Supreme Court of WA|1999-04-09|Before: Mr P, Owen J

Jetcity Pty Ltd (Acn 079 959 854) v Yenald Nominees Pty Ltd (Acn 008 871 225) & Ors [1999] WASC 1042 (9 April 1999)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

Contracts - Sale of land - Subject to finance - Purchaser to use best endeavours to obtain finance - Finance to be obtained from an institution acceptable to purchaser - Whether agreement terminated by reason of conditions being fulfilled

This is an action in which the plaintiff (purchaser) seeks a declaration that a contract for the sale and purchase of a property made between the plaintiff and the first defendant (vendor) has been validly terminated. The plaintiff also seeks an order that the second defendant (the vendor's agent) return to the plaintiff the deposit paid under the contract.

The plaintiff is a private company acquired to represent some business interests of two families, the Di Latte family and the Perrine family. The plaintiff has two directors, Mr Dominic Di Latte and Mr Joe Perrine.

On 26 September 1997, the plaintiff made an offer to purchase a property owned by the first defendant located at 66 Francis Street, Northbridge ("the property") for $2,150,000. The first defendant accepted the plaintiff's offer and a contract for sale of land by offer and acceptance dated 26 September 1997 ("the contract") was executed. The contract incorporated the 1994 General Conditions for the Sale of Land ("the General Conditions"). A deposit of $100,000 was paid to the second defendant which is the agent of the first defendant. Under the General Conditions the second defendant held the deposit as a stakeholder.

"1.1 It is a condition of this contract that before the Latest Time the Lender gives Approval of the granting to the Purchaser of the Loan.

(a) use best endeavours to obtain the Loan and if required in writing by the Vendor or Vendor's agent provide evidence in writing of the making of an application in good faith for the Loan;

(b) when the Loan is approved immediately so notify in writing the Vendor or the Vendor's agent.

(b) the Application for the Loan has not been approved the Purchaser shall immediately notify the Vendor or the Vendor's agent of such rejection or non approval as the case may be.

(a) the condition in paragraph 1.1 is not fully satisfied; and

(b) the Purchaser has complied with paragraphs 1.2(a) and 1.3(a) or 1.3(b) THEN UNLESS the Purchaser has waived this condition and communicated such waiver in writing to the Vendor or the Vendor's agent prior the Latest Time, this Contract shall be deemed to have come to an end without the necessity for either party to give the other notice to that effect. The Deposit and all other moneys (if any) paid pursuant to this contract shall be then refunded to the Purchaser and there shall be no further claim under this Contract by either party, agent or other person at law or in equity.

1.5 If the Purchaser fails to notify the Vendor or the Vendor's agent in accordance with 1.3(b) the Purchaser shall be in default and the Vendor may without prejudice to any other remedies and rights available immediately terminate the Contract by notice in writing to the Purchaser.

1.6 This clause shall operate for the benefit of both the Vendor and the Purchaser ---.

In these reasons I will refer to this provision as "the finance conditions". The reference to "the Latest Time" is, in the context of this contract, 4pm on the day 15 working days after the date of acceptance. Nothing turns on that provision. The contract stipulates that the "Lender" is "an institution acceptable to the Purchaser". There was some controversy over this aspect. I will return to it later. The amount of the loan is specified to be $500,000.

The plaintiff intended to finance the purchase of the property through two separate loans. A loan of $1,600,000 was to be provided by members of the Di Latte family and a loan of $500,000 ("the loan") was to be obtained through a financial institution. The plaintiff had already arranged the loan for $1,600,000 prior to the execution of the contract. The plaintiff's intention was to give the financial institution providing the $500,000 finance a first mortgage over the property and to secure the $1,600,000 loan by a second mortgage.

On 2 October 1997 Di Latte, on behalf of the plaintiff, made an oral application to a Mr Jeffery Hill, the Business Banking Manager of the Challenge Bank, Balcatta ("the Bank") for a loan of $500,000. On 6 October 1997, the Bank advised Di Latte by facsimile that the plaintiff's application for finance had been refused. On 7 October 1997, Di Latte sent a facsimile to its agent Major Corporate enclosing the Bank's facsimile advising that the plaintiff had been unable to obtain finance in accordance with the finance conditions.

By a letter dated 9 October 1997 the first defendant's solicitor made a request (in accordance with cl 1.2(a) of the finance conditions) that the plaintiff provide evidence in writing that an application for finance had been made in good faith.

On 10 October 1997 the plaintiff contacted the Bank and asked if it could provide an explanation for refusing to grant finance. On the same day the Bank by facsimile advised the plaintiff that the reason for its refusal to grant the finance was due to insufficient security. This advice was passed on to the defendants on the same day.

On 13 October 1997 the first defendant gave notice to the plaintiff that it would not refund the $100,000 deposit until it was satisfied the plaintiff had made an application for the loan in good faith as required by cl 1.2(a) of the finance conditions. Some time later, these proceedings were commenced. The second defendant interpleaded and has taken no effective part in the proceedings. It is prepared to abide the decision of the Court. Accordingly, the dispute is between the plaintiff and the first defendant. In these reasons I will refer to the first defendant simply as "the defendant" except where it becomes necessary to distinguish between the two entities.

In para 3 of the statement of claim the plaintiff pleads that the contract was subject to a condition precedent, namely that an institution acceptable to the purchaser would within 15 working days from 25 September 1997, approve a loan of $500,000 to the plaintiff. The plaintiff says that following the execution of the contract, it made an application in good faith to the Bank and notwithstanding its best endeavours, the application was refused. The plaintiff then provided advice to the defendant of the Bank's refusal to grant the loan. However despite this notice being given, the defendant has refused to authorise the stakeholder to refund the deposit.

The defendant admits in para 2 of the defence that the contract was subject to the condition referred to in para 3 of the statement of claim. However it says that the condition was subject to further express terms incorporated by cl 1.2 of the finance conditions. These terms are that the plaintiff would use its best endeavours to obtain the loan and, if required in writing by the defendant or its agent, would provide evidence in writing of the making of an application in good faith.

The defendant contends that the plaintiff failed to use its best endeavours to obtain the loan and failed to provide evidence in writing of the making of an application in good faith. As a result the defendant says the plaintiff has not satisfied the finance conditions and is not entitled to the return of the deposit. Accordingly, its claim in this action should be dismissed.

