New South Wales Supreme Court CITATION : Mallory Technologies Pty Ltd v 3D Global Ltd and Anor [2002] NSWSC 1035 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4378/02 HEARING DATE(S) : 30 and 31 October, 2002 JUDGMENT DATE : 31 October 2002 Mallory Technologies Pty Ltd (Receiver Appointed) - Plaintiff PARTIES : 3D Global Limited - First Defendant Robert Whitton - Second Defendant JUDGMENT OF : Palmer J Rena Sofroniou - Plaintiff COUNSEL : M.J. Cohen - First Defendant Michael Dawson - Second Defendant The Argyle Partnership - Plaintiff SOLICITORS : Watson Mangioni - First Defendant Piper Alderman - Second Defendant CATCHWORDS : ESTOPPEL - First Defendant represents that time for payment of instalment due under contract would be extended - Plaintiff relies on representation and does not make immediate payment - First Defendant resiles from representation before extended time for payment expires and appoints receiver. HELD: First Defendant estopped from relying on rights under contract and from appointing receiver - Shears v Commonwealth Bank explained and distinguished. - Commonwealth v Verwayen (1990) 170 CLR 394 CASES CITED : - Shears v The Commonwealth Bank of Australia (unrep. NSWCA, 4 November 1997) - Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 DECISION : Relief as sought by Plaintiff granted. 1 By its Summons filed on 3 September 2002, the Plaintiff seeks a declaration that the First Defendant was estopped from appointing the Second Defendant on 15 August 2002 as Receiver of certain patents owned by the Plaintiff, in purported exercise of a power conferred on the First Defendant by a Deed of Charge dated 26 March 2001. The Summons seeks an order terminating the Second Defendant's appointment and, in addition, damages as against the First and Second Defendants. 2 The Second Defendant, who is the Receiver, appears by Counsel but seeks to take no part in the proceedings except in so far as any orders may be sought against him. Ms Sofroniou of Counsel, who appears for the Plaintiff, informed the Court at the commencement of the trial that damages would not now be sought against the Second Defendant. 3 The facts may be very shortly stated. The Plaintiff purchased certain patents from the First Defendant pursuant to an Agreement for Sale dated 31 October 2000 ("the Patent Sale Agreement"). The purchase price was $950,000, payable by quarterly instalments calculated upon the basis of a certain percentage of quarterly receipts of income derived from sales by the Plaintiff and its subsidiary. The final instalment of the purchase price was payable on 31 December 2003. 4 The payment of the purchase price was secured by the Deed of Charge dated 26 March 2001, whereunder the Plaintiff charged the patents themselves as security. The Charge provided that if the Plaintiff failed to pay any of the purchase price instalments under the Patent Sale Agreement when due then, at the First Defendant's option, without any demand or notice, all of the balance of the purchase price would immediately become payable. 5 A quarterly instalment of the purchase price, in the sum of $18,515.95, was due to be paid by the Plaintiff to the First Defendant on 2 August 2002. 6 The Plaintiff says that in two discussions, one of which occurred on 2 August 2002 between Mr Cusack and Mr Van Brugge representing the Plaintiff and Mr Talbot, the Managing Director of the First Defendant, and the other of which occurred in a telephone conversation between Mr Van Brugge and Mr Talbot on 13 August 2002, Mr Talbot represented on behalf of the First Defendant that the First Defendant would extend the time for payment of the 2 August instalment until 19 August. The Plaintiff says that in reliance on that representation it did not immediately pay the instalment in accordance with a letter of demand which had been sent by the First Defendant to the Plaintiff on 9 August, but made arrangements to pay the money on 15 August. It says that when it endeavoured to make the payment into the First Defendant's bank account, at first it was not provided with the details of that account by Mr Talbot in response to its request, and then it was informed that the Second Defendant had already been appointed as Receiver of the patents. 7 In short, the Plaintiff says that on 13 August the First Defendant represented that it would take no action to enforce the security under the Deed of Charge until after 19 August, and that in reliance on that representation it did not make immediate arrangements to pay the quarterly instalment then due as it could easily have done either from its own cash resources or cash resources readily available to it but rather waited until 15 August, whereby it acted to its detriment so that the First Defendant was estopped from relying on its strict legal rights under the Deed of Charge until the time for payment on 19 August had expired. 