PARTIES: David Hamilton HILL v GRAND UNITED FRIENDLY SOCIETY & ANOR

JUDGMENT OF : SPIGELMAN CJ; MASON P; FITZGERALD AJA

DAVID HAMILTON HILL v GRAND UNITED FRIENDLY SOCIETY & ANOR

David Hamilton HILL v GRAND UNITED FRIENDLY SOCIETY & ANOR

FITZGERALD AJA: The appellant, Mr Hill, is a barrister. The second respondent, Mr Downing, is a solicitor who at material times acted as solicitor for both Mr Hill and the first respondent, Grand United Friendly Society. Mr Hill and Mr Downing were close friends, and both were also friendly with senior officers of the Society, for which they carried out legal work. Those friendships are now at an end. Judgments were given in the Equity Division on 28 November and 10 December 1996 dismissing Mr Hill's action against both Mr Downing and the Society, ordering Mr Hill to pay the Society the sum of $1,921,706.84 with interest from 10 December 1996 at 18.5% per annum, and ordering Mr Hill to pay the other parties' costs of his action and the Society's costs of its cross-claim against him. Mr Hill has appealed against those judgments.

For reasons which are not germane to these appeals and reflect no discredit upon Mr Hill, he had little, if any, practice as a barrister at the material times. In June 1987, he sold his chambers on the 7th floor of 174 Phillip Street, Sydney, and, as a result, had about $115,000 in cash. His only assets of significance were the middle and lower units in a three unit building at 36 Darling Point Road, Darling Point, which was subject to a mortgage in favour of the Society. The mortgage, which secured about $110,000, was considerably in arrears. Mr Hill decided not to use the available proceeds from the sale of his chambers to make a payment under his mortgage to the Society, but to borrow a considerable additional sum from the Society in order to purchase the third, top floor unit, which it was clear was to become available. His plan was to renovate and sell the property at a substantial profit. He hoped that, when his profit had been gained, he would be able to purchase another eastern suburbs property at a low price as his home, and to return to the Bar.

Both Mr Downing and senior officers of the Society were well disposed towards Mr Hill, and clearly did not subject his proposal to close analysis to ascertain whether it was financially viable. Further, Mr Hill was over-anxious to proceed with his proposal and excessively optimistic. Thus, there is no evidence that he had determined what renovations were necessary or desirable, or what the cost would be, when he applied to increase substantially the amount which he had borrowed from the Society.

Mr Hill's application was made on his behalf by Mr Downing, who wrote a letter dated 18 October 1988 to the Society's Mortgage Officer as follows:

"As you aware David H Hill is a client of this firm and he has for some time now been trying to acquire the only unit in the block at 36 Darling Point Road, Darling Point not already owned by him.

The unit ... is once again back on the market at an asking price of $775,000.

If Mr Hill can purchase this unit, it will give him greater flexibility in his subsequent treatment of the block which could include resale as a whole or redevelopment and sale and/or letting of parts.

We would be grateful if your Grand Trustees could indicate whether they would be prepared to assist Mr Hill with a loan of up to $1.2 million including his present indebtedness to them subject, of course, to valuation. Mr Hill would need the monies for approximately 12 months on an interest only basis."

On the figures provided to this Court, Mr Hill would have had approximately $400,000 available to proceed with his proposal after the purchase price of the top floor unit, stamp duty, Mr Hill's existing indebtedness to the Society and the money which he had available from the sale of his chambers were brought to account.

On 20 October 1998, the Society's Loan Manager wrote to Mr Downing stating that the Grand Trustees were "prepared to assist ... with the additional monies subject to valuation of the properties and submission of financial particulars", and "would be seeking an interest rate of 15.5% per annum". If that was acceptable to Mr Hill, Mr Downing was asked to advise the Society so as to enable the valuation to be arranged.

Prior to the Society obtaining a valuation, the top floor was auctioned on 19 November 1998 and Mr Hill was the purchaser for $755,000. He paid the deposit with money he had from the sale of his chambers. The contract provided for settlement within six weeks. Had the Society not advanced the money Mr Hill needed to complete the purchase, he would have lost the deposit but probably would not have been liable to his vendor in damages. There had been another keen bidder at the auction, and the primary judge found that Mr Hill's "...winning bid was $500 or $1000 above the next highest bid".