It appears to me that the issues to be determined in this action are:

1. Whether the plaintiff made an application for a loan of $500,000.

2. If so, whether the loan application was made in good faith and whether the plaintiff used its best endeavours to obtain the loan.

3. Whether the plaintiff was required to provide evidence in writing of the making of the application in good faith and, if so, whether it complied with the obligation.

The first issue is whether or not the plaintiff made an application for the loan. At the heart of the defendant's challenge to the plaintiff's conduct in this area is the fact (which the plaintiff does not deny) that there was no formal written application for a loan. It is by no means the only issue but it is, I think, what initially aroused the defendant's suspicions. The plaintiff's evidence is that on 2 October 1997 Di Latte on behalf of the plaintiff had a meeting with his bank manager Hill for the purpose of obtaining a loan for $500,000. The defendant contends that the meeting on 2 October 1997 did not constitute a formal application for finance because the information provided by the plaintiff at that meeting was of a vague nature and fell short of what was required.

In his statement of evidence dated 5 October 1998 (which was tendered at the hearing as an exhibit) Di Latte describes the nature of his relationship with Hill and the Bank. He says in para 19 and following that he has used the Bank both personally and commercially for over 10 years and has dealt with Hill personally for several years. Further he says that on 1 October 1997 he called Hill to apply for a loan on behalf of the plaintiff and a meeting between them was arranged. On 2 October 1997 Hill came to Di Latte's office to discuss the loan application.

In para 40 of his statement Di Latte says that it was normal practice for Hill and the manager before him, to attend Di Latte's office when he wanted to apply for a loan. He goes on to say that on these previous occasions he had never been required to complete any forms or provide documents until conditional approval was granted. In para 42 he says that on previous occasions when he obtained finance from the Bank the initial applications had always been done orally and he had never been required to do anything else except provide a copy of the offer and acceptance or contract.

In relation to matters discussed at the meeting, Di Latte's evidence was that he gave Hill a copy of the contract and told him that he had paid the $100,000 deposit. They discussed the arrangement for the $1,600,000 advance from Di Latte's family and the repayment requirements for this loan. They also discussed the property, the plaintiff's proposal for the redevelopment of the property and whether the property was presently leased. He told Hill that the property was to be purchased by the plaintiff and that the plaintiff was a company acquired for the purpose of effecting the purchase. Further Di Latte says in para 25 that he made it clear to Hill at the meeting that none of his other companies or those of Perrine were going to support the plaintiff. They then discussed how the plaintiff would repay the loan without money from the other companies. Di Latte told Hill he was confident that he could rent the property and cover the repayments by the rental income. They then discussed the Bank having a first mortgage over the property and the family members providing the $1,600,000 advance having a second mortgage.

Further evidence of the loan application was provided in the statement of evidence of Hill dated 6 October 1998, which was also tendered as an exhibit. His evidence was that he joined the Bank in 1994 and since then his portfolio of customers had included Di Latte and his companies. In para 5 Hill states that it is not the Bank's practice to require written applications for commercial finance. He says that all applications of this type for commercial finance are verbal and this has been the Bank's practice for a number of years.

Hill says in para 6 that on 1 October 1997 he received a call from Di Latte wanting to discuss a proposal and a meeting was arranged for the next day at Di Latte's office. In para 7 he says that all of the Bank's business managers visit their clients at their clients' premises. He then goes on to describe what was discussed at the meeting and says that Di Latte told him he had made an offer to purchase the property through a newly acquired shelf company. They discussed in broad terms the property and its current building structure, Di Latte's proposal for future development and leasing details. They discussed the amount the plaintiff wanted to borrow, the arrangements which had been made for the $1,600,000 private finance and how the private finance was to be repaid. His evidence was that they discussed the option of securing the finance by providing the Bank with a first mortgage over the property and the private finance being secured by a second mortgage.

In para 15 Hill says that they discussed the serviceability of the loans. There was a possible tenancy with rent of $120,000 per annum. Hill then says that he calculated what would be needed to cover principal and interest. Having done so he told Di Latte there would be a problem servicing the finance and that a cashflow injection would be needed or further security provided before the loan could be approved. In para 20 he says that he told Di Latte that in these circumstances the Bank would require a lease or a pre-lease to be in place before finance could be approved.

Hill's evidence was that as the plaintiff was a newly acquired shelf company he did not require any detailed information on the company for the purpose of approving the loan. Further he said that there was no need for details on Di Latte's other companies as they were not going to be providing any security for the loan. However he says in para 25 that in case Di Latte decided to put up additional security, he had checked both Di Latte's and his companies' financial situation. So far as he could recall they were all heavily secured. He said that he told Di Latte that for the Bank to approve the loan it would require extra security from either Di Latte or the other director personally.

In para 30 of his statement, Hill set out the steps involved for a standard commercial loan application at the Bank. These steps are:

(d) if the application has merit, request further information or obtain it from existing records;

(f) provide a letter of approval subject to formal requirements being completed.

I have considered the cross-examination of Di Latte and Hill carefully. In my view, on this particular issue they did not materially alter the thrust of the evidence-in-chief. I accept their evidence as to what occurred. The defendant relied on the expert evidence of Mr Ian Walters, now a Certified Practising Accountant but formerly a bank officer. His evidence related to the types of practices and information that would be expected from both a borrower and a lender when making an application for a loan. Exhibit 5 is a report dated 3 September 1998, prepared by Walters for the defendant. The report sets out what are, in his opinion, the steps involved in applying for a loan. The report provides a checklist setting out the relevant information which in his opinion would be necessary for a loan application to be properly assessed.

The defendant seeks primarily to rely on Walters evidence in relation to the issue whether the plaintiff used its best endeavours to obtain the loan. However his evidence on cross-examination did little to sustain the defendant's argument that the meeting on 2 October 1997 was too vague to constitute a formal loan application of the type contemplated under the conditions in the contract. In fact (transcript p68) Walters says he was involved in the style of banking that was engaged in by the plaintiff and Hill. I think, in the modern jargon, it is called "relationship banking". He confirmed that the normal practice of commercial lending institutions is for applications to be made verbally without any need for a formal written document. Further when taken through his checklist Walters agreed that on what he had heard at the hearing, apart from "some ambiguity regarding the principal amount to be repaid, there's been different interest rates mentioned.....so I wouldn't be totally certain on that aspect", Hill had been given sufficient information to assess the application.

