Barton v Armstrong [1997] FCA 1107 | Case summary

IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 478 of 1992 GENERAL DIVISION ) BETWEEN: PARRAS HOLDINGS PTY LIMITED (A.C.N. 003 546 807) First Applicant/First Cross-Respondent FULANGA PTY LIMITED (A.C.N. 001 796 354) Second Applicant/Second Cross-Respondent PHONTOS INVESTMENTS PTY LIMITED (A.C.N. 000 870 762) Third Applicant/Third Cross-Respondent ILANZ PTY LIMITED (A.C.N. 001 885 392) Fourth Applicant/Fourth Cross-Respondent P & E PHONTOS PTY LIMITED (A.C.N. 000 870 771) Fifth Applicant/Fifth Cross-Respondent DOVIZO PTY LIMITED (A.C.N. 003 932 269) Sixth Applicant/Sixth Cross-Respondent PETER PHONTOS Seventh Applicant/Seventh Cross-Respondent ELLI PHONTOS Eighth Applicant/Eighth Cross-Respondent HARRYPHILLIP COSTAS Ninth Applicant/Ninth Cross-Respondent MARY COSTAS Tenth Applicant/Tenth Cross-Respondent MICHAEL PHONTOS Eleventh Applicant/Eleventh Cross-Respondent SIBARD PTY LIMITED (A.C.N. 003 575 291) Twelfth Applicant SHIMCOST PTY LIMITED (A.C.N. 003 355 048) Thirteenth Applicant SPOTEK PTY LIMITED (A.C.N. 050 325 212) Fourteenth Applicant/Twelfth Cross-Respondent AND: COMMONWEALTH BANK OF AUSTRALIA (A.C.N. 123 123 124) Respondent/Cross-Claimant Coram: Davies J. Date: 24 October 1997 Place: Sydney REASONS FOR JUDGMENT INTRODUCTION This application is brought by Mr Peter Phontos and his wife Elli Phontos, their son Michael Phontos, their daughter Mary Costas and her husband Harry Costas, and also by nine companies in which various members of the Phontos family are the shareholders. Of these companies, the most significant for present purposes are Parras Holdings Pty Ltd ("Parras") and P. & E. Phontos Pty Ltd ("PEP"). Peter and Elli Phontos were the directors of both of these companies. The shareholders were members of the family or their companies. The respondent to the proceedings is the Commonwealth Bank of Australia ("the Bank"). The issues in dispute arose out of an agreement made on or about 5 September 1988 whereby the Bank agreed to advance $4,782,700 to enable the purchase by Parras of a property at 13-15 Wharf Road, Gladesville, to construct thereon residential units, to pay out loans to PEP and others made by the Australia & New Zealand Banking Group Limited ("the ANZ") and also to pay out another loan due to an individual. The applicants claim, inter alia, breach of contract, dishonour of bills and cheques, misrepresentation and misleading and deceptive conduct, negligence, breach of fiduciary duty, unconscionable conduct and estoppel. Of all these bases of claim, the most important is that of unconscionable conduct. The claim of unconscionable conduct pervades most of the individual allegations which are made against the Bank. One matter relied upon as an element of the claimed unconscionable conduct is the alleged breach of contract by the Bank. In order to divide these reasons into intelligible sections, I shall first outline the principal facts. Then I shall outline the view of the facts the applicants propose, and thereafter the Bank's version of events, laying emphasis upon the matters which influenced the Bank in its actions. I shall then discuss the witnesses. Finally, I shall then deal in more detail with particular aspects of the transactions and with particular claims. I do not propose to discuss every allegation made in the statement of claim, which is 171 pages in length. There are too many individual matters raised to justify my dealing with each of them. The dispute between the parties revolves around some general points of principle. I shall deal with the substance of these under one section or another. I do not intend to repeat matters at length under every possible heading which may encompass them. When dealing with matters of fact, I have kept all the allegations in mind, although I have not necessarily mentioned them. Thus, although I have discussed the issue of "bad faith" under the heading "Breach of Contract", I have kept in mind that allegations of bad faith were made relevantly under other heads such as "Unconscionable Conduct" and "Misrepresentation, Trade Practices Act, Estoppel". It is not practicable to discuss the allegations under all the heads to which they may be relevant. I should not let the matter pass without commenting that, in my opinion, the statement of claim is far too long to promote the interests of efficient commercial litigation. There are numerous individual claims, some of which were either not mentioned by counsel for the applicants in the opening and closing addresses or were only briefly touched upon. Yet counsel declined to abandon matters set out in the statement of claim save for some few areas which were specifically mentioned. Many matters raised in the statement of claim should, in my opinion, never have been claimed and do not warrant a comment. The question of damages has been set aside for subsequent determination. The evidence intended to be adduced on the question of damages would specify in some detail what effect the downturn in consumer demand and in prices had upon Parras' Wharf Road development. That evidence has not yet been adduced. For present purposes, it is not in dispute that the boom in Sydney prices which occurred during the second half of the 1980s began to dissipate in the second half of 1988. During late 1988 and 1989, interest rates rose and consumer interest in residential units tended to fall. By early 1990, Australia had entered a recession and that recession continued through 1991 into 1992. This economic background undoubtedly influenced the outlook of the persons with whom we are concerned, particularly the officers of the Bank. PRINCIPAL EVENTS For 30 years prior to undertaking the Wharf Road project, Peter and Elli Phontos had been active in unit development, specialising in three storey home unit or townhouse projects, predominantly in the area of Gladesville and Sydney's lower north shore. After carrying on business in partnership for many years, Peter and Elli Phontos incorporated PEP in February 1971 and, thereafter, this company functioned as their building company. A practice developed of incorporating a company to undertake each new development and for that company to engage PEP as the builder. By 1988, Peter Phontos was getting on in age. Michael Phontos, his son, who carried on practice as a solicitor on his own behalf and who also had an economics degree, took an active interest in the projects, their financing and their legal ramifications. Harry Costas, his son-in-law, was active in the building works. I am satisfied that the business activities of Parras, of PEP and of most companies in the group were managed by these three persons. Over the years, the Phontos family had prospered However, in early 1988, a dispute arose under a contract which PEP had for the building of a number of units for the Housing Commission at North Ryde. This contract was terminated by the Housing Commission, leaving other contracts on foot. PEP claimed over $10m from the Housing Commission whilst the Housing Commission claimed damages from PEP. Pending the resolution of this dispute, PEP was left with outstanding liabilities, including a liability to the Taxation Department of approximately $170,000 for unpaid group tax. The Phontos family considered it desirable to undertake new projects to generate profit. Peter Phontos gave evidence that, over the years, he had adopted the practice of purchasing the next development site as the construction of the then current development was nearing completion. According to his evidence, his practice was to obtain bridging loan funds of between 80-85% of the purchase price of the land and, after obtaining development approval and building approval, to seek a term loan for the funding of the entire development. Peter Phontos said that, upon receipt of the finance approval, he had in the past been able to draw down funds once he had carried out and completed works to the value of 20% of the cost of the total development or had provided security for that amount. Thereafter, the financier provided the funds necessary until the construction was completed. Peter Phontos said that he had only ever refinanced developments when they were near to completion and when he was able to establish the gross realisation of the current development in the market place at that time. In January 1988, Michael Phontos moved his practice to premises in Linsley Street, Gladesville. On 15 January, he opened an account for his firm, Phontos & Co, and another account for PEP with the Bank's Gladesville Branch. His fiancee's father, Mr K.T. Robinson, was one of three Chief Managers of the Bank, ranking immediately below the General Manager. On 11 March 1988, Michael Phontos applied for an overdraft limit of $15,000 for the Phontos & Co account. The facility was approved on 14 March. By April 1988, one of the applicant companies, Fulanga Pty Ltd ("Fulanga"), was encountering difficulties with the ANZ, which was then the banker to the group, with respect to a development at Bannerman Street, Cremorne. The relationship was said to be "stressed". On 7 April 1988, Horwath & Horwath, chartered accountants, who had been called in by the ANZ, reported to the ANZ on the Cremorne development. On 21 June 1988, an amount of $220,000, which had come to PEP from the Housing Commission, was placed on term deposit with the Gladesville branch of the Bank and an overdraft in the amount of $220,000 was granted, secured by the term deposit. At the time, approximately $2m was owing to the ANZ. Presumably, the new account was opened to avoid restrictions which the ANZ had placed on PEP's account. The making of the term deposit and the opening of the overdraft is illustrative of the Phontos' preference for maintaining assets in their own hands whilst drawing on a bank's funds for the payment of development expenses. In June 1988, Peter and Michael Phontos sought other properties for development and inspected, inter alia, a development site at Wood Street, Manly, a site at Georges Crescent, Drummoyne and a development site in Wharf Road, Gladesville. On 25 June, Peter and Michael Phontos attended an auction of the Georges Crescent, Drummoyne site, together with Mr Robinson, the father of Michael Phontos' fiance. Peter Phontos was unsuccessful in his bid. Negotiations commenced with respect to the Manly site. On 29 June 1988, a holding deposit of $1,000 was placed on the Manly property. Subsequently, one of the Phontos companies, Reillo Pty Ltd ("Reillo"), entered into a contract to acquire the property for $860,000. Later, an agreement was made with the Delfin Property Group, for that organisation to take over the development. A part of the arrangement was that another Phontos company, Ilanz Pty Ltd ("Ilanz"), would receive a "spotter's fee" of $100,000, that PEP would construct the Manly units and that a certain proportion of profits, once they had arrived at a specified level, would be paid to the Phontos group. In early July, Michael Phontos discussed with Mr Robinson the proposed acquisition of the Wharf Road site. Mr Robinson suggested that a new company should be formed. According to Michael Phontos, Mr Robinson suggested that that company should seek acquisition and development funds from the Bank. A 10% deposit was paid on the Wharf Road site on 10 July 1988, the purchase price being $945,000. Parras was then established for the purpose of the acquisition and development. On 15 August 1988, in a letter prepared by Michael Phontos, PEP wrote to Mr N. Marshall, who was an officer of the Corporate Lending Services Division of the Bank ("CLS") under Mr Robinson, setting out some details of the Phontos group and of the proposed development. Shortly thereafter, Michael Phontos delivered to the Bank a cashflow document which set out expected income and expenditure with relation to the Cremorne project, which was then completed or close to completion, the Manly project, which was in its infancy, the Wharf Road project and projects under the remaining Housing Commission contracts at Meadowbank, Redfern and Harbord. On 30 August 1988, Mr Marshall, in a memorandum, outlined a finance proposal which he recommended. This was approved by Mr Robinson on 31 August. Although Mr Robinson was not part of CLS, he had the relevant authority. On the same day, Mr Marshall wrote to Mr Phontos setting out an offer, the terms of which were set out in a document called the "terms sheet". The terms sheet was executed by Parras, PEP, three other of the companies in the group and by Peter and Elli Phontos and Harry and Mary Costas and was returned to the Bank by letter of 5 September 1988. I shall later set out more details of the facility. For the moment, it is sufficient to describe the principal elements. The borrower was to be Parras. There was to be a progressive fully drawn loan of $2,600,000 (FDL 1), a fully drawn loan of $2m (FDL 2) and a bank guarantee of $182,700. FDL 2 was intended to take over the existing facility with the ANZ, of which PEP and Fulanga were the principal debtors. The terms sheet proposed a period of 12 months the development, 9 months for the construction and 3 months for sales. The FDL 1 was to be paid off upon the completion of the development within 12 months. During that period, interest on FDL 1 was to be capitalised. No period was stated with respect to FDL 2 but the terms sheet provided for progressive reduction of this facility from the profits from the sale of the units in the Cremorne development, from profits from the Wharf Road development and from the proceeds of the claim against the Housing Commission. Other terms provided that the Bank's valuation of the security properties was to achieve an "on completion" figure of at least $6.4m, that funds were to be released against architects' or quantity surveyors' certificates and that proceeds of up to $1m if forthcoming from the Housing Commission claim were to be directed to the reduction of the Parras facilities. Settlement for the Wharf Road site was required before the valuations had been carried out. On 9 September 1988, after a discussion between Michael Phontos and Mr Marshall, the Bank agreed to release sufficient funds to complete the acquisition of the Wharf Road property, notwithstanding that the plans and specifications, costing and development approval pertaining to the property would not be available. Mr Marshall advised that, following acquisition, further funds were not to be released until all the conditions of the facility had been met. Michael Phontos has given evidence that, about 8 September 1988, he had a telephone conversation with Mr Marshall in which Mr Marshall said that the applicants were not to worry about the valuations, that the Bank would rest upon its own armchair valuations. Mr Phontos asked whether they stacked up to at least $6.4m and Mr Marshall said "yes". I think a conversation of this nature did not occur. It would be quite inconsistent with a letter sent by Mr Marshall to Mr Phontos of 7 September and a memorandum to the Gladesville Branch from Mr Marshall of 9 September 1988. All required mortgages and guarantees were executed on 15 September 1988 and the Wharf Road property was acquired on 16 September 1988. As the Bank funded the full price of the purchase, a deposit of $90,000 came back to Parras. This was placed on term deposit and an overdraft of $90,000 was granted to Parras. When the arrangements were made with respect to the $90,000, Michael Phontos informed Mr Marshall that the $90,000 would be used for working capital to fund the payment of preliminary costs of the Wharf Road development. It appears that, in fact, only a small part thereof, $5,000 for architects' fees, was actually used for that purpose. On or about 21 September 1988, the Bank received from its Property Valuation Department ("PVD") valuations of the security properties. At that stage, the Wharf Road property was valued just by reference to the site. On 21 September 1988, PEP received advice from its architects that the construction costs would amount to $1.5m. In about September 1988, the Housing Commission cancelled the three remaining construction contracts at Meadowbank, Redfern and Harbord. This, of course, placed additional financial pressure upon PEP for it no longer had ongoing receipts from the work it had been carrying out for the Housing Commission. On 29 September 1988, the application for development approval for the Wharf Road development was lodged with the Ryde Municipal Council. On 4 October 1988, Michael Phontos contacted Mr Marshall and advised that the payout figure to ANZ was $2.15m, rather than the original estimate of $2m. He said that the cost of the Wharf Road project had been downsized from $1,410,000 to $1,300,000. He suggested increasing FDL 2 to $2.15m and decreasing FDL 1 to $2.5m. Mr Marshall reported that the nominal increase in facilities involved was viewed as safe. The change was approved and put into effect. At about the same time, a temporary advance of $800,000 was sought to enable Reillo to acquire the Manly property. On 12 October, the Bank increased the overdraft accommodation by $850,000 as follows:- "Overdraft Limit $ 90000.00 Fully Drawn Loan No. 1 $2500000.00 Fully Drawn Loan No. 2 $2150000.00 Fully Drawn Loan No. 3 $ 182700.00 Contingent Liability Limit $ 800000.00 Total Facilities $5722700.00" The $800,000 related to funds which the Bank advanced to assist the purchase of the Manly property. This sum was repaid shortly thereafter and we are not concerned with it. FDL 1 was reduced to $2,500,000. FDL 2 was increased to $2,150,000 to permit the payout of the ANZ. On about 6 October 1988, the Gladesville Branch was asked to contact Michael Phontos to obtain access to the plans and costings respecting the Wharf Road property so that a valuation on an "on completion" basis could be done. These were received shortly thereafter and forwarded to PVD on 12 October 1988. The development was for 12 units, four townhouses and one cottage. As it ultimately developed, the project became 15 units and the cottage. It has not been suggested that changes made in the design had any material effect on the development and its progress. On 7 October 1988, ANZ advised that payment under its guarantee of $182,700 had been demanded. On 19 October 1988, the Bank received from PVD a value of the Wharf Road development on an "on completion" basis. PVD put a value of $175,000 on each of the units rather than the $200,000 which Michael Phontos had estimated. After legal and selling expenses, the net was calculated as $2,793,400. PVD then went on to make further deductions of the type made in an "in one line" basis of valuation, which I shall later discuss, and valued the project at $2m. The result of the valuations was that the Bank was well short of the $6.4m security specified in its terms sheet of 31 August 1988, whether the $2m or the $2.79m figure was adopted. On 2 November 1988, Mr Marshall signed an internal memorandum which reviewed the risks and concluded that the position was unacceptable. Mr Marshall recommended that additional freehold security be sought. Mr Robinson approved the recommendation. Because of the Bank's practice of keeping its valuations confidential to itself, presumably to protect its valuers, Peter and Michael Phontos were not then advised of the value which the Bank placed upon the Wharf Road development. However, Michael Phontos was informed that further security was required. After discussion, Michael Phontos agreed to grant a second mortgage over a property owned by him at 23 Ashburn Place, Gladesville. He said that no other security was available. The security, when executed, was expressed to be for advances to Parras and to himself. Settlement with the ANZ was originally scheduled for October 1988. However, it did not take place while the Bank considered its position. During this period, Mr Marshall considered the matter and, with the approval of Mr Robinson, sought further security. After Michael Phontos undertook to give a second mortgage over his property at 23 Ashburn Place, settlement was arranged with the ANZ and took place on 9 November 1988. By 24 November 1988, Parras was overdrawn on its limit of $90,000 although, as I have said, very little of that money had been spent on the Wharf Road development. The account was overdrawn in part because various stamp duty and other charges and bank fees had been debited to the account. To overcome the problem of the overdrawn account, Michael Phontos decided to work on the cheque account at the Bank in the name of PEP and this was done. In late November 1988, a problem arose because a company had obtained a default judgment against PEP. PEP was required to put up a cash bond or bank guarantee of $80,000 as security for the payment. On 30 November 1988, Mr Marshall reviewed the position of the group and recommended the issue of a bank guarantee of $80,000 and that a review of the group be undertaken in late January 1989. Mr Robinson approved the recommendation. About that time demolition and clearing work commenced on the Wharf Road property. By late 1988, there was concern in the Bank at PEP's growing overdraft. In December, Mr Ronan noted that he had contacted Peter Phontos and discussed the debt which was then $432,599 and had been informed that the problem had resulted from a delayed progress payment and that no further cheques were to be issued. Mr Marshall noted that the matter was to be discussed with Michael Phontos on his return from overseas. Michael Phontos married on 10 December and was overseas for some weeks. On 7 December 1988, the Bank advised that PEP's approved overdraft had been increased to $370,000 secured by the two term deposits totalling $320,000 plus interest on those deposits of approximately $50,000. On the same day, Michael Phontos, who was also overdrawn, was granted an increase in his overdraft limit of $15,000 to $50,000 "for working capital requirements." Shortly thereafter, the appropriate guarantees and acknowledgments of the total liability were executed. The limits were never respected. The PEP overdraft continued to grow. It had reached $1,023,955 by 18 August 1989. The officers of the Gladesville branch, Mr Ronan and Mr Stevens, did not consider the limit of the drawings to be within their control. The account was under the control of CLS. Mr Robinson, of course, would have been aware of the dispute with the Housing Commission and of the hopes which Peter and Michael Phontos had of achieving substantial success therein. Development approval for the Wharf Road project was granted by the Ryde Municipal Council on 14 December 1988. In early 1989, Mr Marshall was transferred and his place was taken by Mr R.J. Allen-Ankins. In January 1989, the Bank was reorganised. A new office entitled the Northern Metropolitan Zone ("NMZ") was established. Subsequently, most of the substantial corporate accounts at Gladesville were placed under the control of this zone. However, two clients, including the Phontos group, remained under the control of CLS. By 17 February 1989, Mr Stevens noted that the excesses on PEP's account should peak at $601,000. He noted that Michael Phontos was to prepare a full cash flow with all expected expenditure. On 28 February 1989, after reviewing the file, Mr Allen-Ankins of CLS wrote to Gladesville stating that a review of the group was now due and that a detailed report was awaited. Mr Stevens was unexpectedly absent from the branch for some time with the result that the review was not immediately undertaken. On 9 March 1989, Michael Phontos forwarded to the Bank the building approval plans, the specification and the bill of quantities. The bill of quantities estimated the cost of construction at $1,419,023. This was said to include builders' profit at 12.5%. On 5 April 1989, the Chief Manager of the PVD, advised the Bank that PVD costed the project at $1,964,535, excluding preliminary expenses. When Mr Stevens returned to the Branch in early April 1989, he asked Michael Phontos for a cash flow, which was promised for 12 April 1989. The cash flow when received showed anticipated outgoings and anticipated receipts with respect to four projects. One was the Manly project, Delfin's project, which PEP was building. The second was the Wharf Road project, which was shown as receiving construction income as from May 1989, which was improbable as building approval had still not been received. The third was a proposed development by Michael Phontos in Ashburn place which did not proceed. The fourth was a proposed project in Victoria Road, Drummoyne which also did not proceed. The cash flow also included a receipt of $365,000 in May 1989 from the sale of one of the units in Cremorne, which did not occur. The cash flow showed a payment of $15,000 each month for 11 months commencing May 1989 to the Taxation Department, in respect of the outstanding group tax. The information provided by Michael Phontos would not have appeared to be particularly reliable. The PVD had placed a lower value and a higher cost on the development than had Michael Phontos. Of the cash flow projections, the only project actually proceeding was that with respect to Wood Street, Manly. Two of the projects listed had not been the subject of any formal application for finance. The PEP account was seriously overdrawn, just under $800,000. There were expenses such as the group tax and costs in relation to the Housing Commission arbitration to be met. On 19 April 1989, it was noted that accounts of the group were substantially overdrawn and that it was estimated that the PEP accounts would peak at $850,000. By this time, Mr Ronan considered that, "Our client's ultimate success will depend heavily on the outcome of the case against the Housing Commission" and considered that the likely success of that case should be investigated before funding on FDL 1 proceeded. On 5 May 1989, Mr Allen-Ankins noted that excesses were becoming a feature of the Phontos account and he recommended that urgent action be taken. Mr Robinson noted on that memorandum that "Security, if any, should be sought from Michael Phontos." Mr Allen-Ankins noted "We need to have detailed discussions with the clients and manager to get a handle on where these accounts are going." On 9 May 1989, Mr Allen-Ankins informed the Gladesville Branch that the conduct of the accounts was to be fully reviewed and said:- "The conduct of these accounts is to be fully reviewed, however before setting up an interview with the clients we have requested PVD to urgently revalue the Wharf Street property. In the meantime would you please exercise firm control on the current level of excesses, ensuring our overall exposure does not increase. Excesses on Phontos and Co are not to be increased without additional security." On 16 May 1989, Michael Phontos notified the Bank that a cheque for $63,500 had been drawn on the PEP overdraft for the purchase of a property at Darling Street, Balmain. It was proposed that there would be a joint venture between Ilanz and Delfin with respect to that property. PEP was to construct the developments for $1.3m. On the same day, Mr Robinson authorised payment of the cheque. About 17 May, the Chief Manager of PVD, Mr Fernie, advised Mr Robinson that a Gladesville agent had expressed the view that the expected price of the Wharf Road units would be up to $200,000 per unit and that another agent had indicated a price range of $190,000 to $200,000. Mr Robinson noted that, on the basis of $200,000 per unit, Mr Fernie had said that the sales, including the home on the property, could achieve $3,300,000. Mr Allen-Ankins noted in an internal memorandum of 18 May 1989:- "PVD have confirmed On Completion' valuation and investigations by Mr Fernie have established a total sale price of $3.3M. ... The company is on an expansion programme without the necessary working capital to continue operations and we will be better equipped to judge this after the interview tomorrow." On 18 May 1989, there was a meeting between Peter, Elli and Michael Phontos and Mr Allen-Ankins and Mr Ronan at which the position was discussed. Mr Allen-Ankins noted in a memorandum of 9 June 1989:- "We explained that the conduct of their accounts was far from satisfactory and that since inception facilities had not been respected. We then went through the matters raised in our memorandum 5 May and put it to them that without further capital injection they would be unable to continue operations. We also expressed concern that they would contemplate a further joint venture with Delfin given their circumstances. They expressed complete surprise at our claim ..." On 23 May 1989, Michael Phontos forwarded a revised cash flow document. In addition to dealing with the Manly and Wharf Road projects, the cash flow document dealt with projects at Balmain, Ashburn Place and Drummoyne, none of which went ahead. On 30 May 1989, Michael Phontos sent to Mr Stevens a list of "creditors outstanding". This showed quite a number of creditors, many of whom were being paid by instalments. Some of the debts went back to late 1987. One of the debts amounted to $250,000. On 1 June 1989, the Ryde Council issued building approval for the Wharf Road development. Substantial work on the construction did not commence until after August 1989. However, during the second half of 1988, plans had been prepared and there were negotiations with the Council. During the first half of 1989, preliminary work by way of demolition and clearing of the site, leaving only the cottage which was to be retained, was undertaken. On 1 June 1989, PEP executed a building contract with Parras for the construction of works for $1,419,000. Michael Phontos has given evidence of a long conversation between Mr Ronan and himself on about 5 or 6 June 1989. I need not discuss this other than to say that I prefer Mr Ronan's evidence. On 6 June 1989, Mr Ronan wrote to CLS reviewing the overall situation. PEP's overdraft at that time stood at $1,123,096. The Phontos & Co account was at $112,858. Mr Ronan recommended that the terms sheet