Commonwealth Bank v St Gregory's Armenian School

LEGISLATION CITED : Uniform Civil Procedure Rules 2005

Adams v Kennick Trading (International) Ltd & Ors (1986) 4 NSWLR 503 Cohen v McWilliam (1995) 38 NSWLR 476 Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226 Cuttle v Brandt (1947) 64 WN (NSW) 96 CASES CITED : Davies v Pagett (1986) 10 FCR 226 Evans v Bartlam [1937] 2 All ER 646 Moratic Pty Ltd v Lawrence James Gordon & Anor [2007] NSWSC 5 Vacuum Oil Pty Limited v Stockdale (1942) 42 SR (NSW) 239 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387

PARTIES : Commonwealth Bank of Australia (Plaintiff) St Gregory's Armenian School Inc (Defendant)

COUNSEL : DF Villa (Plaintiff) MF Holmes QC (Defendant)

SOLICITORS : Gadens Lawyers (Plaintiff) Fraser Clancy Lawyers ( Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION POSSESSION LIST

2009/296139 COMMONWEALTH BANK OF AUSTRALIA v ST GREGORY'S ARMENIAN SCHOOL INC

JUDGMENT (Set aside default judgment) 1 HER HONOUR: By notice of motion filed 23 December 2009, the defendant seeks an order that default judgment entered against the defendant on 14 December 2009 be set aside. On 15 January 2010 the plaintiff filed a notice of motion but it is not being pressed. 2 The plaintiff is the Commonwealth Bank of Australia (ACN 123 123 124) ("the Bank"). The defendant is St Gregory's Armenian School Inc ("the School"). The School relied on the affidavit of Chris Clancy sworn 23 December 2009, two affidavits of Mark Fraser sworn 21 January 2010 and 8 February 2010, two affidavits of Michael Paschal Ghougassain sworn 21 January 2010 and 23 February 2010 and the affidavit of James Grellman sworn 25 February 2010. The Bank relied on the affidavit of Robert Charles Ralston sworn 13 January 2010 and the affidavit of Michael Blacker sworn 24 February 2010. Background 3 These background facts are largely reproduced from the defendant's counsel's submissions and chronology. 4 In 1986, the school purchased land with the aim of establishing a two-stream primary and secondary school, with two classes in each of kindergarten through to year 12. The School obtained development approval for the construction of primary school buildings and constructed the primary school buildings on the land. In 1989, St Gregory's Armenian School commenced operations on the land. In about 1991, the School commenced a secondary school using demountable buildings on the land. 5 From 2003, the School initiated work towards constructing secondary school buildings on the land. The School engaged consultants and undertook infrastructure works. In May 2006, the School lodged a development application with Baulkham Hills Shire Council. As at mid 2006, the School had spent in excess of $600,000 in relation to the secondary school project including lodging the development application. The School's architect had obtained three quotes from builders to construct the secondary school with the highest being $6.8M. The land and school are currently valued in excess of $10M. 6 At all times during its operation from 1986 the School has never made a profit and has relied upon donations and concessional loans from benefactors to fund the deficiency in its cash flow from year to year. Consequently the School was never likely to be in receipt of any profit or surplus which it could apply to servicing any loan sufficient to fund its secondary school project.

