Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrication Pty Ltd and ANOR S149/1998 [1999] HCATrans 85 (16 April 1999)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S149 of 1998

B e t w e e n -

ASSOCIATED ALLOYS PTY LTD

Applicant

and

METROPOLITAN ENGINEERING AND FABRICATION PTY LTD and KEVIN R. SHIRLAW

Respondents

Application for special leave to appeal

GLEESON CJ

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 16 APRIL 1999, AT 9.31 AM

Copyright in the High Court of Australia

MR R.J. ELLICOTT, QC: Your Honours, I appear with MR W. HAFFENDEN for the applicant. (instructed by K.J. Minotti & Co)

MR B.A.J. COLES, QC: If your Honours please, I appear with MR M.J. COHEN for the respondents. (instructed by Brown & Partners)

GLEESON CJ: Yes, Mr Ellicott.

MR ELLICOTT: Your Honours, this matter raises the construction of what your Honours will recognise, and has been traditionally known as the Romalpa clause, and as far as our researches go, the Court has never considered such a clause. It obviously has considerable commercial interest - that is the clause itself. Needless to say, since 1973, I think it was when the Romalpa Case was first decided, there had been a number of authorities that has given rise to a great deal of debate. Obviously each case, the justices will say, in the end depends on its own facts and the terms of the particular provision.

One of the debates that has arisen relates to those cases where the particular clause provides for a trust over either the goods or the proceeds. Where the trust is for the debt, but the goods and the proceeds are of a greater value, there is, perhaps, a good reason for saying that is a charge on the book debts, and there have been cases that have dealt with that.

This is not such a case. This is a case - and I will take your Honours to the clause in a moment - this is a case where the parties deliberately said that there would be a trust over proceeds to the extent of the amount due at the time that the proceeds were received. Now, in such a case, we say, there is no room for a charge because it is a simple bare trust.

GLEESON CJ: On page 38 at line 30 in the judgment of Mr Justice Sheller, there is a sentence beginning with the word "However" that looks as though it might be fairly central.

MR ELLICOTT: Yes, I was going to take your Honours to that particular passage. Could I go back - and I will come to that, your Honour - could I go back to page 61 of the application book, and your Honours will have noticed that the first four paragraphs, they call them subclauses, those four paragraphs relate to the situation where the goods or the products still remain in existence. I just draw attention to the word "proceeds" there, in the third paragraph:

The purchaser will receive all proceeds -

The basic error, we say, in the judgments below, and including the trial judge, was to treat proceeds as referring to the price agreed to be paid. We say that that is not what the parties clearly intended it to mean in that clause. They intended it clearly - - -

GLEESON CJ: You mean by the price agreed to be paid, you mean by the price agreed to be paid by the person to whom the goods are sold?

MR ELLICOTT: Yes, that is right. That was the basis upon which the Court of Appeal said there was a book debt, but the word `proceeds" there, we would say, clearly means an amount of money received, or the consideration received and it is:

and will keep such proceeds in a separate account until the liability of the vendor shall be discharged.

They said, of course, that under those first four paragraphs there could be no question of a charge. The parties turned their minds against the charge, and there was only a trust. Then we come to the fifth paragraph:

In the event that the purchaser uses the goods/product in some manufacturing or construction process of its own or some third party, then the purchaser shall hold such part of the proceeds of such manufacturing or construction process as relates to the goods/product in trust for the vendor.

As relates to the goods. There has to be a way of determining how much relates to the goods. The last sentence tells you:

Such part shall be deemed to equal in dollar terms the amount owing by the purchaser to the vendor at the time of the receipt of such proceeds.

We say that it is abundantly clear from that, that what the parties intended was that when the proceeds are received you look at the amount outstanding and if they are greater than the amount outstanding you take out of those proceeds and you put it into a separate account and they are held on trust, and it is a bare trust, and it should be paid over to the vendor. If, of course, it is less than the amount then outstanding, then the whole of it is held in trust and should be paid over to the vendor.

Up till that point of time, we say that the preferred construction is that the vendor really does not have any rights except the right to payment. No doubt this clause has been drafted in the background of all these other cases that have taken place, and it has been done, we say, deliberately to avoid this problem of a charge, and therefore we say there is a trust.

