DONG v. MONKIRO PTY. LIMITED & ORS [2005] NSWSC 749 - NSWSC 2005 case summary — Zoe

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DONG v. MONKIRO PTY. LIMITED & ORS [2005] NSWSC 749

[2005] NSWSC 749

Supreme Court of NSW|2005-05-05|Before: Hall J

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Source facts

Court

Supreme Court of NSW

Decision date

2005-05-05

Before

Hall J

Source

Original judgment source is linked above.

Judgment (118 paragraphs)

[1]

Background 5 Certain meetings and communications took place in 1999 and 2000 between Ms. Lee and Mr. Terence Wing Kee Tang, who is the second defendant and sole director of the first, third and fourth defendants. Ms. Lee was introduced to Mr. Tang in China by a neighbour, a Mr. Wu, in 1999. She first met him in Hong Kong at which meeting Ms. Lee says Mr. Tang produced a map and some figures in relation to a proposed townhouse development. The site was 8 Rena Street, Kogarah in Sydney. Mr. Tang, according to Ms. Lee, stated that he needed finance to undertake the development. 6 Ms. Lee met Mr. Tang on a second occasion in Xian, China. The development project was again discussed. Specifically, Mr. Tang inquired if Ms. Lee was interested in buying the project, specifying a price of $1.8680 million. Ms. Lee said that she did not want to purchase it in her own name, saying, "I don't want my ex-husband to know about it". Mr. Tang then suggested buying the property in the name of her cousin, Mr. Dong, the plaintiff. She thereafter put the proposition to Mr. Dong, who is said to have agreed.

[2]

The affidavit evidence 7 The plaintiff relied upon the affidavits of Susanne Lee sworn 25 September 2003, 7 September 2004 (in reply) and 29 April 2005, the latter being the principal affidavit in the plaintiff's case. The plaintiff also relied upon the affidavit of Mr. Chee Kiong Low, solicitor, sworn 3 May 2005. Mr. Low acted on behalf of Mr. Dong on Ms. Lee's instructions in relation to the abovementioned loan transaction. 8 The defendants did not rely upon affidavits that had previously been filed on their behalf.

[8]

(e) 9.01.02 Untitled ( Loan Variation ) First Defendant (Monkiro) 11 The primary contractual document in these proceedings is the Deed of Loan dated 11 February 2000. It is in the nature of a guaranteed loan. The amount of the loan in question was, as earlier indicated, $1.1 million. The plaintiff claims that it was paid by way of instalments to the first defendant, Monkiro Pty. Limited. Certain loan monies were repaid, details of which are set out later in this judgment. There is an issue as to what these payments represented, in particular, whether they related to the Loan Deed. The Deed itself acknowledged that an amount of $287,360 had already been paid to Monkiro as at the date of its execution. (In fact, as discussed later, more than that amount had already been paid.) It records that Monkiro agreed to pay "the balance" as specified in clause 2(b) of the Deed. 12 In the amended statement of claim, the plaintiff relied upon the terms of the Loan Deed which required repayment of the total amount due under it by one payment of $750,000 on 20 March 2001 and a final payment of $870,000 by 1 May 2001 (clause 2(b)). 13 It is important to note at this point that under the Deed, clause 2(b), Monkiro was required to pay an additional $520,000 making the total obligation of Monkiro the sum of $1,620,000. The provisions of clause 2(b) are at the centre of the dispute between the parties. It is sufficient to note here that the additional amount of $520,000 is not described or characterised as interest or a premium. There is no indication in the Deed as to how that amount is calculated or what it is referable to. It is an amount expressed as separate from the loan monies described in clause 2(a) as "the principal sum". 14 The first defendant contends that the provisions in clause 2(b) relating to the obligation to pay this additional amount is a penalty. The plaintiff in disputing that contention says that clause 2(b) is neither a default provision in form or in substance. The plaintiff says that the obligation to pay the amount is not triggered by default such as a failure to pay on time. In contrast, clause 2(c) provides for the payment of interest at a rate of 9.75% per annum to be payable from dates specified if no repayment has been made by the dates specified referred to in [12] above. The rate of 9.75% was the subject of a later loan variation document, which purportedly increased the rate to twice that amount in specified circumstances of default. 15 I should observe at this point that the first and second guarantee documents referred to in the above list of contractual documents are a little curious in that they preceded the Deed of 11 February 2000. They were executed by reference to a loan deed not then in existence. They were effectively replaced and subsumed by separate agreements contained within the Deed of 11 February 2000. 16 The fourth document is a guarantee by Lotilla Pty. Limited, the fourth defendant, in similar terms to the guarantees given by Mr. Tang and Valioso. It is styled "Deed of Variation of Loan" dated 28 March 2001. By it, the fourth defendant agreed to provide a mortgage over property 28 to 39 Premier Street, Kogarah. I will refer to the document again later in this judgment. 17 A "Loan Variation" dated 9 January 2002 was signed by the plaintiff and Mr. Tang as sole director and secretary of Monkiro. It purports to vary clause 2(c) to the Deed of Loan by extending the term of the Loan Deed from 1 May 2001 to 28 February 2002 (clause 1) and increasing the interest rate to 18% per annum if the outstanding balance was not repaid by 28 February 2002. The document erroneously refers to "our Loan Agreement dated 19 January 2000". The plaintiff contended that it evidently was meant to refer to the Deed of Loan of 11 February 2000. 18 In summary, the plaintiff claims in respect of:-

[11]

