Rieson v SST Consulting Services Pty Ltd (ACN 083 263 914) [2005] FCAFC 6 (15 February 2005)

Last Updated: 15 February 2005

FEDERAL COURT OF AUSTRALIA

Rieson v SST Consulting Services Pty Ltd (ACN 083 263 914) [2005] FCAFC 6

STATUTES – s 4L Trade Practices Act 1974 (Cth) – purposive or contextual construction – section enacted in response to a law reform recommendation – whether that purpose achieved

CONTRACTS – severance – illegality – loan agreement made on condition that borrower would acquire specified services from a third party in breach of s 47(1) of the Trade Practices Act 1974 (Cth) – whether offending provision severable – principles applicable to severance

Acts Interpretation Act 1901 (Cth) s 15AA
Trade Practices Act 1974 (Cth) ss 4L, 47, 87, 87A

SST Consulting Services Pty Ltd v Rieson [2004] FCA 937 reversed
News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 followed
CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 applied
Network Ten Pty Ltd v TCN Channel Nine Pty Ltd [2004] HCA 14; (2004) 205 ALR 1 cited
Isherwood v Butler Pollnow Pty Ltd (1986) 6 NSWLR 363 cited
Mills v Meeking [1990] HCA 6; (1990) 169 CLR 214 cited
Newcastle City Council v GIO General Ltd [1997] HCA 53; (1997) 191 CLR 85 cited
Fox v Commissioner for Superannuation (No 2) [1999] FCA 372; (1999) 88 FCR 416 cited
IW v City of Perth [1997] HCA 30; (1997) 191 CLR 1 cited
Brooks v Burns Philp Trustee Co Ltd [1969] HCA 4; (1969) 121 CLR 432 cited
McFarlane v Daniell (1938) 38 SR (NSW) 337 explained
Thomas Brown & Sons Ltd v Fazal Deen [1962] HCA 59; (1962) 108 CLR 391 cited
Carney v Herbert [1985] AC 301 considered
Humphries v Proprietors "Surfers Palms North" Group Titles Plan 1955 [1994] HCA 21; (1994) 179 CLR 597 referred to
Brew v Whitlock (No 2) [1967] VR 803 considered
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1975] HCA 1; (1975) 133 CLR 331 cited
Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 cited
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 208 ALR 213 cited
Marshall v N M Financial Management Ltd [1997] 1 WLR 1527 referred to
SWB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd [1980] FCA 125; (1980) 48 FLR 445 cited

Pearce & Geddes, Statutory Interpretation in Australia (5^th ed, 2001)
Carter on Contract (Butterworths, 2002-)
Cheshire & Fifoot’s Law of Contract, (8^th Aust ed, 2002)

STEPHEN CHARLES RIESON and SCOTT MURRAY BELL v SST CONSULTING SERVICES PTY LTD (ACN 083 263 914)

NSD 745 of 2004

WILCOX, SACKVILLE and FINN JJ
SYDNEY
15 FEBRUARY 2005

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 745 of 2004

BETWEEN:	STEPHEN CHARLES RIESON FIRST APPELLANT SCOTT MURRAY BELL SECOND APPELLANT
AND:	SST CONSULTING SERVICES PTY LTD (ACN 083 263 914) RESPONDENT
JUDGE:	WILCOX, SACKVILLE and FINN JJ
DATE OF ORDER:	15 FEBRUARY 2005
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The orders made by Emmett J on 21 April 2004 be set aside and, in lieu thereof, it be ordered that the application be dismissed with costs.
3. The respondent, SST Consulting Services Pty Ltd, pay to the appellants, Stephen Charles Rieson and Scott Murray Bell, their costs of the appeal.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 745 of 2004

BETWEEN:	STEPHEN CHARLES RIESON FIRST APPELLANT SCOTT MURRAY BELL SECOND APPELLANT
AND:	SST CONSULTING SERVICES PTY LTD (ACN 083 263 914) RESPONDENT

JUDGE:	WILCOX, SACKVILLE and FINN JJ
DATE:	15 FEBRUARY 2005
PLACE:	SYDNEY

REASONS FOR JUDGMENT

WILCOX and FINN JJ:

1 The amended notice of appeal and the notice of contention in this matter raise two issues. The notice of contention concerns the proper construction of s 4L of the Trade Practices Act 1974 (Cth) ("the TP Act"). The trial judge, Emmett J, applied the construction of that section which was acted upon by the Full Court in News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 582-583 ("News Ltd"). It was not a construction with which Emmett J agreed. The respondent, SST Consulting Services Pty Ltd ("SST Consulting"), now challenges the News Ltd construction.

2 The second issue, raised by the notice of appeal, relates to the correctness of Emmett J’s conclusion that a provision of a loan agreement which contravened s 47(1) of the TP Act could in the circumstances be severed at common law from the agreement, leaving the loan obligation to be enforced according to its terms.

3 We are of the view, first, that the view taken of s 4L in News Ltd was correct and, secondly, that his Honour erred in applying the common law principles as he did in this matter.

4 The proceeding was instituted by SST Consulting to enforce a guarantee given by the appellants, Stephen Rieson and Scott Bell, in respect of a loan made by SST Consulting to a company, AFS Freight and Management (USA) Inc ("AFS USA"), of which the appellants were directors. Judgment was given on the guarantee, Emmett J having found that the loan obligation was valid and enforceable notwithstanding that the agreement contained a provision contravening s 47(1) of the TP Act. That provision was severable, hence Mr Rieson and Mr Bell were liable on the guarantee.

THE STATUTORY SETTING

5 Section 47(1) of the TP Act prohibits a corporation in trade or commerce from engaging in the practice of "exclusive dealing" which itself is defined in succeeding subsections by reference to particularised practices. That of present relevance is contained in s 47(6) which provides (inter alia) that:

"A corporation also engages in the practice of exclusive dealing if the corporation:

(a) 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 or description directly or indirectly from another person."

6 The word "condition" is defined for the purposes of s 47 in subsection (13) in the following terms:

"(a) a reference to a condition shall be read as a reference to any condition, whether direct or indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances."

7 Section 4L of the TP Act provides:

"If the making of a contract after the commencement of this section 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."

