Cheah v HPL Developments Pty Limited & Ors

District Court of NSW|2010-05-31

CITATION: Cheah v HPL Developments Pty Limited & Ors [2010] NSWDC 221

Verdict and judgment for the plaintiff in the sum of $460,000 against the first, second and third defendants jointly and severally. DECISION: 2) The proceedings are adjourned to a date to be fixed to deal with issues of costs and interest. 3) My reasons are published.

CATCHWORDS: CONTRACT - Construction of terms - Whether funds provided to defendants by way of loan or investment - Obligations for repayment - Whether agreement or venture terminated - Claimed discharge of second and third defendants as guarantors - Consequence to third defendant of not reading agreement and its guarantee provisons prior to signing it

CASES CITED: Toll (FGT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165

Shaun Yin Thuan Cheah (Plaintiff) HPL Developments Pty Limited (First Defendant) PARTIES: Peter James Hubbard (Second Defendant) Warwick James Lindsay (Third Defendant) Secure Mortgage And Leasing Pty Ltd (Forth Defendant)

COUNSEL: Mr M Graham (Acting for the Plaintiff) Mr M Preece (Acting for the Second Defendant)

Hunter Family Law Centre Pty Limited (Acting for the Plaintiff) SOLICITORS: Peter and Murphy Solicitors (Acting for the First and Second Defendants) Third Defendant - Self Represented

1 Shaun Yin Than Cheah claimed to recover as a debt the sum of $460,000, interest and costs from HPL Developments Pty Ltd, the first defendant, Peter James Hubbard, the second defendant, Warwick James Lindsay, the third defendant and Secure Mortgage and Leasing Pty Limited, the fourth defendant.

2 There was no record on the Court file that the fourth defendant played any part in the proceedings and the plaintiff did not pursue this part of his claim.

3 The claim against the remaining three defendants was based on a commercial arrangement they entered into with the plaintiff in May 2005 for the development by the first defendant of a property at 41-43 Dixon Street, Coolangatta, Queensland. The second and third defendants were directors of the first defendant at that time.

4 The plaintiff provided to the first defendant the sum of $460,000 for the purposes of funding the development. His claim was that he lent this sum to the first defendant on the terms set out in an agreementi bearing the date 20 May 2005, as varied by a further agreementii dated 16 June 2005. The plaintiff claimed that the second and third defendants provided indemnities against loss and guaranteed repayment of these funds by the first defendant. He claimed to have demanded repayment of the funds without success.

5 The plaintiff's claim was quantified as follows:- Principal sum $460,000 Interest at 9.5% to 30.6.10 153,060 $613,060

In addition the plaintiff claimed interest continuing at the rate of $119.72 per day, costs and disbursements incurred in the litigation.

6 The defendants denied liability to the plaintiff on a number of grounds. They claimed that under the terms of the agreement the first defendant's obligation to pay any money to the plaintiff had not yet arisen. They claimed that the plaintiff invested, rather then lent, the funds for the purposes of the development.

7 The second and third defendants claimed that they were discharged from their obligations as guarantors because the plaintiff varied the terms upon which he secured finance to provide funds to the first defendant without their knowledge or consent.

8 The third defendant claimed that he did not understand that the transaction recorded in the first agreement imposed an obligation upon him to guarantee repayment of funds provided by the plaintiff.

9 The issues for determination were: 1 Did the plaintiff provide funds to the first defendant by way of investment or loan? 2 What were the first defendant's obligations in regard to repayment of the funds? 3 Was the agreement validly terminated? 4 Were the second and third defendants discharged from their obligations as guarantors? 5 Was the third defendant bound by the terms of the guarantee? 6 What were the plaintiff's rights to interest?

10 Much of the plaintiff's evidence was provided by way of affidavit and substantial parts of it were not disputed by the defendants.