Loan payments 20 On 3 June 1989 at Mr. Tang's request, Ms. Lee deposited $18,680 into an account titled, T. & T. Investments, an account nominated by Mr. Tang. The deposit was made after the latter indicated that he needed money and asked Ms. Lee for a one percent deposit. 21 A further payment of $18,680 was paid into the same account on 29 July 1999 (see payments listed in paragraph [25] below). 22 In October 1999, Ms. Lee travelled to Sydney and inspected the Kogarah site. Ms. Lee then said she realised she did not have time to stay in Sydney and do the project herself. 23 Following a dinner in October 1999, Ms. Lee says she told Mr. Tang of her change of position and asked for her money back. Mr. Tang indicated he did not have the money as it had been spent on project expenses. There was discussion as to the profitable nature of the project which led, according to Ms. Lee, to her saying that she could lend Mr. Tang the money necessary to undertake the project. A week later Mr. Tang is said to have rung Ms. Lee and accepted her loan proposition, saying, "I'll need to borrow from you $1.1 million. Then I will give you $520,000 interest in 18 months time", to which Ms. Lee said, "I don't want that much interest". Mr. Tang, according to Ms. Lee, said, "I can make a big profit because you will have loaned the money to me so I would like to give you more interest on your loan". 24 Discussion then followed on the subject of the preparation of contracts. Ms. Lee contacted Mr. Kiong Low, solicitor, and gave him instructions to act in relation to the transaction. 25 The following schedule represents the total loan payments made by the plaintiff. Monies were paid by way of loan:- Date Amount 3 June 1999 $18,680 29 July 1999 $18,680 19 October 1999 $200,000 The payment was acknowledged by a document "Receipt for Holding Deposit" which confirmed receipt of $200,000 from Ms. Lee to T. & T. Investment Group "being a loan from Mrs. Susanna Lee". The document purported to contain a guarantee by Mr. Tang for "repayment of this loan". 22 December 1999 $50,000 6 January 2000 $550,000 6 February 2000 $262,634 Total $1,099,994 (plus $6 bank fee) 26 The above payments were paid into the account of T. & T. Investment, a company controlled by Mr. Tang. The first defendant made two re-payments as follows:-

[13]

The loan agreement 28 On 23 December 1999 (by which time four payments had been made), Mr. Tang wrote to Ms. Lee a memorandum concerning the preparation of loan agreement documents. Ms. Lee advised him that she had sent to her solicitor, Mr. Low, a set of Loan Agreements indicating "the Options of our side … however, please feel free to make any amendments and I hope you can get complete protection …". The document goes on to refer to what is entitled "Analysis in the statement of net assets" adding "therefore, there should be sufficient net assets to guarantee the loan of $1.1 million". The memorandum goes on to state:- "(ii) In terms of calculation of returns, I will borrow $1.1 million and am willing to be responsible for a return of $520,000 after tax (no matter whether the business is profitable or runs at a loss), ie., an equivalent of 42.27% …" 29 On the issue as to the nature of the amount of $520,000, I note that the amount of $520,000 is referred to as a "return after tax" rather than as "interest". 30 The document then refers to repayment by way of advance payment of $750,000. On completion, Mr. Tang wrote, "I will pay $870,000 again". 31 The Loan Deed dated 11 February 2000 is expressed to be between the plaintiff, termed "the Investor", the first defendant, Monkiro Pty. Limited, described as "the Developer", the second defendant, Terrence Wing Kee Tang, described as "the Guarantor" and the third defendant, Valioso Pty. Limited, described as "Valioso". I will comment later on the description accorded by the Deed to the plaintiff as "investor".. 32 The recitals in the Deed of Loan include a recital (recital "A"), which refers to Schedule "A" to the Deed. It describes the project as Lot 4 and Lot 5, DP 15960, 4 and 5 Rena Street, South Hurstville, 2220. Recital "B" records that the investor had agreed to make a loan to the developer. Recital "C" records that the guarantor had requested the investor to make the loan in recital "B" to the Developer in respect of which the guarantor gave guarantees and indemnities contained in the Deed. Recital "D" recorded that Valioso agreed to guarantee the arrangements in the Deed and in support agreed to provide a caveat and/or a second mortgage over the property described in Schedule "C" to the Deed, namely Lot 2, DP 15960, 2 Rena Street, South Hurstville, 2220. 33 Clause 2, Loan, contains the provisions that are central to the claim in the proceedings. It is in the following terms:- "2. Loan (a) The Investor shall lend to the Developer a sum of $1.1 million ("the principal sum") on the date of this Deed. A sum of two hundred and eighty seven thousand, three hundred and sixty dollars ($287,360) has been paid to the Developer. (b) The Developer agrees to repay the Investor the balance of the principal sum plus an additional five hundred and twenty thousand dollars ($520,000). This total sum of one million, six hundred and twenty seven thousand dollars ($1,620,000) shall be repaid as follows:- (i) $750,000 on 20 March 2001; (ii) $870,000 on 1 May 2001. (c) Interest shall be payable on the initial sum of $750,000 (if not repaid) from 20 February 2001 and interest shall be payable on the balance of $870,000 (if not repaid) from 1 April 2001. Interest shall be paid at the rate of 9.75% per annum." 34 Clause 11 contained the guarantee and indemnity given by the guarantor, the second defendant, Mr. Tang. 35 Clause 12 contained the guarantee and indemnity provided by the Valioso. 36 The Deed was executed by the parties and in particular by Susanna Lee pursuant to the Power of Attorney provided by the plaintiff (registered book 4263 no. 671).