I am satisfied that the plaintiff did make an application for the amount of $500,000 to the Bank on 2 October 1997. In my opinion what transpired between Hill and Di Latte at the meeting satisfied the requirements expected when a long term customer seeks to obtain a loan from its bank manager. As the nature of the relationship between Di Latte, Hill and the Bank was well established there would have been little need for details of Di Latte's personal or other business dealings to be exchanged. As Hill's evidence indicated, those details were readily available through the Bank's existing records. In any event, the evidence was that the only details required would be those that related specifically to the purchase of the property. These included the entity purchasing the property, how the finance was to be raised, serviced and subsequently repaid and some information concerning future proposals for development of the property. In my opinion all these matters were sufficiently addressed at the meeting on 2 October 1997.

Some of the submissions made by counsel at the hearing tended to suggest that the finance conditions impose on a purchaser two separate and distinct obligations: to make an application in good faith and to use best endeavours to obtain finance. I am not sure that this reflects the true construction of the contractual term. I have already set out the finance conditions in full. To reiterate, the relevant portion is cl 1.2(a) which requires the purchaser to:

"use best endeavours to obtain the Loan and if required in writing by the Vendor or the Vendor's agent provide evidence in writing of the making of an application in good faith for the Loan."

I will have more to say about the construction of the provision later. For present purposes it is sufficient to note that there are two limbs to the provision. The first limb relates to the obligation to use best endeavours to obtain the loan. The second limb imposes the obligation to provide evidence of the making of the application. It seems to me that the primary obligation is to use best endeavours. As will appear from the legal principles that I am about to set out, it is implicit in the obligation to use best endeavours that a person must act honestly and not capriciously. I think the notion of "good faith" in the context of a best endeavours clause of this type is to the requirement of honesty. This may also explain the use of the term "good faith" in the second limb of cl 1.2(a).

The legal principles governing "a best endeavours" clause are well known and were not in dispute at the hearing. However the application of the principles to the particular fact situation is often problematic. This is the case here. The nature of a best endeavours clause was considered by the Full Court in Paltara Pty Ltd & Anor v Dempster & Ors (1991) 6 WAR 85 (Malcolm CJ, Kennedy and Pidgeon JJ). Malcolm CJ described the test that would apply at 89 :

"Whether a party has `used his best endeavours' to achieve a stated objective, must be determined objectively in the light of what in fact is required to be done, in the circumstances as they exist, to achieve the stated objective. In such a case.......he is required to do all that he reasonably can in the circumstances to achieve the contractual objective, but no more.'

There is abundant authority for the proposition that what a purchaser is required to do under a best endeavours clause is to be determined by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the party to the contract viewed in light of the particular contract: Transfield Pty Ltd v Arlo International Ltd [1980] HCA 15; (1980) 144 CLR 83 at 97 per Mason J. While a best endeavours clause places a party under an obligation not to hinder or prevent the fulfilment of its purpose [see Shepard v Felt & Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359 at 378], the obligation does not require the party to go beyond the bounds of reason. He is to do all he reasonably can in the circumstances to achieve the contractual object, but no more: Sheffield District Railway Co v Great Central Railway Co (1911) 27 TLR 451.

In Erley Pty Ltd v Gunzberg Nominees Pty Ltd, unreported, FCt SCt of WA, Library No 980153; 3 April 1998, the Full Court referred to the High Court decision in Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571. Meehan dealt with a contract for sale of land containing a subject to finance clause. The question for determination in Meehan was whether a purchaser who had obtained approval for the finance contemplated under the contract, was under an obligation to accept that finance. This case raises a different issue but the general principles are applicable. In Meehan Mason J said, at 588, that the primary object of a subject to finance clause is to protect the purchaser by ensuring that he is not under a binding obligation to complete the contract if he is unable to obtain the finance contemplated by the contract. The Full Court referred to that dicta and discussed the proposition raised in Meehan that a purchaser who obtained an offer for finance may be required to be reasonable, rather than merely being honest, in determining whether to accept the offer of finance. Although the Full Court left open the question of whether the purchaser was required to act reasonably, it seems to me the authorities support the proposition that a best endeavours clause imparts an objective standard. At the very least there is a requirement that the purchaser act honestly in using best endeavours to obtain the loan.

It might be thought that the principle enunciated in Meehan (supra) that the finance conditions are primarily for the benefit of the purchaser does not apply to contracts using this form of offer and acceptance. This is because of the presence of cl 1.7, which provides that the clause operates for the benefit of both the vendor and purchaser. However in Erley (supra) Pidgeon J (with whom Franklyn J agreed) said, at 13, that this aspect of Mason J's dicta in Meehan was not affected by the presence of cl 1.7.

At and before the time of making the loan application Di Latte, on behalf of the plaintiff, had taken a number of steps which, in my view, showed a genuine intention on the part of the plaintiff to purchase the property. The application for finance has to be seen in that context. The evidence was that prior to the meeting on 2 October 1997 Di Latte had already acquired a shelf company for the purpose of the transaction at a cost of approximately $800 to $900. He had organised finance to the sum of $1,600,000 from his family. He had paid $100,000 by way of deposit and had taken steps to have the `For Sale' sign removed from the property. Informal inquiries had also been made with respect to obtaining a tenant for the property. There had been some initial discussions on the potential redevelopment. I could see nothing in the evidence to point to any relevant change in circumstances between the happening of these events and the 2 October 1997 meeting. In this context "relevant" means a change that may have caused the plaintiff to alter its intention to acquire the property and in turn its efforts to obtain the finance. Di Latte in cross-examination gave evidence that he had taken the steps that I have mentioned in the belief that finance would be obtained.

I accept Di Latte's evidence that at the time of making the loan application he had expectations that the plaintiff's application for finance would be approved. His evidence, at p19 of the transcript, was that he had these expectations for a number of reasons. He believed that his existing good standing and reputation with the Bank would stand him in good stead. He felt that the property was a good prospect for development. He was confident of letting out the property to a tenant at a good rent. However, he did say in cross-examination that he had not been entirely confident of obtaining the loan as he was aware that these would not be the only factors considered by the Bank in assessing the loan. His evidence was that he had seen the property as a good development and hoped to get the finance to purchase it.

