[1999] PNGLR 627

PAPUA NEW GUINEA

[supreme court of justice]

Panga Coffee Factory P/L;
Highlands Coffee Export P/L;
Pous Trading Company P/L; and
Kum Farming & Trading P/L

v

Coffee Industry Corporation Limited

waigani: woods, sheehan, sawong jj
26 August, 6 October 1999

Contract — Statutory illegality — Deed of Arrangement to settle claim by exemption from levy — Powers of a Statutory Corporation to control and regulate the production, marketing and export of coffee — Power to exempt only applies to type and form of coffee not to particular exporters — No power to exempt an exporter — Clause not severable.

Facts

The trial judge found that the Coffee Industry Corporation, have no power to exempt any person from paying a coffee export levy and that under ss 6, 7, and 8 of the Coffee Industry Corporation (Statutory Functions & Powers) Act 1991, all levies were to be applicable to all exporters. Hence, the respondents have acted unlawfully in executing the Deed of Agreement. The trial judge found the contract to be void and unenforceable. 

Held

1.	It is common ground that Courts endeavour to uphold contracts of parties validly made. And where contracts contain invalid or illegal provisions, rather than simply condemning the whole contract for the taint of an invalid provision, the Court will uphold the valid provision if it is possible to do so. If the offending provision can be severed from the contract without destroying the proper import of the contract it will do so.

2.	When valid promises are associated with, but are separate in form from invalid promises the test for severance 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.

3.	Appeals 1 and 30 of 1999 were dismissed and the rulings of the trial Judge on 28 November 1998 on the invalidity of the clause 3 is upheld. Hence, since clause cannot be severed, the claim of Panga is dismissed. All appeals dismissed.

Cases cited

Credit Suisse v Allerdale BC [1996] 4 All ER 129.
Carney v Herbert & Os [1985] 59 ALJR 41.
Electric Acceptance Pty Ltd v Thorley Caravans (Aust) Pty Ltd [1981] VR 799.
Yango Pastoral Co v 1st Chicago Australia (1978) 139 CLR 410.

Counsel

J Griffin QC, G Egan, K Kua, for the appellants.
R O'Regan QC & I Molloy for the respondent.

6 October 1999

By the court. These appeals were heard together. Whilst there have been a number of appeals and also applications in connection with them the issues of competency raised by both sides have been withdrawn and it is agreed that the main issues to be determined by this Court are the substantive rulings by the trial judge, on the 26th November 1998 and 12 February 1999. In the first of these, the trial judge held that certain clauses in a Deed between the parties were illegal and proceeded to sever them from the Deed. Later the trial judge revisited that ruling and determined that the clauses could not be severed without wholly nullifying the Deed and as a result dismissed the appellants' claim.

The appellants had filed a claim in the National Court in April 1996 seeking specific performance of an oral agreement made by the parties on the 29 February 1996 and which oral agreement had been incorporated in a Deed of Agreement dated 3 March 1999. The main term that agreement sought to be enforced was that the First and the second plaintiff were to be exempted by the respondents from paying any export levy on coffee sales to the value of K14,048,911.00. This arose from an agreement to settle a claim that the appellants had alleged against the respondent Corporation.

At issue in this appeal is whether clauses 3 and 6 of the Deed were indeed illegal as ruled, and as such, those clauses severable from the Deed or so integral a part of the Deed that severance would destroy the Deed itself. That is, was the claim correctly dismissed on the basis that the illegal clauses couldn’t be severed from the Deed without destroying the Deed itself.

In the oral agreement of 29 February 1996 the respondent agreed to pay the first and second appellants the sum of K25 million in settlement of a claim raised by the appellant less an outstanding debt of K10,918,088.80 that the first appellant acknowledged was owed to the respondent. It was then agreed that the balance of the claim, would be settled by the first and second appellants being exempted from paying the export levy on coffee exports. The written Deed dated 3 March 1996 which was to give effect to that oral agreement stipulated that the first and second appellants shall be exempted from paying export levy to the value of K14.048.911.

