Supreme Court New South Wales Medium Neutral Citation: Harrenvale Pty Limited v Jon Francis Kelly [2017] NSWSC 1223 Hearing dates: 08/09/2017 Date of orders: 08 September 2017 Decision date: 08 September 2017 Jurisdiction: Equity Before: McDougall J Decision: Summary judgment for the plaintiff against first defendant. Catchwords: CONTRACTS – suspension of rights clause – whether catches first defendant's defence of set-off and cross-claim – CIVIL PROCEDURE – summary judgment – whether arguable defence having regard to proper construction of suspension of rights clause Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: GE Capital Australia v Davis (2002) 180 FLR 250 Palaniappan v Westpac Banking Corporation [2016] WASCA 72 O'Brien v Bank of Western Australia Limited [2013] NSWCA 71 at [75] St George Bank Limited v Field [2007] NSWSC 902 Ultimate Property Group Pty Limited v Lord (2004) 60 NSWLR 646 Category: Procedural and other rulings Parties: Harrenvale Pty Ltd (Plaintiff and cross-defendant) Jon Francis Kelly (First defendant and cross-claimant) Joanne Susan Kelly (Second defendant and cross-claimant) Representation: Counsel: G Ng (Plaintiff) C Carroll (First Defendant) Solicitors: Ashurst (Plaintiff) Holman Webb (Frist Defendant) File Number(s): 2017/12088 Judgment (ex tempore – revised 11 september 2017) 1. HIS HONOUR: The plaintiff (Harrenvale), under its previous name GE Commercial Pty Ltd, extended finance facilities to four companies. Those facilities were guaranteed by the defendants, Mr and Mrs Kelly. 2. Harrenvale says that the borrowers defaulted. It has made demand upon the guarantors pursuant to their guarantees. The matter before the Court today is Harrenvale's application to strike out the commercial list response and commercial list cross-claim by the first defendant, Mr Kelly, and for summary judgment against him. 3. The amount of the demand has been proved by a certificate, and is not for present purposes in issue. The total amount claimed, excluding interest and costs, is in excess of $2.3 million. 4. In the usual way, the commercial list statement "pleads" the finance facilities, advances pursuant to them, default, demand, non-satisfaction of demand, and demand upon the defendants as guarantors. Mr Kelly's commercial list response raises no substantive issue in respect of those parts of the pleadings. 5. As to the various allegations that each of the principal debtors owe the amount demanded, the response is simply that Mr Kelly does not know and so cannot admit the matters pleaded. Likewise, Mr Kelly simply says that he does not know and therefore cannot admit the indebtedness in total as it is pleaded. 6. The real answer (insofar as there is one) appears in para 39 of the list response. In that paragraph, Mr Kelly "seeks a set off or alternatively a discharge of liability...having regard to the matter pleaded in [his] commercial list cross-claim statement". 7. The cross-claim list statement asserts, in substance, that Harrenvale had the benefit of securities, pursuant to which it seized some items of equipment and sold them. Mr Kelly alleges that Harrenvale owed him both an equitable duty and a statutory duty to use reasonable care in the sale of that equipment, to sell it for its market value, or otherwise to obtain the best price reasonably payable. He says that those duties were breached by the way that Harrenvale caused the equipment to be sold, and that the price received was a substantial undervalue. 8. By way of relief, Mr Kelly seeks equitable damages for an amount representing the difference between what he says was the true value of that equipment and the amount obtained, equitable set off of those damages against any amount due to Harrenvale, and alternatively "a declaration that Mr Kelly is entitled to a discharge of his liability to Harrenvale to the extent that Harrenvale's acts reduced the amount for which [the debtors] were credited by reason of the sale of" the equipment. 9. Harrenvale's applications to which I have referred are based on the proposition that, under the terms of the guarantee, any right to claim a set off or equivalent relief are suspended until everything owing under the "agreement" (which includes the loan agreement itself) is paid. Those provisions are found in cl 26(a) which, so far as it is relevant, reads as follows: 26 As long as an amount payable under this agreement remains unpaid, the guarantor may not, without the financier's consent: (a) reduce the guarantor's liability under the guarantee and indemnity by claiming that the guarantor or the borrower or any other person has a right of set-off or counterclaim against the financier; 1. It should be noted that the "agreement" in question is an "equipment line loan facility agreement" which incorporates both the rights and the obligations of Harrenvale and the principal debtors, and also the rights and obligations of Harrenvale and Mr and Mrs Kelly as guarantors. It seems to be reasonably clear (and the contrary was not contended) that, in cl 26, the words "an amount payable under this agreement" either referred to or included amounts owing by the principal debtors themselves to Harrenvale. As I have said, that such amounts are owing is established by the certificate, provision for which is made by cl 33.2 of the agreement. 2. The case for Harrenvale is essentially that Mr Kelly has, for the time being, bargained away his right to raise anything by way of set-off or cross-claim. Mr Kelly accepts that this is so, at least in respect of his prayers for relief which claim equitable damages and a set-off in equity of those damages against any amount otherwise owing to Harrenvale. However, he submits, it does not apply to the alternative declaration, namely that he is entitled to what I might call a pro tanto discharge. 