Your Honours, can I go to those pages? There are a couple of statements which are central, and I will just start at page 34 if your Honour the Chief Justice does not mind, just to lead into this - that is to page 38. At line 22:

In the present case, Metropolitan did not acquire title to the goods before payment and could not, accordingly, charge the goods in favour of Alloys.....There could be no question of any charge over the goods, the title to which Alloys retained -

So, their Honours agreed that there was not a charge under the first four paragraphs. That is all I wanted to point out about that. Then, at 37, 35 to 50 - and this, we say, is where the Court of Appeal fell into error:

In my opinion, the proceeds of the manufacturing process to which subcl (5) referred was the price agreed to be paid for the goods derived from that process.

If your Honours, looking at page 61 again, are able to read into 61 that construction, then we would submit that that is a very difficult task because it is, in a sense, restructuring the agreement between the parties. That is not what they agreed. They said the proceeds, we say, and clearly indicated it, is the amount received as part of the proceeds of sale. He goes on:

Unless otherwise agreed, a buyer must be ready and willing -

He gets comfort from the Sale of Goods Act, but we would submit that does not assist. At 38 we come to the passage that your Honour referred to. At line 26:

However, in my opinion, if subcl (5) is to have any operation it must have operated to charge the book debts as defined immediately they came into existence. If it were otherwise, Metropolitan would be left to deal with the book debts as it pleased. To adapt the words of Roskill LJ in the Romalpa case at 690 it would be strange if the first step in Metropolitan's becoming entitled to the proceeds of sale of the derived goods afforded no relevant security while the next step, when money was received, was the subject of an elaborately drawn provision to give such security.

We say that the parties here have spoken in clear words, and have indicated that the proceeds means those moneys that are received. His Honour has fallen into error because he has said, going back to that earlier passage:

the price agreed to be paid for the goods derived from that process.

He repeats that at line 49 on page 38:

The first sentence in subcl (5), by use of the word "then", meaning "in that case", emphasised that part of the proceeds should be held in trust for Alloys as soon as they came into existence, that is, as soon as there was a price agreed and payable in accordance with the contract for sale.

GLEESON CJ: Is part of your argument, in relation to what appears at line 36, that it is not strange, it is deliberately done that way in order to avoid creating a registrable charge?

MR ELLICOTT: Yes. That is what these parties were doing. They wanted a trust.

GLEESON CJ: Is that the significance of the passage in Benjamin that you have quoted?

MR ELLICOTT: Yes, that is right. Your Honours will have read that and will have noticed that he raises this very point, and the dilemma between the two cases: one where the trust relates to goods, or proceeds, which are greater in value than the debt due to the vendor; and the case which he posits which has never been decided, we say, which is this case, where the trust relates to an amount of the proceeds which is equivalent to the amount that is then outstanding.

McHUGH J: Mr Ellicott, what is sufficiently special about this case to warrant a grant of special leave? Does it not concern no more than the construction of a particular agreement?

MR ELLICOTT: Your Honour, I suppose it can always be said that that is so when we are dealing with commercial matters. It does depend on the particular case, but these clauses have given rise to a great deal of debate in the courts. A lot of them are in England, of course. But, parties, particularly vendors, have been attempting to create appropriate clauses which will enable them to get the protection. Could I just refer to what Lord Goff, when he was Lord Justice Goff, said in Clough Mill Ltd v Martin. I just have a short passage. It really, I would submit, raises the question which - on 116 about two-thirds of the way down, he says, against F:

In every case, we have to look at the relevant documents and other communications which have passed between the parties, and to consider them in the light of the relevant surrounding circumstances, in order to ascertain the rights and duties of the parties inter se, always paying particular regard to the practical effect of any conclusion concerning the nature of those rights and duties. In performing this task, concepts such as bailment and fiduciary duty must not be allowed to be our masters, but must rather be regarded as the tools of our trade. I for my part can see nothing objectionable in an agreement between parties under which A, the owner of goods, gives possession of those goods to B, at the same time conferring on B a power of sale and a power to consume the goods in manufacture, though A will remain the owner of the goods until they are either sold or consumed. I do not see why the relationship between A and B, pending sale or consumption, should not be the relationship of bailor and bailee, even though A has no right to trace the property in his goods into the proceeds of sale. If that is what the parties have agreed should happen, I can see no reason why the law should not give effect to that intention.

