Irani v St George Bank Ltd [2004] VSC 260

Supreme Court of Victoria|2004-08-27|Before: Byrne J

GUARANTEE AND SURETY - construction of Bank Fully Drawn Advance facility - whether Bank entitled to sell security - whether sale by Bank a breach of facility -whether material variation of facility so as to discharge surety - whether repudiation by Bank - whether common mistake.

Pinnacle Investments Pty Ltd ("Pinnacle") was a company controlled by the firstnamed plaintiff, Boman Irani, its sole director. Its shares were held as to 75% by the thirdnamed defendant, Shalridge Pty Ltd. Shalridge was controlled by the secondnamed plaintiff, Homai Irani (known as Dr Homai Kermani), who is and was its sole director and shareholder and the wife of Mr Irani.

On or about 22 November 2001 the defendant, St George Bank Ltd ("the Bank"), agreed with its customer, Pinnacle, to provide a facility in the form of a 12 month fully drawn advance in the sum of $1.88M for certain purposes connected with the development of a landfill operation and a sand quarry on land at 600 Sunbury Road, Bulla. I shall refer to this facility as the November FDA facility.

As the Bank's letter of offer of 21 November 2001 indicates, this was not the first facility granted to Pinnacle with respect to the Sunbury Road project. Indeed, there were at that time three facilities then in place:

* A bank guarantee facility whereby the Bank issued a bank guarantee in the sum of $500,000 in favour of the Environment Protection Authority. This facility was provided in August 2001.

* A temporary overdraft facility with a limit of $80,000 expiring on 30 November 2001. This facility was also provided in August 2001.

* A bill acceptance facility/discount option in the sum of $3,575,000 expiring in June 2006. This facility had been originally provided in June 2000 to enable payment of the price of the Sunbury Road land which had been purchased by Pinnacle in February 2000.

The terms of the November FDA facility were such that the amount of the advance, $1.88M, was to cover $130,000 interest capitalised for the 12 month period of the facility and $1.75M for the purposes of Pinnacle. These were to pay out the temporary overdraft given in August 2001 and, as to $1.4M, to pay for certain capital works on the land and, as to $250,000, for working capital.

Mr Irani and Dr Kermani were guarantors of all of these facilities under two deeds of guarantee and indemnity each dated 16 June 2000. The guarantee given by Dr Kermani was not unlimited: it was limited to the net realisable value of the family home at 10 Marshall Avenue, East Kew, standing in her name, and that of a parcel of shares which she also owned. This land and these shares were mortgaged by her to the Bank as part of the securities held by it.

In 2002, Pinnacle defaulted under the facilities. The following chronology shows the events which followed upon the default.

The Bank served on Pinnacle a demand for payment of its indebtedness then said to be about $5.3M. This demand was not complied with.

The Bank served on Mr Irani and Dr Kermani demands under their guarantees. The demands were not complied with.

An administrator was appointed over Pinnacle pursuant to Part 5.3A of the Corporations Act.

The Bank as debenture holder appointed receivers and managers over the assets of Pinnacle.

The indebtedness of Pinnacle to the Bank upon all accounts was approximately $7.6M.

The Bank as mortgagee in possession entered into a contract of sale to sell the Sunbury Road land.

This proceeding was commenced by Mr Irani and Dr Kermani and others against the Bank.

Upon settlement of the contract of sale, the proceeds of sale were applied by the Bank to discharge the FDA and the balance was credited to other indebtedness of Pinnacle to the Bank. The Bank contends that there still remains a sum of about $2M owing by Pinnacle to it.

The indemnities and guarantees given by Mr Irani and Dr Kermani, to which I have referred, were part only of the securities held by the Bank. Pursuant to the facilities granted prior to the November FDA facility, the Bank held the following securities:

* A registered first mortgage given by Dr Kermani over the Marshall Avenue land.

* A registered first mortgage given by Pinnacle over the Sunbury Road land.

* A registered first floating debenture over the assets of eight companies within the Irani group. These companies included Shalridge, the fourthnamed plaintiff, Thirteenth Corp Pty Ltd, the fifthnamed plaintiff, Combulk Pty Ltd, the sixthnamed plaintiff, Eiros Pty Ltd, the seventhnamed plaintiff, Apadana Pty Ltd and the eighthnamed plaintiff, Boman Irani Pty Ltd, as well as Pinnacle.

* A guarantee and indemnity given by each of these same companies within the Irani group other than Pinnacle.

* An equitable mortgage over the shares owned by Dr Kermani.

* A deed of assignment of a life policy of Mr Irani.

* A Commonwealth Bank guarantee in favour of the Bank in the sum of $500,000.

It was a condition of the November FDA facility that Pinnacle provide to the Bank a further bank guarantee. This was a bank guarantee given by the Westpac Banking Corporation on behalf of Tranteret Pty Ltd in favour of the Bank in the sum of $2M. It is this Westpac Bank guarantee which was central to the issues at the trial before me. In order to understand the circumstances of the granting of the November FDA facility and the provision of the Westpac Bank guarantee as additional security, it is necessary to examine the contractual arrangements with the various parties involved in the landfill and quarry operation on the Sunbury Road land.

As I have mentioned, Pinnacle purchased the Sunbury Road land in February 2000. The price of $4.5M was provided in part by the bill acceptance facility of $3.75M granted by the Bank in June 2000.

