FEDERAL COURT OF AUSTRALIA

SST Consulting Services Pty Ltd v Rieson [2004] FCA 937

TRADE PRACTICES – section 47 (1) of Trade Practices Act 1974 (Cth) (‘TPA’) –whether agreement gave effect to exclusive dealing within meaning of s 47(6) of TPA – whether requirement to provide pack and unpack services as condition of loan amounted to third line forcing – application of s 4L of TPA – whether contravening provision capable of severance

CONTRACT -illegality – whether obligations of the borrower to repay principal and interest void and unenforceable – test of severability – whether illegal provision is ancillary or whether the elimination of illegal promise alters the nature of the contract

CONTRACT -guarantee – whether guarantee rendered unenforceable because of illegality of principal obligations guaranteed

News Limited & Ors v Australian Rugby Football League Limited & Ors (1996) 64 FCR 410 cited

McFarlane v Daniell (1938) 38 SR 337 referred to

Humphries v The Proprietors Surfers Palms North Group Titles Plan 1955 (1994) 179 CLR 597 referred to

Carney v Herbert [1985] AC 301 cited

SST CONSULTING SERVICES PTY LTD ACN 083 263 914 v STEPHEN CHARLES RIESON & ANOR

N1367 OF 2002

EMMETT J

21 APRIL 2004

SYDNEY

THE COURT ORDERS THAT:

1.         Judgment be entered for the applicant in the sum of $1,514,890.00

2.         The cross-claim be dismissed.

3.         The applicant pay the respondents’ costs thrown away by:

(a)        the applicant’s amendment to the reply to defence and defence to cross-claim, filed in Court on 20 April 2004, by inserting paragraph 4(b);  and

(b)        the applicant’s further application to the Court on 19 April 2004 to amend the reply to defence and defence to cross-claim, in so far as the application was unsuccessful.

4.         The respondents otherwise pay the applicant’s costs including any reserved costs of interlocutory proceedings in the Federal Court and the costs of the proceedings and all interlocutory proceedings in the Supreme Court of New South Wales not dealt with by order of the Supreme Court.

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

REASONS FOR JUDGMENT

1                     The applicant, SST Consulting Services Pty Ltd (‘SST’) sues the respondents, Stephen Charles Rieson and Scott Murray Bell under a guarantee dated 23 December 1999 (‘the Guarantee’) in respect of indebtedness to SST of AFS Freight & Management (USA) Inc. (‘the Borrower’).  Messrs Rieson and Bell were directors of the Borrower, which is indebted to SST in respect of advances made by SST to the Borrower together with interest on those advances in the sum of $571,476. 

2                     There is no factual dispute between the parties.  However, Messrs Rieson and Bell say that the obligation of the Borrower to SST to repay the advances and interest is void and unenforceable because it was undertaken as part of an overall agreement whereby the giving effect to of that agreement constituted, a contravention of s 47(1) of the Trade Practices Act 1974 (Cth) (‘the Act’), as being an exclusive dealing within the meaning of s 47(6) of the Act.  They say that SST supplied or offered to supply money lending services to the Borrower on the condition that the Borrower and Australian Freight Services Ltd (‘AFS’), a body corporate related to the Borrower, would acquire ‘pack and unpack services’ in Sydney, Melbourne and Brisbane from a body or organisation described as ‘Port Botany/MPG Facilities’ or such other corporations as SST might direct.  

3                     Section 47(1) of the Act provides that a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing.  Relevantly, s 47(6) provides that a corporation engages in the practice of exclusive dealing if the corporation supplies, or offers to supply, services on the condition that the person to whom the corporation supplies or offers or proposes to supply the services or, if that person is a body corporate, a body corporate related to that body corporate will acquire services of a particular kind from another person.  That kind of exclusive dealing is known as third line forcing.  It is common ground that AFS is related to the Borrower within the meaning of that expression as used in s 47(6). 

BACKGROUND

4                     When a consignee imports goods into Australia and the consignment consists of a full container load, the goods go directly to the consignee’s warehouse.  If a consignment is less than a full container load or constitutes freight of all kinds (respectively ‘LCL’ and ‘FAK’), the containers are first unpacked so that the individual consignees can pick up their goods from a depot.  Once the goods are unpacked and made available for distribution to the consignees, the empty containers are stored, handled and repaired for the shipping companies and lease companies that own the containers.  The freight forwarders charge the shipping and leasing companies for that service.  Similar services are provided in connection with the export of goods.

