Capital Securities XV Pty Ltd (formerly known as Prime Capital Securities Pty Ltd) v Calleja

Discretionary rejection pursuant to s 135

1. The second basis upon which the primary judge excluded the file notes was in the exercise of discretion under s 135 of the Evidence Act. Her Honour stated that the file notes contained no information prior to 1 June 2014. That reflects the limited nature of the subpoena to which they were produced in response. Her Honour also stated that the omission included a "critical matter to a fact in issue", being the agreement reached between Ms Calleja and Baycorp for payment of $500 per week. Mr Young said that this was neither a fact in issue, nor was it a critical matter. No submissions were made in response to that submission, which I would accept.
2. The reasons of the primary judge on s 135 were confined to explaining why there was the possibility of unfair prejudice to Ms Calleja flowing from the inaccuracies and incomplete nature of the record. I respectfully disagree. I do not regard the reference to a payment being paid by the debtor as inaccurate, let alone prejudicial. There is no prejudice in the fact that most references to Ms Calleja's telephone number omit a digit. I would not infer prejudice from the possibility that the document has been altered.
3. Further, a determination of the risk of unfair prejudice required attention to the steps, if any, taken between the time when Prime sought to rely on the file notes, and the time when the objection was taken. That is a period of at least a fortnight, and included two working days (Monday 30 October and Friday 4 November) when the trial did not proceed. There is nothing to suggest that Ms Calleja's lawyers availed themselves of any of the procedures authorised by Part 4.6 of the Evidence Act. Section 167 entitled reasonable requests to be made about the Baycorp file notes, including the particular representations which were claimed to be outside the hearsay rule, or the circumstances in which belated production had been secured. The sanctions for non-response included an order that the documents not be admitted: s 169(1)(c). Or, more directly, Ms Calleja's solicitor could have written or spoken with Baycorp's General Counsel and inquired how the documents had been produced, and if it was perceived to be necessary, could have sought leave to issue a further subpoena to Baycorp.
4. But there is a more fundamental reason why this aspect of the decision cannot be upheld. The question of the risk of unfair prejudice is only one of the three matters to which s 135 requires the Court to have regard.
5. Section 135 is a much more complex provision than, say, s 136, which authorises orders limiting the use of evidence merely upon the court being satisfied of a risk of unfair prejudice. In order to apply s 135, it was necessary for the primary judge to consider two further aspects: (a) to make an assessment of the probative value of the evidence and (b) then to assess whether that probative value was "substantially outweighed" by the danger that the evidence might be unfairly prejudicial. With respect, the reasons do not disclose any process of analysis answering what was required in these second and third steps under s 135. The omission is substantially the same as that identified by this Court in Australian Securities and Investments Commission v Rich [2005] NSWCA 152; 218 ALR 764 at [163] and James Hardie Industries NV v Australian Securities and Investments Commission [2009] NSWCA 18 at [31]-[32]. Although Ms Obrart contended to the contrary, it is plain on a fair reading of the reasons that this did not occur. In order to have done so, it would have been necessary for the primary judge to have proceeded, contrary to her view, on the basis that the documents were business records containing representations which were not excluded by the hearsay rule, to have identified the probative value of those representations in light of the issues between the parties, and then asked whether that was substantially outweighed by the risk of unfair prejudice.
6. For all those reasons, the exercise of discretion under s 135 has miscarried.

