Franks v Equitiloan Securities Pty Ltd

Franks v Equitiloan Securities Pty Ltd - [2008] NSWSC 33 - NSWSC 2007 case summary — Zoe

[33]

10 On 20 August 1998, the parties also entered into a mortgage of the Windy Dropdown property, to Equitiloan Securities (as to 61.78 per cent) and to HGR Nominees (as to 39.22 per cent) as tenants-in-common. The first advance under the credit facility was made to Windy Dropdown on 4 September 1998. The subdivision was registered on 19 November 1998. Lot 10 was sold prior to registration, by contract dated 31 October 1998, for $1.6 million. 11 On 11 November 1998, Equititrust, on behalf of Equitiloan Securities, sent to Windy Dropdown a further letter of offer, offering a "loan increase" of $400,000 to $5.5 million, specifying as the interest rate "10.25% (for prompt payment) payable monthly in advance", and as the requisite security a first mortgage over Lots 10-19 in the subdivision, and a variation of the existing mortgage. The letter did not refer to the 1998 Credit Facility Deed, nor to any other documentation. Windy Dropdown accepted this offer. 12 On 10 March 1999, Equititrust, on behalf of Equitiloan Securities, forwarded to Windy Dropdown a further letter of offer, of a "fixed rate loan facility for one year" in the amount of $6.25 million, for the purpose of paying out syndicate members (a reference to HGR Nominees) ($1,050,000), paying out existing Equitiloan debt ($4,100,000), capitalising interest ($300,000) and construction of two houses on the subdivision ($800,000). It specified, as the security required, a first mortgage of Lots 11-18 in the subdivision, a guarantee and indemnity by the directors of Windy Dropdown, a fixed and floating charge over the assets and undertaking of Windy Dropdown, and a tripartite agreement between Equitiloan Securities, Windy Dropdown and the builder. The interest rate was again specified as "10.25% (for prompt payment) payable monthly in advance". However, paragraph 6 provided that interest would be capitalised monthly based on the balance drawn down, and paragraph 10, entitled Special Conditions, relevantly contained the following: 1. Provision of partial releases of the security held will be subject to the terms agreed in the profit share agreement between Windy Dropdown Pty Ltd and Equitiloan Limited;

[49]

Accordingly, any further advances made to complete the dwellings will be advanced without express approval and will form part of the "moneys secured" under the Credit Facility Deed, the mortgage and other relevant security documentation between the parties dated 20 August 1998. All rights are reserved. 24 According to Mr Franks, he was conscious that the loan documentation in force had the effect that the term expired in March or April 2000, and as that date approached became more active in his attempts to refinance, and in the course of conversations with Mr Wayne McIvor said: "I am very concerned about what will happen in April. Do you propose to do anything about the loan?", to which Mr Wayne McIvor replied: "I can assure you that nothing will happen . If everything is proceeding properly, we are more than happy to continue with the project. We will continue to fund the project". Mr Franks says that he was comforted by those statements, and relied upon them in deciding to cease his attempts to refinance; his evidence to that effect was unchallenged. 25 In his affidavit evidence, Mr Wayne McIvor deposed to having received a telephone call from Mr Franks in about March 2000, in which Mr Franks asked "What is going to happen in March in relation to the expiry of the loan?", and he replied "Phil, at this point in time all we are concerned with is getting the houses finished ". In his affidavit, he denied having said that nothing would happen with the loan, but in cross-examination he conceded that he had said ("under conditions"): "I can assure you nothing will happen if everything is proceeding properly. We're more than happy to continue with the project", adding "We will continue to fund the project". He accepted that at no time in his dealings with Mr Franks between March and May 2000 did he refer to the fact that the loan was in default, and that he did not talk with Mr Franks about the default; he said that he did not know why he did not then say "the loan will go onto the default rate ". He was asked: Q. Did you think that to say to Mr Franks that his loan was in default and he would be charged default interest would infuriate him? A. Absolutely.