should be amended to require payment of up to $3m from the proceeds of the Housing Commission arbitration. Mr Allen-Ankins noted in a memorandum of 9 June 1989 that, at the meeting with Peter, Elli and Michael Phontos on 18 May 1989, the Phontos group had expressed the view that their accounts had peaked and that the position would start to improve. Mr Allen-Ankins said that Mr Ronan had proposed providing additional support to complete Wharf Road and to finance Ashburn Place, a project of Michael Phontos, on the strength of an anticipated favourable outcome of the Housing Commission case. He noted that a shortfall to complete the project was inevitable. Mr Allen-Ankins went on to express the view that:- "These funds [the profits shown in the cash flow] will not clear excesses and sale of units will not clear FDL 2 and 3 $2.47m. The group is virtually bankrupt and given the downturn in the real estate market and building industry in general the ability of the group to trade out of their predicament is not evident. ... There is no good news for the group in the short term and at some stage CBA will have to bail out. It is therefore recommended that CBA take steps now to call up its debts in lieu of the branch proposal." Mr Robinson noted on this memorandum that relevant documents should be forwarded to the Legal Department for an efficacy check and that steps should be taken to maximise available security. Mr Robinson approved the suggestion which Mr Ronan made that the conditions of the loan be amended to require moneys up to $3m which may be coming from the Housing Commission to be directed to the reduction of the Parras facilities. On 15 June 1989, Mr Allen-Ankins wrote to the Gladesville Branch to say that the account was to be strictly controlled and that debts were not to increase beyond their current levels. He also gave instructions for the implementation of the matters specified by Mr Robinson. On 19 June 1989, Mr Stevens informed Michael Phontos that the level of debts on the group accounts was not to increase beyond their current level. Michael Phontos said that work on Wharf Road would have to cease due to this ruling. Mr Stevens' diary note of this conversation reads, inter alia:- "I interviewed Michael Phontos today to bring to his notice the requirements from our P/O/C that the level of debts on the group accounts are not to increase beyond their current level. It was stressed to Mr Phontos that this applied to all accounts including the P & E Phontos accounts and the Phontos & Co account. The implications of this directive from town were discussed with Mr Phontos and it rapidly became evident that work on Wharf Road would have to cease due to this ruling. To overcome this, Mr Phontos requested that we allow the release of an additional $80,000 on the P & E Phontos accounts to enable the uplifting of the BA plans from Ryde Council at a cost of approximately $39,000 plus allow work to the value of $41,000 to proceed. His request was relayed to Mr Allen-Ankins and it was approved subject to these excesses being cleared by the release of funds after a progress payment inspection." Michael Phontos was informed that the release of $80,000 was approved subject to the excesses being cleared by way of the release of funds after progress payment inspection and on the additional condition that the $1m to come from the Housing Commission be increased to $3m. On 22 June, 1989, progress claim No. 1 was lodged. The claim had been prepared by Michael Phontos and was not accompanied by an architect's or quantity surveyor's certificate. Thereafter, all progress claims were calculated and lodged by Michael Phontos or Harry Costas. The claim sought $155,572 which included charges of $45,000 and professional fees of $61,500. There was a dispute as to whether those items were allowed. On 3 July 1989, an officer of the Bank reported that the value of work completed to date was $75,000 and that a progress payment could be made accordingly. The Bank paid $75,000 on 19 July 1989. On 26 June, PEP uplifted the Building Approval and paid the fee of $38,370. On 26 June 1989, Mr Allen-Ankins had recommended the imposition of establishment fees for the excesses both on the PEP account and those of Phontos & Co. On 30 June 1989, Mr Ronan wrote to PEP:- "We have been further instructed today to apply an additional establishment fee of $2100 to cover the increased borrowings since early this year which has today been charged to your account No. 2171 148-551." I do not take this as being a formal grant of an increase in the overdraft limit. I take the imposition of the establishment fee as being no more than the imposition of an additional charge for what had occurred in fact. In the same letter, Mr Ronan wrote to PEP:- "We refer to the discussions between Mr Michael Phontos and Mr Stevens of this office on 19 June 1989 and confirm that our Lending Administration in Sydney has instructed us to contain the debt of the company at its (then) present level. Further excesses of $80,000 were approved on the strict understanding that funds were used for Wharf Road, Project expenditure including B/A fees Progress payments monies soon to be released will be applied wholly to these excesses. According to your account balances these funds are now fully drawn." On 30 June 1989, Michael Phontos was informed that the balance of his account was $146,600 and that this figure was not to increase. On 30 June, 1989, Mr Ronan noted that approved excesses had been fully utilised. On 30 June 1989, one of PEP's cheques was dishonoured. Further cheques were dishonoured in the next few days. On 5 July 1989, Mr Ronan wrote to Parras as follows:- "As discussed with Mr Michael Phontos on 19 June 1989 we require the following amendment to the Bank's original Term Sheet:- Proceeds of up to $3,000,000 if forthcoming in respect of the disputed claim with the Housing Commission (Ryde Project) being directed to reduction of Parras Holdings Pty Ltd's facilities with the Commonwealth Bank of Australia.'" On about 12 July 1989, Michael Phontos spoke to Mr Stevens and then to Mr Ronan. Michael Phontos alleged that some cheques had been dishonoured whereas PEP should have had moneys available to meet the cheques. Mr Stevens said that PEP had to work within the limit as at 19 June. On 12 July 1989, Michael Phontos had opened a cheque account for PEP with the ANZ at its Gladesville branch with a view to operating if possible outside the Bank's restrictions. During July and August, Shimcost Pty Ltd ("Shimcost"), a company of Harry Costas, advanced some funds to assist the project to go ahead and PEP drew funds from its new ANZ account into which moneys from the Manly project had been paid. On 14 July 1989, Ilanz entered into a joint venture with Delfin to develop the Balmain property. PEP entered into a building contract to construct the development for $1.3m. Cheques drawn by PEP continued to be dishonoured. On about 27 July 1989, PEP received a summons from the Housing Commission which sought security for costs of $658,000 in the arbitration which was then on foot. On 19 July 1989, Mr Stevens rang Michael Phontos to say that cheques could only be issued when further income was received. At about the end of July 1989, Mr Ronan informed Michael Phontos that unless the members of the Phontos group executed the amendment to the terms sheet which had been sought providing for the payment of $3 m to the Bank in lieu of the $1m already agreed, then the Bank would not advance any further funds for the construction of the Wharf development. On 2 August 1989, the $3m amendment was executed and delivered to the Bank. The Northern Metropolitan Zone ("NMZ") had been formed early in 1989. Its General Manager was Mr Perkins and the Regional Manager was Mr J.G. Mason. In about April, Mr Mason had visited the Gladesville branch in the course of his duties. He had then noticed that there were excesses on the PEP account and that no proper arrangements appeared to be in place. After discussing the matter with Mr Perkins, Mr Mason wrote to CLS bringing the situation to their attention and advising that NMZ would appear to be the appropriate body to control the account. Mr Robinson replied on 8 June 1989 to say that monitoring of the accounts would be maintained and controlled by CLS. Mr Mason spoke again to Mr Perkins who then raised the matter with Mr Johnson, the Bank's General Manager for New South Wales. On 25 July 1989, control of the Phontos accounts was transferred to NMZ. Presumably resulting from Mr Johnson's involvement in the issue of control, Mr P.R. Hill undertook a review of the Phontos accounts. He reported on 20 July 1989 and said, inter alia:- "From the beginning this was a potential loss connection. It had all the earmarks - another bank client transferring apparently without reason, substantial forex loses incurred while with ANZ, was already suffering cash flow problems as a result of the HC dispute and no financial statements made available. Moreover, subsequent valuations did not realise estimates and the bank's security position was most unacceptable. Since acquisition the debt position has worsened, exacerbated by the legal expenses involved in the HC dispute. ... This is a connection which should not have been acquired. The warning signals were present from the outset. Although not clear from the file, would suspect that escalation of the debt has occurred from a combination of a lack of direction (until recently) from this administration and a lack of control by the branch, possibly attributable to a perception by the branch that CLS management was comfortable with the connection. Having said that, however, it is noted that the P & E Phontos P/L debt increased $220,000 since branch advised not to allow increase in debt levels. Against the foregoing background it is recommended: (1) that a provision for principal loss $50,000 be established and interest reserved; (2) that the file be immediately transferred to control of General Manager Northern Metropolitan (NSW) Zone ..." On that memorandum, Mr Johnson noted:- "I have told Mr Perkins of the transfer of the control to him and apologised for the state of the account. I agree this business we should have let pass at the outset." On 24 July 1989, a second progress claim for $113,460 was submitted to the Bank. Because of the consideration that was then being given to the file, this claim was not dealt with. On 31 July, 1989, Mr Mason, the Regional Manager of NMZ, wrote to the Gladesville branch to say that there was to be no increase in debts permitted on any of the accounts. On 3 August 1989, there was a meeting between Peter Phontos, Michael Phontos and Harry Costas and officers of the Bank, Mr Mason, Mr B.J. Gardiner and Mr I. Stevens. Mr Gardiner had been appointed manager of the Gladesville branch in place of Mr Ronan on 1 August 1989. Mr Mason said that the Bank was worried about the construction funds, that its property department would be asked to value the project and that, until further advice was given, no more cheques were to be drawn. Mr Mason asked whether the members of the group could provide further security and was informed that they could not. On 14 August 1989, PVD reported on the project and said, inter alia:- "The Bank's costing figure of $1,964,555 is likely to increase in line with inflation. The project will rely heavily on the prospect of the currently depressed housing market showing sharp improvement before the completion date to enable the selling prices to cover costs of land, building and interest." On 29 August 1989, Mr H.J. Broekhuijse, the Bank's solicitor, advised Mr Mason that the Bank was not in a strong position to cancel the commitment given in the terms sheet of 31 August 1988. Mr Broekhuijse said that a court could conclude that the Bank's claimed right to cancel the commitment at its pleasure was inconsistent with the agreement to provide a fully-drawn loan on a progressive basis to fund the development of a particular project. In the light of this, Mr Mason, on 30 August 1989, wrote an internal memorandum advising that the Bank had little alternative but to follow Parras through the development of the Wharf Road project. Mr Perkins, the General Manager of NMZ, commented on this memorandum that:- "In the light of our legal advice which was also the writer's opinion we find it extremely difficult to walk away' from the commitment. The former administration's tacit approval to the variations of the original term sheet leaves us with little option but to push ahead on the basis proposed above. Please undertake the discussion with all parties as indicated pointing out our concerns at the Group's present position and the need to pursue an early settlement with the Housing Commission. Progress claims are to be strictly policed." A letter of 30 August 1989 was then prepared which set out conditions which have been described as "the Mason conditions". The letter was handed over and the general position discussed at a conference on 30 August 1989 which Peter and Michael Phontos and Harry Costas attended. At the conference, Mr Mason made it clear, as he recorded in a memorandum of 31 August, that the Bank's further involvement depended absolutely on all conditions being accepted and acknowledged. Mr Mason said that the Bank wanted to make sure that every penny that was advanced went into the Wharf Road project and nowhere else and that the Bank would release payment only upon invoices that came in in respect of the Wharf Road development. He said that the group would also have to pay interest as from September. Mr Mason said that no funds would be provided unless the members of the group agreed to the CBA's requirements. Mr Mason handed over the letter dated 30 August 1989 which was addressed to Michael Phontos and which read inter alia:- "We advise that the Bank has agreed to honour its commitment to the company by further release of funds on the company's Fully Drawn Loan No. 1 for development of the 13-15 Wharf Road Gladesville, development project. Such decision carries with it certain terms and conditions which will apply in respect of the Group's overall borrowings, for which the Bank will require prior formal acceptance by all of the Group's borrowing companies, and also by yourself and all 3rd party mortgagors. Such conditions are set out hereunder:- 1. Funds which are to be provided will be for the express purpose of completing the Wharf road development project. 2. Borrowings on the Company's No. 1 Fully Drawn Loan will be limited to a maximum of $2.5M being the level of the commitment previously given. 3. Progress payments will only be made against original invoices which are to be submitted to the Bank for approval. 4. It being clearly understood and acknowledged that any shortfall in funds which may occur in completion of the project are to be provided from the company's own resources or by outside borrowing. 5. Proceeds of up to $3,000,000 if forthcoming in respect of the disputed claim with the Housing Commission (Ryde project) are to be directed to a bulk reduction of Parras Holdings Pty Ltd facilities, or to any other of the Group's borrowings as the Bank may require. .... 7. All existing Group accounts to be placed on an "In Reduction" basis with no further drawings permitted other than on the "Progressive" Fully Drawn Loan No. 1 of Parras Holdings Pty Ltd. 8. Debts on all such accounts to be contained within present levels with interest to be met as charged each quarter commencing September 1989. In this regard, cash flow projections from all building projects in hand and any other income source are to be made available to the Bank as soon as possible to demonstrate the Group's ability to meet such interest payments. ... 10. An unlimited guarantee supported by the security referred to in (9) above to be given to the Bank by Mr Michael Phontos in favour of all the Groups borrowings. 11. Remaining units at Bannerman St Cremorne to be sold as soon as possible with proceeds applied in permanent reduction of the Parras Holdings Pty Ltd No. 2 F/D/L. In the event that any of the above terms and conditions as set out above are not respected the Bank may need to look to resources available to it under its Securities for repayment of the borrowings. Upon acceptance of the above conditions by all parties, the Bank will release an initial progress payment of $118,000 toward further development of the Wharf Road Gladesville project." The members of the Phontos family were reluctant to accept these conditions but finally agreed to do so. Michael Phontos, in particular, was reluctant to give the required security and guarantee supporting all of the group's borrowings. He sought a restriction of the security to the borrowings of Parras. This was not accepted. The members of the family and the companies agreed to the Bank's terms. In the discussion, Michael Phontos pointed out that there could be extreme difficulty in meeting the September interest on the borrowings but said that Parras would comply with meeting interest as charged from December 1989 on. Mr Mason agreed to put this before Mr Perkins as a reasonable departure from the terms which had been laid down. There was a discussion as to the $118,000 referred to in the last paragraph of the letter of 30 August 1988. Mr Mason indicated that the Bank intended to release sums up to that figure in respect of accounts outstanding to date. The matter was left on the basis that there would be further liaison with the manager of the Gladesville branch with respect to the level of funds sought for work to date. There was a discussion about the problem of invoices. It was suggested that the Bank may care to issue a guarantee to suppliers which would allow invoices to be submitted after delivery. Mr Mason said that CBA Gladesville could look further at that. Michael Phontos agreed that he would provide cash flows as soon as possible. At the time, no party would have had reasonable grounds for concluding that the Wharf Road project could be completed within the limit of the commitment of $2.5m. Officers of the Bank doubted that it would and thus insisted on condition 4. The members of the Phontos family, if they had given their attention to the point, would not have been justified in concluding that they could complete the project within the limit. PEP had outstanding debts, its debts had increased over the prior 12 months and interest was accruing. Nor could any of the parties have concluded that point 3 could be implemented without slowing down the progress of the works. However, those were the terms which the Bank put forward and which the Phontos group thought obliged to accept. A concluding paragraph in Mr Mason's memorandum of 30 August is worth noting, as it reflects the attitude taken by the Bank's officers at that time:- "To conclude the meeting, I reinforced the point that the Bank's agreement to provide further support to the Wharf Rd project, and indeed, to continue to carry the Group's existing borrowings, rests entirely upon all conditions set out in our letter being formally accepted and acknowledged by all parties (condition re meeting of interest in September 89 to be ratified). The need for close management controls, both from construction and financial point of view were stressed to all parties." On 6 September 1989, the applicants executed and provided to the Bank the necessary documents including the guarantee by Michael Phontos which the Bank demanded. On 7 September 1989, there was a discussion between a Mr M.P. Havron, Assistant Manager - Branches, Mr Stevens and Harry Costas in which the invoice system was discussed. Harry Costas was advised that costings needed to be itemised so that the link with invoices could be maintained. On 8 September 1989, PEP's two existing accounts were consolidated and the account placed in reduction. On the same day, $46,000 was released to PEP. The $46,000 was described in a memorandum from Mr Havron as "Authorised based on invoices produced". On this memorandum, Mr Mason noted in handwriting "Invoices linked to actual work completed". The work then proceeded with the development, but rather slowly as the Phontos group was short of funds. On 15 September, the Bank undertook to Boral Steel Pty Limited to pay invoices relating to the delivery of structural steel to the Wharf Road site. Like arrangements were subsequently made with other companies. On 18 September 1989, further costings were received from Harry Costas to facilitate matching the progress claims with invoices. On 22 September 1989, Harry Costas supplied a bill of quantities which showed the anticipated cost of each item and the value of the work already done. This document was thereafter used by Mr Stevens when calculating the payments that were to be made and became known as the "release record". At the same time, Mr Stevens set up what has been called the "funding register" which commenced with $1,198,076 which was the balance of the loan available on 3 October 1989. These documents to be used for recording and checking payments was submitted to and approved by NMZ. On 3 October 1989, Mr Stevens made a calculation from these figures which showed to him that FDL 1 stood at debit $1,301,925, leaving a balance of $1,198,075 available to meet draw-downs, estimated to cost $1,147,102. On 26 September, Mr Mullins of NMZ confirmed the release of a progress payment of $19,000 but said that no further payments were to be released until the cash flow and an increase in insurance cover which had been sought were received. On 30 October, Peter Phontos and Harry Costas were informed that the release of further funds would be frozen until they produced the cash flow and the increase in insurance cover which had been requested. A cash flow prepared by Michael Phontos was drawn up as at 5 October 1989. It showed income and expenditure with respect to the Manly project, the Wharf Road project, the Balmain project and the Ashburn project and income from sales of the two units at Cremorne. This cash flow was no more reliable than the earlier ones. If profits were being received from the Manly project, they did not seem to be reflected in PEP's financial position. The Ashburn Place project and the Balmain project had not been commenced and did not proceed. The Cremorne units were not sold as projected. There was a delay in the construction from 11 October to 1 November as bricks were not on site. In late October, an application was made for increased facilities in the sum of $90,000 in respect of the costs of the Housing Commission arbitration. This increase was recommended by Mr Gardiner, the Manager at Gladesville, but was rejected by his superiors. An offer by the Housing Commission to settle for $1.5m plus costs had been refused as a more realistic settlement of $3.5m to $6.5m was considered achievable. On about 20 November 1989, the Housing Commission arbitration was settled by the payment to PEP of $3.95m. Of this sum, $3.55m was invested at the Bank's Stock Exchange branch in bank bills maturing on 22 December 1989. On 28 November 1989, when the Gladesville branch was advised of this transaction, Mr Gardiner sent a facsimile to the Stock Exchange branch of the Bank to advise that the clients had undertaken that the first $3m received under the settlement would be applied in reduction of their debts. He requested that a "stop" be placed so as to ensure that the funds were not released without the consent of the Gladesville Branch. On or about 30 November, Mr Mason instructed the Gladesville branch to obtain an irrevocable order with respect to the $3m and advised that he would undertake an interview only if there were any problems. On 5 December 1989, there was a meeting between Peter Phontos, Michael Phontos and Harry Costas on the one part and Mr Gardiner on the other. Mr Stevens also attended for some of the time. Mr Gardiner appears to have considered that he could assist the Phontos group by holding a meeting "off the record". He took no notes of the meeting and felt free to offer advice as to what he might seek from the Bank by way of relaxation of the terms which had been imposed on them. Any "off the record" talks between banker and customer are, of course, undesirable. In the present case, there is a dispute as whether Mr Gardiner made promises on behalf of the Bank. I am satisfied that he did not do so but merely indicated what were propositions which he could put forward. However, inconsistently with the context of an "off record" discussion, Mr Gardiner produced towards the end of the meeting an irrevocable authority authorising payment to the Bank of $3m out of the bank bills and he requested Peter Phontos to sign it. Mr Gardiner said that it was a matter "of honour" that Peter Phontos sign the document. Peter Phontos did so against the advice of Michael Phontos. On 6 December 1989, Michael Phontos wrote to the Bank authorising the Bank to apply the $3m in reduction of the debts and requesting certain benefits including the release of all the term deposits, matters which had been discussed in the conference with Mr Gardiner. On 7 December 1989, in an internal memorandum forwarding this letter to NMZ, Mr Gardiner noted that the Wharf Road project appeared to be substantially undervalued at $2m "on completion" whereas the client's estimated sales should clear at $3.5 - $4m. He recommended that the property valuers be requested to revalue. Mr Gardiner went on to say that the Phontos family were anxious to obtain the release of the term deposits totalling $485,000 to complete other jobs and possibly upgrade the finish of the Wharf Road project. He said that if the Wharf Road security was revalued higher, there would be room to accede to their request. He said that the other requests were less important and could be dealt with as NMZ saw fit. On 19 December 1989, Mr Havron reported on the matter in an internal memorandum. He recommended that, as the Phontos group was now in a better position to complete and sell the units as individual lots within a reasonable and workable time frame, a more lenient attitude to the security was warranted. However, when the matter came before Mr Mason, he took a stricter view of the matter. In particular, Mr Mason was of the view that not all of the term deposits could be released. Mr Mason's decision was conveyed orally to Michael Phontos. On 21 December 1989, Peter and Michael Phontos met Mr Mason, who informed them that he would not be prepared to release all the term deposits but would be prepared to reassess the overall position in the following April. In an internal memorandum dated 27 December 1989, Mr Mason recorded:- "In all the circumstances, I am not prepared to move from our original decision and accordingly, request for release of further T/D funds is declined. Company may be informed however, that we would be prepared to reassess the overall position in early April next by which time the Wharf Rd project will be that much further advanced, and clearer indications available as to final costings. If at that time we feel comfortable with our security position and are satisfied with debt servicing up to that time, then I would be prepared to favourably consider making further funds available for working capital, but without any commitment at this stage. Company to be informed that we consider our stance reasonable in all the circumstances, and also, that we consider the funds of almost $216,000 now being made available should, along with the $200,000 said to be available from balance of damages payment, be adequate for their working requirements over the next 3/4 months when position can be reviewed." On 28 December, Mr Gardiner wrote to PEP to say that the $3m debt repayment had been applied to accounts as requested, that some but not all of the term deposits would be released, that PEP would be granted an overdraft of $100,000, that the Gold Mastercard of Peter Phontos would be reinstated and that the provision of bank guarantees to certain trade suppliers would be considered. The release of the guarantee given by Michael Phontos and any change in the system of making progress payments were not accepted. Mr Gardiner indicated that the Bank would reassess the position in three months time. The letter went on to request further cash flow budgets. In accordance with this letter, an overdraft limit of $100,000 was granted to PEP. On 22 December 1989, the Bank drew down $3m from the bank bills which had matured on that day. The Stock Exchange Branch was directed to delete the stop on the remaining funds. Between January 1990 and early March 1990, Mr Gardiner permitted cheques to be drawn and placed to the debit of PEP's overdraft without invoices having to be provided. During that period, moreover, Mr Gardiner continued to make direct payments to certain suppliers. On 23 January 1990, a progress claim drawn by Mr Costas upon a percentage completed basis was lodged. An amount of $129,620 was paid after deducting payments which the Bank had made directly to suppliers such as Boral Steel. However, the relaxation did not overcome all the problems being encountered. During this period, the Bank dishonoured cheques drawn in excess of the $100,000 limit on PEP's overdraft. In early February 1990, a building site at Linsley Street, Gladesville came on the market. Michael Phontos incorporated Dovizo Pty Limited for the purpose of carrying on a development on the site. On 21 February 1990, a deposit of $60,000 was paid for the acquisition of the Linsley Street site at a price of $600,000. During February, Mr Mason and Mr Gardiner came to view the development at Wharf Road. Peter Phontos, who was irate, informed Mr Mason that he was not welcome on the site as PEP's cheques were being dishonoured. Mr Mason withdrew. About mid-March 1990, Mr Gardiner informed Peter Phontos that his superiors insisted that the invoice system be adhered to. On 21 March 1990, Mr Gardiner wrote an internal memorandum which I shall set out as it seems to reflect the problems which were occurring at that time:- "We refer to our recent telephone