8 Insofar as presently relevant, s 87 provides that, where the Court finds that a person who is a party to a proceeding instituted (as here) under Part VI of the Act has suffered or is likely to suffer loss or damage by conduct of another which was engaged in contravention of a provision of Part IV (which includes s 47), the Court may make such orders as it thinks appropriate against that other if the Court considers that the order will prevent or reduce the loss or damage. It is unnecessary for present purposes to set out the terms of s 87A.

THE CONSTRUCTION ISSUE

9 The construction issue concerning s 4L conveniently can be dealt with at the outset. For the purpose of doing that, all that need be said of the factual setting is that SST Consulting’s loan agreement with AFS USA was made on condition that AFS USA would acquire specified services from a third party. It has been conceded that in so doing, SST Consulting contravened s 47(1) of the TP Act.

10 For reasons we later give, it will be necessary to refer to the provenance of s 4L. Before doing so we should note, variously, the Full Court’s view of the section in News Ltd, Emmett J’s preferred construction and the respondent’s submissions on its notice of contention.

11 The Full Court considered that s 4L provided that, if a provision of a contract contravened the Act but was severable, it did not affect the validity or enforceability of the balance of the provisions. If it was not severable, the contract was illegal and void. The Court did not address the possible operation of s 87 and s 87A in either case.

12 The construction of s 4L preferred by Emmett J was expressed in this way (at [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."

13 The respondent’s contention, with one variant, mirrors that of Emmett J: (i) if a contravening provision is severable, the balance of the contract shorn of that provision will be valid and enforceable; (ii) if it is not severable, the entire contract including the contravening provision is valid and enforceable; but (iii) in either case, the enforcement of the contract is subject to any order made under s 87 or s 87A. This construction, it is said, not only gives effect to the ordinary meaning of the section, it reflects an appropriate legislative balance between penalising a contravention of the Act and avoiding the capricious, often unjust, consequences of invalidating contracts at common law. It leaves the contravenor exposed to penalties under s 76 of the Act. While it leaves the contract on foot and enforceable (whether or not shorn of the offending provision), the other party is entitled to seek orders under s 87 to protect itself from loss or damage suffered or likely to be suffered by the contravening conduct.

Consideration

14 This is one of those cases in which the provenance of the provision to be construed is of particular significance. The relevant principle was stated by Brennan CJ, Dawson, Toohey and Gummow JJ in CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 (‘CIC Insurance’) in terms that were reiterated in the majority judgment of the High Court in Network Ten Pty Ltd v TCN Channel Nine Pty Ltd [2004] HCA 14; (2004) 205 ALR 1 at 4. In CIC Insurance their Honours said (at 408):

"It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses ‘context’ in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd [(1986) 6 NSWLR 363 at 388], if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent."

15 The circumstances leading to the enactment of s 4L in 1977 are well known. In 1976 the relevant portfolio Minister constituted the Trade Practices Act Review Committee (‘The Swanson Committee’) with wide terms of reference to review aspects of the operation and effect of the Act and to propose measures by way of its amendment. The original TP Act made no express provision for enforcement of a contract containing a provision that contravened the Act. The Swanson Committee drew attention to this in its Report (AGPS, 1976, Canberra) ("the Swanson Report") at pars 4.31 and 4.32:

"4.31 A number of submissions requested the Committee to recommend amendment of the Act to deal with the problem known as ‘severance’. This problem relates to the enforceability of a contract which contains, as only a part of the contract, an unlawful term or condition, such as a term or condition that is prohibited by section 45 (or perhaps, section 47) of the Act. The issue is whether, assuming that the part of the contract that is in restraint of trade can be isolated from the rest of the contract, the rest of the contract is still legally enforceable. At common law, such severance is permissible provided that it does not alter entirely the scope and intention of the contract. The question is whether the Trade Practices Act permits of the operation of this doctrine of severance.

4.32 The Committee agrees that there is, at least, a problem of uncertainty felt by the community at the present time, namely whether the common law rules of severance will be applied to contracts containing clauses made unlawful by section 45. We feel that it is too harsh a penalty for contracts to be made totally unenforceable in circumstances where the restraint of trade is merely ancillary to, and not the core of, the contract. Accordingly, we recommend that the Act should clearly provide an express power in the courts to apply the common law rules of severance in relation to such offensive clauses."

16 In December 1976 the Minister introduced the Trade Practices Amendment Bill 1977 (Cth). As both the second reading speech (House of Representatives, vol 102, 3531) and the Explanatory Memorandum made plain, the object of that Bill (to quote the Explanatory Memorandum at par 1) was "to implement such of the recommendations of [the Swanson] Committee as can be adopted immediately". Section 5 of the Bill contained (inter alia) a proposed s 4K which, for present purposes, was in identical terms to s 4L. The Explanatory Memorandum at [8] indicated that s 4K was intended to continue in operation the common law principles relating to the severance of restrictive provisions from contracts, subject only to their being displaced by the remedies in the TP Act (hence the reference in s 4K to any order "made under s 87").

17 This Bill lapsed in February 1977 when Parliament was prorogued. The same portfolio Minister introduced a new Trade Practices Amendment Bill 1977 (Cth) which altered its predecessor to the extent of taking account of Government decisions following submissions made on the old Bill. The severance provision, now renumbered 4L, was included unaltered in the new Bill. The Explanatory Memorandum in turn replicated what was said of s 4K in the lapsed bill: see par 9.

18 In light of the above (to which regard legitimately may be had at common law, see CIC Insurance, at 408 and, generally, Pearce & Geddes, Statutory Interpretation in Australia, [3.6] (5^th ed, 2001) there is no doubt as to what was the particular mischief s 4L was intended to cure. It was to dispel uncertainty as to whether the common law rules of severance applied to contracts containing provisions proscribed by the Act by making it clear that they do apply. The issue to be determined is whether on its proper construction it effectuated that purpose.

19 Section 15AA of the Acts Interpretation Act 1901 (Cth) enjoins a court in interpreting a provision of a Commonwealth Act to prefer a construction that would promote the purpose or object underlying the Act to one that would not promote that purpose or object.

