Arab Bank of Australia Ltd v Jeitani

Supreme Court of NSW|2015-09-10|Before: Davies J

Background facts

Mr Gittany had received an indicative letter of offer of a loan to purchase Earlwood in December 2007. In about late May or early June 2008 he met with the relationship managers of the Bank, Maroun Dib and Richard Mansour at the Campsie branch and told them that he wanted to change the home loan for Earlwood into the names of himself and his girlfriend Georgia because they were selling their house in Newtown and moving in together at Earlwood. He was told that if he wanted to change the home loan into both names the Bank would have to reassess it. Subsequently he was told that there was not sufficient time to change the arrangement before the settlement which was due.
Mr Gittany said that when he signed the loan agreement he did not read the pages that he signed. That page contained a Business Purpose Declaration. He said that no one explained the effect of that Declaration to him before he signed it. He said that he signed the loan documents in the belief that the Earlwood home loan was just an ordinary home loan.
The purchase of Earlwood settled on 9 October 2008. The purchase price was $682,000 and the property was transferred into Mr Gittany's name.

Submissions

Mr Gittany relied on s 45 of the Consumer Credit Code then in force which relevantly provided: (1) A mortgage is void to the extent that it secures an amount, in relation to any credit contract which it secures, that exceeds the sum of the amount of the liabilities of the debtor under the credit contract and the reasonable enforcement expenses of enforcing the mortgage. Mr Gittany claimed that by virtue of that section the Bank was not entitled to claim that the Earlwood mortgage secured other than the debt on Earlwood. Alternatively, it was a term of the Earlwood mortgage that it only secured the loan obtained to purchase Earlwood. Mr Gittany submitted therefore that the Bank was not entitled to refuse to discharge the Earlwood mortgage on the basis that it could be treated as securing other debts.
Mr Gittany relied on s 11(3) of the Code on the basis that the Bank knew or had reason to believe at the time the Business Purpose Declaration was signed that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. The Bank was not entitled to refuse to discharge the mortgage and it acted unreasonably in doing so.
Mr Gittany submitted that a number of matters pointed to knowledge on the Bank's part that the property was to be his home and not another property simply to be developed. First, the contractual documents in relation to the loan included a separate section headed "Specific Facility Terms - Housing Loan". Clause 2 of that section of the documents was headed "Occupation of Security Property" and it said this: If the bank has made the facility available to the customer on the basis that the security property is to be the place of residence of the customer then the customer must not: (a) rent the security property to a tenant; or (b) permit anyone to live in the security property without the customer.
The clause went on to say that the failure by the customer to comply with the clause would be an event of default and that the Bank in its absolute discretion could convert the facility into an investment loan.
Mr Gittany next pointed to the conversation he had with Mr Maroun before the loan where he sought to have the loan made to him and Ms Nicoloau. He also drew attention to what was contained in the Bank's valuation of the property obtained to consider the loan he had sought.
Mr Gittany submitted further in the alternative that it was unreasonable to refuse to release the Earlwood property because the Bank had sufficient security including in the Bass Hill property. Mr Gittany relied on valuation evidence and the Schedule to his written submissions calculating the equity as at 30 March 2010.
The bank submitted that Mr Gittany had signed a Business Purpose Declaration and prior to doing so had signed a number of other such declarations in respect of other loans made by the Bank to him and the partnership with Mr Jeitani. The Bank submitted that there is no evidence of a contract, relying on s 304 of the Duties Act 1997 (NSW), for the sale of the property to Ms Nicoloau. The Bank submitted that no tender was ever made for the purchase price of Earlwood by Ms Nicolaou and no independent evidence was presented to the Bank in 2010 of her financial capacity to complete the sale transaction. The Bank disputed that Mr Hadchiti was acting for Ms Nicolaou at the time of the email sent to the Bank on 7 October 2010 asserting that she was ready, willing and able to complete the Earlwood purchase.
The Bank submitted that the mortgage when properly construed was an all- monies mortgage. It submitted that the Credit Code does not apply to the mortgage but says that even if it does that is not the end of the matter. That is because the Bank held a guarantee from Mr Gittany and an interest in any surplus proceeds after repayment of the secured amount. It was entitled to take the view that he should not enter into an arrangement whereby he alienated property other than for its fair market value because that would work to the disadvantage of the Bank under its guarantee.
The Bank submitted that its belief at the time was that the property was being sold for an undervalue. The question, the Bank submitted, is not whether it was being sold for an undervalue but whether the Bank believed that it was, because the issue is whether the Bank acted reasonably in refusing to discharge the mortgage.