discussion with your Mr Mason and confirm the liquidity position of the Phontos group is becoming critical. In our opinion if the Bank does not approve some assistance along the lines recommended below, the Phontos group will be unable to continue operating any longer than two weeks approximately from today. The financial squeeze has developed because numerous cheques have been dishonoured to keep customer within proximity of the approved overdraft of $100,000. As cheques have been returned, the word has spread around the building trade that P & E Phontos is a bad risk as for as supplying materials or labour. Credit has dried up and everybody wants cash in advance or a bank guarantee. Phontos needs to complete the work at Wharf Rd before the bank approves a progress payment and does not have the financial resources to pay immediately or in advance. ... We have endeavoured to assist the Phontos group in the following ways to overcome their liquidity problems:- a) Progress payments have been made against invoices where we have issued Bank guarantees. b) Progress payments have been effected after personal inspections by us have identified completed work according to our detailed schedule. c) Weekly wages have always been paid. d) Some excess has been allowed on the overdraft limit from time to time when we know a payment is close or a deposit is to be lodged. These steps are no longer sufficient as cheques are coming back as bills for collection. We expect another claim for a progress payment of approx. $60,000/$70,000 shortly but it will do little to relieve the account which is already $30,000-00 approx over the limit. ... Phontos & Co Pty Limited is currently negotiating purchase of a large building site in Linsley St Gladesville for $550,000 approx. where they intend to build their next block of units. The site is close to the Gladesville shopping centre and RSL club and is attractively priced. Funds held in commercial bills at Stock Exchange branch have been set aside for the purchase. Mr Peter Phontos is an old time builder who believes in honesty and honouring your commitments, is finding the strain of dealing with unpaid contractors and suppliers almost too much to handle. Phontos & Co P/L now intends to place Mr Eddie Randle who is a very experienced builder and financial controller in charge of the project. ... This move is a step in the right direction as the Wharf Rd project needs strong management and firm cost control to complete within budgetary estimates. Despite this positive step, it is obvious to us that Mr Randle cannot succeed unless the Bank takes realistic steps to assist in overcoming the liquidity crisis. We recommend that the following steps be taken by the Bank to ensure completion of the project:- a) Property Valuations Dept be requested to revalue the work completed on the Wharf Rd project. The last valuation carried out on 14/8/89 when there was little more than foundations completed and almost $1 million had to be deducted from our valuation for contingency allowances. b) Bank approve release of Term Deposit (217150039709) for $105,521 on receipt of company undertaking that proceeds will be applied only payment of Wharf Rd building costs. c) Bank approve additional Bank Guarantees up to $100,000 F/O material suppliers or work performance contractors. Payment will be against invoice and will be deducted from loan funds outstanding and already allocated. d) Some flexibility be allowed to continue with overdraft limit to pay wages and effect payment of some urgent costs possibly 1/2 days prior to a progress payment being effected. Your urgent attention to this matter would be most appreciated." PEP still had $375,000 in bank bills at the Bank's Stock Exchange branch. Peter and Michael Phontos sought to open a cheque account at that branch so as to use those funds. That request was refused. A bank cheque for $75,000 from the bank bills was deposited in an account in Peter Phontos' name at the Gladesville branch. This was used to cover emergency expenses. PEP still had outstanding creditors. Shortly thereafter, on 11 April 1990, the remaining $300,000 approximately from the bank bills was paid into an ANZ account in Martin Place. It will be seen that, despite the problems which the Phontos group was having in completing the Wharf Road project, the group was not prepared to use their own funds to overcome their liquidity problems and the group was still desirous of undertaking additional developments. A further valuation was carried out by PVD. It confirmed the earlier approach that the units would achieve sales of around $200,000 each, giving a gross realisation potential for the 15 units and dwelling of $3,300,000 less legal and selling expenses of $82,500 and a net potential "on completion" of $3,217,500. PVD valued the development on an "in one line on completion" basis at $2,290,000. Subsequently, Mr Mason recorded in a memorandum to the Gladesville Branch dated 9 April 1990:- "Valuation/contingencies have not changed and as such, we would not be prepared to release any of the term deposit funds held as security. ... Likewise, the Bannerman Street Cremorne properties were to be sold and proceeds applied in permanent reduction of the Parras Holdings Pty Ltd FDL." In April, Michael Phontos produced a document entitled "Notes re release of term deposits" which alleged that the $3m had been made available in consideration of the representation by Mr Gardiner on 5 December 1989 of certain matters including a representation that all the term deposits held by the Bank would be released. On 20 April 1990, Mr R.A. Mullins, Deputy Regional Manager of NMZ, saw Michael Phontos and his accountant, Mr Theo Lianos. A further $303,000 was sought to complete the Wharf Road project, $600,000 was sought to complete settlement of the Linsley Street property on which notice to complete had been issued, and funds were sought for Ashburn Place. The notes were produced at his meeting and release of the term deposits was requested. Shortly thereafter, a further cash flow was received from Michael Phontos. The cash flow included projections for the Linsley Street and Ashburn Place projects, which did not proceed. There was also an individual projection for the Wharf Road project. This showed the liability to the Bank reaching $2,903,000 in July and August 1990, decreasing thereafter as sales were made. The facility limit was noted as being $2.6m but it was, of course, only $2.5m. It was noted in the cash flow that the increase in building costs was mainly attributable to the delay in obtaining the development approval and building approvals while the balance of the increase was attributable to construction delays as a consequence of abnormal wet weather. No complaint was then made about the invoice system, perhaps because Michael Phontos wished to keep on good terms with the Bank. On 27 April 1990, there was a meeting between Michael Phontos, Mr Lianos and Mr Mason. The general position was discussed. Mr Mason said that he would be prepared to consider increasing the limit on the Wharf Road project to $2.9m to enable that project to be completed and to release the remaining term deposits so that the purchase of Linsley Street could be completed but only on the condition that the purchaser of Linsley Street, Dovizo Pty Ltd, provided a mortgage back. Michael Phontos gave evidence that Mr Mason said that he would not increase the funding on the Wharf Road property unless the applicants put up that security or other security. I do not accept that the tenor of the conversation was as Michael Phontos has deposed. Mr Havron was also present at that meeting. A memorandum by him on 2 May 1990 sets out what I consider to be the substance of the conversation. It was a meeting at which funds were sought for the purchase of the Linsley Street property. In the course of that meeting, a cash flow projection which had been shown peaking at $2.9m was discussed. Mr Havron noted:- "While further discussion ensued, it was finally agreed that we would consider release of all term deposit funds to complete settlement of Linsley St in exchange for a first registered mortgage over same property. Additionally it would be insisted upon that the Bank would reserve funds ($31,000) from term deposit to meet Group tax instalments due 31/4/90 & 17/5/90. ..." Mr Havron recommended:- "... that we approve substitution of security and increase in progressive FDL No 1 to $2.9M on basis proposed ... " Mr Mason noted on the memorandum that:- "Substitution of sec [security] .... places us in a stronger position ... The increase in F/D/L No 1 commitment ($300000) to $2.9m Prog. is of necessity to permit completion of the Wharf Rd project". On 4 May 1990, Mr Mason wrote confirming the arrangement that had been made whereby the Bank would release two term deposits totalling $375,000 to enable a payment of $21,000 to be made to the Taxation Department leaving funds of $344,000 to be put towards the purchase of Linsley Street. The Bank was to take a mortgage over Linsley Street to secure all liabilities. He noted that:- "We reaffirm that the Bank makes no commitment to finance any future development. We will however agree to consider a proposal in principle providing the approach is made in the proper manner and the Bank is given sufficient time and information to formulate an application and consider a decision which will include satisfactory costing and valuation by our specialist staff." Mr Mason confirmed approval for increase in FDL1 to $2.9m to assist with the completion of the Wharf Road project. He also wrote that, to ensure progression of the work at Wharf Road, on a trial basis funds would be released on weekly presentation of listing of amounts to be paid during that week and confirmed by invoices at the weekend. The letter of 4 May mentioned again that the Bank was expecting the sale of the Cremorne units. In May 1990, a lift for the Wharf Road development, which had been ordered, arrived at the shipping dock. The suppliers required a payment of $35,000. Mr Gardiner refused payment of this sum as there was only $30,000 left of the construction funds. The lift, therefore, could not be acquired at that time. In early May 1990, Linsley Street was purchased using the term deposits which had been released and the cash which remained from the bank bills. Because the cash was so used, the Phontos group thereafter had no funds available either to develop Linsley Street or to assist with the Wharf Road development. On 8 June 1990, Mr Gardiner noted that Peter Phontos estimated that the whole job would be completed by the end of July and had promised to provide new costing estimates. On 4 July 1990, Peter Phontos informed Mr Gardiner that the work would be completed by mid-August. Mr Gardiner impressed on him that, despite numerous requests, the new costings for the construction had not been received from Michael Phontos. On 6 July 1990, when the necessary application for accommodation and supporting documents had been received from Parras, Mr Stevens entered the additional $400,000 in the funding register. Prior to this date, he had allowed the register to move into debit to some extent. On 9 July 1990, Mr Gardiner telephoned Michael Phontos who said that the costings were not completed. Mr Gardiner suggested that this was because it was not possible to complete the job within a $2.9m budget. Mr Michael Phontos replied that savings could be made by not installing ovens until the units were sold. Mr Gardiner suggested that the work on the house could be deferred. Michael Phontos agreed to discuss final cost estimates with his father. On 12 July 1990, Mr Gardiner visited the Wharf Road construction site and discussed with Mr Peter Phontos the rapidly diminishing funding position and the failure of Michael Phontos to provide accurate costings for the work outstanding. On 14 August 1990, the Bank received a document headed "Final Forecast/Cost to Complete" in respect of the development. The accompanying letter of 14 August went on to say:- "The total of the forecast budget of $1,668,076.31 less the original budget of $1,419,000 is the total of the Profit/Loss' column, being - $249,076.31, which, represents the additional monies now required in addition to the original advance required to complete the development. ... Accordingly, we request additional funding of $249,076.31 for the completion of the development. " On 15 August, Mr Stevens wrote in a memorandum that he did not feel that the amount required could be accurately established from the figures provided and he recommended that Michael Phontos be required to provide the Bank with a more detailed list and costing of all outstandings. About that time, Peter Phontos drew a number of cheques on PEP 2 which exceeded its limit of $100,000. These cheques were dishonoured. Peter and Michael Phontos were made aware of the fact that, with the debiting of interest, the limit of FDL 1 had been reached. By this time, the project was moving very slowly. Peter Phontos and Harry Costas could not keep all the trades on site but managed to keep a number of trades operating at a low key level. In August 1990, Mr Gardiner informed Peter Phontos that the Bank required further details of the cost to complete the construction. Taking into account both interest and expenditure, the available funding was exhausted by 17 August 1990. Thereafter no funds were made available by the Bank until the FDL 1 was again increased on 1 November 1990. On 24 August 1990, Mr Gardiner wrote to Michael Phontos to say that the CBA had little confidence in the latest forecast. Mr Gardiner sought, inter alia, a review of the expected income from the sale of the Manly and Cremorne units and of the proposed sale prices of the Wharf Road units. On 28 August 1990, Delfin, PEP, Ilanz and Reillo terminated their arrangements with respect to the Manly project and the Balmain project with the result that Reillo ceased to be entitled to any profits from the Manly project, Ilanz ceased to be entitled to any interest in the Balmain project and PEP's position as a builder for either project ceased. A bill of quantities for the remaining work was received from PEP on 27 August 1990. On 5 September 1990, Michael Phontos wrote to say that he acknowledged that budgetary estimates had increased by $381,324, however the increase had been translated into increased quality and amenities which also resulted in higher expected gross realisation values. He said that, although the original forecast additional expenditure had been only $250,000, the additional amount required of approximately $130,000 would be expended after selling had commenced. The officers of the Bank were dissatisfied with the letter and asked PVD for an estimate. On 14 September 1990, PVD advised that the cost of completion was assessed at $480,000. On 19 September 1990, Mr Gardiner inspected the Wharf Road project and spoke with Peter Phontos on the site and later to Michael Phontos by telephone. Mr Gardiner again expressed concern about the failure to sell the units at Cremorne. On 3 October 1990, Mr Perkins set out in a memorandum problems arising in relation to the matter, including the fact that Michael Phontos was not prepared the sell the units at Cremorne unless forced to do so and the fact that values had continued to drop. Mr Perkins set out certain conditions on which he would be prepared to approve an increase in the facility of $249,076. On 5 October 1990, there was a meeting between Peter Phontos, Michael Phontos, Mr T. Lianos, Mr Mason, Mr Gardiner and Mr Stevens. Mr Mason conveyed Mr Perkins' conditions. An interview with Mr Perkins was requested. That meeting took place on 8 October 1990 at which Mr Perkins, Mr Mason, Mr Gardiner, Michael Phontos and Mr Lianos were present. There was a discussion about the units at Cremorne, Mr Perkins putting the view that, unless the Phontos group voluntarily moved to sell these units, the Bank would look to its security to bring about the sales. There was then a discussion about the moneys required to finish construction. Mr Perkins agreed to increase the additional borrowing from $249,076 to $300,000 to allow the cottage to be completed, on the firm understanding that the units would be completed prior to resumption of work on the cottage. These matters were confirmed in a letter from the Bank to Parras dated 19 October 1990, Mr Perkins ending his letter with the following:- "The above final offer of assistance is the limit of funds to be provided for this project and if the agreed terms and conditions are not adhered to then the Bank would need to seriously consider its options under its securities." On 31 October 1990, the Bank received the required formal undertaking in writing that the two units in Cremorne were to be placed on the market on 15 December 1990. On 1 November 1990, Mr Mason wrote to the Gladesville branch, advising that funds would not be released for Phontos & Co's legal costs and that funds would be released on a progressive basis once the usual letter of request and consents had been obtained. The Manager was requested to continue the existing practice of sighting invoices and advising of the amounts released. The increase in the facility by $300,000 was given effect from 1 November 1990, the necessary documents having by then been received. Problems continued to arise from the invoice system. There was one occasion on 8 November 1990 when the representative from Boral arrived to pour concrete but indicated that he could not give an invoice until he had completed the delivery and had worked out how much concrete had been poured. At the same time, he said he would not make a pour until he had a bank cheque. In the result, the pour did not proceed and the concrete labourers left the site. Marketing of the units commenced in the middle of November of 1990. Unit 15 was sold for $263,000 on 28 November 1990. Unit 8 was sold for $250,000 on 21 December 1990. Ultimately, settlement was not effected under either of those contracts. By the early months of 1991, which was the time of the Gulf War and the time of the announcement by the then Prime Minister that Australia was in a recession, interest in the units had dissipated. One of the problems was that work was progressing on the cottage but only slowly. Yet a strata plan could not be registered until it had been completed. The lift for the units was delivered in January 1991 but its installation took a considerable time. It was not finally installed until April or May. The strata plan was registered on 14 May 1991. On 6 June 1991, the s.317AE certificate of compliance issued. The lift was commissioned for use on 1 July 1991. An arrangement had been made that the two Cremorne units were to be sold if 4 units of the Wharf Road project had not been sold by 15 December 1990. On 28 December 1990, Mr Gardiner wrote to Parras extending the deadline for the four units to be sold until 14 January 1991. One of the Cremorne units was sold on 2 July 1991, the settlement occurring on 20 August 1991. The other, which is occupied by Michael Phontos, was never sold. By late April 1991 the facility limit had again been reached. On 17 May 1991, Michael Phontos wrote to Mr Neville Cox, then the General Manager of NMZ seeking further accommodation. The letter reviewed what, from the point of view of the Phontos group, was the unsatisfactory relationship which the group had had with the Bank. The letter mentioned, inter alia, the alleged representations made by Mr Gardiner at the meeting of 5 December 1989. I need not set out any parts of the letter. In early June, there was a dispute as to whether certain legal costs and agents' fees would be paid out of the settlement moneys. A settlement for unit 8, arranged for 14 June 1991, was vacated. There was a lengthy conference on 17 June, at which Peter and Michael Phontos, his wife, Ms G. Robinson, Mrs K.M. Bella, Mr Cox, Mr Mason, Mr Gardiner and Mr Creighton-Carr were present. On 25 June, 1991, Mr Cox wrote to Parras as follows:- "The Bank has considered all matters arising out of our meeting on 17 June and in particular the Group's request for release of the 10% deposits on each unit, and funding to the Group's request for release of the 10% deposits on each unit, and funding to the Group of an amount of $35,437.49 (made up of $18,590 to Phontos & Associates for legal work completed in connection with the Wharf Road project, and $16,847.49 to Spotek Pty Ltd T/as Laing & Simmons Gladesville for advertising costs of the Wharf Road Units). In the circumstances, the Bank will agree to provision of funds totalling $35,437.49 for the purposes mentioned above on the clear understanding, and as agreed by yourself, that such additional borrowing will be cleared from sale proceeds of the next unit to be settled. The Bank will require a written undertaking from you in this regard, prior to release of the funds. Furthermore, so that sales may continue to be finalised, we confirm that the Bank will consider release of additional funds to fit out those units still requiring P/C items, once projected costs for such items are submitted to the Bank for perusal. It is to be noted however, that such funds would be released on a progressive basis to complete those units where contracts have been exchanged and as settlement approaches. It is clear that a substantial residual debt, possibly well in excess of $1.5m, will remain following sale of all the Wharf Road Units, the Sandstone Cottage and the 2 Cremorne Units, and accordingly the Bank regrets that it will not be in a position to accede to the request for release of the deposit moneys as each sale is completed." Purchaser interest in the units was inhibited by the fact that the units were not completed. The building structure had in general been completed although not fitted out by the end of March 1990. The fitting out, other than the supply of some PC items and some other minor work, was completed by the end of October 1991. Thereafter, the PC items were installed as required before settlement. On 11 June 1991, contracts were exchanged for the sale of units 4, 6, 7, 11, 12 and 14 to one buyer for $200,000 each. That contract was settled on 22 July 1991. On 12 July 1991 unit 9 was settled for $225,000. On 13 August 1991, unit 15 was settled for $263,000. On 30 August 1991, unit 3 was sold for $230,500. On 5 July 1991, unit 13 was sold for $230,000. On 11 October 1991, unit 8 was resold for $248,000. On 7 February 1992, unit 5 was sold for $195,000. On 16 April 1992, unit 10 was sold for $235,000. Two units remain unsold. During July 1991, Mr Gardiner advanced $10,503 to enable PEP to pay off a creditor which had commenced winding up proceedings. Mr Gardiner later declined to advance moneys for the payment off of other creditors. I need not deal in any more detail with the final stages of the development. The Wharf Road units were put on the market by an agent, Spotek Pty Ltd, which traded as Laing & Simmons Gladesville. Spotek was a company which Mr Michael Phontos established and which acquired the right to use the Laing & Simmons name. Accordingly, the Wharf Road units were not sold by an established agent in the Gladesville area. There is no evidence that this affected sales but the fact that Michael Phontos involved himself in the sale of the units and established a company to do so is illustrative of the part which he played in the whole development. The upshot was that Parras did not meet its commitments to the Bank. These proceedings were commenced by the applicants on 15 July 1992. The Bank in a cross-claim alleges that the amounts received met the capital outlaid but not the interest thereon. However, this claim has not yet been the subject of evidence. Two experts, Mr George Zakos, who gave evidence on behalf of the applicants, and Mr John Meredith, who gave evidence on behalf of the Bank, were agreed that had the construction commenced on 1 June 1989 and not suffered delays, it would have been completed on or about 23 February 1990. The experts agreed that there was delay, that the strata plan was issued on 14 May 1991, the lift was commissioned on 5 July 1991 and the units were made progressively fit for occupation from 5 July 1991 until 14 October 1991. The experts were agreed that 84 calendar weeks of delay occurred extending the completion date from 23 February 1990 until 14 October 1991. The experts were agreed that there were 8 calendar weeks of delay due to wet weather, public holidays and rostered time off and a further 9 weeks of program slippage, all of which the experts considered could be expected to occur in the development. A period of 1.5 calendar weeks delay over the Christmas 1990 shutdown was also accepted to be a normal delay. The experts agreed that the first progress payment, which they say was submitted on 22 June 1989, but was in fact submitted on 26 June 1989, was not paid until 19 July 1989. The second progress claim, submitted on 24 July 1989 was not paid until late September 1989, a delay of 5 weeks. There were 12 weeks delay between 17 August 1990 and 31 October 1990, due to absence of funds and a similar delay of 11 weeks from 26 April 1991 to 4 July 1991. The experts noted that there had been a delay of three weeks between 11 October 1989 to 1 November 1989 due to the bricks not being on site. The cause of this was not known but it could possibly have been due to the fact that the finance for the bricks had not been arranged. The experts agreed that there was a period of 15 weeks between 5 July 1991 and 14 October 1991 and a further 17.5 weeks after 23 February 1990 which were related to the manner in which the funds were released. Mr Zakos and Mr Meredith were agreed that, had the construction proceeded in the normal way and had it commenced on 1 June 1989, the cost would have been $1,694,207, with the related corporation, PEP, as builder. The experts agreed that the actual cheques paid out for the construction totalled $1,764,912 and they were agreed that the actual cost of construction exclusive of additional labour costs, rises in materials and labour costs and exclusive also of developers' costs was $1,669,158. The experts agreed that additional labour costs amounted to $58,867 and $11,836 was due to the rise in the cost of labour and materials. They did not agree on whether certain developers' costs of $25,050 should be included as an increased cost. The end result of the project was financially disastrous so far as the members of the Phontos family and the companies in the Phontos group were concerned. The exact figures are not yet before the Court. However, it appears that, as Parras did not recover sufficient from the units to meet both the capital and interest obligations, this group which had been carrying on business for 30 years, was unable to continue in the industry. The applicants' claim $30m or thereabouts for the destruction of their business and the Bank cross-claims for $6m or thereabouts in respect of moneys owing. THE CLAIMS (i) The Applicants' Case The applicants claim that the Bank did not honour its obligations as set out in the terms sheet of 31 August 1988, which provided for the three facilities, the Wharf Road loan of $2,600,000, FDL 1, the ANZ repayment loan of $2 m, FDL 2, and the bank guarantee of $182,700, FDL 3. It is said with respect to FDL 1 that the Bank refused to honour its commitment unless further securities were provided or amended or terms were agreed to. It is also alleged that individual terms of the terms sheet were not complied with, for example, that the Wharf Road development would be valued, for security purposes, on an "on completion" basis and that funds would be released "against architect or quantity surveyors' certificates". Nor was any comparable system instituted. It is alleged that there were oral undertakings given or agreements made by Mr Gardiner on 5 December 1989 which were not fulfilled. The applicants allege that the contents of the terms sheet of 31 August 1988 and the alleged statements made by Mr Gardiner on 5 December 1989 constituted representations which the Bank did not fulfil and which it did not have any reasonable expectation that it would fulfil. It is said that, because the applicants relied in good faith upon their arrangements with the Bank, they found themselves in a position where, when the Bank insisted upon additional security and the making of other changes to the arrangements, they were in no position to do other than accept the Bank's stipulations. The applicants say it was economically impossible for them to do otherwise. The applicants say that the stipulations made and the manner in which funds were advanced, caused the project to be disastrously unprofitable. The applicants say that the Bank's actions in these respects were unconscionable and that the pressure applied constituted economic duress. Perhaps central to the applicants' claims is their allegation that the facility for the Wharf Road project should have been dealt with on its own and that the Bank should have complied with its terms; whereas the Bank, in altering those terms, was seeking to protect itself against the overdraft which PEP had built up for other purposes. The applicants say that the Wharf Road development should have been a straightforward development and that it would have been completed within a reasonable time but for the actions of the Bank. The applicants say that the actions of the Bank precluded them from completing the development in good time and brought their enterprise to a close. The applicants say that the conduct of the Bank precluded them from undertaking or participating in other proposed developments including Ashburn Place, Linsley Street, Balmain and Dobroyd Point. The principal claims made are of unconscionable conduct and breach of contract. Allegations of misrepresentation, breach of the Trade Practices Act 1974 (Cth), negligence, estoppel, bad faith and breach of fiduciary duty are also made. The applicants' counsel expressed the crux of the applicants' case thus:- "There are three aspects of