Zeekap (No 47) Pty Ltd v Anitam Pty Ltd and Foster
[1989] TASSC 32
•13 July 1989
Serial No 26/1989
List "A"
CITATION: Zeekap (No 47) Pty Ltd v Anitam Pty Ltd and Foster [1989] TASSC 32; A26/1989
PARTIES: ZEEKAP (NO 47) PTY LTD
v
ANITAM PTY LTD
FOSTER
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 69/1989
DELIVERED ON: 13 July 1989
JUDGMENT OF: Crawford J
Judgment Number: A26/1989
Number of paragraphs: 37
Serial No 26/1989
List "A"
File No 69/1989
ZEEKAP (NO 47) PTY LTD v ANITAM PTY LTD and FOSTER
REASONS FOR JUDGMENT CRAWFORD J
13 July 1989
The plaintiff seeks summary judgment under O.5 of the Rules of Court. I am satisfied that the first defendant has failed to pay the amount claimed, namely $334,749.52 for goods sold and delivered pursuant to an agreement for sale of a business.
The action arises out of an agreement for sale dated 6 October 1988 between the plaintiff and another company as vendors and the second defendant as purchaser, under which the second defendant (hereinafter called "Mr Foster") agreed with the vendors to purchase land and buildings (known as the Olde Tudor Supermarket complex), the business of that supermarket and certain plant, equipment, fixtures and fittings for the price of $1,320,000. Mr Foster also agreed to purchase the stock–in–trade at a price equal to a valuation to be made as provided in clause 17 of the agreement, payment for such stock–in–trade to be made within 14 days of the receipt of extended stock sheets. The agreement was purportedly entered into by Mr Foster "and/or his nominees or nominee" and clause 33 provided that notwithstanding his right of nomination "he personally guarantees the completion hereof in accordance with the terms hereof". It appears to be commonly accepted that the first defendant, Anitam Pty Ltd (hereinafter called "Anitam"), was nominated by Mr Foster to be the purchaser in his place. The purchase was completed on 24 November 1988, except as to payment for the stock.
The purchase price for the stock was determined under the agreement in the sum of $173,517.89 and the extended stock sheets were received by the purchaser on or about 24 November 1988. Anitam paid to the plaintiff $138,768.35 towards the amount due for the stock, having deducted $34,749.52.
By his affidavit Mr Foster said that he negotiated the purchase with the vendors' agents. In the course of the negotiations he was refused access to the vendors accounts and trading figures but he was provided with limited financial information which included:–
1 An annual turn–over figure of $1,750,293 together with a list of expenses which included the following:–
"Wages $123,000"
2 A list of staff members, identified by Christian names, position, whether permanent or casual, whether they were paid award or over–award wages and some other information. The list asserted that awards were adhered to and at the bottom of the list, in response to a query whether a previously given figure of 81 per cent for the "cost of goods sold" was "a rule of thumb or actual", it was stated: "Cost of goods sold at 81% is a rule of thumb but confirmed with Statewide at 17.9%" I presume that the figure of 17.9% was in fact a margin indicated by Statewide (the identity of which was not explained by the evidence) and that it in turn indicated a cost of goods sold percentage of 82.1.
The defendants claim that after possession of the business was obtained it was discovered that the vendors had been making certain cash payments to an undisclosed weekend manager and to two other employees which were not disclosed prior to settlement, those payments being:–
(a)to the weekend manager, $150 cash each weekend.
(b)to the manager of the supermarket, $50 per week more than was reflected in the disclosed figures.
(c)to Miss Mary Quinn, $20 per week more than was reflected in the disclosed figures.
The evidence established that the plaintiff had recorded the payments as purchases in its books of account, although that appears to be irrelevant as the books of account were not disclosed to Mr Foster prior to the making of the agreement for sale.
Mr Foster is the general manager of Anitam and in paragraph 16 of his affidavit he stated that he and Anitam "seek unconditional leave to defend these proceedings by delivery of a Defence and Counterclaim which sets off against the Defendants a counterclaim for damages for breach of the agreement for sale relied on by the Plaintiff, the damages being likely to exceed the amount of the plaintiff's claim". It is the defendants' case that not only did Anitam have to keep up the payments to the three employees referred to above, but in the case of two of them, it also had to pay an extra amount, so that those three employees came to be paid as follows:–
(a)the weekend manager $250 per week, $100 of which was then deducted for income tax instalments, keeping the weekend manager in the same cash position as before.
