CATCHWORDS

CORPORATIONS - statutory demand - whether debtor corporation can rely upon claim against the creditor corporation for unliquidated damages as an "offsetting claim" where the debt the subject of the demand arose from the dishonour of a bill of exchange - meaning of "cross-demand" discussed - whether debtor corporation had in the circumstances a genuine claim against the creditor.

BILLS OF EXCHANGE - Rule that unliquidated cross-claims can not be relied upon by way of extinguishing set-off against a claim on a bill of exchange discussed.

Corporations Law: ss459A, 459B, 459C, 459E, 459H, 459P, 459S

Bills of Exchange Act (1909) (Cth): s34(3)

Nova (Jersey) Knit Ltd v Kammgarn  Spinnerei GmbH [1977] 1 WLR 713; considered

In re A Bankruptcy Notice [1934] 1 Ch 431; considered

Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135; considered

JOHN SHEARER LIMITED and ARROWCREST GROUP PTY LTD v GEHL COMPANY

No SG54 of 1995

von Doussa, Hill & Tamberlin JJ

Sydney (Heard in Adelaide)

22 December 1995

IN THE FEDERAL COURT OF AUSTRALIA     )

                                      )

SOUTH AUSTRALIA DISTRICT REGISTRY     )  No SG 54 of 1995

                                      )

GENERAL DIVISION                      )

                ON APPEAL FROM A SINGLE JUDGE

              OF THE FEDERAL COURT OF AUSTRALIA

              BETWEEN:      JOHN SHEARER LIMITED and ARROWCREST GROUP PTY LTD

                             Appellants

                  AND:      GEHL COMPANY

                             Respondent

CORAM:    VON DOUSSA, HILL & TAMBERLIN JJ

PLACE:    SYDNEY (Heard in Adelaide)

DATED:    22 DECEMBER 1995

                      MINUTES OF ORDER

THE COURT ORDERS THAT:

     1.   The appeal be dismissed.

THE COURT DIRECTS THAT:

     2.   The parties to file and serve upon each other written submissions relating to costs, both of the appeal and the hearing, within seven days of these reasons being delivered.

Note:     Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA     )

                                      )

SOUTH AUSTRALIA DISTRICT REGISTRY     )  No SG 54 of 1995

                                      )

GENERAL DIVISION                      )

                ON APPEAL FROM A SINGLE JUDGE

              OF THE FEDERAL COURT OF AUSTRALIA

              BETWEEN:      JOHN SHEARER LIMITED and ARROWCREST GROUP PTY LTD

                             Appellants

                  AND:      GEHL COMPANY

                             Respondent

CORAM:    VON DOUSSA, HILL & TAMBERLIN JJ

PLACE:    SYDNEY (Heard in Adelaide)

DATED:    22 DECEMBER 1995

                    REASONS FOR JUDGMENT

THE COURT:

          The appellants, John Shearer Limited ("Shearer") and Arrowcrest Group Pty Ltd ("Arrowcrest"), appeal against the refusal by a judge of this Court to set aside various statutory demands served upon them by Gehl Company pursuant to s459E of the Corporations Law ("the Law").

          The background of the dispute between the parties can be shortly stated.  It will be necessary, however, later to consider the facts in greater detail.

          Shearer, at all relevant times, carried on business in South Australia as a dealer in agricultural machinery.  It had for many years been the Australian distributor of farm machinery and spare parts manufactured by the respondent Gehl

Company of Wisconsin in the United States of America ("Gehl"). This distributorship relationship arose from a series of written agreements each, it would seem, for a term of two years.  The last such agreement was expressed to take effect for a term of two years until 31 July 1994.

          Arrowcrest is the holding company for Shearer and on 16 May 1992 had guaranteed Gehl the prompt payment when due "of all obligations ... arising from goods, equipment and parts purchased" by Shearer from Gehl.

          Gehl did not renew the last of the distributorship agreements after its expiry on 31 July 1994.  According to Gehl, it reached its decision not to do so in May 1994 when it notified Shearer that it would not renew the agreement beyond 31 July 1994.  Prior to that notification, Shearer had ordered goods and parts for which it had drawn bills of exchange by way of payment.  After learning that the distributorship agreement was not to be renewed, Shearer dishonoured various bills.