the Bank's conduct which are central to the applicants' case and upon which the evidence has focussed: A During the period from 19 June 1989 until 30 August 1989 the Bank arbitrarily, unilaterally and without legal justification altered the contractual obligations it owed to the appicants and the conventional arrangements existing between the parties. B From 30 August 1989 until the completion of the Development in October 1991 the Bank advanced funds to Parras for the construction of the Development in such an unsatisfactory, delayed and inconvenient manner as to seriously disrupt and delay completion of construction from February 1990 until October 1991. C From 20 November to 22 December 1989 the Bank acted wrongfully and unjustly in obtaining $3,000,000 of PEP's money." From a reading of the applicants' claims and their affidavits, I gain the impression that the applicants expected in general terms that, if they purchased a development property, then their financier, in this case the Bank, would finance all the costs of planning and development, releasing the funds on a work completed basis and capitalising interest until the units could be sold. That expectation was met by the conditions set out in the terms sheet of 31 August 1988 and was met by the actions of the Bank whilst Mr Robinson had control of the decision making. However, in 1989, the Bank imposed different and special conditions on the Wharf Road development and it refused to finance the Ashburn Place and the Linsley Street developments on the basis anticipated by the applicants. The applicants regard the disaster of the Wharf Road development as the fault of the Bank and their failure to make profits from other developments as due to the conduct of the Bank. (ii) The Bank's Case The Bank says that the offer of 31 August 1988 and the conditions set out therein were directed to the payment out of the ANZ and to the Wharf Road development. However, the Phontos group did not, in the Bank's view, deal with the Bank in that limited way. By mid 1989, PEP had developed an overdraft of over $1m and very little of this money had been spent on the Wharf Road development. Moreover, the Phontos group insisted on taking steps to initiate other developments, although the group was having difficulty completing the Wharf Road development. On 15 August 1988, Michael Phontos had sent to Mr Marshall a statement of the assets and liabilities of the companies and of the principals in the Phontos group, but that statement left out many relevant facts. Apparently Michael Phontos listed only the debts which were secured on the properties mentioned. The Bank suffered from not having, at the commencement of its relationship with the applicants, investigated in depth the financial position of PEP and of the other companies in the Phontos group or of concerning itself in the affairs of the group as a whole. In fact, the Phontos group had by then encountered financial difficulties. The ANZ was dissatisfied with the group's performance in relation to the Cremorne development and had brought in Horwath & Horwath to advise it. The group was so stretched that the guarantee from the ANZ to the Housing Commission for $182,700 was supported by a guarantee from a Mr L. Mechtler. A sum of $25,000 was owed to a Gemma Zbrozek, which was secured by a second mortgage over the home of Peter and Elli Phontos. When a construction group has reached the stage where it cannot pay its group tax, has borrowed $25,000 secured by a second mortgage on a private home and has another contingent liability which is supported by a person who is not a member of the group, it is in financial difficulties. The Phontos group sought the facilities which were offered on 31 August 1988. However, the group needed an even greater injection of funds. It not only did not have capital available to fund new ventures, it had outstanding debts which it could not pay. The result thereafter was that PEP, in the payment almost wholly of liabilities and expenses unrelated to the Wharf Road development, incurred an overdraft of over $1m for which no arrangement had been made. Having regard to the overall position of the group, the Bank's officers considered it necessary to stipulate conditions upon which the Bank would be prepared to continue to support the group. The conditions provided for further security, for the close supervision by the Bank of the payment of accounts and that, if additional moneys other than those agreed to be advanced were required for the completion of the Wharf Road development, those funds would be provided by the Phontos group. The Bank argues that the stipulations made by Mr Mason on 30 August 1989 were not unconscionable but rather were sensible commercial provisions designed to achieve completion of the Wharf Road development under appropriate controls. The Bank claims that the Phontos group agreed to all of these stipulations and that all changes that were made in the relationship from time to time were the subject of contractual variation. The Bank claims that it was the failure of the Phontos group to comply with its contractual arrangements, its underestimation of the cost of the development and its failure to face up to the financial problems of the group which led to the continuing problems which the development faced. In particular, the Bank points to the failure of PEP voluntarily to abide by the limit of its facility, to the failure of the group to sell the remaining two townhouses as required by the terms sheet of 31 August 1988 and the Mason conditions of 30 August 1989, and to the failure of the group to use the money which had become available to it under its settlement with the Housing Commission to complete the Wharf Road development within the limits of the agreed facility. WITNESSES (i) Generally In general, the sequence of events and the nature of the events which occurred is disclosed by the documents which are in evidence and which, being contemporaneous with the events as they occurred, are more likely to reflect the facts than is the evidence of witnesses whose memories are impaired by lapse of time. I have given rather more weight to those documents in evidence than to the affidavit and oral evidence. However, I have taken all the affidavit and oral evidence into account, giving it such weight as seems appropriate. (ii) Michael Phontos Although Michael Phontos was not formally a director of either Parras or PEP and denied that he acted as a director of either, he was the principal witness called on behalf of the applicants. His affidavit ran to 507 pages, although not all of this was received. The Court adjourned for some days whilst the affidavit as filed was reconsidered. Michael Phontos is a charming, personable young man, a solicitor and an economics graduate. However, officers of the Bank ultimately came to the view that they could not rely upon his word. I also would put little weight on it. In part, this is because the documents which he sent to the Bank, such as cash flows and projections, were unreliable. But more importantly, his way of thinking as reflected in his affidavit is not that of any ordinary person engaged in business, but involves a great deal of complicated reconstruction. An illustration concerns a transaction which has, in itself, no relevance to the issues in the case. On 11 March 1988, Michael Phontos applied for an overdraft facility of $15,000 from the Gladesville branch of the Bank, where he had maintained an account since 15 January 1988. The letter of approval of 14 March 1988 read, inter alia:- "The approval is subject to the Bank's usual terms and conditions and the following: ... The account will be reviewed annually." The application form which had been signed by Michael Phontos set out a number of terms and conditions including the term that:- "The Bank may from time to time at its pleasure cancel or vary the limit of accommodation granted to the applicant (s) ... " This was a very simple transaction, particularly as the facility was unsecured. Nevertheless, in his affidavit, having referred to the letter of approval of 14 March 1988, Michael Phontos deposed that a copy of the Bank's "usual terms and conditions" was not enclosed and that he first became aware of the Bank's "usual terms and conditions" after the commencement of these proceedings and upon perusal of the Bank's internal documents. It is illustrative of Michael Phontos' thinking that he should be critical of the Bank in respect of this matter. The criticism has no substance. Had Michael Phontos ever wished to obtain a copy of the "usual terms and conditions", he could have asked for it. In any event, it would seem that the "usual terms and conditions" were those set out in the forms of application, several of which were either signed by Michael Phontos or were seen by him. The application form for the $15,000 overdraft was both seen by him and signed by him. Other similar documents are in evidence. The affidavit then said:- "38. It was my understanding and belief at that time:- a. that the MP O/D (Michael Phontos' overdraft) was to be reviewed by the Bank upon an annual' basis, based upon, the matters contained in the MP O/D Approval; b. that the overdraft limit of $15,000 was unsecured but could be varied from time to time by agreement between myself and the Bank, based upon, my providing security or my cashflow from time to time; and c. that any security that might be provided by me to the Bank would be held by the Bank for the specific purpose for which it was provided, based upon, my having no contemplation at that time that the Bank would regard any security provided by me to be held by it for any purpose other than the specific purpose for which it was provided; (the MP Review & Variation Assumptions')." The suggestion is extraordinary that, at the time he obtained the overdraft facility, Michael Phontos should have turned his mind to the matters set out in para 38 and should have made those assumptions. The transaction was a simple one whereby an overdraft facility of only $15,000 was sought and was granted. What might happen in the future was obviously a matter to be determined at the time any change was sought. Michael Phontos went on to say in his affidavit:- "39. In reliance upon the MP Review & Variation Assumptions, I drew upon the MP O/D in amounts up to and exceeding $15,000." It is impossible to accept that Michael Phontos drew moneys in reliance upon the assumptions he set out in paragraph 38. He had an entitlement to draw up to $15,000 and he needed to make no assumptions to do that. He had no entitlement to draw in excess of $15,000 and the Bank was under no obligation to meet cheques in excess of that. Michael Phontos then went on to depose, in para 40, that at the time of his reliance upon the assumptions, he was not aware that the Bank took the view that it could act to the contrary of the assumptions and could act in accordance with its "usual terms and conditions". Mr Phontos described these facts as the "MP Review and Variation Contradictions". Michael Phontos deposed, in para 42, that, if he had been aware of the MP Review and Variation Contradictions, he would have demanded that the Bank waive them and, failing the Bank's doing so, he would not have established the overdraft with the Bank and would have closed his existing account. All this testimony is troublesome. The affidavit contained eight paragraphs, taking up three pages, dealing with the straightforward transaction of obtaining a $15,000 overdraft, which was a fact of no significance in the case. Most of the content of the paragraphs existed solely in Michael Phontos' imagination. The fact that these matters were seriously deposed to suggests that Michael Phontos is unable to treat straightforward transactions in a straightforward way, as meaning no more and no less than what they purport to do. This characteristic appears throughout his evidence, particularly in the way in which his affidavit has concentrated upon conversations and thoughts rather than upon the content of agreements and other documents. The characteristic was probably also reflected in actions which the Phontos group took. I have dwelt upon these paragraphs of the affidavit as they provide a short example of Michael Phontos' evidence in these proceedings. The remainder of his evidence followed the same pattern, but other transactions were more complex. When dealing with the terms sheet of 31 August 1988, when the Bank made the offer to fund the Wharf Road project, Michael Phontos dealt with this in paragraphs 86 to 105, which cover pages 34 to 64 of the affidavit. Thereafter, he dealt with similar issues, the lack of supply of the Bank's "usual terms and conditions", the assumptions said to constitute his understanding and belief at the time, the contradictions in the Bank's attitude which were claimed to exist and the options which would have been open and taken had he been aware of these contradictions. Michael Phontos quite obviously has a manner of thinking which is peculiar to himself. He must accept responsibility for his affidavit for he was not only the deponent but the solicitor for the applicants. Michael Phontos seems not to read documents such as application forms for loan facilities, letters of approval and offers of finance, such as the letter of 31 August 1988, on their own merits. He has built upon the contractual arrangements substantial edifices of his own imagining. It necessarily follows that the evidence of Michael Phontos as to the conversations that he had with officers of the Bank must be received with care. That is in part because he has, in his affidavit, gone to undue lengths to reconstruct relevant transactions. In part also, Michael Phontos may have approached conversations with a background of thoughts which were unknown to the persons with whom he was speaking. I consider that it was likely that there were misunderstandings because Michael Phontos gave to words used, both his own and those of the Bank's officers, a significance which objectively they did not carry. Michael Phontos has described at length a large number of conversations. For example, he deposed to a telephone conversation which he had with Mr Ronan, the manager of the Gladesville branch, about 5 or 6 June 1989. The conversation covers pp.168 to 174 of his affidavit. Yet Michael Phontos kept almost no notes of his conversations with the bank officers, whereas the bank officers were meticulous in recording important events, either in the form of notes or in the form of internal memoranda. Moreover, the bank officers ensured that, when there was to be any change in the contractual arrangements, that change would be put down in writing. The bank officers did not purport to remember conversations in the same detail as did Michael Phontos. Nor, for that matter, did Peter Phontos or Harry Costas. This is illustrative of the extent to which Michael Phontos has reconstructed events and of the way in which he plays down the significance of what documents say. Another feature of Michael Phontos is, as the officers of the Bank came to realise, that the information which he supplied was unreliable. The statement of assets and liabilities of the members of the family and of the companies given on 15 August 1988, at the very commencement of the Phontos group's relationship with the Bank, was not comprehensive and the feasibility study for the Wharf Road development which was presented at that time was unduly optimistic. Michael Phontos' figures were always unduly optimistic, partly because he did not face up to the realities of the financial position of the group but also presumably because he put forward such figures as he considered would best suit the interests of the Phontos group. I consider his evidence to be, in general, unreliable. (iii) Peter Phontos Peter Phontos is an elderly man and he has had problems in coping with the difficulties which the business faced. He was affected emotionally by the problems encountered, for he had for many years been a successful builder with a good reputation. During the subject period, he found that he could not pay past creditors, sub-contractors and employees as he wished to do. He could not proceed with construction as he had planned to do. He frequently drew cheques when he had no accommodation facility which would enable them to be met. On many occasions, the cheques were dishonoured. He was angry that the Bank had dishonoured his cheques, he was upset that his reputation was affected and he was upset that he could not proceed as he wished to do. There are reasons therefore for treating the evidence of Peter Phontos with some caution. However, a noticeable feature of his affidavit is that it sets out the facts and conversations as one would expect a witness to do. Like his son, Peter Phontos has a pleasant manner and a good presence. Although the evidence does not show that Peter Phontos was other than a builder with a good reputation, the problems of the Phontos group did not commence with the transfer of the PEP account to the Bank. There had been problems with the Housing Commission, although the evidence does not disclose the basis of that dispute. There had also been difficulties with the ANZ, which had called in Horwath & Horwath to report upon the Cremorne development. The group's relationship with the ANZ had become stressed. Moreover, a feature of the conduct of Peter Phontos was that he constantly drew cheques when PEP was over the limit of his overdraft. Mr Gardiner described Peter Phontos in this way in the course of his cross-examination:- "At page 3 over your signature you will see you said, about the second full paragraph: Mr Peter Phontos is an old time builder who believes in honesty and honouring your commitments. did you not?---Yes. That represented your then opinion as a matter of fact?---That's right. Even as you sit there today in that witness box do you not believe that he is a person who believes in honesty and honouring his commitments?---I believe exactly what I said there. Yes?---He's an old time builder. He didn't have - his job was building, it wasn't finance. That is all he knew, is it not?---No, he knew - he did building, you see, but when it comes to writing cheques, the cheque book there - all you have to do with a cheque, you sign it and you give it to anyone that's around." (iv) Harry Costas Harry Costas, the son-in-law, was well regarded by Mr Gardiner. His evidence was given in a straightforward manner and he was in general a reliable witness. However, I do not accept all his evidence as to conversations. In particular, I consider that Mr Costas' evidence as to the conversation of 5 December 1989 was overstated. I prefer Mr Gardiner's evidence. (v) I.M. Stevens Mr Stevens, who was a credit officer at the Gladesville Branch during the relevant period, had only a limited recollection of conversations. However, after listening to his evidence, I gained the impression that Mr Stevens was a methodical officer who put the significant points in writing in his memoranda. His general recollection of significant matters was sound. I consider Mr Stevens' evidence to have been accurate and reliable. Mr Stevens freely agreed with probabilities which were put to him. His answers were short. He did not overstate or elaborate upon points. He did not prevaricate. Mr Stevens readily agreed that he had not approved of the way in which the Phontos' account was being handled by CLS and that, when on 30 August 1989, Mr Mason imposed the condition that interest charged be paid as from September 1989, he, Mr Stevens, doubted that this could be complied with. (vi) A.W. Ronan Mr Ronan was the manager of the Gladesville Branch until 31 July 1989. He was a cautious but straightforward and reliable witness. (vii) P.J. Gardiner Mr Gardiner, the manager of the Gladesville Branch from 1 August 1989, had a style which was more relaxed than that of the other officers, which was no doubt the reason why he had the "off the record" conference on 5 December 1989 which has been the subject of debate. He spoke at greater length than most of the officers and was not as precise in his language. However, having heard Mr Gardiner during his cross-examination, I have formed the view that he was an honest witness with a reasonable recollection. Mr Gardiner appears to have been an effective intermediary between the members of the Phontos family and the Bank. Mr Gardiner did whatever he could to advance the project. Mr Gardiner was responsible for releasing the funds and, within his instructions, he did his best to provide funds for the project. In the course of doing so, Mr Gardiner had many dealings with Harry Costas and he said that he and Mr Costas had respect for each other. Mr Gardiner was always dissatisfied with PVD's in-one-line valuation which, in his opinion, undervalued the project. Mr Mason said of Mr Gardiner that he was "a very capable manager." My impression of Mr Gardiner is that that statement was correct. (viii) Norman Marshall Mr Marshall, who handled the Phontos accounts in CLS until he was transferred in January 1989, was a young man who gave his evidence in a straightforward manner. He appeared to be a capable officer with a reasonably good recollection. (ix) J.G. Mason Mr Mason, who had become the Regional Manager of the Northern Metropolitan Zone early in 1989 and was after 25 July 1989 in charge of the Phontos accounts subject to the directions of Mr Perkins, the General Manager, had been retired for five years when he gave his evidence. Mr Mason did not always answer the precise question asked and tended to say more than was necessary for an answer. I consider that some of Mr Mason's memory was unreliable. The main events were, however, set out in memoranda which he wrote or on which his handwritten notes appear. I consider those memoranda to be reliable. Mr Mason took, in respect of the Phontos accounts, a negative or black and white approach and was undoubtedly influenced by the low in-one-line valuation. Whereas Mr Gardiner took whatever positive steps he could to accommodate Peter and Michael Phontos and Harry Costas, Mr Mason's approach was to lay down conditions and to expect them to be complied with. (x) Elli Phontos and Mary Costas Elli Phontos and Mary Costas both swore affidavits which, in general, affirmed the contents of other affidavits filed in the proceedings. Neither was cross-examined, it being agreed that the rule in Browne v Dunn (1893) 6 R 67 should be relaxed for the purpose of the proceedings. In my opinion, the cross-examination of witnesses which occurred was sufficient in the context of this commercial litigation. (xi) Jones v Dunkel Neither Mr Perkins nor Mr Robinson was called to give evidence. Counsel for the applicants has asked me to draw adverse inferences from what he said was the Bank's failure to call these officers. Jones v. Dunkel (1959) 101 CLR 298 was relied upon. I do not draw any such inference. In my opinion, an adequate number of witnesses was called. Mr Perkins was the General Manager of NMZ, but the part he played is clearly recorded in his memoranda and notes. Evidence from Mr Perkins would have involved unnecessary cost and time. I would not have expected either party to call Mr Robinson. He is the father-in-law of Michael Phontos. At the time when the loan was arranged and while the account was under his control, Mr Robinson had a conflict of interest. He still has that conflict. I assume that both parties would consider that it is likely that, if called, he would be an unpredictable witness. I do not consider that there has been any matter raised which places an obligation upon the Bank to call Mr Robinson as its witness. There is no allegation of unconscionable or wrong conduct on his part. Nor does anything he did have to be explained. The complaints are made with respect to the actions taken by other officers of the Bank. Michael Phontos has given evidence of some conversations he had with Mr Robinson, including conversations prior to the making of the Bank's offer of 31 August 1988. On these matters, I do not consider Michael Phontos' evidence to be reliable. I consider it to be improbable that Mr Robinson would have made any representation of fact which would have misled Michael Phontos or that Mr Robinson said anything that was inconsistent with the terms set out in the terms sheet. Of course, he presumably would not have mentioned the point made in the terms sheet that "The opinion of CBA's valuers will be final." But, if so, that simply points to the difference between general oral discussions and a specific written offer. BREACH OF CONTRACT (i) The Terms Sheet The offer of finance of 31 August 1988 provided, inter alia:- "The above lines of finance are in addition to and not substitution of the Group's existing facilities with our Gladesville branch and will be on CBA's usual terms and conditions together with the specific conditions detailed in the Terms Sheet' attached hereto." The terms sheet provided:- "Commonwealth Bank of Australia is pleased to offer the Phontos Group of Companies a finance package of $4,782,700 on the following terms and conditions: BORROWER: PARRAS HOLDINGS PTY LTD (PARRAS) LENDER: Commonwealth Bank of Australia (CBA) FACILITIES: Progressive Fully Drawn Loan of $2,600,000 Fully Drawn Loan of $2,000,000 Bank Guarantee of $182,700. Progressive Fully Drawn Loan - To assist - PURPOSE: . acquire a property at Wharf Road, Gladesville NSW for $945,000; . restore the cottage thereon at a cost of approximately $50,000; . construct 12 units and four townhouses on the Gladesville property at a total cost of approximately $1,360,000; and . capitalise interest during the construction phase. Fully Drawn Loan - To assist refinance existing facilities with the ANZ and a private mortgage. Bank Guarantee - Provide a back to back guarantee in respect to a guarantee issued by the ANZ in favour of the Housing Commission of NSW. INTEREST RATES, FEES, ETC: Progressive Fully Drawn Loan and Fully Drawn Loan CBA's reference rate plus 1.5% pa. Interest will be calculated on a daily balance outstanding and charged in March, June, September and December each year. CBA's reference is presently 15.0% pa. CBA's normal account keeping and maintenance fee/charges to apply. Note: An undrawn commitment fee of 0.15% per month will be levied against the Progressive Fully Drawn Loan. The fee will commence three months from initial drawdown and be charged monthly in advance on the undrawn commitment of the Progressive Fully Drawn Loan while such exceeds $25,000. The facility limit will be set at $2,300,000 for the purpose of calculating this fee (ie capitalisation of interest amount excluded). Bank Guarantee - Fee of 0.5% per half year charged six monthly in advance. REDUCTION ARRANGEMENTS: Progressive Fully Drawn Loan - Capitalisation of interest during construction and marketing stages (say 9 months) subject to limit ceiling of $2,600,000 not being exceeded. Repayment in full within three months thereafter (ie overall term not to exceed 12 months) from sale of the proposed units, town houses and restored cottage. Fully Drawn Loan - Progressive reduction and ultimate clearance from sale of residual townhouses at Bannerman Street, Cremorne and profits from Housing Commission contracts and the Gladesville development. Bank Guarantee - Annual review. SECURITY: . Registered First Mortgage (third party) by Phontos, Peter and Elli over freehold house property at Hunters Hill NSW. . Registered first mortgage (third party) by Costas, Harry and Mary and Phontos Investments Pty Ltd over freehold house property at Hunters Hill NSW. . Unregistered first mortgage (third party) by Fulanga Pty Ltd over two townhouses at Cremorne NSW. . Registered First Mortgage by Parras over freehold property at Gladesville (purchase property). . Guarantee, unlimited as to amount, noting: Debtors Guarantors All companies All companies Phontos, Peter & Elli Costas, Harry and Mary Note: CBA's valuation of the properties to be taken as security to achieve a combined on completion' figure of at least $6,400,000. In this respect the opinion of CBA's valuers will be final. OTHER CONDITIONS: . Front-end fee of $9,000. This fee is payable on your written acceptance of this loan offer. . Progressive Fully Drawn Loan - Funds will be released on a progressive basis against architects or quantity surveyors certificates. . Proceeds of up to $1,000,000 if forthcoming in respect of the disputed claim with the Housing Commission (Ryde project) being directed to reduction of Parras' facilities with CBA. . Written confirmation that no outstanding taxation will be payable in respect of fiscal years 1986, 1987 and 1988. . P & E Phontos Pty Ltd's existing overdraft arrangement with CBA to remain undisturbed. ..." On taking up the facility, Parras executed the usual form of application which set out the Bank's "usual terms and conditions." The facility offered was for a fully drawn loan of $2m (FDL 2), to be used to pay out the ANZ, a bank guarantee of $182,700 which was to take over the liability of the ANZ in respect of its guarantee of that sum to the Housing Commission and a progressive fully drawn loan of $2,600,000 ("FDL 1"), to be used to acquire the Wharf Road property for $945,000 and to develop units and townhouses on the property. The estimated cost of development, which Michael Phontos had calculated, was $1,410,000. The outgoings anticipated in relation to FDL 1 therefore totalled $2,355,000. This sum and the $248,800 estimated by Mr Marshall for interest approximated $2,600,000. The terms sheet anticipated a development which would be concluded within 12 months. This follows from the amount available for interest, the provision for capitalisation and the reference to an overall term "not to exceed 12 months". No precise starting date was placed upon this 12 months period but it plainly appears from a reading of the whole of the terms sheet that a period of 12 months from the time of the acquisition of the Wharf Road property was contemplated. I do not say that there was any contractual