(b)The manager of the supermarket $50 per week as before.
(c)Miss Mary Quinn $34.13, the extra $14.13 being required to comply with the relevant award. She had previously been paid less than the award.
The total amount which came to be paid by Anitam to these three employees as explained above was $334.13 per week or $17,374.76 on an annual basis. Anitam according to Mr Foster's evidence, has consequently had to suffer a reduction in the "gross profit" of the business by at least $86,873 over five years (being $17374.76 x 5). I will treat the reference to the gross profit as being in error, and assume that he meant to refer to the net profit before tax.
To be able to recover damages in respect of that outlay the defendants might rely on breaches of clauses 31(a) and (e) of the agreement for sale which provided:–
"31 The Vendors warrant:
(a)as far as the Vendors are aware all facts concerning the business and affairs of the Vendors material for disclosure to an intending Purchaser of the goodwill and the assets and the premises of the Vendor have been disclosed to the Purchaser and any such facts arising prior to the date of completion shall forthwith be disclosed to the Purchaser.
. . . . . . . . .
(e)The particulars of the employees of the Vendor set forth in the Fifth Schedule are true and correct in all respects as of the date hereof and, in particular, the dates of commencement, the period of employment for long service leave purposes are true and correct and there are no service contracts with any employees other than engagements on a weekly, fortnightly or monthly basis ".
Mr Foster explained in his affidavit that he instructed his solicitors to deduct $34,749.52 from the settlement funds paid to the plaintiff. A simple mathematical calculation reveals that that sum is exactly twice the annual extra wages payment of $17,374.76 referred to above. For some unexplained reason he simply doubled the anticipated extra annual outlay and deducted it, from what was due for the stock. Mr, Foster's evidence was also that his intention is to retain the supermarket and all the property purchased pursuant to the agreement for sale for period of at least five years.
The plaintiff's application under O15 for summary judgment is based on the ground that the defendants have no defence to its claim. I will first deal with the position of Anitam. Clearly it has a counterclaim to make against the plaintiff, but the question to be decided is whether it has a defence. It does not dispute that the claimed sum of $34,749.52 fell due for payment for the stock under the terms of the agreement for sale. But it claims that its counterclaim may be raised as a defence in the form of an equitable set–off.
The common law gave no right of set–off. The Statutes of Set–off of 1728 and 1734 allowed a right of set–off of debts or ascertainable money demands. They did not permit a claim for unliquidated damages to be set–off. Equity did permit a set–off to be claimed in certain circumstances. If the claim was legal, the defendant could raise the set–off by applying, in equity, for a common injunction to restrain the plaintiff at law from proceeding until he had satisfied the claim of the defendant, be it legal or equitable.
Since the Judicature Acts an equitable set–off may be pleaded as a defence in a plaintiff's action (see the Supreme Court Civil Procedure Act 1932 s10). It was said in some cases that an equitable set–off could only be raised as a defence if it was for a liquidated amount and that it could not be raised in support of a claim for unliquidated damages. See, for example, Smail v Zimmerman [1907] VLR 702; Bayview Quarries Pty Ltd v Castley Development Pty Ltd [1963] VR 445; Fryer v Plucis [1967] WAR 161; and the dicta of Dixon J in McDonnell East & Limited v McGregor (1936) 56 C.L.R. 50 at p.62. However, the preponderance of authority is against that view and it is now accepted that unliquidated damages may be claimed by way of equitable set–off against a claim for a liquidated amount. See, for example, Young v Kitchin (1878) 3 Ex D 127; Government of Newfoundland v Newfoundland Railway Co (1888) 13 App Cas 199; Bankes v Jarvis [1903] 1 KB 549; Sun Candies Pty Ltd v Polites [1939] VLR 132; Hanak v Green [1958] 2 QB 9; Hale v Victoria Plumbing Co Ltd [1966] 2 QB 746; The Tojo Maru [1970] P.21; D Galambos & Son Pty Ltd v McIntyre (1974–5) 5 ACTR 10; Altarama Ltd v Camp (1980) 5 ACLR 513; W Pope & Co Pty Ltd v Edward Souery & Co Pty Ltd [1983] WAR 117; Argento v Cooba Developments Pty Ltd (1987) 71 ALR 253.
