New South Wales Supreme Court CITATION : Tim Barr Pty Limited v Narui Gold Coast Pty Limited [2007] NSWSC 74 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 1 February 2007 JUDGMENT DATE : 19 February 2007 JURISDICTION : Equity Division JUDGMENT OF : Windeyer J at 1 DECISION : Appeal from Associate Justice Macready's decision, which dismissed a motion to strike out paragraphs of the defence, dismissed CATCHWORDS : Catch Words – - Equity – General principles – Equitable defences – Want of clean hands – When available – Requirement of an immediate and necessary connection – Forgery of a bank guarantee by lessee – Funds obtained on loan supported by a forged guarantee applied to improvement of leased land – Whether defence to claim for specific performance of contract upon exercise of option to purchase - Restitution – Unjust enrichment – Right of lessee to recover costs of improvements – Defences – Consideration of whole of dealings – Forgery of a bank guarantee by lessee – Funds obtained by forged guarantee applied to improvement of leased land - Practice – Pleadings – Defence – Striking out – Jurisdiction to order – Defence not so untenable that could not succeed – Order dismissing motion to strike out upheld on appeal partly for different reasons David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 357 CASES CITED : Fenson v Cootamundra Racecourse Reserve Trust [2000] NSWSC 1072 Meyers v Casey (1913) 17 CLR 90 Tim Barr Pty Limited (First Plaintiff) PARTIES : Timothy James Barr (Second Plaintiff) Narui Gold Coast Pty Limited (Defendant) FILE NUMBER(S) : SC 2762 of 2002 COUNSEL : Mr R G McHugh SC with him Mr J E Lazarus (Plaintiffs) Mr M Einfeld QC with him Mr A Harding (Defendant) SOLICITORS : Corrs Chambers Westgarth (Plaintiffs) Verekers (Defendant) LOWER COURT JURISDICTION : Supreme Court (Associate Judge) LOWER COURT FILE NUMBER(S) : 2762 of 2002 LOWER COURT JUDICIAL OFFICER : Macready As J LOWER COURT DATE OF DECISION : 29 June 2006 - 7 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J Monday 19 February 2007 2762/02 TIM BARR PTY LIMITED V NARUI GOLD COAST PTY LIMITED JUDGMENT 1 This is an appeal from a decision of Macready As J under which he dismissed an application by the plaintiff to strike out certain parts of the defence to the amended statement of claim. Since that decision a further amended statement of claim has been filed, but the paragraphs objected to have remained the same as those the subject of the decision appealed from. 2 By lease dated 23 June 2000 the defendant, Narui Gold Coast Pty Limited (Narui) leased to the plaintiff, Tim Barr Pty Limited (TBPL) certain land at Kingscliff known as Cudgen Paddock. The lease was for five years; no rent was payable under it; it provided that the use of the premises was limited to the planting and cultivation of lemon myrtle trees; and it provided that on termination the defendant could and would remove the trees and restore the leased land to its original state. The lease gave an option to purchase to the lessee during the term of the lease. 3 On 3 April 2002 Narui gave notice of re-entry for breach of warranty. TBPL said that Narui's right to do so had not arisen and that any purported termination and re-entry was ineffective and invalid. On 17 April 2003 TBPL gave notice of exercise of option, and now seeks specific performance of the contract for purchase pursuant to that exercise. If Narui was entitled to re-enter TBPL also seeks relief against forfeiture so as to enable it to exercise the option. 4 The second major claim of TBPL is a claim for restitution. In brief the plaintiff says that it has spent over $880,000 on the land and it claims that amount by way of restitution, arguing that the defendant should not be able to take the benefit of the lemon myrtle trees planted on the land without payment of or towards the amount expended to produce those trees. 5 The parts of the defence under challenge all appear under paragraph 55 which at its commencement makes it clear that all the sub-paragraphs to 55 are raised in answer to the whole of the further amended statement of claim. I set them out accordingly: 55. In further answer to the whole of the FASC Narui says that: … (f) on or about 18 April 2000 Barr, in order to obtain finance facilities ("the Loan") from the Commonwealth Bank of Australia ("the Bank"), fraudulently forged and uttered to the Bank a guarantee by Narui, and supporting documents, purportedly executed by officers of Narui; (g) the Loan was drawn down by Barr between May and October 2000 to a total of $265,000, which he applied: (i) partly in the amount of $98,278.16 in discharge of a prior loan from the Bank to Barr secured by a mortgage granted by Narui to the Bank over the land