ANZ Bank v Ciavarella

Overlook Management BV v Foxtell Management Pty Ltd (2002) NSWSC 17 paras 62-65, Commonwealth Bank of Australia v Spira (2002) NSWSC 905 paras 137-148. DECISION : Paragraph 41

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50036/01 Australia and New Zealand Banking Group Limited v Anthony Mark Ciavarella & Ors JUDGMENT 1 His Honour: This is the hearing of a claim by the bank for judgment for monies lent by it and recovery of possession of the properties which were subject to mortgages given by the defendants to secure the monies lent. The main matter in dispute concerns the cross-claim brought by the defendants against the plaintiff in which they allege an agreement to compromise the dispute between the parties and a breach by the plaintiff of that agreement. 2 The parties are agreed that the amount owing on 2 December 2002 was the amount of principal, $1,956,142.82, interest $4,097.60 and fees of $1,028.14. In addition there is an amount of $185,570.78 which was claimed by the bank as costs of enforcement pursuant to the mortgage. It is clear that if the defendants fail on the cross-claim then the bank is entitled to judgment for the outstanding principal, interest and fees and also entitled to an order for possession. A short history of the dealings between the parties 3 The defendants were first offered a facility by the bank in April 1997. It was an overdraft of $50,000 and a fully drawn advance of $1,400,000 together with a separate fully drawn advance of $500,000. In August mortgages were given over the various properties which were owned by various members of the Ciavarella family. A Bill of Sale was given over the unencumbered plant and machinery at the same time. In October 1997 the fully drawn advance of $1,400,000 was increased to $1,500,000. 4 During 1998 the overdraft was increased to $100,000. In 1999 the defendants sought-some increased borrowing in order to finance planting of further grapes in anticipation of a contract for the sale of grapes. A temporary increase was allowed to the overdraft. 5 By the end of 1999 the facilities were in default and in January the accounts were passed to the banks' Credit Management department. On 25 January 2000 a Notice of Event of Default was sent to the defendants in respect of the loans which were then due. 6 On 28 August 2000 there was a mediation between the bank and the defendants in accordance with the Farm Debt Mediation Act 1994. That was adjourned to 5 September 2000. According to the plaintiff agreement was reached in accordance with what was called a Twelve Point Plan. That plan provided, inter alia, for the debt to be repaid in full by 31 December 2001 and provided for the parties to execute a deed setting out the terms, including releases, within 14 days. A draft deed was submitted to the defendants but it was not executed. 7 On 1 February 2001 a second mediation took place but no agreement was reached at that mediation. The parties continued to negotiate for a settlement and a number of offers were made by the defendants which were rejected by the bank. 8 On 13 March 2001 the bank sent a letter to the defendants in the following terms:-

"We refer to a telephone conversation with Sue and your facsimile of 9 March 2001.

You have again requested 12-month interest moratorium. We take this to mean you do not want interest charged for 12 months, is this correct? Or is it that you do not wish to pay the interest for 12 months, but it would continue to accrue? Either way this type of arrangement is not acceptable, interest will be charged and as previously agreed is to be paid if the Bank is to allow time for repayment of the debt.

We have attached a schedule outlining what the Bank is prepared to offer you.

In submitting any further proposals to the Bank you must be able to demonstrate your ability to meet the interest commitments.

Accordingly, the proposal contained in the facsimile of 9 March 2001 is rejected.

Amanda White Manager" 9 There was attached to the letter a document in the following terms:- "1. Existing sale of part of Farm 1714 to be completed and after deducting reasonable legal expenses associated with the sale, water rates (approx $125k) and council rates ($47k), net proceeds are to be paid to the Bank in reduction of the overdraft to a nil balance, any surplus shall be paid in the following order. $20k ANZ, balance to creditors of Mr Ciavarella. 2. The OD will have a limit of $100k.

Ciavarella shall provide to the Bank consent to contact MIA and he shall provide full details of all water licences and rights.

The Bank's consent is required if excess water rights are sold and the proceeds shall be distributed as 20% to ANZ & 80% to Ciavarella.

The company will grant a Charge and provide a Guarantee in favour of Ciavarella.

Ciavarella shall provide full details of all plant & equipment and its location.

Following settlement of part of Farm 1714, interest to be paid monthly on all of the outstanding debts.

g. Any sale of land or assets subject of the Bank's securities shall require the Bank's consent.

9. Inspection to be carried out around 30 March 2001 and then as required by the Bank, but no more than on a quarterly basis. The firm that carries out the inspection shall not be appointed receiver.

11. Deed setting out all these terms together with acknowledgments, releases, confidentiality & consent judgements to be signed within 14 days.