Consideration

Mr Gittany's claim in relation to the release of the Earlwood property is put on two bases. The first is that the loan in relation to Earlwood was regulated under the Credit Code. In those circumstances it is said that the Bank was not permitted to refuse to discharge the mortgage over Earlwood on the basis that that property was security for other loans. The second and alternative basis was that, in any event, the Bank had sufficient security in the Bass Hill property which made it unreasonable for the Bank to refuse to consent to release Earlwood.
The Bank's approach to the claim was to view the matter only as a question of the reasonableness of the Bank's actions. The primary issue, however, was whether the Bank had the right to regard the Earlwood property as security for other loans. This was also the way the matter was pleaded in the Cross-Claim. This turned on the question of whether the loan was regulated under the Consumer Credit Code. The issue of the reasonableness of the Bank's approach to the discharge only arises for consideration if the Earlwood loan was not regulated under the Code.

(a) Was the loan regulated by the Credit Code?

The Credit Code relevantly provides: 5. Meaning of "credit contract" For the purposes of this Code, a credit contract is a contact under which credit is or may be provided, being the provision of credit to which this Code applies. 6. Provision of credit to which this Code applies (1) This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of pre-contractual obligations) is proposed to be entered into - (a) the debtor is a natural person ordinarily resident in this jurisdiction or a strata corporation formed in this jurisdiction; and (b) the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes; and (c) a charge is or may be made for providing the credit; and (d) the credit provider provides the credit in the course of a business of providing credit or as part of or incidentally to any other business of the credit provider. … (4) For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose. (5) For the purposes of this section, the predominant purpose for which credit is provided is - (a) the purpose for which more than half of the credit is intended to be used; or (b) if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used. ... 11. Presumptions relating to application of Code (1) In any proceedings (whether brought under this Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established. (2) Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes). (3) However, such a declaration is ineffective for the purposes of this section if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. For the purposes of this subsection, a relevant person is a person associated with the credit provider or a finance broker (or a person acting for a finance broker) through whom the credit was obtained. (4) A declaration under this section is to be substantially in the form (if any) required by the regulations and is ineffective for the purposes of this section if it is not. … 176 Conduct of agents and related matters (1) The conduct of an officer, agent or employee of a credit provider acting within his or her actual or ostensible authority will be imputed to the credit provider and taken to be conduct of the credit provider. (2) … (5) A credit provider is not, for the purposes of this Code taken to know or have reason to believe something because an officer, agent or employee of the credit provider does so, unless the knowledge or reason to believe that thing is acquired by the officer, agent or employee acting in that capacity and in connection with the transaction concerned.
Whether the Code applied relates to the purpose of the loan. Section 11(3) is concerned with the knowledge or belief of the lender about the purpose of the loan. If the evidence discloses that the lender knew or had reason to believe that the credit was in fact to be applied for personal, domestic or household purposes the conclusive presumption in s 11(2) is overcome. It is then necessary to have regard to s 6 to see if the credit is that to which the Code applies.
Mr Gittany signed a Declaration in relation to the Earlwood loan. Unless Mr Gittany can show that s 11(3) applies there will be a conclusive presumption that the Code does not apply under s 11(2). The issue is, therefore, whether the credit provider knew, or had reason to believe, at the time the Declaration was made, that in this case the loan was to be applied wholly or predominantly for personal, domestic or household purposes.
The evidence points strongly to the purpose of the loan being wholly or predominantly for personal, domestic or household purposes, and points strongly to the relevant Bank officers as knowing or having reason to believe that that was so. The following evidence supports that: (a) In a letter from the Bank to Mr Gittany of 24 June 2008 Mr Dib, the Relationship Manager, refers to the approval of funding to assist with the purchase "of the residential property" at Earlwood. The letter went on to say: However, further to recent discussions, I understand that your intention will be to lodge a development application with your local council to knock down the existing dwelling a (sic) build a new home on the property. (b) Secondly, Mr Gittany gave evidence in his affidavit that in late May or early June 2008 he had a meeting with Maroun Dib and Richard Mansour who were the Relationship Managers of the Bank at the Campsie branch where he said to them that he wanted to change the home loan for Earlwood into both his and his girlfriend Georgia's name. He said they were selling their house in Newtown and moving in together at Earlwood. Mr Maroun replied: If you want to change the home loan into both names, we will have to reassess the loan. There was a subsequent discussion with Mr Maroun where Mr Maroun told him that there was not enough time before settlement to put the loan into both names. There was no challenge to that evidence and neither Mr Dib nor Mr Mansour was called to give evidence. The Bank's submission that the property was not in fact purchased in both names as somehow suggesting that the property was not to be their home is answered by what Mr Maroun said, that the loan would have to be re-assessed and there was no time to do so before the settlement. The significance of what Mr Maroun said is that it shows that the Bank was told that Mr Gittany and Ms Nicoloau were moving into the property. The Bank submitted that I should draw a Jones v Dunkel inference from the failure to call Ms Nicoloau when she could have confirmed Mr Gittany's evidence about it being the family home. However, that misses the point for s 11(3) purposes that this fact was told to the bank officers to put them on notice of what the purpose of the loan was. The fact of the loan agreement with Ms Nicoloau being made the following day provides some support in any event. (c) The loan offer made it clear that the loan was for a term of 30 years and was to assist with the purchase of a residential property. Further, in addition to the general terms and the letter of offer what was described as specific facility terms were said to be incorporated