7 The School was eligible to apply for an annual grant from the Federal Government to assist with repaying the principal of a loan for the construction of secondary school buildings, which the School expected would be approximately $250,000 per annum; and an annual interest subsidy from the State Government payable in each year for 20 years to assist with paying interest on that construction loan. 8 In mid 2006, the School approached the Bank and explained its circumstances and applied to the Bank for a loan of approximately $7.5M, being the costs it had incurred to date in progressing the second school project and the likely further costs of construction of the secondary school buildings. The School had contemplated construction commencing before January 2007. 9 On 9 August 2006, the Bank informed the School that it would not be able to issue loan documents for the construction loan until after the development approval had been granted and a quantity surveyor's report setting out the costs of the works had been obtained. The School asserts that the Bank said to the School that the School should apply for an advance of credit of $600,000 and that loan would be rolled into this (construction loan) facility repaying the overdraft out in full. 10 On 1 September 2006, the Bank formally approved an overdraft of $60,000 in advance of the $600,000. The school says that it relied on the Bank's representations and advice, and drew upon the account. As at 15 September 2006, the account was in debt in the sum of $103,187.92. As 28 September 2006, the account was in debit for the sum of $160,403.70. On 29 September 2006, the Bank formally approved an overdraft of $180,000. The School says that it continued to rely on the Bank's representation and advice and drew on the account. On 12 October 2006, the account was in debit in the sum of $230,807.18. On 13 October 2006, following the signing of the security documents, the overdraft was extended to $600,000. 11 The Bank's approval was provided for the reason and on the terms outlined in the enclosed acceptance document and terms schedule "the agreement"). The facility is an overdraft in the amount of $600,000. 12 On 28 March 2007, Baulkham Hills Shire Council approved the development application for the secondary school buildings. On 19 June 2007, the State Government terminated the interest subsidy scheme. However, the scheme was reinstated for those schools which had progressed at to the DA stage including the School. On 6 December 2007, the School contacted the Bank. The Bank files were missing and there had been a change in personnel. 13 On 9 May 2008, the overdraft account was $630,782.26 in debit and the Bank gave the School the name of a quantity surveyor to assist "with the tender and selection process". On 27 May 2008, the School advised the Bank that Altius, architects, were assisting with the construction certificate and asked for an extension of the overdraft to $800,000. On 29 June 2008, the School asked the Bank if it required anything else to consider the extension of the overdraft to $800,000. During June and July 2008, the Bank commenced dishonouring cheques on the account. 14 On 15 August 2008, the Bank in an internal file note stated that, "the relationship [with the School] is now considered to be in default". On 15 August 2008, the Bank sent emails to the School in which it stated that the Bank "will not finance the building projects". On 18 August 2008, the School wrote to the Bank stating, "the bank initially lent the school $250,000.000 (sic) without any form of guarantee or security from the school. This was for site and design work to begin. Some time later this was formalised with a mortgage over the $600,000.00 in total (October 2006). It was agreed and understood between us and the bank that this was to be the first tranche of the money to be borrowed and that the mortgage would be extended to meet the total cost of the project when this amount had been identified. …" 15 On 19 August 2009, the Bank in an internal email noted that, "It is not clear on what basis the existing funding was provided to the school … However, clearly the intention of the Bank was to see the construction through to completion." Thereafter, cheques drawn on the account appear to have been considered by the Bank on a case by case basis. At all material times during 2009 the account remained open and the Bank allowed the School to pay for services using the credit available on the account. 16 On 9 June 2009, the Bank allegedly made a demand for repayment in full of the overdraft account. The School denies that it ever received this notice. On 7 September 2009, the Bank commenced the present proceedings. The property is valued at $10M.

Setting aside default judgment 17 The power to set aside judgment is contained in Rule 36.16 of the Uniform Civil Procedure Rules 2005 ("the Rules"). It reads: "36.16 Further power to set aside or vary judgment or order (1) The court may set aside or vary a judgment or order if notice of motion for the setting aside or variation is filed before entry of the judgment or order.

(2) The court may set aside or vary a judgment or order after it has been entered if: (a) it is a default judgment, or (b) it has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order, or