[23]

N = Net Deficiency means $1,100,000 less $957,613 is $142,387 1. Scenario 1 1.1 Principal (N) is $142,387 1.2 From 23 December 2001 (date of last payment) to the date of the hearing concluding on 5 May 2005 is 1,229 days. 1.2.1 $142,387 x 9.75% = $13,882.73 pa or daily rate of $38.03 1.2.2 $38.03 per day x 1,229 days totals $46,738.87 1.3 The combined total is $189,125.87 2. Scenario 2 2.1 Principal (N) plus clause 2(b) amount ($520,000) is $662,387. 2.2 From 23 December 2001 (date of last payment) to the date of the hearing concluding on 5 May 2005 is 1,229 days. 2.3 From 20 March to 26 April 2001 is 38 days 2.3.1 $750,000 x 9.75% = $73,125 pa or a daily rate of $200.34 2.3.2 $200.34 per day x 38 days is $7,613 2.4 From 1 May to 23 December 2001 is 237 days 2.4.1 $87,000 x 9.75% pa is $84,825 pa or $232.40 per day 2.4.2 $232.40 per day x 237 days is $55,078.80 2.5 As at 23 December 2001 the amount owing as Principal plus clause 2(b) is $670,000 2.6 From 23 December 2001 to 5 May is 1,129 days 2.6.1 $670,000 x 9.75% pa is $65,325 or $178.97 per day 2.6.2 $178.97 x 1,129 days is $202,057.13 2.7 The combined total is $927,135.85 3. Scenario 3 (principal plus clause 2(b) amount plus interest at 9.75% and thereafter at 18%) 3.1 From 23 December 2001 to 28 April 2002 is 67 days 3.1.1 $670,000 x 9.75% pa is $65,325 pa or $178.97 per day 3.1.2 $178.97 per day x 67 days = $11,990.99 3.2 From 1 March 2002 to 5 May 2005 is 1,161 days 3.2.1 $670,000 x 18% pa = $120,600 pa or daily rate of $330.41 3.2.2 $330.41 per day x 1,161 days = $383,606.01 3.3 The combined total is $1,120,675.72 49 As noted earlier, the defendants did not rely upon any affidavit evidence that had been filed on their behalf. Accordingly, in relation to the discussions entered into between Ms. Lee and Mr. Tang, the only evidence is that of Ms. Lee. She was cross-examined and essentially adhered to her affidavit evidence and was unshaken in cross-examination. In particular, in relation to the amount referred to in clause 2(b) of $520,000, she denied that that amount was intended only to be paid as a profit share in the event that the development project was successful, and returned a profit. Ms. Lee maintained that the amount was simply an amount agreed to be paid in respect of the loan advances made by her to the first defendant.

[57]

The dealings between the parties and the question of retrospectivity 61 In principle, it has been observed, it should be open to the parties to a contract to agree upon the date (including a date in the past) from which their legal relations commenced to have effect and that it should be open to the courts to enforce that agreement: Gilsan (International) Limited v. Optus Network Pty. Limited (No. 2) [2005] NSWSC 38. 62 On the unchallenged evidence, by executing the Loan Deed at the time they did, the plaintiff and the first defendant plainly intended that all rights and obligations as between them with respect to the loan advances for the Rena Street project should be governed by the provisions contained in the Deed. The terms of the Deed reflect the retrospective nature of the Deed's operation and indeed one can additionally imply a term giving it retrospective operation. 63 The law has adopted a practical approach to the operation of commercial contracts having regard to earlier dealings between contracting parties. The law does not assume that acceptance of an offer cannot have retrospective effect so as to make the contract apply to things done earlier in anticipation of the contract. In Trollope & Colls Limited v. Atomic Power Constructions Limited (1962) 3 All ER 1035, Megaw, J. stated:- "… there is no principle of English law which provides that a contract cannot in any circumstances have retrospective effect, or that, if it purports to have, in fact, retrospective effect, it is in law a nullity. If, indeed, there were such a principle, there would be many Mercantile contracts which would, no doubt, to the consternation of the parties, be nullities. Frequently in large transactions a written contract is expressed to have retrospective effect …: and this in cases where the negotiations on some of the terms have continued up till almost, if not quite, the date of the signature of the contract. The parties had meanwhile been conducting their transactions with one another, it may be for many months, on the assumption that a contract will ultimately be agreed on lines known to both the parties, though with the final form of various constituent terms of the proposed contract still under discussion. The parties have assumed that when the contract is made - when all the terms have been agreed in their final form - the contract will apply retrospectively to the preceding transactions. Often, as I say, the ultimate contract expressly so provides. I can see no reason why, if the parties so intend and agree, such a stipulation should be denied legal effect." 64 Similarly, in City of Box Hill v. E.W. Tauschke Pty. Limited (1974) VR 39, it was contended that tender documents for the reconstruction of a road for a Council which were accepted by letter, called upon the tenderer to sign contract documents within four days. It was not in fact signed until some time later by which date works had been performed and certain progress payments had been made. 65 In that case, it was unsuccessfully contended that the contract was purely prospective in operation and in no way related to works which had already been done. However, ultimately, the decision in that case essentially turned upon the principle in Masters v. Cameron (1954) 91 CLR 353 and is therefore not strictly relevant to the point here. As a question of construction I am of the opinion that the Deed of 10 February 2002, had a retrospective operation whereby the first defendant assumed obligations in respect of earlier advances and any other advances falling within the operative terms of the Deed. 66 The evidence establishes that the subject of the only dealing between the parties was the development project described in the Deed. Additionally, all amounts paid by way of loan advances in 1999/2000 were for that project. The parties in late 1999 envisaged and expressly referred to the need to reflect the loan transaction by formal contracts drafted by solicitors. They acted on that basis during which time certain loan advances were made before the 11 February 2000 Deed. Participation in the project (originally as joint venturer) was initially agreed to be on the basis that Mr. Dong would be the "investor", not Ms. Lee, for reasons explained in her evidence. It was not until late 1999, after Ms. Lee decided against an equity participation, that it was agreed that:-

[66]