20 It may well be the case that the common law principle stated in CIC Insurance differs little in substance from what is now required by s 15AA of the Acts Interpretation Act: see Pearce and Geddes at [3.6]. The significance of resorting to "context" or "purpose" in the first instance is that it provides a perspective from which the proper reach of the language of a provision can be judged. It may disclose, for example, an ambiguity or linguistic imprecision or infelicity which is not otherwise apparent on a literal reading of the words used, but which is manifest when regard is had to context or purpose: cf Isherwood v Butler Pollnow Pty Ltd (1986) 6 NSWLR 363 at 387-388; Mills v Meeking [1990] HCA 6; (1990) 169 CLR 214 at 235. Context or purpose can thus justify a court in giving a "strained construction" to cure the mischief the provision was intended to cure or to achieve its clear legislative purpose: see Newcastle City Council v GIO General Ltd [1997] HCA 53; (1997) 191 CLR 85 at 113; Fox v Commissioner for Superannuation (No 2) [1999] FCA 372; (1999) 88 FCR 416 at 421. What is impermissible, though, is to use purpose or context to give a provision a construction which, in light of the language used, is unreasonable or unnatural: IW v City of Perth [1997] HCA 30; (1997) 191 CLR 1 at 12; Newcastle City Council at 113.

21 Though Emmett J considered and the respondent contends that the terms of s 4L are clear and unequivocal, the language is consistent with the purpose revealed by the legislative history. The latter part of s 4L contains no punctuation marks, other than a full stop. The words ‘insofar as that provision is severable’ are the key to the section. They can be read as qualifying the direction that ‘[n]othing in this Act affects the validity or enforceability of the contract’ and as marking out the limits of the provision. The additional words ‘otherwise than in relation to that provision’ make it clear that the validity or enforceability of a severable provision is (or at least may be) affected by the Act. Section 4L would be somewhat clearer if it read as follows:

"If the making of a contract after the commencement of this section 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 insofar as that provision is severable, otherwise than in relation to that provision."

22 Section 4L, read in this way, addresses only one contingency. It is concerned with the validity and enforceability of the balance of a contract which contains an offensive provision where that provision is severable. So considered, it simply does not address explicitly the situation of validity and enforcement where the offending provision is not severable. Subject to any orders made under s 87 or s 87A of the Act which may apply of their own force in a given instance, this situation is left to be dealt with by the ordinary rules relating to illegality to which the severance rules are an exception. The provision so construed gives effect to the Swanson Report recommendation though it necessarily retains expressly the power of the Court to make orders under s 87 and s 87A even in circumstances in which the offending provision can be severed.

23 Though the Full Court in News Ltd dealt briefly with the construction of s 4L, doubtless reflecting the arguments advanced in that case, there was no error in our view in the construction there adopted in relation to severance.

24 This conclusion means that, if the loan agreement remains enforceable, it is because the offending provision was severable from it. It is necessary for us to determine whether or not Emmett J was correct in so ruling.

SEVERANCE

(i) The facts

25 While there is no factual dispute between the parties, it should be said at the outset that the manner in which evidence was presented in this matter has meant that there was an economy of information, and occasionally contradictory information at that, available to his Honour. Perhaps this resulted from the concession made by SST Consulting but the result has been to make the drawing of inferences a hazardous affair.

26 By way of background it is appropriate to begin with a description of the business setting of this litigation. The following narrative is drawn primarily from Emmett J’s reasons for judgment.

27 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 unpacked at a depot at which the individual consignees can pick up their goods. Once the goods are unpacked, the empty containers are repaired and stored for the shipping and lease companies which own them. The freight forwarders charge the shipping and leasing companies for that service. Similar services are provided in connection with the export of goods.

28 At material times, the directors of SST Consulting were 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 which were generally known as the "Port Botany Group". The Port Botany Group carried on business at several locations the largest of which was in Port Botany. 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.

29 Over a period of some ten years up to 1998, the Port Botany Group dealt with an Australian company, Australian Freight Services Ltd ("AFS"). Over that period, the executives of Port Botany Group came to know those involved in AFS and the nature of its business. 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.

30 In 1998 Brennans was taken over by, or its business was consolidated with the business of, the New American Consolidation Association ("NACA"), a competitor of AFS. In consequence, 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. AFS USA was formed to carry on that activity. Packing and unpacking services such as those provided by Port Botany Group, were required by both AFS and the AFS USA. This work from the two companies was valuable to the Port Botany Group.

31 On 5 January 1999, the assets of the Port Botany Group were conveyed under contract 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 a benefit for Mayne Nickless to have packing and unpacking work from AFS and the AFS USA.

32 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:

Mr Rieson:		The USA business is expanding rapidly and additional working capital is needed to fund that growth.
Mr Sweeney:		How much money are we talking about here?
Mr Rieson:		Approximately $1 million. We are seeking private funding for this arrangement.
Mr Sweeney:		What is your proposal?
Mr Rieson:		If you provide the funds you can have certainty in relation to the work.

33 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.
3. If the monthly actual performance falls 10% behind the forecast in any month during the initial period, i.e. Jy 99 – Aug 00, no further funds will be made av.
...
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."

34 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."

35 After some discussion concerning AFS USA’s profit and loss budget 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 [sic] 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."

Mr P F Mansfield was a partner in Mansfield Switzer, a firm of solicitors at Bondi Junction.

36 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. 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".

37 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.
2. If actual monthly performance falls 10% below the forecast included with the loan document in any one month during the initial period (July 1999 – August 2000), the lending arrangements are at an end and all monies thus far paid to be returned with interest calculated at 20% per annum. In relation to comparison of actual with forecast, the figures for comparison are gross receipts and net income.
...
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. Thereafter, advances were made by SST to AFS USA totalling $991,000.

38 On 10 September 1999, two letters were sent by Mr Mansfield, one to AFS and the other to AFS USA. The letters referred to advances made 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.

39 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 [AFS USA] as shown in the attached schedule;
• Messrs Rieson and Bell had an interest in the Borrower continuing its business;
• Mr Mansfield’s letter of 10 September 1999 and an amended schedule were annexed.

40 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."

41 The letter of 10 September 1999 from Mr Mansfield to AFS USA and a schedule setting out the total 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.

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

"PAYMENT NO	DATE	AMT AUD $
1	9.7.99	200,000
2	3.8.99	150,000
3	28.9.99	100,000
4	12.11.99	100,000
5	21.12.99	50,000"

43 The letter of 10 September 1999 to AFS USA 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. Non-performance of budget expectations by more than 35% of profit or 35% adverse nett cash flow such budget expectations and cash flow being attached.
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 AFS USA.

44 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 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.

