JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3

KWS Capital Pty Ltd v Love [2013] WASC 294

McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165

1 FENBURY DCJ: The plaintiff, KWS Capital Pty Ltd is a company in the mortgage/funding and lending business.

2 The defendant, Mr Ross Love, is a retired gentleman who is the registered proprietor of three encumbered properties for the refinancing of which he desired funds. The properties were at Wangara, City Beach and Scarborough Beach.

3 In about December 2012, Mr Love approached KWS Capital instructing them to act as his agent to obtain funds for the refinancing of the existing first mortgage and a caveat on the Wangara property, and the second mortgages on each of the City and Scarborough Beach properties.

4 On 1 February 2013, KWS Capital, procured an offer of finance on various terms and conditions from Balanced Securities Ltd. The offer was contained in a letter from Balanced Securities Ltd of that date addressed to Mr Love care of KWS Capital and sent by email to Mr Apostolakos of KWS Capital. The offer was accepted by Mr Love.

5 No claim was made for payment of brokerage or other fees by KWS Capital.

6 Mr Love's acceptance was withdrawn some weeks later by consent (exhibit 15) because of unilateral mistake.

7 On 1 March 2013 another offer in a greater amount on similar, if not identical, terms and documentation was made by Balanced Securities and this offer was accepted by Mr Love.

8 Again, no claim was made for any payment of fees by KWS Capital.

9 It is noted that KWS Capital had already procured an offer (Approval) of finance from Balanced Securities prior to each of the dates 1 February and 1 March 2013.

10 Contemporaneously with each of these occasions, when accepting and signing Balanced Securities' offer provided to him by KWS Capital, Mr Love also signed a single page document prepared and presented to him by KWS Capital entitled 'Acceptance of Loan Conditions and Payment Authority' (exhibit 5).

11 By the document Mr Love appointed KWS Capital as his 'agent for the purpose of negotiating for an Approval and Advance of a loan (the Loan) from Balanced Securities Ltd' on certain terms and conditions.

12 The details of these commercial happenings were summarised by Edelman J in KWS Capital Pty Ltd v Love [2013] WASC 294, and do not need a repetition here.

13 These proceedings are concerned with the construction of the terms of the agreement reached between KWS Capital and Mr Love on 1 March 2013 which the parties in the trial variously described as the 'mandate' or 'structuring fee agreement' (exhibit 5).

14 It is common ground between the parties that no loan monies were advanced to Mr Love as a result of his agreement with Balanced Securities. Without going into the details, as Edelman J observed at [21], '... it is clear that the amount which Balanced Securities was willing to lend on the terms and conditions of this letter of offer was less than the amount necessary' to achieve the degree of refinancing desired by Mr Love. Edelman J then refers to exhibit 11, an email to KWS Capital's operatives, Matthew Hower and Anthony Apostolakos from Mr Trevor Wilson of Balanced Securities. In that email Mr Wilson, having made observations about the information provided by Mr Love then states:

I am yet to run these numbers formally but looking at the current debts I expect there will be no way for this deal to be able to progress.

If only borrowers were more realistic re asset values we would save a lot of time. (exhibit 11)

15 Mr Metaxas, in his closing submissions, asserted that this email clearly indicates that 'the deal was dead in the water' presumably meaning that as at 3 April 2013 there was no possibility, as proposed, that the funds KWS Capital had obtained approval for would be forthcoming; advanced to Mr Love; and this because Balanced Securities' view was that Mr Love had been unrealistically high in his valuations of the assets he offered as security.

16 In his closing submissions to the court counsel for KWS submitted at ts 110 -111 as follows:

Your Honour, the one critical, we say only question your Honour has to determine is whether or not there is entitlement to a structuring fee triggered by an approval or was drawdown required. If drawdown was required, my friend wins. If approval was the trigger without the need for drawdown, my friend loses.

And the only document your Honour has to construe is what we've called the mandate. It's called a mandate because it's a mandate for the agent, my client the finance broker, to go and search for funds and get an approval for his principal, Mr Love the defendant. And the mandate is the only document your Honour has to legally construe.

And coming to the task of construction, the authorities say one starts with examining the text of the mandate - that's at page 99, your Honour - the text of it followed by the context of it, and then the purpose of it. And if there's no ambiguity on the face of the document, there is no resort to extrinsic evidence.

17 In short it is put on behalf of KWS Capital that on a proper reading of exhibit 5, its entitlement to the fee specified in the agreement with Mr Love was triggered by Mr Love's acceptance of the offer from Balanced Securities on 1 March 2013. That entitlement was not dependent upon when drawdown was required or permitted.

18 Counsel for the plaintiff referred to a decision of Court of Appeal in New South Wales in JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3 where at [118] in a reference to Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95, in [118]:

In Ermogenous, Gaudron, McHugh, Hayne and Callinan JJ distinguished, in the context of considering the contract formation element of intention to create legal relations between the necessary 'objective assessment of the state of affairs between the parties' and the irrelevant 'identification of any uncommunicated subjective reservation or intention that either may harbour'. Equally the reliance by the parties in the present case, in the context of the issue of consideration, on internal documents that were not communicated between them and did not evidence the communication between them of any relevant facts or views conflicts with the need to undertake an 'objective assessment of the state of affairs between the parties' and is therefore impermissible.

