John Steiner v Kenneth Ross Strang and Jason Tang

Supreme Court of NSW|2014-09-05|Before: Sackar J, Rein J

Proceedings 1By their cross-claim filed 30 November 2012, as amended and filed in court on 6 March 2014, Mr Kenneth Strang (Mr Strang or the first cross claimant) and Mr Jason Tang (Mr Tang or the second cross-claimant) seek certain orders and declarations as to whether Mr John Steiner (Mr Steiner or the cross defendant) was indebted to the estate of Dorothy Margaret Steiner in the sum of $881,000.00 as at her death on 12 October 2011. 2The cross-claimants, who are the executors of the will of Mrs Steiner, seek an order that Mr Steiner pay to the estate the loan amount and interest or a declaration that they are entitled to offset the loan amount and interest against any entitlement of Mr Steiner including his entitlement as a residuary beneficiary and as a specific legatee under the will. 3There are substantive proceedings brought by the cross-defendant under the Succession Act, but the cross claim has been brought forward to determine the status of the purported loan, which will obviously have an impact on both the size of the estate and the assets and liabilities of the cross defendant. 4The cross-claim itself was the subject of an order for expedition on 5 July 2014 by Rein J. At that point, the Court noted the agreement of the parties that no objection was taken to the same judge hearing the proceedings numbered 2014/10747 if the judge decided to do so, and taking into account any findings of fact or credit. 5No defence to the cross-claim was filed.

