Deeds of release are undoubtedly one of the most frequently encountered legal documents in any dispute resolution practice. That is particularly so in banking and finance, where forbearance arrangements commonly incorporate a release. While the aim of such clauses is often to cast the release in the widest possible terms, the recent decision of the New South Wales Court of Appeal in Angas Securities Ltd v Small Business Consortium Lloyds Consortium No. 90561 (Angas Securities) is an example of the consequences of the provisions of a release operating more widely than intended. It serves as a reminder of the need to carefully tailor release clauses to suit the individual circumstances of the case. While that advice may seem trite, a number of recent reported cases which involve disputes concerning the scope of releases justifies revisiting this important topic.
The problem in Angas Securities
Angus Securities Ltd (Angas) lent money on the security of mortgages over real property. Small Business Consortium Lloyds Consortium No. 9056 (SBC) insured Angas for losses suffered as a result of borrower defaults, specifically (and importantly) outstanding principal and expenses remaining after the realisation of security taken.
Angas lent $2,340,000 to Mr and Mrs Opie. That loan was secured by a first mortgage over a penthouse in Glenelg North, South Australia. Two other entities made loans to the borrowers, secured by second and third mortgages. Prior to Angas making its loan, it obtained a valuation from Valcorp Australia Pty Ltd (Valcorp). Valcorp valued the property at $3,600,000, or $3,200,000 on a forced sale. The borrowers defaulted and Angas ultimately sold the property as mortgagee in possession. The net proceeds of sale was $1,686,971.47.
Angas sued Valcorp. The losses claimed by Angas were first, damages for loss of principal and, secondly, the loss of an opportunity to earn interest on alternative loans that could have been made. Valcorp asserted contributory negligence on Angas’s part.
Angas and SBC entered into a deed of release which relevantly provided for the payment by SBC to Angas of $597,627 which the parties agreed was the indemnity due to Angas under the insurance policy. Angas released SBC from further claims for indemnity on the basis that:[2]
… repayment of the indemnity sum to SBC takes priority from any funds [Angus] received from any claim against a Third Party for recovery of damages arising out of the default by the borrower (save for payment of recovery costs).
Separately, by letter, SBC agreed to contribute to the costs of the proceedings against Valcorp. While it is unclear whether the parties contemplated it at the time, a finding of contributory negligence may have disentitled Angas to any payment under the policy, as by the policy Angas warranted that it would act prudently in lending to borrowers.
Ultimately (the proceedings against Valcorp being finally determined on appeal to the Full Federal Court), Angas was awarded $649,198.07 in damages. The component of those damages attributable to the loss of opportunity of $310,977.74.
From the judgment sum, Angas paid SBC $310,340.21. It did not repay the whole of the amount paid by SBC under the deed of release ($597,627) on the basis that $310,340.21 represented the proportion of the damages awarded to Angas for loss of principal (being a loss covered by the insurance policy) and excluding the loss of opportunity damages. SBC disagreed, relying on the terms of the deed of release, and sued Angas for the difference.
The parties’ competing contentions
SBC’s argument was simple. It relied on the ordinary meaning of the words used in the deed of release, namely that the deed required Angas to repay a “recovery of damages” awarded to Angas and the judgment against Valcorp fit that description.
Angas’s five arguments could be distilled to one proposition, namely that the loss of opportunity damages were not losses SBC insured Angas against, and the deed of release should be read down to reflect this fact. To illustrate the commercial sense of this proposition, Angas argued that had SBC sued Valcorp under its right of subrogation, it would not have been entitled to retain the loss of opportunity damages.
A further expression of that argument was that the terms of the insurance policy only held Angas liable to account to SBC for indemnified losses. SBC did not dispute this. The deed of release, therefore, gave SBC greater rights than it had under the insurance policy, and it could not have been intended that the deed operate in that way.
Construing the deed of release
The starting point of analysis of Sackville AJA was the unanimous approval by the High Court in Victoria v Tatts Group Ltd[3] of the principles of construction articulated by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd4 and, in particular, the circumstances in which resort may be had to extrinsic material in determining the meaning of a term of a commercial contract.
Applying those principles, Sackville AJA (with whom McColl JA agreed) construed the relevant clause of the deed of release (reproduced above) by reference to the text of the deed as a whole, the commercial object or purpose of the deed and the relevant surrounding circumstances. His Honour found that the meaning of the clause, when read in context, was clear. The submission that it could not have been intended that the effect of the deed was to augment SBC’s rights under the insurance policy was rejected. Indeed, the court (with respect, correctly) held that to so construe the clause gave it no work to do, with the effect that it merely restated the parties’ existing rights and obligations under the insurance policy. His Honour found there was nothing commercially unrealistic about Angas agreeing to refund SBC a greater proportion of its recovery from Valcorp than it was obliged to under the policy.
The cost of a word
It seems likely that Angas did not in fact intend that the deed of release would expand SBC’s rights under the policy and that outcome came about by reason of a drafting error. As was alluded to by Leeming JA,[5] the outcome may have been different had the term “subrogated” been inserted prior to “claim” (as had occurred elsewhere in the deed) to describe the character of the third-party claims. If that be the case, Angas Securities is a powerful reminder how much one word can cost.
The importance of clear drafting has been illustrated in two cases decided in 2015 which concerned the breadth of the operation of deeds of release.
In the first, the high-profile case of IBM Australia Pty Ltd v Queensland[6] (IBM Australia), the state sought to test the breadth of a widely drafted deed of release. Although that challenge was ultimately unsuccessful, leaving the door ajar to a multi-million dollar claim was presumably productive of much angst on the part of IBM, and particularly the persons responsible for drafting the release. The second, Doggett v Commonwealth Bank of Australia,[7] concerned the efficacy of a widely drafted compromise letter in extinguishing claims the appellants in that case were not aware of the existence of. Again, the clause was found to be effective, but it may be the case that a more perfectly drafted release clause may have removed any scope for argument.
Reliance on precedents, often featuring what Martin J referred to in IBM Australia as the “thesaurus” approach to drafting,[8] is no substitute for approaching the drafting of releases on a case-by-case basis. The release ought not be too narrow so as to be ineffective, nor so wide as to either invoke equitable doctrine, the operation of which was explained by the High Court in Grant v John Grant & Sons Pty Ltd,[9] or lead to the kind of unintended consequence that occurred in Angas Securities.
[1] Securities Ltd v Small Business Consortium Lloyds Consortium No. 9056 [2016] NSWCA 182 ;
[2] Above n 1, at [66].
[3] Victoria v Tatts Group Ltd (2016) 328 ALR 564 ; [2016] HCA 5
[4] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 325 ALR 188 ; [2015] HCA 37
[5] Above n 1, at [12].
[6] IBM Australia Pty Ltd v Queensland [2015] QSC 342 ;
[7] Doggett v Commonwealth Bank of Australia [2015] VSCA 351 ;
[8] Above n 6, at at [70].
[9] Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112