5                     The directors of SST are Messrs Peter Sweeney, Paul Sweeney and Denys Truman.  Prior to sometime in late 1998 or early 1999 those three individuals carried on business relating to shipping, through various corporate entities.  Those various corporate entities were generally known as the ‘Port Botany Group’.  The Port Botany Group carried on business at several locations.  The biggest was at Friendship Road, Port Botany, abutting Brotherson Dock; a site of about 12 hectares, which had several buildings on it used by the Port Botany Group for container repairs, container packing and unpacking and container storage.  In addition, the Port Botany Group had a head office in Botany Road, where it also had several warehouses in which packing and unpacking and airfreight businesses were conducted. 

6                     The Brisbane operation of the Port Botany Group was carried out at Fisherman’s Island, at the Port of Brisbane.  Initially the business consisted of storing, handling and repairing empty containers and quarantine services and associated port services.  Once that business was established, the Port Botany Group branched out into packing and unpacking and warehouse related services. 

7                     The land in Sydney and on Fisherman’s Island were leased premises.  The Port Botany Group engineered and constructed the buildings and paving on the premises.  About 30 per cent of the turnover of the Port Botany Group was from packing and unpacking activities and about 70 per cent was from other activities, which included storing, handling and repairing containers and transport generally. 

8                     Over a period of some ten years up to 1998, the Port Botany Group dealt with AFS.  Over that period, the executives of Port Botany Group came to know those involved in AFS and to know the nature of the business of AFS.  Until the late 1990s, AFS was the local agent of a United States freight forwarder called Brennans, which conducted a packing container and freight station in Los Angeles.  Goods sent by Brennans to AFS made their way through the facilities of the Port Botany Group.

9                     In 1998 Brennans was taken over by, or its business was consolidated with the business of, the New American Consolidation Association (‘NACA’), which is a competitor of AFS.  As a consequence of that change, work from Brennans ceased to come through the depot of the Port Botany Group.  AFS then decided to set up its own operation of consolidating cargo on the east coast of the United States, in New York.  The Borrower was formed to carry on that activity. 

10                  Packing and unpacking services, such as those provided by Port Botany Group, were required by both AFS and the Borrower and the work from AFS and the work from the Borrower were valuable to the Port Botany Group.  By contract dated 16 December 1998, which was settled on 5 January 1999, the assets of the Port Botany Group were conveyed to interests associated with the Mayne Nickless group of companies.  SST, or other bodies related to Messrs Sweeney, Sweeney, and Truman, had a management agreement with Mayne Nickless.  Following that sale, it was then a benefit for Mayne Nickless to have packing and unpacking work from AFS and the Borrower. 

11                  In early June 1999, Mr Rieson telephoned Mr Peter Sweeney and the two subsequently met at Mr Sweeney’s office in Botany Road, Banksmeadow.  A conversation took place along the following lines:

12                  Mr Sweeney made notes during the course of the conversation.  His handwritten notes included the following:

‘1.        All pack, unpack, LCL transport in SM & B and Sydney airfreight to be directed to Port Botany/MPG/Pitkin facilities during the life of loan.

2.         If any work directed away from the above facilities, the loan becomes due and payable.

…

5.         The final balloon payment to include the outstanding principle and compounded interest at the rate of 20% pa calculated.

6.         Interest to remain unpaid until the final payment.

7.         If either AFS/Aust or any subsidiary is sold this loan will become payable in full as part of that transaction.’

13                  Later in June, a further meeting took place at the Botany Road, Banksmeadow premises involving Messrs Peter Sweeney, Paul Sweeney, Denys Truman and Rieson.  Mr Rieson said:

‘As NACA has taken Brennans work your Port Botany container depot will suffer a short term loss of FAK containers ex the States and that position will not improve until Denis Partridges sales results start to increase from the New York office.’

After some discussion concerning a profit and loss budget for the Borrower for the 1999 and 2000 financial years, together with other management information relating to AFS, Mr Peter Sweeney tabled the notes that he had made at the earlier meeting and said:

‘SST could agree in principal to the lending proposal but we would have to speak to Paul Mansfield and seek advice as regarding security and documentation after he considers AFS’s financial position.’