Hill's evidence, at p46 of the transcript, was that he had been given enough information to work with for the purpose of assessing the loan. He said the information provided was sufficiently specific for that purpose. Subject to what I will say in relation to the best endeavours issue, there was no evidence that would lead me to conclude that the plaintiff had intentionally withheld information from Hill. The evidence showed that the parties had discussed the property and that during the meeting Hill had obtained information relating to the purchase of the property, the development proposal, the tenancy and the finance. There did not seem to be any information material to the loan that was omitted. In any event, if Hill had needed more information he was clearly in a position to ask Di Latte. There was nothing to indicate that at the meeting Di Latte had refrained from answering any of Hill's questions relating to either the property or the loan application. Nor is there any evidence that after the meeting Hill sought further information that Di Latte refused or neglected to provide.

In my opinion if any real doubts were to arise in Di Latte's mind in relation to the availability of finance they did not arise before the meeting on 2 October 1997. It was not until that meeting that Di Latte became aware of the actual figure needed to service the debt. Di Latte's evidence was that he was unable to understand the concept of principal and interest and relied on Hill to do this calculation for him. This calculation was not done until the meeting. His evidence was that when Hill made the calculation he had been surprised as it had seemed "a bit high". It is also apparent from the evidence that at that meeting Hill brought to Di Latte's attention certain factors and considerations concerning the appropriateness of the plaintiff's application for the loan and its ability to obtain a tenant. I think it is likely that up until this time Di Latte had not given serious thought to whether or not his application would satisfy all the standards required by the Bank for approval of the loan. However in my view even if doubts arose in Di Latte's mind as to the appropriateness of the plaintiff's application for the loan, they did not hinder the approach taken by the plaintiff in making the loan application.

4.3 Did the Plaintiff Use Best Endeavours to Obtain the Loan?

The defendant contends that even if the plaintiff had applied for the loan in good faith the plaintiff was not entitled to have the deposit returned as it had not satisfied the obligations under cl 1.2(a) of the conditions to use best endeavours to obtain the loan. The plaintiff responds by saying that its application for the loan was made in good faith and as a result satisfied the best endeavours obligation in cl 1.2(a). I have already set out the provision but to re-iterate, it provides:

"The Purchaser shall use best endeavours to obtain the Loan and if required in writing by the Vendor or Vendor's agent provide evidence in writing of the making of an application in good faith for the Loan;"

I have already found that at the time the plaintiff made the application it was acting honestly. The remaining issue in relation to cl 1.2(a) is whether the plaintiff was obliged to have done something more than what it did in order to obtain the loan. It seems to me that the basis for this contention is twofold. First, the defendant claims the plaintiff did not fulfil its obligation because it failed to provide certain information to the Bank which was material to the success of the application. Secondly, the defendant says that after having received notice of the Bank's refusal, the plaintiff was under an obligation to pursue the loan further by applying elsewhere or at the very least making enquiries as to why the loan was refused.

In accordance with the legal principles that I have already set out and the express terms of the contract the issue to be resolved is whether the plaintiff did all that reasonably could be expected in the circumstances to obtain finance from an institution acceptable to it. Whether the plaintiff has satisfied the test in Paltara and Erley is essentially a question of fact. A convenient way to determine the question is to examine the conduct of the plaintiff at the time and consider it in light of each of the defendant's allegations.

Counsel for the defendant submitted that there are several reasons why the plaintiff failed to discharge its obligation under cl 1.2. They are:

1. The plaintiff failed to disclose certain information to the Bank which, had it been made available would have enhanced the likelihood of the Bank acceding to the application. In particular, it failed to provide information relating to:

(a) Di Latte and Perrine's intentions to provide finance to the plaintiff for the purpose of undertaking the development project;

(b) the fact that the $1,600,000 loan was to be provided by members of Di Latte's family;

(d) the rental income it hoped to obtain from the property.

2. Once the application for the loan was rejected the plaintiff was under an obligation to ascertain the reasons why the loan was rejected or to look elsewhere to obtain a loan.

3. By making an offer to purchase through a company with a $2 share capital the plaintiff failed to discharge the implied obligation under cl 1.2 of the conditions to act honestly in making the application for finance.

4.3.1 Was material information withheld from the Bank?

I will first deal with the defendant's claim that Di Latte and Perrine withheld from the Bank information of their intention to provide personal finance for the development. In addition to providing their own finance, the defendant says that both Di Latte and Perrine intended to take advantage of their own companies and use their services in undertaking the work on the redevelopment. The defendant contends that these facts, had they been disclosed to the Bank, would have materially assisted the plaintiff's application for the loan.

At the time the contract was executed Di Latte and Perrine shared a close and successful business relationship in property development. Di Latte's evidence was that he and Perrine had been involved together in property ventures since 1976. He said that they became interested in the property about a week prior to making the offer. The offer to purchase was made once they were satisfied that the property had potential for a profitable property development. Further, he said that they intended to lease the property out (initially for a year or so) while they obtained the relevant approvals for redevelopment. Di Latte's evidence was that they intended to lease the property in the short term while they "explored the prospect of development funding through investors". Once the development was completed they intended either to sell the property or to continue leasing it out.

With respect to the supplying of their companies services, Di Latte said that both he and Perrine intended that each of their companies would contribute services to the redevelopment of the property. However he denied the defendant's suggestion that these companies were to provide their services gratuitously. Di Latte said that it was always intended that the companies would be paid for any services provided. Perrine's companies were to provide the architectural services while Di Latte's companies were to provide the contract management services. Further, he said that both he and Perrine intended to contribute about $100,000 each to the redevelopment. His evidence was that initially they intended to outlay all necessary funds required for approvals but that this money would be paid back to them by the plaintiff after the redevelopment was complete and the property on sold.

In cross-examination, it was put to Di Latte that he had failed to disclose to Hill the contribution both his and Perrine's companies were to play in the development of the property. Di Latte conceded that he could not recall actually discussing with Hill the idea of their companies providing the services. The defendant submitted that the fact that these companies would be providing the relevant services in the development would have been an important consideration for the Bank in assessing the loan application.

