Bank of Queensland Ltd v Heritage Village Estate Pty Ltd

Supreme Court of NSW|2012-08-07|Before: Stevenson J

Introduction 1This is an action by the Bank of Queensland ("the Bank") under a guarantee given to it by the second defendant, Mr Matthew Merton ("Mr Merton"), and the third defendant, Ms Karen Butler ("Ms Butler"), in respect of the indebtedness to the Bank of the first defendant, Heritage Village Estate Pty Limited ("HVE"). 2HVE is in liquidation and has played no role in the proceedings before me. 3Mr Merton conducted the proceedings on his own behalf and on behalf of Ms Butler. The Bank took no objection to this course. 4Mr Merton conducted his case with dignity and in a measured, polite and respectful manner, both to the Court and to the legal representatives of the Bank. Although the Defence and Cross-Claim upon which he and Ms Butler relied were, evidently, prepared by a lawyer, Mr Merton is not a lawyer.

Background 5Mr Merton and Ms Butler are the directors of HVE. 6HVE is the registered proprietor of a property at Castle Hill ("the Castle Hill property"). In April 2008, HVE proposed to demolish an existing residence on the Castle Hill property, subdivide the land into two lots, cause residences to be constructed on each lot, sell one of those residences and retain the other as a residence for Mr Merton and Ms Butler. 7In or around April 2008, HVE applied to the Bank for finance for the project. 8In that regard, on 29 April 2008 Mr Graham Atkinson ("Mr Atkinson"), the Manager in the Bank's Risk Assessment division, sent an email to Mr Warren Bobbermien, a subordinate officer of the Bank, saying that he was "uncomfortable with the deal" and that: - "the only way I am prepared to support this is if the existing security held on account of Karen Butler is collateralised to the deal...". 9The "existing security held" to which Mr Atkinson referred comprised properties owned by Ms Butler at West Wyalong ("the West Wyalong property") and Nulkaba ("the Nulkaba property"). Several years earlier, on 21 November 2005, Ms Butler had given the Bank mortgages over those properties in respect of unrelated transactions. 10On 30 April 2008, Mr Keith Rowntree ("Mr Rowntree"), who was then the manager of the Castle Hill branch of the Bank, wrote an email which was in effect in reply to Mr Atkinson's email in which he said: - "Whilst extremely disappointed with the Bank's attitude as this deal will be 61.l % of the end day valuation, the client reluctantly agreed to providing security the Bank already has to add further comfort to an otherwise strong deal." 11Mr Rowntree was called as a witness by Mr Merton. In his evidence he said that the security "the bank already has" to which he referred in this email was the West Wyalong property and the Nulkaba property. 12Mr Rowntree gave evidence that he had had a conversation with Mr Merton in which Mr Merton had agreed, on his own behalf and on Ms Butler's behalf, that "whatever security was already held" by the Bank from Ms Butler would stand as security for the advances sought in relation to the Castle Hill property. 13On 12 May 2008 the Bank wrote to HVE a Conditional Letter of Offer in which the Bank offered to provide two facilities. 14The first was a Commercial Rate Loan of $2,362,000. The second was a Business Overdraft of $65,000. 15That letter stated that the "security to be taken" included an "unlimited guarantee" from Ms Butler supported by the mortgage over the Nulkaba property, an unlimited guarantee from Mr Merton, a fixed and floating charge from HVE and a first mortgage from HVE over the Castle Hill property. 16No mention was made in the Letter of Offer of the West Wyalong property. 17However, as I have mentioned, Mr Merton told Mr Rowntree that Ms Butler would offer the West Wyalong property as security for the loans. In any event, as I discuss below, that is the effect of the documentation. 18HVE went into liquidation in August 2011. 19On 8 February 2012, Garling J made an order granting the Bank possession of the Castle Hill property. The property was submitted to public auction on 23 June 2012. One of the two lots of the property was sold at auction, the other was sold by private treaty later in the day. The properties were sold for a total of $1,080,000. Settlement of both lots was due to occur on 7 August 2012. The Bank's debt, as at 25 July 2012, was $1,492,045.73. There is no material yet before the Court as to the net proceeds of sale of the Castle Hill property. There is thus not yet before the Court evidence as to the precise shortfall claimed by the Bank. Those matters can be dealt with later, as will emerge later in these reasons.