In Equity Doctrines & Remedies by RP Meagher, WMC Gummow and JRF Lehane, 2nd Edition, at p776 it is said:—
"One ingredient was necessary in equity but not required at law, ie that the set–off actually go to the root of, be essentially bound up with, 'impeach', the title of the plaintiff. No such requirement existed at law, but in equity it was indispensable. It was not sufficient that there be countervailing claims, nor that those claims were mutual, nor even that they arose out of the same transaction. The defendant, in order to make out an equitable set–off, had to establish that he possessed some equitable right to be protected from the plaintiff's claim".
There have been a number of cases where the claims of both the plaintiff and the defendant have arisen under the same contract. Such a case was Rawson v Samuel (1841) Cr & Ph 161 in which Lord Cottenham LC said at p178:–
"It was said that the subjects of the suit in this Court, and of the action of law, arise out of the same contract, but the one is for an account of transactions under the contract, and the other for damages for the breach of it. The object and subject matters are, therefore, totally distinct, and the fact that the agreement was the origin of both does not form any bond of union for the purpose of supporting an injunction."
Lord Cottenham LC went on to say that with one exception, in all cases cited in support of the application for an injunction "it will be found that the equity of the bill impeached the title to the legal demand."
In Government of Newfoundland v Newfoundland Railway Co (1888) 13 App Cas 199 at 213 Lord Hobhouse, speaking for the Privy Council, said:–
"Unliquidated damages may now be set off as between the original parties, and also against an assignee if flowing out of and inseparably connected with the dealings and transactions which also give rise to the subject of the assignment".
Bankes v Jarvis [1903] 1 KB 549 clearly does not fit in with such a pronouncement. In that case it was held that the defendant was entitled to set up as a defence against an action by a trustee for purchase money due under a contract for sale of a business, a claim for damages under an agreement made between the defendant and the cestui que trust six Years earlier.
Hanak v Green [1958] 2 QB 9 also causes difficulty. In that case the plaintiff sued the defendant builder for damages for breach of contract for failure to complete or properly complete certain items of work. The defendant was allowed by two members of the Court of Appeal to set–off (1) on a quantum meruit in respect of extra work done outside the contract and (2) damages for loss caused by the plaintiff's refusal to admit the defendant's workman. Sellers LJ agreed but also would have allowed a set–off for damages for trespass to the defendant's tools. The claims for extra work and for damage's for trespass did not arise out of the contract on which the plaintiff sued, although there was some connection with it.
Although it was a case in which it was said that a claim for unliquidated damages could not be made the subject of a set–off, Bayview Quarries Pty Ltd v Castley Development Pty Ltd [1963] VR 445 is relevant for present purposes. The plaintiff obtained a default judgment for the price of goods sold and delivered. An application to set aside the judgment was based on a claim that the defendant was entitled to damages for defects in other goods sold and delivered at an earlier time. Sholl J refused to set aside the judgment. He said at p 448 that it was hopeless to suggest that the defendant's claim for damages arose out of the very transaction sued upon or part of it. It had nothing to do with the goods sold and delivered in respect of which the plaintiff had sued for the price.
In Hale v Victoria Plumbing & Co Ltd [1986] 2 QB 746, a case relating to garnishee proceedings, it was held by the Court of Appeal that the garnishee was entitled to set–off against a judgment debtor's right to payment for plumbing work, a claim for damages for carrying out the work badly. Danckwerts LJ, with whom Winn LJ agreed said that since the Judicature Acts "claims arising out of the same transaction between. two parties can be set–off against each other..," Reliance was placed on another Court of Appeal decision in Morgan & Son Ltd v S Martin Johnson & Co Ltd [1949] 1 KB 107 in which the Court of Appeal cited with apparent approval what was said by Lord Cottenham LC in Rawson v Samuel (supra). I will not deal further with Morgan's case, which is not a strong authority because the existence of an equitable set–off was conceded.
In Edward Ward & Co v McDougall [1972] VR 433, Gowans J said at p439:—
"The solution of the problem must be found in the test of the nexus which must exist between the opposing claims and in a determination of the question whether in the circumstances the defendants show an equity of the necessary kind in respect of the whole or of part of their indebtedness to the plaintiff."
