Merton v Bank of Queensland Ltd

Court of Appeal (NSW)|2013-04-29|Before: Barrett JA, Gleeson JA, Stevenson J

Judgment 1BARRETT JA: The appellants (Mr Merton and Ms Butler, who are husband and wife) were directors of Heritage Village Estate Pty Ltd ("HVE") and guarantors of obligations owed by that company to the respondent bank. 2The respondent, as plaintiff in proceedings determined by Stevenson J in the Common Law Division of the Supreme Court, was successful in claims for rectification of a guarantee document, for a money judgment against the appellants as guarantors and for possession of mortgaged properties. The appellants appealed to this Court. 3At trial, the first appellant (Mr Merton) presented the case of himself and his wife. At the hearing of the appeal, Mr Merton was again self-represented and spoke for his wife. HVE is in liquidation and played no part in the proceedings either at first instance or on appeal.

Background 4HVE owned a property at Castle Hill. It proposed to demolish the existing building, subdivide the property into two lots and build new dwellings on those lots, one to be occupied by the appellants and the other to be sold. 5To that end, HVE required financial accommodation. It obtained this principally from the respondent. 6On 12 May 2008, the respondent, by "Conditional Letter of Offer", offered to provide two facilities to HVE - a commercial rate loan of $2,362,000 and a business overdraft of $65,000. Agreements were later entered into in relation to these facilities. Security was to consist of a first mortgage of the Castle Hill property (which was already mortgaged to Westpac Banking Corporation), guarantees given by the appellants and pre-existing mortgage security held from one of them (Ms Butler) over property owned by her. 7The agreement relating to the commercial rate loan of $2,362,000 described the facility as an "interest capitalised variable commercial rate loan" with a maximum term of one year and payable on demand. The proceedings concerned that facility only. 8The respondent made only one advance under the commercial rate loan agreement. The advance was in the sum of $1,070,016.19 and was made on 26 September 2008. The respondent's position was that it was not obliged to make any further advance because of default by HVE. The default was said to arise under clause 7 of the relevant agreement (to be considered presently) and to consist of HVE's failure to cause subdivision of the Castle Hill property into two lots to be completed within three months of "initial funding" which, on the view the respondent took, occurred on 26 September 2008 when the sum of $1,070,016.19 was advanced. The respondent maintained that that default excused it from any obligation to advance further moneys and caused moneys already owing to it to be payable on demand. 9The appellants' contention was that, even though subdivision had not been completed within three months after 26 September 2008, the respondent remained under an obligation to lend further moneys, at least to the extent necessary to fund completion of the subdivision.

The decision of the primary judge 10The primary judge found in favour of the respondent, holding that (a) HVE had defaulted under the commercial rate loan agreement; (b) the appellants were liable, as guarantors, for the indebtedness of HVE to the respondent and the respondent was entitled to judgment against them accordingly; (c) Ms Butler's properties at West Wyalong and Nulkaba stood as security for the indebtedness; and (d) the respondent was entitled to possession of the properties. 11Central to the judge's decision was the question of the correct construction of the commercial rate loan agreement.

Grounds of appeal 12The appellants' case on appeal is as follows:

The primary judge erred in his construction of the commercial rate loan agreement in that, contrary to the judge's finding, the agreement required the respondent to provide finance to procure subdivision; and this was so even though the $1,070,016.19 had already been advanced.
The primary judge erred in finding that the advance of $1,070,016.19 "evidently" included an amount of $180,000 for subdivision costs. 13Two other grounds of appeal were not pressed. One concerned the order rectifying a guarantee document. The other went to the question whether Ms Butler's West Wyalong property stood as security for her obligations as guarantor of HVE's obligations.