It was put to Hill in cross-examination that, when considering a request for finance for a property that was planned for development, the Bank would want to have a clear idea of the kind of development to be undertaken, the time frame for the development and how the finance for that development was to be acquired. Hill agreed that these issues would need to be addressed but also said that this information would only be required if "the development was what was intended from the start". He said that such information would "not necessarily" be required if the intention was to hold the property for a period before development. At p39 of the transcript he said:

"Well, if a customer was buying a property with the eventual intention for development , the Bank may very well lend funds to purchase the property but give no guarantee to any further funding being lent until the customer had addressed those issues at a later stage.

But the Bank even in those circumstances would want to know that the developer had thought through those issues?----If he's got the capacity to service the funding being requested at the time it may not be an important issue at that point in time, but later on it would become significant."

In relation to what was discussed between Hill and Di Latte about the plaintiff's future plans for the property, Hill said at p42:

"Would it be right to say that your discussion was of a fairly general nature?---Yes, Mr Di Latte discussed various thoughts that he had for development of the property...

...He talked about the possibilities of eventually developing it into accommodation. He said that the structure was such that it could take possibly three to five extra floors; a possibility of a night-club in the basement...

...did he indicate to you his intention to lease out the property in the short term?----Yes.

Whilst he got development approvals and plans organised. Is that correct?----There was no time frame as to when he would commence any developments...

...Did he give you approximate figures of how much the development would cost?...---No , it was only conceptual."

It seems to me that the application made on 2 October 1997 was essentially directed towards obtaining finance for the purchase of the property. The plaintiff was not at this stage seeking finance to develop the property. This accords with the terms of the contract. There was not, as sometimes appears in contracts of this type, a condition that the offer was subject to the approval by a relevant authority of redevelopment plans. The plaintiff's evidence was that it hoped, at some time in the future, to raise the finance for the development through private investors. It is clear from the evidence of Hill and Di Latte that the plaintiff's future plans for the property were discussed at the meeting even if these discussions were of a fairly general nature. Di Latte and Perrine had become aware of the property only a week or so before the contract was executed. It is unlikely that as of 2 October 1997 the plaintiff would have made any definite or thorough plans in relation to the development of the property. At the time of the application to the Bank, the plaintiff's intention was to purchase the property, find a short term tenant and begin to plan the development of the property. On the evidence, the plaintiff did not appear to be in any hurry to develop the property. In fact it could have been some time before the appropriate investors could be found. In the light of all this, I think the information provided to the Bank was appropriate and materially complete. In my opinion there was nothing further with respect to the proposed development, that the plaintiff should have disclosed which would have affected the success of its application. It also seems to me that a fairly general discussion is all that could be expected to have occurred between Hill and Di Latte at the meeting on 2 October 1997.

The defendant also claims that the plaintiff withheld from the Bank information in relation to the source of its $1,600,000 loan. It argues that the plaintiff was under an obligation to reveal to the Bank that the private finance of $1,600,000 was to be provided to the plaintiff through a company owned by the Di Latte family. Counsel for the defendant put to Hill in cross-examination that the fact that this finance was being put up by family members would have been a relevant factor in assessing the application. Hill disagreed with that proposition. At pp43-44 of the transcript the following exchange occurred:

"He didn't tell you, that he was getting the majority of his balance of the funds from his family, did he, or from his family's company?---He just told me it was a private mortgage, a private financing.

It would have been - the source of those funds, whether it was his family or a commercial borrower, would have been a relevant factor for you to consider, would it not, in considering his application for finance or any application for finance?---It doesn't really matter where the funds come from. The matter was that it was a significant amount of money that was being borrowed as well.

But the fact that it was his family company - or his family's, company that was putting up the money, that would have given you as a Banker a level of comfort in relation to Mr Di Latte's commitment to the property, would it not?----Not necessarily. I know nothing about his family background.

You say you would have been totally indifferent to the source of the funds?---Yes..

You wouldn't accept the proposition that if somebody had organised for his family's company to put $1.6 million into a project , that indicates a level of commitment to the success of the project?--I wouldn't think that I could assume anything like that."

I accept Hill's evidence on this point. In my opinion a decision by a family member to invest or provide support in a commercial venture of another family member cannot be seen as any guarantee as to the success of the venture. It is not at all uncommon for members of families to provide finance to other members of the family. These types of intra-family loans may be done for any number of reasons. They may or may not relate to the commercial viability of the venture. In my opinion, it does not follow as a matter of principle, logic or commercial reality that a financial institution must, or even should, regard the provision of finance by related entities as a relevant factor in its decision making process. It might do so but it would depend very much on the individual case. In this case Hill seemed to have been quite indifferent to it as a relevant factor. I am not prepared to say he was wrong.

In my opinion there was no obligation on the plaintiff to inform the Bank that the $1,6000,000 loan was to be provided by one of Di Latte's family companies. There was no evidence that Di Latte had intentionally withheld the source of the loan or that Hill had specifically requested information as to who was to provide the loan. In any event it was Hill's role to ascertain all the information that the Bank required. Di Latte's obligation was to provide Hill with the necessary details. If Hill had thought the identity of the lender material to the application he could have asked Di Latte at the meeting.

A further allegation made by the defendant was that the plaintiff failed to provide the Bank with accurate estimates of the rental income it intended to receive on the property. It argues that if the plaintiff had disclosed the true amount of rental it expected to obtain for the property the plaintiff's prospects of obtaining the loan would have been advanced significantly.

In cross-examination Di Latte said that he had hoped to lease the property at a rental income of anywhere between $200 to $300 per square metre. Di Latte said that based on these figures he believed he could obtain at the very least $200,000 rental income per year. At best Di Latte said he hoped to obtain up to $500,000 per annum for the property. His evidence was that the amount of rental depended on the usage of the property, whether as a night-club or a restaurant. Further, he believed that such an estimation ($500,000) was not unrealistic but it depended on getting the right tenant.

Di Latte conceded in cross-examination that he had not told Hill of his hopes of attracting a tenant able to pay $500,000. His evidence was that at the meeting he told Hill that he expected to obtain an amount of rental on the property that would cover the repayments on the loans. This exchange occurred, at p27 of the transcript :

"Did you tell Mr Hill that you expected to be able to get a tenant of the calibre who would be able to pay you $500,000 for the property?---No, I didn't tell Mr Hill that.

Did you say anything to Mr Hill about the calibre of the tenant you expected to be able to get?---I told Mr Hill I expected to rent the property out and I was hoping that the rental - I expected the rental to be able to repay the loans.