I was told by counsel that in February 2000, Pinnacle entered into a land fill operating agreement with a Western Australian company, Soiltech Australia Pty Ltd, controlled by one Patrick Hallinan. There is in evidence an operating agreement between these parties dated 25 October 2000. Under cl. 8 of that agreement, Pinnacle is to provide infrastructure as required by Soiltech. I was told, too, that Soiltech, in turn, as site manager, entered into a site management agreement with a Tasmanian Government organisation called Civil Construction Services Corporation ("CCC"). CCC was also to carry out infrastructure works, which it did. For this, it sought in 2001 payment of some $1.1M from Soiltech. Soiltech, in turn, sought payment from Pinnacle. It was the requirement for the payment of this sum which constituted the reason for the November FDA facility obtained by Pinnacle from the Bank.

At the same time, Soiltech entered into agreements with two other Hallinan companies with respect to the Sunbury Road project. These were an agreement with Hallinans Pty Ltd on or about 7 August 2001, for the construction of a soil treatment facility, and a quarry sub-licence dated 25 December 2001 with High Quality Quarries Pty Ltd ("HQQ").

Furthermore, on or about 25 September 2001 Pinnacle, Soiltech and Shalridge entered into an agreement with another Hallinan company, Tranteret Pty Ltd, whereby Shalridge granted to Tranteret an option to purchase a 25% shareholding in Pinnacle at the agreed price of $2M. Under the terms of this option agreement, Tranteret was to receive an executed transfer of the Pinnacle shares from Shalridge and to provide to Shalridge a bank guarantee in favour of Soiltech and Shalridge as security. Under cl. 3.2, Tranteret was entitled to lodge the share transfer for registration upon the exercise of the option or in the event that its demand for the return of the bank guarantee was not complied with. Pursuant to this option agreement, Tranteret obtained from Westpac a bank guarantee in the sum of $2M. The copy in the Court Book shows as favouree only Shalridge.

Negotiations with the Bank for the grant of the November FDA facility were not conducted by Pinnacle. The approach was made on behalf of Soiltech by its solicitors, Messrs Chiodo Madaferri, and Mr Madaferri of that firm negotiated with the bank officers. The Bank was represented by Messrs Herbert Geer & Rundle on the transaction.

Mr Irani and Dr Kermani told me that on the evening of 22 November 2001 they were handed the Bank's letter of offer of 21 November by their solicitor, Richard Flory, of Rogers & Gaylard. This was the offer to grant the November FDA facility. Mr Flory took them through the letter and explained it. It was then executed in acceptance of the offer by them and by the various Irani corporate entities whose execution was required. They said that they had proffered to the Bank, by way of additional security, the Westpac Bank guarantee in favour of Shalridge but the Bank would not accept this. It required a bank guarantee in which the Bank itself was named as favouree. Accordingly, with the assistance of Tranteret, a substitute Westpac Bank guarantee for $2M was obtained, naming the Bank as favouree, and this was provided as additional security as required by the Bank's letter of offer.

The present dispute concerns the Bank's manner of dealing with this Westpac Bank guarantee following the default of Pinnacle.

What happened was this. The Bank as mortgagee in possession, offered the Sunbury Road land for sale by tender. HQQ submitted a non-conforming tender including a condition with respect to the Westpac Bank guarantee. On 23 May 2003 it entered into a contract of sale with HQQ to sell the land and certain plant to it for $6.5M. The contract of sale contains the following condition inserted by the tender:

"26.1 The Vendor agrees that on the Settlement Date, the Vendor will: (a) either return to Tranteret Pty Limited the Bank Guarantee issued by Westpac dated October 2001 in favour of the Vendor for a sum of $2 million ("the Bank Guarantee"); or (b) allow the proceeds from the calling of the Bank Guarantee by the Vendor to be utilised as part payment of the Balance on the Settlement Date. 26.2 The Vendor will advise the Purchaser's solicitor by notice in writing, no later than 14 days from the day of sale, as to whether it will either return the Bank Guarantee in accordance with 26.1(a) or allow the proceeds of the Bank Guarantee to be utilised as part payment of the Balance on the Settlement Date, pursuant to 26.1(b)."

The Bank elected to pursue the course permitted by cl. 26.1(a) and, upon settlement of the contract of sale, the Westpac Bank guarantee was returned to Tranteret and HQQ paid the balance owing on the basis of a consideration of $6.5M.

It is put on behalf of the plaintiffs that, by dealing with the Westpac Bank guarantee in this way, the Bank was in breach of the terms of the mortgage granted by Pinnacle and in breach of its obligations as mortgagee under s. 77(3) of the Transfer of Land Act 1958. It is further contended that by its conduct the Bank is, for a number of reasons, no longer entitled to rely upon or to enforce its other securities.

In the course of counsel's openings it became apparent that the thrust of the plaintiffs' complaints was that the Bank had disposed of the Westpac Bank guarantee for no consideration, for no benefit to Pinnacle or to the guarantors. Counsel for the Bank contended that this was a misapprehension of its position and that the Bank would not seek to justify such a disposal, if it had occurred. What they said was that, having regard to special condition 26 of the contract of sale, the Bank sold both the land and the Westpac Bank guarantee for $6.5M and that this was a proper price for those items. They submitted that special condition 26 showed that the consideration appropriated for the guarantee was $2M. Assuming this to be the case, this meant that the issue between the parties was the sufficiency of that part of the consideration which was attributed to the land and plant. Counsel for the Bank contended that, in the circumstances, its sale of this asset for $4.5M was a proper one. Counsel for the plaintiffs said that their client accepted that a sale of the land for $6.5M was unexceptionable but that $4.5M was insufficient. They added that, if this was in truth an issue, they were not ready to proceed without evidence as to the true value of the land and plant. I accepted that they should have opportunity to collate and present this evidence.