B: THE SECOND ISSUE: THE OBLIGATION TO PAY UNDER CLAUSE 2(b) OF THE DEED 72 It having been determined in accordance with the first issue that the plaintiff is entitled to claim against the first defendant in respect of any unpaid monies still outstanding and due under the Loan Deed, the question then arises whether or not the plaintiff is entitled to claim, in addition to the unpaid balance of loan monies, the amount of $520,000 specified in clause 2(b). 73 That provision must be examined in its contractual context, that is, taking account of the other provisions of clause 2, "Loan". 74 Clause 2(a) clearly identifies the monies the subject of the loan, "the principal sum" of $1.1 million. Clause 2(c) provides in clear terms for an entitlement to interest on the loan. An unusual aspect of that sub-clause is that by its terms, interest was not payable immediately upon the making of the loan but 12 months later, from 20 February 2001 should there be a failure to pay the initial sum of $750,000 and thereafter from 1 April 2001 in the event that the balance of $870,000 had not been repaid. An obvious point of inquiry is why, uncharacteristically, interest would not be payable from the date of the first advance? 75 Before dealing with that question, I turn to the provisions of clause 2(b). Unlike clause 2(a) and clause 2(c), clause 2(b) does not identify or specify the basis for or the nature of the additional amount of $520,000 or the nature of the liability subjacent to the requirement to pay that amount. It merely states, "… plus an additional five hundred and twenty thousand dollars ($520,000) …". 76 It is clear that in a number of respects the Deed itself is a poorly drawn document and contains some provisions, included in earlier drafts, that have no operative effect in the final Deed of 11 February 2000 (see below). 77 The defendants have contended that the $520,000 was a profit share that was only payable in the event of the project proceeded, but not otherwise. The plaintiff asserts to the contrary, relying upon the terms of clause 2(b) itself, which he says are unqualified. 78 The defendants contended that the "contractual matrix", a reference to earlier negotiations and drafts of the Deed, could be examined to determine the object or intent behind clause 2(b). 79 The provisions of clause 2(b) are remarkable for three reasons:-

[82]

(l) A commercial contract should be construed fairly and broadly whether or not the contract was drawn with assistance of lawyers. 84 As to the above formulation, see De Cor Blinds Gold Coast Pty. Limited v. De Cor Blinds Australia Pty. Limited [2004] QSC 55 at [25]. 85 At the end of the day, the Court is concerned to determine the rights and obligations of the contracting parties by reference both to the express terms of the contract and with due regard to the essential nature of the transaction embodied in it as determined or reflected by those terms. 86 The Deed seeks to evidence the agreed terms for a transaction in the nature of a loan. Typically, such transactions involve an agreement by a lender to provide loan monies in return for the borrower's agreement to repay the loan monies by a specified date or dates with interest. It is not typical of a simple loan for the borrower to agree to pay an amount equivalent to almost half the amount of the loan itself. This is especially so when the loan is for a limited period (12 months) and where it is secured. 87 In examining the terms of the Deed governing the loan, in this case a court called upon to enforce its terms in the event of a breach by the borrower is, in my view, required to consider whether the unconventional terms of clause 2(b) impose an absolute or unqualified right in the plaintiff, as lender, to recover a lump sum of $520,000. 88 The nature of the contract (the Deed) and the evident commercial objective of the parties are, in my view, relevant in determining the proper application of clause 2(b) to the circumstances of the case. That objective is to be ascertained from the terms of their agreement. In some cases, background material may be admitted, not to interpret words or phrases in the agreement or to ascertain the subjective intentions or understandings of the parties, but, in cases of ambiguity, to objectively ascertain what future conduct their specific promise actually contemplated. The contractual setting may, within the limits of the shadow cast by the parol evidence rule, sometimes be examined, but the use to which such material is put is controlled in accordance with the Codelfa principles. In particular, such evidence, if admitted, is not available to be used to add to, vary, qualify or contradict the language in which the contractual terms are expressed.

[83]

Contractual ambiguity 89 Evidence of surrounding circumstances may be admissible to assist in the interpretation of the provisions of clause 2 if the language or the provision is ambiguous or susceptible of more than one meaning: Codelfa Construction Pty. Limited v. State Rail Authority of New South Wales (1982) 149 CLR 337 at 401; Royal Botanic Gardens and Domain Trust v. South Sydney City Council [2002] HCA 5 at 9.1. Extrinsic evidence may also be utilised to identify the subject-matter of a contract. It is generally accepted that the principles according to which extrinsic evidence is admitted in aid of the construction of the terms of a written contract are as expressed by Mason, J. (as he then was) in Codelfa (supra). According to those principles, evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning (at 352). In Trawl Industries of Australia Pty. Limited v. Effem Foods Pty. Limited (1992) 27 NSWLR 326 at 358, Clarke, JA. observed that it is true to say that in many, if not most, cases in which a court is seeking to construe a particular term of terms of a contract, there will be sufficient uncertainty as to the meaning of the relevant term as to enable the admission of evidence of surrounding circumstances. See also in respect of this point, McHugh, JA. (as he then was) in Manufacturers' Mutual Insurance Limited v. Withers (1988) 5 ANZ IC 60-653 at 75,343. 90 In Royal Botanic Garden and Domain Trust (supra), Gleeson, CJ., Gaudron, McHugh, Gummow and Hayne, JJ. (at 10) referred to observations of Mason, J. in Codelfa (supra) to the effect that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, the Court, pointed out, that an appreciation of the commercial purpose of a contract:- "Pre-supposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating." 91 There are, in relation to this question of admissibility, at least three, and possibly four, questions:-

[96]