11 The plaintiff said that in February 2005 he commenced discussions with Mr Pearce, a former director of the first defendant, since deceased. Their discussions concerned a loan from the plaintiff to the first defendant of $200,000 to be repaid with interest at 10%. The plaintiff declined to proceed with this proposition because he did not wish to risk the sum of $200,000 for a return of only 10% in interest.

12 In April 2005 he met with the second and third defendants, Mr Pearce and Ms Dunn, a director of the fourth defendant. They offered him and another potential lender, Mr Fong, 20% interest. The second defendant told the plaintiff that if he lent the first defendant $400,000 he would be paid $80,000 in interest after 12 months and a bonus of $20,000 at the end of the project. He would therefore receive a total of $100,000.

13 The plaintiff said he was prepared to lend money to the first defendant that he would obtain by borrowing the funds against the security of his home. He wanted his loan secured and guaranteed because he did not want to lose his house.

14 The defendants and Mr Pearce offered to assist him to obtain finance on the security of his house. He said the second and third defendants said to him: We will pay all the interest, the loan amount, broker charges, legal fees and all costs associated with setting up the loan. You don't have to worry about anything, we have arranged a broker who will organize everything and we will meet all costs. iii

15 The third defendant subsequently said: I don't cheat people, I am very fair. Everyone is getting a share in the project and I don't see why you should not get 20% share instead of taking 20% interest. The company will pay all your charges, interest and cost to take the loan. iv

16 Mr Pearce subsequently told him that the other parties agreed with this proposition.

17 At a meeting in the first week of May 2005 he was told that the directors of the first defendant would make arrangements to introduce him to a broker. They told him that it would be better to use the broker's lawyer rather than his own.

18 At a subsequent meeting it was agreed that he would borrow $460,000 so that $60,000 could be used by the first defendant to pay interest, any loan repayments and other charges in connection with the loan.

19 In the first week of May 2005 the plaintiff met with Mr Fleiter, lawyer, of Macquarie Legal Practice. He received a draft agreement by facsimile that, after further consultation with Mr Fleiter, was put before the parties at a meeting at the second defendant's home on or about 20 May 2005. The agreement included provision for the payment of penalty interest.

20 The plaintiff stated that all parties read the contract. Ms Dunn then read the agreement aloud in its entirety. It was signed by all parties and an amendment to clause 7(m) to add the words per annum was initialled.

21 Within one week of signing the first agreement the plaintiff became concerned that it did not precisely state that the guarantors would be required to pay to him $460,000 if the development failed. As a consequence, the second agreement was prepared and signed on 16 June 2005. The plaintiff said all directors of the first defendant read and signed the second agreement without asking questions.

22 The plaintiff then proceeded to complete the loan transaction with the assistance of Macquarie Legal Practice. The precise date of settlement of the loan was unclear but a letter to the plaintiff from Macquarie Legal Practice stated that $70,000 was paid into his account on 27 May 2005.

23 The first and second defendants provided no evidence to contradict any of the evidence of the plaintiff.

24 The third defendant relied on an affidavit dated 16 September 2009. He disputed some of the details of the plaintiff's evidence that were not relevant to the issues.

25 He also stated that his understanding of the transaction was that the plaintiff invested funds with the first defendant on the basis that he would get it back and be entitled to a share of the profits if the venture made a sufficient returnv. He said he did not remember any agreement that the first defendant would take responsibility for the plaintiff's loans. He denied that the conversations alleged by the plaintiff took place. He denied that the directors of the first defendant offered to assist the plaintiff by introducing him to a broker.

26 The third defendant agreed that a meeting was held in May 2005 but he did not remember the date of the meeting. He did not remember if the plaintiff was present at the meeting. He said it was a meeting of the directors of the first defendant such as was regularly held on a Tuesday night at which the various projects of the first defendant were discussed.

27 The third defendant denied that there was any discussion concerning the contents of the agreement or that it was read out loud. He said he did not read it. He thought he was signing the agreement as a director of the first defendant, having relied on Mr Pearce and Ms Dunn to negotiate its contents. He said he never intended to indemnify the plaintiff or provide any guarantee.