In order to salvage the trial date, the parties agreed that I should determine such as the issues as did not depend upon the value of the land and plant. They were agreed, too, that I should not deal with issues relating to the conduct of the Bank's receivers and agents and issues which depend upon these excluded issues.

Accordingly, on day two of the trial, I ordered by consent, pursuant to r 47.04, that this be a trial only of the questions raised by paragraphs 1-9(c), 10-21, 24A, 24B, 24C, 25A-25J (excluding 25C and 25H) and 25K (in relation only to paragraph 25B of the second further amended statement of claim filed on 7 July 2004) and the responding paragraphs of the defence filed on 14 July 2004 and the reply. The preliminary trial was then conducted on that basis and I reserved my decision on 22 July 2004.

After the trial had been completed, counsel for the plaintiffs, without leave, submitted on 28 July another proposed amended statement of claim. I convened a further hearing on 30 July to consider whether the parties wished me to deal with the proposed amended pleading. Counsel for the Bank told me that they were content that I should do so. Accordingly, I gave leave to the parties to amend their pleadings and they have done so in what has been called a third amended statement of claim filed on 2 August 2004, an amended defence and amended counterclaim filed on 4 August 2004 and a further amended reply and defence to counterclaim filed on 5 August 2004.

Upon consideration of these pleadings it seemed to me that those filed on behalf of the plaintiffs may have gone beyond what was necessary to formalise the position which those parties have adopted at trial. I therefore caused to be sent to counsel a memorandum on 6 August 2004 to which I received their responses on 11 August and a further memorandum from counsel for the Bank on 13 August. I have had regard to the matters contained in these documents which I have had placed on the Court file.

As to these post-trial amendments and memoranda I make the following observations.

(1) It is generally not appropriate for a party to submit, uninvited, pleading amendments after trial. When the trial has taken a course not adequately dealt with in the existing pleadings and the amendments merely formalise a party's trial contentions, it may be convenient, and even helpful, for the Judge who is then considering those issues, to permit this. It would be a rare case indeed, for permission to be given, where the amendments raised legal or factual questions not previously dealt with. Such a course is inconsistent with the common law tradition of a trial which is presented orally and where the issues are determined once and for all after argument by the parties.

(2) I decline the invitation of counsel for the plaintiffs to consider further evidence not presented at trial.

Having regard to the post-trial amendments and submissions, the questions for determination at this preliminary trial are those raised in the following paragraphs of the post-trial pleadings.

Statement of Claim: paras 1, 2, 3, 4, 5, 6, 7, 8, 9(a), (b) and (c), 10, 11, 12, 13, 16A, 17, 18, 18A, 18B, 21, 24A, 24B, 24C, 25A, 25B, 25D, 25E, 25F, 25G, 25H, 25I, 25J and 25K (only to the extent that paragraph 25K depends upon paragraph 25B).

Defence: paras 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 17, 18, 19, 20, 23, 26, 27, 28, 30, 31, 33, and 34.

Reply: paras 1A, 1B, 1C, 1D, 1E, 1F, 1G, 1H, 1I, 1J, 1K, 1L, 1M, 1N (other than parts (a) and (b)(i), (ii)), 1O, 1P, 1Q, 1R, 1S, 1T, 1U and 1.

The paragraphs the subject of substantial post-trial amendment are shown in bold.

In the post-trial memoranda counsel for the plaintiffs submitted that paragraph 25C of the statement of claim should be included in the issues for trial. This paragraph was excluded because it is a plea of loss and damage which has never been part of the trial. The basis for the contention that it be included was that paragraph 32 which is the Bank's plea to this paragraph had been included. This is correct, but the consequence contended for on behalf of the plaintiffs does not follow. This is an example which is regrettably frequent in this case that the Bank makes an assertion which is not in fact responsive to the plea. I have therefore excluded paragraph 32 of the defence although certain of its allegations are included in other pleadings which are part of this trial.

I should emphasise that the questions which I have sought to identify by reference to the very confusing pleadings in this case are those which the parties agreed on day two that I should try, namely, those set out in [20] above. To the extent that incidental allegations in those paragraphs of the pleadings which I have set out above go beyond the agreed questions, I shall not concern myself with them.

For the purposes of determining these questions, oral evidence was led from Mr Irani and Dr Kermani and many documents were tendered. There was little, if any, factual controversy. Furthermore, in the course of argument a number of paragraphs of the statement of claim were abandoned or not pressed. These are paragraphs 18B, 25G and 25J.

The live issues thrown up by the pleadings and the evidence may be summarised as follows: the contentions of the plaintiffs that

(1) The Bank was in breach of a term of the November FDA facility that the Westpac Bank guarantee -

(a) would not be called upon otherwise than 12 months after the granting of the November FDA facility and that the proceeds would be applied solely to clear that facility;[1]

(b) was the only security available for the repayment of the November FDA facility;[2] and

(c) might not be returned or dealt with without the November FDA facility being paid.[3]

(2) Upon execution of the November FDA facility, but before its draw-down, the standard terms of the Bank and the securities referred to in paragraphs 1-8 of the statement of claim (insofar as they effective payment of the November FDA facility by Pinnacle and the plaintiffs) were varied or waived so as to incorporate the terms set out in paragraphs 1(b) and (c) above.[4]

(3) The Bank varied the November FDA facility by selling the Sunbury Road land and returning the Westpac Bank guarantee to Tranteret and thereby discharged the sureties.[5]

