FEDERAL COURT OF AUSTRALIA

Reid v Interarch Australia Pty Limited (ACN 069 490 795) [2000] FCA 1328

PRACTICE AND PROCEDURE – motion for summary judgment seeking to enforce settlement agreement after default on payment under settlement deed - whether fresh proceedings should be instituted – whether substantial matters in controversy are involved beyond the ambit of the proceedings as originally constituted – whether, in the interests of justice, disposition of the matter on summary application is appropriate

BANKRUPTCY – provable debt - whether the claim against the second respondent should be characterised as arising by reason of a contract or promise – whether the second respondent was precluded from entering the deed of settlement by reason of his bankruptcy - s 82(2) Bankruptcy Act 1958 (Cth) concerns only claims for damages for breach of the bankrupt’s contract or promise, not that of third parties – test is whether the contract or promise constitutes an essential element of the cause of action

Bankruptcy Act 1958 (Cth) ss 58(3), 82(1), 82(2), 134(1)(f), 153A

Federal Court of Australia Act 1976 (Cth) ss 51A, 52

Trade Practices Act 1974 (Cth) ss 52, 75B, 82

Re Alston (1899) 16 WN (NSW) 22 cited

Darling Downs Investments Pty Limited v Ellwood (1988) 18 FCR 510 cited

Phillips v Walsh (1990) 20 NSWLR 206 applied

Victor v Victor [1912] 1 KB 247 cited

Aliferis v Kyriacou [2000] VSCA 123 applied

CATHERINE GAY REID & ANOR v INTERARCH AUSTRALIA PTY LIMITED (ACN 069 490 795) & ANOR

NG 981 OF 1998

HELY J

19 SEPTEMBER 2000

SYDNEY

THE COURT ORDERS THAT:

1.         the proceedings be dismissed, with no order for costs, insofar as claims made by the first applicant are concerned.

2.         judgment be entered for the second applicant against the first and second respondents in the sum of $500,000.

3.         the first and second respondents pay the second applicant’s costs of these proceedings.

4.         the second applicant’s Notice of Motion for summary judgment dated 28 April 2000, and the respondent’s motion for a stay of 8 September 2000, be dismissed.

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

REASONS FOR JUDGMENT

1                     These proceedings were instituted by an application filed on 17 September 1998.  It is not necessary for consideration to be given to the position of the first applicant, because it is proposed that the proceedings should be dismissed so far as claims for relief by the first applicant are concerned.

2                     The Statement of Claim alleges that the second applicant retained the first respondent to give advice, and to render certain services, in connection with the establishment and operation of a pharmaceutical wholesaling and dispensing business at Wetherill Park in New South Wales, and at Dandenong in Victoria.  The services included the obtaining of all necessary council approvals to enable the establishment and operation of the businesses in question.

3                     The applicant’s case is that the first respondent represented that the requisite council approvals had been obtained, when in truth they had not.  On the faith of those representations, the second applicant claims to have incurred costs and to have expended monies in relation to the premises at Wetherill Park and Dandenong, and thus to have suffered loss.

4                     The Statement of Claim pleads:

-                     against the first respondent, a claim for damages for misleading and deceptive conduct under ss 52 and 82 of the Trade Practices Act 1974 (Cth) (“the Act”), a claim for damages for breach of express terms of the contract of retainer, and a claim for damages for breach of an implied obligation to exercise reasonable care and skill in the performance of the retainer;

-                     against the second respondent, a claim for damages under ss 75B and 82 of the Act on the basis that the second respondent was a person involved in the misleading and deceptive conduct of the first respondent.

5                     An expert retained by the second applicant assessed its loss, on certain assumptions, at $505,385, and, on other assumptions, at $744,687.

6                     On 22 April 1999 Jirsch Sutherland was appointed trustee of the bankrupt estate of the second respondent.  In a report to creditors on 4 April 2000, the trustee said that he had been advised that the second applicant’s claim is not provable in the bankruptcy.  If the claim is successful, the debt will constitute, so it was said, a post bankruptcy debt, and the second applicant will be capable of attempting recovery from the bankrupt, post bankruptcy.  On that basis, the trustee projected that the claims of the secured creditors, and all provable debts would be paid in full, with a surplus available for return to the bankrupt.

7                     On 28 April 2000 the second applicant lodged a motion seeking summary judgment, after the respondents had failed to file evidence in accordance with the timetable which I had directed.  The motion was adjourned, and on 11 August 2000 a Deed of Settlement was entered into between the first and second applicants and the first and second respondents.

8                     The Deed recited various matters in relation to the proceedings, and concluded with a recital, that without admission by any party, the parties had agreed to resolve their disputes, and these proceedings, on the terms set out in the Deed.