term that the whole project would be completed and paid off within 12 months of the purchase of the property. I think there was not. However, that was the general period which the Bank had in mind and on which the figures were calculated. And that understanding accorded with the figures which had been put forward to the Bank by Michael Phontos in his feasibility study. No specific time limit was expressed with respect to the paying off of FDL 2 and nothing was said about either payment of or capitalisation of interest. It would seem that the terms sheet contemplated that progressive reductions would be made right from the start from profits from the Housing Commission contracts, some of which were still then on foot, from the sale of the Cremorne units, and from the profits which would come in from the Wharf Road development. It is clear enough that the Bank had it in mind that Parras would ensure that there would be progressive reduction of the amount owing and that this reduction would account for both the capital and the interest. There was no contractual obligation to pay off FDL 2 in a specific manner. However, the arrangement made would have entitled the Bank, if it were dissatisfied with the progress made in reductions, to call for payment of the loan within a reasonable time or to act under its "usual terms and conditions". It was submitted on behalf of the applicants that FDL 2 implied a reasonable time to allow the orderly sale of the properties mentioned. In my opinion, recovery of the debt represented by FDL 2 was not limited to the properties mentioned in the terms sheet. No doubt, if the Bank had given notice calling for payment of the FDL 2 debt, it would have had to stipulate a reasonable time. The terms sheet provided that PEP's existing overdraft arrangement was to remain "undisturbed". I do not give this provision any significance other than that the facility offered was to be in addition to PEP's existing overdraft facility. On 31 August 1988, PEP's overdraft stood at $80,552.13. The provision did not preclude the Bank from acting under its contract with PEP to call up PEP's overdraft if it considered it appropriate to do so. In his evidence, Michael Phontos said:- "What it [this provision] was saying to me was that PEP's overdraft arrangements stand alone to this facility that is being provided now through Parras." However, the reference to PEP's overdraft in the terms sheet suggests that the Bank had taken the position of PEP into account in the Parras facility and had it in mind that PEP would operate within its overdraft limit, which was fully secured, and that the profits which PEP received under its contracts with the Housing Commission and from the Wharf Road development as well as $1m from the moneys which PEP might receive from its claim against the Housing Commission would be put toward paying off the liabilities incurred under the Parras facility. It has been put on behalf of the applicants that the Parras facility concerned only Parras and the Wharf Road development. Yet, it obviously dealt with more than that. FDL 2 was arranged to pay out the ANZ. Many of the applicants, including Michael Phontos, had commitments to the ANZ which were to be discharged by FDL 2. PEP and Ilanz were the principal debtors which were to benefit. By including a reference to PEP's existing overdraft, which was to remain undisturbed, the terms sheet encompassed PEP, which the parties anticipated would be the builder of the Wharf Road development, within its purview. PEP was a signatory to the terms sheet. There were other contractual documents which affected the arrangements which were entered into. On 15 September 1988, Parras executed an application for accommodation which contained the Bank's "usual terms and conditions". These formed part of the contractual terms. After the terms sheet had been approved and had been accepted and signed, the required guarantees and mortgages were also executed. The mortgages, of course, contained their own provisions, which no doubt should be read in the light of the arrangement from which they derived. (ii) Breach by Bad Faith Allegations of bad faith are made under headings of contract, unconscionable conduct and breach of fiduciary duty. The applicants claim that the Bank acted in bad faith by not complying with the precise terms of the terms sheet, by requiring additional security and by imposing and enforcing the Mason conditions which were set out in the letter of 30 August 1989. It was said that the Bank acted in its own interests without taking the interests of the applicants into account. One claim is that the Bank should, in the middle of 1989, have regarded PEP's overdraft as concerning PEP only and as being separate from the Wharf Road facility. However, such a claim is unrealistic. Not only did the Parras facility provide for the discharge of the liabilities to the ANZ, owed by PEP amongst others, but the terms sheet made specific reference to PEP's overdraft. Absent the Wharf Road facility, PEP would never have been allowed to run its overdraft to over $1m, without there being any arrangement in place for its discharge. The applicants took advantage of the fact that PEP was to be the builder of the Wharf Road development and of the fact that, under the Parras facility, there were securities over real estate and that Parras had guaranteed PEP as required by the terms sheet. The applicants acted as they did and the Bank permitted the applicants to do so because PEP was an integral part of the Phontos group. I see no bad faith on the Bank's part in taking steps to ensure that the position which the Phontos group brought about was brought under control or for insisting that additional security be provided. No doubt the Bank acted primarily in its own interests. However, it was in the commercial interests of all parties that the relationship between the applicants and the Bank be regularised. It is alleged that the Bank acted in bad faith by not disclosing or by not disclosing immediately certain matters to the applicants, including the figures at which PVD had valued the security properties. I see no bad faith in these claims of non-disclosure. In keeping its confidential information to itself, the Bank acted in accordance with usual commercial practice. On many occasions, counsel for the applicants referred to a memorandum written by Mr Stevens of 4 July 1989 where he recorded that, in view of the Bank's waning support, he had not reminded the Phontos group of the provision in the terms sheet with respect to architects or quantity surveyors' certificates. I shall mention this point in more detail when dealing with the claim that the Bank breached that term. For the moment, it is sufficient to say that I do not see any element of bad faith in the memorandum. Mr Stevens was acting as an officer of the Bank should have acted having regard to the circumstances at that time. There was neither bad faith nor misleading conduct in what he did. It was alleged that the Bank acted in bad faith when, on 30 August 1989, Mr Mason informed the applicants that the Bank was not obliged to continue with the Wharf Road development. The applicants allege that Mr Mason had been given legal advice to the contrary by Mr Broekhuijse. In my opinion, there was no bad faith involved. Mr Mason intended to bring the relationship to an end if the Mason conditions were not accepted and, in my opinion, would have been entitled to do so. It was alleged that there was bad faith in the Bank's acting on 22 December 1989 to withdraw $3m from the bank bills. In my opinion, the Bank was entitled to take that step, having regard to its contractual entitlement to the $3m, to the irrevocable authority and to the letter from Michael Phontos of 6 December 1989. It was, moreover, the appropriate course to take as interest was running at a high rate on the PEP overdraft and on FDL 2. Many individual claims of breaches of good faith have been made but these need not be discussed. I have kept the allegations of bad faith in mind when dealing with other issues, even when I may not have specifically mentioned them. I am not satisfied that there was any bad faith on the part of an officer of the Bank. (iii) Breach by Repudiation When different arrangements were insisted on by the Bank and agreed to by the applicants, those arrangements became the subject of amendments to the terms sheet which were agreed to by all parties. Action taken under the amended conditions does not constitute a breach of the terms sheet unless the Bank is precluded by some principle of estoppel or unconscionability from relying upon the agreed amendments. Whether that is so depends on the issues which have been raised under those heads, principally that of unconscionable conduct. However, there is one point with which I should now deal. It is alleged on behalf of the applicants that the Bank breached its contractual arrangements as set out in the terms sheet when, on 5 July 1989, Mr Ronan wrote to Parras requiring an amendment of the terms sheet to increase to $3,000,000 the amount forthcoming under the claim against the Housing Commission and when, on 30 August 1989, Mr Mason handed over the letter of that date which specified what has been called the "Mason conditions" and required acceptance of those conditions if the Bank were to release any further funds under FDL 1. It has been submitted on behalf of the Bank that there had earlier been breaches of the terms sheet which would have justified the Bank in terminating the contract. Reference was made, for example, to the fact that the progressive reduction of FDL 2 had not occurred and that the interest charged on FDL 2 had not been met. By June 1989, interest on FDL 2 amounted to $251,300. I doubt, however, that there had been any breach by the applicants of the conditions in the terms sheet which would have justified the Bank in terminating its contract, although the Bank would have been entitled to give notice requiring FDL 2 to be paid within a reasonable time and may have been entitled to give notice specifying that interest must be paid when charged or perhaps within a reasonable period. In respect of a reasonable time, it is worth noting that the cashflow of August 1988 had shown receipts of $786,475 from the Cremorne units by December 1988 and proceeds of $3,570,000 from the sale of the Wharf Road development by October 1989. However, it was not FDL 2 or the Wharf Road development which had caused the problem which led the Bank to act. By 15 June 1989, the total of PEP's then two overdrafts exceeded $1,000,000. The total reached $1,165,658.84 on 14 July and was $1,090,863.74 on 30 August 1989. The overdraft limit which had been formally approved was $370,000. On 26 June 1989, Mr Allen-Ankins noted in a memorandum, which would come to the attention of Mr Robinson, that "Excesses have been approved by management." He recommended the imposition of establishment fees on the excesses. PEP was informed of this fee by letter from Mr Ronan on 30 June 1989. However, Mr Allen-Ankins' memorandum did not suggest that the excesses had been formally approved by the Bank. That was not the case and no authority was sought from or notification given to the guarantors and mortgagors. In my opinion, the course which the Bank had taken prior to June 1989 of meeting PEP's cheques when presented did not constitute the grant of an increase in the approved overdraft level. The approved overdraft level remained at $370,000. That remained the position even after the imposition of the additional establishment fees. Bank memoranda thereafter continued to distinguish between the approved limit of the overdrafts and the balances outstanding. The approved limit in respect of PEP remained at $370,000. Nor did this situation change when, on 5 July 1989, Mr Ronan by letter sought the $3m amendment or when that amendment was executed and returned on 2 August 1989. That amendment was not sought or granted in consideration of the grant of an increased limit in PEP's overdraft. What was sought and effected was an amendment to the terms of the Parras facility. It was this problem with PEP's overdrafts which led Mr Mason and Mr Perkins to act. PEP had consistently drawn cheques to meet expenditure unrelated to the Wharf Road development. The members of the Phontos family were well aware that the cheques were drawn otherwise than in accordance with the facilities which had been arranged with the Bank and that, because the expenses were not part of the Wharf Road development, their payment did not add to the Bank's security, save insofar as money spent on the Housing Commission claim tended to benefit the Bank. I am satisfied that the Bank would have been entitled to call up and require payment of the balance outstanding in the PEP overdrafts. No doubt, reasonable notice would have been required. I need not determine what period of notice would have been reasonable. It is sufficient that the Bank was entitled by notice to call upon PEP to pay the balance outstanding on its overdrafts. If the Bank had done so, the Phontos group would have faced collapse. In my opinion, the Bank was entitled to regularise the position which had arisen by the middle of 1989 and, indeed, could have been expected to have done so. In his evidence, Michael Phontos said:- "I would say that the bank were not entitled to demand the repayment of the PEP overdraft because they had funded it dominantly on a cash flow lending basis and they knew that they were to be repaid from the projects that the excesses were allowed to be built up upon." However, the Bank had not funded PEP's overdraft on a cash flow lending basis. The position was simply that, without obtaining an increase in its overdraft limit, PEP continued to draw cheques on its accounts, thus building up its overdrafts. The Bank had not turned its attention to "funding" PEP's activities during this period. The Bank's officers had become increasingly concerned about the situation which had come about without any arrangement in place for the overdrafts to be repaid. The act of the Bank in requiring the amount to be received from the Housing Commission to be increased from $1m to $3m and the requirement that the Mason conditions be accepted if further funding was to proceed no doubt amounted to a repudiation of, in the sense of a refusal to proceed further with, the contract on its original terms. However, circumstances had arisen which called for a change in these terms. Because or partly because of this, the applicants did not accept the repudiation. Rather, the terms put forward by the Bank were accepted and there was a variation of the contractual arrangements accordingly. In this circumstance, the allegation of breach of contract by repudiation has no basis, unless a principle of estoppel or unconscionability assists the applicants. (iv) Dishonour of Cheques Schedule A to the statement of claim sets out a number of cheques which it is alleged were wrongly dishonoured. Schedule B lists fees charged in relation to the dishonour of the cheques. I have not identified a basis for concluding that these cheques were wrongly dishonoured. The evidence did not deal in detail with the bank statements and like matters. However, if the applicants desire to pursue this matter, I am prepared to hear further submissions on the point. It would be appropriate to deal with this when the Bank proves its cross-claim. (v) Charges debited to Parras Overdraft Schedule C to the statement of claim alleges a large number of items in the nature of loan charges, stamp duty, other duties and interest which were debited to the Parras overdraft. It is said that these items should have been debited to FDL 1 or FDL 2 in respect of which the rate of interest was lower than that chargeable on the overdraft. I am not presently satisfied that any of the items should not have been debited to the Parras overdraft. I assume that the interest charged related to the Parras overdraft. And I assume that the charges and duties were related to the operation of the Parras facility. There was no express agreement that these items would be paid out of the sums agreed to be lent. However, if the applicants desire to put any further submissions with respect to some aspect of this particular claim, they may do so. (vi) ANZ Settlement In his affidavit, Michael Phontos has claimed that, by 20 October 1988, the Bank had had a reasonable time to pay out the ANZ Bank and that, by reason of its failure to pay out the ANZ until 9 November 1988, the applicants incurred additional interest of $19,792 arising from the difference between the higher rate being charged by the ANZ and the lower rate charged by the Bank. The evidence has not dealt with this issue at any length. However, what is clear is that, during this period, the precondition to the facility, that the securities reaching a value of $6.4m, had not been satisfied or waived. Mr Marshall took this matter up with Michael Phontos in early November and it was not until Michael Phontos agreed to give a second mortgage over the property he owned in Ashburn Place that Mr Marshall authorised the settlement to proceed. There may well have been other reasons for the delay. Mr Ronan gave evidence that, at the time the trustee of the estate of the first mortgagee of the Garrick Avenue security would not concur to the Bank's proposed second mortgage. I am not satisfied, however, that there was, in any event, any breach of contract by the Bank in relation to this matter. (vii) Valuation The terms sheet provided that it was a condition of the arrangement that the valuation of the properties taken as security achieve an "on completion" figure of at least $6.4m. The opinion of the Bank's valuers was to be "final". The term "on completion" was a reference to the Wharf Road development. The other security properties were complete. The Bank's valuation did not reach the specified figure. The two homes and the two Cremorne units were valued on 21 September 1988 at a total of $2,370,000. On 22 September 1988, the Bank received a valuation of the Wharf Road property at $860,000 being a market value of $890,000 less $30,000 realisation expenses. This of course was not an "on completion" value. On 19 October 1988, Mr E.J. Brooks, a registered valuer and a member of the Property Valuation Department ("PVD"), valued the Wharf Road development as follows:- "Currently the market from strata units in the locality has become relatively static. Resistance is now being experienced beyond $150,000 for the more traditional two bedroom units. 10/15 years old in the area. Rentals from the units are also suffering the same problem. Dwellings however, remain keenly sought after, particularly with views along the waterfront. We consider in the prevailing market $175,000 as the ceiling expectancy on the two bedroom units and $300,000 on the dwelling as a consequence of some $50,000 expenditure. Based on the foregoing we assess as follows: 15 units @ $175,000 $2,625,000 Dwelling $ 300,000 $2,925,000 Less legal and selling 4.5% 131,600 $2,793,400 Developers profit & risk 20% 465,000 $2,327,800 Less statutory interest and holding charges over 15 months construction/selling period as $ 285,000 $2,042,000 Extend $2,045,000 Less Realisation Expenses 45,000 On Completion $2,000,000 (TWO MILLION DOLLARS)" It will be noted that, although this valuation of $2m was made on an "on completion" basis, it was a valuation which reflected what in the Bank was known as an "in one line" valuation, that is a valuation on the basis of a sale of the development as a whole by the financier to a developer who would market the units. The valuation, of course, commenced with the sale price of the units and the dwelling for $2,925,000. Whether this was intended to be a conservative valuation is unknown. Mr Brooks was not called to give evidence. When Mr Gardiner became manager of the Gladesville branch in August 1989 and undertook the supervision of the project, he considered that the likely sale prices would be considerably higher than the $175,000 per unit estimated by Mr Brooks. However, taking into account either the figure of $2,793,400 or the figure of $2,000,000, the total figure achieved was well below the specified figure of $6,400,000. On 8 August 1989, PVD increased its value slightly by valuing the units at $200,000 each. Its valuation concluded as follows:- "Bank's Valuation In One Line' On Completion' $2,220,000" A subsequent memorandum from PVD dated 3 April 1990 valued the project as follows:- "..., we confirm our previous valuation as follows: Gross realisation potential from 15 units and one dwelling $3,300,000 Less: Legal and selling expenses 82,500 Net realisation potential On Completion' $3,217,500 ... In the event of the subject property proceeding to sale in-one-line in order to clear indebtedness or because of market forces, it would be necessary to have regard to the following additional allowances in arriving at the possible result of a mortgagee sale. Entrepreneur's profit and risk, say $536,500 Holding charges 11,275 SD & Legal on purchase and interest 379,725 927,500 In One Line valuation On Completion' $2,290,000" The case put for the applicants is that the Bank breached the condition in the terms sheet in that it failed to value the properties on an "on completion" basis, valuing them rather on an "in one line" basis. In my opinion, this contention has no validity for the condition did not place an obligation on the Bank to do anything. The Bank was entitled to take and to rely upon whatever valuation advice it saw fit. However, it could not have relied upon the condition in the terms sheet unless its valuations had met the description given in the terms sheet. An "in one line" valuation is in fact a form of "on completion" valuation as PVD's valuations confirmed. There is in evidence a memorandum of the Bank dated 14 May 1985 which describes the nature of an "in one line" valuation of a unit development. The memorandum states, inter alia:- "Hopefully the following comments will help clarify what has been a contentious issue between Valuers and Lenders. ... A valuation in one line' assumes the worst situation where the developer encounters difficulties financially due to cost overruns, industrial problems or decline in market prices and demand for the units. The concept virtually infers a mortgagee sale but in fact the Bank is more likely to allow the developer to sell individually for at least the first 6 months after completion in order to obtain the maximum financial return. ... The in one line' valuation assumes sale of the completed building (to clear our debt) to another party who will then be entitled to profit from his enterprise. The new owner would be committed to additional expenditure during the selling period such as rates, land tax, insurance premiums, security administration, Corporate Body charges, selling expenses and interest on capital borrowed. ... The level of risk acceptable to the Bank is not for the Valuer to determine. Our valuations will continue to be given in one line' but with calculations included to more adequately inform the processing and approving Officers." Probably, in the preparation of the terms sheet, the figure of $6.4m had been calculated by reference to an estimated sale price of the Wharf Road units rather than on an "in one line" basis. That is because the figure seems to reflect, although it does not precisely accord with, the figures which Michael Phontos had given to Mr Marshall on 15 August 1988. Yet, even so, the Bank would have been entitled to rely upon the condition, had it chosen to do so. That is because the terms sheet provided that "the opinion of CBA's valuers will be final". As the memorandum of 14 May 1985 shows, it was the practice of the Bank's valuers to make a valuation on an in one line basis but to include other information so that the officer attending to the matter could assess the value of the property differently, if he chose to do so. In my opinion, the valuations that were done on behalf of the Bank met the contractual description. It has been put on behalf of the applicants that a valuation on an "on completion" basis meant a valuation of the likely gross proceeds of sale of the property. In my opinion, the term did not carry that meaning. I am satisfied that, under the terms sheet, the opinion of the Bank's valuers was to be taken to be conclusive. They would not have adopted gross proceeds as value of the property for security purposes. On 2 November 1988, Mr Marshall wrote in a memorandum:- "Disparity between PVD's and clients' valuations, has rendered the available security cover well below that initially anticipated. As it presently stands $ for $ cover is not available however if CBA's capitalisation of interest allowance (included in Progressive F/D/L requirement) and a portion of the developers profit/risk are added back slightly better than $ for $ cover is provided ie., CBA's combined F/H valuation $4,655,000 Add Back - CBA's capitalisation of interest component 248,800 - Developers profit/risk $456,600 (@ 75%) 349,200 To support $5,117,700 (97.4%) $5,253,000 Position still falls well short of the approved security margin of 75% and to achieve such CBA would require additional security of approx $1.6M. While CBA could allow some tolerance in the security margin the position as it stands (ie., 97.4%) is considered unacceptable. RECOMMENDATION: Recommend clients be requested to tender any additional [freehold] security available (ie., direct on third party) with such to provide a security margin of around 85.0% (say $ for $ cover of $6.0M after add-back of the above figures ie., $248,800 and $349,200)." Mr Robinson wrote on the memorandum:- "Yes - proceed as recommended." Mr Marshall spoke with Michael Phontos about the matter. As there was no other security available, Michael Phontos reluctantly agreed to give a registered second mortgage over a property which he owned at Ashburn Place, Gladesville, a property which hoped to use for future development. Settlement with the ANZ had been arranged for 7 November 1988. This was put off and rescheduled for 9 November 1988. To allow this settlement to proceed, Michael Phontos gave an undertaking to the Bank to give the second mortgage to the Bank over his Ashburn Place property. This undertaking having been received, the settlement with the ANZ took place. Subsequently, Michael Phontos executed the second mortgage over Ashburn Place. Once all this had occurred, the Bank had waived its right under the terms sheet either to call for further security or to terminate the facility by reason of lack of security. By failing to act upon the valuation condition, the Bank waived compliance with the term. Counsel for the Bank did not contend otherwise. The condition was included in the terms sheet for the Bank's benefit. It chose not to take advantage of it. In my opinion, notwithstanding that the Bank had waived reliance upon the condition requiring security to the value of $6.4m, the Bank was entitled to act upon such valuation advice as the Bank's officers saw fit. It is worth noting, as allegations of bad faith have been made, that Mr Marshall wrote back 75% of the "Developer's Profit/Risk", which was the main element in the reduction of the valuation to an "in one line" valuation. He also wrote back the estimated capitalised interest. Subsequently, other officers, particularly Mr Mason who took a pessimistic view of the project, were more influenced by the "in one line" figure, no doubt taking the view that the development might have to be sold as a whole under a mortgagee sale or to a person who would expect to take a developer's profit. It was claimed that the Bank acted unconscionably by not informing the applicants immediately that the figure of $6.4m had not been reached and, even then, by refusing to inform them what the Bank's valuation was. It was not until 5 December 1989 that Mr Gardiner mentioned the figure of $2m. It was the Bank's practice not to disclose its valuations. I cannot see any wrongdoing on the Bank's part in this. It has been alleged on behalf of the applicants that, by not bringing to the applicants' attention at an early stage the fact that the valuations did not reach the $6.4m specified in the terms sheet, the Bank acted so as to represent to the applicants that the valuations had reached that figure. It is alleged that the applicants relied upon and acted upon that representation. In my opinion, no such representation was made. It was before the settlement with the ANZ occurred that Mr Marshall informed Michael Phontos that additional security was required. The second mortgage over the Ashburn Place property was offered and this was accepted. I consider that what occurred amounted to a waiver by the Bank of the $6.4m condition, but not a representation that the values of the security properties totalled $6.4m. In his affidavit, Michael Phontos placed considerable emphasis upon what he said were representations by the Bank that the Bank would rely upon its "armchair valuations". I do not accept this evidence. I need not set out details of the allegations made. The terms sheet was explicit on the issue of valuation and it is improbable that, in relation to the Phontos group, any officer of the Bank agreed to act otherwise than in accordance with the Bank's usual practice. The only relevant occasion on which the term "armchair valuation" may have been used in conversation was in relation to the settlement for the Wharf Road property, which the Bank agreed should occur before it had had an opportunity to complete its valuations. A reference to an "armchair valuation" appears in a request made to PVD to make a valuation of the Ashburn Place properties; but that was in a different context. (viii) Architects' or Quantity Surveyors' Certificates It was a provision of the terms sheet that funds would be released on a progressive basis against "architects or quantity surveyors certificates." On or about 2 June 1989, Michael Phontos lodged the first progress claim for $155,572. PVD valued the