Fitzgerald v F.J. Leonhardt Pty Ltd D4/1995 [1996] HCATrans 39 (5 February 1996)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Darwin No D4 of 1995

B e t w e e n -

COLIN JOHN FITZGERALD

Applicant

and

F.J. LEONHARDT PTY LTD

Respondent

Application for special leave to appeal

BRENNAN CJ

DAWSON J

TOOHEY J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON MONDAY, 5 FEBRUARY 1996, AT 10.25 AM

Copyright in the High Court of Australia

MR S.K. WILSON, QC: If the Court pleases, I appear with my learned friend, MR W.E.M. LYE, on behalf of the applicant. (instructed by T.S. Lee & Associates)

MR D.A. NORMAN: May it please the Court, I appear on behalf of the respondent. (instructed by Dennis Norman & Associates)

BRENNAN CJ: Yes, Mr Wilson.

MR WILSON: If the Court pleases. This case concerns a contract for the drilling of water bores in the Northern Territory in circumstances where the applicant concedes that there was nothing illegal about the contract in its inception or form and there was no illegal purpose of the parties at the time the contract was made, but it was a contract which was performed in an illegal manner and it was performed illegally because the very act of drilling, which was the subject matter of the contract, was performed without the requisite permit required by the provisions of the Northern Territory Water Act and thereby creating an offence under section 56 of the Act which provided that:

(1) A person shall not, unless authorised by or under this Act, cause, suffer or permit -

(a) a bore to be drilled, constructed, altered, plugged, back filled or sealed off -

and so forth, and in respect of which a penalty for a first offence of $5,000 is prescribed or:

For a second or subsequent offence not less than $5,000 or more than $10,000"

BRENNAN CJ: Your proposition is simply that this was the work that was done, it was prohibited by contract and you cannot recover under the contract for that which is expressly prohibited by the statute?

MR WILSON: That is so, your Honour, and the reason we say, albeit within that simple constraint of fact, that this matter seems to have engendered an enormous amount of review of the various authorities that are commonly referred to as the issue of illegality in contracts, the fact is that there is, in our respectful submission, an important issue for the determination of this Court. That is perhaps best referred to by the reference to the decision of his Honour Acting Chief Justice Gibbs, as he then was, in this honourable Court's decision in Yango [1978] HCA 42; 139 CLR 410, where his Honour at page 413 outlined four ways:

in which the enforceability of a contract may be affected by a statutory provision which renders particular conduct unlawful.

His Honour set out the four categories being that:

(1) The contract may be to do something which the statute forbids -

and we say that is not this case, as it was not in that case -

(2) The contract may be one which the statute expressly or impliedly prohibits -

In terms of the contract at the time of its making, we would accept that it is a contract which the statute neither expressly nor impliedly prohibits:

(3) The contract, although lawful on its face, may be made in order to effect a purpose which the statute renders unlawful -

We say again that in this case the evidence would suggest that the parties did not make the contract with a view to effecting a purpose in contravention of any particular law. Finally his Honour referred to the fourth category, that:

The contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits.

It is our respectful submission that this is perhaps - as we live in a society where Parliament is increasing its statutory controls and regulations on civil conduct, it is likely that this is the category that may most often come before the Courts. It was not the category which his Honour had to deal with specifically in that case because his judgment was able to decide the matter by determining question 2 and by implication he indicated that questions 3 and 4 fell because of the reasons for the determination of question 2. But in relation to the matter, his Honour did say firstly at page 416:

There have been many cases in which a statute which imposes a penalty on an unlicensed or unqualified person for acting in a particular capacity has been held to prohibit by implication all contracts express or implied made by such a person to act in that capacity. In those cases the unsuccessful plaintiff did the very thing which the statute forbade him to do unless he was authorised -

Although those cases refer to, as it were, capacity such as perhaps acting as a broker without having the requisite licence, in this case it is respectfully submitted that the case is even more obvious because the statute involved divides both into a scheme for providing for the licensing of drillers per se and also then providing for the provision of the requisite permit to actually perform the work. Here the contract was for the performance of the work and the requisite permit was not obtained.