Hill could not recall a figure of $500,000 being discussed. In para 15 of his statement he says:

"We talked about the serviceability of the loan. There was a possible tenancy with rent of $120,000 per annum at the start. I worked out that about $480,000 per annum was needed to cover principal and interest on both the private and Bank finance. That was about 0.25 times the debt coverage leaving a significant shortfall."

The defendant contends that if Hill had been aware that the plaintiff expected to obtain $500,000 in rental income rather than $120,000, he might have taken a different view of the application. Di Latte could not recall even mentioning to Hill that there was a possible tenancy involving annual rent of $120,000. I do not think much turns on the disclosure of the figure of $120,000. This figure, if it was discussed, was not put forward by the plaintiff in the context that it was the total amount of rental it expected to obtain for the property. Hill made it clear in cross-examination (p44 of the transcript), that his understanding was that the figure of $120,000 was only in relation to a lease over a portion of the property and not the whole property. Hill said that Di Latte had told him that he was confident of getting tenants for the other parts of the property. Given that the $120,000 only related to part of the property, it seems to me that Di Latte's estimate of the total rental which could be obtained from the entire property might reasonably be said to fall within the range contemplated by him.

Counsel for the defendant put to Hill in cross-examination that if he had known the plaintiff expected to rent the property for $500,000 the application would have come closer to falling within the Bank's guidelines. Hill accepted that if such a rental arrangement was possible that would indeed have been the case. However, he said that the rental income was only one factor to be considered among many others. At p45 the following exchange occurred:

"Mr Di Latte has given evidence this morning to the effect that he thought that on a best case basis he could achieve a rental income of $500,000 for the property. Did he say anything like that to you?----Not that I recall.

If he had said that to you or something to that effect to you, that would have had a bearing on the way you considered his application for finance, would it not?-----It would be a factor in favour of the application for finance would it not?---Depending on the quality of tenancies.

Depending on the soundness of the rental covenant?----Yes."

But there is another matter. In my opinion what Di Latte believed he could obtain or hoped to obtain was, at the time of the meeting with Hill, purely speculative. There was no evidence that at the time of making the application Di Latte had a tenant who had committed, even provisionally, to a lease arrangement . Nor was he in serious negotiations with a prospective tenant. His evidence was that he had had some discussions with possible tenants. However it was clear from his evidence that there was no lease or pre-lease negotiated or that one was likely to be negotiated in the near future. Further Hill's own evidence in para 20 of his statement was that the Bank would require a lease or a pre-lease to be in place before finance could be approved. Given the uncontested evidence of Hill that the Bank's guidelines would have required a pre lease or lease to be in place, it seems to me that the fact that the plaintiff hoped to find a tenant or tenants capable of paying $500,000 did not materially effect the outcome of the application because no such leasing arrangements were in place.

Walter's gave evidence that might be seen as supporting Hill's evidence in relation to the Bank's policy for a pre-lease or lease to be in place before finance was approved. Certainly, Walter's evidence could not be said to refute the position put by Hill. His evidence in cross-examination was that in circumstances where a building's servicing capacity for a loan was to be derived from rental income it was understandable that an application for a loan would be declined when there was no lease in place over that building. This exchange occurred, at 71:

"So prudent Banks look at servicing capacity and asset value?----Correct

In the case of this building, on the offer that was before the Challenge Bank - or the proposal - servicing capacity was to be derived from a tenant or tenants?----Yes

In those circumstances it was entirely understandable that the application was declined, wasn't it ?----entirely understandable?

Yes?----Yes, if you take it literally as the question is asked."

At the time the application for finance was made, Hill could only assess the application on the information before him. This information in turn could only be assessed in accordance with the Bank's guidelines. When the application for the loan was made Di Latte made it clear to Hill that neither he nor his companies would be financing the purchase. As a result Hill was only able to assess the application on information relating to this particular transaction. At that point there was no evidence that any tenant capable of paying $500,000 had been found or that there was a pre-lease or lease in place. In addition, given that Hill had been told that the third party loan had to be repaid in five years, it seems highly unlikely on the face of the application that in this circumstance the rental income would be sufficient to cover the debts. In my opinion it is unlikely that even if Di Latte had expressed to Hill his hopes of finding a tenant willing to pay $500,000, this disclosure would have helped the plaintiff obtain the loan. In any event the fact that there was no pre-lease or lease in place meant that the application did not come within the Bank's guidelines and would not have been approved within the level of authority that Hill possessed.

4.3.2 Should the Plaintiff have sought finance elsewhere?

The defendant submits that once the plaintiff became aware that its application for the loan had been rejected, the effect of cl 1.2(a) was to impose on the plaintiff an obligation to try to obtain finance from another institution. The plaintiff's response to this is that any obligation on it to use best endeavours to obtain the finance was subject to the finance being obtained by an institution acceptable to the plaintiff. The plaintiff submits that at the time the contract was executed the Bank was the only institution acceptable to it. The plaintiff argues that once the application was made and rejected the obligation to use best endeavours was discharged and there was no requirement on it to look elsewhere for finance.

The question to be resolved is whether the plaintiff had fulfilled its obligation under the condition by making only the one application for finance. The express terms of the contract make it clear that the contractual arrangement was conditional on the plaintiff obtaining finance of $500,000 from "an institution acceptable to the purchaser". In my opinion the proposition in Meehan that primarily the purpose of a subject to finance clause is to benefit and protect the purchaser by ensuring that he is not under a binding obligation to complete if he is unable to obtain finance, should extend to protect a purchaser from being forced to obtain finance on terms that are not acceptable to it. I think that where it is an express condition of a contract that the institution must be acceptable to the purchaser there cannot be a requirement on the purchaser to obtain finance from any institution other than one which is acceptable to it. Of course in determining what is acceptable the purchaser must act honestly and not capriciously. There must be some reasonable basis on which the purchaser can rely in writing on a particular lender.