D Galambos & Son Pty Ltd v McIntyre (1974–5) 5 ACTR 10 concerned a claim by a plaintiff for the balance due under a building contract. The defendant sought to set–off a claim for damages for breach of the same contract involving work not done, defective work and work not done in accordance with the plans. Woodward J reviewed a number of authorities, and upheld the right to the set–off. He was of course concerned with claims under a contract for work to be done, and stated that the relevant principles to be extracted from the authorities were:–
(i) Failure in part to perform a contract, or defective performance of a contract requiring work to be done again or directly reducing the value of work done or goods supplied, may be raised as a defence to an action for money due under that contract. (I understand that statement not to refer to equitable set–offs).
(ii) Claims for money due under a contract and for damages for breach of the same contract (arising, for example, from delay) may be set–off against each other where the equity of the case requires that it should be so. This will depend upon how closely the respective claims are related, particularly as to time and subject–matter. The general conduct of the respective parties will, as always, be relevant to the granting of such equitable relief.
(iii) Even where one of the claims is not in terms based upon the contract, but it flows out of and is directly connected with it, a court may be prepared to recognize an equitable set–off.
(iv) The above statements of principle cannot be regarded as having universal application. They do clearly apply to contracts for work and labour, but special considerations are relevant in other areas such as bills of exchange, landlord and tenant and carriage of goods.
A claim to a set–off was rejected in Eagle Star Nominees Ltd v Merril [1982] VR 557 where the plaintiff sued for possession of land as an unpaid vendor, and the defendant purchaser attempted to set–off against the unpaid money a claim for unliquidated damages for breach of a promise by the vendor's agent that a house insurance policy would be assigned to him. Tadgell J applied the principle that the defendant 's cross–claim must be capable of being said to impeach the title to the plaintiff's legal demand. He said that the plaintiff's claim and the defendant's unliquidated cross–claim were independent and in no way mutual. There was no suggestion that the purchase was dependent on or induced or even influenced by the promised assignment of the policy. The plaintiff's promise which was relied on was collateral but subordinate to the contract of sale. There was no question of fraud or any other question which might cause equity to intervene. It followed that the plaintiff's claim owed nothing to any right, legal or equitable, which the defendant asserted and was not impeachable by any equity to which the defendant could refer .
Receivers sued for the price of goods supplied by the plaintiff in W Pope & Co Pty Ltd v Edward Souery & Co Pty Ltd [1983] WAR 117 and the defendant sought to set–off a claim for unliquidated damages arising out of defects and deficiencies in an earlier consignment. The set–off was rejected because on no view of the facts could it be said that the defendant's cross demand in any way impeached the claim of the plaintiff. Nor had it been brought about by, or contributed to by or was otherwise so bound up with the rights on which the plaintiff relied that it would have been unconscionable that the plaintiff should proceed without allowing the set–off. Olney J considered that the law was correctly stated in Spry: Equitable Remedies (2nd Ed.) at p170–171 in these terms:—
"But a defendant can establish an equity only by bringing forward a claim which impeaches that of the plaintiff. For this purpose it is not sufficient merely to prove a countervailing claim; nor, indeed, is it necessarily sufficient to prove a countervailing claim arising out of the same contract as that upon which the plaintiff is bringing suit. What generally must be established is such a relationship between the respective claims of the parties that the claim of the defendant has been brought about by, or has been contributed to by, or is otherwise so bound up with the rights which are relied upon by the plaintiff that it would be unconscionable that he should proceed without allowing a set–off. Thus if conduct of the plaintiff is such as to induce the defendant to incur an obligation in favour of the plaintiff, and that conduct itself is fraudulent, negligent or otherwise wrongful so as to give a cause of action to the defendant, the plaintiff will not ordinarily be permitted to proceed until he has made good the material claims of the defendant. ... There are, of course, other cases also where it will be held that an equitable set–off lies, provided that it appears that the claim of the defendant does in truth impeach that of the plaintiff, for the application of the principles which are here in question should not be arbitrarily restricted."