into the loan agreement. The wording is set out at [87] above. The incorporation of that one term into the otherwise general terms for a loan when taken with the other matters mentioned including the term of the loan points to knowledge on the part of the Bank that the loan was a housing loan for Mr Gittany's own home. (d) In about August 2008 the Bank organised a valuation of the Earlwood property. In the valuation prepared after an inspection on 1 September 2008 the valuer said this: The valuation assumes the owner will not be operating as a developer and claiming GST tax credits as this may trigger a GST liability on sale of the property. The instructing party should satisfy itself in this regard. That statement tends to suggest that the valuer believed that the purchaser was not buying the property for investment or development purposes. Even if that belief and assumption was not derived from the Bank as might reasonably be thought when the Bank had instructed the valuer, the statement put the Bank on notice that the valuation was conducted on that assumption. There is no evidence from any person in the Bank, particularly Mr Reitano who exhibited this valuation to his affidavit, that any enquiry was made of Mr Gittany to clarify or disavow that assumption. There is no evidence of any different or other valuation on the basis of which the loan was made. The inference must be that the Bank believed that the assumption was correct at the time the loan was entered into and advanced. (e) Although the circumstances of the execution of the Declaration would not necessarily be relevant to a determination of the Bank's knowledge or belief for the purposes of s 11(3), Mr Gittany gave evidence that not only did he not read what was on that page before he signed it but no one including Mr Dib gave any explanation to him of that Declaration. Although Mr Gittany was challenged about whether he read the Declaration before he signed it, he was not challenged about his evidence that no explanation was given about the Declaration by the Bank officers at that time. The bank officers were not told, therefore, that the property was an investment property.
It is necessary to say something about Mr Gittany's evidence concerning the execution of the Declaration. In his affidavit, having given the evidence that none of the bank's officers explained the effect of the Declaration he said that he signed the documents for the loan in the belief that it was an ordinary home loan. And he did not believe that it would be security for the companies' other liabilities. In cross-examination he said that he did not read the Declaration before signing it, that he was probably in a rush and that he didn't know what he signed. In answer to questions from me he gave this evidence: Q. When you signed it did you see the word "important" written there in big bold letters? A. No. Q. How could you have missed it when it's so close to your signature? A. I was probably in a rush. Q. But you don't remember? A. I don't remember to be honest, no.
He was also taken to the definition of what was owing under the Earlwood mortgage (Clause 37 of the Memorandum incorporated into the mortgage) and asked if he was told that the amount owing included all money which he owed at any time. He said that he was not and that Mr Dib said "it's a freestanding loan".
Mr Gittany accepted that he had signed a number of other Declarations in respect of other loans.
Mr Castle for the Bank accepted that Mr Gittany did not tell deliberate lies in his evidence. He submitted that he thought Mr Gittany was unreliable in a number of respects in that he remembered things in a way favourable to himself although he believed what he said was true. I consider that this submission should be accepted. An aspect of his evidence that pointed to his honesty was his preparedness to make concessions against his interest. Otherwise my assessment of him was that his interest was in building and developing. Banks, financial and legal matters were a necessary but rather irritating concomitant to enable him to get on with that building and developing. Like many businessman of that type he was likely to sign documents without giving them much or any attention, chiefly because he trusted the Bank to do the right thing by him.
I accept his evidence that nothing was said about the Declaration at the time he signed it. I accept that he did not read it despite its close proximity to his signature. I accept that he believed, particularly in the light of his earlier discussions with the Bank, that he thought they understood Earlwood was to be his and Ms Nicoloau's home that he would buy, knock down and build what it ultimately became. I can more confidently accept this evidence because there was no evidence from Mr Dib or any other bank officer involved in making the loan.
In my opinion, Mr Gittany has satisfied the onus on him under s 11(3) and shows that the Bank at least had reason to believe at the time the Declaration was made that the credit was to be applied wholly for personal, domestic or household purposes. Accordingly, the conclusive presumption in s 11(2) does not operate. It is necessary to have regard to s 6 of the Code to see if the loan falls within that section. The authorities tend to support the view that s 6 of the Code is referring to the actual purpose of the loan and not the lender's understanding of the purpose: Beckley v Consumer, Trader and Tenancy Tribunal [2009] NSWSC 703 at [57], [58] and [69].
There is sufficient evidence that the property was used as Mr Gittany's home, not the least reason being that he gave unchallenged evidence that he did not claim any tax deduction for mortgage payments on the property. In those circumstances the Code applies to the loan.
The result is that the mortgage secured only the loan on Earlwood and not on the other properties as the Bank continuously asserted during 2010 and early 2011. There was, therefore, no proper basis upon which the Bank ought to have refused to discharge the Earlwood mortgage unless some other legitimate basis was available to it to do so.
The Bank submitted, however, that in 2010 and 2011 during the period of the refusal the position was that the conclusive presumption operated because it is only overcome when a court declares that the Bank has the knowledge or belief referred to in s 11(3). That submission should be rejected. As with most matters where a court is called upon to determine rights of persons in contractual matters, the effect of the judgment is retrospective. Analogies abound but orders under the Contracts Review Act are a prime example. The present case might be thought to be stronger since what is being determined is the state of knowledge or belief of the credit provider at the time the Declaration was signed. Because the credit provider (here, the Bank) has been held to have had reason to believe that the credit was to be applied wholly or predominantly for personal, domestic or household purposes, the presumption in s 11(2) never operated on the arrangement. The submission only has some relevance if the Credit Code does not govern the loan and the issue is solely the reasonableness of the Bank's actions.