8 The principles upon which the Plaintiff relies in asserting an estoppel are well established. For the purposes of this case, those principles are sufficiently elucidated in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, and Commonwealth v Verwayen (1990) 170 CLR 394. Those principles may be summarised thus. 9 Estoppel yields a remedy in order to prevent unconscionable conduct on the part of one who has made a representation to another and then seeks to resile from it after the representee has acted on it to his or her detriment. The representation may be as to a present, past or future state of affairs. In particular, the representation may be as to whether the representor will strictly enforce a right against the representee in accordance with a legal entitlement. If an estoppel is found to arise, the remedy given will be no more than is necessary to avoid the detriment occasioned by the representee's reliance on the representation. 10 In order to establish an estoppel arising from a representation a plaintiff must establish that the representation was clear and unequivocal, that the defendant knew or intended that the plaintiff would act or abstain from acting in reliance upon the representation, that the plaintiff did act or abstain from acting in reliance on the representation, and that the plaintiff's action or inaction will occasion detriment if the representation is departed from. Where the plaintiff's action or inaction is induced by the making of a representation promissory in character, knowledge or intention on the part of the defendant that the plaintiff would act or abstain from acting in reliance on the representation is easily inferred. 11 There is said to be one discordant note in the authorities as to these principles. Mr Cohen of Counsel, who appears for the First Defendant, submits that a representation to be capable of founding an estoppel must constitute an agreement supported by a consideration, which he says is not the case here. In support of that proposition, he relies upon the judgment of the Court of Appeal in Shears v The Commonwealth Bank of Australia (unrep. NSWCA, 4 November 1997). 12 In that case the appellant appealed from the refusal of a judge to set aside a default judgment entered by the bank founded upon the appellant's failure to pay a debt due under a mortgage. The appellant asserted that she had a bona fide defence to the claim. She asserted that a concluded agreement had been made between herself and the bank whereby the bank agreed to accept a certain amount in full satisfaction of the debt, but that the bank had reneged on that agreement. By way of defence to the bank's claim, the appellant claimed specific performance of that agreement and, secondly, that the bank was estopped from denying that such an agreement had been made. 13 The judge at first instance held on the evidence before him that no bona fide or triable cause of action as alleged had been made out. The Court of Appeal dismissed the appeal. In the course of his reasons, with which the other members of the Court agreed, Powell JA said: "…it seems to me that, far from that material revealing a concluded agreement of the type advanced on behalf of the Appellants, it did not constitute a concluded agreement at all, and that, even if it were such an agreement, not being supported by consideration, it was unenforceable. Nor, as it seems to me, is any argument based upon an estoppel in any better case, for the estoppel sought to be relied upon could rise no higher than the agreement which it is sought to protect and, if no such agreement be found, in law, to have been made, then the suggested estoppel will have nothing left for it to protect." 14 When this passage is seen in context, it is clear that it is not authority for the proposition put by Mr Cohen. All that his Honour is saying is that the estoppel alleged in that case was one which, if found, would prevent the bank from denying the existence of a binding contract. If there was no binding contract in the first place because, amongst other reasons, there was no agreement supported by consideration, then there was nothing for the alleged estoppel to protect. 15 I must therefore reject Mr Cohen's proposition as inconsistent with the doctrine that estoppel is a substantive principle of law which exists entirely and distinctly independently of contract: see, for example, Waltons Stores (Interstate) Ltd v Maher and Commonwealth v Verwayen . 16 I turn now to the contested factual issue in the case, namely, whether Mr Talbot made the representation in the terms alleged by the Plaintiff. 17 That issue turns essentially upon what was said in the telephone conversation between Mr Van Brugge and Mr Talbot on 13 August 2002 and its resolution primarily depends upon a finding as to the credit of those two witnesses. However, in order to place the critical conversation in a context, it is necessary to give some background. 