DAWSON J: Why is that different from Yango? Why is not the driller carrying on a business, drilling per se not being forbidden, for which he has not the necessary permit?

MR WILSON: Your Honour, the position in Yango was that there was a prohibition against carrying on banking generally and the Court found that the individual contracts that were the subject of the challenge in that particular case were not expressly or impliedly dealt with by the relevant statutory provision. In our respectful submission - - -

DAWSON J: If this were a case in which a driller was required to get a licence generally, you could not distinguish it from - - -

MR WILSON: No, that is so and, indeed, if this - - -

DAWSON J: Why should it be any different in this specific case?

MR WILSON: Because in this case the driller had the licence. If he had not, it may have been a case which was on all fours with Yango. In this case he had the licence but he then went ahead and did the very act which he also needed a permit for.

BRENNAN CJ: But the distinction between this case and Yango is that in Yango there was no prohibition against a contract of lending or of lending. In other words, it was the act in respect of which the claim was made. Here there is a prohibition against drilling. I do not understand why you say the contract did not have as its purpose an unlawful purpose. It was unlawful to drill unless you had a permit.

MR WILSON: Yes. I think perhaps, with respect, your Honour, what I meant was this, that at the time the contract was made it was not unlawful to make a contract for drilling. There is no illegal purpose in drilling. The contract was silent as to - it did not say "a drilling where the driller shall have the requisite permit". It was silent as to that. On the facts as found by the court, the court found that there was no illegal purpose. That is, it was not necessarily the intention of the parties at the time the contract was made to go ahead and - - -

BRENNAN CJ: It was a contract that was capable of being performed lawfully.

MR WILSON: Yes, and therefore we say that there was no illegal purpose at the time the contract was made. It was a contract which, in our respectful submission, falls into that category of case referred to by Mr Justice Gibbs at page 417 where he said:

The performance of a contract may turn it into the sort of contract that is prohibited by the statute, and the test is whether the contract, as made or as performed, is a contract that is prohibited by the statute.

At page 418 his Honour said:

The contract was not "nullified for disobedience to a statute", within the rule of public policy discussed by Lord Wright in Vita Food Products Inc v Unus Shipping Co Ltd because the disobedience in the present case was not in the performance of the contract but was something quite collateral.

That was in the banking context, as your Honour has outlined the distinction. But here of course in the present case it is respectfully submitted that the disobedience was in the performance of the contract in the sense that his Honour had earlier referred to it, being the performance of a contract may turn it into the sort of contract that is prohibited by the statute. Mr Justice Angel in the dissenting judgment found that the contract was for drilling. That does not have to be performed illegally but it was. So, in our respectful submission, that turns it into the type of contract which would be impliedly prohibited by the statute.

That in short compass is our case. We say that that is what this case is about. The question then is: why is there so much confusion about what seems to be on the face of it a relatively straightforward and simple point? If one looks at the evolution of the matter - and, indeed, this is referred to by the judge at first instance. Mr Justice Kearney referred to what may provide an answer as to the reason why - this is at page 45, your Honours, of the application book. May I interrupt myself to say we apologise for the fact that we understand that our original summary of argument had references to the page numbers in an appeal book which had been forwarded to us but we understand that your Honours had an application book. That fact being ascertained this morning, alterations were made and an amended summary was sent through which we hope your Honours have. Mr Justice Kearney at page 45 said:

in the past, because as a matter of public policy the Courts considered that no-one should benefit from committing illegal acts, they would not enforce a cause of action arising therefrom - `ex turpi causa non irotur actio'; and the loss lay where it fell - `in pari delicto potior est conditio defendentis.' More recently, as the regulation of modern life has increased by the "mass of statutes, orders and regulations governing [the citizens'] affairs", as Sachs LJ put it in Shaw v Groom [1970] 2 QB 504 at p522, Courts have focussed more closely on the need to ascertain the legislature's intent as to the effect of the statutory breach on contractual rights, taking into account the nature of the breach. The result has been that the effect on contractual rights of non-compliance with a statute is no longer uniform; increasingly, such non-compliance by the parties has been held not to have affected their contractual rights inter se, though exposing them to the statutory penalty. In effect, greater weight is being given to the other great principle of public policy, that contracts voluntarily entered into shall be enforced.