12. In the event of default the Bank agrees to allow the Ciavarellas' 30 days in which to rectify the default.

13. Interest will be charged at the retail index rate less 1.5%." 10 This document became known as the Thirteen Point Plan. It was in the same terms as the Twelve Point Plan except that in paragraph 10 the debts were to be repaid in full by 31 December 2002 and clause 13 was a new term. 11 On 16 March 2001 a certificate was issued by the NSW Rural Assistance Authority under s 11 of the Farm Debt Mediation Act. That had the effect of exempting the dispute from the Act. 12 There was no further contact between the bank and the defendants on 21 March 2001 when the bank made a decision to issue a demand and to appoint a receiver. On 23 March 2001 the defendants faxed a letter to the bank in which they purported to accept the bank's offer. The letter was in the following form:-

"We would like to advise that we are accepting your 13-point offer.

Could you please confirm that the $20,000 interest adjustment still applies?

We are accepting the 13 points in their present form but we would like you to consider:

2. In the event of the sale of the remaining portion of Farm 1714 and/or Farm 1902, after obtaining your consent, would you consider the proceeds being split 50/50?

In order to expedite matters, and as our son Anthony is still overseas, would it be acceptable to you if he were to sign any documents by fax? Thanking you Yours faithfully, AM (Tony) Ciavarella"

13 On 26 March, which was a Monday, the bank made a demand for the full payment of the debt. They also wrote to the defendants in response to the defendant's acceptance in the following terms:-

"We refer to your facsimile of 23 March 2001. The facsimile does not unconditionally accept the terms set out in the facsimile to you dated 13 March 2001 (the "Offer").

The Bank does not accept the further terms contained in your facsimile. Specifically, the Bank does not agree to additional time to clear the overdraft balance to nil, nor does it agree to split the sale proceeds of Farm 1714 and Farm 1902, 50:50. On our calculations the sale proceeds from both of these properties, less outstanding water rates and other adjustments will not be sufficient to clear the overdraft balance to nil. The current balance of the overdraft is $372,455.31 Dr.

Further, you have provided no evidence that Farm 1902 is on the market for sale, nor that interest can be maintained pending any further debt reduction.

In the circumstances, and given that you have not accepted the Offer, the Offer is now withdrawn and and/or lapsed.

Amanda White Manager" 14 The defendants immediately replied in these terms:- "We refer to your facsimile of 25 March 2001.

We do not agree that our acceptance was conditional. Paragraphs 1 and 2 of our facsimile dated 23 March 2001 were not conditions precedent to acceptance, but merely related issues for you to consider in good faith with the intention of possibly amending the accepted offer.

Accordingly, we maintain our acceptance of your offer dated 13 March 2001.

In light of the above, please indicate whether you still purport that there has been no offer and acceptance.

Tony and Sue Ciaverella" 15 Immediately thereafter there was a response by fax in the following terms:- "We refer to your fax of 26 March 2001.

It is maintained that there is no proper basis to assert any agreement.

Our fax to you dated 13 March 2001 was part of a chain of correspondence. It set out indicative terms upon which the Bank was prepared to resolve the matter. It was at all times clear, however that those terms were conditional upon you satisfying the Bank that you would be able to meet the conditions including, as set out in our fax dated 13 March 2001, all interest commitments. You have not done that and it is clear from your conduct and all the circumstances that you will not and cannot do so.

Further, we note that the Bank has served demand on you in respect of the full amounts due. In the circumstances, it is clear that to the extent that any offer was made (which is expressly denied), that offer had lapsed and/or was not accepted by you.

16 On 27 March 2001 the bank wrote to the defendants advising that the demands had been issued, a receiver was appointed and they commenced these proceedings for recovery of the amounts due. On 28 March 2001 the defendants applied to the Court for an order restraining the receiver from continuing to perform his functions. That application was heard by Hamilton J on 12 April 2001 and orders were made restraining the receiver and agreements entered into by the parties to continue the status quo which included the defendants meeting their interest obligations and other obligations under the securities. That agreement provided for the execution of a release which was executed on 28 May 2001 but which did not apply to the actions of the bank on and after 23 March. 17 The hearing of the proceedings commenced before me on 2 December 2002 and was limited to the question of liability. Damages will be dealt with at a later stage. 18 The plaintiff raised an objection to the admission of documents evidencing the agreement between the parties arising out of the mediations. The objection was based on section 15 of the Farm Debt Mediation Act which provides: "Confidentiality of mediation sessions (1) Evidence of anything said or admitted during a mediation session and a document prepared for the purposes of, in the course of or pursuant to, a mediation session are not admissible in any proceedings in a court or before a person or body authorised to hear and receive evidence. (2) In this section, mediation session includes any steps taken in the course of making arrangements for a mediation session or in the course of the follow-up of a mediation session."