(4) The Bank made an election to return the Westpac Bank guarantee "to assist Tranteret or an entity associated with it, HQQ".[6]

(5) By dealing with the Westpac Bank guarantee as it did, the Bank repudiated the November FDA facility, which repudiation the plaintiffs have accepted by the commencement of this proceeding so that they are discharged from the securities given under that facility.[7]

(6) The November FDA facility is vitiated by common mistake so that the securities are voidable and are rescinded.[8]

(7) The Bank is estopped from relying upon its standard terms insofar as they affected repayment of the November FDA facility by Pinnacle and the plaintiffs to allege that the plaintiffs are liable for any indebtedness of Pinnacle to the Bank.[9]

(8) Upon the election of the Bank under special condition 26 and its delivery of the Westpac Bank guarantee to Tranteret the Bank was not entitled to be paid $6.5M under the contract of sale with HQQ.[10]

(9) The Bank did not recover $2M or any value from its dealings with the Westpac Bank guarantee.[11]

(10) The Bank did not apply any of the proceeds from the contract of sale to the indebtedness of Pinnacle under the securities referred to in paragraphs 1-8 of the statement of claim.[12]

The Breach of Contract Claims

Two terms of the November FDA facility agreement were alleged to have been breached by the Bank. The first is pleaded as follows:

"25A. Further or alternatively, it was a term of the November 2001 Facility that the Bank would call on the Bank Guarantee for $2m in 12 months from the signing of the November 2001 Facility and that it was to be applied solely to clear the FDA Facility provided to Pinnacle.

The plaintiffs' post-trial amendments included new paragraphs 24A and 24B of the statement of claim which appear to be directed to incorporating into the November FDA facility a further term which is rather different from that originally relied upon which is set out in paragraph 25A of the statement of claim. This new pleaded term which is referred to as "the Repayment Term" is expressed in paragraph 24A(b) to be as follows:

"24A. There were terms of the November 2001 Facility that: ... (b) repayment of the FDA Facility was to be by way of interest only, with interest to be capitalised for the initial 12 months, within the overall limit (of $1,888,000) and at the completion of the period (being 1 year from drawing or earlier should there be a default lawfully entitling the Bank to call upon the Bank Guarantee), the full debt was to be cleared by the Bank calling on the Bank Guarantee ('the Repayment Term') and that upon a proper construction of the Repayment Term: (i) the Bank Guarantee was the only method by which the Bank was to be repaid the FDA Facility; (ii) the Bank could not return or deal with the Bank Guarantee without the FDA Facility being paid, alternatively, being treated by the Bank as being fully repaid; (iii) the Bank had no recourse to Pinnacle and the Plaintiffs under the Securities for repayment of the FDA Facility;

PARTICULARS

The Repayment Term is contained in the 'Details Sheet' of the Letter of Offer under the heading 'Repayments' (at Court Book 869)."

The November FDA facility was in writing and was contained in the accepted Bank letter of offer dated 21 November 2001 and the documents referred to in it. The pleaded terms are said to be found in the first or perhaps both of the following passages in this letter of offer:

"Repayments: Interest Only, with interest to be capitalised for the initial 12 months, within the overall limit. Alternatively interest can be met from other sources. At the completion of the Interest Capitalisation period, the full debt is to be cleared by way of St George Bank calling on the Bank Guarantee for $2,000,000.00 provided by the Westpac Banking Corporation."

"Ongoing Conditions 1. Written confirmation from Hallinans Pty Ltd that they are aware and acknowledge that the Bank Guarantee of $2,000,000.00 will be called on by St George Bank Limited in 12 months time, to clear the Fully Drawn Advance Facility provided to Pinnacle Investments Pty Ltd."

The breach pleaded in the amended paragraph 25B of the statement of claim is as follows:

"25B. In breach of the terms of the November 2001 Facility, the Bank: (a) agreed with [HQQ] to return the Bank Guarantee to Tranteret;

PARTICULARS

The agreement is a contract of sale with Hi-Quality with a condition that the Bank either release the Bank Guarantee for $2m or allow the proceeds of the Bank Guarantee to be utilized by [HQQ] as part payment of the balance of the purchase price of the contract of sale dated 23 May 2003 ('the Contract of Sale'); (b) did not clear the FDA Facility provided to Pinnacle by calling on the Bank Guarantee; (c) purported to apply the sale proceeds from the Contract of Sale not towards repayment of the Secured/Guaranteed Money as Varied but towards repayment of the FDA Facility; and (d) failed to apply the sale proceeds from the Contract of Sale towards repayment of the Secured/Guaranteed Money as Varied; (e) has wrongfully (in the premises set out in paragraphs (a) to (d) hereof) made demands on the Plaintiffs that they are indebted to the Bank."

It will be readily seen from this that the term pleaded by the plaintiffs in paragraph 25A does not address their real complaints made in paragraph 25B. It is, of course, correct that the letter of offer contemplates that, at the end of the term of the facility, the debt of $1.88M, or that part of it that has not been paid under the early payment provisions, will be satisfied by the Bank calling upon the Westpac Bank guarantee. There was at trial no challenge to the evidence of the Bank that, after paying out the November FDA facility, it applied the proceeds of the contract of sale to reduce or discharge other indebtedness of Pinnacle. What appears to be put in paragraph 25A was that the Bank might not deal with the Westpac Bank guarantee otherwise than as there pleaded. What is alleged against the Bank as a breach of this term is that it simply returned the guarantee to the company on whose behalf it was given and that no benefit was received for this and applied to satisfy the November FDA facility.