The facilities 20On 27 May 2008, the Bank and HVE entered into a Business Overdraft Agreement for $65,000. Both Mr Merton and Ms Butler executed the relevant documentation as directors of HVE. The documentation referred to a "security requirement" including first mortgages over the Castle Hill property, mortgages from Ms Butler over the Nulkaba property and the West Wyalong property, and guarantees from Ms Butler and Mr Merton. 21On 10 June 2008, the Bank and HVE entered into a Commercial Rate Loan Agreement in the sum of $2,362,000. 22Mr Merton and Ms Butler also executed that document as directors of HVE. 23The Commercial Rate Loan Agreement provided that the security included mortgages over the Castle Hill property, the West Wyalong property, and the Nulkaba property. In relation to the latter two properties, the security was described as having been "provided by guarantor". 24The Commercial Rate Loan Agreement was stated to be an "interest capitalised variable commercial rate loan", with a maximum term of one year and payable on demand. 25The purpose of the Commercial Rate Loan Agreement was described as to "assist refinance Westpac... Debt and to assist construct two residential houses". 26The loan document stated that the $2,363.000 to be advanced was for specified "costs" including $880,000 for "Land/Refinance" and $180,000 for "Subdivision Costs". 27In regard to the component of $880,000, the loan agreement also included a "Request Notice", signed separately by Mr Merton and Ms Butler, in which they gave notice to the Bank that they wished to make a "drawing under the facility" described as an "initial draw" of $880,000 for "refinance of Westpac loan". 28The Request Notice stated that Ms Butler and Mr Merton wished that "initial draw" to take place "as soon as possible". 29Included in the agreement under the heading "Conditions Precedent" was clause 7 which provided: - "Subdivision and issue of titles to be confirmed within a maximum of 3 months of initial funding a [sic] prior to construction funding being made available". 30The relevant council, the Hills Shire Council, did not issue a "Subdivision Certificate" pursuant to s 109C(1)(d) of the Environmental Planning and Assessment Act 1979 until 14 October 2010. 31Clause 7 of the Commercial Rate Loan Agreement is of central importance in the case, and I shall return to it later in this judgment.

Mortgage securities 32The Bank relies upon the mortgage given to it by HVE over the Castle Hill property. As I mentioned, that property has now been sold by the Bank in exercise of its power of sale. 33The Bank also relies upon the mortgages given by Ms Butler to the Bank on 21 November 2005 over the Nulkaba property and the West Wyalong property. 34Mr Merton did not dispute that the Bank was entitled to security over the Nulkaba property in respect of the advances made to HVE. He did dispute that the Bank had such security over the West Wyalong property. For the reasons I explain below, my opinion is that the West Wyalong property does stand as security for the Bank's debt.

The guarantees 35The guarantees executed by Mr Merton and by Ms Butler are in the same form. Ms Butler executed her guarantee on 10 June 2008. Mr Merton executed his on 11 June 2008. Both guarantees stated: - "This guarantee applies to the loan agreement between the borrower and us signed by us on 27 May 2008." 36The guarantee contained a "guaranteed limit" of $2,357,000. 37No issue is raised by Mr Merton or Ms Butler on the pleadings, or in submissions, as to the enforceability of the guarantees. 38The guarantees are drawn in very wide terms. By clause 4.1 each of Mr Merton and Ms Butler guaranteed that "the debtor will pay us all amounts payable under a guarantee development when they are due." 39Subclause 4.5 of the guarantees provided that the Bank was not obliged to make demand on HVE prior to making demand on the guarantors. The guarantee provided that an amount was "payable" for the purposes of clause 4.1 if it was "currently payable or will or may be payable in the future." 40Clause 26 of the guarantees provided that the Bank could exercise its rights under the guarantees "in any way we consider appropriate" and that the Bank could pursue the guarantors under the guarantee "before we enforce any of our rights or remedies...against the debtor...or under another document".