comprised in folio identifier 1/706497 ("Lot 1") which comprised part of Kings Forest; (ii) as to the balance in payment for and on behalf of TBPL in respect of the lemon myrtle tree plantation; (h) by reason of the matters pleaded in (f)-(g) above Barr and TBPL wrongfully and knowingly exposed Narui to a potential liability to the Bank; (j) but for the receipt and application of the proceeds of the Loan, TBPL and/or Barr would not have had sufficient resources to finance the establishment of the lemon myrtle tree plantation or to carry out the Use and would not have been in a position to enter into the Lease; (k) at all times Barr kept secret from Narui the existence of the Further Loans and the matters pleaded in (f)-(i) above; (l) at the time of the grant of the Lease, TBPL: … (vi) was aware of the matters pleaded in (f)-(h) above; 6 In the decision under challenge the learned Associate Judge said that the paragraphs raised a defence of unclean hands. He did not appear to consider them on any other basis. He held, relying on the principles in Meyers v Casey (1913) 17 CLR 90 at 123 that the conduct relied upon must have an "immediate and necessary relation to the equity sued for". He stated that although it was argued that the whole purpose of the lease was to enable the property to be developed as a lemon myrtle tree plantation the fact was that the lease contained no positive covenants as to development of the land but rather a provision restricting the use of the land for any other purpose. He held that the facts pleaded in the challenged paragraphs so far as the claim for specific performance was concerned were "quite irrelevant to the particular equity claimed namely specific performance". 7 Insofar as the claim for restitution was concerned the following passage appears in the judgment: But the equity which the plaintiff seeks to enforce is a claim in restitution, which is pleaded in para 69. That pleading which runs through to para 77 is one which has its foundation as an alternative claim. In late 1999 or early 2000 Narui requested the plaintiff company and Mr Barr to develop the land. There then follows pleadings of having developed them and having spent costs in excess of some $888,000. It is pleaded that Narui had made no contribution and that a benefit should not accrue. That claim for restitution is based on usual principles enforced in equity and the unjustness of allowing the plaintiff company to receive the benefit of it after the termination of the lease. The question is whether there is, in fact, any immediate necessary connection between the legality and the lack of clean hands. There is, in my view, a peripheral connection and that is that there is a possibility that Narui has been subjected to liability to the bank, the bank presumably took without notice of the forgery, and so there is a detriment that has been suffered by Narui. That is something which was caused by the plaintiff company as a, result of what is alleged to be the fraudulent conduct. When if one looks at it at trial, it may be that all that has happened is there has been a potential liability created by the existence of that fraudulent guarantee. It may be that there in fact has been no liability on Narui because it has not been called upon. One could imagine circumstances where a court, in considering the results, might think that the illegality was such that it would not necessarily lead to any deduction of what might be possibly recovered by the plaintiff by way of restitution. In other words, it might be rejected. However, it does seem to me that there is this tenuous connection. It is only in this area that I can see it but for these reasons I will not strike out the allegations. 8 The simple argument of TBPL on appeal is that a peripheral and tenuous connection, using the words of the Associate Judge, falls far short of the requirement for an immediate and a necessary relation to the equity sued upon. The other argument is that the claim for restitution in the circumstances here, is a legal rather than an equitable claim so that the defence of lack of clean hands is not available in any event. 9 I should interpolate here that as a result of his decision on the question of restitution and the defence to it the learned Associate Judge dismissed the motion. It might have been more logical to limit those paragraphs to the claim for restitution rather than allow them to stand as a defence to the whole of the plaintiff's claim. On the other hand Associate Justice Macready may have considered that as he was going to allow the paragraphs to stand as a defence to the claim in restitution then the matter was not so absolutely beyond argument that the defence should not be allowed to stand generally. It is just not possible to tell this. It is perhaps for that reason that the defendant put on a notice of contention, the purpose of which was to support the retention of those paragraphs even so far as the claim for specific performance was concerned. 