I have already referred to the contract of sale and set out special condition 26[13]

. It seems to me that, on a proper construction of the special condition, what the Bank was selling for $6.5M was, not only the land and plant, but also the Westpac Bank guarantee. It is true that the guarantee is to be delivered to Tranteret and not to the purchaser, HQQ, but this does not detract from the nature of the transaction. It is true, too, that the schedule to the contract of sale describes the $6.5M price as the consideration for the land and plant. Nevertheless, it cannot be disputed that the benefit which the purchaser received in exchange for this price includes the contingent right under special condition 26. It is contingent because it appears from this special condition that the Bank reserved to itself the right to elect to follow one of two courses. First, to call upon the Westpac Bank guarantee, in which event the price would be abated by an amount equal to the proceeds received. Second, to return the security to Tranteret, in which case the full price of $6.5M is to be paid.

This is a choice which is, by the special condition, given to the Bank not to HQQ nor to Tranteret. It is, to my mind, clear that in this way the Bank, having elected to return the Westpac Bank guarantee, has obtained some value for the security, for it has received a sum of money for it and the land and the plant. This money has been applied to the discharge of the FDA.

In these circumstances, attention shifted to three matters. First, whether the Bank complied with its obligations owed to Pinnacle by obtaining $6.5M for the two securities and, if not, what rights are available to the plaintiffs as guarantors arising from this? These matters were deferred for later trial.

The second matter was whether, under the terms of the facility, it was open to the Bank to return the Westpac Bank guarantee in exchange for cash received from HQQ rather than to call upon Westpac Bank to pay the $2M under the guarantee. These are the breaches alleged in parts (a) and (b) of paragraph 25B.

The submission put on behalf of the plaintiffs was that, on a proper construction of the November FDA facility, the only way the Bank could realise the security given in November 2001 represented by the Westpac Bank guarantee, was to call upon it. I do not read the terms of the facility as so limiting the rights of the Bank. I should add that, at times, counsel for the plaintiffs appeared to concede that it was proper for the Bank to deal with the bank guarantee in this way provided that it obtained for the security its full value of $2M. If that was a concession, it was properly made. The Westpac Bank guarantee was given as security to enable the Bank to recover a sum due and owing by Pinnacle. How it might achieve this is a matter for the Bank. The fact that the most obvious way of realising the security would be to call upon the grantor to pay does not mean that other means are impermissible. I am satisfied that the Bank was entitled to realise its security by selling it. The further question whether sufficient value was obtained for it is another matter.

This conclusion means that, if the term alleged in paragraph 25A is to be understood as the only course open to the Bank, the term has not been made out. If on the other hand it is not to be so understood, no breach alleged in paragraph 25B(a) or (b) has been proved.

The third matter, that raised in parts (c) and (d) of paragraph 25B of the statement of claim, is whether the Bank was in breach of the terms of the November FDA facility by applying the proceeds of the contract of sale towards the discharge of the FDA rather than to discharge other liabilities of Pinnacle. This remarkable contention appears to be in contradiction of the Repayment Term alleged in paragraph 24A(b), contrary to the arguments presented on behalf of the plaintiffs at trial, and does not sit easily with the rest of the pleading, notably paragraph 25B(b).

It will be recalled that the November FDA facility was the fourth facility granted to Pinnacle by the Bank. The earlier facilities incorporated by reference the Bank's commercial banking facilities standard terms. These standard terms provided that the securities given by Pinnacle secured each and all of its liabilities so that, upon realisation, the proceeds of any security might be applied to discharge any liability. In paragraph 24A(d) it is alleged that these standard terms formed a legally binding contract between Pinnacle and the Bank. I accept this to be the case.

Then follows paragraph 24B which is in the following terms:

"24B (a) Upon execution of the November 2001 Facility and before draw-down on the FDA Facility: (i) the Standard Terms - Commercial Banking Facilities 1997 Edition; (ii) the Commercial Banking Facilities - Standard Terms [10] 2000 Version; (iii) the Commercial Banking Facilities - Standard Terms [07] 2001 Version; (iv) the Securities, insofar as they affected repayment of the FDA Facility by Pinnacle and the Plaintiffs (as opposed to any other moneys secured by the Securities within the meaning of 'Secured Money' and 'Guaranteed Money'), were varied, alternatively, waived so as to incorporate the Repayment Term in lieu of the general provisions of the Securities (in either case, 'the Securities as Varied') so that the Securities as Varied only secured the indebtedness of Pinnacle to the Bank for other than under the FDA Facility ('the Secured/Guaranteed Money as Varied').

PARTICULARS

The general provisions of the Securities as Varied are references, inter alia, to the definitions of 'Secured Money' and 'Guaranteed Money' and to clauses 5.2.1(c); 5.2.1(e); 5.2.1(i); 5.2.1(o) of the guarantees (referred to in the Securities in this pleading). The drawn-down took place on 23 November 2001 (Court Book 893). (b) There was no waiver in writing pursuant to Clause 27.1 or otherwise by Pinnacle agreeing to any waiver of its right under the November 2001 Facility to require the Bank to call on the Bank Guarantee to repay the FDA Facility; (c) The Bank arranged for itself the terms of the written confirmation and acknowledgment of the Hallinan's Acknowledgment.

PARTICULARS

The Hallinan's Acknowledgment is contained in the Letter of 22 November 2001 (Court Book 890)."