The plaintiff's evidence was that it did not make any other applications to any other financiers once its application to the Bank was rejected. The condition precedent did not identify by name the bank or other institution from which finance would be sought. However, Di Latte said at p33 of the transcript, that at the time the contract was executed the Bank was the only institution acceptable to the plaintiff. I have come to the view that the plaintiff was not under an obligation to look elsewhere for finance. I have done so for a number of reasons. First, the express terms of the condition precedent provide that the loan is to be obtained by an institution "acceptable to the [plaintiff]". It is clear from the evidence that the Bank was the preferred financier and that Di Latte had over the years formed a long and close relationship with it. Further, the evidence was that he relied on the Bank not only as a source of finance but also for financial advice. His evidence was that he relied on Hill to calculate principal and interest and that he relied on and accepted Hill's judgment in such matters. It appears from the evidence that Di Latte and his companies had for at least the last 10 years dealt exclusively with the Bank. In cross-examination the defendant explored the history of the Di Latte entities in relation to finance applications during that period. I think it is fair to say that there was little or no evidence to indicate that the plaintiff had sought or obtained finance of any significant amounts from other institutions over that period. In my opinion to place the plaintiff under a obligation to look further to obtain finance when it had already made an application in good faith to the only institution acceptable to it would be contrary to the principles set out in Meehan.

Before leaving this point, I wish briefly to address the defendant's contention that the plaintiff should have made further enquires to the Bank for the purpose of ascertaining why the loan had been rejected. At face value there is much to be said for that proposition. The obligation to act honestly and not capriciously would, in my view, import a requirement that the applicant be aware of the shortcomings or deficiencies in its case. The reason for this is that the deficiencies be eminently capable of quick and easy resolution. But each case must be viewed according to its own facts. In this instance the tenor of Di Latte's evidence (although I accept that it may not have been put to him quite as directly as this) was that he was aware of the Bank's misgivings. During the meeting Hill had done some calculations which "surprised" him. Hill was a man whose financial acumen he respected. Hill knew of the range of the Di Latte entities' activities and financial resources. In the circumstances of this case, I think it was open to Di Latte to accept the decision to reject the application as having been arrived at after proper consideration and for good reason.

In my view, this is not a case where the deficiencies in the application were capable of quick and easy resolution. I do not think that the plaintiff was under an obligation to press the Bank further. Nor do I think it reflects against the honesty of the plaintiff's attempts to obtain finance.

Finally on the issue whether the plaintiff used its best endeavours in obtaining finance, the defendant contends that from the outset the plaintiff failed to act both honestly and reasonably by making an application for finance through a company with a paid up capital of $2. They claim that the plaintiff could, or should have been aware that such an application was, from the outset, nothing less than hopeless.

The same legal principles apply here. To determine what is reasonable in relation to a best endeavours obligation, regard must be had to the particular circumstances and they must be viewed in light of the particular contract: see Paltara and Transfield. Di Latte's evidence was that he had acquired the company for the purpose of purchasing the property. He also stated from the outset that he did not intend that his other companies would support the financing of the project. He said that he and Perrine intended to put up some initial funds but that after that they would look for private investors.

I do not accept this contention in the broad sense in which it is put forward. The concept of a company as a legal entity separate and apart from its directors and shareholders still applies. The "$2 company" is not without its critics but the law has not moved to require any particular minimum of paid up capital for a corporate entity of this type.

The purpose of the best endeavours clause is to regulate a purchaser's conduct in acquiring the finance contemplated in the contract, not to undertake an examination of the purchaser's ability or capacity as a corporate entity to obtain such finance. In advancing this contention the defendant relies on factors surrounding the plaintiff's existence as a legal entity, its capital structure and in turn its ability to obtain finance. In my opinion these factors are not relevant in determining the question whether the plaintiff used its best endeavours to obtain the loan. In any event the plaintiff's identity was known by the defendant prior to the contract being executed. Any doubts the defendant had as to the plaintiff's ability to obtain the finance could have been raised prior to the formation of the contract.

5. The Requirement to Provide Evidence of the Application

If requested to do so the plaintiff was required under cl 1.2(a) to provide the defendant with evidence in writing of the making of an application in good faith. The defendant claims that to satisfy this obligation the evidence provided must be of a sufficient nature to enable a reasonable vendor to satisfy itself that a relevant application has been made in good faith. The defendant contends that neither the facsimile message from Di Latte to its agent Major Corporate dated 7 October 1997 or the Bank's letter dated 10 October 1998 contained any material which would have enabled the defendant to determine whether an application had been made in good faith.

In response, the plaintiff argues that the vendor's entitlement under cl 1.2(a) to require evidence of the making of an application in good faith only exists while the contract is on foot. Counsel for the plaintiff submitted that once the contract has come to an end in accordance with cl 1.4(b), the defendant no longer has the right to require that evidence in writing be given. The plaintiff's alternative position is that it did in fact provide to the defendant evidence in writing that an application in good faith was made.

This raises a difficult question of construction. The defendant argues that the contract is not terminated until the purchaser, if required to do so, gives evidence in writing that an application was made in good faith. Further the defendant submits that the evidence provided must disclose not only that an application was made but also that the application was made in good faith. The plaintiff contends that once an application in good faith is made under cl 1.2(a) and notice is provided under cl 1.3(b) that the application has been rejected, cl 1.4(b) deems the contract to have come to an end. The plaintiff says that once it had given notice to the defendant that its application for finance had been rejected, the contract came to an end in accordance with cl 1.4(b) and the defendant no longer had the right under cl 1.2(a) to require the plaintiff to provide written evidence of the application.

Earlier in these reasons I pointed out that the primary obligation on the purchaser is contained in the first limb of cl 1.2(a), namely to use best endeavours to obtain the loan. That obligation is not expressly conditioned by the requirement that the purchaser must act in good faith. It might be said that the reference in the second limb to "good faith" indicates the implication in the first limb of an obligation to that effect. But it is not necessarily so. Of course, the obligation to use best endeavours imports a requirement to act honestly and not capriciously and to that extent it reflects the notion of good faith. But the drafter of the provision has used different words in the two limbs and they must be given some meaning.

Clause 1.4 is self executing in the sense that the contract is deemed to have come to an end if nominated conditions have been fulfilled. They are that the loan is not approved and that the purchaser has complied with cls 1.2(a) and 1.3(a) or 1.3(b). It must relate to both limbs of cl 1.2(a), that is, to the use of best endeavours and to the provision of written evidence. This condition, in so far as it relates to cl 1.3, does not raise difficulties. Clause 1.3 requires the purchaser to give to the vendor written notice of the rejection or non-approval of the loan. That is eminently capable of objective assessment. The only issue is that it seems, from a practical perspective, to envisage that some action or activity may take place after the Latest Time has passed. A lender may react to an application at the last minute. Accordingly, the purchaser might not know until the Latest Time that the loan had not been approved (as opposed to having been rejected) and could not give notice until after the passing of the Latest Time. This is not without significance because a failure to give that notice puts the purchase in default under cl 1.5.