18 On 2 August 2002, a meeting took place between Mr Cusack, Mr Van Brugge and Mr Talbot. Mr Cusack and Mr Van Brugge explained that as the Plaintiff was obliged to pay quarterly instalments under the Patent Sale Agreement calculated by reference to receipts of income and as receipts of income would probably be quite small until December 2003, it was likely that the first Defendant would receive very little under the Patent Sale Agreement until a final lump sum payment in December 2003. A proposal for early repayment of the balance of the purchase price, then about $870,000, was discussed. The proposal had been mooted some time previously. Mr Talbot was interested in pursuing the proposal because the First Defendant wished to obtain its money under the Patent Sale Agreement sooner rather than later. 19 In the course of the conversation, Mr Talbot referred to the quarterly instalment of $18,515 due to be paid that day and asked whether it would be paid. Mr Cusack's evidence was that he responded: "We can make the payment today but we've got other payments due. We would prefer to delay today's payment if we can" . He says that Mr Van Brugge suggested that the instalment then due be included in a lump sum payment to be made pursuant to the early payment proposal, that he prepare a projection of likely sales up to December 2003 showing that most of the purchase price would not become payable until then, and that Mr Talbot said: "Fine. Just put your proposal to me" , upon which note the meeting concluded. 20 Mr Van Brugge's evidence about this conversation differed in substance only to the extent that he says that he responded to Mr Talbot's enquiry as to whether the instalment would be paid that day by saying that the Plaintiff could make a payment arising under another contract which was due to the First Defendant on the following Tuesday, but that it could not make the payment of the instalment due that day. 21 Mr Talbot's evidence in cross examination was that he was told that the Plaintiff could not make the instalment payment on that day. He says that he responded merely by suggesting that the Plaintiff pay off the whole of the balance of the purchase price due under the Patent Sale Agreement by instalments of $10,000 per week. He agreed, in substance, that the meeting ended on the note that the Plaintiff would prepare and provide to him a review of its likely cash receipts until December 2003 and that the matter would then be discussed again. 22 I accept the evidence of Mr Van Brugge and Mr Talbot to the effect that Mr Talbot was told that the Plaintiff could not make the instalment payment on 2 August in preference to the evidence of Mr Cusack in that regard. Mr Van Brugge is the chief financial officer of the Plaintiff and I think that it is inherently probable that he would have known in more detail than Mr Cusack what payments the Plaintiff could make that day out of its immediately available cash resources. 23 It is clear enough, however, that when Mr Talbot was told that the instalment would not be paid that day he did not protest or otherwise press strongly for immediate payment. His attitude was one which clearly indicated to Mr Cusack and Mr Van Brugge that the First Defendant would not enforce its security rights immediately but would wait and see whether an immediate lump sum payment proposal was acceptable. 24 Nothing was heard by Mr Talbot from the Plaintiff for the next few days because Mr Van Brugge, who was primarily responsible for preparing the Plaintiff's projections, fell ill and Mr Cusack was about to depart for a business trip to China. Mr Talbot therefore decided to formalise the First Defendant's position. On 9 August he sent an e-mail to Messrs Cusack and Van Brugge: "John, Sorry to hear that Rick is not well. Please give him my regards for a quick recovery. Also the China program sounds promising – good luck. I understand the delay in getting back to us. I hope you also appreciate that I will need to write to you re the outstanding amount of $18K odd due on 2 Aug. I will need to record that we are following up on the matter. I will fax over the letter to you hopefully today. Talk to you again on your return on the 19th. Michael." 25 Later that day Mr Talbot sent a letter which read as follows: " RE: OVERDUE INSTALMENT FOR THE PURCHASE OF PATENTS I refer to your facsimile of 9 July 2002 in which you advised that $18,515.95 was due to the Company in accordance with the Agreement for quarterly payments to be made for the purchase of patents. As noted in your advice this instalment was due on or before 2 August 2002. As of this date the Company has not received that amount and you are considered to be in default of the Agreement. In accordance with clause 8 of the Agreement (in particular s8.1) all of the secured money being approximately $892,146.78 is immediately payable. The Company draws your attention to clause 9 with respect to costs associated with the recovery of these funds and to Clause 10, which refers to the remedies available to 3D Global Ltd arising from this default." 