28 He took the same approach to the second agreement. He did not read it or ask for any explanation. He was told only that it amended the first agreement with the plaintiff. Again he thought he signed the second agreement as a director of the first defendant.

29 The third defendant confirmed that the development remained incomplete. At the time of swearing his affidavit he anticipated completion by May 2010. Photographsvi taken shortly prior to the hearing on 31 May 2010 indicated that the development was still not finalised.

30 The plaintiff claimed that he lent funds to the first defendant for the purposes of the development.

31 The second and third defendants rejected this claim and argued that the plaintiff invested funds with the first defendant that were to be repaid on completion of the development in accordance with the provisions of the first agreement.

32 In support of this argument I was referred to Recital D to the first agreement: The investor, at the request of the developer and the guarantors, has agreed to invest the investment funds with the developer to enable and assist the developer with the funding of the acquisition of the development of the property, in consideration for which the developer has agreed that the investor shall be entitled to and receive a share in the profits derived and arising from the venture.

33 In his submissions the second defendant referred to other provisions of the first agreement, including Clause 9, venture profits and losses; Clause 11, termination; Clause 12, indemnities; and Clause 13, guarantees. On the basis of these provisions it was argued that the plaintiff was not entitled to any repayment of the fund of $460,000 paid to the first defendant. Rather, he was entitled to 20% of the net profit of the development, calculated in accordance with the terms of the first agreement.

34 The submissions overlooked the following operative provisions of the first agreement: 1(1)(d) "the investment funds" means the funds to be advanced by the investor to the developer; 2(1)(e) The developer will pay on behalf of to [sic] the investor all the costs, including application fees, legal fees and establishment costs, plus interest and principal repayments (if any), as and when they fall due under the investors loan facility with La Trobe arranged by the investor in order to procure the investment funds or any substitute loan facility. 6(2) The investor covenants with the developer that he will, simultaneously with the execution of this agreement, advance the investment funds to the developer. 7(1) For the purpose of this agreement the expression 'venture costs' means all moneys paid or payable and listed hereunder incurred in respect of the venture namely: (h) All costs (including, but not limited to, stamp duty and other disbursements) associated with and fees and interest, including repayment of the principal loan amounts, payable under both the investor's loan facility and the finance facilities, excepting interest and costs arising from default by the developer which shall be borne by the developer; (m) penalty interest for late completion payable to the investor by the developer for late completion, being 9.5% pa from that date which is twelve (12) months from the date of this agreement until the day of payment of venture profits to the investor.

35 It was submitted by the second defendant that the intent of clause 2(1)(e) was difficult to determine and that the preferable interpretation of its meaning was that it did not guarantee the plaintiff the return of his funds. Instead the agreement provided for those investment funds to be dealt with as venture costs so that, if a 20% share of the profits was not available, then the venture costs would be paid in accordance with the priorities set out in clause 10 of the first agreement.

36 I did not accept that there was any ambiguity in these provisions of the agreement or that the interpretation contended for by the second defendant was available. The result of this interpretation was that the plaintiff would potentially be worse off if the development produced a profit than if it suffered a loss. Further, clauses 9 and 10 of the first agreement clearly provided for the net profit to be calculated after deducting venture costs, which by definition included the plaintiff's funds, expenses and interest and for proceeds of sale of the property to be applied to meet expenses of the development, including venture costs before payment of profits.

37 There could be no doubt therefore that the intention was that the amounts due to the plaintiff in respect of his funds were to be repaid before any calculation of the profits of the development.

38 As to the question of whether those funds were invested in the development or lent to the first defendant, the definition of investment funds referred to funds to be advanced by the plaintiff. This definition governed Recital D. Clause 6(2) obliged the plaintiff to advance the investment funds to the developer. The repayment by the first defendant of the principal loan obtained by the plaintiff and ancillary costs, interest, including penalty interest, and expenses was included as a venture cost in clause 7(1)(h) of the first agreement. Payment of the venture costs was provided for in clause 10 before distribution of any profit and the calculation of net profit was, in accordance with clause 9, to be arrived at by deducting venture costs from the gross sale price of the property.