(b) No contract and no tender

Mr Gittany claimed to have entered into a contract to sell Earlwood to Ms Nicolaou on 18 February 2010. The purchase price was $620,000 with a deposit of $62,000. Mr Gittany sought to tender a copy of the front page of the contract for sale as part of the exhibit to his affidavit. Objection was taken to the tender in reliance on s 304 of the Duties Act.
It appears that that contract must have been mutually rescinded because Mr Gittany gave evidence that he entered into another contract to sell Earlwood to Ms Nicolaou on 18 October 2010 for a purchase price of $595,000 with a deposit of $124,000. He sought to tender a copy of the front page of that contract. It was similarly objected to because it was not stamped.
Section 304 of the Duties Act provides: 304 Receipt of instruments in evidence (1) An instrument that effects a dutiable transaction or is chargeable with duty under this Act is not available for use in law or equity for any purpose and may not be presented in evidence in a court or tribunal exercising civil jurisdiction unless: (a) it is duly stamped, or (b) it is stamped by the Chief Commissioner or in a manner approved by the Chief Commissioner. (2) A court or tribunal may admit in evidence an instrument that effects a dutiable transaction, or is chargeable with duty in accordance with the provisions of this Act, and that does not comply with subsection (1): (a) if the instrument is after its admission transmitted to the Chief Commissioner in accordance with arrangements approved by the court or tribunal, or (b) if (where the person who produces the instrument is not the person liable to pay the duty) the name and address of the person so liable is forwarded, together with the instrument, to the Chief Commissioner in accordance with arrangements approved by the court or tribunal. (3) A court or tribunal may admit in evidence an unexecuted copy of an instrument that effects a dutiable transaction, or is chargeable with duty in accordance with the provisions of this Act, if the court or tribunal is satisfied that: (a) the instrument of which it is a copy is duly stamped, or is stamped in a manner approved by the Chief Commissioner, or (b) the copy is duly stamped under section 299.
The Bank did not object to the receipt of copies of the front pages of the contracts on the basis that they should not be regarded as contracts but merely as documents which give rise to an inference of an intention to enter a contract.
The evidence discloses that stamp duty was not paid on a contract for the sale of Earlwood until 15 July 2011. That came about because the date on the contract was altered from 18 October 2010 to 18 June 2011. The Bank was prepared to admit that stamp duty had been paid on that contract. That contract does not seem to be the relevant one for the purposes of this case because Mr Gittany puts forward, and the Bank disputes, the fact that he had entered into a contract to sell the Earlwood property on two dates in 2010 and it was in the ensuing months that the Bank refused to discharge the mortgage to allow him to complete those contracts.
The Bank's submission that the documents cannot be received into evidence as contracts is correct. Nothing in s 304 enables that result to be avoided in circumstances where no offer was made by Mr Gittany to comply with sub-s (2). The result must be that the evidence discloses only that there was an intention on the part of Mr Gittany and Ms Nicolaou to enter into a contract in all likelihood on the terms that appear in those documents.
A matter associated with the unstamped contracts raised by the Bank was whether Ms Nicolaou was ready, willing and able to purchase the property. The submission that she was not ready seemed to flow on the one hand from the failure to demonstrate that there was more than an unstamped front page of a contract for sale form and also from the fact that neither Mr Gittany nor Ms Nicolaou tendered to the Bank the amount due to discharge the Earlwood mortgage.
In the first place, it is not clear to me why it was ever necessary for the Bank to know or to receive proof of the reason Mr Gittany wanted to discharge the Earlwood loan. The only requirement, on the assumption that the loan was regulated by the Consumer Credit Code, was that Mr Gittany be in a position to pay out what was due to the Bank in return for a discharge of the mortgage. In that way, the fact that there is no proof of a stamped contract is irrelevant to a determination of the issue.
What is clear is that from the time Mr Gittany sought to discharge the mortgage the Bank thwarted him, wrongly relying on the fact that the property was security for other loans and in particular the loan in relation to the Bass Hill properties. Further, the history shows that the Bank kept imposing more and more requirements on Mr Gittany notwithstanding that he had fulfilled the earlier requirements. Finally the Bank agreed to discharge the mortgage in June 2011 when the deposited plan on the Bass Hill properties was registered. Those matters are significant in relation to the assertion that the Bank was never obliged to discharge the mortgage because the payout figure was never tendered. It is clear from the history that until June 2011 the Bank made it perfectly clear that it was not prepared to discharge the Earlwood mortgage because it regarded its continued existence as necessary for security for loans in relation to other properties.
In Fisher & Lightwood's Law of Mortgage (3rd Australian Edition, Lexis Nexus Butterworths, 2014) the following appears: 32.42 The conduct of the creditor may amount to a dispensation with the tender. A mere claim of more than is due will not have this effect, but if, claiming too much, or setting up two different claims, one of which is wrongful, the creditor so conducts himself as to show that a tender of the amount properly due would not be accepted, it will be a dispensation: Scarfe v Morgan (1838) 4 M&W 270; 150 ER 1430; Kerford v Mondel (1859) 28 LJEx 303.
In Challenge Bank Ltd v Hodgekiss (1995) 7 BPR 14, 399; [1996] ANZConvR 364 Young J said: … To show dispensation from the requirement to tender it must be established by the mortgagor that on the balance of probabilities, had the tender been made, it would have been refused. See also Coughlan v George [2003] NSWSC 512; 11 BPR 20919.
I am satisfied, to a high degree of certainty, that if tender had been made by Mr Gittany at any time until June 2011 the tender would have been refused because of the Bank's erroneous belief that the Earlwood property was security for the Bass Hill and other loans.
The Bank's further claims that the contracts between Mr Gittany and Ms Nicolaou were not at arms' length and that the prices had been achieved relative to what Mr Gittany owed Ms Nicolaou and what was owed to the Bank are irrelevant considerations.
The Bank's submission that it was entitled to reject the application to discharge the mortgage because the purchase price was less than the market value in circumstances where Mr Gittany was a guarantor for other loans should also be rejected. If that proposition were correct it would effectively give control to the Bank over a guarantor's dealings with his or her assets generally, notwithstanding those assets were unsecured. A refusal to discharge a mortgage regulated under the Consumer Credit Code on that basis might also be thought to be perilously close to an effective breach of s 45 of that Code.
The Bank was not entitled to refuse to discharge the Earlwood mortgage because that mortgage secured only the loan on Earlwood. It was a breach of the mortgage and of the Bank's duty as mortgagee not to have discharged the Earlwood mortgage. Mr Reitano's evidence was that the Bank received the discharge authorities in May 2010. Although, by reason of s 304 of the Duties Act, I have no evidence of a binding contract by Mr Gittany to sell Earlwood, the evidence satisfies me that Mr Gittany and Ms Nicoloau intended to enter a contract to sell to her. It was that which was to enable Mr Gittany to discharge the mortgage. In those circumstances it would be reasonable to hold, and I do so hold, that the Earlwood mortgage should have been discharged by 31 July 2010. The extent of Mr Gittany's damage is, therefore, interest and fees charged from that date until the date of the Bank's agreement to discharge in June 2011 together with a reasonable period thereafter to effect settlement.