26 It is to be observed that neither in the e-mail nor in the letter of 9 August does Mr Talbot make actual demand for payment either of the instalment due on 2 August or of the balance of the purchase money under the Patent Sale Agreement. He merely draws attention to the fact that a default has occurred and to the consequences of that default under the terms of the Patent Sale Agreement. It is not the sort of letter which would be written by a secured creditor pressing for immediate payment and threatening to exercise security rights if such payment were not made. 27 Mr Van Brugge says that on Wednesday, 13 August, he telephoned a major shareholder of the Plaintiff, Mr Gall, and told him of the 9 August letter. Mr Gall said that Mr Van Brugge should speak to Mr Talbot and get an extension of time until the following Monday, 19 August, to pay the quarterly instalment and that if Mr Talbot agreed to the extension, Mr Gall would provide the money by then. Mr Gall's evidence is to the same effect. 28 At about noon on 13 August, Mr Van Brugge telephoned Mr Talbot. He told him that he had just spoken to Mr Gall regarding the overdue quarterly instalment. He says that he said to Mr Talbot: "Provided that we can put money into your account by Monday, would you be prepared to waive any breach" , to which Mr Talbot responded: "Yes, I'll agree to that. If you can make that payment it will be good as I can then report to the Board that you are complying with your obligation" . Mr Van Brugge said: "Thanks for that, we will definitely have that money paid by Monday" . 29 Mr Talbot says that earlier on 13 August he had had a telephone conversation with Mr Van Brugge in which he had said that the First Defendant's Board was meeting the next day and that he needed to know what was the Plaintiff's response to his letter of 9 August. He says that Mr Van Brugge responded that an answer was awaiting Mr Cusack's return from China. Mr Van Brugge denies that this conversation took place. 30 Mr Talbot says that after this conversation Mr Van Brugge rang him back and said that he had spoken to Mr Gall about the letter of 9 August, and that Mr Gall would try to arrange funds from his own account to pay the quarterly instalment which had been due on 2 August. He says that Mr Van Brugge said: "If [we] made that payment by Monday, 19 August, would the Board be open to setting aside the default notice and allowing us to get back on track" , to which he responded: "Yes, probably" . 31 It will be seen that the crucial difference between the two versions is that, according to Mr Talbot, Mr Van Brugge implicitly recognised in this conversation that an extension of time for payment was a Board decision and that Mr Talbot was only giving his opinion as to what the Board's attitude would probably be, whereas, according to Mr Van Brugge, Mr Talbot simply agreed outright to the extension of time request and observed that if the payment were made he could then report to the Board that the Plaintiff was complying with its obligations. 32 Mr Van Brugge says that he made a contemporaneous note of this telephone conversation with Mr Talbot on 13 August on a copy of Mr Talbot's 9 August letter. His note reads: "Spoke to Michael on 13/8 at 12.10pm – he would agree to waive the breach if we put the $18k into the 3DG account by Monday!!!" . Mr Van Brugge was not challenged on this evidence. Mr Talbot did not make a note of his telephone conversation with Mr Van Brugge. 33 I have come to the conclusion that Mr Van Brugge's evidence should be preferred to that of Mr Talbot, for the following reasons. 34 First, Mr Van Brugge struck me as a careful witness who was endeavouring to tell the truth to the best of his recollection. He remained firm in his evidence under cross examination. He did not attempt to embellish or add to his evidence. 35 Second, Mr Van Brugge made a contemporaneous note of the conversation with Mr Talbot on 13 August, the accuracy of which was not challenged. It is inherently probable that, on such an important matter, he would make a note of what was, for the Plaintiff, a significant concession by the First Defendant. The note makes no reference to the decision to extend time being one for the Board of the First Defendant, nor does it suggest that Mr Talbot's agreement to extend time was qualified in any way. 36 Third, I do not accept the evidence of Mr Talbot as reliable. His evidence about the conversation with Mr Van Brugge in cross examination differed significantly from his evidence on affidavit and was inconsistent. In his affidavit he says that it was Mr Van Brugge who asked whether the Board would be "open to setting aside the default notice" and that he