The advance 41The Bank made only one advance under the Commercial Rate Loan Agreement. That advance was made on 26 September 2008 and was in the sum of $1,070,016.19. 42There is no evidence before me as to how this figure was calculated. However, as Mr Merton pointed out in oral submissions, this figure was a fraction short of the total of $880,000 (the amount required to retire HVE's existing indebtedness to Westpac) and $180,000 (the component of the advance described as being relevant to "subdivision costs"). 43The Bank advanced no further funds under the agreement. 44On the Bank's case, this was because HVE made default under the agreement as, contrary to condition 7, it did not cause "subdivision and issue of titles" to be "confirmed" within three months of "initial funding"; that is within three months of 26 September 2008, namely by 27 December 2008. 45It is the Bank's case that, as a result of that default, it was not obliged to make available any "construction funding". 46Further, the Bank submits that HVE thereby became liable to pay the funds already advanced on demand. 47It is the case of Mr Merton and Ms Butler that the Bank was obliged to advance further funds, at least so far as was necessary to complete the subdivision. I will turn to that aspect of the case later in this judgment.

Did the guarantees extend to the Commercial Rate Loan Agreement? 48A question arises as to whether the guarantees extend to the Commercial Rate Loan Agreement. 49This was not a matter raised, in terms, in the Amended Defence or Cross-Claim. 50Mr Sulan, who appeared for the Bank, very properly drew the Court's attention to this issue. 51The issue arises because, as I have said, both guarantees stated that they applied to "the loan agreement between the borrower and us signed by us on 27 May 2008". 52Thus the guarantees referred to only one "loan agreement" and referred to such an agreement as having been "signed by us" on 27 May 2008. 53As emerges from what I have said earlier, there was only one "loan agreement" signed by the Bank on 27 May 2008, namely the Business Overdraft Agreement. 54Critically, the Commercial Rate Loan Agreement was not signed on 27 May 2008. That document was dated 10 June 2008 and, I would infer, was executed by all the parties that day. 55The Bank submits that the guarantees should be construed as if they referred to the Commercial Rate Loan Agreement. 56It is true that, as part of a process of construction, the Court has power to correct obvious mistakes. 57Thus in Fitzgerald v Masters (1956) 95 CLR 420 at 426-7 Dixon CJ and Fullagar J said: - "Words may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency." 58The relevant principle is vividly captured by the words of Lord Hoffman, Chartbrook Ltd v Persimmon Homes Limited [2009] AC 1101 at [25] where his Lordship said: - "All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant." 59However, this process of construction is not available to change the legal effect of a document. 60When the language of a document is clear, the principles of construction which bind the Court are also clear. 61Thus Gibbs J (as his Honour then was) said, in the well-known passage in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109: - "If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different." 62Similarly and much earlier, Issacs J (as his Honour then was) said in International Paper Company v Spicer (1906) 4 CLR 739 at 762: - "If words are susceptible of only one plain and unambiguous meaning, that must be the meaning attributed to them, and no different interpretation can be substituted merely because the parties may have thought differently and acted accordingly." 63It is true, as Mr Sulan submitted, that the "guarantee limit" of $2,357,000 appears odd in the context of the $65,000 limit in the business overdraft. That does, albeit faintly, point to the conclusion that "something has gone wrong" with the language of the guarantee. However, it appears to me there is no ambiguity in the language used in the guarantee and that it does not admit the construction contended for. 64In my opinion, the guarantee can only extend to the Commercial Rate Loan Agreement if it is rectified to have that effect. 65The principles relevant to rectification are well-known and summarised by McLelland AJA in Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 345 as follows: - "In general, the remedy of rectification of an instrument is available where it is established by clear and convincing proof that at the time of execution of the instrument the relevant party or parties as the case may be had an actual intention (if more than one party, a common intention) as to the effect which the instrument would have which was inconsistent with the effect which the instrument as executed did have in some clearly identified way." 66In short, what is required is "clear and convincing proof" that, by mutual mistake, the plaintiffs have signed a document the words of which did not give effect to the agreement made between them. 67There is clear evidence that it was the Bank's intention that the guarantees extended not only to the Business Overdraft Agreement but also to the Commercial Rate Loan Agreement. There is in evidence a security schedule prepared by the Bank which is completed so as to show the guarantees as being security for both facilities. 68There was also evidence that it was intended by Mr Merton and Ms Butler that the guarantees extended to both agreements. 69This matter was raised in argument on 6 August 2012. Mr Merton indicated that he wished to, as it were, obtain instructions from Ms Butler before making any concession about the matter. 70When the matter was called on for further hearing on 7 August 2012 Mr Merton said: - "The position is simply I spoke with Ms Butler and she agreed with me we were signing a guarantee for the whole amount of the loan which, in our expectation, would be provided by the bank, that includes the overdraft facility and also the capital sum of $2.32 million". 71I asked Mr Merton whether he and Ms Butler consented to an order that the guarantees be rectified so as to have that effect. Mr Merton said that he and Ms Butler did agree to that course of action. 72In my opinion the concession Mr Merton made was properly made and consistent with the frank and open manner in which he conducted the proceedings before me. 73In any event the evidence pointed strongly to the conclusion that it was indeed the intention of Mr Merton and Ms Butler that the guarantees extend to both facilities.