That is the basic principle, we say, and we say the Court of Appeal has departed from that. If it has departed from it, then it is important commercially, in relation to a clause which is not a one-off type of clause, but one that is commonly used, then there is a good reason why this Court should intervene and deal with the matter, because it has that broad relationship.

McHUGH J: But given the passage that appears at page 38, why is it not open to traders in other cases to adjust an agreement such as that set out at page 61, or a title as that set out at 61, to overcome the passage on page 38, to make it quite clear that it was not intended to operate to charge them the book debt?

MR ELLICOTT: Your Honours, we would say these parties have really done their utmost - we would say, in effect, that there is another ground, namely, that administration of justice in this particular case is required by special leave. That is because, we say, they are clearly wrong. These parties have, in effect, we would submit, used a clause which creates, if you like, a law school trust; it is a sort of simple case of a trust.

McHUGH J: That seems to be the only basis for special leave, because I really do not think there is any question of general principle involved in this.

MR ELLICOTT: The general principle is that apparently the Court of Appeal has, in a case where the parties have gone out of their way to deal with the matter in a way that we would submit is abundantly clear - not just arguable, but, we would submit, on the face of it, the Court of Appeal is wrong, and in those circumstances, this Court ought to intervene where the clause, itself, is one of a nature which is widely used in commerce.

GLEESON CJ: Mr Ellicott, what is the practical consequence of concluding that an agreement such as this requires registration?

MR ELLICOTT: The practical consequence is that parties have to go to the trouble of registering, and that means, under 262, as it then was - it is no doubt some other number now - of the Corporations Law, and, of course, in the ordinary run of commerce, parties do not think about those things. They enter into contracts; these things are done in international trade - this was not done in international trade, but it was done in contemplation of international trade, and these things are occurring day by day, and the small business people will put their clauses on, with the advice of the local solicitor, perhaps - - -

GLEESON CJ: Put their clauses on or leave them off. I was going to ask you why is the - - -

MR ELLICOTT: They do not think in terms of, "Should I rush down and register this?" - and they would have to register every document.

GLEESON CJ: What is the significance for this case of the absence of this provision, or these words from one of the invoices? I mean by that, I am just looking at the question of whether this is an appropriate vehicle to test this question. What would be the consequence of concluding in the present case that because the clause was left off one of the invoices it did not have application in respect of one lot of goods? How would you then make this clause work?

MR ELLICOTT: There was a question there as to whether or not it should be implied due to a course of conduct that the parties had acted in this way. I think it is fair to say that below, and it is in the last passage, I think, of the judgment of Justice Sheller, that my friend was inclined not to disagree with the proposition. I am not saying he has conceded it.

McHUGH J: Yes, I tended to think that you really have to find - - -

MR ELLICOTT: In other words, we would be able to get up the point that the parties conducted themselves on the basis that this clause operated; that, therefore, would not provide an impediment. Our basic submission is that if this Court has not previously considered a Romalpa clause, and as it has generated debate in courts in Australia and elsewhere, and as there appears to be, on the face of this, a clause which purports to set up a trust in clear terms against the background of cases referred to by Benjamin on Sale, for instance, where the trust is over property in respect of proceeds which are larger than the amount owing, in those circumstances, this is a clear vehicle for a debate, but it is also a matter of considerable importance to the commercial community, that this particular issue be settled, and we would ask that your Honours, on those grounds, would grant special leave to appeal.

GLEESON CJ: Thank you, Mr Ellicott. Yes, Mr Coles.

MR COLES: If your Honours please. Firstly, we submit that clauses of this kind are, of necessity, infinitely varied, and the body of case law that has grown up, which we emphasise is largely English case law comprising first instance or intermediate appeal judgments, has served only to illustrate the infinite variety of drafting techniques available in clauses of this kind.