If I am wrong in holding that the loan was subject to the Credit Code it is necessary to see whether the Bank acted unreasonably even although Earlwood could be regarded as security for the other loans.
The position with regard to the Bass Hill property was as follows: 1. The amount of the Bass Hill debt shown on the bank statement as at 30 March 2010 was $500,827.06; 2. To that figure there needed to be added the surplus outstanding on Merrylands of $71,177.31 and the amount paid for GST of $116,644 making a total of $688,648.37 secured on Bass Hill; 3. Although Mr Gittany sought to discharge Earlwood at least by March 2010 the Bank took no steps to obtain a valuation of Bass Hill until 7 October 2010 when it required Mr Gittany to obtain one. That was despite Mr Gittany maintaining throughout the negotiations for the discharge of Earlwood that there was sufficient equity in Bass Hill to cover the other debts to the Bank. Despite the email from Mr Reitano to Mr Gittany on 12 October 2010 ([74] above) it does not appear that the Bank ever obtained a valuation of Bass Hill. 4. A retrospective valuation as at 30 March 2010 valued the Bass Hill property between $735,000 and $775,000. There was, on the basis of that valuation, sufficient equity left in Bass Hill to meet the Bank's concerns during 2010.
The following matters appear to me to amount to the Bank having acted unreasonably in relation to the discharge: 1. The matter referred to at [125(3)] above. On the basis of the retrospective valuation, there was sufficient equity in Bass Hill to cover any shortfall from Merrylands. There was no evidence challenging that valuation and it should be taken to demonstrate the value of Bass Hill at that time. I accept that the Bank did not have that valuation at the time nor any valuation at all but it did not obtain one. There was an evidentiary onus on the Bank, if it wished to demonstrate that the equity in Bass Hill was insufficient at the time, to point to some material that contradicted the retrospective valuation. 2. The continual addition of requirements before it would discharge and the Bank's changes of mind as set out at [64] to [82] above; 3. The Bank prepared a diary note of the meeting with Mr Gittany and others ([57] to [59] above) which recorded Mr Risk as saying that the Bank had information that Earlwood was worth between $800,000 and $900,000. Mr Reitano's evidence was that the Bank did not have a valuation in that range. Rather it had a price estimate of $714,000 about which Mr Gittany was not told, and the Bank assumed the true value of the property was $800,000 to $900,000 given that the document containing the price estimate contained an old photo. What was said by Mr Rizk in the conference was at best misleading and unreasonable. 4. The Bank did not need to await settlement of the sale of the Merrylands units because they knew from the contract prices what would be obtained on settlement. It may be accepted that the Bank needed to await the registration of the plan of subdivision because from that date the Merrylands contracts became unconditional. That occurred on 8 September 2010. Further, even if it was reasonable to wait until the contracts had settled so that the Bank had the money in its hand, the last sale settled on 18 October 2010. The shortfall was relatively small ($71,177.31). 5. In the conference between Mr Gittany, Mr Jeitani, Mr Charlie Gittany and the bank officers including Mr Reitano on 28 July 2010, Mr Gittany had asserted that the Earlwood property was "a stand-alone". Mr Rizk then drew Mr Gittany's attention to the all-monies clauses in the loan documents and guarantees. There was evidence that Mr Reitano was advised by McGillivrays August 2010 that there may be a problem with the all-monies clause in the Earlwood mortgage. Although that concern stayed in Mr Reitano's mind throughout 2010 it does not appear that he attempted to clarify the matter. He said that he reported the advice to Mr Rizk but they considered it and rejected it. I found that evidence somewhat unsatisfactory because on a number of occasions elsewhere in his evidence Mr Reitano was quick to say that any legal matter was not for him but for the Bank's lawyers. No reasons were given for rejecting the solicitors' advice about the all-monies clause. 6. Although it can be seen that the deposited plan was registered on Bass Hill in June 2011, which may explain the Bank's consent to the discharge of Earlwood at that time, that was not the explanation offered by Mr Reitano. His evidence was simply that the Bank agreed to the sale of Earlwood in July 2011 without pressing any of its former objections. The Bank submits that an inference should be drawn that the former objections were not pressed because of that registration. When Mr Reitano gave the evidence he did, but nothing more, I do not think I should draw that inference. The result is that there is no explanation for the Bank's change of heart in July 2011.
In my opinion, if Earlwood secured other debts owed to the Bank because the loan agreement was not regulated, the position was that there was adequate equity in Bass Hill that made it unreasonable for the Bank to have refused to discharge the Earlwood mortgage from the date of settlement of the final Merrylands townhouse. By that date the Bank knew exactly any shortfall position that had to be recouped from Bass Hill.