(c) in the case of proceedings for possession of land, it has been given or made in the absence of a person whom the court has ordered to be added as a defendant, whether or not the absent person had notice of the relevant hearing or of the application for the judgment or order." 18 The authorities on setting aside default judgment are Evans v Bartlam [1937] 2 All ER 646; Vacuum Oil Pty Limited v Stockdale (1942) 42 SR (NSW) 239; Cuttle v Brandt (1947) 64 WN (NSW) 96; and Adams v Kennick Trading (International) Ltd & Ors (1986) 4 NSWLR 503. 19 One of the considerations to be taken into account when determining whether default judgment should be set aside was expressed by Priestley JA in Cohen v McWilliam (1995) 38 NSWLR 476 (at 481) quoting from the Federal Court in Davies v Pagett (1986) 10 FCR 226: "It is, however, another question whether concern about the extent of delays, either in a particular case or generally, should, in the absence of prejudice in the particular case, be taken into account in exercising a discretion to set aside a default judgment. The fundamental duty of the court is to do justice between the parties. It is, in turn, fundamental to that duty that the parties should each be allowed a proper opportunity to put their cases upon the merits of the matter. Any limitation upon that opportunity will generally be justified only by the necessity to avoid prejudice to the interests of some other party, occasioned by misconduct , in the case, of the party upon whom the limitation is sought to be imposed. The temptation to impose a limitation through motives of professional discipline or general deterrence is readily understandable; but, in our opinion it is an erroneous exercise of the relevant discretion to yield to that temptation…" Explanation for delay 20 On 14 December 2009, default judgment was entered. On 23 December 2009, this motion to set aside default judgment was filed. The motion was filed nine days after default judgment was entered. Mr Ghougassian deposed that he does not recall being served with the statement of claim. However, Kris Sabatino in her affidavit sworn 13 September 2009, deposed that Mr Ghougassian was personally served with the statement of claim. On 2 September 2009, the Bank's solicitors wrote to the School's solicitors informing them that they had been instructed to commenced proceedings for the outstanding debt and the possession of the property. On 3 September 2009, the School's solicitors advised the Bank's solicitors that they no longer acted for the School. On 5 September 2009, Daniel Ghougassian replied to the Bank's solicitors as follows: "Thank you for your letter dated last week. We are in the process of answering the CBAs request in regards repayments of any outstanding loans. Progress in this regards has been slower than we anticipated though we now believed that, by the end of September (or so) we will be in a position to re-finance our School High School building project and can extinguish the CBAs loan entirely." 21 Dr Daniel Ghougassian is the brother of Michael and is the Chairman of the Board of the School. Michael gave evidence that he discussed school issues with Daniel and they decided what to do. In other words Daniel was acting with approval of Michael and visa versa. 22 On 11 September 2009, the process server Ms Sabatino reported to Justin Bate that on 9 September 2009, she gave Michael three copies of the notice to occupier as well as a sealed copy of the statement of claim. She reported: "he is going to defend the matter as it his belief they do not have to pay back the loan as the bank did not loan them 5M the bank has driven their students away (looks like they only have about 6 children and 1 teacher) he will be representing the school because the Judge will feel sorry for him and be more sympathetic" 23 It is convenient at this stage that I should make comment about Michael Ghougassian's demeanour. Due to his condition of posterior neck and right upper limb radicular pain Mr Ghougassian could not travel to the city to be cross examined but he could travel to Parramatta. This court sat at Parramatta to enable him to be cross examined. Mr Ghougassian stood in the witness box. He kept his right arm folded across his body and his neck was bent forward but he could move it. When he gave evidence he was sharp and understood the questions he was asked. On the issue of service of the statement of claim he chose his words very carefully. When asked about service of the statement of claim he deliberately answered that "I do not recollect" but when asked about the comment that he said to the process server that, he "will be representing the school because the Judge will feel sorry for him and be sympathetic" he outrightly answered, "Definitely not" because it did not occur, "doesn't make sense it's not in my brain cells to say something like that." (T 50). 24 On the balance of probabilities, it is my view that Michael Ghougassian was aware that he had been personally served with the statement of claim. However, the delay between judgment being entered and this motion being filed is relatively short, namely nine days.

The proposed defence 25 The School alleged that there first, is an implied term in the contract; secondly, equitable estoppel; thirdly, there is contractual condition precedent, and fourthly, the demand was not served. Implied term 26 On 14 September 2006, the Bank wrote to the Board of the School advising that it had approved the facility totalling $600,000.