Discussion 26There are a number of issues to be determined, namely the construction of the acknowledgment of loan, whether a debt is owed to the estate and whether the cross-defendant is obliged to pay interest. 27At the outset, it should be noted that it is not disputed that the amount of $881,000 has not been repaid. Furthermore, the two conditions set out in the loan acknowledgment, namely that the deceased did not make demand for the repayment of the loan and that Mr Steiner was named as a residual beneficiary, have both been met. 28Mr Steiner was the only witness required for cross-examination. He accepted that other payments had been made to him by his mother (14 payments totalling approximately $1.2 million) but those other payments were not accompanied by any documentation suggestive of a loan arrangement. 29There was no evidence as to any terms or conditions to be attached to the provision of moneys prior to the execution of the acknowledgment (other than, of course, its characterisation as a loan or a gift), although nor was Mr Steiner asked to accept that the conditions in the acknowledgment of loan were in fact agreed to prior to the execution of that document. 30However, in my mind, Mr Steiner was clearly satisfied that the terms in the acknowledgment of loan were terms upon which he agreed to be bound, not only because he executed it but more importantly because he was the party that took the initiative and instructed his solicitor to prepare it. 31Counsel for the cross-defendant puts forward a submission that the consideration for signing the Acknowledgement of Loan was past consideration, relying on the fact that the document was brought into existence after the whole of the moneys were advanced. 32To my mind, this fundamentally misconceives the nature of the acknowledgment of loan. It is objectively not intended to be the contract between the parties, but an acknowledgment of a loan already entered into. In that sense, it is properly to be regarded as an admission or as admissible post-contractual conduct. 33In Cross on Evidence (9th edition), the learned author J D Heydon observes at [39290] that: The post-contract conduct of the parties may, of course, be relevant to matters other than the construction of the document... And where there is a dispute as to the existence of a contract, or the contract is oral (Carmichael v National Power plc [1999] 4 All ER 897) or there is a question as to how the contract is to be characterised (Bankway Properties Ltd v Pensfold-Dunsford [2001] 1 WLR 1369)... the parties' subsequent conduct may be relied upon to establish the existence of that contract, and what the terms of that contract were... 34In Lym International Pty Ltd v Marcolongo [2011] NSWCA 303, Campbell JA additionally observed: [139] Third, where a contract is oral, post-contractual conduct may be used to ascertain the subject matter of the contract. Such use of subsequent conduct is justified when it is "relevant, on an objective basis, to the identification of the subject matter of the contract or the determination of the necessary terms, as distinct from deciding the meaning of words". Such subsequent conduct is relevant in that way when "what was done later [is] a basis for inferring what was agreed when the contract was made, or as establishing later additions or variations", citing Browne LJ in Ferguson v John Dawson & Partners (Contractors) Ltd [1976] 1 WLR 1213 at 1229. [140] I respectfully agree with Spigelman CJ's analysis. Other authority that where a contract is partly written and partly oral, the terms of the contract are to be ascertained from the whole of the circumstances as a matter of fact is collected in Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; (2009) 261 ALR 382 at [90]. [141] There is a vast difference between the task that is involved in interpreting a wholly written contract, and the task involved in finding what has been agreed in a contract that is not wholly in writing. The difference between those tasks in itself makes a vast difference between the circumstances in which post-contractual conduct can be relevant for the respective tasks. [142] Where there is a contract that is wholly in writing, there is no doubt what the contract is - it is the writing. The task of interpretation is ascertaining the meaning that the bystander who knows all the relevant surrounding circumstances would understand from the parties using the words in that writing. The admissibility of evidence for interpreting a wholly written contract is decided by reference to whether it is able to assist in ascertaining the meaning that the bystander who knows all the relevant surrounding circumstances would understand from the parties using those words. Save in the case of post-contractual events providing retrospectant evidence of a surrounding circumstance that was known to the parties at the time of contracting, the view favoured in this court is that post-contractual conduct cannot assist in that task, and thus is not admissible, or if admitted cannot legitimately be used in that task: the cases cited by McColl JA in County at [161] ([118] above). [143] By contrast, the task in ascertaining what are the terms of a contract that is not wholly in writing is quite different - the task is finding as a fact what the parties have agreed. A range of post-contractual conduct could be relevant to ascertaining what the parties have agreed. For example, their conduct in carrying out the contract could itself be objective evidence of what they had agreed, an admission of one of the parties could assist in ascertaining what they have agreed, and business records created to record or report on the contract rather than carry it out could also assist in that task. 35The statement in James Miller & Partners v Whitworth Street Estates Ltd [1970] AC 583 at 603 per Lord Reid that "it is not legitimate to use as an aid in the construction of [a] contract anything which the parties said or did after it was made" was reaffirmed in Agricultural and Rural Finance Pty Limited v Gardiner (2008) 238 CLR 570 at [35] per Gummow, Hayne and Kiefel JJ. 36More recently, in Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 the Court of Appeal considered the issue of post-contractual conduct. Basten JA observed (Gleeson JA agreeing) at [120]-[121]: [120] There are difficulties attending the use of post-contractual statements to construe the terms of a contract. It is an accepted principle that anything which the parties said or did after a contract was made cannot be used "as an aid in the construction of" the contract: Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; 238 CLR 570 at [35] (Gummow, Hayne and Kiefel JJ), referring to the statement of Lord Reid in James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603. That principle derives from the "objective" theory of contract, which provides that the legal obligations of the parties to the contract do not depend upon their subjective beliefs but upon the view of the reasonable bystander informed as to the surrounding context and circumstances, which in practice means the view of the court based on the evidence before it: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 775 (Lord Hoffmann); Wilson v Anderson [2002] HCA 29; 213 CLR 401 at [8] (Gleeson CJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 at [16] (Lord Hoffmann, PC); and see Lewison and Hughes, The Interpretation of Contracts in Australia (Law Book Co, 2012) at [2.04]-[2.05]. [121] On the other hand, where it provides evidence of facts, the assertion of which is against the interests of one party, it may be admissible as an admission by that party. However, to the extent that the evidence reveals an opinion as to a question of law rather than fact, the admission may be irrelevant or valueless. (The relevant authorities were collected by Campbell JA in Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; 261 ALR 382 and in Lym International Pty Ltd v Marcolongo [2011] NSWCA 303.) Alternatively, the evidence may establish contextual facts in existence at the time the contract was executed. 37Therefore, the acknowledgment of the loan should properly be regarded as post-contractual conduct which should be treated as an admission by Mr Steiner. The question of consideration being past at the point when the acknowledgment was executed simply does not arise. 38Alternatively, in my view the parties may well have come to an agreement before the provision of the remaining sum which was to be the subject of formal documentation. That formal documentation, being the acknowledgment of loan, was to reflect the terms of their agreement that it was to be a loan, not a gift. The parties, or at the very least Mr Steiner, it seems to me had anticipated that the agreement would be reflected in writing. Hence he prepared a draft and provided it to his solicitor. 39Therefore, on either characterisation of the acknowledgment of loan, I am not persuaded that the issue of whether sufficient consideration has passed between the parties properly arises. In my view, the acknowledgement of loan is a clear indication that a debt is owed to the estate. Mr Steiner agrees that (in circumstances where there was no demand before death) he will "repay the loan to my mother... to her estate upon her death". I am not satisfied, in the circumstances and on the evidence before me, that the amount of $881,000 was intended to be a gift. It can only be sensibly viewed as a loan from the deceased to Mr Steiner, and it is therefore a debt owed to her estate.