The reference to Paul Mansfield was a reference to Mr P.F. Mansfield, a partner of the firm of Mansfield Switzer, solicitors, of Bondi Junction. 

14                  On 24 June 1999, AFS sent, by facsimile transmission, a document containing two schedules.  The first schedule set out monthly cash requirements from July 1999 through to June 2000 totalling $1 million as follows:

The second schedule set out repayments to be made in August 2000, 2001 and 2002 of the sums of $100,000, $250,000 and $500,000 respectively and a payment in September 2003 of $150,000 plus the ‘Balloon Interest Payment’.

15                  On 2 July 1999, Mr Mansfield sent to Mr Peter Sweeney a document entitled ‘Special Terms for Inclusion in Agreement’. (‘the Special Terms’).  The Special Terms included the following:

‘Default Events

All pack and unpack, LCL transport in Sydney, Melbourne and Brisbane, and air freight to be direct to Port Botany/MPG and Pitkin facilities.  The charges to be at normal market trading rates and payment terms in accordance with those corporations’ policies.  This is to apply to the life of the loan.

1.         If any work is directed away from those facilities, this is a default event.

…

Non-Compliance of any Condition of the Loan

In the event of non-compliance with any condition of the loan or default event, the whol [sic] amount becomes due and payable together with interest that would otherwise have been payable at the end of year four.  The total being due within fourteen days of notice in writing from the lender.

Other Terms

A.        …

B.         The final payment at the end of the year four to include outstanding principal and compounded interest at a rate of 20% per annum, calculated on weekly rests.

C.        …

D.        The second scheduled payment is subject to the provision of draft 1999 accounts…

E.        The third scheduled repayment is subject to audited accounts showing not greater than 20%age reduction in shareholders’ funds…

F.        …’

It is clear that the reference to a ‘scheduled payment’ in clauses D and E is a reference to the schedules of 24 June 1999 described above.  A copy of the Special Terms was signed by Messrs Truman and Rieson on 7 July 1999. 

16                  Thereafter, advances were made by SST to the Borrower totalling $991,000 as follows:

17                  On 10 September 1999, two letters were sent by Mansfield Switzer, one to AFS and the other to the Borrower.  The letters referred to advances made to the Borrower and to proposed arrangements for security.  They also referred to proposed arrangements concerning the direction of all pack and unpack services in Sydney, Melbourne and Brisbane.  I shall refer to those provisions in more detail shortly. 

18                  On 23 December 1999, the Guarantee was entered into between SST as lender and Messrs Rieson and Bell as guarantors.  The Guarantee recited that:

• SST had advanced funds to the Borrower as shown in the attached schedule;
• Messrs Reison and Bell had an interest in the Borrower continuing its business;
• Mansfield Switzer’s letter of 10 September 1999 and an amended schedule were annexed.

19                  Clauses 1 and 2 of the Guarantee were in the following terms:

‘1.        In the event of the Borrower defaulting under any of its obligations, as set out in the 10^th of September document both as to payment of interest and principal as well as positive acts to be done, the guarantors will pay on demand to the lender the principal amounts advanced with interest at the rate reserved in the payment schedule up to the time of payment under the Guarantee

2.         This Guarantee is a continuing guarantee and takes into account future advances in accordance with the Schedule attached or variations therefrom to the document of the 10^th of September 1999.’

20                  The letter of 10 September 1999 from Mansfield Switzer to the Borrower and a schedule setting out the total of funds lent as at 21 December 1999 were annexed to the Guarantee.  There is some question as to whether or not the second letter of 10 September 1999 addressed to AFS was also annexed to the Guarantee.  The language of the Guarantee suggests to the contrary.  However, I shall refer to the terms of that letter, since they do have some bearing on the issues that I have to determine. 

21                  The schedule of funds lent attached to the Guarantee was as follows:

22                  The letter of 10 September 1999 to the Borrower was relevantly in the following terms:

‘Please find enclosed set out hereunder what I understand are Heads of Agreement.

If the items set out are acceptable to your company and the board agrees to be bound by them, please endorse the foot of this letter confirming the company’s acceptance of the terms and return documents to this office.