[63]

38 In a letter dated 26 July 2000, Mr Trodden asserted that Windy Dropdown had relied upon representations made by Equitiloan Securities - to the effect that Equitiloan Securities intended to see the project through, and would not precipitously take any steps to threaten the opportunities to maximise returns under the Profit Share Agreement by purporting to exercise the power of sale or taking other steps that would reduce Windy Dropdown's effective control of the site - and sought assurance that Equitiloan Securities would not take any step adverse to Windy Dropdown's interests or inconsistent with the Profit Share Agreement, concluding, "Our client, wishing to maintain and improve the cordiality of relationships, does not make any ultimatum at this stage, but would appreciate a response to the above within, say ten days". Equitiloan responded on 3 August, as follows (emphasis added): We are not agreeable to your client controlling the marketing. This is in the hands of Ray White Manly and shall proceed in accordance with their advice. We likewise wish to maintain cordial relations. However, your client needs to understand that if he is unwilling to co-operate with the marketing efforts proposed we shall exercise our rights as proposed. The Profit Share Agreement in no way ameliorates these rights. Please advise by return the status of moneys to be released to us from trust account. Upon receipt of these moneys and upon your client confirming his co-operation we are happy to consider a further advance to your client for cash flow purposes. 39 On 15 August, Mr Trodden wrote to Mr Mark McIvor, relevantly: In the spirit of pragmatism and advancing the project, our client has confirmed our instructions regarding the release of the funds held in trust to you. Our client does so upon the basis of your representations in the final paragraph of your letter of 3 August, 2000 (and earlier discussions) regarding further future funding, carrying with them the implication that you will continue to support the project to the extent of your capacity. We look forward to receiving details of your on-going arrangements for bringing the project to final fruition. 40 The next relevant development was on 6 October 2000, when Mr Trodden wrote to Equitiloan Securities that Windy Dropdown wished to discharge the mortgage, requesting preparation of a discharge and a payout figure in readiness for settlement on 20 October 2000. The request was repeated on 10 October, 11 October, 16 October, 17 October and 19 October. On 26 October 2000, Windy Dropdown instituted these proceedings, for redemption of the mortgage. Equitiloan Securities [not Equititrust] served a Notice of Default on 27 October, asserting a default under Clause 14.1(a) of the mortgage by failure to repay the principal sum and accrued interest on 26 March 2000, and in permitting a creditor to lodge a caveat. 41 Mr Mark McIvor swore an affidavit on 11 November 2000 in which he deposed that as at 17 November the amount outstanding to Equitiloan Securities [not Equititrust] would be $5,051,846, which sum included interest at the higher rate of $252,078. In order to procure a discharge, Windy Dropdown paid, under protest, the whole amount demanded, including interest at the higher rate from March 2000 until settlement. Although Mr Franks contends that this amounted to $303,064, the only evidence that quantifies it suggests that the amount paid on account of interest at the higher rate was $252,090 [Affidavit of Mr Mark McIvor sworn 5 March 2003, par 28 and annexure MM4]. Having commenced these proceedings to compel Equitiloan Securities to discharge its mortgage, Windy Dropdown then amended its claim - the mortgage having been discharged - to recover, by way of restitution, first, from Equitiloan Securities, the amount paid as interest at the higher rate; and, secondly, from Equititrust, the amount which it had paid under the profit share agreement in respect of lots 14 and 15 in the subdivision.

[65]