work done at only $75,000, the difference being mainly in the items of "statutory overheads" $45,000 and "professional fees" $61,500. These were not included in PVD's calculation of the work done. Michael Phontos gave evidence that he did not employ an architect or quantity surveyor because he had been informed that the Bank's valuers were required to certify the amount to be released. Michael Phontos gave evidence that PEP had prepared a draft claim in February 1989 which he said he had then discussed with Mr Stevens. He said that, subsequently, he spoke with Mr P. Retford of PVD on 27 February 1989. Michael Phontos deposed to this conversation:- "He said: I've got a request from the Gladesville Branch to carry out a progress payment inspection at the Wharf Road project in Gladesville. Can you provide me with a copy of the BA plans, the specification and costing' ... I said: I didn't know the Bank had its own staff to assess the release of construction funds, I thought it only valued properties for security purposes and had panel quantity surveyors to approve the progress payments?' He said: Oh yes, our department not only values properties but we're also required to approve the release of construction funding to builders'." Michael Phontos gave evidence that, having been informed of the PVD's valuation of $75,000, he had this conversation with Mr Stevens early in June 1989:- "I said: How was the $75,000 calculated?' He said: I don't know Michael, I only have the figure' I said: Well, I need to know, your valuers undervalued the work completed' He said: Well, your claim was only PEP's progress claim on Parras, you didn't provide an architects certificate' I said: Hang on, I know what the Terms Sheet says, but I thought that if I provided you with an architects or quantity surveyors certificate that the Bank's valuers still had to certify the amount in any event, is that right?' He said: Yes, the Bank's valuers are still required to certify the amount' I said: Well what's the point in us employing an architect or QS then. We don't need an architect to supervise the job for Parras, we can look after that ourselves, but if you want me to get a quantity surveyor in, I'll get one, I'm dealing with them at the moment for the Arbitration. Look, PEP's progress claims give as much if not more detail than any certificate from an architect or quantity surveyor, but I'll provide you with the detail that goes behind the claim for your valuers to have a look at and reassess the claim.' He said: OK, I'll forward that to them'" Michael Phontos also gave evidence that, in reliance upon certain assumptions he drew from his conversation with Mr Stevens, he did not seek instructions from Peter Phontos to engage an architect or quantity surveyor to provide certificates and that he permitted PVD to assist in assessing the value of the work. I do not accept that any officer of the Bank said or suggested to Michael Phontos that the Bank would not comply with the condition in the terms sheet. Nor do I accept the precise details of the conversations deposed to by Michael Phontos. It appears from Mr Retford's evidence that, with projects such as the Wharf Road development, it was the practice of the Bank to have its inspectors visit the site about once a month and to report on the value of the work done. It is not improbable that Michael Phontos learned that the Bank had its own staff who assessed the value of the work done and that he decided to take advantage of this fact and to prepare the progress claims himself. Michael Phontos, who had an economics degree, acquired software which contained an appropriate program to enable him to do this and he did so prior to the presentation of the first progress claim and prior to his conversation with Mr Stevens which I have set out. I doubt that the applicants had intended to engage an architect or a quantity surveyor to supervise the project. The Phontos group had a serious shortage of funds. Whenever bills of quantity or the like were drawn up, they were drawn up by Michael Phontos or Harry Costas. All progress claims were prepared by Michael Phontos or Harry Costas. No architect's or quantity surveyor's certificate was ever tendered. One submission put by the applicants was that the Bank was obliged to assess funds for release on the same basis as an architect or quantity surveyor would have done. There are two problems with this contention. One is that, by not tendering an architect's or quantity surveyor's certificate, Michael Phontos was content to have the Bank release funds in accordance with its ordinary practice. The provision of the terms sheet ceased to play a contractual part because neither party sought to rely upon it and each was content to proceed otherwise. The second problem is that the evidence does not disclose what, if anything, was the difference between the way in which the release of funds was assessed by the Bank and the way in which the assessment would have been undertaken by an architect or quantity surveyor. There was a dispute with the very first claim for $155,000, which was lodged on 27 June 1989. It included a claim for architect's fees and other preliminary expenses. The evidence before me does not show and I am not satisfied that architects' or quantity surveyors' certificates would have included those fees. Certificates, if given, would ordinarily have been given under a building contract. Unless the building contract specifically included architects' fees and other preliminary expenses, one would think that they would be outside the ambit of matters dealt with by the building contract. Michael Phontos gave evidence that he had an agreement with Mr Marshall in November 1988 that architects' fees and preliminary expenses would be funded by the Bank. However, I consider it improbable that Mr Marshall turned his attention in that conversation to either an interpretation of or an amendment of the provisions set out in the terms sheet. On 28 November 1988, Michael Phontos had sought additional accommodation. On 30 November 1988, Mr Marshall wrote a lengthy memorandum which included a recommendation that a bank guarantee of $80,000 be granted. The memorandum noted as follows:- "Mr Michael Phontos was interviewed by the writer on 28 November 1988 resulting in this request for additional accommodation. ... Construction is expected to commence in January 1989 pending which there will only be nominal outgoings (eg architect's fees, etc) Such will be paid via excesses on the overdraft and subsequently cleared from the first progress payment under the progressive F/D/L." (emphasis added) In my opinion, that memorandum reflected information given to Mr Marshall by Mr Phontos, not an agreement made by Mr Marshall that architects' fees etc would be payable out of the first progress payment. Counsel for the applicants contended that the memorandum was an admission that the Bank was contractually bound to pay the architectural expenses and the other incidental expenses claimed. However, I do not consider the memorandum to be such an admission. After the dispute about the progress claim had arisen, Michael Phontos wrote to the Bank:- "We understand that it is the Banks policy to release funds for construction work only and not design and that the valuation of the Progress Claim will exclude the design components under Statutory Overheads and Professional Fees. It was believed by this firm, in conformity with our practice with Delfin, that where design documentation is not provided for a development that the Builder undertake same and include it within its Building Contract." This letter did not suggest that there had been any prior agreement about the matter. On the same day, 4 July 1989, Mr Stevens wrote a memorandum which included the following:- "We have already explained to clients that redrafting the claim will have no effect on the Banks valuation of work completed to date as our policy specifically precludes the inclusion of professional fees in our costings and resulting inspections. Mr Phontos has now claimed that this was not advised at the time of his original discussions with your office. Perusal of the original diary note and approval letter/terms sheet reveals that funds were to be released against Architects/Quantity Surveyors Certificates and would not have involved Bank staff in physical inspections. This appears to have been reflected in the 25% reduction in the establishment fee of $12000 originally recommended. We have not reminded clients of this in view of the Banks waning support and tightening of control over the groups accounts." (emphasis added) Throughout the course of the hearing, counsel for the applicants often referred to this note and to the fact that Mr Stevens had not reminded the applicants of the provision stated in the term sheet. I do not see any significance in the point. An architect's or quantity surveyor's certificate was never tendered. At that stage, 4 July 1989, Parras would have been entitled to tender a certificate but it did not do so. There was no breach of contract or threatened breach of contract in relation to the matter or any unconscionable conduct. It suited the Phontos group as it suited the Bank that the Bank's officers should deal with the release of the funds. Later, on 18 July 1989, Mr Stevens and Mr Hill of CLS discussed the matter. Mr Hill at first advised that it appeared from Mr Marshall's diary note of 28 November that the Bank had made a commitment to settle or include in the first progress payment an amount to cover architects' fees. Accordingly, he thought that an amount of $136,500 could be released. Subsequently, Mr Hill phoned Mr Stevens to say that he had overlooked a previous memorandum whereby the $90,000 limit on Parras Holdings had been established to cover initial expenses on the Wharf Road project. He advised that CLS Holdings was considering the matter. At the time, there was a misunderstanding by Mr Hill of the position regarding the $90,000. This sum had been made available to Parras because, being the deposit paid, it was the balance left over from the amount which the Bank advanced on the purchase of the Wharf Road property. However, I cannot see any breach of contract or unconscionable conduct arising out of that. Before the whole matter was further considered, $75,000 was released on 19 July 1989. For the reasons I have already stated, I am not satisfied that Parras had a contractual entitlement to payment of more than $75,000. This term as to architects' or quantity surveyors' certificates became irrelevant when the Mason conditions were imposed on 30 August 1989 and were accepted by the applicants. Thereafter, the release of funds was handled in accordance with the invoice condition to which the applicants begrudgingly agreed. (ix) The Off-the-Record Conference On 2 August 1989, the terms sheet was amended increasing to $3m the sum required to be paid off the group's indebtedness from the moneys claimed from the Housing Commission. This point was also specifically included in the Mason conditions of 30 August 1989. On 20 November 1989, PEP received a cheque for $3.95m from the Housing Commission. Out of this sum, bank bills were purchased for $3.55m from the Bank's Stock Exchange Branch. On 5 December 1989, Mr Gardiner held what he called an "off the record" meeting with Michael Phontos, Peter Phontos and Harry Costas. Mr Stevens attended the meeting for some of the time. Mr Gardiner, who sought to progress the development and who took a more relaxed line than did his superior officers, Mr Mason and Mr Perkins, considered that the Phontos group might reasonably expect to receive some relaxation of the existing conditions on the payment of the $3m to the Bank. Of course, he had frequently met with Peter and Michael Phontos and Harry Costas and understood their views. He called the conference for 5 December 1989 with the intention of putting to the members of the Phontos group his views as to what they might reasonably request. Because Mr Gardiner thought that his superior officers might consider it improper for him to be suggesting such things to the members of the Phontos family, he decided that the meeting should be "off record" and he kept no note of it, treating it as an informal meeting between himself, Peter and Michael Phontos and Harry Costas. At the meeting, Michael Phontos and Peter Phontos indicated that they were not bound by their agreement as to the $3m. They apparently considered that once the money had been received, it was PEP's money and that the Phontos group could renegotiate the transaction. Peter Phontos, in his affidavit, said that, at that time, it was his understanding and belief that:- "PEP was free to deal with the bank bills as it saw fit." That, of course, was not the Bank's view and Mr Gardiner had already sent to the Stock Exchange Branch an internal memorandum called a "stop order" notifying the Stock Exchange Branch of the Bank's interest in the funds to the extent of $3m. In the course of the conversation, Peter and Michael Phontos and Harry Costas indicated that they wanted the term deposits and other securities to be released. Mr Gardiner indicated what he thought could be achieved and what could not. As to the release of the two homes of Peter Phontos and Harry Costas, Mr Gardiner indicated that that would not be acceptable to the Bank. There was a discussion about the Bank's security and a discussion about the fact that the Bank's valuation was low. Michael Phontos sought release of his personal guarantee. Peter and Michael Phontos and Harry Costas indicated that they wanted at least $1m available so that they could proceed with their development activities as they had done in the past. The idea was proposed that, if the Bank released the term deposits, if the Phontos group used $250,000 out of the bank bills as working capital and if the Bank allowed PEP an overdraft of $100,000 and gave guarantees to suppliers to the extent of $100,000, those arrangements would give the Phontos group the $1m it sought. It has been put on behalf of the applicants that Mr Gardiner bound the Bank contractually to honour the requests which the Phontos group made. In my opinion, Mr Gardiner did not bind the Bank to anything at that meeting. There may have been some confusion between the parties for, as I have said, Peter and Michael Phontos appeared to have approached the conference as though the $3m in bank bills was PEP's money and that it was up to them to decide whether or not the sum should be released to the Bank. In my opinion, that attitude was unrealistic. PEP was a party to the original contract and, when the deed of acknowledgment of the variation was executed on 22 August 1989, it was executed on behalf of all parties. PEP and Parras were contractually bound to pay those moneys to the Bank and the Bank held the bills in which the money was represented. Accordingly, if the members of the Phontos group thought on 5 December 1989 that they were bargaining with the Bank as to the release of the $3m, that would not have been the Bank's view. I am also satisfied from the evidence of Michael and Peter Phontos and of Harry Costas that Mr Gardiner's evidence that he indicated that he could not bind the Bank was correct. Thus, Michael Phontos gave this evidence in his affidavit, the first passage being in the middle of the the conference and the remainder at the end:- "Gardiner said: I can't authorise the release of any mortgaged property. I need approval of my head office.' ... Gardiner said: I still have to report to head office about our arrangements for their approval.' I said: But you said you only needed approval to have the properties released' Gardiner said: Michael, my report will go with my recommendation supporting your requests, I'll get their approval, there'll be no problem' I said: Well Brian, as long as it's clear that since the letter was signed as an example of our good faith to the Bank, we expect the Bank to reciprocate by honouring those requests' Gardiner said: Head office will approve it Michael, your father has given them what they wanted, they will reciprocate in good faith' I said: OK Brian, I trust you." Without accepting that evidence, for I think it is improbable that Mr Gardiner would have been as definite as Michael Phontos said he was, the evidence, nevertheless, indicates that Mr Gardiner informed Peter and Michael Phontos and Harry Costas that the matter would be considered in head office where the decision would be made. Peter Phontos gave like evidence to that of Michael Phontos when he deposed:- "Gardiner said: Write me a letter Michael, so that I can report to head office about what we've talked about. Then, I'll get all of this to head office and I'll make sure that they'll be honourable like you've been Peter and get approval' I said: Well, Brian, don't think that that piece of paper is a cheque until you get that approval.' Gardiner said: Don't worry Peter, we'll get it done, everything will be alright'" Harry Costas' affidavit was most favourable to the applicant's case but it gave this evidence:- "Gardiner said: I'll need to confirm what we've discussed today with head office.". In my opinion, it was made clear to Peter and Michael Phontos and Harry Costas that a request for relief had to be made on behalf of the Phontos group and that this would be considered by NMZ. This conclusion is well supported by the fact that, on the following day, 6 December, that request was made. The letter was formulated in terms of a request. Moreover, Michael and Peter Phontos and Harry Costas were well aware that at all times the significant decisions had been taken by officers superior to Mr Ronan and his successor, Mr Gardiner. At first, decisions had been taken by the officers in CLS and by Mr Robinson. Subsequently, decisions had been taken by officers of NMZ, Mr Mason and Mr Perkins. The current conditions had been laid down by Mr Mason with the approval of Mr Perkins. It is unfortunate that, before the meeting concluded, Mr Gardiner, who had been instructed to obtain the execution of an irrevocable authority for the payment of $3m to the Bank out of the bank bills, did so. That, of course, was not an "off the record" matter although Mr Gardiner would have considered the execution of the irrevocable authority to be merely a recognition of the Bank's entitlement. Mr Gardiner produced the irrevocable authority and asked Peter Phontos to sign it. There was a deal of discussion about this. Michael Phontos advised his father not to do so. Mr Gardiner said that Peter Phontos should honour his existing commitment. After discussion, Peter Phontos indicated that he would execute the irrevocable authority as a matter of honour. Probably he went on to say that he expected the Bank to reciprocate by honouring the requests made and by supporting the group on the Wharf project and on other projects. Notwithstanding that the irrevocable authority was sought and executed, I am satisfied that Mr Gardiner did not make any binding contractual promises on behalf of the Bank. He made it clear that any changes to the contractual arrangements would have to be agreed to by his superiors. Mr Gardiner may well have said that the Bank would support the group in future, in relation to other projects, but I do not regard any such statement as being of a contractual nature or even as being a statement of fact. Mr Gardiner had no authority to bind the Bank as to the future and all parties were aware of that. It has been submitted on behalf of the applicants that, in the conversation, Mr Gardiner bound the Bank to provide all the funding that was necessary to complete the Wharf Road development and to fund other projects which the Phontos group would undertake. I think it is probable that something was said about continuing with the funding of the Wharf Road project and, probably, that something was said about other projects. However, insofar as Mr Gardiner gave an assurance, I think it is probable that he simply assured Peter and Michael Phontos and Harry Costas that the Bank would continue to fund the Wharf Road development as agreed and would consider proposals for other projects if they were put forward. I do not accept that there was anything said which could reasonably have been understood to be a commitment by the Bank to an open-ended obligation to fund whatever was required for the Wharf Road development or for other projects. It is not suggested that there was any discussion of amounts and it is not suggested that the Phontos group was at that time seeking additional funding for the Wharf Road development. The Bank had been meticulous in expressing the limit of any facility granted and in informing the mortgagors and guarantors of the current limit of their liability. I consider that Mr Stevens' recollection of the meeting, given at pp.846-7 of the transcript, is likely to have been accurate. That recollection contains no element of agreement on the part of Mr Gardiner to the variation of the existing arrangements. Mr Stevens' recollection is that:- "Peter agreed to sign the document in spite of Michael's desire to tie the signing to some conditions." Peter Phontos has given evidence that, when he left the conference:- "I then felt shaking cold, giving $3 million away without a single thing in writing at that time." However, as I have already mentioned, the irrevocable authority did not give away the $3m. The Bank's entitlement to that sum had already been assured by the amendment to the terms sheet on 2 August 1989 and the acceptance of the Mason conditions. Although the irrevocable authority operated in terms by way of contract, it was in practical effect a machinery document facilitating the Bank's access to the funds. In executing the irrevocable authority, Peter Phontos was not giving away money. However Peter and Michael Phontos and Harry Costas looked upon the matter, Mr Gardiner would have considered the Phontos group contractually bound to pay the $3m to the Bank and would have considered Peter Phontos bound as a matter of good faith to execute the irrevocable authority. Michael Phontos gave evidence that he understood Mr Gardiner to promise that the Bank would fund the group's future projects as they occurred, subject to normal commercial constraints of valuation, gearing ratios and the like. Michael Phontos gave evidence that the reference in the irrevocable authority to "advances .... to be granted" referred to the undertaking to fund future projects. I do not accept the evidence of Michael Phontos on this point. I consider it to be improbable that Mr Gardiner gave any assurance with respect to future projects. Michael Phontos also gave evidence that Mr Gardiner promised that any further money required to complete the Wharf Road project would be advanced. I consider it to be improbable that any promise or assurance was given by Mr Gardiner with respect to that matter. There had always been a limit placed on the Wharf Road facility. That limit remained and there was no conversation directed at either increasing it or eliminating it. Michael Phontos also said in his affidavit that Mr Gardiner agreed that the Bank would capitalise interest on the Wharf Road development as well as making such further funds available as were required to complete the Wharf Road development. Mr Gardiner has denied any such promise. I accept his evidence. However, all parties at the meeting would have assumed that interest would be capitalised. Mr Gardiner, for his part, did not expect the Phontos group to meet the Mason condition that interest charges be paid. That condition was never enforced. On the following day, 6 December, Michael Phontos sent a letter to Mr Gardiner setting out, inter alia, requests for the release of certain securities including the term deposits and seeking certain other benefits which had been discussed:- "We refer to our meeting yesterday and to our authorisation and direction to pay to the Commonwealth Bank, Gladesville Branch, $3 million plus interest payable upon the monies due to our firm from the Commonwealth Bank, Stock Exchange Branch. We hereby authorise and direct you to pay the proceeds of the said authorisation as follows:- 1. Firstly, in total reduction of all debit balances (if any) in the following accounts held by this firm or our group companies and associates - ... 2. Secondly, the balance of the proceeds, after the above payments, in reduction of the account known as Parras Holdings Pty Limited, Fully Drawn Loan Number Two, Account Number, 2171 0015 4249. In consideration of the above payments we request the release of the following securities held by you and variation of conditions of borrowing:- 1. Release of term Deposits numbered 2171 5003 8394, 2171 5003 9709 and 2171 5004 7725 (previously 2171 5004 0291), 2. Release of the equitable charge given by Mr Michael Phontos over his 50% share in Initium Pty Limited and his written undertaking to give a 2nd mortgage over his 50% share of the commercial building owned by Initium Pty Limited once strata title issues. 3. Release of any guarantee given by Mr Michael Phontos to the Bank, 4. That progress payments on the Wharf Road project be made on a percentage complete basis and cease to be made only upon production of original invoices, 5. The provision of an overdraft limit of $100,000 on the account known as P & E Phontos Pty Limited No 2 Account, Account number, 2171 0015 4396, 6. The provision of certain bank guarantees (to be advised and agreed) to certain trade suppliers of P & E Phontos Pty Limited, and 6. Reinstatement of the Gold Mastercard of Mr & Mrs Phontos." The request was forwarded by Mr Gardiner to NMZ on 7 December 1989 with a lengthy summary of the position and the following recommendation:- "It would appear to us that the Wharf Road project appears to be substantially undervalued at $2 million on completion' whereas customers estimate sales should clear $3.5/$4 million. As there are 15 x 2 Bedroom units with ensuite, storage area plus double garage and a 4 Bedroom house on the site, our valuation of $2 million does appear very conservative. We recommend that Property valuers be requested to revalue the work in progress and on completion' valuation as the previous valuation is dated October 1988. The Phontos family are anxious to obtain release of the term deposits ($485000) to complete other jobs and possibly upgrade the finish of the Wharf Rd project. If the Wharf Rd security was revalued higher than the actual building cost ($2.5 million) there would be room to accede to their request. Other requests are of lesser importance and can be dealt with as you see fit." On 19 December, Mr Havron reported on the requests. He recommended in favour of most of the matters sought but recommended that only the Ilanz term deposit worth $115,759 be released, retaining term deposits to the value of $265,558. He recommended that the guarantee given by Michael Phontos not be released. He recommended that the request for Bank guarantees for suppliers be looked at. Mr Mason approved these recommendations. On 21 December 1989, Mr Mason held a conference with Peter and Michael Phontos. He advised that the Bank would release only $115,759 out of the term deposits which totalled $486,838, and that it was considered that, with this $115,759, an overdraft of $100,000, which was agreed to and $200,000, which was available to PEP from the remaining Bank bills, a total of $416,000 would be sufficient for the immediate future as working capital. He said that the Bank was prepared to reassess the position the following April by which time the Wharf Road project would be much further advanced. I am not satisfied that there was any breach of contract or breach of faith involved in this response. Mr Mason, the superior officer, was entitled to take the view which he did. (x) Implied Terms The applicants allege many implied contractual terms including the following set out in paragraph 18 of the statement of claim:- "(i) the Bank would value the real property forming part of the security prior to the Bank requiring the lodgment of the security; (ii) the Bank would disclose to the relevant Applicants that it was not satisfied with the valuation of the real property forming part of the Security prior to the Advance being made; (iii) the Bank would release funds by way of drawdowns of the advance (in particular FDL 1) in a timely and efficient manner; (iv) the Bank would not in the administration of the advance take into account:- (A) matters involving any other company directly or indirectly associated with Parras; and (B) matters extraneous to Parras; (v) the Bank would not seek to improve its own security position as a condition of its performance of contract. (vi) the Bank would not unilaterally alter its interest rate and fee structure during the term of the advance." Of these alleged terms, there is no basis for terms (i) and (ii). As to implied term (iii), it may be accepted that the express requirement that the Bank release funds under FDL 1 on a progressive basis carried with it an obligation on the part of the Bank to act responsibly and reasonably. Certainly, the Bank was under an obligation to take all steps as were reasonably necessary to ensure that Parras had the benefit of the facility which was granted. See Butt v M'Donald (1896) 7 QLJ 68 at 70-1; Fitzgerald v FJ Leonhardt Pty Ltd (1997) 71 ALJR 653. There is no basis for implied term (iv). When circumstances changed, as they did when PEP's overdrafts extended to over $1m, the Bank was entitled to take that fact into account. The Parras facility was not limited to Parras. The facility took PEP into account. There is no basis for implied term (v). The Bank did not receive security to the value which it looked for, and the arranged security had not been calculated by reference to an overdraft of PEP of over $1m. As to implied term (vi), the express term was that the interest charge was to be at the Bank's "reference rate plus 1.5% pa". This was a reference to the reference rate from time to time, not to the reference rate existing on 31 August 1988. I