It seems that that trend is something which has caused confusion to some extent amongst both the judiciary and the relevant text writers.

TOOHEY J: Have you had a look at the recent decision of this Court in Nelson v Nelson which was handed down late last year?

MR WILSON: No, I cannot say that I have, your Honour.

TOOHEY J: It was a case in which property had been placed in the name of another member of the family so that the party who claimed beneficial ownership could get a beneficial loan under the War Service Homes Act. Then a question arose as to whether that claim to equitable title could be defeated by a plea of illegality. These questions were canvassed. I am not saying that they dispose of it one way or the other for the purposes of this application but they do emphasise that we are in the area of public policy here, are we not, and that there is a range of considerations to be taken into account including the position of the person who, if illegality is found to exist, benefits very considerably from such a finding even though - and that may not be the case here - that the person concerned was fully aware of the potential illegality of the contract.

MR WILSON: Your Honour, I think the agreed facts here are that our client would not have been aware of the potential illegality and simply left the matter to the driller to do his job and normally it would have been upon him to procure the relevant permit, although it is conceded that under the relevant section of the Act, both the driller and my client would have been exposed to penalty for the permit not having been obtained.

BRENNAN CJ: Nelson v Nelson is reported in 132 ALR 133. Judgment was published on 9 November 1995. It should be noted that if there is an issue which comes before the Court on an application for special leave, it is the duty of counsel to do what they can to apprise themselves of the latest decisions of this Court on the subject matter.

MR WILSON: Certainly, your Honour. We apologise, your Honour, for not being familiar with that decision.

Your Honour, the text-book writers in relation to this area have said in terms of the Laws of Australia, Chapter 4:

This is a complex area in which great uncertainty exists both as to the present state of the law and its future development. As Carter and Harland remark:

It.....seems to be generally accepted that it is impossible to reconcile all the cases on illegality. To some extent this is understandable because views on the contravention of public policy are likely to change over time. But there are substantive inconsistencies, particularly where the consequences of illegality are in issue, and not all the inconsistencies can be explained away simply by saying that public policy has changed.

It is our respectful submission that in this particular case that confusion in the majority judgments has revealed itself by the focus of the majority judges on appeal on the statements by this honourable Court in Yango.

DAWSON J: But your case is surely that whatever uncertainty there might be elsewhere, there is not in this area, but where you have to rely on the illegality in order to prove your claim you cannot succeed; that is simply what you say, is it not?

MR WILSON: Yes.

BRENNAN CJ: That is it.

MR WILSON: Yes, and here, in this particular case, there is a complete and relevant nexus between the act prohibited, which is the drilling without the relevant permit, and the contract itself as performed, which was to drill for a price.

TOOHEY J: There may be a nexus, but does it follow that the person seeking to recover in those circumstances has to rely upon an illegality in the sense that that concept has been developed through the cases.

MR WILSON: With respect, your Honour, the cases fall either side of what is sometimes a fine line, but the - - -

TOOHEY J: Is it a fine line here? If the driller is suing, the driller says, "Well I did the work. The other party agreed to pay me $X. I want my money."

MR WILSON: Yes, and public policy would say - - -

TOOHEY J: Well, before you get to public policy, that was not my question.

MR WILSON: No.

TOOHEY J: You were saying that the person seeking to recover in those circumstances has to rely upon the illegality, and I questioned whether that is so in the present case.

MR WILSON: The driller would have to plead that he did the work.

TOOHEY J: He certainly would not plead he did it without a licence.