44 On 1 September 2005, the administrators executed a deed assigning to the present plaintiff, Mr Franks, "any claim or cause of action by WDD against Equitiloan Securities in respect of or arising out of the dealings between WDD and Equitiloan Securities in relation to the development by WDD of property, being lot 8 in Deposited Plan 224946, at Molong Street, North Curl Curl, New South Wales, including but not limited to claims which WDD has against Equitiloan Securities". On 7 April 2006, the administrators rejected Equititrust's proof of debt in respect of the costs in part, and rejected it in respect of the profit share claim in toto . By originating process filed in proceedings 2473/06, Equititrust appealed from that decision of the administrators. A further deed, dated 10 July 2006, between Windy Dropdown and Mr Franks provided that, for avoidance of doubt, the subject matter of the assignment under the deed of 1 September 2005 "includes all matters relating or arising out of" these proceedings, "including the actions by WDD against all defendants in those proceedings, being Equitiloan Securities Pty Limited, Equitiloan Limited [Equititrust], Wayne McIvor and Mark McIvor". 45 Equititrust's appeal against the rejection of its proof of debt was fixed for hearing before White J to commence on 7 November 2006. The present proceedings had not yet been fixed for hearing, but a callover was imminent and the parties discussed the manner and sequence in which both cases should proceed. At that stage, Equititrust did not have leave to proceed with its cross-claim against Windy Dropdown, which leave was required by (CTH) Corporations Act 2001, s 444E. One of the proposals under discussion involved the possibility that Equititrust would defer prosecuting the appeal against the rejection of its proof of debt, and instead obtain leave to prosecute its cross-claim against Windy Dropdown in these proceedings, and that Equititrust and the administrators would agree to be bound, for the purposes of the appeal, by the decision of the Court in these proceedings. Thus, on 7 November 2006, the hearing of the appeal did not proceed; his Honour made no orders (as some formalities concerning the draft orders required further attention), but it is plain that all parties then envisaged that the hearing of the cross-claim (as part of these proceedings) was to proceed first, that Equititrust would be given leave to prosecute the cross-claim against Windy Dropdown, and that the hearing of the appeal from the rejection of the proof of debt would abide the outcome of the cross-claim, in respect of which the administrators agreed to be bound by the Court's decision. 46 Although it was envisaged that his Honour would in due course make orders in chambers when short minutes were brought in, that had still not been done when the matter came before me for pre-trial directions on 6 February 2007, when, by consent, I made the following directions: 1. Subject to paragraph 2, below, pursuant to section 444E(3) of the Corporations Act 2001, leave be granted to the Cross-Claimant, Equititrust Limited (formerly known as Equitiloan Limited) to begin and proceed with its Cross-Claim against Windy Dropdown Pty Limited (subject to Deed of Company Arrangement).

[68]

Contentions 48 On his claim for restitution of the higher rate interest paid by Windy Dropdown to Equitiloan Securities, Mr Franks submits that Equitiloan Securities was not entitled to charge interest at the higher rate because: · The concept of higher rate interest was only capable of being given meaning and context by reference to the 1998 Credit Facility Agreement, and that agreement did not operate after March 1999; · There was no event that entitled Equitiloan to charge the higher rate; · Equitiloan Securities is estopped from charging higher rate interest. 49 On his claim for restitution of profit share paid by Windy Dropdown to Equititrust, Mr Franks originally contended that Equititrust was not entitled to the profit share under the Profit Share Agreement because the obligation to pay profit share was unsupported by consideration. This contention was abandoned (in anticipation of its inevitable rejection) in final submissions. However, Windy Dropdown continued to oppose Equititrust's cross-claim for profit share in respect of the other properties, contending: · That on its proper construction, the Profit Share Agreement related only to Lots 14 and 15 and not to the other lots; · That any entitlement to profit share was contingent on the on-going involvement of Equititrust and/or Equitiloan Securities in the funding of the development; and · That the Profit Share Agreement had been terminated, before any right to profit share in respect of the other lots had accrued. Was Equitiloan Securities unable to charge higher rate interest by reason of the 1998 Credit Facility Agreement not applying after March 1999? 50 This issue involves two subsidiary questions: the first is whether Equitiloan Securities' entitlement to higher rate interest was dependent upon the 1998 Credit Facility Agreement; and the second is whether that agreement had continued application after March 1999. 51 In an on-going and somewhat flexible commercial relationship, in which there are a series of inter-related transactions, separately recorded but with some common documentation, it is not always easy to identify where the current operative obligations are to be found: later transactions may modify earlier obligations, even though the earlier is more formally documented. Here, as the offer of 14 December 1999 was rejected, the last documented agreed terms were those contained in the letter of offer of 7 July 1999. In turn, that offer was expressed as an increase of the (then) existing facility, and what resulted from its acceptance is properly to be seen as a variation of the terms contained in the letter of 10 March 1999: it referred to substantially the same security as was mentioned in the 10 March 1999 letter (save that it substituted reference to a Variation of Mortgage for the Mortgage); and it repeated many of the Special Conditions applicable to the 10 March 1999 offer. It manifests an intention that the mortgage as varied secure advances pursuant to the letter of 7 July 1999, which included the advances mentioned in the letter of 10 March 1999. 52 The reference in the 7 July letter to an interest rate "for prompt payment" is to be understood in the context that the mortgage, as varied by the variation, specified higher and lower interest rates. For present purposes it is unnecessary to resort to the credit facility agreement: that the Variation of Mortgage imposed an obligation to pay interest at the higher rate, unless it was paid promptly and there was no default, was a matter of which all the parties were on notice as at 7 July 1999 at least. Thus even on assumption that the Credit Facility Agreement was no longer operative between the parties, an entitlement to charge interest at the higher rate in certain circumstances was conferred by the mortgage as varied. Accordingly, the entitlement to charge higher rate interest was not dependent on the Credit Facility Agreement, but was supported by the mortgage as varied, which unquestionably covered advances made after March 1999.