The facts in Sun Candies Pty Ltd v Polites (1939) VLR 132 were similar, but not exactly the same, as this case. The plaintiff sued for the unpaid balance of purchase money due under an agreement for sale of a business. The defendant counterclaimed for damages for deceit and breach of warranty, based on an alleged misstatement by the plaintiff of facts as to the net profits of the business. The right to a set–off was upheld. "The plaintiffs claim was for balance of purchase money of a business. The defendant' s unliquidated claim was for breach of a warranty as to the value of that business which value determined the amount of purchase money." (at p135). Similar facts arose in Altarama Ltd v Camp (1980) 5 ACLR 513. The plaintiff sought orders restraining the defendant from taking winding up proceedings based on the non–payment of purchase moneys due under an agreement for sale of a business. The plaintiff sought to set–off a claim for unliquidated damages for breach of warranties in the sale agreement. At pp519 and 520 McLelland J said:—
"The kind of circumstances which would render it inequitable that a creditor should recover his debt in proceedings for that purpose without meeting a counterclaim for unliquidated damages are not precisely defined in the authorities. There have been many judicial discussions of the question since the decision of the English Court of Appeal in Hanak v Green [1958] 2 QB 9, including, in Australia, Newman v Cook [1963] VR 659; Edward Ward & Co v McDougall [1972] VR 433; Galambos v McIntyre (1974) 5 ACTR 10, and Re Convere Pty Ltd [1976] VR 345. Many of the English authorities are reviewed in British Anzani v International Marine Ltd [1979] 3 WLR 451. To adapt one test applied in Smith v Parkes (1852) 16 Beav 115; 51 ER 720 and approved in Government of Newfoundland v Newfoundland Railway Co (1888) 13 AC 199, the equitable right arises if the debt and counter–claim flow out of the same transaction and are inseparably connected. The degree of connection required for 'inseparability' cannot be precisely defined, but in my opinion is achieved in the case of a claim for the outstanding balance of the purchase price for property sold, and a claim for damages for breach of a warranty in the contract of sale directly affecting the value of the property in question or a claim for damages for fraudulent misrepresentation of a kind directly related to the value of the property sold (see e.g. Sun Candies Pty Ltd v Polites [1939] VLR 132 and Newman v Cook (supra), at 674)."
It is said, seemingly correctly, by Dr. Derham in his book Set–Off at p17, that Australian courts have tended to be more conservative on questions of equitable set–off than English courts, and by and large have continued to espouse the formulation of the principle enunciated and applied by Lord Cottenham in Rawson v Samuel (supra). English courts do refer to the same principle. Thus in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1979] 3 WLR 451 at 456 Forbes J said:—
"The locus classicus for the principle involved is the judgment of Lord Cottenham LC in Rawson v Samuel [1841] Cr & Ph 161, 178:
'We speak familiarly of equitable set off, as distinguished from the set off at law; but it will he found that this equitable set off exists in cases where the party seeking the benefit of it can show some equitable ground for being protected against his adversary's demand. The mere existence of cross demands is not sufficient;
............'
And then, at p.179:
'Several cases were cited in support of the injunction; but in every one of them except Williams v Davies, 2 Sim 461, it will be found that the equity of the bill impeached the title to the legal demand.'
It is this feature that the equity must go to the 'very root of the plaintiff's claim that is the essential attribute of a valid equitable set off."
But later he went on at p46 to say:–
"In other words, in considering questions of this kind it is what is obviously fair or manifestly unjust that will determine the solution. This is because today while it is necessary to look back before the Judicature Act to discover the broad principles upon which equity would grant relief, it may not be helpful to seek to find out from the cases what a court of equity would have done in a similar case. The principle may be derived from the older cases. The application of the principle should be reached by a consideration of what today would be regarded as fair or just. This is but a reflection of the passage I have already quoted from the judgment of Lord Denning MR in the Federal Commerce case [1978] QB 927, 974–975."
Insofar as it might be suggested that the question or the court is simply what would be fair or just, or unfair and unjust, I do not agree. l accept that an accurate statement of the Law is contained in the cited passage from Spry (supra). I also adopt what was said by Woodward J in D Galambos & Son Pty Ltd v McIntyre (supra) at p26, that where there are involved claims for money due under a contract and for damages for breach of the same contract, the equity of the case will depend upon how closely the respective claims are related, particularly as to time and subject–matter. Further the general conduct of the respective parties will be relevant when considering whether to grant this equitable relief.