1.         The directors whose names appear at the foot of this clause will guarantee the repayment of all principal and interest of the loan.  The details of which are set out on the attached paper.

Directors:           Stephen Charles Rieson

                           Scott Murray Bell

2.         The directors will guarantee any moneys thus far paid to [the Borrower] to date and any other further advances to the company as generally set out in the schedule attached.

3.         Default events which render within 7 days of demand payment of principal and interest calculated to end of term in relation to the loan include:

A.        The non-repayment of any scheduled item of interest or principal.

B.         …

C.        …

D.        …

E.        The failure to direct all pack and unpack in Sydney, Melbourne and Brisbane and Sydney air freight to Port Botany/MPG facilities including transport or as the lender shall advise at agreed cost in line with market conditions.

4.         …

5.         …

6.         [The Borrower] will direct all work of pack and unpack LCL nature in Sydney, Melbourne and Brisbane, together with Sydney air freight to the corporation that the lender shall direct.  Such work shall include transport.

7.         …

8.         …

9.         Should the shareholders wish to repay the whole loan, to sell their shares in the subject company or should the company wish to sell or merge or otherwise deal with the fabric of the business, the vendor holds no objection provided all principal and interest… is paid up to date of settlement.

…’

The letter was counter signed on behalf of the Borrower. 

23                  The letter to AFS was relevantly in the following terms:

‘Please find enclosed set out hereunder what I understand are Heads of an Agreement reached.

If the items set out are acceptable to your company and the board agrees to be bound by them, please endorse the foot of this letter confirming the company’s acceptance of the terms and return documents to this office.

1.         Australian Freight Services (AFS) will guarantee the loan obligations of AFS Freight Management (U.S.A.) Inc.  The details of which are broadly set out on the AFS paper attached.

2.         AFS will enter into a deed whereby they will cause all their pack and unpack LCL transport in Sydney, Melbourne and Brisbane and Sydney air freight to be directed to Port Botany/MPG and Pitkin facilities or as the nominee of the lender shall direct.

3.         The deed of agreement herein before referred shall incorporate such terms as the lender shall require to secure their position in relation to the monies advanced to the United States and the performance of AFS in relation to the use of Sydney, Melbourne and Brisbane services including transport and pickup.’

The schedule attached to that letter was a copy of the schedules of 24 June 1999 described above, with the addition of a reference to interest ‘at 20% p/a calculated on monthly rests’.  The letter was counter signed on behalf of AFS.

24                  At some time in approximately July 2000 the shares in the Borrower and AFS were sold to NACA.  Settlement of the sale was to take place on 30 July 2000.  On 20 July 2000, SST wrote to the Borrower attaching an updated interest schedule, effective as at 30 July 2000.  SST requested payment of the amount due of $A1,137,519.  However, that sum was not paid by the Borrower. 

25                  On 9 August 2000, SST wrote to Messrs Rieson and Bell drawing attention to the provisions of clause 9 of the letter of 10 September 1999 to the Borrower.  SST asserted that that provision ‘bound the shareholders to pay all Principal and Interest to the lender as at the date of any sale agreement settlement’.  On 31 August 2000, AFS wrote to SST confirming that a telegraphic transfer to SST of the sum of $419,523.48 had been made on 29 August 2000.  Mansfield Switzer acknowledged receipt of that sum by letter of 1 September 2000 and demanded payment of the balance within seven days. 

26                  On 13 September 2000, Mr Bell wrote to Mansfield Switzer referring ‘to our discussion regarding the payment of the balance of the loan being $571,476.52 plus interest’ and offering to meet ‘to discuss this matter’.  On 14 and 18 November 2000, Mansfield Switzer wrote to Messrs Bell and Rieson respectively referring to default by the Borrower and saying that, unless the amount outstanding was paid in full within seven days, recovery action would be commenced.  No further amount has been paid, hence this proceeding.

THE ISSUES

27                  The principal defence raised by Messrs Rieson and Bell flows from  the application of s47(1) of the Act.  In short, they say that, because the arrangements for the advances and their repayment as between the Borrower and SST were part of an overall agreement that contravened s 47(1) of the Act, the overall agreement was unlawful and, accordingly, the obligations of the Borrower to repay the balance of principal and interest are void and unenforceable.  Since the principal obligations guaranteed under the Guarantee are void and unenforceable, there is no obligation on the part of Messrs Rieson and Bell as guarantors.