19 Counsel also referred, as did his opponent, to the decision of the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40]:

This Court ... has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

20 It was put on behalf of Mr Love that KWS Capital was not entitled to its fee under the agreement until the funds were advanced and received by him or on his behalf. As no funds were forthcoming, it was put Mr Love was not liable for the fee.

21 As I have mentioned, the offer made by Balanced Securities which was accepted by Mr Love on 1 March 2013 was made subject to various conditions. Some of the more salient of those conditions are set out in exhibit 4 being a letter from Balanced Securities to Mr Love care of KWS Capital Pty Ltd:

We advise that we as the Lender are, subject to us verifying the accuracy of information contained in your application and further subject to execution by each party of a facility agreement (the Facility Agreement) and other definitive documents (Transaction Documents) as required by the Lender, prepared to lend you funds upon the following terms and conditions (letter of offer) ...

Principal $6,845,000 or 55% of the current market valuation of the Properties detailed below (exclusive of GST) commissioned by us, whichever is the lesser.

Term 12 months with the right to early discharge on payment of Interest to date of repayment plus two months additional interest.

The term is to commence from the Interest Commencement Date.

Interest

Commencement Date From the date of settlement or seven days after the dispatch of mortgage documents to you, whichever is the earlier.

Transaction Document to include this Letter of Offer, the Security Letter, the Facility Agreement, and each Security Document.

Security Document (various described in the document especially first registered mortgage over the three properties Wangara, City Beach and Scarborough Beach and so on).

...

Special Conditions 1. Subject to receipt of the Lender's formal valuation the allocation of the Principal under this offer is as follows

...

(b) $230,000 to meet costs, fees and expenses set out herein and any brokerage payable to your broker;

...

10. Prior to any advance under this Letter of Offer the Lender requires the following to be provided which must all be satisfactory to the Lender in all respects:

(a) a valuation from the valuer instructed by the Lender concerning:

(i) the 'as is' value of the Wangara Property taking into account its current zoning and development potential and an 'as if complete' value of Wangara assuming approval of the 6 lot subdivision. The valuer must confirm that there is no planning impediment that would prevent the immediate subdivision of the property. They are to be valued on a current market;

(ii) the current market value of City Beach and Scarborough properties.

...

Fees (a) Legal fees for documentation the Transaction Documents

(b) A loan approval fee ...

(c) All registration fees ..

(d) An evaluation fee ...

Liability for Interest

Costs, Charges and

Expenses It is a condition of this Letter of Offer that, upon acceptance, each Obligor shall jointly and severally become liable to pay on demand all interest costs, charges and expenses incurred in relation to the proposed loan, and that such liability shall not be in any way affected by the fact that the proposed loan does not proceed or that it proceeds for a different principal sum or on different terms than those stated herein. Insofar as such costs, charges and expenses comprise legal fees, they shall be paid by you on an indemnity basis.

22 Balanced Securities Ltd never advanced the funds to Mr Love because the conditions upon which the approval for the advance of funds was made were not met as mentioned above.

23 Relevant terms of the structuring fee agreement or mandate document (exhibit 5) upon which KWS Capital sues in these proceedings are as follows.

24 The document, exhibit 5, described as 'Acceptance of Loan Conditions and Payment Authority' was prepared by and addressed to KWS Capital Pty Ltd. In its opening the following appears:

I, Ross Maitland Love, sole director of Newco (TBA) severally as the Borrower (the 'Borrower')

And its' officers and each of them our agent for the purpose of negotiating for an Approval and Advance of a loan (the 'Loan') from

on the following terms and conditions

....

25 There is then a reference to the security property that will be utilised to secure the loan and the amount of the loan is mentioned and then the following appears:

Structuring fee payable to

KWS Capital Pty Ltd

for acting as agents and

obtaining approval for the

loan from the Lender to the

Borrower:

We irrevocably authorise the Lender to disburse the structuring fee of $154,000 (one hundred and fifty-four thousand dollars and zero cents) payable to KWS CAPITAL PTY LTD of Level 14/28 Flinders Street, Adelaide, SA, 5000 for acting as agent when advancing the loan.

In consideration of the Lender approving the Loan to the Borrower, the Borrower hereby agrees to pay the structuring fee to KWS Capital Pty Ltd and hereby specifically charges their interest in the properties to secure payment of the structuring fees and costs to KWS Capital Pty Ltd.

26 KWS Capital Pty Ltd assert, as I have indicated, that on a proper construction of the terms of this document, in spite of the fact that no monies were ever in fact advanced, Mr Love is liable to pay the fee of $154,000 to KWS Capital.

