests of sureties who are otherwise, even with protection, in a vulnerable position.  They have a public protective purpose and, by analogy with the rule which has developed in the cases of statutory rights, the law would not sanction their wholesale exclusion in the manner in which they have purportedly been excluded by the clauses in question here.

GUMMOW J:   You have to say that there is a category here alongside penalties ‑ ‑ ‑

MR BRERETON:   Yes.

GUMMOW J:   ‑ ‑ ‑ which is a restriction on freedom of contract.  That seems to be a large step.  If it is a penalty, it is a penalty and it does not matter you have contracted to say it is not and, if it is, it is unenforceable in any event.

MR BRERETON:   I was going in fact to come to that analogy, because the idea that there are public policy limits to the ability to exclude the rules of equity, and even of law, protective of sureties has been aired, though probably not resolved, in a number of cases.  One which deals with the point which your Honour raises is the judgment of Justice Clarke at first instance in Citycorp Australia v Hendry (1985) 4 NSWLR 1 at 21 where his Honour extended the rule of public policy precluding enforcement of a penalty to a contract of indemnity which in effect would have indirectly enforced the penalty by imposing an equivalent liability on the indemnifier. The point was left open in the Court of Appeal by Justice Priestley, who gave the leading judgment.

GUMMOW J:   Now, that has to bring you to clause 5.1.3, does it not, which is an indemnity?

MR BRERETON:   Yes, and the answer to that is that that makes no difference.  Even if the contract is one of indemnity, the same principles of equity are applicable in cases in which, strictly speaking, there is not a relationship of suretyship but a person who has a secondary liability in substance has a right of reimbursement from one who is primarily liable.  Even if this is truly a contract of indemnity and not one of guarantee, the indemnifier, if the indemnifier paid out the creditor, would still have a right of recovery against the principal creditor, and on the authority of Lord Selborne in Duncan Fox v North & South Wales Bank (1880) 6 App Cas 1 at 13 under a contract which is not strictly one of suretyship but in which there is a ‑ ‑ ‑

GUMMOW J:   That is a case about bills of exchange, is it not?

MR BRERETON:   But there is a statement of principle which deals with contracts, not strictly one of suretyship but ‑ ‑ ‑

GUMMOW J:   That is right, because it is a case about bills of exchange.  That is why he had to say ‑ ‑ ‑

MR BRERETON:   And a contract of indemnity is in the same plight.  For example, an insurer is an indemnifier but an insurer typically has a right of recovery against the principal wrongdoer when the insurer is called upon to pay out the insured.  In a contract of indemnity the indemnifier will normally have a right of recovery against the principal creditor and, for that reason, on the authority of Lord Selborne, if there are securities which secure the principal debtor’s indebtedness, those securities are to be preserved, or ought to be preserved, for the benefit of the indemnifier and the same principles of equity as apply in cases of suretyship apply in such a case.

In any event, there is authority for the view that a clause such as clause 5.1.3 does not in fact convert what would otherwise be a contract of guarantee into one of indemnity.  Heald v O’Connor [1971] 1 WLR 497 and Citycorp Australia v Hendry, already referred to, at page 20 lend some support to that.

The idea that public policy imposes limitations on this type of exclusion clause has been abroad but, as I suggested earlier, not resolved.  I have already referred to how it arose in Citycorp.  In Standard Chartered Bank v Walker [1982] 3 All ER 938, in a judgment which has not otherwise found favour in this country, Lord Denning suggested that a clause excluding the liability of a mortgagee for negligence or any clause which made the guarantor liable for a larger sum than that for which the mortgagor principal was liable would be enforceable. Although ultimately his Lordship relied on the equivalent of the Contracts Review Act (NSW) for that proposition, his Lordship also referred to a number of earlier cases which predated that Act to found the basis for that.

GUMMOW J:   Yes.  It has not been taken up though, has it?

MR BRERETON:   No, it has not and, as I have said, that judgment has not been received enthusiastically on other grounds in this country.

GUMMOW J:   It died with its author, I think ‑ ‑ ‑

MR BRERETON:   In Dunlop New Zealand Ltd v Dumbleton [1968] NZLR 1092 Justice Wilson held that the reason why a guarantor was discharged in the event of a variation of the principal contract was because of an implied condition in the contract of guarantee to that effect and that that implied condition could not be waived. But that seems to have been not on public policy grounds but because the condition itself had the effect of setting aside the liability and that that could not be retrospectively waived.