28                  In their defence Messrs Rieson and Bell also raised a further issue.  The substance of that issue was that, in breach of the overall agreement, SST failed to obtain a fixed and floating charge over the assets of AFS and of the Borrower and a guarantee by AFS.  They asserted that such a failure discharged their obligations under the Guarantee.  In its amended reply, SST asserted that, by force and effect of certain provisions of the Guarantee, any failure by SST to obtain such charges or guarantee had no effect on the obligations of Messrs Bell and Rieson.  Messrs Bell and Rieson conceded, through their counsel, that those provisions of Guarantee were a complete answer to that aspect of their defence.  However, those provisions of the Guarantee were not pleaded until immediately before the commencement of the hearing.  That fact may have a bearing on costs.

TRADE PRACTICES DEFENCE

29                  In their defence, Messrs Rieson and Bell pleaded their case under the Act as follows:

1.   The advances by SST to the Borrower were made pursuant to an overall agreement between SST, Messrs Rieson and Bell, AFS and the Borrower, which included the following terms:

(a)        Positive obligations to be performed by AFS and the Borrower and Messrs Rieson and Hill, as conditions of the making of the loan, were:

(i)         AFS would direct all its pack and unpack LCL business in Sydney, Melbourne and Brisbane, together with Sydney airfreight, to the corporations that SST should direct, such work to include transport.

(ii)        AFS will enter into a deed whereby it will cause all its pack and unpack LCL transport in Sydney, Melbourne and Brisbane and Sydney airfreight to be directed to Port Botany/MPG and Pitkin facilities or as the nominee of SST shall direct.

(iii)       All pack and unpack business in Sydney, Melbourne and Brisbane were to be directed to Port Botany/MPG facilities, in line with market conditions, for the life of the loan.

(b)        The loan agreement would incorporate such terms as SST should require to secure their position in relation to the moneys advanced to AFS and the performance of AFS in relation to the use of Sydney, Melbourne and Brisbane services including transport and pickup.

(c)        It would be an event of default should Messrs Rieson and Bell or AFS fail to direct all pack and unpack business in Sydney, Melbourne and Brisbane and Sydney airfreight to Port Botany/MPG facilities including transport, or as SST should advise.

2.   The Guarantee was provided as required by the terms of the overall agreement.

3.   By the overall agreement the service of money lending was provided by SST to the Borrower only on condition that the Guarantee contained terms of default as required by the overall agreement.

4.   An event of default stipulated in the Guarantee was the failure of the Borrower to carry out the positive obligations of the overall agreement, including those positive obligations set out above.

5.   The requirements referred to above concerning pack and unpack business were requirements whereby AFS and the Borrower, being related companies, were required to acquire services from persons or corporations other than SST who provided those services at the Port Botany/MPG and Pitkin facilities in Sydney, Melbourne and Brisbane.

6.   The Port Botany/MPG and Pitkin facilities in Sydney, Melbourne and Brisbane were owned or to be owned by MPG Logistics Ltd trading under various firm names.

Each of those assertions was admitted by SST although they do not accord precisely to the terms of the documentation.  Further, SST conceded in the course of the hearing that, by reason of those matters, there was a contravention of s 47(1) of the Act.

30                  SST’s response to the assertion that the obligations of the Borrower to repay the advances is void and unenforceable because of illegality was two-fold.  First, formal reliance was placed on s 4L of the Act.  Secondly, SST claimed that the unlawful aspects of the overall agreement can be severed from the lawful aspects, with the consequence that the obligations of the Borrower to repay the advances with interest, in accordance with the terms of the letter of 10 September 1999, continue in full force and effect.

Section 4L of the Act

31                  Section 4L of the Act provides as follows:

‘If the making of a contract… contravenes this Act by reason of the inclusion of a particular provision in the contract, then, subject to any order made under section 87 or 87A, nothing in this Act affects the validity or enforceability of the contract otherwise than in relation to that provision in so far as that provision is severable.’