The counterclaim of Anitam for damages for breach of warranty does not directly relate to the stock in respect of which the plaintiff has sued for the balance purchase price. The warranted facts were material to the value of the business. The counter–claim therefore directly impeaches the right of the plaintiff to be paid the agreed purchase price of $1,320,000 for the assets other than the stock. That amount was paid in full by Anitam before it was in the position of being able to ascertain that a breach of warranty had occurred (assuming for present purposes that it had). If it had learned of the breach before making payment, it would clearly have been entitled to raise the counter–claim as an equitable set–off in an action by the plaintiff for some unpaid part of that sum of $1,320,000. Anitam now claims in effect that it has "overpaid" the plaintiff for the other assets and that it would be inequitable to require it to pay more to the plaintiff than it in effect owes under the agreement, after taking into account that "over payment".
It is my opinion that there is a sufficient relationship between the plaintiff 's claim and the counter–claim of Anitam as to justify the counter–claim standing as an equitable set–off in defence of the former. Both claims have arisen out of the same agreement. The plaintiff's claim is for part of the purchase price. Anitam's counter claim directly impeaches the right the plaintiff had to be paid a part of the purchase price. It would be unconscionable if the plaintiff were to be permitted to proceed without allowing the set–off, in circumstances where it can be said that the plaintiff has received all of the price to which it is entitled under the agreement after allowing for any set–off directly impeaching the right to part of the price.
I add that if I had not been prepared to allow the set–off, I would have been prepared to make an order pursuant to O15 r3(2) that execution of the judgment sought by the plaintiff be stayed until after the trial of the counterclaim.
Counsel for the plaintiff submitted that Mr Foster should hot be entitled to claim the set–off because of his position as guarantor of payment of the purchase price by Anitam. The terms of the guarantee, in clause 33 of the agreement, were as follows:—
"Notwithstanding the Purchasers right of nomination he personally guarantees the completion hereof in accordance with the terms hereof".
Such a question, but with different terms of guarantee, was considered in Westco Motors (Distributors) Pty Ltd v Palmer (1979) 37 FLR 140, which was a case to which the plaintiff's counsel referred. In that case the plaintiff had sold spare parts to a car dealer on credit. By an agreement between the plaintiff and the defendant the latter had agreed that in consideration of the supply of goods by the plaintiff to the dealer on credit, the defendant would guarantee "the payment to you of all such amounts as become due and payable to you by the dealer for all goods so supplied by you to the dealer as aforesaid". The plaintiff sued the defendant for $28,810.31 due under the guarantee for goods so supplied to the dealer. The defendant sought to raise a set–off based on an assertion that the dealer had available to it a counterclaim for damages for breaches of the Trade Practices Act 1974, which breaches related to such matters as conduct in restraint of trade and anti–competitive behaviour. The court rejected the defendant's right to claim the set–off. Sheppard J relied very much on the terms of the guarantee. At p146 he said:—
"It may be true, as counsel for the defendant submitted, that the breaches of the Act which are alleged to have been committed arise out of transactions pursuant to which the very goods the price of which is guaranteed were supplied. But the cause of action is, nevertheless, separate and distinct from the cause of action which the plaintiff has for the moneys which it is owed, and in respect of which the defendant has been sued upon his guarantee. By the guarantee, the defendant guarantees the payment to the plaintiff of all such amounts as become due and payable' to the plaintiff by the company 'for all goods so supplied' by the plaintiff to the company, The obligation, therefore, is to guarantee the sum or sums of money which become due by the company to the plaintiff for the supply of goods. If it were alleged that the goods so supplied were not in accordance with the contract, and that the principal debtor had a claim upon that ground, the position would be similar to what it was in Langford's case. But here the cause of action is separate and distinct from that upon which the plaintiff would rely in proceedings against the principal debtor. It is the amount owing upon the plaintiff's cause of action which the defendant guaranteed to pay."