3. Because the issue is so narrow, it is not necessary to refer to the whole of several cases to which counsel took me in the course of submissions. It is for example accepted that in this area of legal discourse, there is, as I said in St George Bank Limited v Field, [1] an important distinction between a defence that impeaches the guarantee and a defence that impeaches the exercise of rights under that guarantee. In case I should be thought to be immodest in referring to my own decision, I note that what I said was referred to with apparent approval by Corboy J (with whom Martin CJ agreed) in Palaniappan v Westpac Banking Corporation [2] and by Ward JA (with whom Beazley P agreed) in O'Brien v Bank of Western Australia Limited. [3] 4. The distinction was put in a slightly different way by Buss JA in Palaniappan. Although his Honour gave separate reasons, he concurred in the orders proposed by Corboy J, and I do not see anything in what Buss JA said that diverges from the substance of the reasons given by Corboy J. In particular, Buss JA gave some consideration to the decision in O'Brien. His Honour noted at [133] to [135] that the decision in O'Brien established that a suspension clause, in an appropriate form, will not prevent a guarantor from asserting that there is no money payable under the guarantee. As his Honour said, it will not apply where a guarantor alleges a defence that denies the debt or the enforceability of the guarantee. In my respectful opinion, that is correct. 5. The submission for Mr Kelly was to the effect that the pro tanto discharge, the subject of the declaration to which I have referred, does not involve any form of equitable set-off. Thus, the submission went, it falls outside cl 26(a), which in terms focuses on suspending the right to reduce liability by claiming a right of set-off or asserting a counter-claim. However, I think, that submission cannot be correct. 6. Leaving aside the interesting but presently irrelevant debate as to the various forms of account that may be available in relation to a mortgagee sale (the topic was discussed at some length, and in an illuminating way, by Young CJ in Eq in Ultimate Property Group Pty Limited v Lord), [4] the reality is that the only way that Mr Kelly's liability could be reduced by some sort of accounting exercise would be if the amounts said to be attributable to Harrenvale's breaches of equitable or statutory duty were set off against amounts otherwise proved to be owing to it. However, the submission went, this was a different meaning of set-off to that which was the subject of cl 26(a). 7. First of all, cl 26(a) simply refers to a "right of set-off". It does not specify what that right is. As a matter of ordinary language, a set-off simply involves appropriating or allocating, against a particular monetary claim, a monetary amount that may offset or reduce it. It may perhaps be observed that redefining set-off in terms of offset is not particularly helpful. 8. That this is the way that the clause should be understood is confirmed, I think, by the decision of Bryson J in GE Capital Australia v Davis. [5] I start by observing that the contractual suspension provision considered by his Honour (cl 8.1 set out at [17] of his Honour's reasons) is in very similar terms to cl 26(a), with which I am concerned in this matter. 9. The observations of Bryson J in Davis have been cited, with apparent approval, on numerous occasions. They are, perhaps, most notable for his Honour's insistence at [97] that it is open to parties, and not against public policy, to "agree that in stated circumstances a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them". 10. However, along the way to reaching that view, his Honour, at [83], gave some consideration to what happens in the taking of mortgage accounts. His Honour was dealing with breach of s 420A of the Corporations Act 2001 (Cth) (and that is relied on in this case) but I think what he said is of more general application. 11. His Honour said that at the heart of establishing the amount of the plaintiff's entitlement against the defendant was the process of considering whether any credit in respect of breach should be allowed in calculating the amount. If it should be, then the subsidiary question was one of quantifying it. His Honour then turned to how that might be done. He said: If the mortgagor is entitled to have a further credit brought into account on taking the mortgage accounts, the guarantor can get the benefit of the credit by relying on an equitable set off against the creditor's demand. To do so is to rely on an entitlement of the mortgagor to set off that credit on taking the mortgage accounts. The substance of what the guarantor does by relying on a set off is establishing the true amount of his own liability by showing that the debtor is entitled to a set off. [6] 1. In my respectful opinion, that analysis is correct. In my view, it applies precisely to the prayer for relief, seeking a declaration that the asserted breaches of duty would discharge pro tanto the liability of Mr Kelly under his guarantee. 2. It follows, in my view, that however the consequences of the asserted breaches are pleaded in this case, they do not escape the net of cl 26(a). On that basis, Harrenvale has made good its claim to strike out the relevant pleadings, and to summary judgment for the amount the subject of the demand, presumably together with interest and costs. 3. I will hear counsel on the form of orders to be made. ********** Endnotes 1. [2007] NSWSC 902 at [18]. 2. [2016] WASCA 72 at [141]. 3. [2013] NSWCA 71 at [75]. 4. (2004) 60 NSWLR 646. 5. (2002) 180 FLR 250 at [83]. 6. At [83]. 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. Decision last updated: 12 September 2017