[69]

53 However, it is useful to consider in any event whether the Credit Facility Agreement had continued operation after March 1999. The 1998 Credit Facility Agreement was expressed to be in respect of a $5.1 million progressively drawn down variable rate loan facility for one year . The November 1998 letter was expressed as an increase of that facility to $5.5 million. The March 1999 letter referred to a $6.25 million fixed rate loan facility , which involved paying out HGR and clearing the existing Equitiloan Securities debt. This March 1999 facility was thus expressed to be a different facility, upon different terms, from the 1998 credit facility. Unlike the November 1998 letter, it did not purport to increase the existing facility, but to effect a "clearing" of the pre-existing facility and its replacement by another (different) facility. Some terms of the 1998 Credit Facility Agreement were inapt for the new March 1999 facility, particularly those terms as to interest and the duration of the facility. 54 While those considerations tell in favour of the view that the March 1999 facility replaced the 1998 facility, supporting the contention that the 1998 Credit Facility Agreement had no further operation, there are also contrary indications. First, none of the documentation relating to the replacement March 1999 facility contained any of the provisions one would expect to see as to the obligations of the borrower and events of default. Secondly, and more importantly, the express terms of the Credit Facility Agreement - including in particular the definitions of "money secured" and "security", clause 5 (Continuing security), and clause 6 (Events of default) - tell in favour of the 1998 agreement continuing to operate. Decisively, moneys advanced under the March 1999 facility fell within the definition of "money secured" (c)(v) in the 1998 Credit Facility Agreement, and the provisions of clause 5 specifying the requirements for its discharge were not satisfied in March 1999.

[74]

Was there an event entitling Equitiloan to charge interest at the higher rate? 59 Although that question conveniently describes the issue, it does not do so precisely, because under the loan documentation (the mortgage as varied, as well as the Credit Facility Agreement), the obligation of Windy Dropdown was to pay interest at the higher rate, unless those conditions that obliged Equitiloan to accept the lower rate were satisfied. Although the wording is different, in substance the conditions specified in the mortgage and in the Credit Facility Agreement were the same, namely (1) payment of interest on or before the due date, and (2) observance and performance throughout the preceding month of all relevant covenants, conditions and agreements on the mortgagor's part contained or implied in the mortgage [Variation of Mortgage, cl B(a); Credit Facility Agreement, cl 3.3]. As the obligation was to pay interest at the higher rate unless those conditions are satisfied, the legal onus of proving satisfaction of the relevant conditions is born by the mortgagor, who claims the benefit of the exception from the obligation to pay the higher rate. In addition to those provisions, under the Credit Facility Agreement [special covenant 13(e)] interest became payable at the higher rate upon expiry of the term of the loan, unless and until a deed of extension was executed. 60 Under the March 1999 facility, although Clause 5 (entitled "Interest Rate") referred to interest being payable "monthly in advance", Clause 6 (entitled "Payment of Interest") provided that interest would be capitalised monthly based on the balance drawn each month. This provision for capitalisation overrode any earlier obligation to pay periodical instalments of interest. In those circumstances, there was no obligation to make a payment of interest each month, save by way of capitalisation. The only due date for payment of interest was, in those circumstances, the date for repayment of the loan, namely twelve months after drawdown. 61 The July 1999 loan offer increased the amount of the facility. In respect of interest rate, it provided that interest would be calculated monthly on the amount drawn "and capitalised within the approved limits", also introducing a variable interest rate. As to payment of interest, however, it continued to provide: "interest will be capitalised monthly based on the balance drawn down". It contained no other provision for payment of interest. Accordingly, it did not impose any obligation to pay interest before termination of the loan, whereupon principal and capitalised interest was to be repaid. 62 It follows that, up until the date for capital repayment - twelve months after drawdown of the March 1999 facility, namely 26 March 2000 - there could be no failure to pay interest on or before the due date, and the first condition of eligibility for the lower rate was satisfied.