Relevant principles concerning ambiguity 98 In Stadium Australia Management Limited v. Sodexho Venues (Aust.) Pty. Limited [2002] NSWSC 437, Bergin, J. (at [46]) referred to dicta of Santow, J. in Allstate Explorations v. L.V. Beaconsfield Gold NL [1999] NSWSC 832 at [42] wherein it was stated:- "Indeed, 'ambiguity' is itself a word of ambiguous reference. Does it mean that one of the two (or more) meanings are equally available, or does it also comprehend the commoner situation where the literal words have a likely conventional meaning but are capable of bearing a less likely one; one which, under well-accepted canons of construction can be established as the party's common intention in an objective sense by reference to what Lord Steyne calls 'the objective contextual scene'?" 99 Kirby, P. in State Lotteries Office v. Burgin (unreported 23 April 1993) said:- "Ambiguity is not the same as difficulty of construction. See Schuler (L) AG v. Wickman Machine Tool Sales Limited (1974) AC 235 (HL) 261. Conventionally the law has classified ambiguity into two types: the patent and the latent. A patent ambiguity appears plainly from nothing more than the words of the instrument under consideration. Those words may be self-contradictory or irreconcilable. As a last resort, in such cases, a court will conclude that the parties had not reached agreement at all. It will declare the supposed contract void … a latent ambiguity arises where evidence of the circumstances surrounding the making of the contract is essential to clarify the words used which are otherwise obscure …" 100 In Burns Philp Hardware v. Howard Chia Pty. Limited (1987) 8 NSWLR 642 at 657, Priestley, JA. stated that words would be taken to be "ambiguous" if they have "two or more plausible meanings when the context of the words in the document is taken into account in the light of the knowledge any ordinary intelligent reader of the document would bring to the reading of it". See also B & B Constructions (Aust.) v. Brian A. Cheeseman & Associates Pty. Limited (1994) 35 NSWLR 227, 234-237 per Kirby, P. See also Trawl Industries of Australia Pty. Limited v. Effem Foods Pty. Limited (1992) 27 NSWLR 326, 358-359 per Clarke, JA.

[105]

(h) The interest-free period under clause 2(c) (that is for the period prior to 20 February 2001) is not characteristic of a straightforward loan transaction. It is, at least, consistent with a deferred or prospective benefit (equity) in lieu in favour of "the investor" , that is, the foregoing of an entitlement by the lender to interest in return for a substantial return on investment on completion of the development, on the basis that the project proceeds. 102 The language chosen to express the developer's obligations under clause 2(a) is inappropriate and to a point confusing. The obligation on the developer to "repay" is only applicable to the amount of the loan previously advanced of $1.1 million referred to in 2(a) but not to the amount of $520,000. There is no suggestion in the Deed or elsewhere that the plaintiff lent or otherwise paid $520,000 to the first defendant at any stage. The use of the term "repay" is therefore not apposite with respect to that particular amount. 103 Clause 2(b) appropriately then refers to the developer's agreement to "repay" the balance of "the principal". The clause should refer, but does not refer, to an agreement to pay (not repay) the additional $520,000. There being no indication that the $520,000 was ever the subject of a loan between the plaintiff and the first defendant, there is arguably an omission or uncertainty as to what, in the context of the Deed, the amount of $520,000 in fact represented. There is also arguably a further issue as to whether the obligation to pay that amount was intended to be a conditional or an unconditional obligation. If the former, was the obligation conditional upon the development project proceeding? 104 The aim, purpose or intended operation of the contract in respect of the amount of $520,000 is not addressed in either the recitals or in the operative provisions of the Loan Deed. The obligation was to pay that amount without the Deed specifying what the obligation represents. It finds its place in a loan agreement in circumstances in which its relation or connection, if any, to the subject loan is not made apparent. Attention is not to be restricted to the terms of clause 2(b) but the provision is to be understood in its context, that is, having regard to the nature of the contract. In Davis Contractors Limited v. Fareham Urban District Council (1956) AC 696, Lord Reid said that the task of the court was to determine "on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances", "whether the contact which they did make is … wide enough to apply to the new situation: if it is not, then it is at an end" (at 720-721). 105 The above factors raise the question as to whether clause 2(b) is to be applied literally, that is, as requiring repayment of the loan monies as well as the payment of $520,000 whether or not the project proceeds. Considered as a whole and having regard to internal linguistic features of the Deed, the question is whether the disproportionally large amount of $520,000 was in fact intended (but not stated) to be in the nature of a profit share in the event that the project proceeds. The (implied) obligation to pay that amount obviously has a commercial basis to it, but there remains the question, what is that basis? 106 In approaching this aspect of the matter, the Court must be conscious of the need to ensure that one is in truth dealing with a question of ambiguity arising from the contractual language employed in the Deed. As has been said, there is a danger of allowing the judicial mind to be diverted by knowledge of the negotiations and dealings between the parties as it approaches the task of construction: B & B Constructions (Aust.) Pty. Limited v. Brian A. Cheeseman (1994) 35 NSWLR 227 per Kirby, P. at 233. On the plaintiff's case, there is no ambiguity in the words employed in clause 2(b) and the fact is, of course, that I am not considering this issue in proceedings in which relief by way of rectification is being sought by the first defendant. Additionally, in arriving at a conclusion as to the meaning and intended operation of clause 2(b), one must be conscious of the injunction stated by Mason, J. in Codelfa (supra) at 352, namely, that evidence of surrounding circumstances is not admissible to contradict the language of the contract when it has a plain meaning. 107 I am of the opinion that extrinsic evidence (which was tendered in the plaintiff's case) may be referred to in ascertaining the common intention of the parties. There is latent ambiguity as to whether the provisions of the Deed, in particular clause 2(b), were intended to confer or vest in the plaintiff a right to the amount of $520,000 as a condition of the loan governed by the Loan Deed or whether they impliedly intended that that amount was payable only in the event that the development for which the loan was expressly raised in fact proceeded. 108 If I am wrong in this conclusion, and there is in fact no such ambiguity, then I am of the opinion that extrinsic evidence conforming to the Codelfa principles may be utilised in order to identify the subject-matter of the agreement contained in the Deed, that is, to determine whether the subject-matter of the Loan Deed was a loan agreement simpliciter or whether it was both a loan transaction and an investment agreement of a conditional nature for the payment of a lump sum derived from the project. 109 Although somewhat unrelated to this last point, but nonetheless in aid of it, is the exception to the parol evidence rule which permits evidence to be adduced "as to surrounding circumstances" Codelfa (supra) per Mason, J. at 347, 352. See also Lord Wilberforce in Reardon Smith Line Limited v. Hansen Tangen (The Diana Prosperity) (1976) 1 WLR 989 at 995 and DTR Nominees Pty. Limited v. Mona Homes Pty. Limited (1978) 138 CLR 423 at 429 ("mutually known facts")