The third matter raised in the Cross-Claim concerned what were said to be excessive legal fees charged by the Bank when exercising its rights under the three mortgages. This was a matter that I was informed during submissions has been resolved between the parties.

Conclusion

The precise amount of any damages should be agreed between the parties in the light of my holding at [123] above. The parties should bring in Short Minutes to reflect these reasons generally, and including the agreement in relation to legal costs.
I will hear the parties on costs. My prima facie view is that each party has succeeded on one ground and failed on another with the result that there should be no order as to costs to the intent that each party should bear his and its own costs of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 May 2016

Consumer Credit (New South Wales) Act 1995(NSW)

Goods and Services Tax Act 1999(Cth)

(a) The GST claim

The first of the matters raised in the Cross-Claim concerns GST gross up clauses in the contracts to sell units 1, 3 and 4. They were clauses by which the purchasers agreed to indemnify the vendor in the event that GST was or became payable on the sale.
In the contracts of sale for units 1 and 4 the relevant term was clause 37 of the Special Conditions. It provided: GST The purchaser warrants that the amount payable under this contract does not include GST amount payable pursuant to any GST legislations (sic). The purchaser agrees to indemnify the vendor against any liability to pay GST arising from breach of this warranty. This clause shall not merge on completion. In respect of unit 3 the form of the clause was clause 14 of the Special Conditions which provided: GST 14. For the purposes of this contract, "GST law" means A New Tax System (Goods and Services Tax Act (Cwth) and all associated legislation and regulations as amended from time to time. (a) All relevant terms and phrases used in in this Clause have the same meaning as they have under GST law. (b) Where any supply under this contract by the vendor to the purchaser is or becomes subject to GST, the relevant amount otherwise payable to the vendor by the purchaser in respect of that supply under this Contract must be increased by ten per cent (10%) or by applicable GST rate at the relevant time if different. (c) The provisions of clause 14 shall not merge on completion.
Mr Gittany claimed that the effect of these clauses was that, to the extent that GST was payable on the sales of the units, the Bank as mortgagee in possession was entitled to demand a gross up for GST from the respective purchasers under those contracts of sale in accordance with the terms of the respective contractual provisions. The Bank did not avail itself of that right despite an entitlement to do so even in relation to the contract of sale for unit 3 which was entered into by the Bank.
Mr Gittany claims that because the Bank did not avail itself of the obvious entitlement to the GST gross up, the Bank had sacrificed the interests of the mortgagors and the guarantors by failing to obtain the best price reasonably obtainable for those three units.
The matter is put alternatively that the Bank failed to avail itself of the GST margin scheme on the sale of those town houses. Mr Gittany submitted that it was open to the Bank to apply the margin scheme from the time it went into possession in March 2010 up until the time of supply, namely, completion of the contracts of sale on the various dates between 1 and 18 October 2010. Mr Gittany said in his affidavit that it was always his intention to apply the margin scheme and claim input tax credits to reduce the GST payable.
The claim relies on a duty owed by the Bank to Mr Gittany on one or more of the following bases: 1. a duty to act in good faith; 2. a duty to act in accordance with s 420A of the Corporations Act 2001 (Cth); 3. a duty of care to ensure that reasonable steps were taken in the sale of the Merrylands properties to recover the GST or to procure the operation of the margin scheme under Division 75 of A New Tax System (Goods and Services Tax) Act 1999 (Cth).
Mr Gittany submitted that the application of the GST margin scheme required the agreement of the purchaser in each case under s 75(5) of the Goods and Services Tax Act 1999 (Cth). He submitted that, having regard to the inclusion of the GST gross up clauses in the contract of sale, there was every reason why a purchaser would have agreed to the application of the margin scheme if asked because of the economic incentive to do so. The result was an overpayment of GST in the order of $54,189.56 being an amount that could and should have been applied in reduction of the debt owed to the Bank and thus the amount to be enforced under the guarantee.
Mr Gittany submitted that after the contracts for the sale of the Merrylands units became unconditional there was no reason the Bank should not have availed itself of the GST clauses to recover the amount of GST that it was required to pay to the ATO. Mr Gittany submitted that Mr Reitano, in accordance with whose recommendations as Manager Recoveries the Bank would act, was aware in the period up to December 2010 of the GST gross-up clauses and he notified the Bank of that fact. The Bank's obligations were not to sacrifice the interests of the mortgagors and those under the mortgagors such as the guarantors by failing to act on those GST gross up clauses.
Mr Gittany relied on the general equitable duty of a mortgagee to act conscionably towards the mortgagor and persons under the mortgagor and submitted that the duty would be breached where there was a failure to take an obvious step or precaution: Upton v Perpetual Trustees [2007] FCAFC 57; (2007) 158 FCR 118 at [86(g)(i)].
Mr Gittany also relied on s 420A of the Corporations Act 2001 (Cth). He accepted that the duty under that section was not owed directly to him as a guarantor. However, the guarantor had the right to avail itself of any defences available to a mortgagor and to have an accounting or equitable damages where there is a breach of the duty to the mortgagor: GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250 at [56]; Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646 at [75]-[78].
