Peter A Clarke

The Federal Court decision in  Lodge Partners Pty Ltd v Pegum is a salutory lesson that while the threshold for determining whether there is a genuine dispute is low where the facts are essentially agreed and the main dispute  is the construction of a contract a court can and does make that call. In this proceeding that construction was against the applicant and the statutory demand was not set aside. On his way to that conclusion Lingren J provided a very useful analysis.

Issues

The focus here was on what constitutes a genuine dispute.  Lingren dealt with that in a two stage process. At [17] he quickly reviewed the authorities and distilled the principle that no “genuine dispute” exists where  the contentions by the applicant is devoid of substance such that “no further investigation is warranted.”  He said:

The concept of a “genuine dispute” has been discussed in the cases. The dispute must be bona fide and must truly exist in fact, and the grounds for alleging the existence of the dispute must be real and not spurious, hypothetical, illusory or misconceived: see, for example, Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464. In Solarite Air Conditioning Pty Ltd v York International Australia Pty Ltd [2002] NSWSC 411, Barrett J said (at [23]), after reviewing the authorities, that the task faced by a company challenging a statutory demand on the “genuine dispute” ground is not a difficult or demanding one. His Honour added:

The company will fail in that task only if it is found upon the hearing of its s 459G application that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger.

In cases where the dispute revolves around the construction of a contract only and there is no dispute on the facts Lingren says at [18]:

The notion of not warranting further investigation has assumed importance in a particular class of case. Where the dispute relates to a simple question of construction that can be decided following a short hearing and there is no factual issue to be resolved, the Court will decide the question and, if the construction is against the company, the dispute will not be classified as “genuine”: see Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384-5 (Delnorth); Lifestyle Retirement Projects No 2 Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 705 at [16]– [17]; BBX Holdings Ltd v American Home Assurance Co [2007] NSWSC 549 at [15]– [17]. In the same vein, in the earlier case of Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, McLelland CJ in Eq said that the expression “genuine dispute” connotes “a plausible contention requiring investigation” (at 787 – my emphasis).

Provided the issue in dispute is a short point on a short point of  law or construction of a document or agreed facts the court can address those issues and make a ruling.  The key issue is whether or not further investigation is required which involves some contention (see paragraph [19].

Application

The issue then became one of construction of an agreement. Unusually the court needed to consider pre contract material – using the private dictionary cases as authority for ruling on the word “each”.  He summarised that principle at paragraph 31:

Generally speaking, it is not permissible to take pre-contract negotiations into account in the construction of contracts: see, for example, Prenn v Simmonds [1971] 1 WLR 1381. However, there are exceptions to the general rule, one of which is that evidence is admissible to show what both parties intended a particular ambiguous term used in the contract to mean: see, for example, Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 348-350, 352-353 per Mason J; ProForce Recruit Ltd v Rugby Group Ltd [2008] 1 All ER 569 (Comm) at [83], [86], [88]; Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523; and see Corbin on Contracts (rev’d ed, 1998) vol 5 § 24.8. Sometimes cases of this kind are called “private dictionary” cases: the parties have agreed that a word or expression in the express terms of their contract is to have (or not to have) a certain meaning.

Lingren found against the applicant’s construction, the applicant was obliged to pay the creditor 10% of each tranche of payments from a client introduced by the creditor.  Given that was the basis for the statutory demand the application was dismissed.

Lesson

Where the facts are discrete, there was no credit issues at stake and the legal question is a short one, such as a fairly straightforward interpretation of a clause of a contract an applicant should be on guard.  The low bar for assessing a genuine dispute is lower where there is controversy and moving parts requiring findings of fact.  Given the consequences of an application being dismissed is serious – winding up – if there are issues of credit and facts in dispute it is better that they are put before the court than hope a pure legal argument will sway the bench.