MR WILSON: And he certainly would not plead that he did it without a licence and yet he could not plead that he did it with a licence.

TOOHEY J: So he just pleaded he did the work. The defendant would then plead that the contract was, either in its inception or as performed, in breach of the relevant legislation, but I thought you were putting to us that this was the sort of case in which the plaintiff would have to rely upon the illegality in order to recover.

MR WILSON: I was putting to your Honours that there was a sufficiently strong nexus between the illegality, the act of illegality, and the fundamental consideration or performance of the contract by the driller.

TOOHEY J: That may be true, that may be so.

MR WILSON: And that was to then to lead me to say that therefore we would submit that as a matter of public policy this is a clear case where we say that public policy would intervene and would focus on the fourth category of case enunciated by acting Chief Justice Gibbs, as he then was, which was not a matter which the majority judges really, in our respectful submission, focused on. They became, we would respectfully submit, overborne by looking at the contract in its inception and asking questions whether it had to be performed illegally, and having answered those questions in the negative really did not go on and consider, within the context of the dichotomy set out by acting Chief Justice Gibbs, the fourth category of case and his Honour's comments in relation to that which were, of course, incidental in the context of Yango's case. And we say that in this particular area there does seem to be an uncertainty both amongst the judges, as your Honours will have seen from our summary of argument there are references to the individual judges who have said that there seems to be uncertainty in the decisions, the textbook writers seem to say there is uncertainty about the interaction between the application of the principle in Yango and how public policy would intervene in a fourth category situation.

TOOHEY J: When you put it that way, Mr Wilson, you are really taking us into the area of public policy and in taking us into that area you are taking us into a range of considerations, including the nature of the legislation, what the position of the parties would be if the contract were not enforced, and so on.

MR WILSON: Yes.

TOOHEY J: Now, in the light particularly of the discussion by the Court recently in Nelson's Case and a little earlier in time in Yango's Case, what is there about this case that invites this Court to consider yet again the questions of public policy, in relation to a particular statute?

MR WILSON: In relation to this particular statute, only that the Water Act in the Northern Territory obviously is an Act designed to preserve a very special natural resource and a commodity in that State which probably has greater importance than perhaps in other parts of the Commonwealth, and when one can look at what is a comparatively simple fact situation and have a variance of judicial determinations about the effect of the non-compliance with that statute on a contract, then, in our respectful submission, if there is that uncertainty this honourable Court should intervene to make it absolutely clear how public policy would intervene in such a case in a fourth category situation. If the Court pleases.

BRENNAN CJ: Yes, thank you, Mr Wilson. Mr Norman.

MR NORMAN: May it please the Court. The question of public policy, we submit, in vitiating a contract made between two competent parties who had, at the time of its making, no intention of breaking the law, was dealt with by Lord Devlin in St John Shipping Corporation v Joseph Rank Ltd.

BRENNAN CJ: Why do you say they had no intention of breaking the law, when the statute provides for the doing of that which by section 56 is prohibited?

MR NORMAN: Yes, the policy, your Honour, in the NorthernTerritory of the Water Controller is that, no doubt because of the distances involved, should one sink a bore which comes up dry, there is no need then to obtain the permit prior to sinking another bore.

BRENNAN CJ: The policy cannot possibly affect the construction of the statute, can it?

MR NORMAN: Only in this way, your Honour, that in so far as the breach of section 56, that is sinking a bore without a permit, the Board or the Controller has to authorise criminal proceedings. That is provided for in section 105 of the Act. Now, if one applies that to the ordinary everyday affairs of the person who is licensed to drill, as in this case, then the offence under section 56 not being a regulatory offence, he would then surely have a defence.

BRENNAN CJ: Being what?

MR NORMAN: To doing what the Water Board permits him to do.

BRENNAN CJ: If he has got a permit, it does; if he has not got a permit, it does not.

MR NORMAN: No, but the policy of the Board is that you, to use the phrase used, "go for your life until you sink a bore which produces water and then we will issue you with the permit".