The Bank submitted that, in the first instance, Mr Gittany had no standing to raise this matter. That was because the Bank had not called on the guarantee in relation to the Merrylands loan. Further, at the outset of the hearing the Bank gave an undertaking that it would not enforce any amounts against Mr Gittany under guarantees that he has given. It became clear that the purpose of that undertaking was to deny Mr Gittany standing to contest the issue concerned with the GST gross up. The Bank submitted that the only parties who had standing to complain about that matter were the companies themselves and, because the companies are now in liquidation, the only person who might have a claim would be the liquidator.
The Bank initially submitted that, with the exception of the contract for unit 3 where the Bank sold as mortgagee in possession, the Bank was not in a position to pursue the purchasers for the GST. That was because the contracts were entered into by the companies as vendors. Those companies are now in liquidation and it would be the liquidators alone who would be in a position under the contract to pursue the purchasers for the money. However, in final submissions the bank accepted that it had the right to pursue the matter relying on a Power of Attorney clause in the mortgage.
The Bank submitted that the margin scheme under the GST Act could not have been employed without there being a renegotiation of the contracts. This was because it was a requirement that a choice be made if the margin scheme was to be used at the time the contract was entered into. In respect of units 1 and 4 no election was made to use the margin scheme.
The Bank initially submitted that if it had attempted to enforce the GST clauses by requiring payment of the GST at settlement the purchasers may have rescinded the contracts. The bank submitted that the purchasers had a right to do so notwithstanding the registration of the plan. This was because a right to rescind had become available to the purchasers when the plan was not registered within the stipulated period. The purchasers did not lose that right to rescind even when the plan was registered. Alternatively, if the bank made such demand on the purchasers there was a risk that they would claim a right to rescind. In that way it can be seen that any attempt to renegotiate the arrangement to the margin scheme might have resulted in the purchasers claiming the right to rescind.
Subsequently, the Bank accepted that the purchasers' right to rescind was lost on registration of the plan. However, the Bank submitted that it was not certain that the purchasers could have been held to the terms of the GST gross-up clauses if, for example, it sought to recover the amount of the GST in a suit for specific performance.
The Bank submitted that it was under no obligation to make demand on or sue the purchasers, particularly after settlement. Reliance was placed on Westpac Banking Corporation v Kingsland (1991) 26 NSWLR 70 at 705-707.
The Bank submitted that any shortfall on the Merrylands facilities, including the amount of $116,644 remitted to the ATO for GST, was paid from the proceeds of the Bass Hill sale. Another secured creditor, Messrs Padovan and Bale, ranked ahead of Mr Gittany and his other creditors in relation to the proceeds of the Bass Hill sale. The amount of their debt at 15 January 2015 was $504,635.72. There is no proof that the debt to Messrs Padovan and Bale would be discharged prior to the payment of any monies payable by the Bank. In that way, Mr Gittany has not suffered any loss.
In reply Mr Gittany said that he had standing because the monies owed by the companies in relation to the Merrylands town houses were also secured by the Bass Hill property of which he was an owner. Any shortfall from the sale of Merrylands would next be charged against Bass Hill and any surplus would not go to the liquidators of the companies. Further, although Messrs Padovan and Bale were next in line on the sale of Bass Hill the failure of the bank to collect the GST from the purchasers meant that Mr Gittany's indebtedness to Messrs Padovan and Bale was thereby increased. The Bank's answer to that was that if any monies were recovered from the purchasers they would not benefit the Bass Hill property, rather, they would have gone into the companies which were in liquidation.
The Bank submitted in the alternative that any claim by Mr Gittany in relation to the GST amount was a loss of chance case. That was because it could not be certain what attitude the purchasers would take if the Bank claimed against them under the GST clauses. If the Bank sought to have the purchasers vary the contracts to apply the Margin Scheme the contingency was how those purchasers would react, that is, whether they would agree to vary the contracts in that way. The Bank submitted that Mr Gittany led no evidence to establish that any action on the Bank's part would have yielded a benefit.
The Bank submitted that the evidence demonstrated that it had acted in good faith in relation to the sales. It pointed out that Mr Gittany acknowledged in his evidence that the prices obtained for the units were record prices. Further, he agreed that the Bank acted at all times prudently and appropriately in relation to the contracts.
The Bank pointed further to the evidence that Mr Gittany had been advised by his accountant that no GST was payable on the Merrylands contracts. The email of 13 October 2010 sent by Mr Reitano to Mr Gittany showed that the common assumption of the Bank and Mr Gittany at that time was that no GST was payable. After the units had settled the Bank received advice that GST was payable. The Bank settled the sale while this matter was unresolved. Mr Reitano's evidence was that the Bank needed to complete the contracts as soon as possible with as few difficulties as possible to avoid the risk of loss on the sales.
The Bank submitted that it was not obvious that the Margin Scheme was the appropriate way to deal with GST. If the Bank had commenced negotiations with the purchasers to vary the contracts that would inevitably have caused delay and might have led the purchasers to seek to rescind their contracts to take advantage of the fact that the sales process was then in the hands of the Bank as a mortgagee.