45 At some time about July 2000 the shares in AFS USA and AFS were sold to NACA. This event triggered the obligation to repay principal and interest. 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. That sum was not paid.

46 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 AFS USA. SST asserted 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. Mr Mansfield acknowledged receipt of that sum by letter of 1 September 2000 and demanded payment of the balance within seven days.

47 On 14 and 18 November 2000, Mansfield Switzer wrote to Messrs Bell and Rieson respectively referring to default by AFS USA and saying that, unless the amount outstanding was paid in full within seven days, recovery action would be commenced. No further amount was paid.

48 In his brief cross-examination Mr Peter Sweeney (the only person to give oral evidence) stated or agreed that:

(i) although it was not a benefit to SST Consulting under its management agreement with Mayne Nickless to have the work from AFS and AFS USA, this was a benefit to Mayne Nickless;
(ii) SST Consulting was only newly incorporated at the time and had not carried on business as a moneylender; and
(iii) it was an important part of the deal struck with Mr Rieson that the pack and unpack business from AFS USA and AFS would be handled by Mayne Nickless.

49 Mr Sweeney disagreed with the suggestion that he would not have been interested in making the loan if it had been a straight loan without that business coming his way. He subsequently confirmed that having the AFS USA and AFS business was important to him, as was his having the agreement of the two directors (Mr Rieson and Mr Bell) to ensure this happened.

(ii) The applicable principles

50 While the courts have formulated a number of tests of severance that accommodate varying contingencies, it is well-recognised that "[q]uestions of severability are often difficult, and tests that have been formulated as useful in particular classes of case are not always satisfactory for cases of other kinds": Brooks v Burns Philp Trustee Co Ltd [1969] HCA 4; (1969) 121 CLR 432 at 438.

51 For present purposes we would note the following.

(i) To paraphrase Jordan CJ in McFarlane v Daniell (1938) 38 SR (NSW) 337 at 345 where valid promises supported by legal consideration are associated with, but are 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 which cannot be taken to pieces without altering its nature. However, if the elimination of the invalid promises changes the extent only but not the kind of the contract, the valid promises are severable. In contrast, if the substantial promises were all illegal or void, merely ancillary promises would be inseverable. See also Thomas Brown & Sons Ltd v Fazal Deen [1962] HCA 59; (1962) 108 CLR 391 at 411; Carney v Herbert [1985] AC 301 at 310 – 311.
(ii) In considering whether a valid promise is enforceable notwithstanding that it is severably associated with an illegal promise, it is necessary to have regard not only to the validity of the promise but to the validity of the consideration for the promise: McFarlane v Daniel, at 345. If the consideration for both the legal and illegal promises is an entire one, i.e. it is not divisible or apportioned between the legal and illegal promises, and there is no basis for finding that any proportion of it can be attributed to the illegal promise, there can be no severance save (a) where the illegal promise is of such minimal significance as to be immaterial: Humphries v Proprietors "Surfers Palms North" Group Titles Plan 1955 [1994] HCA 21; (1994) 179 CLR 597 at 606 and 609; or (b) usually, if the justice of the case so requires and there is no public policy objection, where the illegal promise is ancillary and exists for the exclusive benefit of the party who wishes to enforce the contract without the illegal provision: Carney v Herbert, at 317.
(iii) There is subsisting controversy as to whether the test of "inferred intention" provides a relevant inquiry as to the circumstances under which promises are divisible, where the illegal promise is not exclusively for the benefit of the party seeking to enforce the contract. In Brew v Whitlock (No 2) [1967] VR 803 (a case raising severance of an uncertain term) the Full Court of Victoria said (at 813):

"It seems to us that once the conclusion is reached that the invalid promise is so material and important a provision in the whole bargain that there should be inferred an intention not to make a contract which would operate without it, but to make a contract which is conditional upon the operation of that promise, then it must be treated as forming with the other valid promises an indivisible whole which cannot be taken to pieces without altering its nature, and as not being capable of elimination without changing the kind of the contract."

52 In Carney v Herbert (a case in which illegal mortgages were severed from a composite share sale transaction on the basis that they were ancillary to the overall transaction and were for the exclusive benefit of the vendor who was seeking to enforce the transaction), the Judicial Committee of the Privy Council rejected the argument that, as the evidence was that the plaintiffs would have declined to have entered into the contract if no mortgage was forthcoming, the mortgage was not severable, "since severability must be judged at the moment when the contract is concluded according to the then intentions of the parties": [1985] AC at 316. In so doing the Judicial Committee disapproved of observations in Brew v Whitlock (No 2) "which might be read as giving some support to this proposition": ibid.

53 Subsequently, without reference to Carney, McHugh J in Humphries observed (at 621-622):

"In my opinion, in cases where a provision in a contract is void, is not for the exclusive benefit of the party seeking to enforce the contract, and is part of the consideration for an indivisible promise of the defendant, the proper test for determining whether the void provision is severable from the indivisible promise is that formulated by the Full Court of the Supreme Court of Victoria in Brew v Whitlock [No 2]. In that case, the Full Court said that "once the conclusion is reached that the invalid promise is so material and important a provision in the whole bargain that there should be inferred an intention not to make a contract which would operate without it", the invalid promise should be treated as inseverable from the contract."

54 We have referred to this last matter as the appellants have sought to rely upon McHugh J’s observations in this appeal.

(iii) The trial judge’s decision

55 Though the appellants sought initially to challenge Emmett J’s formulation of the principles applicable to severance in the end they conceded that they were correctly stated. However, they contended those principles were misapplied. We note that, save for the final matter on "inferred intention" referred to above, his Honour’s statement of principle reflects our own view.

56 The reasons given by Emmett J for severing the illegal promise were as follows.

(i) Two quite distinct arrangements were proposed and entered into: the first related to the loan advances and their repayment with interest; the second was the directing of the business of AFS and AFS USA to SST Consulting’s nominee (i.e. Mayne Nickless).
(ii) Neither of these arrangements was separately illegal. The illegality resulted from making the first conditional upon the second.
(iii) While it may be that the advances would never have been made if Mr Rieson had not made his initial proposal that "you can have certainty in relation to the work", against that it needed to be considered that the money lending arrangement was, as Emmett J understatedly described it, "somewhat usurious". Given the terms of the lending arrangement one could conclude that such terms would have been taken up by any lender, had they been offered.
(iv) His Honour stated explicitly (at [45]) that:

"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."