A decision by your Honours on the construction and operation of this clause would not, in our submission, resolve any question of doubt or general importance. It would merely provide fuel for the - - -

McHUGH J: It may, to this extent, may it not, that if this Court says that this particular clause was effective, then in cases concerned with a purchaser using goods in a manufacturing or construction process, it might then become known as the Associated Alloys clause.

MR COLES: Yes, this would be this Court's contribution to renaming Romalpa to Associated Alloys, but we submit more may be required to attract a grant of special leave than the assistance of the drafting members of the commercial community. We say that nothing else would be the result.

GLEESON CJ: What do you say about the argument Mr Ellicott addressed to the reasoning on page 38?

MR COLES: We firstly adopt the reasoning of the Court of Appeal, and implicitly of Justice Bryson that, in effect, you cannot separate out the charge consequences appending the book debt from the trust.

GLEESON CJ: But it may be that that which Mr Justice Sheller said was strange is, in truth, readily understandable if the clause were drafted in this way precisely for the purpose of avoiding the necessity to register it as a charge.

MR COLES: Yes, that is a possibility. We next contend, however, that for other reasons this case could not be a suitable vehicle. In short, it is one thing to, of course, point to the operation of the clause, but the clause needs to assist in the operation of the transactions and dealings between the parties. I want to give your Honours two references. If your Honours would look firstly at page 36 of the application book, your Honours will see there is recorded, about line 42:

Bryson J said that Metropolitan had done nothing to identify any part of the proceeds -

that is the proceeds of resale -

as relating to the steel in the three invoices and had done nothing to set aside and hold any part of the proceeds in trust for Alloys.

GLEESON CJ: Does that mean anything more than that if a sum of money were received on trust for Alloys, it was not treated in that way by Metropolitan.

MR COLES: That is right.

GLEESON CJ: What would follow from that?

MR COLES: What follows from that is when one adds to that a further finding of facts, we submit, by his Honour - if your Honours would go back to page 12 in the application book at line 20 his Honour records:

Further there is no basis on the evidence on which any particular one of the derived products, whether they have been delivered to Lucky Goldstar -

which was the purchaser in Korea:

or are still in Metropolitan Engineering's hands, can be identified as having been produced from the goods in any one of the three invoices.

Those findings of fact are important in the context of the relief sought.

GLEESON CJ: Might I ask, can they be identified as having been produced from the goods in one or other of the three invoices?

MR COLES: There is no evidence that that is so in the findings made by his Honour.

GLEESON CJ: I just want you to be clear about my question. Can they be identified as having been produced from goods in the three invoices, although which of the three invoices is not clear.

MR COLES: We are inclined to submit not. There is certainly no finding that supports that inference. But, in any event, even if there were that would not suffice, because each invoice is specific to the goods the subject of it.

GLEESON CJ: But do the three invoices in question cover all the relevant goods that were supplied?

MR COLES: No, they do not. That is the difficulty. There are some 20 or more invoices; some of which were paid; some of which were paid in part - at least one of which was paid in part - and these three were three of the 17 or 18 or 20 or so in total that happen to be the three that were not paid at all. There are quite a number of others that were paid. Of course, what has happened here is each invoice purports to create a charge in respect of proceeds for sale for the goods the subject of that individual invoice. The quantities of steel and - - -

GLEESON CJ: Purports to create a trust, actually.

MR COLES: I do apologise. In fact purports to create a trust, not in terms of charge; your Honour is correct. But, each one is specific to the particular goods the subject of the invoice. On the other hand, the goods were no doubt consumed in a larger scale manufacturing process for a continuing contractual arrangement with a Korean company. We say that the findings of his Honour indicate that when one looks then to what relief the applicant sought, both before Justice Bryson and eventually in this Court, and for that purpose you go to page 59 of the application book, you will see that there are the greatest possible difficulties.

GLEESON CJ: Do you mean by that, that for reasons unrelated to any breach of trust on your client's part, it would be impossible, applying this clause to the facts and the circumstances of the present case, to identify an amount of money held on trust.