TOOHEY J: But that cannot override the provisions of the Act, particularly when in section 56(2) there are situations adverted to in which it is not necessary to hold a licence or, more accurately, it is a defence to a prosecution for putting down an unauthorised bore, such as urgency, but in the light of that it is very hard to see how you can say that the administrative policy of the Water Board can override the provisions of the Act. But is not your difficulty really, in relation to section 56, that it is not a section that strikes only at the driller, but it makes it an offence to cause, suffer or permit the bore to be drilled. In other words, both parties, I would assume, are liable to prosecution under section 56, as distinct from some of the cases where a builder is required to hold a building licence which often does not affect or impose any liability upon the building owner.

MR NORMAN: No. Your Honour, we say that the driller or both parties commit a criminal offence. Now if there was no policy of the Board on how the Act should be enforced then, with respect, there is a deal of strength in which I would have difficulty, but here we have a driller who is licensed, who is simply carrying out the policy of the authority which issues the permit. What the authority is saying is, you do not need the permit, albeit you and the landowner will be in breach of section 56(1), there will be no mens rea attached in the driller going ahead and drilling a bore in contravention of section 56.

TOOHEY J: But you are transposing criminal concepts into an area of public policy. I would have thought that the strength of any answer to the applicant's case might lie elsewhere in terms of the seriousness of the offence, the nature of the penalty, the position of the parties if the contract is not enforced, those sort of considerations that have played some part in recent decisions of the English courts, although it should be said, I think, not supported by all members of the House of Lords, and some of the considerations in Nelson, but simply to say, "Well, there is no mens rea on the part of the parties in committing a breach of section 56", does not seem to me to take you very far.

MR NORMAN: No, but what does take us, we submit, further, is that the breach itself was in its context a minor breach.

DAWSON J: I thought you were saying there was an honest and reasonable mistake a moment ago.

MR NORMAN: Your Honour, yes I did, but what I - - -

DAWSON J: But the fact that you have a defence does not mean that the Act is not illegal, does it?

MR NORMAN: No, but the breach, we say, was minor. It would be much different by analogy had my client not - - -

DAWSON J: In these purposes a little illegality is as effective as a big illegality, is it not? You cannot draw a distinction that way, can you?

MR NORMAN: Your Honour, it really goes to, for the purposes of this application, the question of public policy. Now what we say is that, as a question of public policy, the breach, or the purpose of the Act, is sufficiently served by the penalties applicable to section 56.

BRENNAN CJ: Mr Norman, this was a claim for the price of doing the work of drilling a bore, is that right?

MR NORMAN: Yes, well three bores, to be precise.

BRENNAN CJ: Three bores, yes. Now section 56 made it an offence to drill any of those bores.

MR NORMAN: Yes.

BRENNAN CJ: It could not be a much bigger or a much smaller offence then digging the three bores contrary to section 56, and the price that was sought for that was the price for doing that which section 56 prohibited. What is your defence?

MR NORMAN: The defence is - - -

BRENNAN CJ: What is your claim, I should say?

MR NORMAN: It is that the penalty provisions of the Water Act is sufficient for the purposes of the Act and to deny a party its remedies under contract would cause injury, we say, to an innocent, in this case, respondent.

BRENNAN CJ: Well, that is an interesting question. Is it not one which should agitate this Court on special leave? In other words, if the doing of work is prohibited by a statute and the work is done and the price under a contract is claimed for it, is the Court free to consider whether or not the criminal penalty prescribed is a sufficient penalty or is the Court enabled to give judgment in accordance with the contract disregarding the illegality?

MR NORMAN: We would argue, your Honour, that the statutory penalty imposed for a breach of section 56, then to deny a person whose remedies under contract would mean that, a, he suffers twice, both criminally and civilly, and that the statutory punishment would be sufficient. That was the view, in our submission, in the St John Shipping Case (1957) 1 QB, where Lord Devlin said this at page 288:

Nor must it be forgotten that the rule by which "contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds.