          In the result, Gehl served statutory demands upon both Shearer and Arrowcrest.  Shearer and Arrowcrest then applied to the Court under s459G of the Law for orders setting aside the two statutory demands.  Each company accused Gehl of misleading or deceptive conduct.  Shearer claimed also to have a case against Gehl in damage for breach of an implied term in the distributorship agreement.  Each thus claimed to have "an offsetting claim" as that expression is defined in s459H(5) exceeding the amount of the dishonoured bills.  The matter came before a Registrar of the Court who formed the view that the statutory demand which had been served on Shearer should be set aside on the basis that Shearer had a genuine claim against Gehl for an amount in excess of the face value of the bills dishonoured.  The Registrar, however, concluded that Arrowcrest did not have an offsetting claim which it could rely upon and accordingly refused to set aside the statutory demand served upon that company.

          Gehl then applied to a judge of the Court to review the Registrar's decision setting aside the statutory demand on Shearer.  Arrowcrest, for its part, also sought a review of the Registrar's decision refusing to set aside the statutory demand issued to it.

          By the time the matter came before the Court on review, two further bills of exchange had been dishonoured.  In consequence, Gehl had served further statutory demands on both Shearer and Arrowcrest, which companies in turn sought orders from the Court setting these further statutory demands aside.  Accordingly, there were heard concurrently applications for the review of the Registrar's decisions as well as applications to set aside the subsequent statutory
demands served on Shearer and Arrowcrest.  Nothing really turns upon the discrete nature of the two sets of proceedings.

          The proceedings by way of review involve an application in the original jurisdiction of the Court by way of rehearing; Re Brindle; Ex parte FB & FA McMahon Pty Ltd (1992) 35 FCR 506

          Affidavit evidence was adduced on behalf of Shearer and Arrowcrest, as well as on behalf of Gehl.  Neither side saw fit to cross-examine the deponents of affidavits.

          Ultimately the learned trial judge found no reason to delve into the facts, beyond those which we have already set out, because of a view which his Honour formed on a question of law which he stated at the outset of his reasons in the following terms:

          "The short point in these proceedings in [sic] whether the Corporations Law (`the Law') has had any effect upon the rights of a creditor when his debtor dishonours a bill of exchange.  Expressed another way (and absent fraud and other specialty defences) does acceptance of a bill of exchange still constitute an irrevocable and unconditional obligation to meet the face value of the bill on its maturity date."

          Having so stated the question for determination, his Honour concluded that Shearer could not rely upon an unliquidated claim against Gehl as "an offsetting claim", with the result that his Honour set aside the decision of the Registrar and dismissed Shearer's application to set aside the subsequent statutory demands based upon the bills dishonoured after the initial proceedings had been referred to a Registrar.

          His Honour then concluded that the fate of the Arrowcrest matters depended upon the outcome of the Shearer matters.  In the result, his Honour took the view that Arrowcrest's application for an order for review should be dismissed and that its application for an order setting aside the most recent statutory demands against it should also be dismissed.  His Honour made certain consequential orders not relevant to an understanding of the present proceedings.

          It is convenient to consider first the question of law dealt with by his Honour, so far as it affects Shearer.

THE RELEVANT PROVISIONS OF THE LAW

          Section 459E(1) authorises the service upon a company of a demand for payment of a single debt due and payable, or two or more debts due and payable, where the single debt, or the total of the separate debts, are in excess of the "statutory minimum" defined in s9 of the Law, presently $2,000.  The statutory demand requires payment or, in the alternative, securing or compounding of the amount claimed within twenty-one days of the service of the statutory demand s459E(2).  The legislative history underlying s459E and an exposition of its significance is to be found in the judgment of Gummow J, with whom Brennan CJ, Dawson, Gaudron and McHugh JJ agreed in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 131 ALR 353.

          The consequences of failure to comply are to be found in ss459P, 459A, 459B and 459C of the Law.  Put shortly, an application may be made to wind up a company which is insolvent.  There is a statutory presumption contained in s459C(2) that a company is insolvent if, during the three months ending on the day when the application to wind it up was made, it had failed to comply with a statutory demand.  Although that presumption operates only unless the contrary is proved (see s459C(3)), leave of the Court is required under s459S(1) if the company opposes the application on a ground which could have been relied upon as a ground to set aside the statutory demand.  Further, the Court is directed not to grant leave unless satisfied that the ground taken is material to proving the company to be solvent.