19 Justice Barr in Bell v Mediate Today Pty Ltd (unreported, SCNSW, 29 October 1998) considered whether a document recording terms of settlement entered into between parties who settled their differences at a mediation session held under the provisions of the Farm Debt Mediation Act was admissible in evidence. The magistrate held that such documents did not come within the meaning of the words "pursuant to a mediation" and ordered that the document be produced. Barr J upheld the decision of the magistrate and expressed the view that: "the Court should have regard to the purposes of the Act in general and the section in particular in considering whether such a document is inadmissible by reason of the section".

"Section 15 was considered by Badgery-Parker J in State Bank of New South Wales v Freeman & Ors, 31 January 1996 unreported. One of the questions his Honour had to answer was whether a decision by the New South Wales Rural Assistance Authority to grant a certificate under s11 of the Act was reviewable by this Court. His Honour received evidence, over objection relying on s15, of documents exchanged by the parties to a mediation prior to the mediation and about what happened at the mediation. One of the documents recorded the heads of agreement the parties had reached. In the result, his Honour's decision made it unnecessary to decide about the admissibility of the heads of agreement, but his Honour made these remarks about the scope of the section - "In the course of the proceedings there was some interesting discussion as to what documents were or were not rendered inadmissible by the provisions of s15(1) - for example, whether it would have the effect of excluding from evidence the heads of agreement by which, in the present case, at the conclusion of the mediation, the parties recorded the agreement that they had come to. It is, in my view, clear that a document of that nature has to be regarded not as a document prepared for the purposes of, in the course of or pursuant to a mediation session, even allowing for the extended definition of "mediation session" in s15(2) but must be regarded as a document which came into existence after the mediation session had concluded. I recognise that that view makes it difficult to understand what is intended to be conveyed by the phrase "pursuant to a mediation session" - perhaps it means or is intended to mean something like, "in the pursuit of a satisfactory mediation."" In Commonwealth Bank of Australia v McConnell, 24 July 1997 unreported, Rolfe J was dealing with a dispute between parties to a farm debt who had been to mediation and prepared heads of agreement. The heads of agreement were tendered, but a foreshadowed objection under s15 did not materialise, so it became unnecessary for his Honour to decide whether they were caught by the section. His Honour said this about the section - "These provisions are intended to ensure that a mediation will allow for full and frank discussion with a view to the parties seeking to reach a resolution of their dispute or, in cases where there is no dispute, an accommodation based on the particular facts of the case. Unless there is a legislative prohibition on a revelation of what was discussed it is probable that one of the intentions of the Act, namely to seek to bring about a resolution would be severely impeded. In this way the Act seeks to ensure that discussions at a mediation have the same status as "without prejudice" communications aimed at settling litigation." His Honour referred with approval, in the following terms, to the judgment of Badgery-Parker J in State Bank of New South Wales v Freeman -

"Although his Honour expressed a strong view that the agreement reached at a mediation was admissible, he did not finally conclude that it was. Common sense would indicate, at least prima facie, that his Honour's preliminary view is correct. If it is not, a party could reach an agreement at mediation and later refuse to abide by it and preclude its being tendered. That approach would seem to defeat a fundamental objective of the Act." Bearing in mind the purposes of the Act and the section, namely to make attendance at mediation in appropriate circumstances a condition precedent to the enforcement of a farm debt and, in order to further the parties' chances of agreeing at mediation, to preserve the confidentiality of things said and written, I think that their Honours' approach is correct. I acknowledge the difficulty referred to by Badgery-Parker J about what subs(2) means in its reference to steps taken "in the course of the follow-up of a mediation session", but I do not think that that expression includes the preparation of heads of agreement or terms of settlement. That is because by the time that step is taken, the mediation session has come to an end. The preparation of such documents does not "follow-up" the mediation session. Such documents are not prepared pursuant to a mediation session. I think that to construe the section so as to exclude from evidence terms of a settlement reached at a mediation would go beyond the purposes of the Act and might even defeat them, as Rolfe J has observed." 21 On the bank's case the mediation had concluded by 15 February 2001 when it lodged an application for a certificate under s 11 of the Act. Although Mrs Ciavarella thought it was continuing with further offers it seems to me that having regard to the bank's actions, it had, in fact, concluded. The relevant documents in these proceedings were prepared when the mediation session had already come to an end and are not a "follow up" to a mediation session. The preparation of the Thirteen Point Plan and the letter of 13 March 2001 do not fall within the scope of s 15 and accordingly the documents are admissible. Similarly the documents forwarded after the September mediation are also admissible. The cross claim 22 It is only the cross claim which has been debated before me. The cross claim is in fairly short compass and the current pleading is the second further amended cross claim which was filed on 29 November 2002. That alleges that there was an agreement between the bank and the defendants arising out of the acceptance by them on 23 March 2001 of the offer in the bank's letter of 13 March 2001. There is then pleaded an express term of that agreement that the loan was not repayable until 31 December 2002 and implied terms the detail of which I will consider shortly. 23 On the face of the letter of 13 March 2001 it plainly appears to be an offer. The fax of 23 March 2001 plainly appears to be an acceptance. The bank's answer encompassed the following points:

(a) The letter was merely one in a chain of correspondence. (b) The defendants did not demonstrate an ability to meet their interest commitments. (c) The letter was preliminary to an offer as it used the words "prepared". (d) The acceptance was not unconditional. 24 Other than stating that the letter was in the course of correspondence this does not assist in arriving at a conclusion as to whether a contract came into existence. That fact depends upon the terms of the particular letters and it is certainly not unusual for a contract to arise out of a chain of correspondence particularly as that is the object of the chain of correspondence. So far as the use of the word "prepared" is concerned that word has to be seen in the context of the letter. See Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 PBR 97578 at 14570. 25 The suggestion that the acceptance was not unconditional I think has no substance. In express terms the letter of 23 March 2001 makes it clear that there is an unconditional acceptance. The additional words in the third paragraph are just nothing more than a request for further consideration of particular matters. The first sentence, the words that begin the third paragraph and the last paragraph all point to the acceptance being unconditional. It is apparent on the face of the letter of 13 March 2001 that there had been a number of offers by the defendants to settle the matter. In response the bank set out what it was prepared to offer after rejecting the defendant's earlier offers. In my view the language is the language of an offer and there has been an acceptance. 26 The second last paragraph of the letter of 13 March 2001 I would not construe as a condition of the offer. The schedule contains what the bank is prepared to offer and all the second last paragraph does is to provide against a not improbable consequence that the defendants might make a counter offer which by reason of timing or other matters would raise the possibility of interest not being met. In terms it is expressly directed to further offers by the cross defendant. 27 In the event that this construction is not correct it is abundantly plain on the evidence that the defendants kept appropriate books and records which would have enabled them to demonstrate their financial situation. The parties have only attempted this exercise ex post facto and in addition there has, of course, been no default under the facilities in respect of payment of interest from 13 March 2001 to the present time. If it were a condition of the offer it arguably would have to be a condition subsequent in respect of which reasonable time would need to be allowed by the bank for its satisfaction. The bank did not do this. 28 The other matter that has to be addressed in terms of whether there is a concluded agreement are the terms of clause 11 which provides for the execution of releases and other associated matters within 14 days. That 14 days would obviously run from the time of acceptance and conclusion of the agreement on 23 March. There was no submission of that deed by the bank given the steps which they had taken. However, it should be noted that in September 2000 following the conclusion of the second mediation in that year a form of deed of release had been submitted to the defendants by the plaintiff and accordingly were known to all parties. 29 The principles in this regard are well known and the starting point is Masters v Cameron (1954) 91 CLR 353. At page 360 the majority said:- "Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract. (at p360)" 30 There should be added to that statement what appears to be a fourth category which appears from the decision of Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd and Ors (1986) 40 NSWLR 622 at 628 where McLelland J as he then was said:- "There is in reality a fourth class of case additional to the three mentioned in Masters v Cameron , as recognised by Knox CJ, Rich J and Dixon J, in Sinclair, Scott & Co v Naughton (1929) 43 CLR 310 at 317, namely, "... one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms". Their Honours refer to the speech of Lord Loreburn, in Love & Stewart v S Instone. " It was quite lawful to make a bargain containing certain terms which one was content with, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that were the intention of the parties, then a bargain had been made, none the less that both parties felt quite sure that the formal document could comprise more than was contained in the preliminary bargain." 31 This case was approved on appeal at (1996) 40 NSWLR 631. 32 As the Thirteen Point Plan is quite detailed in the number of matters with which it deals and there are already in place existing securities, it seem to me that there has been agreement reached and that that agreement would be within the first class of Masters v Cameron. As has been pointed out in a number of authorities the second agreement is specifically enforceable. See Niesmann v Collingridge (1921) 29 CLR 177 at 184 and Godecke and anor v Kirwan (1973) 129 CLR 629 at 648. 