The Deed of 3 March states as follows:

2.	Panga and CIC agree that through the actions of the previous Coffee Industry Board Panga has suffered significant damages. Panga and CIC have agreed to settle the damages claim from Panga in the order of K25 million less the balance outstanding of the stock retention loan as at the date of this Agreement, which net amount shall be paid on terms and conditions as set out hereunder.

3.	As from the date of this Agreement:

(a)	Panga and CIC agree that Panga and/or HCE shall be exempted from paying export levy on both overseas and local coffee sales to the value of K14,048.911 being the agreed settlement amount; and ….

The trial Judge considered the powers of the Coffee Industry Corporation under the Coffee Industry Corporation (Statutory Functions and Powers) Act 1991 to ascertain whether the above provisions of the deed were powers open to the Board within the ambit of the Act. The trial judge found that the CIC's powers were clearly set out in the Act and the power to impose a levy provided in Sections 6 and 7 of the Act.

Section 6 gives the power to fix a levy and Section 7 gives the power to impose a variable levy on any particular form or type of coffee or coffee product that may be exported. The trial Judge found that any export levy imposed made with reference to the type and form of coffee or coffee product to be exported is to be levied against all exporters. The issue for the trial judge was whether the CIC has the power under the Act to enter into an agreement whereby it may exempt a particular coffee exporter from paying an export levy.

He found that where the CIC imposes an export levy in the exercise of its discretion it is the clear intention of the legislation that such a levy should apply equally to all coffee exporters in respect of that particular type or form of coffee or coffee product. It follows therefore that the CIC could not discriminate between the coffee exporters. The only exception in which a coffee exporter may be treated differently is set out under s 7(9) of the Act, which deals with a former levy and a new levy to a particular exporter in circumstances, which are not applicable to the present case.

The trial judge found the above construction consistent with the overall purpose of the Act which is to control and regulate the production, processing, marketing and export of coffee in the interests of the collective benefit of the coffee industry. He then found that the purported exercise of power to grant an exemption to a particular exporter to the exclusion of all other exporters is inconsistent with the clear intention of the Act that all exporters should be treated equally. Therefore the purported exercise of a power to exempt a particular exporter must be prohibited by the Act. The trial judge therefore found that the contract, which purported to exercise such a power, is void and unenforceable.

It was submitted that in effect, the exemption from the levy is to enable a set-off of one debt against another, namely the balancing of the acknowledged stock retention loan debt against a claim of loss, the balance to be by way of exemption on levies. But that mode of 'payment' is one, which the Board was not entitled to undertake. First of all the claim is not a pre-existing debt, nor even an acknowledged debt, but rather is an amount agreed to be paid to effect a settlement of a claim. Before the agreement was executed it did not exist as a debt at all. Further, the levy itself cannot be called a debt because at the time of the agreement there was no ascertainable amount, it was only amounts that may in future be payable following certain possible activities of the parties.

There were no agreement for periodic reduction of any balance sum by stipulated instalments which may fall due at stated times in the future, the agreement did not state that. Rather the Agreement purports to grant a blanket 'exemption' which immediately brought the arrangement in conflict with the terms of section 7 of the Act.

We agree with the learned trial judge that the Act gives no power to the Corporation to exempt particular coffee exporters; it only gives the power to exempt in relation to a type or form of coffee. The Corporation is a public authority with a power to deal in monies for which it has obligations to the members of the public engaged in the industry. It can only enter into arrangements and contracts in accordance with its powers under its enabling legislation as referred to above. There was a clear lack of capacity to enter into the arrangement set out in Clause 3 (a). See Credit Suisse v Allerdale BC [1996] 4 All ER 129.

The appellants are claiming enforcement of a contract under deed, which purports to acknowledge the appellants claim for compensation, and stipulates its mode of payment. Clearly that mode of payments is illegal and unenforceable.

