The plaintiff sought summary judgment under Part 13 rule 2 of the Supreme Court Rules in this application and the defence sought relief saying that the proceedings were frivolous, or vexatious or that no reasonable cause of action or that the proceeding s were an abuse of process of the Court. The plaintiff was seeking possession a property at Bellevue Hill and payment of debts due to it from a mortgage between the plaintiff and first defendant and the second and third defendants’ guarantees between the plaintiff and the second and third defendants who were directors of the first defendant. The defendants asserted that the plaintiff, inter alia breached its contract with them in that it failed to make finance available, which was a direct cause of their inability to complete the project and repay the mortgage on time, and by application of the doctrine of equitable set off the defendants had the right to set off the claim for damages against the amount secured by the mortgage and guarantees. The defence said they would be amending their defence at the hearing (if it proceeded) to claim relief for unconscionable conduct and that the mortgage should be declared null and void under s9 of the Contracts Review Act. Therefore the application for summary judgment was taken into account at its highest by assuming these changes had been made.
The law in relation to summary judgment
In Agar v Hyde (2000) 201 CLR 552 the High Court held at 57 that:
“Ordinarily a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formula which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were to go to trial in the ordinary way……It would be wrong to deny a plaintiff resort to the ordinary processes of a court on the basis of a prediction made at the outset of a proceeding if that prediction is to be made simply on the preponderance of probabilities.”
General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 Barwick CJ said:
“Although I can agree with Latham CJ in the same case when he said that the defendant should be saved from the vexation of the continuance of useless and futile proceedings, in my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal. On the other hand I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff’s claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed…..It is sufficient for me to say that these cases uniformly adhere to the view that the plaintiff ought not to be denied access to the customary tribunal which deals with actions of the kind he brings, unless his lack of cause of action – if that be the ground on which the Court is invited, as in this case, to exercise its powers of summary dismissal – is clearly demonstrated. The test to be applied has been variously expressed; ‘so obviously untenable that it cannot possibly succeed’; ‘manifestly groundless’; ‘so manifestly faulty that it does not admit of argument’; ‘discloses a case which the Court is satisfied cannot succeed’; ‘under no possibility can there be a good cause of action’; be manifest that to allow them’ (the pleadings) ‘to stand would involve useless expense.”
The cross claim brought by the defendants against the plaintiff plead that by the Bank withdrawing the undrawn portion of the loan, the action had the effect of preventing the defendants from being able to refurbish the apartments on the property and landscape the property. Further, they plead that the loan contract was not reasonably fit for the purpose and in breach of s 74(2) of the Trade Practice Act and the Bank was engaged in misleading and deceptive conduct (s 52 of the TPA and s 42 of the FTA. The cross defendants sought damages by reason that they had to enter into a further loan contract with another financier at a higher interest rate and incurred further expenses such as stamp duty, valuation expenses and legal costs. Nevertheless, the defendants claimed that they had been unable to raise the entire amount of $688k and had been unable to redevelop the property in the time frame proposed and they had been deprived of the expected profit from redeveloping and selling the property or alternatively leasing out the apartments. The cross claimants alleged that the cross defendant breached a term of the loan contract. The second and third defendants have also claimed in relation to the guarantees and the deed under the CRA and have sought an order declaring the guarantee and the deed void.
According to the Laws of Australia an equitable set-off may arise when: firstly, the defendant has a claim of debt or damages against the plaintiff and secondly, the defendant’s claim is so closely related to the plaintiff’s claim in subject matter that it impeaches the plaintiff’s claim in the sense that it would be positively unjust that there should be a recovery without an allowance or deduction.
As noted in Halsbury’s Law’s of Australia, for the defence to succeed, it is essential that the defendant identify some equitable right to be protected from the plaintiff’s claim. In such cases, the existence of cross demands alone is insufficient, even if they arise out of the same subject matter .
Though born of the same legal foundation, the English and Australian law on the doctrine of equitable set-off has since diverged with the English authorities adopting an ‘expansionist’ approach while the Australian authorities upholding a more ‘restrictionist’ interpretation.
The Court here relied on the New Zealand decision of Popular Homes Ltd v Circuit Developments Ltd  2 NZLR 642 which considered the doctrine of equitable set-off in respect of the divergent views held by the English and Australian authorities. In that case, the matter under consideration involved a contract for the sale of land where the first defendant defaulted in its obligation to provide finance that prevented the plaintiff from completing the project and repaying the mortgage. In finding that the necessary relationship existed between the respective claims of the parties so as to require equitable intervention, Barker J [at 660] summarised the situation:
“Before the first defendant is entitled to enforce this debt, equity will allow a set-off of the damages caused by his breach. The two claims are so closely related as to make it unconscionable for the first defendant to recover without allowing a set-off.”
In Tooth & Co Ltd v Rosier (Wood J – 7 June 1985 – unreported) there was an application for summary judgment. In the course of considering it his Honour dealt with a defence of set-off and said:
‘No general rule can be laid down except by stating that such a set-off will arise when there exists circumstances which make it unjust or inequitable that a plaintiff should be permitted to proceed with his claim…..As presently advised, I do not see any fault in this test. No doubt where an equitable counter-claim was pleaded the fact that the transactions concerned were separate will always be a powerful consideration. However, at this stage of the proceedings, I am not clearly satisfied that the facts alleged would not give rise to an equitable defence.’”
Here the Court held that the defendant had an arguable case and may, by operation of the doctrine of equitable set off, have a right to set off any damages against the amounts secured by the mortgage as in Popular Homes. It is also arguable that the counter claim was so directly connected with the claim that it would be unjust to allow the plaintiff to recover without taking into account the defendants’ counter claim. As Wood J pointed out in Tooth, the ultimate question might not always be confined to the construction of in this case, the loan agreement and guarantee.
The plaintiff submitted that even if it did not have an entitlement to summary judgment in relation to the claim under the mortgage, then it had an entitlement to summary judgment under the deed. The defendants submitted that this deed reflected the parties giving the defendants the opportunity to refinance the loan and that once it had the funds to refinance, the provisions of the deed took effect.
The defendants plead that they were unable to proceed with the development, as they did not receive the full loan of $400,000.00. As a result, they were unable to maintain the repayments under the loan contract. The cross defendant then threatened and intended to have recourse to its rights as against the property and against the guarantors under the mortgage. The cross claimants then had little immediate alternative but to enter into the deed in circumstances that were unjust in respect of their interests.
The Court held that to determine whether the deed was unconscionable, the facts and circumstances including the earlier financial dealings needed to be ascertained. The deed referred to the plaintiff exercising its rights in relation to the mortgage. The cross claimants had an arguable case and the matter was allowed to proceed to trial. The plaintiff was not entitled to summary judgment.