The Society obtained a valuation which valued the building at 36 Darling Point Road at $2 million as at 2 December 1988. Mr Hill's loan application was further considered by the Grand Trustees on 6 December 1988 when it was deferred because he had not provided the financial particulars referred to in the Society's letter to Mr Downing dated 20 October. Nonetheless, on 8 December 1988, the Society's Loans Manager wrote to Mr Downing in the following terms:

I refer to previous communications and forward attached relevant security documents and request the Variation be prepared incorporating the following details:-

(a) Principal indebtedness to be increased to $1,200,000.

(b) Interest rate to be increased to 18.5% per annum reducing to 15.5% per annum if paid by due date.

(c) Repayments to be increased to $46,500 per Quarter Interest only.

(d) Term capital to be extended to 20th February 1991.

Mr Downing prepared a mortgage which he sent to the Society on 16 December. After the document was signed by the Society, it was signed by Mr Hill on 30 December, when the Society advanced $713,946 and Mr Hill completed his purchase of the top floor unit. The mortgage was not explained to Mr Hill and he was not given a copy of it. He said that he did not read it before signing and returning it, but that evidence was not wholly accepted by the trial judge.

The mortgage document contained a number of discrepancies which it is unnecessary to discuss. The one matter which is of significance for present purposes is that, in accordance with the Society's letter to Mr Downing dated 8 December 1988, it provided for quarterly interest payments at 18.5% reducing to 15.5% per annum if paid by the due date on the amount for the time being outstanding under the mortgage. Initially, that was about $800,000, including the amount secured by the earlier mortgage over the ground and middle floor units. Mr Hill was not required to draw down more than he needed from time to time.

The foundation of Mr Hill's case was that he had been told by Mr Downing, prior to signing the mortgage document and indeed prior to purchasing the top floor unit at auction, that the interest on the loan would be capitalised, which he took to mean would not be payable until the date for repayment of the loan, resulting in an obligation to then repay $1.2 million, or such lesser sum as had been received from the Society, plus accrued interest.

Interest would have accrued not only on the money received by Mr Hill from the Society but also on interest which had previously accumulated. Depending on the times at which Mr Hill received further advances from the Society up to the total of $1.2 million and the period by reference to which interest was calculated and debited, the compounding effect would probably have resulted in him owing much more than $1.2 million to the Society on 20 February 1991 when repayment in full was due. Whether the Society's security would have been correspondingly diminished depended in turn on the result of the renovations to the property at 36 Darling Point Road and movements in the real estate market.

Mr Hill had no capacity to pay interest except out of the sale proceeds of one or more of the units at 36 Darling Point Road, and he made no attempt to do so. The Society provided Mr Hill with amounts which he requested for renovations, which it debited against the total of $1.2 million. Interest at the rate of 15.5% per annum was also debited against that total sum on a quarterly basis. Prior to 8 September 1989, Mr Hill was told that there was only $31,810 remaining available for renovations.

On 8 September 1989, Mr Downing wrote on Mr Hill's behalf to the Society, seeking an additional $300,000 to complete the project. The Society obtained a valuation of $2.5 million, and approved the additional borrowing at a rate of 20.75% per annum, reducing to 17.75% if the interest was paid on time.

Before a variation to give effect to that arrangement was prepared and signed, Mr Downing made a further application to the Society on behalf of Mr Hill, seeking an additional $100,000 "to safeguard the interest payments". That also was approved, this time at an effective rate of 18.5%. Two variations, one for $300,000 and one for $100,000, were signed by Mr Hill and sent to the Society on 19 December 1989 for execution.

On 5th March 1990, Mr Downing again applied on Mr Hill's behalf to the Society, for another $200,000 to complete the work. Mr Downing's letter stated:

"He [Hill] informs that us that he will have insufficient funds to effect such completion together with the capitalisation of interest."

The additional loan was approved at an effective rate of 19%, and a variation dated 2nd April 1990 was signed.