There was reference to the belief of the Minister communicated to the Board that a settlement of the claim would be in the best interests of the coffee industry. That is completely irrelevant. The Minister is not the Corporation. It is the Corporation that is regulated and bound by its Act and it must at all times act in accordance with its powers and responsibilities as defined in the Act and for the best interests of all coffee producers in Papua New Guinea.

The reference to the power granted to the Corporation in its Memorandum of Association to secure the repayment of any debt in any way refers to debts from others, not to the payment of its own debts, if, of course, the "settlement" of the purported claim could be called a debt. The trial judge found it was not and we agree.

Reference was made to cases where whilst there was acknowledged a breach of a statute, the relevant contract was held to remain unaffected. Those cases turn on these particular facts. In Yango Pastoral Co v 1st Chicago Australia (1978) 139 CLR 410 whilst the Bank may have been in breach of the statute, the debtor was still liable under its mortgage guarantees. In other cases referred to, the contracts or financial dealings were clearly arrangements separate from the lack of power or illegality. In those cases the party affected could not escape an obligation through its own default. In this case the whole agreement was clearly dependent on the supposed power to exempt, which it did not have.

Following the National Courts finding of illegality and initial order of severance further submissions from Counsel caused the trial judge to revise his conclusion that although clause 3 (a) of the deed was illegal, it was severable from the deed. He found that by virtue of the wording in clause 2 of the agreement, "which net amount shall be paid on terms and conditions as set out hereunder", the procedure of exemption from levy in clause 3 was critical to the whole Agreement to settle. He then ruled that as Clause 3 (a) was in fact such a vital part of the whole agreement that without it the whole agreement recorded in the deed must fall.

He ruled therefore clause 3 couldn’t be severed from the whole agreement. We would agree with that finding for the reasons we have stated above.

It is common ground that Courts endeavour to uphold contracts of parties validly made. And where contracts contain invalid or illegal provisions, rather than simply condemning the whole contract for the taint of an invalid provision will uphold the valid provision if it is possible to do so. If the offending provision can be severed from the contract without destroying the proper import of the contract it will do so.

When valid promises are associated with, but are separate in form from invalid promises the test for severance 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. See Carney v Herbert & Os [1985] 59 ALJR 41. In that case there was a contract for the sale of shares and the contract provided that the purchase price of the shares was to be secured by mortgages, which mortgages were held to be illegal and void as being in breach of the Companies Act. In that case it was held that the mortgage did not go to the heart of the transaction and its elimination would leave unchanged the subject matter of the contract, namely the sale of the shares. However in the case before us now, the evidence before the trial Court clearly shows the whole agreement to settle was founded upon and was dependent on the arrangements over the levy monies. See Page 688 of the Appeal Book in the words of Mr Ganarafo "Then the decision to offer K25 million by way of levy exemption after deducting K10 or K11 million owed by Panga to CIC…"and further; "That request or that proposal had been around for some time. I mean, that is what Wally would ask. He would say the money would not come from CIC. I will get it back by levy exemption". So it is clear that the way the arrangement was discussed by the CIC the exemption was not incidental or peripheral. Nor was it merely the machinery of payment. From the evidence of the witnesses it was the whole basis of the agreement, which was subsequently incorporated into the Deed. In the terms of the words in Electric Acceptance Pty Ltd v Thorley Caravans (Aust) Pty Ltd [1981] VR 799 "the invalid arrangement was so material and important in the whole bargain that there should be inferred an intention not to make a contract which would operate without it".

We dismiss the Appeals 1 and 30 of 1999 and uphold the rulings of the trial judge on 28 November 1998 on the invalidity of the clause 3 and the ruling of 12 February that the clause cannot be severed and thereby the claim of Panga was dismissed. This ruling effectively deals with the Appeal No 2 of 1999.