This is a surprising plea. Each of the standard terms referred to in part (a)(i), (ii) and (iii) was a term of one or other of the facilities granted by the Bank to Pinnacle. It is nowhere pleaded that the plaintiffs were parties to these agreements. "The Securities" mentioned in part (a)(iv) is an expression defined in paragraph 8 of the statement of claim to mean the securities, including guarantees and charges given to the Bank by the eight plaintiffs, other than the Westpac Bank guarantee.

In part (a) it is said that these contracts were varied or "waived" upon execution of the November FDA facility, which occurred on 22 November 2001, but before the draw-down. Nothing is disclosed as to the nature of this variation or waiver. There is nothing in the executed letter of offer which has this effect.

In paragraph 24A(a) it is said, correctly in my view, that the November FDA facility and the Standard Terms [07] 2001 may be or may only be varied in writing. Returning to paragraph 24B(b) the pleaders assert that there was no such waiver in writing. In particular, there was no waiver as permitted by the facility or otherwise "by Pinnacle agreeing to any waiver of its right under the [November FDA facility] to require the Bank to call on the [Westpac Bank guarantee] to repay the FDA facility". I am not at all confident what meaning or significance is to be given to these words.

I pass over part (c) which appears to have nothing to do with the case.

I return to paragraph (a) and the supposed variation or waiver of the standard terms and the Securities. The variation and waiver affect only the repayment of the FDA facility by Pinnacle and the plaintiffs. Why this should be so is a matter of conjecture. The effect of the variation and waiver is said to be the incorporation of the "Repayment Term as defined in paragraph 24A(b)"[14 ]

. The practical effect of this, it would seem, is that the Bank has lost the right to recover the amount owing by Pinnacle under the November FDA facility from the proceeds of any security held by it including the guarantees and charges and mortgages given by the plaintiffs other than from the proceeds received upon calling upon of the Westpac Bank guarantee.

I can see no basis for accepting such a series of allegations. Insofar as they are said to follow from the terms of the accepted letter of offer of 21 November 2001, they are inconsistent with its terms. The letter, executed by the plaintiffs, makes it clear that all existing securities as well as the further security of the Westpac Bank guarantee, are available for all facilities given to Pinnacle, including that granted under the letter.

I do not accept that the Repayment Term became a term of the November FDA facility, overriding the standard terms. I do not accept the suggested construction of this non-existing term. In paragraph 24A(b)(i), it is put that this Repayment Term means that the Westpac Bank guarantee is the only method by which the Bank was to be repaid the November FDA facility. I do not accept this to be a proper construction of the facility. In any event, the plaintiffs in paragraphs 25B(c) and (d) allege that the Bank breached the terms of the facility, including the Repayment Term, by applying the proceeds of the contract of sale, including the proceeds of the sale of the Westpac Bank guarantee, to discharge the November FDA facility. It is said that that these proceeds should have been applied to repay the other obligations of Pinnacle.

I will not dwell long upon other aspects of this contention, for it is without substance. The standard terms apply to all facilities and all securities were available to support all of the obligations of Pinnacle. This is clear from the terms of the 21 November letter of offer from the Bank. If the Bank received value for its sale of the Westpac Bank guarantee, it was entitled to apply this money against any obligation of Pinnacle at its choice, including the November FDA facility. This it did. I find no breach of contract.

It is alleged in paragraph 25D of the statement of claim that the Bank purported to vary the November FDA facility by electing to sell the land to HQQ and, pursuant to special condition 26(1), to return the Westpac Bank guarantee to Tranteret in exchange for $6.5M. This being an unconsented to substantial variation to the detriment of the plaintiffs, they, as sureties, are discharged by the application of the principle of equity discussed in Ankar Pty Ltd v National Westminster Finance (Aust) Ltd[15].

The argument must fail for the following reason at least. The sale of the land and the Westpac Bank guarantee is not a variation of the November FDA facility; the sale was made in performance of the facility or in performance of the rights of the Bank with respect to the securities given under the facility.

Paragraph 25H of the statement of claim alleges:

"25H Wrongfully the Bank unilaterally elected to release or has released the Bank guarantee to assist Tranteret, or an entity associated with it, [HQQ]."

There was no evidence before me that the Bank elected to return the Westpac Bank guarantee or that it in fact returned it to Tranteret for any wrongful or collateral purpose. The purpose suggested in the plea is that of assisting Tranteret or HQQ. The nature of this assistance is altogether obscure. If the Bank had called upon the guarantee it may be supposed that Westpac would have debited the account of Tranteret as a consequence. This may have had a commercial impact upon its associate company HQQ. At the same time, HQQ would have obtained as a benefit, a reduction in the price of the Sunbury Road land equivalent to the proceeds of the guarantee received by the Bank. No point was taken of any disparity between the amount which Tranteret would have been debited by Westpac and the amount which HQQ would have been credited in this way. In any event, it did not happen. The Bank elected to return the Westpac Bank guarantee to Tranteret. It was not established in evidence or by argument how this course, which had the consequence of increasing the amount of cash HQQ was to pay under the contract of sale, assisted HQQ or Tranteret. No argument was offered as to the legal consequence of any such assistance or how it might be wrongful. The contention of the plaintiffs is without substance.

The contention of the plaintiffs here is that, by its breach of contract alleged in paragraph 25B of the statement of claim, the Bank has repudiated the November FDA facility and that the plaintiffs have accepted this repudiation.

This contention, too, must fail. It is sufficient that I list the reasons:

* I have found no breach of contract as alleged in paragraph 25B of the statement of claim.