The rule in Cherry v Boultbee 40The cross-claimants rely on the rule in Cherry v Boultbee (1839) 41 ER 171 in support of the proposition that the executors can set off a debt owed by a beneficiary against that beneficiary's entitlement to the estate (whether that entitlement be as a residuary or to a legacy or both). 41In Cherry v Boultbee, Lord Cottenham LC held at 173: It must be observed that the term "set-off" is very inaccurately used in cases of this kind. In its proper use, it is applicable only to mutual demands, debts and credits. The right of an executor of a creditor to retain a sufficient part of a legacy given by the creditor to the debtor, to pay a debt due from him to the creditor's estate, is rather a right to pay out of the fund in hand, than a right of set-off. Such right of payment, therefore, can only arise where there is a right to receive the debt so to be paid; and the legacy or fund, so to be applied in payment of the debt, must be payable by the person entitled to receive the debt. ... In all the cases referred to, except that of Ex parte Man (Mont. & Mac. 210), the liability to pay the debt and the right to receive the money had been at some time vested in the same person; and all that the Court did in those cases was to consider that the party liable to pay the legacy had actually done what the law considers him entitled to do, namely, to apply a sufficient part of the legacy to payment of the debt. 42Lord Cottenham had "no hesitation" in preferring the principles expressed in cases other than Ex parte Man: at 174. 43The rule was stated compendiously by Sargant J in Re Peruvian Railway Construction Co Ltd [1915] 2 Ch 144 at 150: Where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute. 44However, as noted in Meagher Gummow and Lehane's Equity: Doctrines and Remedies at [37-125], the rule known as the rule in Cherry v Boultbee was enunciated but not applied in that case, and in any event had arisen in an earlier case called Jeffs v Wood (1723) 24 ER 668. As Palmer J noted in Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (In liq) (2004) 49 ACSR 531 at [33]; [2004] NSWSC 383: ...this proposition ought more accurately to be called, if anything, the "rule in Jeffs v Wood" and Cherry v Boultbee should be regarded as a qualification or exception to that rule, as Sargant J himself recognised in Re Peruvian Railway. 45In Gray v Gray [2004] NSWCA 408 the Court of Appeal considered the application of the rule in Cherry v Boultbee. The rule itself, summarised at [13] as being to the effect that as a claimant a party was a beneficiary he needed to set off what was due by him to the estate (without regard to limitations), was not under serious challenge before the Court. 46Young CJ in Eq (Sheller and Bryson JJA agreeing) noted at [14] that "the case raises the very awkward situation in which a judge has to adjudicate as to whether a transaction was one of gift or is one of loan where the principal actor is dead or unavailable, there is inadequate recording of the transaction (or at least the court is not presented with an accurate recording of the transaction), and virtually all that is before the court is the fact of payment". I should note that in the present case it is the construction of the loan acknowledgement, rather than inadequate recording of the transaction, that gives rise to the dispute. 47His Honour reiterated that the onus of proving that the transaction was a loan rather than a gift was on those claiming the set-off of those debts: at [17]. Young CJ in Eq also held that there was "no doubt that under the rule in Cherry v Boultbee, not only the debt but also interest due on the debt is able to be set against the legacy due to the debtor": at [94]. 48The learned authors of Equity: Doctrines and Remedies also state at [37-170] "the right [to deduct the debt from the amount owing to the debtor] can be asserted against a residuary legatee or a pecuniary legatee; it cannot be asserted against a specific devisee or legatee". The cases of Re Taylor [1894] 1 Ch 671 per Chitty J and Re Akerman [1891] 3 Ch 212 per Kekewich J are cited in support of this proposition. 49It clearly must be correct that, as Chitty J put it, a specific gift cannot be measured against a debt. For example, if a testator bequeaths a valuable piece of artwork to a beneficiary who is liable to the estate for a certain monetary amount, it cannot be the law that the executors are entitled to retain the artwork until such time as the liability of the beneficiary is satisfied. Nevertheless, the question does not arise in the present case as Mr Steiner is the recipient of a pecuniary legacy (in addition to his interest as a residuary beneficiary). 50In order for the equity to operate, the debt owing must of course be a valid debt: see, for example, Parkes Property and Stock Co Ltd v Perpetual Trustee Co Ltd (1936) 36 SR (NSW) 457. The acknowledgement of loan, and in particular the agreement that "the loan can be repaid by the borrower by offsetting the amount of the loan as part of the borrower's entitlement as a residual beneficiary" (the offset term), is express. 51The cross-claimants submit that the whole of the loan amount is a debt due by Mr Steiner to the estate of the deceased, and the offset term merely provides a practical means by which the loan can be repaid. They submit that the offset term does not constitute an agreement whereby Mr Steiner's share of the residuary estate will, if paid back to the estate, constitute a discharge of the whole debt. Put simply, in circumstances where his share of the residuary estate is not sufficient to cover the loan amount, the remaining amount will continue to be money due to the estate. As the cross-claimant submits, it may well have been that the deceased thought that the loan amount would not have exceeded Mr Steiner's entitlement as a residuary beneficiary, but that is ultimately irrelevant. 52Counsel for the cross-defendant submits that the acknowledgement of loan envisages that no demand for repayment need be made if the residue is "sufficient" after payment of debts and testamentary expenses. In the alternative, if the residue is insufficient, the construction of the acknowledgement of loan is said to be that only so much of the debts and testamentary expenses as exceed the residue would be offset against the loan, and it would not be necessary to repay the whole of the loan. 53In my view, the cross-claimant is clearly correct in their submission. The acknowledgment of loan, despite the earlier handwritten document provided by Mr Steiner, contains no mechanism or suggestion of forgiveness of the loan amount. It certainly does not suggest that the loan amount would be discharged in any circumstances, but merely and ultimately offset. 54I also reject the submission of the cross-defendant that the rule in Cherry v Boultbee cannot apply to the $2 million legacy as to do so would be inconsistent with the terms of the acknowledgement of loan. It may well be that the latter half of the acknowledgment of loan is otiose, but I see no inconsistency between the application of the rule and the insertion of a mechanism by which it was clear that Mr Steiner's entitlement as residuary beneficiary would be offset by the amount of the loan. That provision, in my view, in no way precludes the application of the rule in Cherry v Boultbee not only to his residuary entitlement but also to the pecuniary legacy he otherwise receives.