Utility

1. Ms Calleja's final submission was that even if the Baycorp file notes were wrongly rejected, it did not affect the outcome of the trial.
2. It will be recalled that hotly in contention between the parties was whether Ms Calleja had authorised Prime, inter alia, to disburse funds to Baycorp. Further, the primary judge found that Mr and Ms Calleja were honest witnesses and made serious adverse credit findings of all of the witnesses called by Prime save for Ms Smith.
3. The records for 20 February 2015 reproduced above provide a powerful basis for concluding that Ms Calleja authorised Prime to pay $60,000 to be provided by it to settle in full her company's debt to Baycorp. If, as the file note records, Ms Calleja rang Baycorp directly and said that she wanted to "sif account, offered 60k as full and final" and "explained that she is taking out a loan of $360k only drawing out $150k", that is evidence that Ms Calleja instructed Prime at around the same time to "settle in full". It is powerful evidence insofar as it is approximately contemporaneous, and has been recorded by a non-party. And it is entirely consistent with the instructions given by Prime to its solicitor at Gadens, copied to a Calleja PJC email address, at 11.17am on the same day, referring to earlier discussions and confirming that "Baycorp are prepared to accept $60,000 as full and final settlement..."
4. Ms Calleja gave different recollections of these events in her affidavits. In her first affidavit, sworn 29 September 2016, which may have been prepared before the email dated 20 February 2015 had been brought to her attention, she said: "In or around March 2015, I received a phone call from Baycorp to say that if we paid the loan out that day, they would accept $60,000 in full and final settlement of the debt. I told Baycorp that the company did not have the funds available. I did not know that the plaintiff was going to pay this debt from the loan facility and did not authorise this payment."
5. In her affidavit sworn 13 February 2017, Ms Calleja gave the following evidence: "Between 16 February 2015 and 20 February 2015, I can't recall exactly which day, I received a telephone call from Baycorp. I had a conversation with a lady in words to the following effect: Baycorp representative: Hi Liz, I'm calling about your company's debt to Baycorp. There's around $65,000 still owing. but if you pay the full amount today we'll reduce the total payable to $60,000. Me: Thanks, but the Company just doesn't have that kind of money at the moment, so I won't, be able to do that. I have been shown the email exhibited at page 139 and 140 of exhibit PS-1 to which I was copied. I don't have a specific recollection of reading that email at the time. I assume I probably read it. I wasn't asked by anybody from Gadens or Prime Capital whether I agreed to pay out the debt to Baycorp and I had already told Baycorp that the Company was not in a position to pay the debt in full, so I do not recall thinking anything further of it. My intention was to continue with the instalment arrangements with Baycorp which had been in place since 2010 and there was no need or ability in the company to pay the Baycorp debt out in one go."
6. The Baycorp file note of 20 February 2015 is inconsistent with both accounts given by Ms Calleja. The inconsistency goes not merely to credit, but also to a large issue in the case, namely, whether Prime was authorised to disburse funds to Baycorp as occurred.
7. Ms Obrart submitted that even if the file note had been admitted into evidence, the primary judge would still have found Prime's witnesses to be discreditable and her witnesses to be honest and credible. It is of course possible, if the file note were admitted, that Ms Calleja might have been accepted as a generally creditable witness, whose recollection was faulty in this respect, or that in some way the file note was inaccurate.
8. But it cannot be concluded that the rejection of the Baycorp file notes would not have affected the outcome, either on the narrow issue of authorisation to disburse funds to Baycorp, or the more general question of the assessment of Ms Calleja's testimonial evidence. If the file notes had been in evidence, then it would have been necessary for the primary judge to have had regard to their probative value, bearing in mind the possibility that they (no differently from any other business record) were incomplete or incorrect, in assessing whether or not Ms Calleja did give instructions to disburse some $60,000 to Baycorp to discharge her company's indebtedness.
9. The primary judge found at 366 and (16) that "Neither Ms Calleja or Mr Calleja or Mr Bugeja gave authority, or were aware of the use to which Prime intended to put the 'loan monies'" and that when making those payments "Prime disregarded entirely the wishes and interests of the borrower". If the file notes had been in evidence, it would not have been open to make those findings without having regard to them, and explaining how the finding was reconciled with the file note.
10. More generally, in order to assess the credibility of Ms Calleja, it would have been necessary to weigh Ms Calleja's affidavits and her evidence in cross-examination against what was recorded in the file notes. Still further, there would or at least may have been a consequential impact upon the assessment of the credit of the witnesses called by Prime.