Perhaps closest to home in Port Jackson Stevedoring v Salmond & Spraggon 139 CLR 231 Justice Stephen at page 258, with whom Justice Murphy at 285 agreed, thought that exclusion clauses in the stevedoring industry which divorced:

the power of control from any liability for the consequences of its non‑exercise not only attracts that natural antipathy to exemption clauses and to the saving of “grossly negligent people from the normal consequences of their negligence” . . . but may also be thought to be positively undesirable in the public interest.

On that issue special leave was granted in Nissho Iwai v Malaysian International Shipping Corporation 167 CLR 219 but, when that case was called on, that point was not ultimately considered and did not fall to be considered.

GUMMOW J:   Is there anything about Justice Stephen’s point in the Privy Council in Salmond v Spraggon?

MR BRERETON:   I do not think so, your Honour.  At page 231 in Nissho Iwai is the dictum which says special leave was granted on this issue but ultimately we did not have to consider it.  But those cases taken together, though I readily accept they do not provide a compelling body of law that there is such a public policy, show that the thought that there is a public policy which impacts on clauses of this kind is alive and well.

GUMMOW J:   Yes, but people say “public policy” as if it explains itself.  What is the policy of the law in this question and why is the policy of the law to that effect?

MR BRERETON:   The policy of the law is that rights, whether they be statutory or equitable, which are for a public protective purpose, rather than of a purely private character, cannot be bargained away.

GUMMOW J:   It is a very wide proposition.

MR BRERETON:   And the cases do proceed by degrees and, for example, as your Honour knows ‑ ‑ ‑

GUMMOW J:   I am sure there are many exceptions to it.

MR BRERETON:   Looking at contracting out of the jurisdiction of the courts, arbitration is permissible, certificates on questions of fact are permissible.  There are degrees in this area.  It is probably permissible ‑ indeed, the authorities would compel us to accept at this stage that it is permissible to have a provision in a guarantee which provides explicitly that the creditor may give time to the principal debtor or that the creditor and the principal debtor may vary the terms of the principal contract.  But it is a large step from that to a provision which purportedly excludes the whole of the law of suretyship protective of the guarantor without referring to those specific aspects which are excluded so as to show that the parties have even turned their mind to the specific aspects to be excluded.  That is where the policy ‑ ‑ ‑

GUMMOW J:   How would this apply in the present case?  What will be its impact on the outcome of this litigation?

MR BRERETON:   Its impact would be that the creditor’s ability to rely on clause 5.1.2, to save it from having the guarantor credited with the value of the lost securities, would be taken away.

GUMMOW J:   But if this release that is brought about in equity, as you say, is an equitable matter, it would be subject to equitable conditions, would it not, including laches, acquiescence and so forth?  That would open an area of factual dispute.

MR BRERETON:   The Court of Appeal has held – and we do not understand this to be in issue – that but for that clause the guarantor would have been entitled to succeed on the impairment of securities.

GUMMOW J:   We will hear from Mr Jackson.

MR BRERETON:   May it please the Court.

MR JACKSON:   Thank you, your Honours.  Your Honours, the first thing is my learned friend said “but for that clause”; what the Court of Appeal actually said is at page 132 paragraph 69, “But for cll 5.1.2.1 and following in the memorandum”.  That is the first thing, your Honours.  That is a matter that we invite your Honours to note in passing.

The second is this, that the argument that has now been presented is, with respect, no matter how much one endeavours to finesse it into the last set of written submissions, really quite new and a quite new elaboration upon it.  It suffers, your Honours, from the difficulty that it has not been dealt with at all by the courts below and the Court would not have the benefit of any such discussion.  The second feature about it is that one notes that if there is to be this underlying public policy, somewhat undefined, it does not sit too well with the actual finding which again appears at page 132 paragraph 70:

there was no possible basis for the Court to refuse to enforce these terms under s7 of the [Contracts Review] Act.

So there had been an issue at trial and on appeal in relation to whether the contract was one which could be regarded as unfair or unjust.  Now, your Honours, I appreciate it is not quite the same point but it militates against the view that there would be found to be a public policy which would be against the insertion of clauses of this kind.