[106]

Extrinsic evidence 110 In applying the principles which entitle the court to receive extrinsic evidence of a specified nature (Codelfa at 352), or alternatively to utilise such evidence, reference to it in this matter may be restricted to the written documents that may properly be regarded as constituting the objective framework of facts within which the contract (the Deed) came into existence and to the parties' presumed intention in that setting. 111 In Exhibit CKL3 to the affidavit of Chee Kiong Low sworn 3 May 2005, at pp.21-29, is a letter from Mr. Low's solicitor dated 4 January 2000 to the solicitors for Monkiro enclosing a draft deed setting out the terms and conditions proposed on behalf of Ms. Lee. In that draft, clause 2 separately dealt with the loan of $1.1 million, the term of the loan and interest. In a separate clause (clause 7) entitled "Profit Sharing" the following draft clause appears:- "Upon completion of the project, the Developer agrees to repay the Investor the balance of the principal sum plus an additional five hundred and twenty thousand dollars ($520,000 )." 112 In an earlier letter of 13 December 1999, Mr. Low wrote:- "… our client needs to have confirmation of profits to ensure that her profit benefit in this clause is as it should be …" (emphasis added) 113 At p.32 of Exhibit CKL3 to Mr. Low's affidavit is a letter from the solicitors for Monkiro dated 14 January 2000 to which a draft deed was attached. This draft deed blended the repayment provision with the profit-sharing provision but cast them in a form involving a payment of two instalments of $750,000 and $870,000 which are the two instalment amounts referred to in the Deed sued upon. 114 A clause in similar terms is found in a later draft (p.85 of Exhibit CLK3). The first draft prior to 11 February 2000 contained a clause in identical terms to clause 2(b) of the final deed is to be found at CLK3 at p.97. 115 On 18 January 2000, Kiong Low sent a Deed for execution to Monkiro's solicitors which included a clause 2, Loan, in the same terms as appears in the Deed of 11 February 2000. On 19 January 2000, Monkiro's solicitors sent a draft Deed to Kiong Low in a different form whereby the loan amount of $1.1 million was specified in clause 2 and the profit-share was specified in clause 3. 116 On 20 January 2000, Kiong Low re-submitted the Deed in the form sent on 18 January 2000 with a few amendments. On 25 January 2000, following terse correspondence between the solicitors, Kiong Low re-submitted a Deed for execution which was in the same terms as the Deed executed on 11 February 2000. There is no indication in the correspondence as to why clause 2, which combined the loan of $1.1 million with the amount of $520,000 was insisted upon nor is there any indication that the $520,000 was not to be a profit-share payment as earlier drafts of the Loan Deed recorded. Ms. Lee's affidavits certainly do not suggest that the original concept of a profit-share as proposed by her was at any point between December 1999 and 11 February 2000 changed for any particular reason. 117 The factual matrix evidenced by these documents establishes that the parties were proceeding upon the basis that the obligation to pay the amount of $520,000 represented a profit share should the development proceed. Whilst the change in the form and terms of clause 2(b) in later drafts for payment of the amount of $520,000 was made at Ms. Lee's insistence, it appears that clause 2(b) was intended to maintain the earlier understanding of the parties that that amount would be payable as a profit share. This position is reflected in the evidence. Firstly, there is, as stated above, no evidence from Ms. Lee suggesting, subsequent to the draft Deed sent on 4 January 2000 or at any stage, that there was any alteration to the original basis (the profit share concept) upon which the amount of $520,000 was to be paid. Secondly, the evidence of Ms. Lee does indicate that she, at no time in discussions with Mr. Tang, adopted a hard line or an insistence on payment of $520,000 on an unconditional basis. In fact her evidence indicates that from the outset that she was, if anything, somewhat resistant to payment to her of such a large amount of money. 118 In her affidavit sworn 25 September 2003, Ms. Lee gave evidence of a conversation with Mr. Tang in October 1999 in which he stated that the project he had in mind would return a "big profit" (paragraph 12). 119 In paragraph 13 she states:- "About a week later when I was in Hong Kong, Tang telephoned me and said: 'thank you for your suggestion of the loan. I accept it. I will need to borrow from you $1.1 million. Then I will give you $520,000 interest in 18 months time'. I said, 'I don't want that much interest'. Tang said, 'I can make a big profit because you will have loaned the money to me so I would like to give you more interest on your loan.'" 120 In relation to this evidence, Ms. Lee was cross-examined:- "Q. And your response to that was that you did not want that much interest, wasn't it? A. Yes. Q. Because you know that was an exorbitant amount of interest, didn't you? A. Yes." 121 I am mindful that Ms. Lee claimed in her affidavit of 29 April 2005 that she asserted that Mr. Tang referred to the amount of $520,000 as "interest". However, her recollection of conversations on this particular aspect needs to be examined in light of the correspondence and the draft documents which came into existence in the relevant period leading to the formation of the Loan Deed. I have referred elsewhere to Mr. Low's characterisation of the contract as relating to what he termed his client's profit benefit and to the draft deeds in which it was referenced as "profit sharing". Added to this evidence is, of course, the terms of clause 2 itself which do not characterise the amount as interest. In any event, the discussion on the amount of $520,000 referred to in [118] was in the context of the project proceeding. I note also that the reference to that amount in the memorandum written by Ms. Lee dated 23 December 1999 (referred to in [28] above) was expressed in the context of the development business in fact proceeding as planned, whether successful in outcome or not. 122 It is clear from Ms. Lee's affidavit sworn 29 April 2005 (paragraph 21) that the discussion between Mr. Tang and herself concerning the sum of $520,000 was in the context of Mr. Tang speaking of generating profit from the project. Part of the conversation related by her in that paragraph contained the exchange:- He said: I am disappointed that you do not want to buy the project, but I thank you for the suggestion of the loan. I want to accept it. I will need to borrow $1.1 million and I will pay you back the principal and interest of $520,000 within 18 months. I said: I don't want that much interest. He said: I can make a big profit because you will have loaned the money to me so I would like to give you more interest on your loan. I want you to have it. 123 The conversation then goes on to relate a discussion as to how the amount loaned would be repaid. 124 The plaintiff relies upon the acknowledgment document dated 9 January 2002 executed by Monkiro and headed "Monkiro Pty. Limited" as an admission by the first defendant that the Deed of February 2000 related to the earlier payments. It was put that the acknowledgment of 9 January 2002 is only consistent with Monkiro recognising an obligation to pay the amount under the Deed including the $520,000 amount. 125 I will consider the effect, if any, of the acknowledgment document when dealing with the question of interest. There are a number of points to be considered in determining whether the document can found an estoppel or admission against the first defendant:-