merely replied: "Yes, probably" . However, in cross examination he said: " Q: In fact in the course of that conversation with Mr Van Brugge you had said to him: Yes, you have until 19 August to pay? A: I said before I didn't say that but what I had said was that the board was sitting on the following day and I would put the proposal to them and they would probably accept getting them back on track. Q: I suggest that the Board did not support the agreement that you had made with Mr Van Brugge that they could have until 19 August and they did not document it? A: That is correct, they were very disappointed with the outcome and weren't prepared to ratify what I had said to him in terms of being: Yes, probably." A little later Mr Talbot gave this evidence: " Q: Mr Talbot, I am a bit in doubt as to what you actually said to Mr Van Brugge on that occasion, that is, the telephone conversation on 13 August. In your affidavit you say at page 5, paragraph 11, that when Mr Van Brugge rang back and said something to you to the effect: if they make the payment by Monday would the board be open to setting aside the default notice and allow us to get back on track? The evidence is that you said, 'Yes, probably.' Is that what you said? A: Yes. Q: Is that all that you said? A: Yes." 37 It will be seen that Mr Talbot's evidence was not consistent and I am unable to rely upon it with any confidence. 38 I think that there is a likely explanation for the inconsistency in Mr Talbot's evidence. Mr Talbot says that he had a good personal relationship with Mr Cusack and Mr Van Brugge. The manner in which Mr Talbot reacted on 2 August to the information that the Plaintiff would not be able to pay the quarterly instalment due on that day suggests that he was willing to be co-operative, not confrontational. That impression is strengthened by the tone of his e-mail and his letter of 9 August. 39 I think that it is inherently likely that when Mr Van Brugge rang on 13 August with a request for an extension of time for a matter of a few days upon a firm assurance that the quarterly instalment would then be paid, Mr Talbot was, likewise, co-operative and ready to assist by agreeing to the request. The fact is that the Board reversed his decision the following day and decided to call up the whole of the balance of the purchase price due under the Patent Sale Agreement rather than wait until December 2003. According to Mr Talbot, he was told to disengage from the matter and let the Receiver handle it. I infer that that direction was given because it was thought that Mr Talbot had been too lenient with Messrs Cusack and Van Brugge in agreeing to an extension of time. As a result, Mr Talbot has found his personal situation with Mr Van Brugge and Mr Cusack somewhat awkward, and he has sought to put a gloss upon what told Mr Van Brugge on 13 August in order to justify his position somewhat. 40 There is no dispute about what occurred after Mr Van Brugge's telephone conversation with Mr Talbot on 13 August. On 14 August the Board of the First Defendant refused to extend time for the Plaintiff to make the quarterly instalment payment and resolved to appoint a Receiver immediately. Mr Talbot did not inform the Plaintiff of this decision on 14 August. 41 On 15 August, Mr Gall made arrangements to obtain $18,515.95 from bank accounts under his control. There is no dispute that this money was available to Mr Gall immediately. He then telephoned Mr Talbot and said: "Michael, could you give me the details of your bank account. I want to deposit the $18,515.95 today" . Mr Talbot said: "I don't have those details in front of me but I'll give you a call straight back" . 42 Mr Talbot did not tell Mr Gall that the Board had resolved to appoint a Receiver that day. He did not ring Mr Gall back. Later that day, Mr Gall attempted to telephone Mr Talbot to enquire what was happening, but was given the message that Mr Talbot had gone out to lunch and would be back at three o'clock. Shortly afterwards, the Plaintiff was informed of the Second Defendant's appointment as Receiver of the patents. 43 The Plaintiff has not paid the quarterly instalment of $18,515.95 because the First Defendant has made it clear that it will not terminate the Receiver's appointment if that sum is paid. Rather, the First Defendant insists that the Receiver sell the patents in order to pay it the whole of the outstanding purchase money under the Patent Sale Agreement. 