[75]

63 As to the second condition (performance of other relevant covenants, conditions and agreements), while the onus of proving absence of default in this respect lies on the mortgagor, in the light of the recital in the Variation of Mortgage dated 8 April 1999 that "The principal sum remains owing but all interest has been paid and the mortgagor is not in default under the said mortgage", the mortgagee bears at least a forensic or evidentiary onus of raising the issue. It was not suggested that there was any subsequent default - other than in respect of payment of interest - before March 2000, and Equitiloan Securities only ever claimed interest at the higher rate from March 2000. I accept that, until March 2000, Windy Dropdown performed and observed all other relevant covenants, conditions and agreements. 64 As to Special Covenant 13(e), the March 1999 facility was for a term of one year, expiring in March 2000. The parties never agreed to extend that term: although a mortgage statement issued on about 18 November 1999 stated that the loan was repayable on 4 September 2000, that was apparently in anticipation of the loan offer of 14 December 1999, which included a proposed extension to 4 September 2000, but was ultimately not accepted. As McIvor Coghlan's letter of 27 January 2000 to the directors of Windy Dropdown records, the parties were unable to agree to the terms and conditions of that offer, and there is no evidence of any reliance on any suggestion that an extension had in fact been granted. 65 As has been seen, the loan offer of 14 December 1999 (which, though bearing that date, was probably forwarded under cover of Equitiloan Securities' letter of 19 January 2000), included as a proposed special condition an assertion by Equitiloan Securities and an acknowledgment by Windy Dropdown of default on the basis that, whereas the Credit Facility Deed provided for the monthly payment of interest, the parties had agreed that interest would be capitalised to a maximum amount of $300,000, and that the borrower, having exhausted the agreed limit of capitalisation, had committed an event of default. Windy Dropdown did not agree to the terms of the 14 December 1999 letter, and I have concluded, above, that in light of the terms of the March and July 1999 letters of offer, there was no obligation to pay interest before March 2000; thus the assertion in the 14 December letter of an event of default in that respect was incorrect. 66 Mr M S Willmott SC, for Mr Franks, submitted that the term of the March 1999 facility should be construed as "one year or such further period as may be necessary to finalise the building and realisation of Lots 14 and 15 ". He submitted that there could not be a contractual default until Lots 14 and 15 had been completed and sold as contemplated by the Profit Share Agreement. I do not accept this submission, which was advanced essentially on two bases. Insofar as it was suggested that such a term should be implied, it is neither obvious nor necessary to give business efficacy to the contract. It is commonplace for loan agreements to be for specified terms, even though the project which the loan is to fund may not necessarily be completed within the term. That is a risk that the borrower/developer conventionally assumes. Implication of such a term would place the lender at the mercy of the vagaries of the construction industry, and there is simply no reason to suppose that the parties would have contemplated such a position. 67 The submission was advanced also on the basis that, under the profit share agreement, Equititrust and Windy Dropdown were joint venturers who owed fiduciary obligations to each other. While there are undoubtedly many contexts in which an agreement to share profit can evidence a partnership or joint venture, that is not always so. Consideration of the terms of the Profit Share Agreement as a whole does not suggest that these parties intended to assume the fiduciary obligations inter se of joint venturers. In this case, the profit share was simply a different means of remunerating the financier for the risk it was assuming, and empowering it to control the project to protect its interests. The powers which were conferred on the financier in respect of the project were by way of securing its position, rather than by way of distributing responsibilities between joint venturers. I do not accept that this Profit Share Agreement imported relevant obligations of a fiduciary character. 68 Neither principal nor capital was repaid upon expiry of the loan in March 2000. Accordingly, from that point there was a failure to pay interest when due, and the first condition entitling Windy Dropdown to pay at only the lower rate was no longer satisfied. Moreover, Special Covenant 13(e) in the schedule to the Credit Facility Agreement had the effect that, the twelve month loan term having expired without any deed of extension having been executed, the higher rate of interest was payable. On either view, Windy Dropdown was not eligible for the lower rate of interest after March 2000, and as a matter of strict legal right Equitiloan Securities was entitled to charge the higher rate of interest from that date. Is Equitiloan Securities estopped in equity from insisting on payment of interest at the higher rate from March 2000? 69 Mr Willmott SC submitted that if, as a matter of strict legal right, Equitiloan Securities was entitled to charge the higher rate of interest from March 2000, nonetheless Equitiloan Securities was precluded from insisting on its strict legal right to be paid interest at the higher rate by a promissory estoppel arising from the course of dealing between the parties from early 2000.