32                  Section 87(1) relevantly provides that, where the Court finds that a person who is a party to a proceeding instituted under Part VI of the Act has suffered or is likely to suffer loss or damage by conduct of another person that was engaged in contravention of a provision of Part IV (which includes s 47), the Court may make such order or orders as it thinks appropriate against the person who engaged in the conduct if the Court considers that the order will prevent or reduce the loss or damage.  SST submits formally that, whatever might have been the consequence of contravention of s 47 under the general law as regards illegality, the effect of s 4L is that the whole of the overall agreement, including the obligation to repay the advances with interest, is valid and enforceable. 

33                  Section 4L appears to me to be clear and unequivocal in its effect.  That is to say, even if the making of a contract involves a contravention of the Act, the contract would be valid and enforceable except to the extent that the provision of the contract that renders the contract a contravention can be severed, in which event that provision will not be valid or enforceable.  On the other hand, relief can be granted to a party to such a contract under s 87 or s 87A by reason of the contravention.

34                  However, SST concedes that the decision of the Full Court in News Limited & Ors v Australian Rugby Football League Limited & Ors (1996) 64 FCR 410 precludes me from reaching that conclusion.  Having regard to the conclusion that I have reached on the question of severability, it is unnecessary for me to decide that question of what relief might be available pursuant to s 87(1) of the Act.

Severability

35                  The obligations of the Borrower guaranteed by Messrs Rieson and Hill are those arising under the arrangements evidenced by the letters from Mansfield Switzer of 10 September 1999.  As I have said, there is some doubt as to whether both letters of that date were intended to be annexed to, and were, in fact, annexed to the Guarantee.  For present purposes I do not consider that anything turns on that matter one way or the other.  It is appropriate, in my view, to have regard to both letters for the purposes of determining whether or not the offending parts of the arrangement, whatever it was, are capable of severance. 

36                  Two quite distinct arrangements are contemplated by the letters.  The first is the arrangement relating to the advances by SST to the Borrower and their repayment of those advances with interest.  The second is the proposed arrangements between AFS and the Borrower, on the one hand, and the operators of the Port Botany/MPG facilities or other persons nominated by SST, on the other.

37                  It is accepted on behalf of Messrs Rieson and Hill that each of those arrangements, taken separately, involves no contravention of the Act or any other illegality.  Rather, it is the tying of the two together that constitutes a contravention of s 47(1).  That must be so, since s 47(6) contemplates providing, or offering to provide, services on condition that the recipient of the services acquires services of a particular kind from another person.  That is to say, it is the conditioning of the provision of money lending services upon the acquisition of pack and unpack services from another person that is unlawful.  Once that tie or condition is removed, any unlawfulness would be removed.

38                  There is no evidence that the terms of the advances were more favourable to the Borrower or to SST than they would have been had the condition of taking pack and unpack services from another person not been imposed.  Further, the pack and unpack services were to be provided on commercial terms.

39                  When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are, in substance, so connected with the others as to form an indivisible whole that cannot be taken to pieces without altering its nature.  If the elimination of the invalid promises changes the extent only, but not the kind of the contract, the valid promises are severable.  If the substantial promises were all illegal or void, merely ancillary promises would be inseverable.  Where a consideration on one side is given as a quid pro quo for promises on the other side, some of which are lawful and some of which are unlawful, and it is not possible to apportion the first consideration, then severance will not be available :see McFarlane v Daniell (1938) 38 SR 337 at 345 and Humphries v The Proprietors Surfers Palms North Group Titles Plan 1955 (1994) 179 CLR 597 at 604 - 606, 609 and 618 - 619.

40                  However, those rules will not decide all cases.  It is necessary to have regard to each case as it arises and the particular circumstances of each case in order to determine whether severability is a possibility in relation to part of the contractual obligations.  Questions of severability are often difficult and the test for deciding questions of severability that have been formulated as useful in particular cases are not always satisfactory for cases of other kinds (see Carney v Herbert [1985] AC 301 at 309). 

41                  One approach to severability is the approach sometimes described as the blue pencil test: is it possible to rule out parts of the contract without doing serious damage to the obligations of the parties?  I apprehend that that is what Jordan CJ had in mind, in McFarlane v Daniell,in referring to the elimination of an invalid promise that changes the extent only, but not the kind, of the contract. 