* If the return of the Westpac Bank guarantee to Tranteret was a breach of agreement it does not, in my view, amount to a repudiation of the November FDA facility.

* Pinnacle as contracting party has not accepted the repudiation.

* If it is open to the plaintiffs to accept the repudiation, they have not done so. The commencement of this proceeding, seeking as it does damages for breach of the agreement, does not amount to an acceptance.

* If the November FDA facility has been terminated, as suggested, this does not affect the other facilities and the securities given under them.

This contention appears, rather surprisingly, in the reply. I will set out the pleas in full:

"1A. The Letter of Offer was executed by the plaintiffs, Pinnacle and the defendant in the common belief that the defendant would call on the Bank Guarantee for $2m in 12 months from the signing of the November 2001 Facility and that it was to be applied solely to clear the FDA Facility provided to Pinnacle ('the common belief').

PARTICULARS

(a) The common belief of the parties is contained in the express written terms of the Letter of Offer which stated that at the completion of the Interest Capitalisation period, the full debt was to be cleared by way of SGB calling on the Bank Guarantee for $2m provided by Westpac Banking Corporation in favour of the defendant. (b) Further, the belief of the Defendant is contained in: (i) paragraph 29(c) of the Defence of 14 July 2004; (ii) the Advance Application of the Defendant dated 21 November 2001; (iii) the Defendant's letter of 22 November 2001 addressed to P. Hallinan. 1B. The Plaintiffs would not have consented in writing to vary their obligations under the Securities to cover the November 2001 Facility by executing the Letter of Offer were it not for the common belief. 1C. The Defendant by its defence: (a) in paragraph 27(c): now contends that notwithstanding that it attempted to call on the Bank Guarantee it was at liberty to return the Bank Guarantee to Tranteret Pty Ltd and not apply it to pay out the FDA Facility in 12 months from the signing of the November 2001 Facility; and (b) in paragraphs 29(d), (e) and (f): now contends that because Tranteret Pty Ltd obtained an interlocutory injunction preventing the Defendant from then calling on the Bank Guarantee the Plaintiffs did not provide a Bank Guarantee in accordance with the FDA Facility or the Letter of Offer. 1D. In the premises referred to paragraph 1C, if those allegations are found at trial as facts (which is expressly denied) then the Letter of Offer does not reflect the common belief of the parties and was signed under a common mistake by the Plaintiffs, Pinnacle and the Defendant. 1E. In the circumstances the Securities are voidable and are rescinded."

It may be accepted that what is called in paragraph 1A, the common belief, was held by both parties at the time of contract. As I have mentioned, such a belief does not carry with it a belief that the security might not be called upon in the event of default or that it might not be sold.

In evidence, it appeared that the letter of offer of 21 November 2001 was fully explained to Mr Irani and Dr Kermani by their solicitor before it was accepted.

Paragraph 1C sets out what is said to be the present state of belief of the Bank. In paragraph 1D it is said that, if this present state of belief is well-founded, then in November 2001 the parties laboured under a common mistake. It is clear that this conclusion does not follow from the premise. Furthermore, neither part (a) nor part (b) of paragraph 1C represents the present contention of the Bank. I say this with respect to part (b) because counsel for the Bank did not press paragraph 29(f) of the defence, and rightly so. It would not have much prospect of success.

I turn now to paragraph 1E. This does not follow from what goes before, either as a matter of logic or as a matter of law. I reject the contention of the plaintiffs based on mistake.

The estoppel contention in paragraph 25J of the statement of claim was not pressed at trial. In the post-trial amendments to the reply, the plaintiffs assert a rather different argument based on estoppel. In order to understand this rather puzzling contention, it is necessary to consider the pleas to which it responds.

In their new paragraph 24A(d) of the statement of claim the plaintiffs contend that certain of the Bank's standard terms formed a legally binding contract between Pinnacle and the Bank. It may have been thought that such an allegation was not controversial, and the Bank in fact admitted it in paragraph 26(h) of its defence. But the Bank went on to assert, non-responsively, that the standard terms were not part of the contract between it and the plaintiffs, the guarantors of Pinnacle. This, too, might have been thought to be innocuous and uncontroversial. Nevertheless, it provoked the plaintiffs to make the following assertion in paragraph 1H of their reply:

"1H Further or alternatively, in respect of the allegations contained in paragraph 26(h) of the Amended Defence stating that the Details Sheet formed no part of any contract between the Defendant and the Plaintiffs (being a reference to the securities as varied as alleged by the Plaintiffs), the Plaintiffs deny the allegations and say further that the Defendant by executing the November 2001 facility and procuring the Plaintiffs to so execute the November 2001 facility represented to the Plaintiffs the matters set out in paragraph 24A of the further Amended Statement of Claim ('the representation').

PARTICULARS

The Representation is in writing in a letter dated 21 November 2001 and as particularly set out in paragraph 24A of the Further Amended Statement of Claim."

It will be seen that this paragraph, too, does not respond to the plea to which it is directed, for it assumes, wrongly, that the Bank's plea is tied to the plaintiffs' own expression "the Securities as Varied" which is defined in paragraph 24B(c) of the statement of claim.[16]

This refers back to the plaintiffs' own concept, the "Repayment Term", which is defined in paragraph 24A(b) of the statement of claim[17]

. Having constructed this edifice, all of which I reject, the plaintiffs crown it with a representation extracted from the Bank's letter of offer which the letter does not contain on any fair reading. This contention then is taken through paragraph 1I, 1J, 1K and 1L of the reply to the conclusion in paragraph 1M that the Bank is estopped from relying upon the terms of its standard terms or indeed upon the securities to allege that the plaintiffs are liable under the guarantee.