GUMMOW J:   Well, yes, that is why I took this up with Mr Brereton.  That sentence beginning at the bottom of page 132:

Moreover quite apart from her signing the acknowledgement . . . the events of the years that followed . . . did not give any hint that Mrs White did not accept that the Bank had acted with propriety –

et cetera.

MR JACKSON:   Yes.  Your Honour, if I could just say that the letter of 13 February 1990 we have not specifically relied on, but what it is is one which sets out – and this is, I think, a fortnight after the events or perhaps a little less – what took place and invites her to acknowledge receipt of the letter.  Now, no doubt for present purposes one could not try to get more out of it than that but, your Honours, it does amount to a real question whether there was in fact some acceptance of what had taken place.

Leaving that aside, the next feature to which we would seek to go is this, that the notion that there is a public policy against this is directly against, in our submission, this Court’s decision in the two decisions to which we have referred in our written submissions.  That is O’Day and Buckeridge.  Your Honours will find them at about page 217 in the volume of materials and your Honours will see there, if I could go to O’Day first of all.  At page 217 at the bottom of the page where referring – I am sorry, it is page 217, your Honours, of the book.

GUMMOW J:   Yes, we have it.

MR JACKSON:   Yes, at the bottom of the page, Justice Dixon:

The ordinary rights of a surety in respect of securities given by the principal debtor do not exist in the present case.  Each of the instruments of suretyship –

and your Honours will see the remainder of that sentence, including a reference particularly to subrogation – an equitable doctrine.

GUMMOW J:   Yes.

MR JACKSON:   Your Honours, one also sees Justice Evatt at the bottom of page 219 of the volume we have given your Honours:

The documents of guarantee signed by the appellant are themselves sufficient to defeat the arguments so vigorously contended for by Mr Walker.  Although a surety is a debtor most favoured by the law, he cannot escape his contractual obligations where they provide –

et cetera.

GUMMOW J:   Yes.  Now, it is in reliance upon O’Day that these clauses have been drafted for many years.

MR JACKSON:   Yes, your Honour.  Could I just say Justice McTiernan at page 221 in the first new paragraph, which goes to about halfway down the page, is to the same effect.  Could I just say, your Honours, that the existence of observations of that kind demonstrates, in our submission, that there really is not a public policy of the kind in question.  When one is speaking about matters of contract, it is very difficult to say in circumstances where, if one just takes the indemnity clause – and there was an indemnity clause in O’Day – for example, one has the situation where it says whatever might be the situation if you were treated as a guarantor or surety, the position is that you agree to be treated as a principal debtor.  Your Honours, with respect, what is wrong with that?

Your Honours will see that we have set out in our written submissions a quotation from the judgment of the New Zealand Court of Appeal – and this is in paragraph 7 – in Orme v de Boyette where Justice McMullin spoke of the reason why one has indemnity clauses.

Now, your Honours, the fourth point we would seek to make is this, that our learned friends’ argument speaks of rights that cannot be given away or bargained and sold but the references all appear to be statutory rights behind which there is a statutory public policy or public policy on intent which can be derived from the terms of the statute.  But the general proposition, which applies to statutory rights as well as to other rights, is that rights which are ones for the benefit of particular people are capable of being, to use the expression used in the early cases, bargained and sold.

One sees that even, for example, in relation to the now statutory right of subrogation which is referred to in section 3 of the Law Reform (Miscellaneous Provisions) Act 1965.  We have referred to the actual provision in paragraph 8 of our written submissions, footnote 5.  The actual provision itself can be seen at page 265 of the volume of materials.  But, your Honours, there are cases in which that right has been held to be excluded by provisions such as the clauses in question here.  If I could just give your Honours a reference – we do not have the case with us – to one of the cases.  It is Austin v Royal (1998) NSW ConvR 55‑863 in which the number of cases in which that has occurred have been referred to.

Now, your Honours, if one takes the types of entitlements there are in relation to sureties, it is very difficult, in our submission, to see a particular reason why they should be regarded as being ones incapable of

being bargained away.  True it is, as indeed one sees in the passages to which I referred a moment ago in O’Day, that they are rights where the law, using the term generically, has had special concern for the position of sureties.  That being said, the cases equally say that those rights are ones which are capable of being dealt with contractually.  Your Honours, those are our submissions.

GUMMOW J:   Yes, thank you, Mr Jackson.  Yes, Mr Brereton.