But I should return to the relevance of cl 1.2(a). The "evidence in writing" to which the vendor is entitled under the second limb is evidence of the "making of an application in good faith". It is not evidence of the "best endeavours" used by the purchaser in pursuit of the application. Nor, on the face of it, does it extend to the reasons why the application did not succeed. It is not, it seems to me, something in the nature of pre-trial discovery or the disclosure of a case in reply by which the purchaser is to set out what steps it has taken to support the application and thus to establish that it has used "best endeavours". Had the drafter of the provision wished to achieve that result he or she could have said so. It would require precise language to that effect and I do not think that is what cl 1.2(a) means.

I think the second limb means what it says. It is limited to the making of the application and to the making of the application honestly in the sense that it was a genuine application made to a bona fide lender. This gives some meaning to the addition of the words "in good faith".

Clause 1.2 deals with the making of the application, its pursuit and its approval. There is a contrast between it and cl 1.3, which deals with the rejection or non-approval of the loan. This supports the view that, generally speaking, cl 1.2 speaks of the time before the Latest Time. Put another way, cl 1.2 has three aspects: the making of an application in good faith, the use of best endeavours to obtain the loan and immediate notification of the approval of the loan. It is easy to see why the last of those three matters was not picked up in cl 1.4 because there is no question of the contract coming to an end. But the self executing aspect of cl 1.4 depends on the purchaser having fulfilled its obligations under each of the other two aspects. The contract does not come to an end under cl 1.4 unless, among other things, the purchase has used best endeavours to obtain the loan. As I have already said, this is not something to which the second limb relates. If no request has been made under the second limb and the application is rejected, then (assuming the purchaser has made best endeavours) the contract comes to an end once the notice of rejection has been given.

The right of the vendor to insist on the provision of evidence arises under, and only because of, the second limb. It seems to me that once the contract has come to an end there is no longer a contractual basis on which the vendor can rely in this regard. There is nothing in the language of the provision to support an interpretation that the obligation survives the termination of the contract. It is not, for example, covered by para (5) of the item "Interpretation" in the General Conditions which provides that warranties and representations survive settlement and do not merge in the transfer or settlement.

If the written evidence that the vendor could insist on receiving is limited to the making of the application honestly it would extend to part only, and not to the whole of, the obligation to use best endeavours. Accordingly, it would not have the effect of establishing that the purchaser had complied with its obligations under cl 1.2(a) so as to be entitled to treat the contract as having come to an end. I do not think that the construction to which I have come is inimical to its very existence or utility. At any time prior to the receipt of notice of rejection the vendor could make the request. It would be of utility if, for example, the vendor felt the purchaser was "dragging its feet" in making the application or had made a sham application, perhaps to an entity that was not a bona fide lender. It goes further. The loss of the opportunity to insist on the production of evidence of the making of an application in good faith does not deprive the vendor of the right to assert the continued existence of the contract if best endeavours have not been used.

It seems to me (and based on my finding that the plaintiff used best endeavours to obtain the loan) that by the time the defendant's solicitors made the request for evidence in writing by the letter of 9 October 1997 the contract had come to an end. Notice of rejection (which satisfied cl 1.3(a)) was given by the plaintiff to its agent. While it is unclear how or when the notice was passed on by the plaintiff's agent to the vendor or the vendor's agent it is apparent from the solicitor's letter that by 9 October 1997 it had been received by the vendor. The request was, therefore, without contractual foundation and the failure of the plaintiff to respond did not constitute non-performance of the obligations so as to disentitle the plaintiff from treating the contract as at an end.

5.1 Did the Written Evidence Satisfy Clause 1.2(a)?

In case I am wrong in this construction of the contractual provision , I should deal with the alternative submission that the plaintiff's response to the request was adequate. By its solicitor's letter of 9 October 1997, the first defendant exercised its right under cl 1.2(a) to require the plaintiff to provide evidence in writing of the making of an application in good faith. On 10 October 1997 the plaintiff, by its solicitors, provided a letter from the Bank confirming that its application for finance had been refused. The defendant claims that neither the solicitor's letter nor the Bank's letter contained any material which could have enabled the defendant to determine whether the application had been made in good faith.

In my opinion the letter was sufficient to discharge the plaintiff's obligation under cl 1.2(a). The letter provided evidence that the Bank had received an application for finance of $500,000 from the plaintiff and that that application had been considered but rejected. Further the Bank, when requested, provided the defendant with its reason for rejecting the finance. The reason given to the defendant was that the application did not meet the Bank's security guidelines. I have already said that, on its proper construction, cl 1.2(a) may not require disclosure of the reasons for rejection. That is not to say that the reasons may not be relevant. They may assist in establishing that the application that was made was put forward in good faith. In this case the application was made to a major banking institution. There is nothing on the face of the letter (or indeed in the evidence generally) to suggest that it was a sham. There is nothing on the face of the letter or elsewhere in the evidence to suggest that the Bank did not receive the application, deal with it according to standard procedures and reach a considered conclusion on it. In the circumstances of this case it would be quite inappropriate to start from the position that the Bank was, or may have been, party to an arrangement that was less than it purported to be.

In my opinion if the obligation to provide evidence in writing of the making on an application in good faith was extant as at 9 October 1997, the forwarding to the defendant's solicitors of the Bank's letter of 10 October 1997 was sufficient compliance with the obligation.

In my opinion the plaintiff had complied with its obligations under the finance conditions. Accordingly the plaintiff was entitled under cl 1.4(b) to treat the contract as having come to an end and to have the deposit of $100,000 paid to the second defendant returned to it. The plaintiff is entitled to declarations and orders accordingly.

Jetcity Pty Ltd (Acn 079 959 854) v Yenald Nominees Pty Ltd

At a glance

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Decision date

Before

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Source

Catchwords

Judgment (136 paragraphs)

Jetcity Pty Ltd (Acn 079 959 854) v Yenald Nominees Pty Ltd (Acn 008 871 225) & Ors [1999] WASC 1042 (9 April 1999)

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Cases Cited (4)