(v) The precise benefit to SST Consulting from the tying arrangement was not clear. The business that was to benefit from it was the Mayne Nickless group. It was not suggested that the tying arrangement constituted any benefit to AFS or AFS USA.
(vi) The terms of the tying arrangement were that the pack and unpack services were to be provided on commercial terms.
(vii) The tying of the arrangements for the advances to the direction of packing and unpacking business was 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": [49].
(viii) To the extent there was an unlawful provision in the overall agreement, SST Consulting was entitled to treat that provision as severed from the loan obligations and to enforce those obligations. As those obligations were guaranteed by Mr Rieson and Mr Bell, the guarantee was enforceable against them.

(iv) The appeal

57 The appellants’ contentions can be put shortly. First, they said that, in light of the concessions that s 47(1) applied to the parties’ contract and that the loan obligation was conditional upon the illegal tying arrangement, severance was never possible. The two arrangements were bound together by the parties. We would note in passing that at the hearing of the appeal counsel for SST Consulting reiterated the concession that the agreement to loan $1 million was conditional upon the tying agreement. Secondly, the appellants argued, in light of the findings made by his Honour, it was impossible to treat the tying arrangement as divisible or as an "insignificant" component of the overall arrangements. Counsel placed reliance upon the joint judgments in Humphries. They also referred to McHugh J’s test in Humphries (referred to above), for the purpose of establishing that Emmett J directed himself to the wrong matter when asking whether the advances would not have been made if the tying agreement had not been offered. They said the correct question was whether the advances would have been made absent the tying arrangement.

58 SST Consulting submitted that the tying arrangement was ancillary; its severance would leave the subject matter and the primary obligations of the parties unchanged, and there is no public policy objection to enforcing the balance of the contract.

(v) Consideration

59 It is generally agreed that the question of whether illegal provisions in a contract are severable – as distinct from whether they will be severed given the nature of the illegality in question: cf McFarlane v Daniell, at 346; Carney v Herbert, at 316 – is a matter of construction of the parties’ agreement or, as it is sometimes put, "one of intention to be gathered from the instrument itself": Brooks v Burns Philp Trustee Co Ltd, at 442. Such an inquiry can be a contrived one for the reason noted in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1975] HCA 1; (1975) 133 CLR 331 at 342; generally the parties "have not foreseen that one or more of the provisions in their agreement will be unenforceable": see also Carter on Contract at [28-300]. In consequence, the intention ascribed to the parties through the application of tests such as we have noted earlier is often only an imputed one.

60 This said we would nonetheless emphasise that, given the modern rules of construction of contract: see Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 208 ALR 213; and despite earlier views to the contrary: Whitlock v Brew (No 2) at 807-808; resort can properly be had to extrinsic evidence to establish the context of the parties’ relationship in relation to the issue of severance: see generally Cheshire & Fifoot’s Law of Contract, [6.17] (8^th Aust ed, 2002). In a case such as the present such evidence is of some significance.

61 Though SST Consulting’s contract with AFS USA evolved during the period from June 1999 to September 1999 – and SST Consulting concedes that a contract came into existence in June – it is quite clear that the "pack and unpack" obligation as we will call it was given and retained importance and prominence in the parties’ agreement. On the material before us, the reasons why this was so can be little more than a matter of speculation. The benefit that accrued to SST Consulting from the pack and unpack obligation was, as Emmett J indicated, by no means clear. The nature of the "management agreement" between Mr Sweeney or his companies and the Mayne Nickless group was not revealed in evidence nor was any explanation given as to why the pack and unpack business was allocated to that group. And it has not been suggested that it constituted any direct benefit to AFS USA or AFS. Be this as it may, the pack and unpack obligation was made a feature of the proposed SST Consulting–AFS USA contract from its June 1999 inception. At all times, departure from it was to be a default event. AFS was required to enter into a deed to ensure its pack and unpack LCL business in Sydney, Melbourne and Brisbane would be directed in accordance with the contract. And the Guarantee given by Mr Rieson and Mr Bell was triggered by any default by AFS USA under any of its contractual obligations. The respondent has not sought to put on evidence to explain why the various arrangements were structured as they were or to qualify the apparent significance given to the pack and unpack obligation in those arrangements. In these circumstances it can hardly be denied that the pack and unpack obligation was an integral part of the arrangements put in place to underpin the loan that was being made.

62 The terms of the loan arrangement have all the hallmarks of a loan of last resort. It may well be that the pack and unpack obligation, no less so than the default event requirement relating to default in performance of budget expectations and the taking of guarantees, was a manifestation of the loan’s character. Apparently, Mr Riesen originally offered the obligation as an inducement to Mr Sweeney to make the loan. It is not clear why he thought it necessary to do this. However, it is clear from how the parties structured their commercial relationship that the parties to the SST Consulting–AFS USA contract intended there to be "reciprocity of obligation" (Brooks v Burns Philp Trustee Co Ltd, at 438) between the promises given by each of them. In our view, to adopt the words of Kitto J in Brooks at 438, that reciprocity "necessitate[s] an inference that the legal validity of each promise [was] a condition of the operation of the other". Put shortly, the parties structured their contractual and associated arrangements in such a way as to evince a mutual understanding that the component parts of the contract were so connected as to constitute an indivisible whole.

63 To excise the pack and unpack obligation from that whole would be to alter the nature of the contract notwithstanding that what remained of the arrangement would embody a loan obligation. It would create a quite different business relationship from that which was intended and was reflected not only in the contract but in related contractual documentation such as AFS’s deed and the Guarantee.

64 With respect to Emmett J, it is not sufficient to justify severance to say that cutting the tie between the pack and unpack obligation and the loan obligation "would [not] in any way change the character or nature of the arrangements in relation to the advances". In many cases where an agreement falls within s 47(6) a like comment could probably be made about any obligation to provide goods or services which is conditional on (i.e. is tied to) the proscribed third party dealing. The question is not whether excising the pack and unpack obligation would change "the character or nature" of the loan obligation. Rather, it is whether it would change the character or nature of the parties’ contract.

65 For reasons which are not able to be inferred, SST Consulting and AFS USA designedly structured their relationship in a particular way and with particular incidents. They wedded the loan and the pack and unpack obligations. It is not for the Court to divorce the two components of their arrangement.