27 KWS Capital provided this document to Mr Love seeking his signature and agreement to it on the same occasion as Mr Love accepted Balance Securities' conditional offer of finance. The documents, together with others, were in the one bundle and all bear the same date.

28 As I have noted, the effect of this was that the conditional funding approval was obtained at the same time as the agreement to obtain that funding approval was signed by Mr Love. On KWS Capital's case it was entitled to its fee on the same date, being 1 March 2013, albeit payment of that fee was not to be made until the funds from Balanced Securities were advanced to Mr Love.

29 By exhibit 5, KWS Capital was appointed Mr Love's 'agent for the purpose of negotiating for an Approval and Advance of a loan (the Loan) from Balanced Securities Ltd'.

30 As previously highlighted, there then appears with respect to the fee the words 'structuring fee payable to KWS Capital for acting as agents and obtaining approval for the loan from the lender (undefined but presumably Balanced Securities Ltd) to the borrower ... $140,000 plus GST = $154,000.

31 It must have been anticipated KWS would continue its efforts as agent for Mr Love in dealing with the meeting of any special conditions to which a loan approval may have been made subject by the lender.

32 The final two clauses are in the following terms as I have stated:

We irrevocably authorise the lender to disburse the fee payable to KWS - ... for acting as agent when advancing the loan.

In consideration of the lender approving the loan to the borrower, the borrower hereby agrees to pay the fee to KWS and hereby specifically charges their interest in the properties to secure payment of the fees and costs to KWS.

33 KWS asserts these words are unambiguous, as is their meaning and effect which is that Mr Love agreed to pay the fee to KWS for obtaining funding approval and the fee was due when Mr Love accepted Balanced Securities' offer, even though the offer was subject to conditions that were not ever met and even though no funds were ever advanced to Mr Love.

34 In my view any consideration of the terms of the document would lead to a conclusion that the words used are ambiguous. Some phrases which might suggest that KWS' contention is maintainable. Others do not.

35 Given the ambiguity of exhibit 5, the factual matrix in which the relevant events occurred can be assessed so as properly to construe the document.

36 It is to be observed that, clearly, Mr Love had no ability to pay KWS Capital's fee before he received the finance he needed. From the documentation it is clear KWS Capital's fee/commission was to be paid out of the funds KWS Capital procured for Mr Love. This makes commercial sense given the object of the exercise was the refinancing of Mr Love's real estate investments by increasing the extent of his borrowings.

37 Two basic assertions are put on behalf of Mr Love. Firstly, and primarily, it is put that the offer/approval of finance was subject to conditions that were not met. Therefore, it is argued, no approval for advancement of funds was ever given and KWS Capital was therefore not entitled to its fee.

38 According to Mr Love 'approval' of finance for the purposes of exhibit 5 should be found to mean unconditional approval.

39 In written submissions it is put on behalf of Mr Love that the relevant factual matrix to assist in a proper construction of the document is as set out in the defence pars 4 - 7 inclusive.

40 It is put that if that is accepted, 'the literal construction asserted by KWS Capital makes no commercial sense at all'. The agreement was that the fee would be paid when and only if there was loan and then it was put in submissions as follows:

1. In this case there was no loan and the defendant was never told he could borrow any amount from the lender.
2. The agreement provided for the fee to be paid by the lender, obviously, from the loan. This reinforces that there had to be an advance.
3. As matters progressed the 1 March 2013 offer was withdrawn and the plaintiff's mandate was cancelled. At that time the plaintiff made no demand for payment.
4. In any event the offer dated 1 March 2013 was subject to conditions including the refinancing of all mortgage debts for which the lender allowed $5.275m. The lender also allowed $230,000 for costs, fees and expenses, $500,000 for the judgment debt, $690,000 for interest capitalisation and $150,000 to assist with completion of the subdivision of Wangara. As at December 2012 the defendant owed $4.925m in December 2012 on the mortgages and $500,000 for the judgment debt. [sic]
5. The maximum amount that Balanced Securities may theoretically have been prepared to lend was $5.55m (on the basis of the valuation) although no offer to lend that amount was ever made.
6. An offer of that amount would have meant that there was $4.02m to pay out the mortgages so there was never going to be a advance as was acknowledged by Mr Wilson on 3 April 2013.

41 As Edelman J in (above) said at [62] 'the agreement must be construed in a commercially sensible way, although consistently with the language of the contract'.

42 Amongst the authorities his Honour refers to is Gleeson CJ in McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, 589 said:

This commercial contract should be given a business like interpretation. That interpretation requires attention to the language used by the parties, the commercial circumstances which a document addresses, and the objects which it is intended to secure.

43 I find the defendant's argument compelling in relation to this issue. In the circumstances of this transaction in my view the fee of $154,000 was not payable without an advance and as there was no advance then as the defendant's puts it, the claim for the fee fails.

44 I accept the defendants contentions that it would be uncommercial to construe the fee structuring agreement 'as involving an undertaking by him to pay the $154,000 fee irrespective of whether the funds are advanced to him or not'.

45 I find for the defendant and the plaintiff's claim must be dismissed.