The renovation work on the building was completed by the end of June 1990. As at 5 July 1990, Mr Hill owed the Society $2,072,753, and the Society was seeking repayment. The units in the building were not immediately saleable because the work that had been done necessitated a new or amended strata plan to conform with the building as altered. It might have been possible to sell the entire building immediately, but, in any event, the titles to the individual units could had been put in order by the end of September 1990. However, Mr Hill did not do what was necessary to register a new or amended strata plan. He did not want to sell the building or the units. He refused to accept valuation advice, and held excessively optimistic views concerning the value of the property. He thought that it was worth $3 million and perhaps would be worth $3.5 million if he waited. He hoped that he could sell the top unit for $2 million, and keep the bottom and middle level units. The trial judge found that Mr Hill refused to sell on the market which existed by late 1990, when property values were falling, and that they continued to fall in 1991.

Eventually, the Society sold as mortgagee. Interest had continued to accrue, and there was a very substantial shortfall between the amount which Mr Hill owed the Society and the amount received by the sale of the property at 36 Darling Point Road. The money judgment in favour of the Society to which this appeal relates concerns that debt. Mr Hill blames the respondents for his predicament, and his appeal otherwise seeks damages which, broadly speaking, are sufficient not only to extinguish his debt to the Society except for his original borrowing in respect of the bottom and middle level units but also to restore to him the value of those units which, of course, he has lost.

The keystone of Mr Hill's argument is the proposition that, but for the misstatement with respect to capitalisation of interest which he alleges, he would not have increased his borrowing from the Society to $1.2 million on the terms recorded in the Society's correspondence to Mr Downing and/or the mortgage document executed by Mr Hill on 30 December 1988 and, since no other terms were available from the Society, he would not have increased his borrowings at all. While he probably would have lost his deposit on his purchase of the top floor unit at 36 Darling Point Road, he still would have had part of the sale price from his chambers and would have owned the lower and middle units, subject only to his debt with respect to his original borrowing from the Society.

It is sufficient to mention a few of the basic objections to Mr Hill's fundamental proposition.

Firstly, he did not prove that he probably could not have borrowed the money which he needed to complete the purchase of the top level unit at 36 Darling Point Road and to renovate the units on terms which were suitable to him if the terms on which the Society was prepared to extend his borrowing to $1.2 million were unacceptable to him.

Secondly, the alleged misstatement did not cause him to borrow the additional money - a decision which was entirely his - but to borrow on terms different from those which he intended; in effect, the borrowing involving up to $1.2 million on the Society's terms provided him with less than he expected, resulting in insufficient funds for the renovations undertaken. However, any error on behalf of the respondents, and any potential consequences for the Mr Hill other than the effects of higher interest rates, were cured by the subsequent loans which the Society made to Mr Hill. He did not complain in this Court of the higher interest rates, and he has not sought relief related to the extra costs associated with the borrowings subsequent to the initial increase to $1.2 million. Contrary to his submission, Mr Hill did not obtain the additional, later loans from the Society because of the situation which the respondents had created but because he remained committed to his project and optimistic that it would yield substantial profit, a belief which continued for a considerable period after the last instalment was advanced by the Society.

Thirdly, the trial judge made an express finding that the alleged misstatement did not cause the appellant's initial increase in his borrowing from the Society to $1.2 million, but that "... he would have gone ahead with that borrowing on the terms upon which it was available from the Society"; i.e. the terms which the Society offered.. That is not a finding which should be overturned by this Court. The trial judge rejected important parts of Mr Hill's evidence, and there were a variety of considerations which supported his Honour's finding. For example, the appellant had close personal and professional associations with Mr Downing and senior officers of the Society; the transaction by which his borrowing from the Society was increased to $1.2 million left him an amount of approximately $80,000 to $100,000 for renovations on any view; on the evidence, he did not know what the renovations would cost, and he did not even give evidence that he had decided what renovations would be undertaken; and there was no evidence that he could not, for example, have borrowed more as the project proceeded or carried out a renovation and sale of the units in stages, using profit from each stage to renovate the next.

In what has been said to this point, it has been assumed that Mr Hill established that the terms offered by the Society were the only terms upon which it was prepared to permit him to increase his borrowings to $1.2 million. There was no evidence to that effect. Even if that was the appropriate inference, the Society's attitude was immaterial unless it meant that Mr Hill's project could not, or would not, have proceeded. As stated above, that was not demonstrated.

In short, assuming all else in Mr Hill's favour, his claims fail because he did not establish that his losses were probably caused by the respondents or either of them.

In my opinion, the appeal should be dismissed with costs.