Is Ms Butler's West Wyalong property security for the advances under the Commercial Rate Loan Agreement and the Business Overdraft Agreement? 74In my opinion the answer to this question is "yes", for the following reasons. 75First, Mr Rowntree gave the evidence to which I referred, that Mr Merton told him that Ms Butler agreed that the West Wyalong property, as well as the Nulkaba property, would be security for the proposed advances. I should add there is no suggestion before me that Mr Merton did not, at all times, have Ms Butler's authority to speak on her behalf. 76As I have mentioned Mr Merton has conducted these proceedings on Ms Butler's behalf as well as his own. 77Second, the terms of the West Wyalong mortgage make clear, in my opinion, that it does extend to the advances made in 2008. 78The West Wyalong mortgage incorporated, by reference, memorandum AA170454D filed at Land and Property Information New South Wales. That memorandum provides that the mortgage secures the "total amount owing" which was, in turn, defined to mean "all moneys which...you owe us, or will or may owe us in the future." 79That provision alone is, in my opinion, sufficient to render the West Wyalong property as security for such liability as Ms Butler has in respect of the advances to HVE. 80The memorandum describes the "total amount owing" as also including the amount owing under "an agreement covered by this mortgage." 81 An "agreement covered by this mortgage" is in turn defined to include "an agreement or any other arrangement...under which...you incur or owe obligations to us under which we have rights against you." 82Again this provision is in itself sufficient to render the West Wyalong property security for Ms Butler's liabilities in respect of the advances to HVE. 83The expression "agreement covered by this mortgage" also extends to any agreement which "you acknowledge in writing to be an agreement covered by this mortgage." 84In the guarantee, Ms Butler has acknowledged that the guarantee is "covered" by the West Wyalong mortgage. This is because in the guarantee Ms Butler has acknowledged that: - "Any existing security is also security for the obligations secured by this guarantee." 85The guarantee defines "security" as including any security given "in connection with the guarantee". 86In my opinion the West Wyalong mortgage security is given "in connection" with "this guarantee". 87I have two reasons for coming to this conclusion. The first is the evidence of Mr Rowntree to which I have referred. 88The second is the terms of the Commercial Rate Loan Agreement letter signed by Ms Butler in which it is stated that one of the securities "provided by the guarantor" is the West Wyalong mortgage. 89The result is that, in my opinion, the West Wyalong property stands as security not only for Ms Butler's liability in respect of the advances to HVE but also for HVE's liability in respect of those advances. It follows that the property is also security for Mr Merton's liability as guarantor for those advances. 90In the alternative the Bank sought to rectify the guarantees to make clear that it is secured by the West Wyalong mortgage as well as the Nulkaba mortgage. 91In view of the conclusions to which I have come, it is not necessary for me to deal with that submission.