Conclusion on grounds 1-3

1. Error is established in the interlocutory ruling on 6 November 2017. The error was one which affected the final result, as that phrase was used in Gerlach v Clifton Bricks Pty Ltd (2002) 209 CLR 478; [2002] HCA 22 at [6], in the sense that it has not been demonstrated that the erroneous exclusion of the file notes could not affect the evaluation of the matters in issue and also matters relating to credit. It follows that the appeal must be allowed, the orders made by the primary judge set aside, and a new trial ordered.
2. The Baycorp file notes are business records. The representations to which Mr Young pointed during the appeal were those to the effect that Baycorp had threatened the possibility of litigation, and the conversation on 20 February 2015 reproduced above. Those representations fall within s 69(2), and to the extent that Prime seeks to rely upon them for a hearsay purpose, the hearsay rule does not apply.
3. The Baycorp file notes should not have been excluded under s 135. No practical danger of unfair prejudice was made out, and in any event, the documents were highly probative.
4. The precise basis on which the documents are tendered at a retrial will be a matter for the parties. If Prime wishes to go further than has been set out above, then it should advise the respondents in a timely fashion of the representations on which it seeks to rely. That would entitle the respondents to consider their position, including by exercising the procedures under Division 4.6 of the Evidence Act.

Remaining grounds of appeal

1. None of the other grounds of appeal can affect the orders I propose. However, some of those grounds, which are removed from the assessment of credibility of the witnesses, may be addressed.

Ground 4 - refusal of Prime's further subpoena

1. Ground 4 was a challenge to the dismissal of Prime's application for short service to issue a subpoena addressed to Baycorp the following day. However, in circumstances where the inevitable consequence of permitting it to do so would have been the adjournment of the hearing into the following year, in litigation which had already consumed more time than had been allocated, and in circumstances where Prime had permitted its case to close without resolving the objection until the second last day of the trial, I would have concluded that there was no appellable error on the part of the primary judge in the exercise of her discretion having regard to s 56 of the Civil Procedure Act 2005 (NSW). In any event, as the purpose of the proposed subpoena was to fill a gap in the chain of title held necessary to prove the authenticity of the business records, it is now shown to have been otiose.

Grounds 5 and 15 - establishing the loan agreement

1. Grounds 5 and 15 were directed to challenging the conclusion at [323] and elsewhere that, with the exception of the second page 31 (which was the page with the "20418014.1 ARA EVW" footer), Prime had not established that the loan agreement in evidence as exhibit D was the loan agreement signed by Mr and Ms Calleja on 12 February 2015. The primary judge accepted Ms Calleja's submission that Prime "has not discharged the onus of proving that a document in the form of this document was entered into ... by the parties and formed a final and binding agreement". I respectfully consider that this aspect of the fact finding by the primary judge has miscarried.
2. The version of the loan agreement on which Prime relied was tendered by it without objection by Ms Calleja at the commencement of the trial. Indeed, although the form of the document contained in the appeal books is that of an unexecuted undated draft, the Court's file discloses that Ms Calleja verified her company's Further Amended Statement of Claim, on 2 November 2017, which was filed on that day, and that pleading positively asserts that Calleja PJC agreed to a loan agreement containing clauses 2.1, 2.3, 3.1, 5, 6.5, Schedule 1 and Item 10 (see paragraphs 3(a), (c), (e) and (f)). Those terms were material to Ms Calleja's case. For example, it was an essential element of the case that the disbursements were unauthorised to establish that the purpose of the loan was to acquire the three semi-trailers.
3. True it is that Exhibit D comprised the originals of the loan agreement together with other documents involved in the refinancing. Exhibit D was tendered by Ms Obrart with a view to establishing that the second page 31 was printed on different quality paper. As much may readily be accepted: it is a paler shade of white and less translucent to the unassisted eye than the balance of the documents. It also has a different footer and has never been stapled.
4. It may readily be inferred that there were at one stage two copies of the loan agreement (and, quite possibly, two copies of the balance of the documents involved in the refinancing) prepared by Gadens, one bearing a footer "2041801.1 ARA ARA" and the other bearing the footer "20418014.1 ARA EVW". As much is tolerably clear from the two letters sent by Ms Anthony at Gadens on 5 December 2014 and 2 February 2015. But I do not consider that there is a proper basis for the inference that the document executed by the Callejas was in any materially different form from that which had been tendered without objection. There was no testimonial or documentary evidence supportive of that proposition. That absence may in part be a consequence of the fact that no such case had been pleaded by Ms Calleja, and indeed her pleading, to the extent that it identifies the clauses in the loan agreement, is inconsistent with that being the case. That is to say, it was common ground between the parties that an agreement was entered into, and there was only one candidate for the form of that agreement in evidence, which was tendered without objection and which was consistent with what Ms Calleja had verified when updating her pleadings on the third day of the trial.
5. The question was not whether Prime had established beyond reasonable doubt the written terms of the loan facility. On the civil standard, in light of all of the documents and the matters put in issue by Ms Calleja, the only finding available was that the terms were reflected in the "ARA" document in the Court Book.
6. None of the foregoing is to deny that it is highly unsatisfactory that Prime appears to have produced a composite document from two different originals. But the fact that Prime appears to have done so does not sustain the inference that there was some form of the Loan Agreement different from that contained in the Court Book. I do not think that this is a case where it can be said that the plaintiff has failed to establish the terms of the written agreement to which Ms Calleja bound both herself and her company. Were it necessary to do, I would have regarded these grounds as made out. That is less significant in this litigation than it may be in other cases, because it was common ground that Prime was bound to roll over the facility at least in some circumstances after it had expired, even though that was not found in the document.