The facility 27 The terms schedule at item 2 identified the total facility limit as $600,000 subject to the Bank's right to reduce or cancel the limit. Item 3 states that it is a term that until the overdraft is cancelled and repaid, the overdraft is repayable on demand which the Bank may make at any time (Usual terms and conditions clause 7.1). 28 Clause 7.1 of the usual terms and conditions provides: "7.1 If the limit is cancelled, the Borrower must pay on the Bank's demand the debit balance of the overdraft or the Capital Equity Loan Account. If the Limit is reduced, the Borrower must reduce the debit balance on the Loan Account to an amount equal to or less than the reduced Limit on the Bank's demand. Demand under this clause may be made at any time and from time to time." 29 The School alleged that in the circumstances, the Bank has no right under the agreement to make a demand that the School repay the credit in full immediately on demand. Any such demand is contrary to the terms of the agreement and in particular in breach of the implied term pleaded in paragraph 15 of the defence. 30 For a term to be implied, it must be reasonable and equitable, as between the parties; it must be necessary to give business efficacy to the contract. While this means that mere reasonableness is insufficient, it does not mean that a term will be implied only if the contract would be ineffective without it; rather, the term must be necessary to give the contract the efficacy which the parties must have intended it have, it must be so obvious that 'it goes without saying'; it must be capable of clear expression; and it must not contradict any express term of the contract: see generally Moratic Pty Ltd v Lawrence James Gordon & Anor [2007] NSWSC 5 at [12]. 31 The Bank submitted that there can be no doubt that there was an agreement for the provision of the overdraft facility. The Bank's records are contemporaneous evidence of the acceptance of the offer of the overdraft facility. The Bank says that not only is there no merit to this aspect of the proposed defence, it says that it cannot seriously be suggested bona fide that there was no such agreement as alleged by the School. The Bank submitted that assuming that the agreement for the provision of the overdraft facility was not entered into in the manner alleged by the School the moneys nonetheless are repayable on demand on either one of two bases. First, at common law the presentation of cheques that would send a current account into debit is treated as an implied request for an overdraft, and the honouring of those cheques constitutes an acceptance of that request, it being a term of the implied overdraft that the debit balance is repayable on demand: Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226; and secondly, the terms and conditions governing the account expressly provide similar effect. The Bank says that on any view the balance of the overdraft facility is prima facies repayable on demand. 32 The School submitted that there is an agreement pleaded by the Bank and that the proposed defence related to that agreement. The School says that it is contrary to the objective circumstances that the parties agreed to the moneys drawn down on the overdraft being repayable in full immediately on demand made at any time as asserted by the Bank. The School further submitted that the parties did not transact in a vacuum. The contract contains specific terms to give effect to their presumed intention and it is absurd to suggest that the agreement provided that an operational school would immediately draw on an overdraft to pay an existing debt, but agreed to a term which required immediate repayment in full when both parties knew the School had no funds and would only be able to repay the overdraft from moneys drawn down on the first tranche of the construction loan from the Bank. The School says that the parties did not agree on the basis that the Bank could close down the School at any time by simply making a demand for repayment in full. The School further submitted that the agreement is incapable of sensible operation between these two parties in the unique circumstances of this case without the implied term in the proposed defence. The implied term is needed for the effective operation of the contract. It is reasonable and equitable. It is what the parties "would most likely have agreed had they considered the point". This argument is not a strong one.

Equitable estoppel 33 The School alleges that the circumstances have given rise to an equitable estoppel. It says evidence reveals that, in the words of Brennan J in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 428-429, an equitable estoppel has been established since:

"(1) the [School] assumed that a particular legal relationship then existed between the [School] and the [Bank] or expected that a particular legal relationship would exist between them and, in the latter case, that the [Bank] would not be free to withdraw from the expected legal relationship;

(2) the [Bank] has induced the [School] to adopt that assumption or expectation;

(3) the [School] acts or abstains from acting in reliance on the assumption or expectation;

(5) the [School's] action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and

(6) the [Bank] has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, [the Bank] who has not actively induced the [School] to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the [Bank's] property, a diminution of [its] rights or an increase in [its] obligations and [it], knowing that the [School's] reliance on the assumption or expectation may cause detriment to the [School] if it is not fulfilled, fails to deny to the [School] the correctness of the assumption or expectation on which the [School] is conducting [its] affairs". 34 The scope of the doctrine of equitable estoppel has been "expanded beyond pre-existing contractual relations": see generally Moratic Pty Ltd v Lawrence James Gordon at [28] - [29]. Equity provides relief for a plaintiff who has acted to its detriment on the basis of a fundamental assumption in the adoption of which the defendant has played such a part that it would be unfair or unjust if it were left free to ignore it, on the footing that it would be unconscionable for the defendant to deny the assumption. The unconscionability which attracts the intervention of equity is the defendant's failure, having induced or acquiesced in the adoption of the assumption or expectation, with knowledge that it would be relied on, to fulfil the assumption or expectation or otherwise to avoid the detriment which that failure would occasion. In the circumstances set out above the Bank is estopped from making a demand that the School repay the credit immediately.