10 It is clear that the paragraphs should be allowed to stand unless the defence which they are intended to support would be clearly unavailable, in other words whether the claimed judgment based upon those paragraphs would be doomed to fail. I have come to the conclusion that the decision rests upon sub-paragraphs (j) and (k) of paragraph 55. There is of course a lot to be said for the view of the Associate Judge that there was no covenant for development of the lands with funds obtained as a result of the forged guarantee, but it does not seem to me the position is so clear as to justify a strike out. After all there was only one permitted use of the land. It is also put that there is no pleaded allegation that had Narui known of the forgery then it would not have entered into the lease. That is a matter which if relied upon could so easily be the subject of an amendment that I do not think that the lack of such a statement would justify a strike out. I consider the facts alleged in paragraphs (j) and (k) sufficient to allow the paragraphs pleaded as a defence of unclean hands to the claim for specific performance to go to trial. It is accepted that if it were the result the same facts were relevant to the claim for relief against forfeiture. On that basis then the present position as it stands as a result of the decision of the learned Associate Judge dismissing the motion before him should be allowed to stand. 11 I now turn to the claim for restitution. It was accepted by senior counsel for the defendant that if the defence were only an equitable defence of unclean hands then it was not relevant to the claim for restitution which was not an equitable claim. However he argued the paragraphs have a wider purpose. The argument for the defendant is founded upon passages from judgments in David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 357 and Fenson v Cootamundra Racecourse Reserve Trust [2000] NSWSC 1072. The passage relied on in the case of David Securities is at page 379 of the judgment as follows: The respondent's submission that the appellants must independently prove "unjustness" over and above the mistake cannot therefore be sustained. The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution. Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognizes would make an order for restitution unjust. There can be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust . It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust. 12 Mr M D Einfeld QC, senior counsel for the defendant, argued that the pleaded allegation of fact that the plaintiff had obtained loan funds as a result of its having forged a guarantee in the name of the defendant was a matter to be taken into account in determining whether or not retention of the lemon myrtle trees was unjust. He also relied upon the passage in paragraph 97 of the judgment of Bryson J in Fenson, which involved a claim for the value of improvements to the Cootamundra Racecourse Reserve Trust by the plaintiff to the effect that the whole of the circumstances of the parties' dealings and the conduct "in making the improvements must be evaluated and a conclusion must be reached overall as to whether the circumstances give rise to an obligation to make fair and just restitution". The argument of the plaintiff is that there is no connection between the work done, which brings about the claim for restitution, and the pleaded allegations as to forgery. However, there may be equal force in the submissions of Mr Einfeld that the improvements or work done to bring the lemon myrtle tree plantation into being were financed in part through funds obtained by fraud through forgery of a guarantee in the name of the lessor company. While there may be no economic loss to Narui, as it could hardly be liable to a creditor under a guarantee it did not execute, it might not be impossible to argue that there was sufficient connection to make Narui's retention of the value of the expenditure in the form of lemon myrtle tree oil just. 13 In my view the position is not so clear that the defendant should not be entitled to have the matter go to trial for a final determination. In those circumstances the paragraphs the subject of complaint should stand and the appeal therefore fails. 14 The notice of motion should be dismissed with costs. ********** 21/02/2007 - Insert dated of Judgment on page 1 of judgment. - Paragraph(s) Heading 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.