          A statutory demand may be set aside by the company upon which it has been served where the Court is satisfied that there is a genuine dispute as to the existence or the amount of the debt to which the demand relates (s459H(1)(a), or that the company has an offsetting claim.  In each case the statutory demand, however, would only be set aside if the dispute as to the debt or its amount, or as to the offsetting claim, has the result that the debt is wholly disputed or alternatively that the offsetting claim is at least equal to the amount of the debt to which the statutory demand relates.  Otherwise the Court may make an order under s459H(4) varying the amount of the demand and declaring it to have effect as varied.

          The expression "offsetting claim" is defined in s459H(5) in the following terms:

          "`offsetting claim' means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates);".

          For the purposes of considering the question of law raised, we will assume that Shearer has a valid claim under s82 of the Trade Practices Act 1974 (Cth) or otherwise for breach of implied warranty in an amount equal to at least the total of the face value of the bills dishonoured.  If it were otherwise, then the statutory demands could not be set aside, irrespective of the correctness of the view which his Honour took of the law.

          At the heart of his Honour's judgment lies the decision of the House of Lords in Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713.  In that case the defendants were sued by the plaintiffs for moneys due on six bills which had been dishonoured.  The defendants wished to assert, by way of defence, set-off or counter claim, a claim for unliquidated damages against the plaintiffs alleging, inter alia, that there had been a supply of secondhand and not  new machinery.  These claims had been the subject of arbitration proceedings in Germany.  The defendants sought a stay of the court proceedings seeking to have the whole of the dispute between the parties determined by arbitration pursuant to a provision of the Arbitration Act 1975 (UK).  The House of Lords held that the proceedings on the bills should not be stayed.  Lord Wilberforce, with whose reasons Viscount Dilhorne and Lord Fraser agreed, said (at 720):

          "I take it to be clear law that unliquidated cross-claims cannot be relied upon by way of extinguishing set-off against a claim on a bill of exchange ... As between the immediate parties, a partial failure of consideration may be relied upon as a pro tanto defence, but only when the amount involved is ascertained and liquidated ...  The amount claimed here in respect of the machines is certainly neither ascertained nor liquidated, and the claim in respect of mismanagement is one for a wholly unrelated tort, so that there would seem to be no basis for denying the appellants' claim that, as regards the bills, there is no dispute."

          As his Honour the trial judge pointed out, Lord Salmon dissented but not with respect to what Lord Wilberforce had said in the passage cited above.  Thus, Lord Salmon said at 726):

          "I agree that there is no defence to the bills, since the only possible defence (which is not relied upon by the respondents) could be that their acceptance had been procured by fraud, duress or for a consideration which had failed and because the damages claimed in the arbitration are unliquidated damages and such damages cannot be set off against a claim on the bills of exchange: James Lamont & Co. Ltd. v Hyland Ltd. [1950] 1 K.B. 585."

          Lord Russell, who reached the same conclusion as did Lord Wilberforce, said (at 732-3):

          "It is in my opinion well established that a claim for unliquidated damages under a contract for sale is no defence to a claim under a bill of exchange accepted by the purchaser: nor is it available as set-off or counterclaim.  This is a deep rooted concept of English commercial law.  A vendor and purchaser who agree on payment by acceptance of bills of exchange do so not simply on the basis that credit is given to the purchaser so that the vendor must in due course sue for the price under the contract of sale.  The bill is itself a contract separate from the contract of sale.  Its purpose is not merely to serve as a negotiable instrument, it is also to avoid postponement of the purchaser's liability to the vendor himself, a postponement grounded on some allegation of failure in some respect by the vendor under the underlying contract, unless it be total or quantified partial failure of consideration."

          In the earlier case of Cebora S.N.C. v S.I.P (Industrial Products) Ltd [1976] 1 Lloyds Rep 271, referred to in the judgment below, reference is made to the significance of the principle in mercantile commerce.  Sachs LJ said (at 278-9):

          "Any erosion of the certainties of the application by our Courts of the law merchant relating to bills of exchange is likely to work to the detriment of this country, which depends on international trade to a degree that needs no emphasis.  For some generations one of those certainties has been that the bona fide holder for value of a bill of exchange is entitled, save in truly exceptional circumstances, on its maturity to have it treated as cash, so that in an action upon it the Court will refuse to regard either as a defence or as grounds for a stay of execution any set-off, legal or equitable, or any counterclaim, whether arising on the particular transaction upon which the bill of exchange came into existence, or, a fortiori, arising in any other way.  This rule of practice is thus, in effect, pay up on the bill of exchange first and pursue claims later."