I reject this argument. It depends upon contentions which I have rejected and its conclusion does not follow from any of those contentions in any event.

Paragraph 1Q of the reply is in the following terms:

"1Q In respect of the allegations contained in paragraph 31(a) of the Amended Defence, the Plaintiffs deny that Special Condition 26 provides that by electing to return the Bank guarantee, the defendant could be paid $6.5M instead of $4.5M under the Contract of Sale since the return of the Bank Guarantee resulted in the forfeiting of, or the surrendering of the right of the Defendant to call upon the Bank Guarantee for $2M for no consideration."

The effect of the election of the Bank pursuant to special condition 26 to return the Westpac Bank guarantee is that HQQ was obliged to pay $6.5M upon settlement of the contract of sale. There can be no doubt about this. It may be that the plea directs attention to the alternative scenario, in the event that the Bank had elected to call upon the Westpac Bank guarantee. In such an event, which did not occur, the plaintiffs deny that the Bank could be paid $4.5M under the contract of sale. This may or may not be correct. What the Bank is to receive in that event is $6.5M less the proceeds received by it from Westpac under the guarantee. It seems, however, very likely that in terms of the Westpac Bank guarantee it would have received $2M in which case the Bank would have received from HQQ upon settlement $4.5M subject to adjustments. I suspect, however, that this is not the thrust of the plea, for it offers another reason for the denial. The problem is that I cannot understand how the proffered reason supports the denial. Nor is it clear where the plea goes. Whatever it means and wherever it goes I am not persuaded to accept it.

Bank Did Not Recover $2M or Any Value From the Security

This contention, of course, lies at the heart of the plaintiffs' case. It is found in the reply in paragraphs 1N(b)(iii), 1R and 1S but, surprisingly, not in the statement of claim.

The contention can be addressed at two levels. Did the Bank recover any value from the Westpac Bank guarantee; and did the Bank recover $2M from it.

To my mind it is self-evident that the Bank recovered some value from the security. By the contract of sale it sold both the Westpac Bank guarantee and the Sunbury Road land and plant for $6.5M. The terms of the election available to the Bank under special condition 26.1(a) show that the return of the guarantee to Tranteret had the consequence of increasing the amount payable by HQQ under special condition 21.1(b). This is its value.

The second question, whether the Bank received $2M for the Westpac Bank guarantee, was disputed on behalf of the plaintiffs. This is a little surprising for, in paragraphs 28 and 29 of the statement of claim and paragraph 1Q of the reply, they contend that a proper allocation of the price paid under the contract of sale produced the result that the bank obtained only $4.5M for the land and plant, the balance being for the bank guarantee. It is, of course, correct that the contract makes no such allocation except by inference from special condition 26. If the price is to be reduced upon election by the Bank to call upon the guarantee, the reduction would reflect the proceeds of this security. On its face, Westpac would be obliged to pay $2M so that this might be taken as the portion of the price referable to this asset. This would mean that the substantial issue for trial became the question whether the Bank was in breach of a duty owed to the guarantors by reason of the fact that it obtained only $4.5M for the land and plant. Indeed, it was this that caused the plaintiffs to seek that the trial be adjourned and, later, to accept that the remaining issues might go forward.

No reason has been pleaded in support of a contention that the reduction in the price, if the Bank had so elected, would be less than $2M. It was not, for example, pleaded that Westpac would have been unable or, for some reason, unwilling to pay in full upon demand.

Nevertheless, it appears that the Bank did make an unsuccessful attempt to call upon the bank guarantee. This was, however, forestalled by Tranteret which in proceeding No. 8189 of 2002 sought an injunction restraining it from doing so. In that proceeding the Bank on 3 March 2003 gave an undertaking to the Court not to make a demand pending determination of the proceeding or further order.

In the circumstances, it may be correct, as counsel for the plaintiffs urged, that I should not attempt to value the Westpac Bank guarantee. Having regard to the fact that it is encumbered by this claim of Tranteret, it may be that it is worth very much less than its face value. I shall therefore stand that issue over for the next trial.

The Application of the Proceeds of the Contract of Sale

The contention here is set out in paragraph 1T of the reply in the following terms:

"1T In respect of the allegations contained in paragraph 31(d) of the Amended Defence, the Plaintiffs say that the sale proceeds were not applied towards repayment of the Secured/Guaranteed Money as varied as was required."

The expression "Secured/Guaranteed Money as Varied" is defined in paragraph 24B(a) of the statement of claim[18]

to mean the indebtedness of Pinnacle to the Bank under its facilities other than the November FDA facility.

The uncontradicted evidence was that the proceeds of the contract of sale were in fact applied first to extinguish the Pinnacle indebtedness under the November FDA facility and the balance towards the other indebtedness of Pinnacle to the Bank. There is no substance in this contention.

I conclude therefore that the contentions of the plaintiffs which were the subject of the preliminary trial have failed. I will list the remaining issues for mention so that they may be dealt with in due course.

[2] Statement of claim paras 24A(b)(i), (iii), 25B

[3] Statement of claim paras 24A(b)(ii), 25B

[5] Statement of claim paras 25D, 25E, 25F

[16] Set out at para [[] above

17] Set out at para [[] above

18] Set out at para [[] above

At a glance

Court

Decision date

Before

Source

Judgment (136 paragraphs)

Parties

Cases Cited (1)