need not deal with all the alleged terms pleaded in paragraph 18 of the statement of claim. In my opinion, the terms do not assist a consideration of the case. In paragraph 19, the statement of claim pleads other implied terms including:- "(b) the Bank was not permitted to satisfy itself in respect of the documentation concerning the costing of the construction of the Development and/or the plans, specifications and approvals of the Development; (c) the Construction Funds released to Parras pursuant to FDL 1 were to include all costs of the Development (except land acquisition costs of the Development (except land acquisition costs and capitalised interest) and in particular:- (i) design fees; (ii) fees paid to statutory authorities; (iii) all preliminary costs; and (iv) construction costs as incurred, including builder's profit costs; ... (e) the proceeds from property sales directed to the reduction of the Advance were net of adjustments for water and council rates, land tax, body corporate fees, legal fees, agent's commission and advertising costs incurred in respect of such sales and legal fees incurred in respect of the Development." There is no basis for reading term (b) into the contract. The Bank had agreed to release funds for the construction of the Wharf Road development. The Bank clearly had an interest in what the development was and what the cost of construction would be. Michael Phontos was critical of the fact that the Bank sought the plans which had been lodged for building approval so as to enable it to make a valuation. Yet, as the valuation was to be on an "on completion" basis, the Bank was obviously entitled to see what was planned. The Bank was also interested in the total cost of construction so that it could better assess the funds which should be released from time to time. When the project was over budget and the applicants sought further finance, the Bank could reasonably expect to be given information as to the cost of completing the project. Neither term (c) nor term (e) should be implied into the contract. The term agreed with respect to the release of funds was that the funds were to be released pursuant to architects' or quantity surveyors' certificates. As to term (e), there was no limitation requiring repayment of the moneys advanced under the facility from any particular source, although certain sources of funds were pointed to. The terms sheet provided for the progressive reduction and ultimate clearance of FDL 2 from the sale of the townhouses at Cremorne, the profits from the Housing Commission contract and the Wharf Road development. It provided for the repayment in full of FDL 1 within an overall term not to exceed 12 months from the sale of the proposed units and the restored cottage. There was no contractual arrangement that any particular funds could not be touched by the Bank. When the Bank insisted that certain funds be used for the completion of the units, it did not act in breach of an implied term to the contrary. I need not comment upon other implied terms pleaded. (xi) PEP bank bills It is alleged that the Bank had a contractual obligation to pay to PEP the bank bills having a face value of $3,550,000, which were due on 22 December 1989. It is claimed that this obligation was broken insofar as the $3m, which had been the subject of the variation of contract on 2 August 1989 and the irrevocable authority, was not paid to the applicants but was retained by the Bank. However, there was no breach of contract. PEP had agreed that this sum would be paid to the Bank. The Bank was entitled to retain the sum and, indeed, the irrevocable authority executed by Peter Phontos on 5 December 1989 specifically authorised it to do so. (xii) Sale of Unit 8 Unit 8 was due for settlement on 14 June 1991. On the day of completion, Michael Phontos notified the purchaser's solicitors that bank cheques were to be drawn as follows:- "1. Office of State Revenue $ 27,555.70 2. Ryde Municipal Council $ 3,277.00 3. Water Board $ 2,386.23 4. Laing & Simmons Gladesville $ 20,381.45 5. Phontos & Associates $ 18,590.00 6. Commonwealth Bank of Australia $152,898.38 $225,088.76" The Bank declined to settle on this basis and, consequently, the sale fell through. Previously, on 4 June 1991, Mr T. Creighton-Carr, an officer of the Bank, had written a memorandum reviewing the position. He commenced the memorandum:- "Essentially the Phontos' have again run out of funds and the Wharf Road project remains incomplete." Mr Creighton-Carr recommended that a number of steps be taken, including the step that "Full proceeds of unit sales will be applied to CBA's debt with no exceptions." Subsequently, Mr Mason agreed to pay the land tax of $27,558.70 but required that the deposit moneys which had been paid by the agent into an account at the Gladesville Branch be paid direct to the Bank. After the settlement went off, there was, on 17 June 1991, a long discussion between officers of the Bank and Peter and Michael Phontos and others representing the Phontos group. The meeting was inconclusive but, on 17 June, Michael Phontos wrote to the Bank putting forward a number of propositions and summaries of the legal fees and of the agent's fees. It appears that the legal fees of $18,590 which had been claimed out of the proceeds of Unit 8 included legal fees for the purchase of the Wharf Road property, for the entry into a Water Board contract, for the development of the strata plan, for the obtaining of a s.317AE certificate, for the setting up of the body corporate and, finally, $3,784.10 for the sale of Unit 8. Of the moneys which were sought for the agency, it appears that $6,100 was commission in respect of Unit 8, while $14,281.45 was advertising expenditure which had been incurred from 30 November 1990 onwards. It does not appear to me that there was any breach of contract by the Bank which caused the sale to go off. By June 1991, the Bank had already advanced more than it had originally agreed to advance in respect of FDL 1. At the time, further moneys were required to enable the project to be completed. I do not consider that there was a legal entitlement on the part of the Phontos group to have all past legal fees and all past agency fees deducted from the proceeds of the sale of Unit 8. This was a matter which should have been raised with the Bank and in respect of which arrangements should have been made prior to the day. Arrangements were ultimately made and Mr Cox wrote on 25 June 1991 to say that the Bank would fund those disputed items. (xiii) Financing of Other Projects It is alleged that the Bank refused to provide finance for the Ashburndevelopment, for the Linsley Street development and for a development which Harry Costas had in mind at Dobroyd Point. It is sufficient to say that the Bank was under no obligation to do so. Moreover, neither Dovizo, the proprietor of Ashburn Place, nor Sibard, the proprietor of Linsley Street, was ever in a position where it could proceed with the development of its property. The Linsley Street property was mortgaged to the Bank to support Parras' obligations. There was little evidence about the Dobroyd Point development. However, I am satisfied that the Bank was under no obligation to support that development, and that, by December 1991, when the application was made, the possibility of sufficient finance being provided by the Bank to enable the development to go ahead was negligible. I have earlier dealt with the issue of further funding when discussing Mr Gardiner's off the record conference. (xiv) PEP Overdraft It was said on behalf of the applicants that the Bank breached the contractual arrangements with respect to PEP's overdraft when, on 30 August 1989, Mr Mason placed PEP's overdraft in reduction. It is claimed in the statement of claim that the next annual review date was 21 June 1990. There are at least two reasons why there was no breach of contract. The first is that the conditions of the letter of 30 August 1989 were agreed to by the applicants. The second is that, in any event, the Bank was perfectly entitled to stipulate that no further cheques be drawn. The applicants had no entitlement to draw a cheque beyond the approved limit. It should also be noted that PEP's accounts had effectively been placed in reduction on 19 June 1989 when Mr Stevens informed Michael Phontos that they were not to increase beyond their current levels, although this stricture appears to have been ignored by PEP. LACK OF CONSIDERATION Throughout the claims made by the applicants are allegations that certain transactions were not supported by consideration or that there was a failure of consideration. I do not propose to discuss each transaction in relation to which this allegation has been mentioned. I have kept the allegation in mind when considering the facts and consider that nothing that occurred failed through lack of consideration. The $3m amendment to the terms sheet which was requested on 5 July 1989 and which was agreed to on 2 August 1989 resulted from a request which was made in the context of an ongoing contractual relationship. The request was agreed to. The parties agreed to amend the terms of their relationship. It is not necessary to establish that something different or additional was promised in exchange for each variation which occurs in such a relationship. The continuation of the ongoing relationship provides the necessary consideration. In any event, the applicants, having agreed to the amendment and the Bank having relied upon that amendment, are estopped from resiling from it. See Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; The Commonwealth v Verwayen (1990) 170 CLR 394. The term was repeated in the bargain made when Mr Mason presented the Mason conditions on 30 August 1989 and when those conditions were accepted on 1 September 1989. There may well have been no consideration for the irrevocable authority of 5 December 1989. I doubt that the document took effect as a contract. However, if it failed to have contractual effect because there was no consideration, the authority nevertheless operated as a simple authority, authorising the Bank to deal with the bank bills in accordance with its terms. That authority was supported by the contractual arrangements into which the parties had entered. UNCONSCIONABLE CONDUCT (i) Principles In my reasons for judgment in National Australia Bank Ltd v Nobile (1988) 100 ALR 227, I examined the principal authorities relating to the issue of unconscionable conduct. I referred to authorities in the United Kingdom such as Shiloh Spinners Ltd v Harding [1973] AC 691; Lloyd's Bank Ltd v Bundy [1975] 1 QB 326 and National Westminster Bank PLC v Morgan [1985] AC 686. I also discussed Australian authorities including Harrison v National Bank of Australasia (1928) 23 Tas LR 1; Blomley v Ryan (1956) 99 CLR 362; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 and Legione v Hateley (1983) 152 CLR 406. I adopt and apply in these proceedings the comments I there made. The general principle stated in Story's Commentaries on Equity Jurisprudence, 13th Ed., para 1316 is:- "The whole system of Equity Jurisprudence proceeds upon the ground that a party having a legal right shall not be permitted to avail himself of it for the purposes of injustice, or fraud, or oppression, or harsh and vindictive injury." In Amadio, Gibbs CJ set out the principle in these terms at 459:- "The principle of equity applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands': Blomley v Ryan (1956) 99 C.L.R. 362, at p.415, per Kitto J., and see at pp. 405-406, per Fullagar J." At 462, Mason J, after referring to the remarks of Fullagar J in Blomley v Ryan, said:- "It is made plain enough, especially by Fullagar J., that the situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word disadvantage' by the adjective special' in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party." At 461, Mason J said:- "... relief on the ground of unconscionable conduct' is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage ..." This element of the overbearing of a person's will which serves to invalidate consent given was referred to by Story at para 221 in this way:- "In this class may properly be included all cases of unconscientious advantages in bargains obtained by imposition, circumvention, surprise, and undue influence over persons in general, and in an especial manner all unconscientious advantages, or bargains obtained over persons disabled by weakness infirmity, age, lunacy, idiocy, drunkenness, coverture, or other incapacity, from taking due care of or protecting their own rights and interests." Thus, there are two elements to be considered. The first is superior bargaining power on the one hand and special disadvantage on the other. The second is the taking of an unfair or unconscientious advantage of the opportunity thereby created. The circumstances in which the principle will apply cannot be definitely described. The facts of each particular case must be examined. Economic duress in the sense of the obtaining of unfair or unconscientious advantage from a party which, because of its financial situation, was in no position to refuse entry into a disadvantageous transaction, provides a circumstance to which the equitable principle of unconscionable conduct will apply. It has long been established that courts of equity will relieve against unconscionable transactions resulting from pressure placed on persons in a state of poverty. See O'Rorke v Bolingbroke [1877] 2 App Cas 814 at 822. (ii) Position of Disadvantage I think it may be accepted that, at all relevant times, the applicants were in a position of special disadvantage. The Phontos group transferred dispensable bank accounts from the ANZ at a time when the group was having financial problems and when its relation with the ANZ were deteriorating. The Phontos group encountered liquidity problems at least when the Housing Commission cancelled the first contract. Its liquidity problems magnified when the Housing Commission terminated the remainder of the contracts later in 1988. From that time on, the Phontos group looked to solve its problems either by trading profitably in new ventures or by recovering sufficient damages from the Housing Commission. Neither result eventuated. From the time PEP commenced to overdraw on its overdraft, the Phontos group was effectively locked into its relationship with the Bank. It has been put on behalf of the Bank that, once the Phontos group received the $3.15m from the Housing Commission, it was released from pressures which had been placed upon it. However, in my opinion, as the arrangement at this stage was that the Bank would receive $3m out of the Housing Commission moneys, the Phontos group had no realistic prospect of either refinancing the Wharf Road project or of paying off the debts due to the Bank. Accordingly, had the Bank acted unconscientiously, I may have been satisfied that relief should be granted. Although the Bank was not fully aware of the position of the Phontos group, particularly in the early days of the relationship, the Bank's officers would, I think, have been generally aware that, if the Bank terminated its relationship with the Phontos group, the group could not survive. The principal issue is thus whether the Bank acted unconscionably so as to take advantage of the applicants' position. (iii) Overall Position The case put for the applicants was that Peter Phontos and his family wished to carry on their business as Peter and Elli Phontos had done successfully for many years. Peter Phontos had maintained a practice of obtaining properties suitable for development, of borrowing 100% of the construction cost, of carrying out a development, and, towards the completion of the development, purchasing another suitable property and perhaps refinancing the development that was underway. In 1988, a development in Cremorne had been completed and units were ready for sale. Another development at Manly was under consideration. Other development properties were being sought. Peter Phontos and his family hoped to go on as they had in the past. The circumstances had, however, changed. PEP was in dispute with the Housing Commission. PEP had creditors which it could not pay. The applicants owed approximately $2m to the ANZ, with whom their relationship was stressed. Michael Phontos arranged for the account to be moved to the Bank under the arrangements I have outlined. The applicants appear to have looked upon the Parras facility as a separate facility limited to the Wharf Road development. A basic allegation in this case is that, because the Bank did not treat the Wharf Road development separately from all other considerations and comply with the terms sheet according to its terms, the Bank engaged in unconscionable conduct. Yet, the Parras facility did not concern only Parras' development of the Wharf Road property. The facility encompassed the taking over of PEP's debt to the ANZ of approximately $2m. The terms of the facility included the retention of PEP's overdraft facility with the Bank which had already been established and included provisions for the payment of $1m to the Bank out of the moneys claimed from the Housing Commission. The arrangements made to establish the Parras facility therefore encompassed PEP within the overall arrangement. And, of course, PEP was to be the builder of the Wharf Road development. There is no reason to think that, had PEP been able to comply with the limit of its overdraft with the Bank, the Wharf Road development would not have proceeded in the ordinary way. It was the extremely rapid rise in PEP's overdraft which caused alarm in the Bank. An overdraft facility of $200,000 had been granted on 21 June 1988, which was secured by a term deposit. The overdraft limit was increased to $370,000 by 9 December 1988. By June 1989, the overdraft had risen over $1m. Embarrassment arose when, in June and July 1989, PEP issued cheques which the Bank dishonoured. The Bank was dissatisfied with the way in which the account was being handled and the members of the Phontos family were dissatisfied with the Bank because cheques had been dishonoured. In the first 12 months of the relationship, very little of the moneys expended by PEP went towards the Wharf Road development. What the moneys were spent on is not entirely clear and I have not thought it proper to analyse the many cheques which are in evidence. However, I infer from the evidence that some of the expenditure went to PEP's past trade creditors, other expenditure was upon the Manly project and other moneys were spent upon the proceedings in the claim against the Housing Commission, including the preparation of the anticipated arbitration. What is clear is that, even with the expenditure of $1m drawn from the Bank, PEP continued to be financially stretched. The view of Peter and Michael Phontos seems to have been that all moneys that were spent were spent in good faith for the benefit of the group. It is not suggested that any expenditure was for extraneous purposes such as overseas holidays, expensive cars or the like. Michael Phontos put more than once to officers of the Bank that the Bank should be pleased that PEP was expending moneys on the Housing Commission claim, for moneys from that claim were to be paid to the Bank. The point was also put that the Bank would receive the benefit of the profits which PEP would make from the Manly project. However, it seems to me that it was inevitable that, sooner or later, the Bank would call a halt to the drawing of cheques without authority, that the Bank would seek to impose strict controls upon PEP's accounts and that the Bank would seek to enhance the Bank's security. The case put for the applicants is that the Bank's conduct was unconscionable in insisting upon conditions which had not been set out in and, indeed, were inconsistent with, the terms sheet of 31 August 1988. However, by the middle of 1989, the Bank was confronted by the fact that it was dealing with people who did not comply with their arrangements. PEP had drawn far beyond the level of its facility without attempting to seek additional funds. The units in Cremorne had not been sold. Peter Phontos showed a reluctance to abide by restrictions for, after being advised not to do so, he drew cheques on the Bank for matters unconnected with the Wharf Road development. The Bank was aware that the position of PEP in 1988 had not at first been fully disclosed to it and that PEP's position had, if anything, deteriorated. In addition, there was PEP's debt of $1m to be dealt with and this had not been contemplated at the time of the 1988 arrangement. It does not seem to me to have been unfair or unconscionable for the Bank to have taken the steps which Mr Perkins and Mr Mason took to regularise the position and to ensure that moneys expended out of the funds of the Bank were directed solely to the Wharf Road project. Michael Phontos has given evidence that, although it was his belief at the time that the Bank had an argument that it was entitled to demand payment of PEP's overdraft, in his view the Bank was not entitled to demand repayment of the overdraft for the Bank had funded it on a cash flow lending basis and the Bank knew that it was to be repaid from the projects and had therefore allowed the excesses to be built up. There are several problems with this view. Perhaps the most important is that, whatever Michael Phontos had in mind with respect to a "cash flow lending basis", no arrangements had been made as to that. PEP had simply drawn cheques. There was no arrangement whatever for repayment. Counsel for the applicants put the claim this way:- "It was unconscionable for the Bank to take advantage of a situation which it had permitted and encouraged to arise. The Bank permitted the situation to arise by failing to identify, or to even attempt to document, the contractual or other basis upon which the PEP excesses were peremitted to be run up. It encouraged the situation by continuing to lend money, by approving new limits and by paying without demur cheques drawn on the accounts overdrawn above formal limits. ... It was unconscionable to permit the Applicants to proceed from October 1988 until mid-June 1989 on a certain set of expectations concerning the continued performance of Contract 1 and the overdraft arrangements and then, at a time when the applicants were totally reliant for their financial survival upon those expectations being honoured, suddenly to act in a manner antithetic to those expectations. As Professor Finn puts it, the unconscionability lies in one party [taking] refuge in the formal rules of contract law to deny effect being given in whole or in part to the expectations reasonably created by the course of their relationship.'" However, the factual basis for the submission does not exist. The Bank always made clear what was the agreed limit of PEP's overdraft. Thus the letter of 7 December 1988 approving the increase to $370,000 said:- "Limit arrangements are to be respected at all times." In late November 1988, Mr Marshall reviewed the position in detail after speaking with Michael Phontos. He proposed a review in January 1989, which in fact did not then go ahead as Mr Marshall was transferred. In December 1988, Mr Ronan spoke about the overdraft with Peter Phontos. Mr Ronan was informed that there had been a delayed progress payment. He said that no further cheques were to be issued. In February 1989, Mr Stevens spoke with Michael Phontos about the excesses. Michael Phontos agreed to prepare a full cash flow showing all expected expenditure and income. These events are typical of what occurred. In my opinion, the applicants, and particularly Michael Phontos, were always fully aware of the limits which had been agreed and they realised, or should have realised, that officers of the Bank were concerned about the developing situation. In my opinion, the Bank did not "encourage the situation" and did not pay cheques "without demur". I have already indicated that there was some lack of control and delay resulting from the transfer off Mr Marshall in January 1989 and later the unexpected absence from the Bank of Mr Stevens. But the advantage which the applicants took of this situation was not encouraged by the Bank. I do not consider that it would have been unconscionable for the Bank in the middle of 1989 to call up PEP's overdraft on reasonable notice and I am satisfied that the evidence does not disclose any basis for an estoppel which would have precluded the Bank from doing so. A contention of the applicants is that any money expended was expended for the purpose of earning profits and pursuing the Housing Commission arbitration. The contention of the applicants is that the Bank must have understood that it was to be repaid from these sources. However, PEP had made no arrangements with respect to the excess of the PEP overdraft. The Bank was entitled to meet PEP's cheques if it saw fit to do so and it was entitled to call up PEP's overdrafts if it saw fit to do so. In the following sections of these reasons, I deal with specific aspects of the transactions. I should mention now that, in addition to considering the specific matters which have been raised, I have also considered the totality of the matter, to see whether, taken as a whole, the applicants' complaints of the Bank raise a case of unconscionable conduct on the part of the Bank. In my opinion, they do not. The applicants' problems arose from their own position, their inability to realise the state of their financial affairs and their determination to proceed with developments when they were financially unequipped to carry them out. I am satisfied that the Bank did not act unconscionably. (iv) Transfer of Control It may well be that there was a change in attitude by the Bank when the control of the Phontos accounts was transferred from CLS to NMZ on 25 July 1989. However, other officers had become concerned about the matter long before that. Mr Marshall of CLS had proposed in late 1988 to review the situation. This review was delayed by Christmas 1988 and the fact that Michael Phontos was overseas on his honeymoon during January 1989. In that month, Mr Marshall was transferred. Mr Allen-Ankins, who took over Mr Marshall's position, became concerned about the matter after considering the file. He initiated a review; but there was a delay due to Mr Stevens' unexpected absence from the Bank. In about April of 1989, NMZ also became concerned about the account and Mr Mason took steps to have the account transferred to NMZ, which occurred in late July 1989. By that time, Mr Allen-Ankins, Mr Paul Hill, Mr Mason, Mr Perkins and Mr Johnson, the NSW General Manager, were all very concerned about the situation. It is impossible to decide what steps Mr Robinson would have taken had he remained in charge of the accounts. His notations on memoranda in evidence show that he approved of the Bank's requesting the amendment of the terms sheet to increase the $1m to $3m. Nevertheless, he approved a payment of $63,500 on 19 May 1989, in relation to the Balmain project and noted the vague information that:- "(My understanding was that funds credited from Delfin would overcome need for debt to increase after payment of $63,500) Please fax approval for payment of cheque for $63500 to Branch. In all the circs & with present debt level decision to pay is reasonable in view of agreement with Delfin." The applicants did not expressly claim that it was unconscionable for the Bank to transfer control from CLS and Mr Robinson to NMZ, although there seems to be a sense of grievance about this. It was conceded that the applicants could not reasonably claim entitlement to any special treatment by reason of the relationship with Mr Robinson. The Bank was always entitled to move an account from one officer to another. I do not see any element of unconscionable conduct involved in the transfer of control which occurred. The account was moved to NMZ which was the proper authority under the Bank's internal arrangements for the handling of the Phontos accounts. For the account to remain in control of CLS, where it was under the direction of Mr Robinson, would have been to keep it under the control of an officer who had a conflict of interest. (v) Failure to Disclose Throughout the submissions and claims put on behalf of the applicants are contentions that the Bank's officers failed to disclose matters which the Bank's officers were taking into account and of which the applicants were unaware. These contentions are put under the headings of lack of good faith, misrepresentation, estoppel and unconscionable conduct. I have already dealt with the claim that the Bank's valuations should have been disclosed. For the moment, whilst dealing with unconscionable conduct, it is relevant to mention the contention that the Bank's officers did not disclose to the applicants their view that the project would not be successful. For example, Mr Allen-Ankins said in a memorandum of 9 June 1989, in relation to the development, that:- "The shortfall to complete the project is inevitable." In the same memorandum, he wrote:- "The group is virtually bankrupt" and "At some stage CBA will have to bail out". The view of Mr Mason and of Mr Perkins was generally to the same effect. Mr Perkins wrote on 30 August 1989:- "The group's overall position and the Bank's for that matter is precarious." It is put on behalf of the applicants that the Bank should have kept the applicants informed of the information which it had and of the views held by the Bank's officers and that for the Bank to lay down the Mason conditions without informing the applicants of what the Bank thought about the project was unconcionable conduct, for the applicants accepted the Mason conditions and anticipated the carrying out of a profitable project. In my view, there was no unconscionable conduct or misleading conduct on behalf of the Bank. The views that I have set out are no more than the views of particular officers of the Bank. Other officers tended to hold a more favourable view. Mr Gardiner thought that PVD's valuations of the Wharf Road development were unduly low. Moreover, the circumstances did not require the Bank to advise the applicants. The applicants were all experienced in property development and, indeed, would have been expected to know a good deal more about it than did the officers of the Bank. There was no occasion for the Bank's officers to advise Michael and Peter Phontos of the views held by particular Bank officers. The estimates made by PVD were regarded by the Bank as confidential to it. In my opinion, in imposing the Mason conditions and going ahead with the facility, the Bank was not acting either unconscionably or in bad faith but rather was accommodating the applicants in the project which they wished to carry out. (vi) The Imposition of Stricter Controls The applicants claim that the Bank should have complied with the provisions set out in the terms sheet and that there was no occasion to impose either the limits or the stricter controls which the Bank imposed. However, officers of the Bank came to the view that Michael and Peter Phontos could not be trusted to deal with the Bank in accordance with terms which had been agreed. Mr Allen-Ankins of CLS first directed that the accounts were to be strictly controlled and that debts were not to increase beyond their current levels. Mr Hill of CLS, on 18 July 1989, first imposed the restriction that sums needed for wages or pressing accounts in respect of the Wharf Road property could be paid if the Gladesville branch sighted the invoices or accounts and made payments on that basis. Mr Stevens, after speaking with Mr Hill, noted that: "The aim of this restriction is to ensure that the funds expended to the debit of our account are purely for the Wharf Rd project and not to anyway supplement the working capital requirements for other projects being undertaken by P & E Phontos Pty Limited." That attitude of the officers of the Bank was justified by the conduct of the applicants. As Mr Gardiner has so clearly described, Peter Phontos was not responsible with a cheque book. PEP continued to draw on its overdraft when there was no authority to do so, even after cheques had been dishonoured; and he did so for purposes other than the Wharf Road development. Moreover, after the imposition of the Mason conditions of 30 August 1989, the applicants failed to comply with them, except to the extent that they were forced to do so. Thus, the two Cremorne units were not sold, although the applicants were put under pressure to sell them. Ultimately, one was sold but not until the middle of 1991. Of the moneys in excess of $3m which PEP received from the Housing Commission, very little was used for the purposes of the Wharf Road development. Mr Mason had made it clear in his conditions that the additional moneys required for the Wharf Road development were to be provided by the Phontos group. However, both Michael Phontos and his father held the firm view that all moneys required for the development should come from the Bank. Accordingly, they did not use their own moneys for that purpose. Only a relatively small part of the Housing Commission settlement moneys was used for the Wharf Road project. This attitude of indifference towards compliance with the Mason conditions, which can be inferred from the applicants' actions, was confirmed by the cross-examination. Michael Phontos gave this evidence in relation to the unit at Cremorne which he occupied:- "Why did you not sell it in mid-1989, for instance, when Mr Mason was asking for the 3 million and those conditions were being put. Why did not you put your unit on the market then and reduce the security?