42                  As a general rule, where parties enter into a lawful contract and there is an ancillary provision which is illegal but exists for the exclusive benefit of one party, the Court may, and probably will if the justice of the case so requires and there is no public policy objection, permit that party, if it so wishes, to enforce the contract without the illegal provision (see Carney v Herbert (supra) at 317).

43                  The illegality involved in the present case was that the making of advances, and the continuation of those advances without calling them up, was conditional upon pack and unpack work being directed to the nominees of SST.  One question that might arise, but has not been the subject of argument or discussion, is the extent to which it is necessary to identify the precise person to whom work was to be directed.  The parties have proceeded on the basis that it is sufficient that unidentified members of the Mayne Nickless group were the subject of the condition for the purposes of s 47(6). 

44                  The offending provisions of the arrangement presently under consideration are those contained in Clauses 3(e) and 6 of the letter of 10 September 1999 to the Borrower, together with Clauses 2 and 3 of the letter addressed to AFS.  It may be that, if Mr Rieson had not proposed to Mr Peter Sweeney in their initial discussion the incentive that ‘you can have certainty in relation to the work’, there would never have been any advances.  Against that, however, must be considered the somewhat usurious nature of the money lending arrangement.  The advances were to be made, in effect, for a maximum of four years and were to carry interest at the rate of 20 per cent, compounding monthly.

45                  One could conclude that such terms would have been taken up by any lender, had they been offered. I would not infer that the advances would not have been made if the tying arrangements had not been offered by Mr Rieson as an inducement, bearing in mind that there was to be security given by both the Borrower and AFS as well as the Guarantee.  On the other hand, I accept that the tying arrangements were regarded as being of significance so far as SST was concerned.  It is not insignificant that, in the notes that Mr Sweeney made at the meeting in early June, the arrangements concerning pack and unpack work appeared first.  While another handwritten note made no later than 3 September 1999, when a copy of it was sent by facsimile transmission, had that provision at the end, the Special Terms, which were actually signed on behalf of the parties, commenced with the reference to the pack and unpack arrangements. 

46                  Thus, it could not be said that the tying arrangements were insignificant or that they were not important to SST.  Precisely what benefit accrued to SST, however, is by no means clear.  The business that was to benefit from the tying arrangement was carried on by the Mayne Nickless group.  On the other hand, it appears that there was some consulting arrangement between SST or Messrs Sweeney and Truman, on the one hand, and the Mayne Nickless group, on the other, such that some benefit may have flowed to SST or its principals by reason of increased business directed to the Mayne Nickless group. 

47                  There is no suggestion that the tying arrangements constituted any benefit to the Borrower, or to AFS.  Doubtless, because of the relationship between AFS and the Borrower, it was in the interests of AFS to give security in respect of the indebtedness of the Borrower but there was no basis, as I perceive the evidence, for suggesting that the tying arrangement, except to the extent that it ensured that the advances would be made, benefited the Borrower, AFS or Messrs Rieson and Bell as guarantors.

48                  There was no evidence of the extent to which the tying arrangement was given effect to, following the making of the advances.  It was not the failure to direct work pursuant to the tying arrangement that gave rise to the early demand for payment.  Rather, it was the sale by the Borrower and AFS of their undertaking or the sale of the shares in those companies that gave rise to early repayment, as contemplated by Clause 9 of the letter from Mansfield Switzer to the Borrower.  It may be that an inference should be drawn that there was, in fact, compliance with the tying arrangement, although there is no suggestion that that, of itself, caused any damage or loss to any of the parties.  As I have said, the terms of the arrangement were that the pack and unpack services were to be provided on commercial terms and there was no suggestion that the terms were more favourable to the Mayne Nickless group than the terms on which it provided such services to other persons. 

49                  I consider that the tying of the arrangements for the advances to the direction of packing and unpacking business is not such that the cutting of that tie would in any way change the character or nature of the arrangements in relation to the advances.  The elimination of the tie would not have been in any way prejudicial to Messrs Rieson and Hill and, indeed, may have been beneficial.  The question of whether or not the overall arrangement is valid and enforceable as against the Borrower in its entirety, subject to the making of orders under ss 87 or 87A if an application were made by the Borrower, is not in issue.  However, I consider that, to the extent that there was an unlawful provision in the overall agreement, SST is entitled to treat that provision as severed from the arrangement, so as to permit the enforcement, as against the Borrower, of its obligations in respect of the advances.  It follows, therefore, that the obligations in respect of the advances that were guaranteed by Messrs Rieson and Hill under the Guarantee are valid and enforceable obligations. 