35 Equitable estoppel operates when the defendant has induced or acquiesced in the adoption by the plaintiff of an assumption that the defendant will not assert its strict legal rights, so to prevent unconscionable (or unconscientious) insistence by the defendant on its strict legal rights: Moratic Pty Ltd v Lawrence James Gordon at [33]. 36 The Bank acknowledges that there is a factual dispute to be tried over what representations were or were not made by officer of the Bank. However, the Bank submitted that even if the Court accepts the evidence of Michael Ghougassian it does not give rise to an arguable defence based on estoppel. I disagree, however, particularly where both parties acknowledge that there was a meeting on about 9 August 2006. Even as late as 19 August 2009, the Bank's internal email noted, "It is not clear on what basis the existing funding was provided to the School… However, clearly the intention of the Bank was to see the construction through to competition." There is a recording of the meeting. The facts and circumstances can only be properly ascertained at trial. Once the facts have been distilled it may be that there is an equitable estoppel.

Contractual condition precedent 37 The School submitted that the Bank has no right under the agreement to make a demand that the School repay the credit immediately because on the proper construction of the agreement, the debit balance of the overdraft account was only payable upon demand if the Bank had first cancelled or reduced the limit under Clause 7.1 of the usual terms and condition for commercial facilities. The School says that at all times in 2009 the Bank extended the limit on the account to allow the School to pay for certain indebtedness.

38 The Bank submitted that this defence has no merit at either a factual level or as a matter of construction, and is not bona fide. The bank submitted that it is clear that it cancelled the limit from the numerous pieces of correspondence seeking the School's proposals for repayment of the overdraft. The Bank says that it is also evident from the fact of the demand itself. The Bank further submitted that there is no reason why as a matter of banking practice or as a matter of construction, the cancellation of the limit and the making of the demand cannot occur simultaneously and by the same instrument. 39 It is my view that this is an arguable defence as the account is still operational and no correspondence has been forwarded to the School specifically notifying it that the limited was cancelled in accordance with Clause 7.1.

No service of the demand 40 The School has denied receipt of the demand made on 9 June 2008 and it submitted that in the absence of a demand being made, no moneys can be due. The notice of demand was posted to the School at 1 Mungerie Road, Beaumont Hills 2155. Mr Ghougassian gave evidence that there are three lot 1's in Mungerie Road. One lot 1 is Crown land and it is set aside for a future university. Australia Post does deliver mail to Mungerie Road. 41 The Bank further submitted that the position of the School can only be described as marginal at best and that all indications are that it is currently trading insolvently and certainly would be if repayments were being made as if they were being made pursuant to the terms of a putative construction loan. I accept that the School has not made any repayments since February 2009. 42 The Bank submitted that the interests of justice do not warrant the setting aside of the judgment. 43 Mr Ghougassian has been incapacitated for some months and has not been able to attend to school matters. He has not been able to attend to an application for refinance nor has he prepared budget account or management plans for 2010. The delay in filing this application was only nine days. The property (with the high school being built) has been valued in excess of $10M. It is a non-profit organisation and apart from this facility there is no evidence to suggest that the School cannot pay its debts. It receives some funding from the State and Commonwealth governments. The defence is arguable. In these circumstances there has been an adequate explanation for delay and the defence is bona fide. The default judgment entered on 14 December 2009 is set aside. The matter is to be listed for a status conference on 1 April 2010 at 9.00 am before the Registrar. 44 Costs are reserved.

(1) The default judgment entered on 14 December 2009 is set aside.

(2) The matter is to be listed for a status conference on 1 April 2010 at 9.00 am before the Registrar.

(3) Costs are reserved. **********

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.