Interest 55The final issue is that of interest. The cross claimant seeks a declaration that Mr Steiner is obliged to pay interest. No interest is payable in accordance with the terms of the loan and for any period prior to the death of the deceased on 12 October 2011. 56The cross-claimant submits that interest should run from 12 October 2011 and that the Court should exercise its discretion pursuant to section 100 of the Civil Procedure Act 2005 by ordering "interest up to judgment", being interest that would run from the date on which the debt was due and payable (but otherwise not paid). The cross-claim seeks a fixed rate of 7.5%, but the cross-claimant submits that the appropriate rate would be those available from time to time under the Civil Procedure Act. 57The cross-defendant submits that if Mr Steiner is called upon to pay interest, it is only on the difference between the amount of the loan and the residue, when ascertained. 58In my view, interest should only be calculated on the amount remaining after the offset has been calculated. In other words, the cross-defendant will be ordered to pay interest only on the loan amount less any amount he is entitled to as a residuary beneficiary.

Conclusion 59For the reasons I have expressed above, the cross-claimants are entitled to succeed on their cross-claim. Mr Steiner is indebted to the estate of the late Dorothy Steiner in the sum of $881,000 and the executors are entitled to offset that amount and interest at the prevailing rate against his entitlement both as a residuary beneficiary and as a specific legatee under clause 3(a) of the deceased's will. 60I note that a submission was made by the cross-defendants that testamentary expenses do not include legal costs of various court proceedings, especially absent judicial advice. In my view, that submission is only relevant to the question of costs and it is not appropriate for me to express a view on it at this point. 61I invite the parties to prepare short minutes to give effect to my reasons, and to relist the matter if necessary so that the question of costs may be determined. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 September 2014

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