Reference was there made to Langford Concrete Pty Ltd v Finlay [1978] 1 NSWLR 14. In that case the plaintiff, a concrete contractor, agreed to carry out certain work for a building company and the defendant, a director of the building company, entered into an agreement to guarantee the payment "of all monies which are now payable or may in the future become payable by the Builder to the Contractor (which said monies are hereinafter called 'the monies hereby secured')....". On an application by the defendant to set aside judgment by default it was held that he was entitled to take advantage of a cross–claim which would have been open to the building company based on an allegation that the concrete work supplied by the contractor was defective, and therefore that the amount payable to the plaintiff should have been reduced. The Court of Appeal interpreted the guarantee as requiring the guarantor to pay only what was payable by the principal debtor. It was not a guarantee to pay the price, or the price without deduction, but to pay only what the debtor could have been compelled to pay.
In Rowlatt on Principal and Surety, 4th Edn, at p103, it is stated that where the principal is entitled to a set–off against the creditor's demand arising out of the same transaction as the debt guaranteed, and in fact reducing that debt, the surety is entitled to plead it in an action by the creditor against the surety alone. A similar statement appears in 4th Edn Halsbury Vol 20 at p102. It is not necessary however to further consider authorities on the question, because in any event I am satisfied that Mr Foster clearly has a right to claim the set–off in this case. His guarantee is in fact contained in the agreement for sale of the business itself, and that agreement was entered into between him and the plaintiff. Anitam was not a party to that agreement when it was entered into. I am therefore satisfied that Mr Foster may respond to the plaintiff's claim against him on the guarantee by taking advantage of and setting–off Anitam's claim for damages for breach of warranty, that warranty having been made to him personally. This is not a case of Mr Foster having to rely on a contractual promise made only to Anitam. He relies on the plaintiff's contractual promise to him. Accordingly I am satisfied, particularly taking into account that Anitam is also a party to this action and that I have held that Anitam is allowed to raise the claim for damages as an equitable set–off, that he may do so as well. It would be inequitable not to allow him to do so.
The remaining matter for consideration is the amount of damages which the defendants may claim to set–off against the plaintiff's claim. Counsel for the plaintiff argued that notwithstanding that the evidence established that the amount of wages paid by the plaintiff was understated by the plaintiff to Mr Foster, the result of that understatement and of any breaches of warranty could, on the evidence, only have resulted in Anitam having to pay out an unexpected net amount of $5,934,76 per annum and not $17,374.76 per annum as claimed by the defendants. The basis for this argument was that as the evidence revealed that the undisclosed amount of wages was in fact recorded as part of purchases in the plaintiff's books of account, the net unexpected outlay facing Anitam is the figure of $5,934.76 per annum being the annual amount of the additional payments it found itself obliged to pay the weekend manager (for income tax) and Miss Quinn (to comply with the award). The plaintiff 's counsel argued that notwithstanding that the books of account were not disclosed to Mr Foster prior to sale, he was informed that the "cost of goods sold" was 81 per cent "as a rule of thumb" or, it would seem, 82.1 per cent as "confirmed with Statewide". To accept this argument it would be necessary to accept that in fact the undisclosed wages sum was reflected in the percentages provided by the plaintiff. That is a matter for speculation. As the defendants' counsel said, that might or might not be disclosed as a fact with discovery of documents in the course of the action.
The evidence shows that wage payments were not accurately disclosed by the plaintiff notwithstanding that it warranted that all material facts had been disclosed. The defendants have established a prima facie and arguable case of breach of warranty and it is not appropriate that I speculate whether the amount of the additional annual outlay may in fact be less than at first thought because some of it may have been reflected in the percentages provided by the plaintiff for the "cost of goods sold".
Accordingly, for the purposes of considering the giving of leave to defend, I propose to accept that the defendants have a prima facie set–off for damages for a breach of warranty which has resulted in Anitam having to meet an annual expense of $17, 374.76 greater than the plaintiff's warranty had caused it to expect .
The affidavit evidence read on behalf of the defendants did not seek to establish the amount of damages counter–claimed by Anitam, except in so far as Mr Foster attested that the "gross profit" of the business had been reduced by at least $86,873 over five years and that the damages are "likely to exceed the amount of the plaintiff's claim". This evidence was not challenged by cross–examination or by other evidence. All of the evidence satisfies me that the defendants have an arguable counter–claim and set–off for damages exceeding the amount of the plaintiff's claim. An annual expense of $17,374.76 for five years prima facie equates to a sum in excess of $34,749.52 by way of damages.
For the reasons stated it will be ordered that the defendants have leave to defend the action.
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