          As the last citation makes clear the rule is a rule of practice.  It does not mean that the person liable on the bill but claiming to have an unliquidated claim against the holder of the bill is left with no remedy at all.  It means merely that, the claim must be litigated elsewhere, except in exceptional cases.

          The rule has been applied in Australia on many occasions.  Indeed my researches suggest that only in Ingleton v Coates (1896) 2 ALR 154 was a different approach taken.  Aickin J referred to the decision of the House of Lords in Nova (Jersey) Knit Ltd with apparent approval in KD Morris & Sons Pty Ltd (In liquidation) v Bank of Queensland Ltd (1979-80) 146 CLR 165 at 203, although it must be said that his Honour was in the minority in that case, albeit not in respect of any matter for which the House of Lords decision is authority.  The rule has been accepted as applicable in Australia in a multitude of cases.  These include in Victoria, Mobil Oil Australia Ltd v Caulfield Tyre Service Pty Ltd [1984] VR 440, a decision of the full Supreme Court and Pinewood Resources Ltd v Moffat (Tadgell J, 5 April 1989, unreported) in New South Wales in Buying Systems (Aust) Pty Ltd v Tien Mah Litho Printing Co (PTE) Ltd (1986) 5 NSWLR 317 at 327-8 per Cohen J, Ferro Corporation (Aust) Pty Ltd v International Pools Aust Pty Ltd (1993) 30 NSWLR 539, per Rolfe J, and Coloursplendor Graphics Ltd v FMF Colour Creations Pty Ltd (unreported, Brownie J, 3 December 1987); in Western Australia in Amalta Holdings Pty Ltd v Richard Geoffrey Luff (unreported, Full Court, Kennedy, Franklyn and Seaman JJ, 21 December 1989); in Queensland in Eversure Textiles Manufacturing Co Ltd v Webb [1978] QR 347 and in New Zealand in International Ore and Fertilizer Corporation v East Coast Fertilizer Co Ltd [1987] 1 NZLR 9, and Finch Motors Ltd v Quin [1980] 2 NZLR 513.

          One of the exceptions to the rule, as is made clear in the judgment of Lord Salmon in Nova (Knit) is the case of fraud.  There are three possible explanations for this.  The first is to be found in s34(3) of the Bills of Exchange Act (1909) (Cth) which sets out the circumstances where the title of a person who negotiates a bill may be defective.  Those circumstances include fraud as well as where the bill has been obtained by unlawful means.  The second is that a Court of Equity could set aside the bill if obtained by fraud, so that it is necessary to deal with the case in fraud before permitting judgment to be entered for the face value of the bill.  The third is that it would be unconscionable in a case where the bill was obtained by fraud to permit the fraudulent party to rely on the bill without permitting the party liable on that bill to raise the liability of the holder of the bill in damages or to an account by way of a cross-claim.  By analogy, therefore the rule would have no application in a case where by virtue of some statutory provision the Court might set aside the bill.  Such a case would arise where there has been conduct in breach of s52 of the Trade Practices Act in circumstances where s87 of that Act could be invoked to set aside the bill cf Ferro Corporation (supra at 541-2).  Likewise, where the bill was obtained as a result of conduct which was misleading and deceptive in breach of s52 of the Trade Practices Act it may well be that the rule has no application.  That, however, is not a matter which is required to be determined in this case.

          It does not follow from the rule or its underlying rationale, that a claim, as alleged on behalf of Shearer, could not constitute an "off-setting claim" as that expression is defined in s459H.  All that follows from the rule (subject to any exception relevant to cases where s52 has been breached) is that if Shearer were sued by Gehl and sought to set up a cross-claim or cross-demand for an unliquidated amount based either upon s52 of the Trade Practices Act or a claim for breach of an implied term, a court would not stay judgment on the proceedings to recover moneys owing under the bills until the hearing of any cross-claim or cross-demand.  Summary judgment would be ordered upon proof of the bills, no stay of execution would be granted and the cross-claim or cross-demand would proceed for hearing in due course.  But to say that is not to say that Shearer has no cross-demand.