Grounds 13, 14 and 29 - legal advice

1. These grounds turned in part on the proposition that the loan agreement actually executed was different from that as to which Ms Smith advised. It follows from what has been said in relation to grounds 5 and 15 that the respondents had the benefit of advice from Ms Smith not to enter into the transaction.

Grounds 19, 26 and 27 - matters outside the scope of the pleadings

1. Grounds 19, 26 and 27 were directed to an "unpleaded asset lending case" and the findings made by the primary judge as to the speed with which Prime commenced proceedings to enforce its security. Their gravamen was a challenge to the reasoning of the primary judge at [361]-[364] explaining her Honour's conclusion that "nothing about this transaction was about fair dealing" and including findings to the effect that neither Mr Ainsworth nor Mr Scanlon was concerned about the capacity of Calleja PJC to repay the loan and were unduly speedy in seeking to enforce the security. It was said that the allegation that Prime's conduct involved "asset lending" was not pleaded as it should have been and the primary judge was not permitted to make findings about a matter which was "never an issue in the proceedings". The same was put as to the speed of enforcement.
2. In light of Prime's success on the earlier grounds, these grounds need not be determined finally. They are, with respect, more complex than appears from the parties' submissions.
3. First, a remarkable feature of the history is that, in the present case, notwithstanding the extremely high interest rate of the refinancing, the borrower did pay the entirety of the interest throughout the period of the loan (indeed, hundreds of dollars more than the monthly amounts Prime advised should be paid), except for roughly a fortnight in the twelfth month, which, according to Prime, brought it into default such as to disentitle it from a rollover which Prime was otherwise bound to provide.
4. Secondly, contrary to Ms Obrart's submission, there is no mention in the pleadings of Prime being prepared to lend on a 12 month term in circumstances where it knew or believed that the principal could not be repaid.
5. Thirdly, it was accepted that Prime was under some obligation to roll over the facility, for at least a further 12 months assuming it was in "good order", notwithstanding the absence of any such obligation in the loan agreement.
6. Fourthly, in her written submissions supplied shortly in advance of the hearing, Ms Obrart had, in a section directed to the "Application of principles concerning guarantees to the present case", and under the subheading "Contracts Review Act and the guarantee", said: "To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests: Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 …".
7. Contrary to Mr Young's submission, I would conclude that Ms Calleja was thereby seeking to include, as one of the matters on which a finding of unjustness (within the meaning of the Contracts Review Act) might be made, that Prime had engaged in lending money without regard to the ability of the borrower to repay.
8. Each party opened its case very briefly, with the written submissions having been read by the judge and regarded by the parties as having identified the issues.
9. Fifthly, Ms Obrart proceeded to cross-examine Prime's witnesses, including as to steps they took at the time of the refinancing to consider whether the loan could be repaid in full after 12 months. This occurred without objection. Ms Obrart also was permitted to ask Mr Scanlon, without objection, why proceedings had been commenced so quickly when the loan had basically been maintained. Prime's solicitor served a notice of default under cover of letter dated 11 May 2016 giving until 14 June to remedy the defaults. However, Prime commenced proceedings for possession on 20 May 2016, more than three weeks before the time it had stated for remedying the defaults had expired. It is not clear when the originating process was served, but according to Prime's own document, Ms Calleja continued to make substantial repayments of interest in April, May and June 2016. Mr Scanlon's response to the haste was that legal proceedings "take a very long time", and that "my experience is that people are very slow and make these processes go a very long time so we have to work quickly at the start to get people to take care of their affairs". He added that if clients paid late, that impacted upon Prime's ability to obtain funding, and concluded: "I accept that the notices went out quite quickly after the expiry in response to the fact that our experience here is that people don't take action and these processes take so long."