66 We consider that Mr Sweeney’s evidence in cross-examination lacks the clarity necessary to provide a reliable basis for any inference upon the question of how SST Consulting would have acted if the tying arrangements had not been made. It clearly does not reveal the significance of the tie to the agreement that actually was struck. Our earlier conclusion was based on the conversations and documentation from the time the contract was suggested until it reached its final form. That conclusion necessarily carries with it at least an inferred understanding that the various contractual promises and obligations assumed were indivisible. It is therefore unnecessary to go on to consider whether there could be inferred an intention not to make a contract which would operate without the tie: cf Brew v Whitlock (No 2) at 813. Notwithstanding the view of McHugh J to which we earlier referred, we clearly are not constrained by authority to consider that matter: see Carney v Herbert at 316; see also the comments of Millett LJ in Marshall v N M Financial Management Ltd [1997] 1 WLR 1527 at 1532.

67 It has not been suggested that the pack and unpack obligation was so insignificant as to be immaterial. It cannot be suggested that obligation was merely ancillary and for the exclusive benefit of SST Consulting. And no proper basis exists for apportioning the consideration received between the pack and unpack and the loan obligations.

68 The final matter to which we should refer is the somewhat tentative submission made by the appellants that the text and structure of s 47(6) and the concession made by SST Consulting preclude it from asserting that severance was possible. To the extent that this submission is founded on the proposition that the conditional character of a dealing envisaged by s 47(6) itself precludes the possibility of severance, the submission must fail. The subsection merely requires proof of the fact that the parties contract or arrangement contained such a condition: see SWB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd [1980] FCA 125; (1980) 48 FLR 445 at 454; irrespective of its centrality to, or significance in, that contract or arrangement. It is these latter matters, and not the fact of the contract or arrangement embodying a proscribed condition, which are of importance in determining severability in a given case. The respondent’s concession in their defence that certain matters pleaded by them revealed a contravention of s 47(1) of the Act did not foreclose the possibility of severance. That possibility is precluded, not by the contravention itself, but by the particular character of the contract into which the parties entered.

69 The SST Consulting-AFS USA contract was illegal. It was prohibited by statute. Neither the contract nor the Guarantee given by the appellants was enforceable because, in order to prove its rights in either case, SST Consulting would have to rely upon the illegal contract.

DISPOSITION

70 We would (i) allow the appeal; (ii) set aside the orders of the trial judge; (iii) dismiss the respondent’s application; and (iv) order the respondent to pay the appellants’ costs of the appeal and of the application.

I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Wilcox and Finn.

Associate:

Dated: 15 February 2005

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 745 of 2004

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	STEPHEN CHARLES RIESON FIRST APPELLANT SCOTT MURRAY BELL SECOND APPELLANT
AND:	SST CONSULTING SERVICES PTY LTD (ACN 083 263 914) RESPONDENT

JUDGES:	WILCOX, SACKVILLE and FINN JJ
DATE:	15 FEBRUARY 2005
PLACE:	SYDNEY

REASONS FOR JUDGMENT

SACKVILLE J:

71 I agree with the judgment of Wilcox and Finn JJ on the construction of s 4L of the Trade Practices Act 1974 (Cth) (‘TP Act’).

72 I also agree with their Honours’ conclusion that the agreement embodied in the two letters of 10 September 1999 from Mansfield Swizer to AFS Freight Management (USA) Inc (‘AFS USA’) and to Australian Freight Services Ltd (‘AFS’) (‘the Agreement’) was illegal and that AFS USA’s promise to repay the loan plus interest cannot be severed from the illegal portions of the Agreement. I agree generally with their Honours’ reasons, but wish to set out my own reasoning on this issue.

73 The rules governing illegal contracts are notorious for their complexity and obscurity. These characteristics stem, in part, from the varied circumstances in which contracts can be said to be illegal: Cheshire and Fifoot’s Law of Contract (8^th Aust ed, 2002) at [18.1]. As Professor Rose has pointed out, the difficulties are exacerbated by the proliferation in modern times of rules and regulations. An agreement involving a contravention of any of these rules and regulations, perhaps even if inadvertent, may produce harsh consequences for a party which finds itself unable to enforce the contract: F D Rose, ‘Reconsidering Illegality’ (1996) 10 J Contract Law 271, at 273; see too N S Marsh, ‘The Severance of Illegality in Contract’ (1948) 64 LQR 230, at 233, arguing that tests as to the severability of illegal contracts which may have been reasonable when propounded have become highly artificial in changed social and legal conditions.

74 In the present case, the appellants have been sued on the guarantees they provided under a deed made on 23 December 1999. In that deed, the appellants guaranteed performance of the obligations of AFS USA under the Agreement. If the appellants are correct in the arguments advanced in this Court, they will effectively be relieved of their guarantees on the ground that the Agreement was illegal and thus AFS USA is not liable to repay the funds advanced to it by the lender, SST Consulting Services Pty Ltd (‘SST Consulting’), pursuant to the Agreement. The lender will be denied recovery of the sum of approximately $1.5 million (including interest) advanced by it to AFS USA. Indeed, but for the fact that repayments totalling $419,523 were made by or on behalf of AFS USA, the loss sustained by SST Consulting as the result of the illegality relied on by the appellants (if their argument is correct) would be even greater.

75 The primary Judge summarised the appellants’ pleading of their illegality defence as follows ([2004] FCA 937, at [29]):

‘1. The advances by SST to the Borrower [AFS USA] were made pursuant to an overall agreement between SST [Consulting], 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 [full container load] business in Sydney, Melbourne and Brisbane, together with Sydney airfreight, to the corporations that SST [Consulting] should direct, such work to include transport.

(ii) AFS will [sic] 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 [Consulting] shall direct.

(iii) All pack and unpack business in Sydney, Melbourne and Brisbane were [sic] 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 [Consulting] 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 [Consulting] 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 [Consulting] 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 [Consulting] 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.’

76 SST Consulting admitted each of these allegations. Moreover, as the primary Judge recorded, SST Consulting conceded at the hearing that, by reason of the matters pleaded, it had contravened s 47(1) of the TP Act.