MR COLES: Yes; and Justice Sheller did say it may well be that that simply, of itself, defeats the applicant's claim for relief, although he did not need to decide that because he pronounced against the applicant on the basis of the construction clause having the effect he found. Page 59 records the primary relief sought by the applicant, which is that there is held on trust for it an amount of $US197,000. Now, $US197,000 happens to be the aggregate of the three unpaid invoices, but there was no evidence, and in the light of the findings of fact obviously there could not have been any evidence that there was held, or available, or retained on trust, any identifiable sum of money representing the proceeds of the resale at all. So, a declaration in terms of that paragraph could never have been made, and if your Honours were to conclude that Justice Sheller's reasoning was wrong, it would take the matter, in our respectful submission, no further.

GLEESON CJ: Is this the proposition that is referred to on page 44 commencing at line 1?

MR COLES: Yes, quite. There is further a prayer for an account, but one asks, with respect, an account of what, because absent an identifiable trust fund there is nothing for which an account can be directed. Plainly, the liquidators, formerly the administrators, could not be, themselves, liable to account unless it was shown, and there was no attempt before Justice Bryson or the Court of Appeal so to show, that they had, themselves, in some way, with knowledge of the facts, participated in the non-earmarking of the proceeds of sale for trust purposes.

GLEESON CJ: We have two issues that I think we need to keep separate. One is any conduct on the part of your client which made it difficult to work out how this operates, which I presently would have thought was irrelevant; and the other is an impracticability of doing the exercise resulting from the course of dealings between the parties, which is a different question.

MR COLES: It seems, although we do not put anything in particular, but it seems from the description of the manufacturing process involved, which must be case-specific to the present proceedings, the consumption of the goods, which were, in effect, raw steel, in the more elaborate manufacturing process, and the on-sale of those manufactured items, would have made it a practical commercial difficulty, if not an impossibility, to earmark the eventual proceeds of sale to the extent of the original unpaid invoices with the identity of a trust fund payable for the benefit of the applicant. We see that insurmountable difficulty. I am fortified by, in the applicant's favour, by any findings of fact that could say that difficulty could be resolved; at least render this a wholly unsuitable vehicle for a grant of special leave. Your Honours could, at best, in our respectful submission, pronounce abstractly on the consequences of the clause, and the validity of the Court of Appeal's reasoning as to its application.

The last matter raised concerned the invoice did not have the clause. We sought to raise before the Court of Appeal something which we, I think, had to concede was not raised in the court below, namely, that on an analysis of all of the circumstances, where the Romalpa clauses or the retention of title clauses were not as a matter of contract law incorporated into the contract between the parties at all, for the basis reason, of course, that the contract was formed by orders and acceptances of orders, and the Romalpa clauses appear to come at the end of the deal, as it were, once the invoices are issued. That is, in effect, Oiley v Marlborough Court sort of point. We were refused that application to argue whether in truth and in fact the clauses really were incorporated. We would wish, with whatever prospects of success we might anticipate enjoying, to agitate that question afresh before your Honours if leave were granted to the applicant. But, we would say the prospect that there is always, in cases such as this, a real question whether the clauses are even incorporated, is another reason why there could be some question as to the suitability of the instant proceedings as worthy of a grant of leave.

Otherwise, we would wish to say finally, your Honours, that even if the precise reasoning of Justice Sheller were open to debate or question, there is an alternative ground based upon what he put by the citation from Justice Templeman in the Borden Case. That is to say, rather than simply being a charge on book debts, this was a charge in the nature of a floating charge, and therefore equally susceptible to the operation of 266 of the Corporations Law.

We would say that that conclusion is in any event available as an alternative. In fact, the Court of Appeal may have there fallen into error because they said, correctly, that you would not find a floating charge over a trust fund. But the problem, of course, is there was not a trust fund; there was merely a fund of the proceeds of sale out of which a trust fund might have been appropriated. With respect to the proceeds of sale the charge could, as Lord Justice Templeman describes it, have floated down and become a floating charge, even if once the trust fund were created it did not enjoy that quality. We say that there is, in any event, an alternative basis for upholding the result that the contractual arrangements produced a security arrangement in any event.