[82]

77 The absence of any reference on behalf of Equitiloan Securities to default or higher rate interest was not mere oversight, but deliberate; Equitiloan Securities viewed Mr Franks as a difficult customer and felt that any allegation of default or suggestion of higher rate interest would infuriate him and derail the project from progress towards completion and sale of Lots 14 and 15. When Equitiloan Securities told him that nothing would happen, they knew he was concerned about the consequences of expiry of the loan. I am thoroughly satisfied that Equitiloan Securities knew and intended that Windy Dropdown and Mr Franks would rely on the statement that nothing would happen upon expiry of the term of the loan. 78 The elements of a promissory estoppel are, therefore, established. From March 2000, Equitiloan Securities was estopped from insisting on its strict legal right to take action adverse to Windy Dropdown in reliance upon expiry of the loan (including by charging interest at the higher rate), so long as the sale and realisation of Lots 14 and 15 proceeded satisfactorily. 79 As is the case with many promissory estoppels, this was a position from which Equitiloan Securities was entitled to resile, but only upon giving reasonable notice. Equitiloan Securities' letter of 17 July 2000 threatened the issue of default notices "failing a satisfactory response to our facsimile by close of business on Wednesday (19th July)". A response was provided by that date, and even if it were not satisfactory to Equitiloan, did not result in the issue of default notices then. That was not notice of intention to resile from the estopped position; rather, it signified adherence to the estopped position so long as the condition (a "satisfactory response to our facsimile") was met. Equitiloan Securities' letter of 18 July 2000, indicating that a program of sale had been requested from Ray White Manly and "we shall be proceeding in accordance with their advice" concluded " If we do not receive full co-operation we shall have no alternative but to exercise our power of sale" - again, the threat was conditional (upon not receiving full co-operation), and it left open the distinct possibility (if not preference) of not exercising the power of sale. It said nothing about higher rate interest. It was insufficiently explicit to amount to reasonable notice of intention to resile from the estopped position.

[83]

80 Mr Trodden's letter of 18 July 2000 refers to "Mark McIvor's comment regarding further documentation to make the loan compliant", requesting that such documentation be forwarded for approval; this is entirely consistent with the view that Equitiloan Securities would continue to refrain from exercising its strict legal rights while the position was regularised. 81 Equitiloan Securities' letter of 3 August 2000 contained the sentence: However, your client needs to understand that if he is unwilling to co-operate with the marketing efforts proposed we shall exercise our rights as proposed. 82 The corollary is that if he were willing to co-operate , Equitiloan Securities would continue to refrain from exercising its rights. This was not notice of intention to resile from the estopped position. 83 Accordingly, until it served Notice of Default on 27 October 2000, Equitiloan Securities had not given reasonable notice of its intention to resile from the estopped position. Until then, it was estopped from insisting on its strict legal rights under the loan documentation by taking action detrimental to the interests of Windy Dropdown in reliance upon pre-existing defaults. It follows that when Windy Dropdown demanded a payout figure, Equitiloan Securities was not entitled to insist on higher rate interest. Mr Franks, as Windy Dropdown's assignee, has made good the case that despite its strict legal entitlement to higher rate interest from March 2000 until discharge of the facility, in equity Equitiloan Securities was not entitled to higher rate interest for that period, and must make restitution of the sum so charged. 84 Mr M G McHugh submits that as a result of the assignment of the mortgage and securities by Equitiloan Securities to itself and Equititrust, and any overpayment of interest can be set-off against any profit share that remains due to Equititrust. Although the claims for relief in the Further Amended Statement of Claim may not have been as felicitously expressed as possible, it was clear at least from the outset of the hearing that the claim for restitution of the overpaid interest was brought against Equitiloan Securities. The evidence of Mr Mark McIvor established that Equitiloan Securities lent funds on behalf of investors who deposited money with it and held the mortgages securing the advances, acting as a trustee, while Equititrust was a merchant bank and managed the mortgage lending scheme. The 23 March 2000 assignment was for regulatory compliance reasons, and was not intended to affect the beneficial interests: the consideration was expressed to be $1. I have referred, above, to the on-going treatment of Equitiloan Securities as the real lender despite the 23 March 2000 assignment. On the available evidence, I infer that Equitiloan Securities, not Equititrust, received the benefit of the payment on 17 November 2000 of principal and interest - including in particular the higher-rate interest. This is consistent with the manner in which Mr Mark McIvor explained that the proceeds of Lots 14 and 15 were applied. Accordingly, it is Equitiloan Securities, not Equititrust, that is obliged to give restitution. 85 On that basis, no question of set-off arises, as the debtor to Mr Franks (as assignee of Windy Dropdown) is Equitiloan Securities, a different legal entity from Windy Dropdown's creditor Equititrust. There are not mutual debts capable of being set-off. Was the $236,715 profit share paid mistakenly? 86 Mr Franks, as assignee of Windy Dropdown, originally claimed restitution of the $236,715 previously paid pursuant to the Profit Share Agreement upon the sale of Lots 124 and 15, on the footing that it had been paid under the mistaken belief that there was an enforceable obligation to do so, when - so it was said - the obligation was unsupported by consideration moving from Equititrust. In final submissions, Mr Willmott SC abandoned this contention. In my view that concession was rightly made. While it is true that, on the face of the recitals in the Profit Share Agreement, consideration moves from Equitiloan Securities and not from Equititrust, it is well established that even where consideration is stated in a formal agreement, evidence is admissible to show that there was other consideration. The evidence establishes that, in respect of each loan facility and variation, an establishment fee was charged by and paid to Equititrust. The inference is that Equititrust procured Equitiloan Securities to make the relevant advances, and that itself is consideration moving from Equititrust.

