Pay now, litigate later: a key decision of the WA Court of Appeal

Background

The WA Supreme Court (Court of Appeal)[1] recently delivered a significant decision confirming that parties can rely on properly drafted “suspension” and “no set-off” clauses to defer any claims by counter parties (for example a borrower or guarantor) that they have legal or equitable set-off claims (eg sale of a secured property at an undervalue) against the recovery of a contractual debt, until after that debt is repaid; the “pay now, litigate later” clause.

Background facts and procedural history

The appellant was a director of a land developer, Murray Riverside Pty Ltd (the Company) and guaranteed the liability of the Company to the respondent pursuant to a deed of guarantee and indemnity (the Guarantee).  The key terms of the Guarantee (at least in the context of the appeal) were clause 9(a) and 13.1 and provided (in summary) that:

• while guaranteed money (a defined term) remained unpaid, the appellant must not (without the respondent’s consent) reduce his liability under the Guarantee by claiming that he or the Company had a right of set-off or counterclaim against the respondent (clause 9(a)); and
• the appellant was required to pay the guaranteed money 'in full without set-off, counterclaim or deduction' (clause 13.1).

The respondent demanded payment of amounts owing by the Company, and when that demand was not met, appointed receivers and managers under various security provided by the Company.

The receivers realised the Company’s assets but the proceeds of sale were insufficient to discharge its indebtedness, at which time the respondent made a demand under the Guarantee for payment of the shortfall.

That demand was not met and the respondent commenced proceedings to enforce the Guarantee.

The respondent applied for summary judgment in response to a “bare” defence filed by the appellant.

Before that application was heard, the appellant filed an amended defence and counterclaim raising arguments including breach of duties by the receivers and managers and the respondent (effectively that there was a sale at an undervalue).

At first instance[2] Master Sanderson observed that the allegation that the receivers had breached their duties faced 'considerable difficulties' in light of findings that had been made by Beech J in earlier proceedings[3]. However, the Master assumed for the purpose of the hearing that it could be accepted the appellant had a case to put against the respondent.

Despite this, on the basis of clause 9 of the Guarantee the Master concluded[4] that the appellant's set-off and counterclaim could not defeat the respondent's right to obtain a judgment having regard to clause 9 of the Guarantee and that the expression 'without set-off' in a payment excluded all forms of set-off.  The Master further found that regardless of the merits of that set-off claim, the Guarantee was effective 'to postpone the rights of [the appellant] to agitate [the] alleged [counterclaim and] set-off' and that there was no arguable defence to the respondent’s claim for judgment.

Summary judgment was entered against the appellant.[5]

The appeal

The appellant appealed the Master’s decision to grant summary judgment and ultimately[6] put a case which required assessment of the following (among other) issues:

• Did the appellant's plea as to the respondent's alleged conduct in relation to the sale by the receivers and managers of the Company’s assets constitute a reasonably arguable defence under the Australian Consumer Law.
• If so, was this defence able to be maintained despite clause 9 of the Guarantee.

In ultimately deciding against the appellant, the Court provided a detailed overview of the law of set-off, suspension clauses, construction of contracts (among other things) and confirmed the following principles:

• The ordinary and natural meaning of the expression 'a right of set-off', in the context of a contractual provision that suspends the making of a claim of 'a right of set-off' by a party to the contract, includes all forms of set-off.
• Subject to any statutory provision to the contrary, a right of set-off, including a right of equitable set-off, may be excluded by express or implied agreement.
• A ‘suspension’ clause does not oust the jurisdiction of the courts. It suspends, but does not otherwise impair, the rights of the party bound by the provision.
• That party is entitled to enforce the rights in question provided it conforms with its primary obligation to make payment to the other party.

The Court identified that the apparent purpose or object of clause 9(a) of the Guarantee was to ensure immediate payment by the appellant to the respondent, if the Company did not pay, of the whole of the amount due and payable by the Company to the respondent, without any deduction on account of any set-off or counterclaim.

The subject clauses excluded any set-off claim (legal or equitable) without the payment of the guaranteed money first, which had not occurred.

In the circumstances, it was not reasonably arguable by way of defence that the respondent's reliance on the Guarantee should be restrained or the subject of other relief under the Australian Consumer Law.

Lavan Legal comment

The Court’s decision provides certainty to parties that with clearly drafted ‘suspension’ and ‘no set-off’ clauses, the indebtedness under a contract (for example a loan agreement or guarantee) must be discharged before any defence of set-off or counterclaim (eg claim for loss in respect of a sale at an undervalue) can be agitated in court proceedings.

This does not mean that a party would be unable to make such a claim at all, rather the party is unable to proceed with the claim until payment in full has been made. 

That is to say (for example), that borrowers and guarantors who allege a sale at an undervalue, must pay the full amount of their debt, before they can proceed with any litigation.