          The word "cross-demand" is a word of considerable width.  While the words "counterclaim" and "set-off" are technical words, the meanings of which are confined, the same is not true of the word "cross-demand".  That is not a technical term.  Thus in In re A Bankruptcy Notice [1934] 1 Ch 431, Lord Hanworth MR, after discussing the technical meaning of the words "counterclaim" and "set-off" in the context of bankruptcy legislation, said (at 438):

          "I turn, therefore, to what to my mind is the wider word, `cross-demand'.  If a cross-demand is only to be interpreted as meaning something which could have been
introduced into the action by way of counterclaim, it adds nothing to the word `counterclaim'.  `Cross-demand' seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims, something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies outside a counterclaim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt.  I do not desire to say what `cross-demand' may include, but it is not difficult to say that it does not include a claim of such uncertain nature as appears in these Chancery proceedings."

          The Full Court of this Court took a similar view in Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 at 138-9, emphasising that an unrestricted meaning should be given to the word "cross-demand" and see too Re Smith; Ex parte Chesson (1992) 106 ALR 359 at 364 (affirmed on appeal, sub nom Chesson v Smith (1992) 35 FCR 594).

          It would seem to follow that in the context of the Law, a context similar to that in s41(7) of the Bankruptcy Act 1966 (Cth), a cross-demand will include any claim for damages which exists at the time the application to set aside the statutory demand is made, which is for a monetary amount capable of quantification whether or not it arises out of the same transaction or circumstances as the debt to which the statutory demand relates.  There can be no doubt that a claim for damages under the Trade Practices Act or for breach of an implied contractual term will satisfy the description of a cross-demand and thus be an off-setting claim, whether or not it could be relied upon as a defence by way of counter-claim or set-off in proceedings on a bill of exchange on which the person claiming damages is liable.

          The policy behind Division 2 of Part 5.4 of the Law supports this interpretation.  Failure to comply with a statutory demand is taken to be evidence of insolvency.  It is for that reason that application may be made to the Court to set aside a statutory demand in circumstances where the person against whom the demand is made has a genuine cross-demand, at least equal to the amount of the sum demanded from him or her.  If it should turn out that there was a real cross-demand of equal amount to the sum referred to in the statutory demand, the company failing to comply with the statutory demand would be wound up in circumstances where clearly it was not insolvent and where a proof of debt from the person giving the statutory demand might well be rejected in liquidation because of the existence of a set-off: cf Gye v McIntyre (1991) 171 CLR 609.

          Nothing in the judgment of Cohen J in Buying Systems (Aust) (supra) compels a different conclusion.  In that case an insolvent company sought to restrain the defendant from proceeding with an application for winding up on the basis that it had a bona fide cross-claim against the defendant.  The debt owed to the defendant arose out of two dishonoured bills.  The cross-claim was for an unliquidated amount arising out of a different transaction.  It was also for an amount less than the amount of the dishonoured bills.  In these circumstances and as a matter of discretion Cohen J refused to enjoin the winding up of the plaintiff.  The case does not stand for the proposition that the plaintiff had no cross-demand.

          We would accordingly find, contrary to the learned trial judge, that it does not follow that Shearer does not have an off-setting claim merely because the debt referred to in the statutory demand arises from a bill of exchange.  It thus becomes necessary to consider in more detail whether the claim asserted by Shearer (and likewise the claim asserted by Arrowcrest) are genuine claims which each company has against Gehl and which are equal to or exceed the amounts the subject of the respective notices.

          In order to show that an offsetting claim is genuine it must be put forward in good faith.  There must be something more than a mere assertion.  The precise test to be applied has been the subject of some diverging views: cf Chase Manhattan Bank Australia Limited v OSCTY Pty Ltd (1995) 17 ACSR 128 at 135.  It is unnecessary to resolve in the present case which of these diverging views should be accepted for on none of them can Shearer and Arrowcrest succeed.

          As particularised in the application for review, the off-setting claim which Shearer asserted against Gehl was said to be:

          "4.1.1 a claim for unliquidated damages for breach of contract, in that it was an implied term of the distribution agreement between Shearer and the Respondent that the Respondent would continue to supply parts and warranty after the termination,

          4.1.2 a claim for loss or damage pursuant to Section 82 of the TPA [Trade Practices Act] for a breach of Section 52 of the TPA in that the Respondent engaged in false and deceptive conduct by representing to Shearer and Arrowcrest that it would renew the distribution agreement."

          Arrowcrest was said to be entitled to set-off Shearer's claim for unliquidated damages against Gehl in Gehl's claim against it.  Alternatively, it was said that Arrowcrest, when sued, could immediately join Shearer as a third party and claim an indemnity from it.  It in turn could then join Gehl as a fourth party claiming damages for breach of warranty.  All the claims would then be heard together, the rights of all parties determined and the appropriate set-offs made after judgment.  Finally, it was said that Arrowcrest had itself a direct right of action for damages against Gehl pursuant to the provisions of s82 of the Trade Practices Act and access to ancillary powers such as contained in s87 of that Act.