[84]

87 Moreover, on the face of the Profit Share Agreement, there was consideration moving from Equititrust: clause 8.2 provided as follows: 8.2 Equitiloan [Equititrust] agrees to pay Philip Franks a project management fee of 2.5% of the gross construction cost. 88 Further, even if there were no consideration moving from Equititrust, there was plainly consideration moving from Equitiloan Securities, which could enforce a contractual obligation of Windy Dropdown to make a payment in favour of a third party, or another party to the contract. There was, therefore, an enforceable obligation to make the payment of profit share, even if it were not enforceable by Equititrust. 89 It follows that Equititrust's profit share entitlement was supported by consideration, and there was no such mistake as had been contended. Accordingly, the claim for restitution of profit share paid to Equititrust was rightly abandoned. The Cross-Claim 90 Equititrust cross-claims for the profit share in respect of the other lots. It is common ground that if Equititrust is entitled to profit share in respect of lots other than Lots 14 and 15, the quantum of that entitlement is $722,880. Windy Dropdown resists the cross-claim on three grounds: · That, properly construed, the Profit Share Agreement related only to the two lots on which houses were built (in the events which happened, Lots 14 and 15) and not to the other lots; · That the Profit Share Agreement was contingent on the on-going involvement of Equitiloan Securities and Equititrust in the funding of the development; and · That the Profit Share Agreement had been terminated before any right to profit share in respect of lots other than Lots 14 and 15 had accrued. 91 Clause 7 of the Profit Share Agreement, entitled "Construction Approval", is concerned only with two lots, selected by Equititrust, on which houses were to be constructed; for this purpose, Equititrust selected Lots 14 and 15. But that is because Equititrust had agreed to provide construction finance only in respect of two lots. Whereas Clause 7, relating to construction finance, was concerned with two lots only, Clause 6, relating to profit share, was concerned with "each lot which comprises part of the Development Site". It is instructive that Clause 6.1 fixed the amount of profit share according to whether or not the minimum price was achieved, so as to guarantee to Equititrust six per cent of the greater of the minimum selling price and the actual sale proceeds, and in conjunction with Schedule C fixed a minimum selling price, on alternative "with house" and "without house" bases, for every lot, not just Lots 14 and 15. There is nothing to suggest that Equititrust's profit share entitlement was to be limited to the two lots on which houses were to be built. All the textual pointers are to the contrary. The circumstance that "without house" calculations were included, as well as "with house" calculations, shows that it was contemplated that the profit share would be applicable regardless of whether houses were built. I therefore reject the submission that, properly construed, the Profit Share Agreement entitled Equititrust to profit share only in respect of the two lots on which houses were built. 92 As to the argument that, under the Profit Share Agreement properly construed, any entitlement of Equititrust to profit share was contingent on the on-going involvement of Equitiloan Securities in financing the project, the starting point is that there is no express provision to that effect. Again, it is instructive that Clause 6.1 and Schedule C provide minimum selling prices for all lots on a "with house" and a "without house" basis, contemplating that lots might be sold without houses, and therefore with no further finance provided by Equitiloan Securities. For Windy Dropdown it was submitted that Clause 6.1(b) was predicated upon a percentage of a principal repayment, but a principal repayment can be made from the proceeds of an undeveloped lot as well as from those of one on which a house is erected. I therefore reject the submission that under the Profit Share Agreement, properly construed, any entitlement of Equititrust to profit share was contingent on the on-going involvement of Equitiloan Securities in financing the project. 