---He didn't make that an absolute requirement at that time." Peter Phontos gave this more general evidence:- "Did you tell Michael in mid-1988 before the money was taken from the Commonwealth Bank that it was your intention to sell the remaining two townhouses only if it became necessary but not at that particular time?---Yes." Peter Phontos gave this evidence about the Mason conditions:- "Is it the case, Mr Phontos, that when you signed the Mason conditions you had no intention of complying with any more of it than you had to from time to time?---I always had in mind that I would negotiate, yes. You would negotiate?---Negotiate the situation. If I been forced to." It is not surprising that, when faced with this attitude on behalf of Peter and Michael Phontos, the Bank's officers should insist upon laying down strict controls to ensure that the money which the Bank advanced for the project was spent on the Wharf Road project. (vii) $3 Million Amendment On 19 June, Mr Stevens told Mr Phontos that an additional $80,000 would be released to permit the uplifting of plans at a cost of $39,000 and to allow work to a value of $41,000 to proceed, subject to the excess being cleared by the release of funds after progress payment and subject to agreement that the moneys to come from the Housing Commission arbitration would be increased from $1m to $3m. The release of the $80,000 was approved by letter of 3 June 1989. On 5 July 1989, a letter was sent by Mr Ronan to Parras enclosing a form of amendment and noting that the Bank required the amendment to be made. No express threat was made as to what would occur if the amendment was not executed. Some time before 2 August 1989, the document amending the terms sheet was executed by the parties to the Parras facility and, on 2 August, it was delivered to the Bank by Michael Phontos. As one might expect, no statement was made at the time that the document had been executed under protest or duress. Michael Phontos has given evidence that the applicants considered at the time that they had no choice but to sign the amendment. One can accept that the applicants had no choice in the sense that, if they did not execute the amendment which the Bank required, the Bank would have been likely to call upon PEP to pay its overdraft. That would have led to the collapse of the Phontos group. However, that is not to say that the Bank acted in any unfair or unconscionable way. FDL 2 had increased because of the interest incurred. Progressive reduction had not occurred. The Wharf Road property had been acquired and interest was running on FDL 1. Yet the development was not underway and PEP's overdraft had grown to approximately $1m. In the light of those matters and the fact that the securities had not come up to valuation, it was neither unfair nor unreasonable of the Bank to seek a means of achieving payment of the applicants' debts. Even $3m would not have been sufficient to pay off FDL 2 and the PEP overdraft. The terms sheet of 31 August 1988 did not contemplate a substantial unsecured overdraft on the part of PEP and, although no specific time had been stated for the payment of FDL 2, the terms sheet looked to the progressive reduction of that debt and to the completion of the Wharf Road development within 12 months. The $3m amendment did not significantly improve the Bank's position over that anticipated by the Parras facility. Of the additional $2m, $1m could roughly be equated with PEP's liability and $1m would have restored the security position. It should also be noted that, apart from expressing the request for the amendment in terms of a requirement, no additional pressure was placed upon the applicants to execute the document. The applicants had the document for approximately four weeks before it was returned. Michael Phontos was a solicitor and would have advised the other individuals. Peter Phontos and Harry Costas were experienced businessmen. In my opinion, the amendment to the terms sheet was executed because, although the applicants did not wish to execute it, they thought that the demand was not unreasonable and that it was in the best interests of the applicants that they should do so. When, on 17 May 1991, Phontos & Associates wrote to Mr Neville Cox, the then general manager of NMZ, setting out the problems which the Phontos group had with the Bank, no complaint was then made in relation to this amendment to the terms sheet. Nor for that matter was any complaint then made that the Mason conditions had been imposed on the applicants under duress. Michael Phontos gave evidence that Mr Ronan had said to him that, if the applicants provided the amendment to the terms sheet, the Bank would release the next progress payment. This evidence was denied by Mr Ronan and I think that his evidence is the more probable. It may be that Mr Ronan said that the execution of the amendment to the terms sheet would assist with funding. Obviously this was the case. It is claimed that the Bank acted unconscionably but when Mr Gardiner placed a "stop order" on the bank bills held at the Bank's Stock Exchange Branch and when, on the maturity of the bills, the Bank extracted $3m from the sum available and used it to pay off in part the applicants' debts. This had been authorised by the irrevocable authority signed on 5 December 1989 and the letter from Michael Phontos of 6 December 1989 which had specified the debts to which the $3m was to be applied. The applicants rely upon the fact that the $3m was used in this manner without obtaining further authority from Peter or Michael Phontos. In my opinion, no unconscionable conduct was involved. Peter Phontos had signed the irrevocable authority on behalf of PEP and Michael Phontos had written specifying the manner in which the $3m was to be applied. It was applied in accordance with these authorities. Moreover, the money was applied, not just for the Bank's benefit, but to pay off the applicants' debts or, more strictly, part thereof. The moneys were applied in accordance with their authorisation and for their benefit. I see no element of unconscionable conduct in this. It appears from the submissions by counsel for the applicants and from the evidence of Peter Phontos which I have set out that the applicants take the view that the Bank appropriated their money for the Bank's own benefit. However, all that occurred was that the Bank used $3m in accordance with the applicants' authority to pay off the applicants' debts in a manner specifically authorised by the applicants. (viii) Meeting of 5 December 1989 It is alleged that, at this meeting, Mr Gardiner made promises and representations which were false and which misled Peter and Michael Phontos and Harry Costas and that, during the meeting, Mr Gardiner placed unconscionable pressure upon Peter Phontos to sign the irrevocable authority. I prefer the evidence of Mr Gardiner to that of Peter and Michael Phontos and Harry Costas as to what occurred at this meeting. That is because, having heard Mr Gardiner give his evidence, I consider that he was an honest and straightforward bank officer and a reliable witness. Although he had no notes of the meeting other than some brief notes as to security values and the amount of outstanding obligations, Michael Phontos set out in his affidavit in chief a conversation which went over 14 pages. I do not accept that Michael Phontos has a memory that enables him to remember a conversation in that detail. Perhaps Michael and Peter Phontos held the view when they came to the meeting that the funds received from the Housing Commission belonged to the Phontos group to be used as it saw fit. Peter and Michael Phontos were not entirely open in their dealings with banks. Thus, Peter Phontos gave this evidence:- "Mr Phontos, why did you cause this $220,000 to be deposited with the Commonwealth Bank rather than with the ANZ?---Because that's the way business people operate. You got to have some sort of funds somewhere which if needed to put your hand on when you need it, your Honour. I have always been doing this, even when I was - say for instance - with AGC, I never banked with Westpac the times; I banked with - what they call it - CBC - the National now, your Honour." It can be appreciated that there may have been some misunderstanding by Michael and Peter Phontos and Harry Costas of what Mr Gardiner said and some misunderstanding by him of what they were thinking. Peter and Michael Phontos and Harry Costas may well have approached the meeting with the belief that they were negotiating with Mr Gardiner and may well have given more weight to some of his comments than was justified. Mr Gardiner did not attempt to negotiate for he had no authority to do so. He was merely seeking to assist the Phontos group by identifying what benefits they could reasonably request and which he could put to his superiors. I consider many parts of the affidavits as the evidence of Peter and Michael Phontos and of Harry Costas with respect to this conversation to be overstated and wrong. For example, Michael Phontos deposed:- "I said: Brian, you're assuring me that I don't have to write on this that the release of $3 million, or whatever figure is inserted, is subject to and conditional to the release of all of the term deposits and the other matters discussed at this meeting?' Gardiner said: No, you don't have to write anything like that, everything we discussed will be OK'" I consider it to be highly improbable that words such as that were used in the course of the meeting. The irrevocable authority which was signed by Peter Phontos during the meeting read:- "In consideration of certain advances and accommodation granted or to be granted to me by the Commonwealth Bank of Australia, Gladesville Branch, you are hereby authorised and directed to pay all monies up to the amount of $3,000,000-00 plus interest payable due or to become due to me to the Commonwealth Bank of Australia, Gladesville Branch. This order is irrevocable without the written consent of the said Bank." It was unfortunate that Mr Gardiner requested that this be executed during an off-the-record meeting but, in my opinion, neither his conduct nor the irrevocable authority constituted unconscionable action. The authority was effectively an administrative act which facilitated the release to the Bank of the funds which had been agreed to be released by the amendment to the terms sheet of 2 August 1989 and which had been required by the Mason conditions of 30 August 1989. The irrevocable authority did not alter the existing contractual relationship between the parties, but operated as an authority. During the course of the meeting, Mr Gardiner did inform Peter Phontos that he should sign the irrevocable authority as a matter of honour. It was clear that Peter Phontos was reluctant to do so and that he was advised by Michael Phontos not to sign it, at least without attaching conditions to it. Peter Phontos signed the irrevocable authority because his honour was at stake. However, I do not think that there was anything unconscionable in what was done. PEP was contractually bound to pay the $3m to the Bank and the bank bills representing the $3m were held in the Bank's Stock Exchange Branch. Because of the amendment to the terms sheet on 2 August 1989 and its repetition in the Mason agreement of 30 August 1989, the applicants were committed by their agreement to the payment of that sum to the Bank. Peter Phontos was, in truth, honour bound to execute the irrevocable authority. In my opinion, there was no unconscientious taking advantage of a person in a position of disadvantage in the happenings of this meeting of 5 December 1989. (ix) Failure to Increase the Facility as required It was submitted on behalf of the applicants that the Bank acted unconscionably in failing to make available such additional moneys as were required to complete the development of the Wharf Road project. In my opinion, it was not unconscionable for the Bank to place a limit on the facility granted or for the Bank to show reluctance in increasing the facility. Michael Phontos did not pay much attention to the limits which the Bank placed upon the facilities. When asked about the position in March, April and May of 1989, when officers of the Bank were becoming very concerned, Michael Phontos said:- "I thought things were just progressing in the normal fashion, they were aware of the projects and everything was fine." Peter Phontos said as to his past practice:- "I might get contract to build a block, or units many time it's happening and when we run short of funds I call the rep at the time come at the job and usually the time is when we have the roof on it and everything more or less looks - look at he building and he just make another valuation for the project, specific takes the - what I was asking to finish it off in the last stages that's the way I just operate the time, your Honour." However, from the Bank's point of view, the arrangement was not open-ended but was limited to the agreed sums. The Bank was meticulous in expressing the limit of its facility and, whenever any increase was made, the Bank wrote to all concerned, including the guarantors, setting out in writing the limit of their liability. Whenever necessary, written consents to the increases in the facility were obtained. In fact, the Bank extended the facility after 30 August 1989 by $400,000 on 9 July 1990, by $300,000 on 29 October 1990 and by funding the PC items when contracts were exchanged. However, the Bank in general took the view that this project should be completed by the Phontos group from their own funds. There were two possible avenues of funds. The first was the two Cremorne units which it had been contemplated right at the start on 31 August 1988 would be sold. Had the applicants been prepared to sell these units and had the units been sold and the moneys been paid to the Bank under its mortgage, the Bank may well have taken a different view. The other funds available were the funds remaining from the Bank bills. After the Bank had received its $3m and certain creditors had been paid, a substantial amount remained available to the Phontos group. Of this, over $200,000 was used to acquire the Linsley Street property which became mortgaged to the Bank. The funds could have been used to complete the Wharf Road development. No doubt, the members of the Phontos family wished to carry on business as they had in the past, purchasing one property for development before they had completed an existing development. However, at this time, the Phontos group did not have the financial capacity to do that. It does not seem to me that the Bank's attitude to the provision of additional finance was either unconscionable or surprising. (x) The Bank's Legal Advice On 29 August 1989, Mr Mason consulted with the Bank's solicitor, Mr Henry Broekhuijse, and discussed whether it was possible to cancel the Parras facility. Having examined the terms sheet for the facility and the "usual terms and conditions", Mr Broekhuijse advised that the Bank was not in a strong position to cancel its facility. Mr Mason set this down in a memorandum to which he attached a draft of his proposed letter of 30 August 1989. Mr Perkins agreed with the approach taken and, in a memorandum, said:- "In the light of our legal advice which was also the writer's opinion we find it extremely difficult to walk away' from the commitment. The former administration's tacit approval to the variations of the original term sheet leave us with little option but to push ahead on the basis proposed above." It has been put on behalf of the applicants that it was dishonourable for the Bank to insist upon the Mason conditions of 30 August 1989 when it believed itself committed to continuing with the Parras facility. However, it was PEP's overdraft of more than $1m which was the matter which principally concerned the Bank. Mr Broekhuijse had not been asked to advise on that. Mr Broekhuijse's advice was simply one of the matters which Mr Mason took into account in formulating the course which he proposed. In my opinion, the Bank would have been entitled to call up PEP's overdraft on reasonable notice if the Mason conditions had not been accepted. That is one of the courses of action which Mr Mason had in mind. (xi) PVD's Valuations Two matters which affected the Bank's thinking were PVD's valuations of the completed development, which were lower than Mr Gardiner thought appropriate, and PVD's estimates of the cost of construction, which was higher than had been estimated by Michael Phontos. I have already dealt with the question of the "in-one-line valuation" and need not discuss it further. PVD originally placed a figure of $175,000 on the sale value of each of the completed units. Subsequently, the value was increased to $200,000. The original valuation may have been low but I do not think that any taint of unconscionability attaches to that. It was normal practice for the Bank to take account of the values which its own valuers determined. That indeed was a term of the original agreement. Nor do I think that there was anything unconscionable in the Bank's taking into account its own valuer's estimation of the cost of construction. It would seem that, at $1,964,535, this may have been a little high, for the two experts, Mr Zakos and Mr Meredith, have now agreed that the cheques paid in the construction by PEP totalled $1,764,912 and that the cost of construction, excluding additional labour costs, costs in the rise in materials and labour and developer's costs was $1,669,157. However, the Bank's estimate of the costs of construction took into account ordinary profits and margins which PEP did not charge. Mr Retford said that the figure of $1,964,535 could be reduced by $200,000 in an owner/builder situation. This would bring the Bank's figure into line with the actual expenditure. It has not been shown that this estimate, which was based on a guide called "Rawlinson's Guide", was negligently done. Although the estimate raised some further doubts in the minds of the officers of the Bank as to the viability of the project, it tended to operate to the benefit of the applicants in the release of funds. I see no element of unfairness or unconscionability in this matter. (xii) Settlement with the Housing Commission The arbitration with the Housing Commission was settled on about 20 November 1989 and, on that day, the applicants received a cheque for $3.95m. It is claimed that the applicants had to settle the matter because of their problems with the Bank. Michael Phontos in his evidence referred to the Mason condition requiring payment of interest in December 1989 and said that this was one of the commercial reasons promoting the settlement. He agreed that there were other reasons and agreed that counsel for the applicants had advised that, although higher sums had been claimed, the realistic range for the claim was between $3.5m and $6.5m. Michael Phontos agreed that one of the factors taken into account was that 1990 was a period of very high interest rates. There had been many business failures and it was a good time to consolidate. I do not see any unconscionable conduct on the part of the Bank arising from this evidence. (xiii) Linsley Street Development On 21 February 1990, only two months after the events of December 1989 when the applicants unsuccessfully sought the return of all the term deposits held by the Bank by way of security, Dovizo Pty Ltd entered into an agreement to acquire properties Nos 1 and 3 of Linsley Street, Gladesville. There were two contracts, the price being $300,000 for each property with a deposit of $30,000 for each property. I assume that the $60,000 deposit was paid on 21 February 1990. In April 1990, Michael Phontos submitted another cashflow to the Bank which included cashflows with respect to a development at Ashburn Place and a development in Linsley Street. He has given evidence that it was his belief at the time that the Bank was obliged to release the term deposits and was obliged to fund the development in Linsley Street and that the cashflow provided for this to occur. In fact, Dovizo made an application for finance to the Australian Guarantee Corporation ("AGC") on 16 March 1990. No formal application for finance was lodged with the Bank. On 20 April 1990, Michael Phontos and the accountant, Mr Lianos, saw Mr R.A. Mullens, the deputy regional manager of the Bank, and requested an additional $303,000 to complete the Wharf Road project and $600,000 to complete the purchase of the Linsley Street property on which a notice to complete had been issued. The cashflow was produced and handed over at that meeting. Mr Mullens expressed doubt that the Bank would assist with either the Linsley Street or the Ashburn Place projects. Michael Phontos then again sought the release of the term deposits. On 27 April 1990, Michael Phontos and Mr Lianos spoke with Mr Mason. On 27 April, Mr Mason said that he was prepared to increase the limit on the Wharf Road project by $400,000 to $2.9m to enable the project to be completed and to release the term deposits so that the Linsley Street property could be acquired, but only on the condition that a mortgage would be given to the Bank over the Linsley Street property. The cashflow which Michael Phontos had produced showed that FDL 1 would peak at $2.9m. On 30 April 1990, there was a letter from Phontos & Co to the Bank giving details of the Linsley Street property and confirming the advice of Mr Mason that the remaining term deposits valued at approximately $375,000 were to be released, from which $21,000 was to be retained for payment to the Taxation Department leaving a balance to be utilised towards purchase of the Linsley Street property of approximately $344,000. Settlement followed accordingly and, on 2 May 1990, the mortgage was given to the Bank. In his affidavit, Michael Phontos put the matter on the footing that Mr Mason had been requested to provide $400,000 for the completion of the Wharf Road development and had refused to do so unless additional security was provided. The statement of claim also puts this claim, alleging that the Bank would not release the term deposits unless it received the mortgage of the Linsley Street property. It is alleged both in Michael Phontos' affidavit and in the statement of claim that the Phontos group was placed under economic duress both as to the purchase of the Linsley Street property and the completion of the Wharf Road development and that, under that duress, the mortgage of the Linsley Street property was executed. It is said that the Bank acted unconscionably in this matter. Michael Phontos gave evidence that the Phontos group could have lost its deposit for the Linsley Street project and that it did not have to proceed. He said that the problem was that the Bank was not going to provide any funding for the Wharf Road development unless it received additional security. I do not accept this evidence. I consider that the purchase of the Linsley Street property was driven by Peter and Michael Phontos and that the Bank did not desire the Linsley Street property to be purchased and did not have its overall position significantly improved by the transaction. I see neither unconscionable conduct nor duress in this matter. It was not unreasonable for the Bank to take the view that the Phontos group was unwise to enter into the new project. If the Phontos group had not done that, it would have had $200,000 or more left from the bank bills which it could have used in the completion of the Wharf Road development. This would have gone a long way to complete the development. As it was, a substantial sum of money was tied up in a property which the Phontos group were unable to develop as there were no funds available for its development. As Mr Havron said in a memorandum of 2 May 1990:- "The wisdom of purchasing a further development site could be challenged and certainly defies some logic." The transaction was not sought by the Bank. The Bank ultimately agreed to provide a further $400,000 for the Wharf Road development and to release the term deposits of $375,000 in exchange for a mortgage over the Linsley Street property which was acquired for $600,000. Perhaps the Linsley Street property was purchased as a lever to persuade the Bank to release the term deposits. That may well have been a factor. However, it was not a useful step. In my opinion, the conduct of the Bank in relation to Linsley Street was neither unfair nor unconscionable. (xiv) The $111,000 Dispute In his affidavit in reply, Michael Phontos raised a matter which he called "the $111,000 Error". Michael Phontos dealt with this matter over approximately 80 paragraphs. In substance, he alleged that Mr Stevens had made an $111,000 error in his calculations and that this had affected the release of funds to Parras in the many ways which were described in the affidavit. The issue had commenced with the bill of quantities which had been prepared by Harry Costas and given to Mr Stevens on 22 September 1989. The bill was not submitted as a claim but was used by Mr Stevens as a basis against which claims could be checked and funds released. This document, which has been referred to during the hearing as the "release record", set out the various categories of work and a value against each category to give a total of $1,419,000, which was the price in the building contract. Against each item was the value of the work performed to date, a total of $276,121.60. In a memorandum of 3 October 1989, Mr Stevens set out his analysis of the release record and how he proposed to record funding releases. He asked NMZ for confirmation that his proposed record of payments would be satisfactory. The memorandum stated, inter alia:- "Each category total has been reduced by the amount of work completed or the amount paid (whichever the greater). Attachments B & C relate to paid accounts from Shimcost [Mr Costas' company] & P & E Phontos Pty Ltd respectively. Current Breakup is as follows (Cents rounded out) Category No Description Category Total Less `Paid' Balance Avail 1 Demolisher 10000 7500 2500 2 Excavation 58915 51440 7475 3 Concretor 199461 31512 167949 4 Bricklayer 158742 23100 135642 ... Total 1418999 271897 1147102

Barton v Armstrong

At a glance

Court

Decision date

Before

Source

Judgment (15 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (11)

Cited By (3)