MR BRERETON:   So far as the point not being dealt with below is concerned, it is true that in terms it was not argued in that way below.  It was sought to be argued in the context of the application of the Contracts Review Act to the particular clauses in question, and I will come to that and the pleading point about that next.  However, it is a pure question of policy which does not depend on the facts of the case in question and the Court would not be disadvantaged by not having the consideration of an intermediate appellate court on that issue.

So far as the argument on the Contracts Review Act is concerned and what appears at the foot at application book page 132, the reasons which Justice Cooper gave are summarised in the second sentence of paragraph 70 of the Court of Appeal’s judgment, focused on the “failure to raise the matter in the pleading or until the evidence had closed” and the reason why Justice Sheller ultimately held that there was no possible basis for the court to refuse to enforce those terms under section 7 was a pleading point, as appears from Justice Cooper’s reasons at pages 60 to 61.

The correctness of that pleading point is itself dubious.  One would have thought that the defendants, Mrs White, having pleaded the Contracts Review Act generally in her defence, if clause 5.1.2 was to be relied on as a reply to her reliance on the impairment of securities, 5.1.2 ought to have been pleaded as a reply and she might then have rejoined with a contention that 5.1.2 ought not be enforced under the Contracts Review Act.  That was not done and 5.1.2 was not pleaded in the Bank’s reply.  However, the bottom line is this argument was foreshadowed at trial, at least in addresses.  It ultimately did not succeed on a pleading point.  In the context of the Contracts Review Act, it was certainly not put as a question of public policy as I now put it.

So far as what my learned friend says about laches is concerned, all that Mrs White did was that a fortnight after the security has been impaired she signed, at the Bank’s request, a letter acknowledging what had happened.  She gave evidence that she thought that she had no choice, that she was presented with a fait accompli and, as I understand the trial judge’s judgment, she was accepted on that point.

In my submission, neither O’Day nor Buckeridge, relied on by my learned friend, are contrary to the proposition for which I contend.  One needs to appreciate that O’Day did not turn on an indemnity clause.  If one turns to page 199 of the bundle, it will be seen from the second holding in the headnote that it was held:

that the provisions of the instruments of suretyship effectually disentitled the surety to any right or interest which he might otherwise have had in the security given by the principal debtor.

The relevant clause is at page 202 of the bundle, I think, at about point 6.  On page 202 of the bundle, just before the end of the long paragraph, the last three lines there:

the guarantors will not in any way claim the benefit or seek the transfer of any other security or any part thereof.

So it was a specific clause dealing with a specific situation, not a general omnibus exclusion of the whole of the law protective of guarantors relating to suretyship.

Similarly, in Buckeridge there was a specific clause which did no more than defer the surety’s rights.  That can be seen at page 235 of the bundle, right at the foot of the page:

The opening words of the clause were:  “[U]ntil the Mortgagee shall have received all moneys owing to it by the Mortgagors the Guarantors shall not be entitled on any grounds whatsoever to claim the benefit of any security –

So, again, a specific clause dealing with a specific contemplated situation, not a general omnibus exclusion.

I accept that the cases to which I have referred deal with statutory rights, but the principle which they illustrate is one of statutory rights protective of disadvantaged people.  Just like statutes, equity has a policy which underlies it and that policy, in this case, just as in unconscionable dealing or undue influence, is to protect disadvantaged people.  It can hardly be suggested that equity would sanction the contractual exclusion of the right to claim relief for unconscionability or undue influence.  Those are my submissions.

MR JACKSON:   May I just correct one thing my learned friend said, with respect.  If one looks at O’Day at the bottom of page 202, the next paragraph, the one “By the mortgage given”, your Honours will see it

contains a number of clauses, including one which goes over to the top of the next page.

GUMMOW J:   Yes.  I am looking at page 205 of the report, (a) for example.

MR JACKSON:   Paragraph (a), yes, that is the point I was seeking to make.  And Justice Dixon refers to there being three instruments of which this is one.

GUMMOW J:   Yes, thank you.

The Court has considered the propositions advanced in the applicant's supplementary summary of argument dated 9 April 2003 as they were developed and, indeed, expanded in oral submissions this morning.  The Court is of the view that there are insufficient prospects of success in any appeal to warrant a grant of special leave.  Accordingly, special leave is refused and refused with costs, including any reserved costs.

The Court will adjourn until 10.15 am on Tuesday, 29 April at Canberra.

AT 9.38 AM THE MATTER WAS CONCLUDED