44 Mr Gall says that as at 2 August, 15 August and as at the present time he has the money available to pay the quarterly instalment which was due on 2 August, and that he is ready, willing and able to make that payment on behalf of the Plaintiff. There is no serious challenge to that evidence and I accept it. 45 In my opinion, the Plaintiff has established its claim for relief. On the evidence of Mr Van Brugge as to what Mr Talbot said in the telephone conversation of 13 August, Mr Talbot plainly and unequivocally represented to him that the time for payment of the instalment due on 2 August would be extended until 19 August and that the default rights and security rights referred to in Mr Talbot's letter of 9 August would not be exercised if the Plaintiff paid the outstanding quarterly instalment by that time. The conversation could not have been understood in any other way. 46 There is no question that Mr Talbot had ostensible authority, at the least, to make the representation on behalf of the First Defendant. He was its Managing Director; he had been conducting negotiations on behalf of the First Defendant with the Plaintiff for an early pay-out of the Patent Sale Agreement purchase monies; and he had signed the letter of 9 August. Even more significantly, in April 2002 he had made and confirmed an agreement with the Plaintiff extending time for the payment of monies under another contract between the First Defendant and the Plaintiff without informing the Plaintiff that he had first to refer the matter to the First Defendant's Board. 47 I infer without hesitation that the representation made by Mr Talbot, being promissory in character, was intended by him to be relied upon by the Plaintiff. It was in fact relied upon to the detriment of the Plaintiff in that, had it not been made, I am quite satisfied that the Plaintiff, through Mr Gall, would have paid the outstanding instalment of $18,515.95 on 13 August at the very latest rather than take any risk that what it regarded as patents worth at least $5M be put in jeopardy by the appointment of a Receiver. 48 In reliance upon Mr Talbot's representation, Mr Gall waited until 15 August before attempting to make the payment, by which time the First Defendant had reneged on Mr Talbot's representation. 49 In my opinion, the First Defendant was estopped from resiling from its representation that time for payment of the instalment was extended until 19 August, and was estopped from exercising its rights under the Patent Sale Agreement and the Deed of Charge until the extended time for payment had expired. Payment in full of the outstanding instalment would have been made on 15 August but for the First Defendant resiling from its representation. The detriment which the Plaintiff has suffered by reliance upon the representation is that it is now said to be in default of the Patent Sale Agreement, the whole of the balance of purchase monies due thereunder is now said to be immediately payable, and a Receiver has been appointed to secure that repayment. 50 In my opinion, the remedy to which the Plaintiff is entitled is one that will prevent it from suffering the damage which it has incurred by reliance upon the representation made by the First Defendant. That remedy will be a declaration and order in terms of paragraphs 1 and 2 of the Summons. However, that relief being equitable and discretionary in character, the Plaintiff will have to do equity as a condition of obtaining that relief. It will be required to pay the amount of $18,515.95 as a condition of the Plaintiff's obtaining the relief sought. 51 I will stand the proceedings over for a short time to enable the Plaintiff to make arrangements to tender that payment to the First Defendant. The proceedings will be adjourned to a date to be fixed. If the Plaintiff then provides evidence that it has tendered the payment to the First Defendant, the declaration and order sought will be made. 52 The Plaintiff seeks an order for damages against the First Defendant. There is no evidence before the Court which shows that the Plaintiff has in fact suffered any damage by reason of the receivership of its patents. 53 Ms Sofroniou seeks an order that it be referred to a Master to enquire whether any such damage has been suffered and, if so, what is the amount. In the absence of any evidence that any damage at all has been suffered, I do not think it appropriate to order such an enquiry. 54 As to costs, the First Defendant must pay the Plaintiff's costs of the proceedings. As the Plaintiff's claim for damages against the Second Defendant was abandoned yesterday morning, the Second Defendant's costs up to that time must be paid by the Plaintiff. After notice that the damages claim against the Second Defendant was abandoned, the Second Defendant had no reasonable basis, in my opinion, to continue to be represented by Counsel during the continuation of the trial. I do not think that the Plaintiff should be required to bear the costs of that representation. 55 When the matter is brought back for the making of orders, the Plaintiff should bring in Short Minutes of Order reflecting the orders which I have foreshadowed. 56 I will stand the matter over until Tuesday, 5 November at 9.30am for the bringing in of short minutes. – oOo – Last Modified: 11/07/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.