          Affidavits were filed in support of the case for the appellants.  From the evidence of Mr Hong, the Managing Director of Shearer and a Director of Arrowcrest, it is possible to glean something of what is said to be the case for each company.  It seems that the relationship between Shearer and Gehl has existed since 1982 from which time Shearer purchased from Gehl machinery and spare parts and onsold them to dealers and farmers throughout Australia.  There is said to have been an agreement in 1991 and 1992 that the arrangement between the parties could only achieve growth if the relationship was maintained as a long term one.  Additional Gehl products were introduced at that time into Australia and there was a joint promotion of them.  Mr Hong says that it was acknowledged by Gehl that in respect of many of the products it would take more than twelve months for them to be sold.  Accordingly, credit terms were extended for twelve months on the basis that Arrowcrest provide a guarantee.  A joint letter sent on behalf of Gehl and Shearer to customers in 1992 referred to the joint "long term commitment" to supplying quality haymaking equipment.

          Mr Hong then deposes that in 1993 negotiations took place between the parties for the distribution of a new product in Australia known as the "Gehl-skid steer loader".  Shearer is said to have incurred expenditure of some $20,366 in promoting this new product and Mr Hong says that until the beginning of 1994, discussions took place between the parties concerning the strengthening of ties between them.  No mention was then made of any intention to terminate the agreement.  It was not until May 1994 that Gehl advised Shearer that the distributorship agreement would not be renewed.  Mr Hong says that this letter came as a surprise to him.   Ultimately a new distributor was appointed by Gehl on 1 August 1994 effective from the next day.  Mr Hong then alleges that Gehl refused orders for spare parts after termination of the agreement, those parts being necessary to enable Shearer to meet warranty commitments.  In support of this allegation Mr Hong annexes a facsimile message dated 5 August 1994 attaching a purchase order for parts said to be urgently required by end users for "machine down and warranty service orders".  In reply came a facsimile to the following effect:

          "Reference is made to your faxes, one dated August 4th 1994 and the other August 5, 1994, to my attention.

          Please refer to our fax, Ref: FX1208 dated August 2, 1994 indicating that Gehl will no longer accept any orders from John Shearer Limited."

          It should be noted at this stage that Gehl now argues that this last facsimile has been misconstrued and should be seen by reference to other correspondence around the same time.  We will return to this matter later.

          There is then an assertion of loss by Mr Hong.  It is in the following terms and represents the only evidence on oath as to loss:

          "John Shearer has incurred substantial losses with respect to Gehl equipment and spare parts because of the reduced value, has incurred losses with respect to the promotion of the Gehl loader and is owed moneys by Gehl for outstanding warranty claims.  Particulars of those losses I estimate as follows:

          21.1Reduced value of stock

              on hand together with loss

              of profit on sale                    A$550,000

          21.2Reduced value of parts

              together with loss of profit

              on resale                            A$180,000

          21.3Losses on promotion of Gehl loader    A$20,366

          21.4Outstanding warranty claims            A$7,000

                                                 A$757,366".

          For the respondents various affidavits from Mr Gehl were filed.  In those affidavits Mr Gehl gives a different view of the Shearer/Gehl relationship as it existed in early 1992.  He says that there was concern at that time that Shearer had no field sales force.  He says he was then assured by Shearer that it would be increasing its field sales force over time.  A facsimile from Mr Gehl to a Mr Gwinnit of Arrowcrest dated 9 April 1992 refers to the necessity of "investment in sales people" to ensure success in redeveloping the dealer organisation of Shearer corroborates this part of Mr Gehl's evidence.

          In his affidavit Mr Gehl says further that in order not to have the dispute with Shearer harm Gehl's retail customers, Gehl allowed warranty parts and credits to flow to Shearer after the agreement between them came to an end.  The losses said to be suffered by Shearer were of course denied.  Mr Gehl says that the decision to terminate the distributorship came about because Shearer "downsized" and restructured its organisation due to financial problems in 1991, to the extent that it could no longer provide a field sales organisation.  Mr Gehl reiterated the right of Gehl not to renew the agreement.