39 I was left without doubt that, although the terms investor and investment funds were used in the first agreement, the funds provided by the plaintiff were provided by way of an advance or loan and, under the first agreement, were treated as a loan to be serviced by the first defendant and repaid in the same way as the finance facilities of $5,290,000. The result was that the plaintiff was entitled to repayment of the principal of $460,000 and payment of borrowing expenses and interest. His arrangement with the first defendant also allowed him to share profits to the extent of 20%.

40 This part of the second and third defendants' defence to the claim failed.

ISSUE 2 - The first defendant's obligations to repay the funds

41 The first and second defendants, whose submissions were relied upon by the third defendant, argued that clause 11(1) of the first agreement provided exclusively for the duration of the agreement between the parties and therefore for the duration of the venture. It was not disputed that the venture was not terminated on the grounds provided in clauses 11(1)(a) or (B). Clause 11(1)(c) provided that, unless earlier terminated in accordance with those provisions, the venture terminated 18 months after the date of the agreement or 20 November 2006.

42 For this reason the defendants argued that the plaintiff was not in a position to terminate the agreement. His course at that time, it was claimed, was to move to wind up the venture. In the absence of action to exercise this right, he waived his right to do so and acquiesced in the first defendant's failure to comply with the provisions of clause 11(3) concerning the action to be taken to value, realise and sell to the best advantage the assets of the venture and account for the proceeds in accordance with the terms of the agreement.

43 The defendants argued that since the venture was ongoing the plaintiff was not entitled to repayment of the $460,000 he paid into the venture. He was entitled only to an account in writing in accordance with clause 11(3); after the sale of the development property, a share of profits, if any, up to 20% of that profit; and distribution of the proceeds of sale in accordance with the priorities established by clause 10. Only if there was a short fall in funds available to repay the plaintiff could he rely upon the indemnity provided for in clause 12(1) and the guarantee provided for in clause 13(1).

44 It was claimed that clause 2(1)(e) was inconsistent with the balance of the first agreement in that it provided for payment of all amounts, including principal repayment, payable in respect of the La Trobe loan as and when they fall due. The second and third defendants claimed that this provision should be considered in conjunction with clause 10 so that the amounts payable to La Trobe should be dealt with in accordance with the priorities listed in that clause.

45 I did not accept these submissions for the following reasons.

46 Clause 2(1)(e) of the first agreement contained a specific provision for payment of the plaintiff's obligations to La Trobe as and when they fell due. Venture costs were listed in clause 7. They included expenses that necessarily were required to be met as the development proceeded. Examples of the costs listed in that clause were: the purchase price of the property, legal fees, stamp duty, rates and taxes and insurance premiums. These were not expenses of the type that could be deferred pending completion of the development and realisation of the assets of the venture.

47 Clause 10(1)(d) provided for the payment of venture costs outstanding and then due and payable before any profits might be distributed. This provision clearly contemplated that venture costs would be paid for as and when they fell due. It could therefore only be interpreted as applying to so much of the La Trobe loan as was required to be paid to obtain discharge of the finance facility entered into with the plaintiff if the loan was not repaid when it fell due.

48 Further, the first defendant paid the fees and costs of the plaintiff's securing the loan facility from La Trobe and paid interest up to the sum of $60,000 in accordance with the provisions of the loan agreement. It was apparent therefore that it clearly understood that it was the first defendant's obligation to meet these payments in accordance with the terms of the loan agreement. It was not suggested that the first defendant expected the plaintiff to meet those obligations and await the termination of the venture for reimbursement.

49 The argument that the second agreement supported the second defendant's interpretation of the first agreement was clearly untenable. The second agreement confirmed the obligation contained in clause 2(1)(e) of the first agreement to pay the plaintiff's costs, including application fees, legal fees and establishment costs, as and when they fall due. There could be no suggestion that this provision excused the first defendant from meeting principal repayments as they fell due.