It is plain enough, and we here adopt what Justice Bryson said, that the arrangements were contemplated by way of security, because the interest in the trust fund, if one had ever been created, was inherently defeasible, having regard to the fact that, for example, if the creditor were paid out of other funds then the trust fund, even if it represented the proceeds of sale, would simply vanish. So, it was a security arrangement. The only issue is which of two possible provision in the Corporations Law, if any, it attracted. In our respectful submission, it is equally possible to maintain the Court of Appeal's reasoning on the alternative basis of a floating charge. I mention that, both for the reason that it suggests also this may not be a suitable vehicle, but secondly, that is another question we would wish to agitate before this Court if the applicant were granted the leave it seeks.

GLEESON CJ: Mr Ellicott, what do you say about the proposition that on the facts of the present case the relief that you are seeking would not be available?

MR ELLICOTT: Your Honour, to answer that, could I hand up some documents? These proceedings commenced in April 1996. I think the summons was dated 18 April 1996, and the liquidation, of course, had occurred prior to that, and the voluntary administration had occurred prior to that. In the summons we asked for, in 1(b):

An order that the second defendant.....account to the plaintiff.

The second document is an affidavit from an accountant employed by the first defendant. This was in the proceedings before Justice Bryson. In paragraph 5:

I can work out an approximate relationship between the cost of steel material supplied by the plaintiff being $476,913.93 to the total cost of other material and labour in constructing the 35 jobs which is estimated to be $3,875,147.61 - - -

GLEESON CJ: How does that relate to the three invoices in question?

MR ELLICOTT: That is part of the jobs - that $476,913.93 represents the - I will not say all the invoices, but some of the invoices - it is the total there that some of them to the amount of some $200,000-odd was still outstanding. He is saying:

I say that the materials supplied by the plaintiff represents about 11.45% of the total contract price -

Obviously, there may be parts which do not contain our materials, but that is not to the point. It was supplied in order to process these jobs.

The judgment in this matter was given rather quickly as a matter of urgency, it came on quickly, and judgment was given in May 1996, and the hearing of the appeal was early August 1998, but an application for expedition was made, and the third document is an affidavit by a Mr Cussen - - -

McHUGH J: Before you go to that, Mr Ellicott, what is the meaning of the square brackets and the words "object defer"? Was there ever any ruling on these paragraphs?

MR ELLICOTT: No. I was not below, but my friend tells me.

MR COLES: Mr Cohen appeared below, your Honour.

MR ELLICOTT: There was never any decision.

McHUGH J: But that means this material never got into evidence then.

MR ELLICOTT: No, but the objection was never ruled upon, and it stayed in. In this affidavit for expedition at paragraph 13:

The sum of $206,469.30 is held b a Korean Company, L.G. Engineering -

that is Lucky Goldstar Engineering -

as retention monies in respect of a contract completed by Metropolitan Engineering and Fabrications Pty Limited in or about July 1996. The retention monies are to be held for a period of two years and are due to be released in August 1998.

That was after the matter was heard, but apparently before judgment was given. There was also evidence that as at 29 February 1996 - and I know it is difficult for your Honours to encompass this in the time we have - but on 29 February 1996, being a leap year, the amount then outstanding to be invoiced was $2 million, under these contracts. That meant, of course, that there were a lot of funds there which could be appropriated or entrusted to our client. The proceedings started; judgment was given against us; we wrote and said to the liquidator, "We hold you personally liable if you dispose of funds".

What I am saying is that we are entitled to an account, at least - that is to say, to have an inquiry as to whether or not the funds were received. Are they still retained? If they are not retained, was the liquidator aware of our rights at the time and, if so, are there some rights which we have against the liquidator? In other words, these are not academic proceedings, even if there are no funds. We are entitled, we would submit, to have our right to an account, and if that account leads to the fact that there are no funds outstanding, that may, at the same time, lead to the proposition that we have a claim against the receiver or liquidator. It is on that basis that we would say this is not a matter that the Court should refuse simply on that ground.

GLEESON CJ: Thank you. We will just adjourn for a short time to consider the course we will take.

AT 10.09 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.10 AM:

GLEESON CJ: In this matter there will be a grant of special leave to appeal.

AT 10.10 AM THE MATTER WAS CONCLUDED