Default? 92The Bank relies upon clause 7 of the Commercial Rate Loan Agreement. I have set out the terms of that clause above. 93In my opinion three matters arise on the proper construction of that clause. 94First, applying the principles in Fitzgerald v Masters to which I have referred above, in my opinion I should construe the word "a" in the expression "initial fund a prior to construction funding" as "and". It is obvious that, to use Lord Hoffman's words "something has gone wrong" with the drafting. Accordingly, I construe the clause so that it reads: - "Subdivision and issue of titles to be confirmed within a maximum of 3 months of initial funding and prior to construction funding being made available." (emphasis added) 95Second, although clause 7 appears in the agreement under the heading "Condition Precedent" I read it as not only stipulating a condition precedent for funding (beyond "initial funding") but as also imposing on HVE an obligation to ensure that subdivision of the Castle Hill property and issue of titles be "confirmed" in the stated period, that is, in the events that happened, by 27 December 2008. 96Third, I would construe the word "confirmed" as imposing on HVE an obligation to demonstrate to the Bank, by objective evidence, that the Castle Hill property had been subdivided and that titles for the subdivided property had been issued within the stipulated time. 97As I have set out above, "issue of titles" did not occur and was not "confirmed" until October 2010. 98On the Bank's case, HVE was thereby in default under the Commercial Rate Loan Agreement as at 27 December 2008. That is because, contrary to clause 22(c) of the "General Conditions" incorporated in the agreement, HVE had not done something that it had agreed to do. 99The result is that by reason of clause 23.1 of the General Conditions of that agreement, the total amount owing under the facility became payable on demand. 100The Bank made demand on HVE on 8 April 2009. It also made demand on Mr Merton and Ms Butler as guarantors on the same day. 101In my opinion the Bank was entitled to make simultaneous demand on the guarantors because of the provision of clause 4.5 of the guarantee to which I have referred. 102I accept these submissions. It follows that, on the face of it, subject to matters arising in the Amended Defence and Cross-Claim, that the Bank has established its case and entitled to relief. It has established its case that HVE was in default under the Commercial Rate Loan Agreement. If that is right it follows that HVE has also made default under the Business Overdraft Agreement: see the cross-default provision part 11(A) of the General Conditions to the Business Overdraft Agreement.

Mr Merton's submissions 103However I must also consider Mr Merton's careful submissions. 104Mr Merton submitted that it was the Bank, not HVE, that was in default. Mr Merton submitted that the Bank was obliged to provide sufficient "initial funding" to enable the subdivision to be completed. 105Mr Merton acknowledged that the Commercial Rate Loan Agreement recited that the component of the advance referable to "subdivision costs" was $180,000, and that amount was evidently included in the advance of $1,070,016.19 made on 26 September 2008. 106However, he pointed to the fact that on 25 September 2008, an engineer engaged by the Bank on 18 June 2008 to provide "Subdivision Progress Valuation Reports" had reported to the Bank that "the final estimate to complete the construction of these works is now $201,709". 107Mr Merton submitted that the Bank was obliged to include this extra funding as a part of the "initial funding". 108Mr Merton argued that this obligation arose from the words of clause 7 itself. He argued, as I understood him, that it must follow from the imposition on HVE of the obligation to procure "subdivision and issue of titles" within three months of "initial funding" that such "initial funding" must itself be sufficient to allow subdivision to occur. 109I have given careful consideration to this submission but I am afraid I am not able to accept it. 110There is no provision in the Commercial Rate Loan Agreement obliging the Bank to advance any part of the facilities limit of $2,363,000 by any particular time. 111The only indication in the Commercial Rate Loan Agreement as to the content of the "initial funding" is to be found in the Request Notice to which I have referred. 112It will be recalled that the Request Notice requested that there be an initial draw of $880,000 to refinance the Westpac loan to be made as soon as possible. 113In those circumstances, in my opinion and on the proper construction of the Commercial Rate Loan Agreement, the reference to "initial funding" in clause 7 is a reference to no more than such part of the facility limit that the Bank agreed to make the subject of an "initial draw" under the Request Notice. 114There is no other evidence of how the $1,070,016.19 drawn down on 26 September 2008 was calculated. 115In any event, the manner in which Mr Merton (and Ms Butler) put the case at hearing was different from that pleaded in their Amended Defence and Cross-Claim which I now turn.