9                     The Deed provides that in return for releases, the first respondent and the second respondent jointly and severally agree to pay to the second applicant the sum of $150,000 by three instalments of $50,000 on specified dates.  Clause 6 of the Deed provides that in the event that payment of any of the instalments is not made by the specified date, the releases shall be void, and the full amount claimed by the second applicant, as evidenced in its expert’s report, being the amount of $500,000, together with interest and costs, shall become immediately jointly and severally due and payable by the first respondent and by the second respondent.  Clause 6(c) of the Deed provides that the first and second respondents:

“... shall not take any steps to defend and will consent to summary judgment being entered against each of them for the amount of $500,000 ..., together with interest and costs, in respect of the Proceedings.”

10                  The respondents failed to pay the first of the instalments referred to in the Deed by the specified date or at all, and on 1 September 2000 the second applicant applied by Notice of Motion in these proceedings, for an order that judgment be entered against each of the first respondent and the second respondent in favour of the second applicant in the amount of $500,000 together with interest pursuant to s 52 of the Federal Court of Australia Act 1976 (Cth).  The motion also sought dismissal of the summary judgment application lodged on 28 April 2000, and dismissal of the proceedings insofar as claims for relief made by the first applicant are concerned.

11                  By Notice of Motion dated 7 September 2000 the first and second respondents sought orders that the proceedings be stayed, and alternatively an order that the Deed of Settlement dated 11 August 2000 between the parties be set aside.

12                  The respondents contend that the second applicant’s claim against the second respondent is a debt provable in his bankruptcy.  If that is so, then:

-                     from and after 22 April 1999 the second applicant was not entitled to take a fresh step in these proceedings, without the leave of the Court (s 58(3) Bankruptcy Act 1958 (Cth) (“the Act”)).  Such leave has not been given, and the second applicant does not seek it;

-                     the power to make a compromise with a person claiming to be a creditor in respect of a debt provable in the bankruptcy resides with the trustee (s 134(1)(f)), hence the settlement deed was ineffective, at least so far as it purported to compromise the claim made by the second applicant against the second respondent: Re Alston (1899) 16 WN (NSW) 22.

13                  The respondents also contend that whilst the Court has power to entertain a motion in these proceedings for the enforcement of a settlement agreement reached in relation to the proceedings (Darling Downs Investments Pty Limited v Ellwood (1988) 18 FCR 510), the Court should, in the exercise of its discretion, decline to entertain the applicant’s motion, because it raises issues foreign to those raised in the these proceedings, namely issues associated with the validity of the Deed of Settlement, and the circumstances of the second respondent’s bankruptcy: see Phillips v Walsh (1990) 20 NSWLR 206.

14                  Mr Crouch, a representative of the trustee, gave evidence to the effect that the trustee has no objection to orders being made in terms of par 6(c) of the Deed of Settlement.  The trustee is waiting on a clearance from the Tax Office to complete his administration.  Subject to the receipt of that clearance, and to no new matters emerging, the expectation is that on payment of the secured creditor the bankruptcy will be annulled pursuant to s 153A of the Act.  That section provides that if the trustee is satisfied that all the bankrupt’s debts have been paid in full, the bankruptcy is annulled, by force of the sub-section, on the date on which the last such payment was made.  At the risk of stating the obvious, the Trustee is not a party to these proceedings.

a provable debt?

15                  Section 82(1) of the Act relevantly provides that all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he may become subject before his discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his bankruptcy.  Section 82(2) provides:

“Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.”

The corollary is that a demand in the nature of unliquidated damages arising “by reason of” a contract or promise is provable in the bankruptcy.  The question is whether the claim against the second respondent should be characterised as arising by reason of a contract or promise.

16                  The claim against the second respondent is not a claim in contract.  There is no contract between the second applicant and the second respondent.  However, the respondents submit that the contract between the second applicant and the first respondent is an essential part of the factual substratum which gives rise to the claim against the second respondent.  The conduct of the second respondent is conduct in purported performance of the contract between the second applicant and the first respondent, and it is the fact of that contract which induced the second applicant to rely upon the representations as to the granting of council approvals.  It is not necessary, it is said, that the contract be an element of the cause of action; it is sufficient if the demand arises by reason of a contract, even though the cause of action is not for breach of contract.

17                  There are at least two answers to this submission.  First, s 82(2) is concerned with claims for damages for breach of the bankrupt’s contract or promise, and not with the contracts or promises of third parties.  The intention of the bankruptcy legislation was to grant the bankrupt a discharge from all pecuniary liabilities arising contractually (Victor v Victor [1912] 1 KB 247, 252-253).  The contrast is with demands for damages for personal torts.  The cases referred to by Brooking JA in Aliferis v Kyriacou [2000] VSCA 123 at par [8] proceed upon the basis that s 82(2) is concerned with the claims for damages for breach of the bankrupt’s contract or promise.