50                  I should mention a further argument advanced on behalf of Messrs Rieson and Hill.  It was contended that the Guarantee does, by its terms, do something forbidden by s 47(1) of the Act, namely to ensure that the Borrower acquires services from a third party and that, therefore, the Guarantee is impliedly forbidden by the Act.  It seems to me that the argument does not lead anywhere.  As I have said, it is common ground that one of the provisions of the overall agreement was unlawful as being a contravention of s 47(1).  To the extent that the Guarantee relates to that unlawful obligation it may well be that the Guarantee is unenforceable.

51                  That conclusion however, follows from the fact that the principal obligation is unenforceable rather than asserting that any illegality so far as the Guarantee itself is concerned.  I do not consider that the Guarantee of the obligation to repay the advances is unenforceable by reason of illegality.  It may be, of course, that in so far as there was a contravention, the giving of the Guarantee might have had the consequence that Messrs Rieson and Hill were involved in the contravention.  That, however, is not an issue before me.  I do not consider that provisions such as s 75B of the Act, relating to the circumstances in which an individual will be involved in a contravention, renders the Guarantee itself illegal.

52                  Messrs Rieson and Hill also filed a cross-claim, in which they sought relief under s 87(1) in the event that I held that the whole of the overall agreement was valid and enforceable by the operation of s 4L.  In light of the concession made by SST, it is unnecessary to deal with that question.  However, if the matter did arise, the observation should be made that there has been no attempt made to establish or prove any loss or damage on the part of Messrs Rieson and Hill in relation to the enforcement of the obligations of the Borrower in relation to the advances, by reason of the tying arrangement.  There has not been any evidence of any loss or damage arising by reason of giving effect to the tying arrangement. 

53                  It may be that, if the Borrower were a party to the proceeding, relief might have been available under s 87, to the effect that those provisions of the overall agreement that constituted the tying arrangement would not be enforced.  That, in substance, is the effect of the conclusion I have reached as to severance.  That is to say, if the effect of s 4L was that the overall agreement was valid and enforceable subject to an order under s 87, the Court may well have made an order that the arrangements in relation to the directing of pack and unpack services would not be enforceable.  Whether that relief would be available to the guarantors might be debateable, but it is not, as I have said, a matter that arises for my decision. 

54                  In all the circumstances, it seems to me that the result of my determination is that none of the defences raised on behalf of Messrs Rieson and Hill succeeds.  It follows that there should be judgment for SST against Messrs Rieson and Hill in the sum that was due and owing as at the date of commencement of the proceeding, together with interest under s 51A of the Federal Court Act.

55                  I raised the question of whether the respondents, as guarantors, would be liable for interest at the contractual rate up to the date of judgment.  The schedule attached to Mansfield Switzer’s letter of 10 September 1999 refers to interest at 20 per cent per annum, calculated on monthly rests, September 2003 being the date fixed for repayment.  Clause 9 of the letter referred to the possibility of sale and said that SST would accept all principal and interest up to the date of settlement of the sale.  On balance, I consider that a fair reading of the contractual arrangements between SST and the Borrower is that the Borrower was liable to pay the interest, at the rate of 20 per cent per annum calculated on monthly rests, up to the date of payment.  Further, Clause 1 of the Guarantee provided that the guarantors were to pay, on demand, the principal amounts with interest at the rate reserved in the payment schedule, up to the time of payment under the Guarantee.

56                  In the circumstances I consider that there should be judgment for SST of an amount calculated to include interest up to the date of judgment at the rate of 20 per cent per annum calculated on monthly rests.  I will stand the matter over to next Friday for the purposes of making orders to give effect to my reasons, including orders as to costs.  The parties are in agreement as to the orders for costs save for one matter and that relates to the amendment of the reply to the defence.  I consider that it is appropriate that SST bear the costs, if any, thrown away by that amendment and by the unsuccessful application for further amendment that was heard on the first day of the hearing.

Associate:

Dated:              16 July 2004