10. That answer does not explain why Prime commenced litigation weeks before the time specified in its notice issued pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW) had expired.
11. Sixthly, in assessing the credibility of Prime's witnesses, there could be no error by the primary judge in evaluating their testimony in answer to those questions which were asked without objection. To the extent that these grounds challenge the propriety of the primary judge making findings, I would reject them.
12. Seventhly, it is true that in closing submissions, both in chief and in reply, Mr Young insisted that questions of asset lending and the speed of enforcement went outside of the pleadings. That was factually correct. The submission in reply was in response to extensive submissions by Ms Obrart directed to this issue.
13. Eighthly, there is a little artificiality in submissions to the effect that one aspect of Prime's conduct was or was not "in issue". The Contracts Review Act required the Court to have regard to "the public interest and all the circumstances of the case": s 9(1), and authorised the Court to have regard to the parties' conduct "in relation to the performance of the contract since it was made": s 9(5). The ASIC Act likewise required an assessment of the quality of Prime's conduct "in all the circumstances": s 12CB(1), and authorised regard to be had to conduct after the contract had been entered into: s 12CC(2)(j). Irrespective of the state of the pleadings, in the circumstances of this litigation there is to say the least much to be said for the proposition that the Court was not able to disregard the circumstances attending the enforcement of Prime's security.
14. It is not necessary to express a concluded view as to whether this is a case where the parties have chosen to disregard the pleadings and to fight the case on issues chosen at the trial: see the authorities mentioned by Bathurst CJ in Krnjulac v Lincu [2015] NSWCA 367 at [15]. In circumstances where written documents were provided by way of opening, which made it plain that Ms Calleja was relying, in part, upon what her counsel described as the unjustness of "asset lending", where the speed of enforcement following the relatively minor default in April 2016 in relation to an otherwise well-serviced loan was so remarkable, and where the cross-examination proceeded accordingly and without objection, and the only times that it was said that this was outside the pleadings were in closing address, it is easy to see why the primary judge approached the task in the way that her Honour did.

Ground 35 - failure to find default

1. Prime contended in writing, but did not elaborate orally, that the primary judge should (inevitably) have found that the respondents were in default at the end of the 12 month period. I do not accept this submission. The real question is whether the account was in "good order" when the facility expired. When precisely the facility expired is unclear, having regard to the fact that the large majority of the drawing down not on 17 April 2015, but in May. Further, it is difficult to say what the effect of that would be upon the interest calculations. It is clear that on most occasions, the respondents paid each month hundreds of dollars more than the amount they had been told to repay. Prime took a different view. Prime capitalised the $2,000 fees it imposed, which had the effect of increasing the amount needed to be paid each month - but the Court was told that it never advised the Callejas of any increased monthly payment that was required, let alone what the current position of the account was. A recurring theme in the evidence seems to be that there was delay in Prime providing a record of the day to day status of the account.
2. I would not conclude that a finding that the account was not in "good order" in April or May 2016 was inevitable; far from it.