50 Nor could this provision add any weight to the second defendant's argument that these expenses were to be met only after the development was completed, the property sold and venture costs ranking higher in priority paid.

52 I accepted that the venture self terminated on 20 November 2006 and that the purported termination of the venture by solicitors acting on behalf of the plaintiff in December 2006 was ineffective.

53 This meant that although the venture terminated on 20 November 2006 the agreement itself was not terminated. There were provisions in the agreement that governed the steps to be taken when the venture terminated and, as at the date of the hearing, those provisions had not been complied with.

54 It followed that those provisions continued to apply to the calculation of the profits, if any, of the venture and to the obligation to pay the plaintiff 20% of those profits.

55 He made no claim in these proceedings to any part of the profits of the venture and I therefore considered this aspect of the transaction no further.

ISSUE 4 - Discharge of the obligations of the guarantors

56 The second and third defendants argued that they were discharged from their obligations as guarantors on two bases. The first was that the plaintiff varied the terms of the loan facility without their consent. The second was that the plaintiff, by failing to take action to wind up the venture after it was terminated in accordance with the terms of clause 11(1)(c) of the first agreement, reached a binding agreement with the first defendant to extend the time for the performance of the first defendant's obligations.

57 The first defendant took no issue with the date of the first agreement. The second and third defendants claimed that the first agreement was signed on or about 10 May 2005 and that after that date the plaintiff without their consent varied the terms of his loan agreement with La Trobe Investment Management Australia Pty Ltd.

58 On this basis they claimed that they were discharged from their obligations under the indemnity and guarantee provisions of the first agreement.

59 I accepted the principle of law, as set out in paragraph 55 of the submissions provided on behalf of the second defendant, that a guarantor will be discharged from obligation when the principal and creditor vary the terms of the guaranteed contract without the guarantor's consent.

60 The second and third defendants claimed that the terms of the loan made to the plaintiff were varied from a two year to a one year term and from a variable to a fixed interest rate.

61 There were documents in evidence that confirmed that between 10 May 2005 and 13 May 2005 the terms upon which the plaintiff borrowed funds from La Trobe were altered. An application for mortgage financevii dated 29 April 2005 sought a loan of $480,000 at a preferred interest rate of 7.75% variable for a term of two years. A loan offerviii dated 10 May 2005 made by La Trobe offered to provide funds in the sum of $460,000 for one year with interest at 7.61% fixed. The offer was accepted by the plaintiff on 12 May 2005 and an amended letter of offerix was issued by La Trobe on 13 May 2005.

62 The plaintiff denied that he initially intended to seek a two year loan period but agreed that he changed his initial requirement from a variable interest rate to a fixed rate. He agreed that he did not inform the second defendant of this change.

63 It was established therefore that there was at least one change to the intended loan transaction between the plaintiff and La Trobe between 10 and 13 May 2005.

64 The date handwritten into the first agreement was 20 May 2005. Although they claimed that it was signed on or about 10 May 2005, the second and third defendants provided no evidence to support that claim. The third defendant said that the first agreement was signed at a regular Tuesday meeting of the directors of the first defendant. It was apparent from other materialsx before the Court that minutes of these meetings were recorded. They produced no minutes for any meetings held in May 2005. I have inferred that the minutes of the meetings held in May 2005 would not assist the defendants in establishing that the first agreement was signed on 10 May 2005.

65 In the absence of evidence to the contrary, I find that the first agreement was signed and became effective on 20 May 2005.

66 The result of this finding is that whatever changes were made to the loan transaction between the plaintiff and La Trobe, they took place at a time when no agreement existed between the plaintiff and the first defendant and there were no obligations to be guaranteed by the second and third defendants. Those obligations came into effect when the first agreement came into effect on 20 May 2005. There was no evidence to suggest that they were varied during the term of the first agreement after that date.

