In Associated Retailers Limited v Toys Unlimited Pty Ltd & Ors Kyrou J considered the operation of section 51A of the Trade Practices Act, promissory estoppel and undertook a contractual analysis of settlement agreementss.

Facts

Associated Retailers Limited (“ARL”) sued Paul Moore (“Moore”) under a mortgage, in the sum of $150,000, which was given as security for Toys Unlimited (“Toys”). Toys had purchased a business known as Cairns Toyworld (see [14] – [21]).  The terms and conditions of trade required agreement to pay ARL on a monthly basis amounts due for the supply of goods, service charges and interest on overdue amounts ([2]).  Officers of Toys and other parties provided guarantees for the liabilities of Toys.  ARL placed Toys into liquidation claiming indebtedness in the sum of $1,306,034.93.  After the business was sold the deficit was $460,073.11  (see [54] – [56]).  ARL commenced proceedings against the guarantors.  It also sued Moore in the sum of $123,508.44 and interest of $204,607.74.

In a mediation ARL entered into a Settlement Agreement with the guarantors whereby the latter jointly and severally agreed to pay to ARL $25,000 (the “Settlement Sum”) in full and final settlement of its claim [6]. Moore alleged that prior to the execution of the mortgagor ARL represented to him that his liability under the mortgage would be limited to $150,000 and would subsist for 12 months only.  ARL claimed the mortgage was for a period of least 12 months.  Moore also alleged that the Settlement Agreement had the effect of discharging any liability which he may otherwise have had to ARL (see [22] – [52], [58] – [63], [76] – [162]) .  As a consequence of this pleaded defence ALR joined the barrister engaged by ARL at the time of settlement, Mr Evans, as a defendant..

Decision

Kyrou J undertook a very detailed analysis of the evidence a large part of which was oral. In the main he strongly preferred the evidence of the defendant’s witnesses over those of the plaintiff.

Limitation on liability

As to the period of the mortgage Kyrou J found against ARL and preferred the evidence of Moore and his supporting witnesses.  His Honour noted that he had regard to section 140(2) of the Evidence Act.  He accepted Mr Moore’s evidence that had he been made aware of ARL’s intention to enforce the mortgage for a period of more than 12 months he would not have executed the mortgage.

Misleading representation

Moore pleaded section 51A of the Trade Practices Act (the TPA), providing that where a corporation makes a representation with respect to any future matter without having regard to the truth of that representation that representation shall be taken to be misleading.  Section 51A(2) provides that such a corporation shall be deemed not to have had reasonable grounds for doing so unless it adduces evidence to the contrary.  Kyrou J found the representation was with respect to future matters, being ARL representing that the mortgage would cease to secure  liabilities of Toys after 12 months (see [164]).  At [165] his Honour found that at no time did ARL, per its primary witness, Mr Williams, intend that the represeentation be incorporated into the mortgage and accordingly did not have any reasonable grounds for representing that the liability would be secured for 12 months. At [166] his Honour concluded that ARL engaged in misleading in deceptive conduct under sections 52 and 53 of the TPA.

At [167] Kyrou J set out the elements necesasry for a representation to give rise to promissory estoppel . They are that, in this case, that Moore:

(a) he expected that a particular legal relationship would exist between him and ARL, and that ARL would not be free to withdraw from the expected legal relationship;

(b) ARL induced him to adopt the expectation;

(c) he acted in reliance on the expectation;

(d) ARL knew or intended that he would rely on the expectation;

(e) his action would occasion detriment if the expectation were not fulfilled; and

(f) ARL failed to act to avoid that detriment by fulfilling the expectation or otherwise.

His Honour also found that Moore had to prove that the terms of the representation are clear and unambiguous. At [169] he found all the requirements for promissary estoppel was satisfied and, at [170], the terms of the representation were clear and unambiguous. He further found that ARL acted contrary to the representation by refusing to discharge the mortgage following the payment of all moneys owed by Toys as at the completion of 12 months. Accordingly, at [177], ARL is estopped from enforcing the mortgage.

Unconscionable conduct

Because of the findings relating to the misrepresentation and estoppel Kyrou J found that ARL’s failure to limit the term of the mortgage constituted unconscionable conduct [180].

Discharge of liability under the Mortgage arising from the Settlement Agreement.

Kyrou J set out in detail terms of the settlement agreement ([182]) and the applicable principles arising out of the settlement, being:

• the release of one of a number of creditors who are jointly, or jointly and severally, liable for the same debt releases all of them [183]
• the creditor, without having received full payment of performance from the debtor, agrees to release the debtor, any guarantor will also be released ([183]), save where the creditor enters into a covenant not to sue the debtor because such a covenant does not affect the underlying liabilities of the co debtors or guarantors( [184])
• the question whether a contractual term operates to release a covenant not to sue must be determined by construing the term in the context of the contract as a whole ([185])

In construing the contract the relevant factors include, at [186]:

(a) where there is a joint obligation, a term that is expressed to be a release will usually be construed to have that meaning;

(b) even if there is a joint obligation, if any intention to reserve rights against the co-debtors or guarantors is found, expressly or impliedly, in the contract, then it is most likely that the parties intended the term to operate as a covenant not to sue; and

(c) the court may have regard to the surrounding circumstances in determining whether the term was intended to operate as a release or as a covenant not to sue the party who bears a joint or joint and several liability

Kyrou J found the settlement agreement contained two types of provisions that protect the parties from liability ([195]). The first type provided immediate protection while second provided protection prospectively upon the making of payments as set out in clause 2 of the agreement.  Kyrou J found that the Settlement Agreement, read as a whole, provided for a mutual compromise and release of the parties (see [198] – [199]). At [200] because he found that the Settlement Agreement contained both a covenant not to sue and a release clause in favour of Toys and other defendants this precluded a finding that the Settlement Agreement contained an implied reservation of rights against Moore.  As a result there was no amount payable by Moore to ARL under the mortgage, irrespective of the above findings of misrepresentation and unconscionable conduct.

Mr Williams, on behalf of ARL, instructed Evans to draft terms of settlement in such a way that did not result in loss of ARL’s rights against Moore under the mortgage.  Kyrou J found that Evans was negligent as he had a duty to ARL to draft the Settlement Agreement in a matter that preserved ARL’s rights of recovery against Moore. That duty could have been fulfilled by including in the Settlement Agreement an unequivocal covenant by ARL not to sue the guarantors together with a clause that expressly preserved ARL’s rights against Moore and omitting any words which would could have been construed as a release in favour of those parties ([212]).  However because ARL was estopped from enforcing the mortgage there was no loss consequent upon that negligence.

Moore raised a number of what may be best described as exotic defences in addition to those which were successful. In those respects Kyrou J did not accept the defendants contentions:

• that the mortgagor contained a representation limiting Moore’s liability to a period of 12 months [221]
• that the settlement agreement varied the terms of trade.  The Settlement Agreement was a stand-alone document [222]
• ARL did not exercise the appropriate 30 days notice under section 84 of the Property Law Act [225]
• the mortgage is void and ineffective as creating or imposing an invalid clog upon his right to redeem the mortgage [226]

Issue

For practitioners this decision highlights the care needed in drafting a settlement agreement where there are multiple debtors and defendants.  That is particularly so where the intention of the creditor is to settle against only some of the parties.  Kyrou J undertook a very extensive analysis of the operation of the Settlement Agreement, an analysis which applies generally across the field. Kyrou J highlighted the deficiency in this case but also set out in detail the means of avoiding a similar problem in the future.