          Mr Gehl, in one of his affidavits, deals with the correspondence of August 1994 to which reference has already been made.  From this correspondence it seems that in 29 July 1994 Shearer had sought to purchase four items of equipment described as "3 MX125s and 1 CB865".  There is no evidence as to what these items of equipment were, although it was said from the bar table that they were new goods.  In response to this request, Gehl sent a facsimile dated 2 August 1994 which, after referring to that purchase order, said:

          "I would refer you to the letter dated May 23, 1994 signed by John Gehl which advised John Shearer Ltd that it was `the intent of the Gehl Company not to renew the Distributorship Agreement we executed with John Shearer Limited as of the 1st day of August 1992'...  The position of the Gehl Company has not changed and we consider the Distributorship Agreement with John
Shearer Limited to have ended as of July 31, 1994.

          Based upon the fact that the distributorship relationship between Gehl and John Shearer ended as of July 31, 1994, Gehl will no longer accept any orders from John Shearer Ltd."

          It was said that the failure to supply relied upon by Mr Hong was thus in the context of new items of equipment rather than spare parts for warranties.  In further support of this proposition there was exhibited a facsimile from Shearer to Gehl of 10 January 1995 where a purchase order for service parts was made by Shearer and accepted by Gehl in a facsimile response of 10 January 1995.  The price for such parts was to be at a discount of forty percent from list price but terms to be cash in advance before shipment.  An invoice dated 18 January 1995 indicated the order had been fulfilled.  Other invoices suggested that other orders for parts had been fulfilled.

          Finally reference should be made to the distributorship agreement between Gehl and Shearer and the guarantee between Gehl and Arrowcrest.

          The distributorship agreement provided that Gehl would sell to Shearer the products identified in it during the term of the agreement to the extent that Gehl had such products available for sale and accepted such orders in writing.  A warranty was given to Shearer by Gehl that the products sold would confirm to Gehl's product warranties which were exhibited to the agreement.  Specifically it was provided that Gehl not be liable for any representation or warranty other than as set out in the Gehl product warranty.

          An obligation was imposed upon Shearer not merely to provide a suitable place of business and adequate sales personnel and technicians, but also to maintain an inventory of the products, parts and accessories.  The agreement then provided for what was to happen in the event of its termination.  Gehl was to be under no obligation to buy back any of Shearer's inventory, but if Gehl terminated the agreement, Gehl was to repurchase the inventory of spare parts.  The agreement provided for what is referred to as the "Annual Surplus Service Parts Return Program" but the provisions governing that programme related only to the giving of a credit against amounts owing by Shearer to Gehl during the course of the agreement and had no application at all to the case where the agreement ceased by effluxion of time.

          The guarantee provided as follows:

          "In consideration of Gehl Company (`Gehl') extending to John Shearer Limited (`Shearer'), a subsidiary of Arrowcrest Group PTY Ltd (`Guarantor') the Guarantor hereby unconditionally and absolutely guarantees the prompt payment when due (whether at maturity, by acceleration or otherwise) of all obligations (`Accounts') arising from goods, equipment and parts purchased by Shearer from Gehl, plus all interest on all Accounts, and all costs and expenses which may be incurred by Gehl in the enforcement of this guaranty or of the Accounts, including without limitation, reasonable attorney's fees.

          This guaranty is a guarantee of payment and not merely collection.  No renewal or extensions of any Account, no release or surrender of any security for any Account, no release of any person primarily or secondarily liable on any Account, no assumption of payment of any Account, no delay and enforcement in payment of any Account, and no waiver or delay or omission in exercising any right or power under any Account or in pursuing any other remedy in Gehl's power whatsoever shall affect the liability of the undersigned hereunder.  In order to hold the undersigned liable under this guaranty, there shall be no obligation on the part of Gehl at any time to resort to payment for payment to Shearer or to any other persons primarily or secondarily liable on any Account or to any security for any Account and Gehl shall have the right to enforce this guaranty irrespective of whether or not other proceedings, or steps are being taken against Shearer on any Account or against any property securing any Account; provided however that Guarantor shall not be required to make any payment hereunder of principal or interest guaranteed hereby unless and until, at least 15 days prior to making demand hereunder on Guarantor (i) Gehl shall have notified Guarantor in writing at its address indicated below ... and (ii) Shearer shall have continued to fail to make such payment in full to Gehl."