The commercial rate loan agreement 14The commercial rate loan agreement was contained in two related documents. One (consisting of nine pages, including a schedule designated "Commercial Rate Loan Facility Schedule") was headed "Facility Details". The other (of 33 pages) was entitled "Commercial Rate Loan Facility General Conditions". 15The Facility Details document contained a section headed "Conditions Precedent" and a section headed "Conditions Subsequent". In the "Conditions Subsequent" section there appeared eleven items of which one was as follows: "9. Funding is to be advanced to meet the following costs: Item Cost Contribution Advance Land/Refinance 1,350,000 $ 470,000 $ 880,000 Subdivision Costs 180,000 180,000 Section 94 and Land Tax 18,000 18,000 Construction - Houses 834,000 834,000 Contingency 50,000 50,000 Inclusions and fittings 100,000 100,000 Landscaping and Pools 140,000 140,000 Interest 160,000 160,000 Total (Excluding GST) 2,832,000 470,000 2,362,000 Establishment Fee 11,810 11,810 Legal costs 5,000 5,000 2,848,810 486,810 2,362.000

16Among the Conditions Precedent was the following item 3: "Westpac Debt being refinanced to be confirmed in writing by Westpac. Availability of loan funds under the loan will be reduced in line with the balance of the debt at Westpac." 17Item 7 in the Conditions Precedent section was in these terms: "Subdivision and issue of titles to be confirmed within a maximum of 3 months of initial funding a [sic] prior to construction funding being made available." 18The Commercial Rate Loan Facility Schedule forming part of the agreement set out particulars peculiar to the transaction, including facility limit, term and annual percentage rate. Under a heading "Request notice", the schedule stated: "The attached request notice forms part of this Schedule." 19A form headed "Request Notice" followed on the next page. 20It will be convenient to refer to conditions precedent 3 and 7 as simply "clause 3" and "clause 7" and to condition subsequent 9 as "clause 9". It will also be convenient to refer to the event mentioned in clause 7 (confirmation of subdivision and issue of separate titles) as "subdivision confirmation".

The initial advance 21On or about 10 June 2008, HVE gave the respondent a "Request Notice" under the facility agreement. The notice was in the form attached as part of the schedule to the agreement. The relevant part of the notice read: "We give you notice that we wish to: ... Make a drawing under the facility: (a) the proposed drawing is a: initial draw ... (b) the proposed amount is $880,000 - refinance of Westpac loan (c) the proposed drawdown date is -/-/- as soon as possible [illegible] to be advised." 22The italicised parts were handwritten in the printed form. 23It is not in dispute that the respondent thereafter advanced $1,070,016.19 on 26 September 2008. In this Court, the appellants maintained that the respondent nevertheless remained obliged to advance $180,000 for subdivision costs. This sum is the second item in the table forming part of clause 9. 24In its amended statement of claim filed on 22 December 2010, the respondent pleaded at paragraph 10A: "The initial funding to be provided by the Plaintiff to the First Defendant pursuant to the First Loan Contract, being the sum of $1,000,070.16 was made available by the Plaintiff to the First Defendant on or about 26 September 2008." 25The response, in an amended defence filed on 7 June 2011 was: "10A is agreed." 26The respondent later filed a second amended statement of claim in which paragraph 10A was corrected to refer to $1,070,016.19 instead of $1,000,070.19. The defendants below did not plead to that amended paragraph. They had, in an amended cross-claim filed in August 2010, themselves pleaded that $1,070,016.19 was advanced on 26 September 2008. 27The central issue, as presented to this Court, is whether the respondent was obliged to make advances beyond the initial $1,070,016.19.