67 There was evidence that indicated clearly that the plaintiff entered into no binding agreement to extend the time for performance of the first defendant's obligations under the first agreement. As early as June 2006 the plaintiff instructed solicitors to seek repayment of his funds. Further demands were made on the first defendant in December 2006 and on the first defendant and the guarantors in December 2007.

68 This aspect of the defence of the second and third defendants therefore failed.

69 The third defendant claimed that he was unaware that he entered into any arrangement to provide a personal guarantee of the first defendant's obligations to the plaintiff under the first and second agreements.

70 He acknowledged that he signed both agreements at meetings of the directors of the first defendant. He claimed that the terms of the agreements were not explained to him, they were not read out and their contents were not discussed. He said the first agreement was tabled at a meeting of the directors by Trudy Dunn, an officer of Secure Mortgage Leasing Pty Ltd, as Shaun's agreementxi that they simply needed to sign. The second agreement was tabled at a subsequent meeting on the basis that it dealt with amendments to the agreement with the plaintiff.

71 The third defendant said he did not read either of the agreements. He believed that he signed them as a director of the first defendant and not in his personal capacity.

72 I rejected this defence for a number of reasons.

73 It was not pleaded in the third defendant's amended defence to the claim filed on 18 March 2010.

74 The third defendant was an architectural draftsman. He agreed in cross examination that he had been involved in many other property developments over many years both in New South Wales and in Queensland. He denied that he was involved in any of the financing arrangements for these developments. His involvement in these developments, however, established that he was a person experienced in commercial transactions. In those circumstances and on the authority of Toll (FGT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, I did not accept that he could escape liability under the guarantee on the basis that he failed to read the agreements before he signed them.

75 Further, the third defendant's affidavit evidence stated: 27. I did not object to not reading the agreement nor did I question its contents as I was relying on Robert Pearce and Trudy Dunn who I believed had negotiated the agreement in the best interests of everyone involved and that they were satisfied with the agreement. Trudy Dunn had previously arranged for the First Defendant many loans to assist with its various projects and there had never been any issue or difficulty arising out of those arrangements and I therefore trusted her entirely in these dealings.

76 This paragraph suggested that the third defendant relied upon Mr Pearce and Ms Dunn entirely and that he did not question their judgment concerning the interests of the parties. In those circumstances, even if I accepted that he was not told of the terms of the guarantee, I considered it unlikely that, if fully informed, he would have refused to sign the documents.

77 Finally, the second defendant put no evidence before the Court and no evidence was called from Ms Dunn. I inferred that their evidence concerning the circumstances in which the agreements were signed would not assist the third defendant in this aspect of his defence.

78 I find the third defendant liable on the guarantee contained in the first agreement.

79 The plaintiff claimed interest at the rate of 9.5% per annum on the unpaid principal sum. This claim was based on clause 7(1)(m) of the first agreement.

80 The claim for interest was not addressed by any of the parties in their submissions.

81 On reading clause 7(1)(m) of the first agreement, it appeared to me that there was available an argument that the penalty interest to be paid under that clause related to the overdue payment of venture profits and not the failure to repay the moneys borrowed by the plaintiff from La Trobe.

82 I considered that the first defendant's obligation to pay interest on the La Trobe loan was provided for in clause 2(1)(e) of the first agreement.

83 I propose to adjourn the proceedings to allow the parties to address me further on this issue.

84 Verdict and judgment for the plaintiff in the sum of $460,000 against the first, second and third defendants jointly and severally.

85 The proceedings are adjourned to a date to be fixed to deal with issues of costs and interest.

i Exhibit A ii Exhibit B iii Plaintiff affidavit, 23.4.2009, [21] iv [22] v Third defendant affidavit 16.9.09, [18] vi Exhibit 1D-1 vii Exhibit 2D-1 viii Exhibit 2D-2 ix Exhibit C x Exhibit D xi Third defendant's affidavit 16.9.2009, [25]

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