93 As to the argument that the Profit Share Agreement was discharged in respect of future rights and obligations by the refinance of the loan facility in October 2000, with the result that Equitiloan Securities is not entitled to profit share from lots sold after that date, again, there was no express discharge of the Profit Share Agreement. As the entitlement to profit share was not dependent on on-going finance of further houses on lots other than the first two to be developed, it follows that if Windy Dropdown proceeded without further finance - using its own resources or resources obtained from elsewhere - that would not detract from Equititrust's entitlement to profit share. There is no basis for any implication that the Profit Share Agreement was discharged, just because the loan was refinanced; nor can it be said that the Profit Share Agreement was so intertwined with the loan facility that refinance of the loan necessarily brought it to an end. Such an outcome would involve attributing to the parties an intention that Windy Dropdown could, by refinancing, deprive Equititrust of its profit share at any time, in respect of lots not yet redeveloped and sold. There is no basis for any such implication; indeed it would be contrary to the implicit obligation of each contracting party to do all things necessary on its part to enable the other to have the benefit of the contract. Under the Profit Share Agreement, Equitiloan's obligation was to fund the development of two lots. In return for that, it became entitled to profit share on all the lots, not just the two it funded. In that context, it would not make sense that refinance of the loan would bring to an end the Profit Share Agreement. 94 The final argument was that the Profit Share Agreement was terminated by Windy Dropdown, for repudiation by Equititrust. 95 Windy Dropdown contends that by insisting on payment of the whole of the proceeds of sale of Lots 14 and 15, Equitiloan Securities and Equititrust repudiated the Profit Share Agreement. Equitiloan Securities contends that, because the facility was in default, it was entitled to repayment in full and thus to the whole of the proceeds - not pursuant to the Profit Share Agreement, but pursuant to its securities. 96 If the facility was in default, Equitiloan Securities was entitled to repayment in full, which in turn would have entitled it to receive the whole of the proceeds of sale of Lots 14 and 15, notwithstanding the Profit Share Agreement. On the other hand, if the facility was not in default, Clause 6.1 of the Profit Share Agreement entitled Windy Dropdown to receive a share of the proceeds of sale of Lots 14 and 15 in connection with partial discharge of the security, and in that event it would have been inconsistent with the Profit Share Agreement for Equitiloan Securities to insist upon payment to it of the whole proceeds. 97 Although I have found that the facility was, strictly, in default by reason of the term having expired, I have also concluded that Equitiloan Securities and Equititrust were estopped from taking any action adverse to Windy Dropdown on that ground. That includes insisting on repayment in full - in effect, calling up the loan. For Equitiloan Securities to insist on repayment to it of the whole of the proceeds of Lots 14 and 15 was inconsistent with the state of affairs from which departure was precluded. Equitiloan Securities was not entitled to refuse to perform its obligations under the Profit Share Agreement, and its insistence on payment of the whole of the proceeds of Lots 14 and 15 to it was repudiatory. 98 However, repudiation only brings a contract to an end with respect to future obligations if it is accepted and the innocent party elects to terminate. There was never any express acceptance, nor any communication of a decision to terminate. Windy Dropdown contends that it accepted the repudiation by requesting a payout figure, and by refinancing. Neither of those acts was, in my opinion, an acceptance. Each is equally consistent with the Profit Share Agreement remaining on foot. Moreover: · on 18 July 2000, Mr Trodden requested that documentation to make the loan compliant be forwarded for approval; · on 26 July, Mr Trodden sought assurance that Equitiloan Securities would not take any step adverse to Windy Dropdown's interests or inconsistent with the Profit Share Agreement, and expressed his client's wish to maintain and improve the cordiality of relationships; and

At a glance

Court

Decision date

Before

Source

Judgment (96 paragraphs)

Parties

Cases Cited (3)