[115]

Alternative defences: implied term - duty of good faith; unconscionability 129 The defendants plead alternative defences in paragraphs 10 and 11 of the notice of grounds of defence to the amended statement of claim. 130 In paragraph 10(g) of the defence it is alternatively pleaded that there was an implied term to the effect that the amount of $520,000 was a profit share in the event that the development went ahead. It is unnecessary here to set out the principles governing the implication of a term. Those principles are well established: BP Refinery (Westernport) Pty. Limited v. Hastings Shire Council (1977) 52 ALJR 20 at 26; Codelfa (supra) at 345-347. 131 The fundamental question is, as I have earlier determined in this judgment, one of interpretation of the Loan Deed in the light of those facts which are admissible for the purposes of determining the objective background facts and the subject matter of the contract. In any event, I am not satisfied that all of the conditions necessary to ground the implication of a term, in particular, the term pleaded operate in the circumstances of the present case. 132 I do not believe that the defendants can rely upon the doctrine of good faith for the purposes of establishing a defence of a breach of an implied term as pleaded in paragraph 11 of their defence. 133 The principles establishing a duty of good faith in the exercise of an entitlement or power under a contract are well-established: Alcatel Australia Limited v. Scarcella (1998) 44 NSWLR 349 at 368-369; see also Hughes Aircraft Systems International v. Air Services Australia (1997) 76 FCR 151 at 191-193 per Finn, J. and Gary Rogers Motors (Aust.) Pty. Limited v. Subaru (Aust.) Pty. Limited (1999) ATPR 41-703 at [37] and Far Horizons Pty. Limited v. McDonalds Australia Limited [2000] VSC 310. 134 In Alcatel (supra), Sheller, JA. observed (at 368) that if a contract confers power on a contracting party in terms wider than necessary for the protection of the legitimate interests of that party, the court may interpret the power as not extending to the action proposed by the party in whom the power is vested or, alternatively, conclude that the power is being exercised in a capricious or arbitrary manner or for an extraneous purpose which is another way of saying the same thing. 135 I do not believe that it could be said that action to enforce the provisions of clause 2(b) (assuming that they could be said to give rise to an entitlement to claim the amount of $520,000) in the circumstances would in itself attract the good faith doctrine. In particular if could not be said that the provision in those circumstances was wider than necessary for the protection of the legitimate interests of the party nor could, in those circumstances, it be said to be capricious or arbitrary for the plaintiff to claim in accordance with clause 2(b) in that event. The defence pleaded in paragraph 11 accordingly is not made out. 136 Finally, the defendants asserted that it would be unconscionable for the plaintiff to claim an entitlement to the amount of $520,000 referred to in clause 2(b) of the Loan Deed. Given that I have already determined, as a matter of construction, the question of the plaintiff's entitlement to the amount of $520,000 adverse to him, it is strictly unnecessary to resolve the unconscionability defence. I will, however, deal with it briefly. 137 In the defendant's written outline of submissions, it is simply asserted that it would be unconscionable for the plaintiff to claim such an amount where there is no evidence that the proposed development contemplated in the agreement went ahead or that it made the anticipated or any profit. There were very limited oral submissions on made on behalf of the defendants on this point. It was not developed in argument either at a generic level in terms of fundamental principles according to which equity acts in well-established areas involving unconscionability. As to the concepts of unconscionability and unconscionable conduct as understood in accordance with general law principles, see recent discussion by the High Court in Australian Competition & Consumer Commission v. CG Berbatis Holdings Pty. Limited (2003) 214 CLR 51 at 72-74 per Gummow and Hayne, JJ. I do not consider that the limited basis identified in the submissions made on behalf of the defendant attracts those general law principles in the circumstances of this case.

[117]