77 A contract may be illegal because making or performing it is prohibited, expressly or impliedly, by statute. It may also be illegal because the making or performance of the contract is contrary to public policy. In the present case, the appellants argue that the arrangements recorded in the Agreement were prohibited by s 47(1) of the TP Act. In particular, they say that cll 2 and 3 of the letter addressed to AFS and cll 3(E) and 6 of the letter addressed to AFS USA were prohibited by the statute.

78 The letter of 10 September 1999 to AFS required it to enter a deed whereby it would cause certain freight to be directed to ‘Port Botany/MPG and Pitkin facilities or as the nominee of the lender [SST Consulting] should direct’ (cl 2). The deed was to incorporate such terms as the lender required to secure its position in relation to the moneys advanced and the performance of AFS in relation to the use of the facilities (cl 3). The letter to AFS USA defined a ‘default event’ to include a failure to direct the freight to Port Botany/MPG facilities or as the lender advised (cl 3(E)). AFS USA, like AFS, was required to acquire freight services as directed by the lender (cl 6).

79 Section 47(1) of the TP Act provides that a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing. Section 47(6) relevantly provides that a corporation engages in the practice of exclusive dealing if it supplies or offers to supply services on the condition that the person to whom the corporation supplies or offers to supply the services, or a related body corporate, will acquire services of a particular kind from another person. The appellants say that SST Consulting offered to supply and did supply services (a loan to AFS USA of $1 million) on condition that AFS USA and AFS (a corporation related to AFS USA) would acquire packing and unpacking services from the Mayne Nickless Group which operated the Port Botany facilities. So much is conceded by SST Consulting.

80 It will be seen that s 47(1) of the TP Act (when read with s 47(6)) does not explicitly prohibit the making of a contract or arrangement of a particular kind. In this respect, it is to be contrasted with s 45(2) of the TP Act which prohibits a corporation from making a contract or arrangement if, inter alia, a provision of the contract has the purpose of substantially lessening competition. Nonetheless, it appears to be common ground that the effect of s 47(1) is implicitly to prohibit the making of a contract which incorporates an undertaking by a corporation to supply services to another corporation on condition that the recipient, or a related corporation, will acquire specified services from a third party. On this basis, s 47(1) of the TP Act prohibited the making of the Agreement since, by entering the Agreement, SST Consulting engaged in the practice of exclusive dealing: cf Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd [1978] HCA 42; (1978) 139 CLR 410, at 423-424, per Mason J.

81 It is a matter for Parliament to determine the effect of a contract entered into in contravention of a statute. Where Parliament does not do so explicitly, it is usually said that the common law determines the consequences of the illegality (Carlton & United Breweries Ltd v Castlemaine Tooheys Ltd [1986] HCA 38; (1986) 161 CLR 543, at 554-555, per curiam), although it would seem that the process generally involves construing the relevant statute. Be that as it may, the ordinary rule is that if Parliament prohibits the making of a contract, the contract does not give rise to an enforceable right or obligation; if Parliament prohibits the performance of a contract, performance cannot be compelled: Trade Practices Commission v Milreis Pty Ltd (1977) 29 FLR 144, at 158-159, per Brennan J.

82 The authorities establish that the ordinary rule applies to contracts or arrangements entered into in contravention of s 45(2) of the TP Act, notwithstanding the existence of an express power in s 87(2) to declare void a contract made in contravention of the TP Act: TPC v Milreis Pty Ltd (1977) 29 FLR 144, at 150-152, per Bowen CJ; at 158-162, per Brennan J, approved in CUB v Castlemaine Tooheys Ltd, at 554-555. By parity of reasoning, once it is accepted that s 47(1) prohibits the making of an agreement by which a party engages in the practice of ‘exclusive dealing’, ordinarily the contract will not give rise to enforceable rights or obligations, and performance of the agreement cannot be compelled.

83 The ordinary rule is, however, subject to the doctrine of severance. This doctrine is designed, in part at least, to mitigate the harshness that may result from holding an illegal contract to be unenforceable. Because the parties to a contract do not usually provide for the possibility that the contract will be found to be illegal, it is necessary to formulate a test to determine whether the doctrine of severance can be invoked to save part of the contract: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1975] HCA 1; [1975] AC 561, at 578, per Lord Cross. Since the circumstances in which illegal contracts are entered into vary so widely, no single test of severance has been accepted: Brooks v Burns Philp Trustee Co Ltd [1969] HCA 4; (1969) 121 CLR 432, at 438, per Kitto J; Carney v Herbert [1985] 1 AC 301, at 309, per Lord Brightman.

84 In Australia, the test stated by Jordan CJ (with whom Davidson and Owen JJ concurred) in McFarlane v Daniell (1938) 38 SR (NSW) 337, is often cited. Jordan CJ said (at 345):

‘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 which 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.’ (Citations omitted.)

85 This rather general language is by no means easy to apply to particular fact situations since it requires the Court to make value judgments. McFarlane v Daniell itself was a straightforward enough case, which did not involve statutory illegality. A contract of employment included promises made by the employee (an actor) which were found to be void because they were in unreasonable restraint of trade. Not surprisingly, the Full Court held that the invalid promises made by the employee were severable from the employer’s promise to pay his salary. Obviously enough, to deny the employee the salary due to him because some provisions, presumably inserted in the contract at the employer’s insistence, were in restraint of trade would have been a very harsh result.

86 The test in McFarlane v Daniell was applied by the High Court in Thomas Brown & Sons Ltd v Fazal Deen [1962] HCA 59; (1962) 108 CLR 391. In that case the plaintiff, a dealer in jewels who was also a gold prospector, sought to recover gold and gems he had placed in a safe and deposited during World War II with the defendants. By depositing the gold the plaintiff had breached wartime regulations, which required him to deliver up any gold in his possession to the Commonwealth. The High Court held that performance of the bailment agreement contravened the regulations, so that the case was one of statutory illegality. However, the Court considered that although the plaintiff could not recover the gold, the defendants’ promise to return the gems was valid and could be severed from the invalid provisions relating to the gold. The plaintiff’s right to recover the gems was not answered by a defence of illegality since (at 411):

‘the contractual obligation upon the [defendants] as to the return of the plaintiff’s property on demand applied to every part of the property deposited whether demanded together with the rest of it or separately.’