          The guarantee is to remain in force until all accounts are paid in full.  However, it is then provided, notwithstanding any other clause, that the guarantee is to have "an expiry date of not more than six (6) months from the date of expiry of the current John Shearer Limited / Gehl Distributorship Agreement".

          One of the difficulties facing the Court and facing Shearer is that neither of the claims sought to be put forward by Shearer is adequately particularised.  Of the implied term that is alleged, all that is said is that the term is "that the respondent continue to supply parts and warranties after the termination".  The difficulty about such an implied term is that it is so vague as to be meaningless.  Particularly it does not indicate on what terms the parts would be provided after the agreement was terminated.  It may, no doubt, be accepted that Gehl must in some way or other remain liable to ensure that warranties given are complied with.  But it does not follow from that, that it goes without saying that Gehl would continue to be liable to supply parts of all kinds, whether warranty or otherwise, after termination of the agreement on the same terms as those parts would have been provided prior to that termination.  The uncertainty of the term suggested by Shearer is made manifest in the correspondence, to which reference has already been made, where orders for parts were accepted on various terms.  On one occasion payment in advance was required, on another occasion payment within thirty days was required.  The difference between the two arrangements appears in no way to have been questioned by Shearer.

          The Trade Practices claim is even more nebulous.  It is difficult to understand precisely what the claim is.  It seems to be suggested that there was some obligation on the part of Gehl to advise Shearer at a time earlier than May 1994 that Gehl proposed not to renew the agreement.  The misleading and deceptive conduct alleged is the failure so to advise.

          It should be said that there is absolutely no evidence that Gehl had, prior to May 1994, determined to terminate the agreement.  Such evidence as there is might suggest some dissatisfaction on the part of Gehl from 1992 onwards, but nothing suggests that any decision was made not to renew until the May letter.  It is hard to see how Shearer could succeed in any claim under the Trade Practices Act reliant upon a failure by Gehl to inform Shearer, unless Shearer could prove that Gehl had, at a date earlier than May 1994, decided to terminate but had refrained from advising Shearer of this decision, leaving Shearer to continue to make orders for goods to its detriment.  There is not a single skerrick of evidence to this effect.

          Another difficulty in the way of Shearer is that there is nothing in the material before the Court which can be said to amount to more than a mere allegation that damage of the kind specified has been suffered.  While it must be accepted that it is not contemplated that in an action to set aside a statutory demand, evidence needs to be adduced of the kind that would need to be adduced at a trial of the issues between the parties, it is simply not enough for Shearer to assert damage in the most general of terms without more, particularly in a case where damages of the requisite amount, that is to say damages that are at least equal to or exceed the debt of the creditor are not self evident.

          These factors, together with the fact that since the dispute between the parties commenced in September 1994 and the claims were asserted by Shearer at that time, no attempt has been made by Shearer to commence proceedings against Gehl to recover the amounts said to be owing by Gehl to Shearer or particularise the claims with any precision, unite in my view to lead to the conclusion that the claims sought to be made by Shearer are not "genuine" and thus fall outside the category of off-setting claims.

          This conclusion effectively leads to the same result for Arrowcrest.  Arrowcrest is liable as guarantor for the amounts for which Shearer is liable.  While no doubt it may be said that even if Shearer had a defence Arrowcrest might not, that argument does not arise in the present circumstances.

          There is further no evidence at all which would lead to the conclusion that there was a genuine claim by Arrowcrest directly against Gehl under s82 of the Trade Practices Act sounding in damages.  There is no suggestion that Gehl has engaged in conduct which is misleading and deceptive so far as concerns the guarantee.  The only conduct sought to be relied upon is conduct in respect of Shearer.  There is no evidence, however, to suggest that Gehl's conduct has in any way been misleading or deceptive.

          The consequence of my view is that the decision of the judge below is affirmed, although albeit on different grounds.  In the circumstances a question arises as to costs.  As the parties have not had the opportunity to argue the question of costs, we would direct that each party file and serve upon the other written submissions relating to costs, both of the appeal and of the hearing, within seven days of these reasons being delivered.

I certify that this and the

preceding twenty-seven (27) pages

are a true copy of the Reasons

for Judgment herein of the Court.

Associate:

Date:  22 December 1995

Counsel and Solicitors       J Wilkinson with J Clarke

for Appellants:              instructed by Cowell Clarke

Counsel and Solicitors       P McNamara instructed by

for Respondent:              Johnson Winter & Slattery

Date of Hearing:             14 November 1995

Date Judgment Delivered:          22 December 1995