18                  Thus, for example, if a defendant intentionally interferes with the performance by a third party of a contract between the third party and a plaintiff, the defendant will be under a tortious liability to the plaintiff for interference with that contract.  If the defendant became bankrupt, it seems to me that the damages claim would not be a provable debt, even though the existence of a contract between the plaintiff and the third party is a precondition to the defendant’s liability.  In such case the defendant is liable because of his tortious conduct.

19                  Thus, even if it be assumed that a contract between the second applicant and the first respondent is an essential part of the factual substratum underlying the claim against the second respondent, the contract is not that of the second respondent, hence the demand is not “by reason of” a contract or promise within the meaning of s 82(2).

20                  Second, in Kyriacou the Court of Appeal of the Supreme Court of Victoria, unanimously held that the correct test to apply for the purpose of deciding whether a demand is within the exclusion provided by s 82(2), leaving breach of trust to one side, is whether a contract or promise constitutes an essential element of the cause of action.  In that case, a claim against a solicitor for damages for negligence was held not to be a demand which arises by reason of a contract because, although there was a contract between solicitor and client, the contract was not an essential element in the plaintiff’s cause of action in negligence.

21                  The Court of Appeal declined to follow earlier first instance decisions that it was sufficient for a claim to fall within the exception to s 82(2) that the claim be causally connected to the contract or promise, such that it could be said that the claim arises by reason of the contract or promise, even though the contract or promise is not an essential element of the cause of action relied upon.

22                  In those circumstances, it seems to me that I should simply follow a recent decision of an appellate court reached after a consideration of the history of the legislation and the authorities, rather than adding what could be no more than another decision at first instance on the question.

23                  For those reasons, I conclude that the second applicant’s claim against the second respondent is not a debt provable in his bankruptcy, hence the leave of this Court is not required before the second applicant can take a further step in these proceedings, and the second respondent was not precluded by reason of his bankruptcy from entering into the Deed of Settlement.  An alternative contention, put in the respondent’s written submissions, that even if the debt was not provable, the second respondent was in some unexplained way prevented from entering into the Deed of Settlement was abandoned.

whether fresh proceedings should be instituted

24                  In Phillips v Walsh, McLelland J held that, whether or not the Court has power, on motion in existing proceedings, to enforce an agreement compromising the proceedings, it should not do so where substantial matters in controversy are involved beyond the ambit of the proceedings as originally constituted, or where, in the interests of justice, disposition of matters on summary application is inappropriate.

25                  No argument was put by the respondents, that the provisions of clause 6 of the Deed of Settlement were void as a penalty, and a foreshadowed argument that there was some defect in the execution of the Deed of Settlement by the first respondent was abandoned.  The only issue ultimately advanced was whether the second applicant’s claim was a debt provable in the second respondent’s bankruptcy.  No other basis of invalidity of the Deed of Settlement was argued.  The second applicant accepted that if its claim was a provable debt, then its motion for judgment should be dismissed.

26                  There is thus tendered a short issue of law not dependent on the resolution of any factual controversy which, all other things being equal, is appropriately disposed of on summary application.  The only virtue claimed for fresh proceedings, is that the trustee in bankruptcy is not a party to the present proceedings, and could be joined if proceedings were instituted for specific performance of the Deed of Settlement.

27                  But there is no controversy between the second applicant and the Trustee.  Each is of the view that the second applicant’s claim against the second respondent is not a provable debt.  The Trustee knows of these proceedings, and his representative gave evidence of a lack of objection on the part of the Trustee to the making of the orders sought in the motion.

28                  In those circumstances, there would be no substantive advantage to be derived from requiring the institution of fresh proceedings.  All the second applicant seeks is to enforce a compromise reached under the umbrella of the original claim, and there is no difficulty in a summary determination of the only matter raised by the respondents in opposition to the applicant’s claim.

29                  In the light of the conclusion which I have reached, it is not necessary to consider what the position would have been vis-à-vis the first respondent, had I concluded that the claim against the second respondent was a debt provable in his bankruptcy.

30                  The orders which I make are:

-                     that the proceedings be dismissed, with no order for costs, insofar as claims made by the first applicant are concerned;

-                     that judgment be entered for the second applicant against the first and second respondents in the sum of $500,000;

-                     that the first and second respondents pay the second applicant’s costs of these proceedings;

-                     that the second applicant’s Notice of Motion for summary judgment dated 28 April 2000, and the respondent’s motion for a stay of 8 September 2000 be dismissed.

31                  The motion sought interest under s 52 of the Federal Court of Australia Act 1976 (Cth), which is payable from the date of judgment without the need for specific order.  No claim was made for interest under s 51A of that Act.  In case this is due to error, I reserve liberty to the second applicant to apply in relation to interest by notice to the respondents and to my associate given on or prior to 22 September 2000.

Associate:

Dated:              19 September 2000