C: THE THIRD ISSUE: ENTITLEMENT TO INTEREST 140 I have earlier referred to the provisions of clause 2(c) whereby interest is stated to be payable at the rate of 9.75% per annum in the event that the amounts specified therein are not paid respectively on 20 February 2001 and 1 April 2001. 141 There is a question as to whether it is open to the plaintiff to claim interest at a higher rate, namely at 18%, based upon the acknowledgement document earlier referred to dated 9 January 2002. There is very little evidence concerning the circumstances in which that document came into existence. It is addressed to the plaintiff on the letterhead of Monkiro Pty. Limited and executed by Mr. Tang and the company seal was attached to the document. It is in the form of an acknowledgment "we hereby acknowledge that we have defaulted in our repayment of the loan as per our Loan Agreement dated 19 January 2000". 142 The document is not, in terms, in the form of a variation of a deed or indeed as an agreement signed or otherwise adopted by the parties. Mr. Low refers to the document in his affidavit sworn 3 May 2005 (paragraph 50). He there merely states that he cannot recall how he received the document from the first defendant and confirms that there was no agreement between the parties dated 19 January 2000. 143 The only evidence from Ms. Lee is to be found in her affidavit sworn 25 September 2003. In paragraph 22 she states that in January 2002 she asked Mr. Tang for the balance of the loan. She merely states "following my request, a document dated 9 January 2002, a copy of which is annexed hereto and marked with the letter 'D', was prepared". Ms. Lee does not provide any evidence of a discussion between the parties whereby there was an agreement to vary the terms of the Loan Deed, in particular to provide for a default interest rate of 18% per annum. 144 The document of 9 January 2002 is not a formal agreement by way of variation of the Loan Deed. I have earlier referred to issues with its terms whereby it purports to record conditions to which "the lender" has agreed. There is no agreement evidenced by the document or otherwise binding the plaintiff and first defendant. Accordingly, I am of the view that the claim seeking an interest rate of 18% must fail. 145 A further matter raised in relation to the default rate, was whether or not, having regard to the prevailing Supreme Court rates, 18% would constitute a penalty. The interest rate prescribed by the Supreme Court Rules (Schedule J) operative as at 9 January 2002 was 10% per annum. Although I am inclined to consider that the rate of 18% per annum was so high as to arguably constitute a penalty, given the conclusion earlier stated as to the absence of any effectiveness in law of the acknowledgment document as a variation to the Loan Deed, this is not an issue, which I need determine. 146 A proper reading of clause 2(b) in the context of the Deed gives rise to the implication that the interest rate payable on any outstanding monies under the Deed would attract the interest rate of 9.75%. 147 I have on this basis calculated the interest outstanding on the principal amount of $142,387 from the period 23 December 2001 to 2 August 2005. The calculation is as follows:- Principal N = $142,387 From 23 December 2001 to 2 August 2006 = 1,318 days $142,387 x 9.75% = $13,882.73 = $38.03 per day 38.03 x 1,318 = $50,123.54 Principal and interest = $192,510.54 148 I will permit the parties to make submissions on the calculations. Subject thereto, I propose to enter a judgment in favour of the plaintiff in the sum of $192,510.54. 149 I will defer making any order for costs including costs of any proceedings by way of cross-claim until I have heard submissions from the parties. 150 I accordingly am of the view that the plaintiff is entitled to an order against the first defendant as borrower and an order that the second, third and fourth defendants are jointly and severally liable as guarantors in respect of the order to be made against the first defendant. **********

Cases Cited (22)

CITATION : DONG v. MONKIRO PTY. LIMITED & ORS [2005] NSWSC 749

Masters v. Cameron (1954) 91 CLR 353 Gilsan (International) Limited v. Optus Network Pty. Limited (No. 2) [2005] NSWSC 38 Trollope & Colls Limited v. Atomic Power Constructions Limited (1962) 3 All ER 1035 City of Box Hill v. E W Tauschke Pty. Limited (1974) VR 39 Greer v. Kettle (1938) AC 156 Bowman v. Taylor (1834) 2 Ad & El 278 Con-Stan Industries of Australia Pty. Limited v. Norwich Winterthur Insurance (Australia) Limited (1985-86) 160 CLR 226 Codelfa Constructions Pty. Limited v. State Rail Authority of NSW (1982) 149 CLR 337 Royal Botanic Gardens & Domain Trust v. South Sydney City Council [2002] HCA 5 Trawl Industries of Australia Pty. Limited v. Effem Foods Pty. Limited (1992) 27 NSWLR 326 Manufacturers Mutual Insurance Limited v. Withers (1988) 5 ANZ IC 60-653 at 75,343 Australian Broadcasting Commission v. Australasian Performing Right Association Limited (1973) 129 CLR 99 Upper Hunter County District Council v. Australian Chilling & Freezing Co-op Limited (1968) 118 CLR 429 Horton Geoscience Consultants Pty. Limited v. Energy Minerals Pty. Limited [2005] QCA 169 De Cor Blinds Gold Coast Pty. Limited v. De Cor Blinds Australia Pty. Limited [2004] QSC 55 CASES CITED : Stadium Australia Management Limited v. Sodexho Venues (Australia) Pty. Limited [2002] NSWSC 437 Allstate Explorations v. L.V. Beaconsfield Gold NL [1999] NSWSC 832 State Lotteries Office v. Burgin (Kirby, P., unreported 23 April 1993) Burns Philp Hardware v. Howard Chia Pty. Limited (1987) 8 NSWLR 642 B & B Constructions (Australia) Pty. Limited v. Brian A. Cheeseman & Associates Pty. Limited (1994) 35 NSWLR 227 Davis Contractors Limited v. Fareham Urban District Council (1956) AC 696 Reardon Smith Line Limited v. Hansen Tangen (The Diana Prosperity) (1976) 1 WLR 989 DTR Nominees Pty. Limited v. Mona Homes Pty. Limited (1978) 138 CLR 423 DP Refinery (Westernport) Pty. Limited v. Hastings Shire Council (1977) 52 ALJR 20 Alcatel Australia Limited v. Scarcella (1998) 44 NSWLR 349 Hughes Aircraft Systems International v. Air Services Australia (1977) 76 FCR 151 Gary Rogers Motors (Australia) Pty. Limited v. Subaru (Australia) Pty. Limited (1999) ALPR 41-703 [37] Far Horizons Pty. Limited v. McDonalds Australia Limited [2000] VSC 310 Hospital Products Limited v. US Surgical Corporation (1984) 156 CLR 41 Australian Competition & Consumer Commission v. CG Berbatis Holdings Pty. Limited (2003) 214 CLR 51

[2005] QCA 169

[2004] QSC 55

[2000] VSC 310

(1954) 91 CLR 353

(1982) 149 CLR 337

(1992) 27 NSWLR 326

(1973) 129 CLR 99

(1968) 118 CLR 429

(1987) 8 NSWLR 642

(1994) 35 NSWLR 227

(1978) 138 CLR 423

(1977) 52 ALJR 20