33 In the circumstances I am satisfied that there is a contract between the plaintiff and the cross claimants as a result of the exchange of correspondence. Implied terms 34 In paragraph 8 of the second further amended cross claim the following implied terms were pleaded:- "…that the Bank: (a) would not seek to demand repayment of the monies due to the Bank under the loan facilities prior to 31 December 2002 unless the cross-claimant failed to honour his obligations under the 13 Point Agreement. (b) would not rely upon any alleged default by the cross-claimant occurring prior to the 13 Point Agreement as a basis for exercising its rights under the Security Agreements against the cross-claimant or in relation to the Security Property; and (c) would exercise its powers and discretions under the Agreement in good faith, fairly and reasonably and for the purpose for which they were given." 35 The first two terms are to be implied if at all pursuant to the principles set out in BP Refinery (Westernport) Pty Limited v Shire of Hastings (1997) 180 CLR 266 at 283. The second term said to be implied as a result of Burger King Corporation v Hungry Jack's Pty Limited [2001] NSWCA 187. 36 In respect of the first implied term it was submitted by the defendant that such a term should not be in conflict with the securities which were still in existence under the Thirteen Point Plan. The very terms of the Thirteen Point Plan obviously contemplate the securities being in existence and being part of the new agreement. The only way the securities appear to be varied is in respect of the outstanding repayment of the outstanding debts which are postponed to 31 December 2002 and the rate of interest. The Thirteen Point Plan, although giving 30 days to rectify default, does not itself provide for a demand for repayment of monies in case of default. Clearly in these circumstances the implied term is necessary, is obvious and does not contradict any express term of the contract. The term is reasonable and is clear in its expression. In my view, the term should be implied. 37 In respect of term (b) it was suggested that there should be a right for the bank to rely on a default that occurred prior to the Thirteen Point Plan but which was then unknown to it. The bank in this case relied upon an analogy with McMahon v State Bank of New South Wales (1990) 8 ACLC 315 which held that a receiver could justify his appointment by relying upon a default the existence of which was not known at the time of the receiver's appointment. See also Canberra Advance Bank Ltd & Anor v Benny & Ors (1992) 9 ACSR 179 and Union Bank v Downes & Anor (1896) 12 WN (NSW) 131. 38 The matter has some relevance because it is plain that on 20 October 2000 the Ciavarellas gave a crop lien to the Murrumbidgee Irrigation Authority to secure payments for water. Such a lien was prohibited by the banks securities without consent and no consent was obtained. So far as the giving of the crop lien is concerned it is clear that the bank knew a crop lien had been given prior to 13 March 2001. That breach was just one of many defaults which had occurred and the whole of the attempt to settle the dispute between the parties was predicated upon there being defaults in existence with the parties trying to find a means to proceed to an orderly separation of their affairs. It would run counter to the detail of the Thirteen Point Plan if it could be immediately frustrated by the bank at will in respect of some part of the existing defaults all of which were being put behind the parties as is evidenced by the terms of clause 11. In my view, it is appropriate to imply the term referred to in 8 (b). 39 So far as the third term is concerned, namely, to act in good faith, fairly and reasonably for the purposes for which the powers and discretions under the agreement were given is concerned, this would normally be implied. See Burger King Corporation (supra), Overlook Management BV v Foxtell Management Pty Ltd (2002) NSWSC 17 paras 62-65, Commonwealth Bank of Australia v Spira (2002) NSWSC 905 paras 137-148. Breaches of the implied term 40 There are three breaches relied upon by the defendants. The first breach is the issuing of the demand of 26 March 2001, the second the appointment of the receiver on 27 March 2001 and the third is the commencement of these proceedings on 27 March 2001. As the appointment of the receiver can only made on there being a default, it follows, as no fresh default has been established, that he was invalidly appointed. As the principal debts are not due the bank was not entitled to make demand or commence proceedings for recovery of the principal sum. In my view there were breaches of the first two implied terms. Given the seriousness of the bank's actions I would also think that there would be a breach of the third term.

1. I declare that a valid and binding agreement was made on 23 March 2001 between the cross-claimants and the first cross-defendant for repayment of advances then made by the first cross-defendants to the first cross-claimant.

2. I declare that the appointment by the first cross-defendant of the second cross-defendant on 27 March 2001 as Receiver pursuant to the mortgages between the cross-claimants and cross-defendants was invalid.

3. I restrain the second cross-defendant permanently from acting as a receiver of the cross-claimant's properties pursuant to the mortgages between the cross-claimants and the cross-defendant. 42 I will give directions for the further conduct of the matter and hear arguments on costs. *********

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