Defence and Cross-Claim 116The manner in which the case proceeded was that Mr Sulan opened the case for the Bank and then adduced the Bank's evidence-in-chief. Mr Merton then opened his and Ms Butler's case and explained, at some length, how he saw the position. I reminded Mr Merton in the course of that opening that although I understood that he was informing the Court of his view of the matter and its history, when it came to deciding the issues in the case I could have regard only to the evidence admitted in the proceedings. 117Ms Butler has given no evidence in the proceedings. Mr Merton has sworn an affidavit. Objection was taken to the bulk of the affidavit and only a small number of paragraphs were, ultimately, read by Mr Merton. None of them touched on the matters agitated in the Amended Defence and Cross-Claim. 118Mr Merton also sought to read an affidavit of Mr Con Bozionleos. That affidavit contained material not relevant to any issue before me and I rejected it. 119Mr Merton cross-examined some of the witnesses called by the Bank. He also subpoenaed to give evidence Mr Rowntree and his wife, Mrs Margaret Rowntree, who were both officers of the Bank at the relevant time. 120None of the evidence elicited by Mr Merton from those witnesses provided any support for the allegations made in the Amended Defence or Cross-Claim. 121The substance of Mr Merton and Ms Butler's case is to be found in the Cross-Claim which elaborates on the fundamental contention, made in the Defence, that the Bank wrongly refused to advance under the Commercial Rate Loan Agreement, any more than the sum of $1,070,016.19 advanced on 26 September 2008. 122The Cross-Claim reveals that the basis upon which Mr Merton and Ms Butler contended that there was an obligation on the Bank to advance more than the 26 September 2008 amount was an oral representation attributed to Mr Rowntree as follows: - "Prior to 10 June 2008 [the Bank] represented to [HVE, Mr Merton and Ms Butler] that it would provide finance to [HVE], subject to certain terms and conditions, to enable [HVE] to complete the Works and the Redevelopment Works on the Property and to comply with the terms of the Development Approval". 123The claim made in the pleading is that, inconsistently with that alleged representation, the Bank did not provide finance to enable the completion of the "Works" and the "Redevelopment Works" on the property and that the Bank thereby engaged in unconscionable conduct for the purpose of s 51 AC of the Trade Practices Act 1974 (Cth). 124The difficulty is that neither Mr Merton nor Ms Butler adduced any evidence of the alleged representation. 125Further, although Mr Merton called Mr Rowntree to give evidence, he did not suggest to Mr Rowntree that any such representation had been made or asked him any questions about that matter. 126It follows that there is simply no evidentiary foundation for the Defence or Cross-Claim and they must fail.

Conclusion 127It follows that for those reasons I find: - (a)the guarantee executed by Mr Merton and Ms Butler should be rectified to the effect claimed by the Bank; (b)HVE has made default under the Commercial Rate Loan Agreement; (c)HVE thereby made default under the Business Draft Agreement; (d)Mr Merton and Ms Butler, as guarantors, are liable to pay the Bank the debt owed by HVE to the Bank under those facilities; (e)the Bank is entitled to judgment against Mr Merton and Ms Butler for the amount due; (f)Ms Butler's properties at West Wyalong and Nulkaba stand as security for those debts; (g)the Bank is entitled to possession of the two properties; (h)Mr Merton and Ms Butler have not made out the defence pleaded in the Amended Defence to the Cross-Claim; (i)the Cross-Claim should be dismissed; (j)Mr Merton and Ms Butler must pay the Bank's costs.

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: 03 October 2012

Trade Practices Act 1974(Cth)

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