He goes on:

It may be questionable also whether public policy is well served by driving from the seat of judgment everyone who has been guilty of a minor transgression.

We say that, in this case, the transgression must be regarded as minor, since the evidence of the enforcing authority, the Power and Water Authority, they say in terms that they do not regard the offence as having been committed at all.

TOOHEY J: But why do you say that? I mean, why seek refuge in the administration of the Act? How does that help you?

MR NORMAN: In this way, your Honour, that we say that it goes to the argument that the breach of section 51 was minor.

TOOHEY J: Well that is using that policy in a different way to the way in which you used it earlier on, which was almost in effect to say there would be no breach of the Act, but for the moment you are accepting there was a breach of the Act but, having regard to the policy or the way in which the Act was administered, you say the breach was one of insufficient seriousness to preclude recovery under the contract.

MR NORMAN: Precisely. And Lord Devlin went on to say:

I have said enough -

DAWSON J: But that is a very different situation, is it not? I mean, the illegality there was incidental to the contract which is the carriage of goods. It would be a parallel case if it were a case where it was illegal to carry the goods unless a permit was obtained, and that is a very different sort of case.

MR NORMAN: Your Honour, indeed yes, but on the question of public policy, we say that what was said in St John Shipping Case was followed in Yango by his Honour Mr Justice Mason.

DAWSON J: That is right, because in Yango, of course, again the illegality was only incidental at best to the contracts which were in issue.

MR NORMAN: Yes, save, your Honour, that at page 429 in Yango his Honour Justice Mason said this:

There is much to be said for the view that once a statutory penalty has been provided for an offence the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished.....and that it would be a curious thing if the offender is to be punished twice, civilly as well as criminally. The main considerations from which the principle ex turpi causa arose can be seen in the reluctance of the courts to be instrumental in offering an inducement to crime or removing a restraint to crime.

However, in the present case, Parliament has provided a penalty which is a measure of the deterrent which it intends to operate in respect of non-compliance with section 8. In this case it is not for the court to hold that further consequences should flow, consequences which in financial terms could well far exceed the prescribed penalty and could even conceivably lead the plaintiff to insolvency with resultant loss to innocent lenders or investors.....It may be that the true basis of the principle is that the court will refuse to enforce a transaction with a fraudulent or immoral purpose.

And his Honour Justice Jacobs at page 430 said:

When a statute expressly prohibits 5 the making of a particular contract, a contract made in breach of the prohibition will be illegal, void and unenforceable, unless the statute otherwise provides either expressly or by implication from its language.

We say that lays emphasis on the fact that the statute has to direct itself, not against some manner of concern, which is the subject of a regulation, but concern itself with the contract itself.

Your Honour, the purpose, we say, of the Water Act is not to frustrate the payment of the money, or to put it another way, not to frustrate the payment of properly incurred debts or liabilities. We say that applying Yango to the present case we say that to deny the respondent of his civil remedies would be unjust and would certainly not be in the public interest. The purpose of the Act is sufficiently served, we say, by the imposition of a penalty provision in respect of the breach of section 56, and to deny his remedy in contract, the consequences would greatly outweigh the statutory punishment that could have been imposed upon him.

The Water Act itself provides a number of sanctions in the preservation of the water resource in the Territory. Firstly there is a prohibition against unlicensed drillers, section 48. Section 49 provides the conditions under which a drilling licence may be granted. The regulations also provide the circumstances under which a person may become a licensed driller, but apart from those sanctions, there is power for the Controller to enter and take action - section 20 and section 70:

Power to Give Directions

Section 105 provides that the institution of proceedings for offences under the Act:

shall not be commenced without the consent in writing of the Controller;

And those matters, your Honours, we say that the breach was minor and that it is not a case where special leave should be granted.

BRENNAN CJ: Thank you, Mr Norman.

We need not trouble you in reply, Mr Wilson. There will be a grant of special leave in this case.

AT 11.07 AM THE MATTER WAS CONCLUDED