Consideration

The Bank in the present case was able to claim the GST that it paid from the purchasers pursuant to clause 37 for units 1 and 4 and clause 14 for unit 3. The Bank became responsible for the payment of GST after completion of the contracts. Clause 38.1 of the Memorandum incorporated into the Merrylands Mortgage appointed the bank and its employees as the companies' attorney and in clause 38.2 provided: If you are, or we reasonably believe that you might be, in default, an attorney may: (a) do anything which you can lawfully authorise an attorney to do in connection with this mortgage, [or] the property… In Chaplin v Young (1864) 33 Beav 330; 55 ER 395 at 398 Sir John Romilly MR said: In the case of a mortgagee of the business, if he enters into possession, he becomes the owner of the business, and he stands exactly, as regards his powers, in the place of the mortgagor, and, accordingly, he is accountable to the owner of the equity of redemption for everything which he either has received or might have received or ought to have received, while he continued in such possession.
Mr Reitano at the bank was aware of these clauses and understood that if he called on the purchasers to pay the GST they would be obliged to do so. However, he said that he did not consider enforcing them.
Those GST clauses expressly provided that they would not merge on completion. No issue could have arisen after completion about any right on the part of the purchasers to rescind the contract if demand had been made to them under those clauses.
However, even if demand had been made prior to or at completion for the payment of the GST there would have been no basis for the purchasers to claim a right to rescind the contract. Even though the registration of the plan took place beyond the time stipulated in the contract the purchasers did not, when they had the opportunity to do so after that date but before the registration of the plan, move to rescind the contract.
The Bank does not now contend that the purchasers would have had a right to rescind at the time of settlement by reason of non-registration of the plan by the date stipulated. The Bank accepts that clauses 28 and 29 of the standard form contract constitute an answer to any claim by the purchasers for a right to rescind.
The Bank's submission was ultimately that it was not certain that the purchasers could have been held to the GST gross up clauses "having regard to other available legal defences that could be argued by them in relation to the GST issue" either in answer to an action for specific performance if brought before settlement or in an action to enforce the clauses after settlement. Quite what those legal defences might be was not specified.

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