Grounds connected with witnesses' credibility

1. Grounds 7, 8, 10, 11, 17 and 18 were challenges by Prime to the unfavourable credibility findings made by the primary judge in relation to Mr Ainsworth and Mr Scanlon, and the favourable credibility findings in relation to Mr Bugeja and Mr and Ms Calleja.
2. All of these findings were based upon lengthy cross-examination, and in circumstances where, to put the matter neutrally, there were irregular aspects of the documentation prepared by Prime referred to above. The findings were made without regard to the Baycorp file notes. There is no utility in reviewing the process, and it is not possible to do so without running the risk of expressing views which will distract from what must occur at the retrial.
3. In a similar category is the challenge in ground 21 to a rejection of part of Mr Scanlon's evidence as to the absence of documentary records within Prime, a challenge in grounds 12, 16 and 19 to the findings as to the oral representations said to have been made by Prime, a challenge in grounds 20 and 22 to the findings about authority (noting Prime's concession that any authority it had was oral) and a challenge in ground 25 to the rejection of Prime's (unpleaded) case of election or affirmation (which turned on the state of mind of Mr and Ms Calleja when they learned of the disbursements). Those findings are heavily dependent upon credibility. So too were the remaining grounds. I do not consider it is appropriate to address them any further.
4. Grounds 28, 30, 31, 32, 33 and 34, which were directed to the appropriate orders, likewise depend upon evaluative judgments which were informed by an assessment of contested primary facts and the witnesses' credibility. However, it should be noted that, as Ms Obrart ultimately conceded, it is not possible to defend orders which gave to Ms Calleja the benefit of both the amounts paid in interest and fees, and also the rent paid for trailers over the period.
5. Finally, Prime challenged the order for indemnity costs. Ms Calleja sought to defend the order by a notice of contention. It is unnecessary to address any of these submissions. The costs discretion was squarely informed by the same considerations which have been mentioned above, and will have to be re-exercised in any event.

Conclusion and orders

1. I have concluded that there was material error in the rejection of the tender of the Baycorp file notes. The consequence is that the appeal must be allowed, the orders set aside, and there be a retrial.
2. I do not consider that there is scope for relitigating the terms of the loan agreement signed by Ms Calleja, or the advice received from Ms Smith in relation to it.
3. I propose that the appeal be allowed, the orders (including the orders rejecting the admission of the Baycorp file notes) be set aside, and in lieu thereof, the proceeding be remitted for a further hearing. Having sought to defend all aspects of the primary judge's decision (save for a concession as to the orders made on the second day of the appeal), the respondents must pay Prime's costs of its appeal, but should have a certificate under the Suitors' Fund Act 1951 (NSW). The costs of the first trial are to fall within the discretion of the judge who hears the retrial: see Hatziandoniou v Ruddy (No 2) [2015] NSWCA 277.
4. The orders I propose are:
5. Appeal allowed.
6. Set aside the orders made on 6 November 2017 refusing to admit the documents which now comprise pages 1099-1110 of the Blue Book ("the Baycorp file notes"), orders 1-12 made on 6 December 2017, and order 2 made on 19 December 2017, and in lieu thereof, remit the proceedings for a retrial, that remitter to include the costs of the first trial.
7. Note that (a) the previous representations contained in the Baycorp file notes, insofar as they include representations as to the possibility of litigation and the offer by Ms Calleja to pay $60,000 to Baycorp from funds borrowed from Prime, fall within s 69(2) of the Evidence Act 1995 (NSW), and (b) the form of the written Loan Agreement executed by the parties is not in issue.
8. The respondents to pay the appellant's costs of the appeal, but to have a certificate under the Suitors' Fund Act 1951 (NSW).

Amendments 26 February 2018 - Coversheet - name of Australian Securities and Investments Commission Act 2001 corrected; citation for National Australia Bank Ltd v Rusu (1999) 47 NSWLR 309; [1999] NSWSC 539 corrected.

[89] "Tennant and Porter JJ" corrected to "Tennent and Porter JJ"

[92] quoting Hope JA, correct "form and content" to "form and contents"

[99] correct citation for National Australia Bank Ltd v Rusu (1999) 47 NSWLR 309; [1999] NSWSC 539 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 26 February 2018