87 The most recent High Court case considering the rules relating to severance is Humphries v The Proprietors ‘Surfers Palms North’ Group Titles Plan 1955 [1994] HCA 21; (1994) 179 CLR 597. A body corporate entered into a management agreement under which the manager agreed to perform a variety of duties. Clause 2(r) provided that the manager’s duties included conducting a letting agency for townhouses on the property for such of the owners who required the service. The remuneration stipulated in cl 8 of the agreement was a single annual sum, payable monthly. Under the relevant Queensland statute, the body corporate lacked power to enter an agreement providing for letting services to be provided by a manager. Thus entering an agreement including cl 2(r) was ultra vires the body corporate. The question was whether cl 2(r) was severable from the rest of the management agreement, so that the manager could sue the body corporate for unpaid fees.

88 Brennan and Toohey JJ distinguished McFarlane v Daniell on the ground that (at 605):

‘the invalidity of the promise in unreasonable restraint of trade arose because the law would not enforce such a promise against the promisor; but, as the promisor’s promise was not illegal, there was no legal inhibition against the enforcement of the promisee’s promise to pay the stipulated remuneration. In the present case, the invalidity arises not because it is against the policy of the law to enforce a promise such as that contained in cl 2(r) against the promiser but because the Act prohibits the incurring of an obligation by the promisee to disburse the funds of the body corporate for purposes which it is not empowered to pursue.’ (Emphasis added.)

89 Their Honours noted evidence that the stipulated remuneration was largely attributable to tasks other than the letting of townhouses. They considered (at 606) this to be irrelevant as it was:

‘not possible to treat the promise to pay remuneration as divisible between purposes on which the body corporate is authorised to disburse its funds and purposes for which the disbursement of its funds is forbidden. It is not suggested that the provision of a letting agency was of such minimal significance as to be immaterial.’

It followed that the body corporate’s promise to pay a single sum as remuneration for the performance of duties, including those specified by cl 2(r), was not authorised by the legislation. Accordingly, the manager could not enforce the body corporate’s promise to pay the remuneration.

90 Deane and Gaudron JJ addressed the severance question briefly. In their view (at 609), the evidence did

‘not sustain a conclusion that the provision of the letting agency was such an insignificant component of the duties of the Manager for which the body corporate agreed to pay the base remuneration of $60,000 per annum that it can be disregarded. Nor is there any basis for a finding that a particular proportion or amount of that annual remuneration can be attributed to the Manager’s promise to conduct a letting agency. That being so, we agree with the conclusion of the Court of Appeal that cl 8 cannot be saved by any process of severance or reading down. It follows that the clause was, in its entirety, ultra vires and void.’

91 McHugh J reached the same conclusion, by a somewhat different process of reasoning. His Honour formulated the general principle as follows (at 621):

‘[I]n cases where a provision in a contract is void, is not for the exclusive benefit of the party seeking to enforce the contract, and is part of the consideration for an indivisible promise of the defendant, the proper test for determining whether the void provision is severable from the indivisible promise is that formulated by the Full Court of the Supreme Court of Victoria in Brew v Whitlock (No 2) [[1967] VR 803, at 813]. In that case, the Full Court said that "once the conclusion is reached that the invalid promise is so material and important a provision in the whole bargain that there should be inferred an intention not to make a contract which would operate without it", the invalid promise should be treated as inseverable from the contract.’

His Honour noted that cl 2(r) was not for the exclusive benefit of the manager. He thought that on the evidence it was impossible to conclude that the body corporate would have paid the manager $60,000 per annum without its promise to provide the letting service.

92 Humphries seems to support the proposition that where a single promise to pay is not merely void but illegal by virtue of statute, the promise cannot be treated as divisible between legitimate and forbidden purposes unless the forbidden purposes are of ‘minimal significance’. This is the approach taken by Brennan and Toohey JJ and the judgment of Deane and Gaudron JJ is consistent with that approach. The approach suggests that the nature of the illegality is also important in determining whether the lawful part of a contract can be severed from the unlawful: Carney v Herbert, at 311.

93 Two features of the present case are striking. First, the condition attached by SST Consulting to its undertaking to lend moneys to AFS USA was not merely void, but illegal. The condition contravened directly the prohibition in s 47(1) of the TP Act. Secondly, the condition imposed by SST Consulting (albeit with AFS’s acquiescence) was central to the contractual arrangements made by the parties to the Agreement. The linkage between the loan and AFS’s undertaking to acquire services from Mayne Nickless was the very first point noted by Mr Sweeney when recording his conversation with Mr Rieson in June 1999. The Agreement itself not only explicitly requires AFS and AFS USA to direct the identified work to a third party, but provides that a failure to do so is an act of default rendering principal and interest payable, in effect, on demand.

94 The primary Judge found that the tying arrangements were not unimportant to SST Consulting, even though the evidence did not explain the precise benefit that would flow to SST Consulting from implementing those arrangements. If anything, this understates the position. Unlike his Honour, I consider it very doubtful that SST Consulting would have agreed to make the loan without the tying arrangement. No doubt the interest rate was high and some security was offered. But the interest of SST and SST Consulting in being lenders of last resort to AFS USA was clearly strongly influenced by the willingness of AFS to enter into the tying arrangement. Whether or not SST Consulting would have made the loan independently of any tying arrangement, the fact is that it chose expressly to link the two.

95 In my view, there can be no severance of the lawful from the illegal parts of the Agreement. By entering the Agreement, SST Consulting contravened the specific prohibition in s 47(1) of the TP Act. The form of the Agreement makes it clear that the illegal condition was at the heart of the parties’ contractual arrangements. The very loan SST Consulting seeks to enforce was made conditionally on AFS’s agreement to acquire services from a third party. To ignore the illegal condition would radically alter the nature of the Agreement.

96 It is true that by virtue of the illegality of the Agreement, SST Consulting is unable to recover the large sum due to it under the terms freely accepted by AFS USA and the appellants. This comes about, however, because SST chose to lend money on a condition that contravened s 47(1) of the TP Act. It must abide the consequences, even though they may appear to be harsh.

97 I agree with the orders proposed by Wilcox and Finn JJ.

I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Associate:
Dated: 15 February 2005

Counsel for the Appellants:	Mr R Lilley
Solicitor for the Appellants:	Synkronos Legal
Counsel for the Respondent:	Mr D Murr SC and Mr J Thompson
Solicitor for the Respondent:	Mansfield Switzer
Date of Hearing:	15 November 2004
Date of Judgment:	15 February 2005