The application to adduce further evidence 28Before addressing that matter, I must deal with an application by the appellants for an order that further evidence be received on appeal. That application was dealt with at the start of the hearing on the footing that the decision and reasons would be given upon delivery of judgment on the appeal itself. 29Because the appeal is from a decision made after a hearing on the merits, this Court is precluded from receiving further evidence except on "special grounds": Supreme Court Act 1970, s 75A(8). 30The categories of "special grounds" are not closed: Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64. It can be said, nevertheless, that special grounds are unlikely to exist unless the evidence sought to be tendered could not have been obtained with reasonable diligence for use at the trial, is credible and is of such a quality as to produce a high degree of probability that a different result will emerge: Atkins v National Australia Bank Ltd (1994) 34 NSWLR 155 at [160] per Clarke JA (with whom Sheller JA agreed). 31The appellants' application is supported by an affidavit of Mr Merton to which are annexed copies of the documents sought to be tendered. The annexure "A" and each of the two annexures marked "C" were in evidence before the primary judge. They are available on appeal and nothing more need be said about them. Annexure "F" is a copy of an affidavit of Mr Atkinson which was read at the hearing before the primary judge. Again, the content is available on appeal and nothing further need be said. 32Annexure "D" is a copy of an affidavit of Mr Rowntree which was read on an unsuccessful application by the appellants to reopen their case after the primary judge had announced his decision and delivered reasons. The respondent accepts that the evidence in that affidavit was not taken into account by the primary judge in reaching his substantive decision. It also says that Mr Rowntree's affidavit cannot assist the appellants. That submission must be accepted. Mr Rowntree, a former branch owner of the respondent, deposes to his belief or understanding about the purpose of the loan, when advances would be made and what the advances would cover. That evidence of the deponent's belief or understanding is obviously irrelevant to questions of the existence and nature of the obligations of the respondent under the written contract. The evidence therefore does not give rise to any likelihood at all that its use could change the result. 33The remaining documents are annexures "B", "E", "G" and "H". These were not tendered at trial. The respondent objects to their being received on appeal. The respondent points out that the documents were discovered by it in the proceedings. They were therefore available for use by the appellants but they did not seek to use them. 34The appellants accept that the documents in question were included in a list of discovered documents received by their then solicitor from the respondent. They say that they had no access to the list of discovered documents because they had ceased retaining the solicitor who exercised a lien for unpaid costs over all relevant documents, including the list. 35In relation to annexures "B", "E", "G" and "H", I am not satisfied that the particular practical difficulty under which the appellants laboured at the time can or should be regarded as something that made the documents unobtainable by them by reasonable diligence. The solicitor was representing them. The respondent made disclosure to the appellants through the solicitor. The communication barrier between the appellants and the solicitor was of the appellants' own making and cannot be allowed to rebound to the disadvantage of the respondent. 36In the result, therefore, I am not satisfied that "special grounds" have been established as contemplated by s 75A(8) of the Supreme Court Act. I would dismiss the application for an order that this Court receive further evidence on appeal.

The sum of $1,070,016.19 37Although there is no dispute that the single advance made by the respondent was in the sum of $1,070,016.19, there is uncertainty as to how that sum was made up. 38By the Request Notice of 10 June 2008, HVE sought an advance of $880,000 which it described as "refinance of Westpac loan". There was no dispute that there was pre-existing indebtedness of HVE to Westpac and that part of the loan to be provided by the respondent was to clear that debt. The first item in the table forming part of clause 9 was "Land/Refinance" of $880,000. 39There was only one Request Notice and one advance. The advance was on 26 September 2008, more than three months after the giving of the notice on or about 10 June 2008. The way in which $1,070,016.19 came to be advanced when the notice requested $880,000 is unexplained and, as the primary judge found, there was no evidence as to how that amount was calculated. His Honour noted that the first appellant had acknowledged in the course of the hearing that the $180,000 for "Subdivision Costs" in the table to clause 9 was "evidently included in the advance of $1,070,016.19 made on 26 September 2008". The first appellant said in this Court that he had never accepted this. Counsel for the respondent pointed to parts of the transcript consistent with the first appellant having accepted the thesis stated by the judge. The aggregate of the clause 9 items for "Loan/Refinance" ($880,000) and "Subdivision Costs" ($180,000) is, of course, $1,060,000. 40The transcript shows that the first appellant did make such acknowledgements. For example: "So the pay out of one million and seventy thousand dollars which was in the bank's view over the amount that was owing to Westpac, also included the primary works for the subdivision which includes a bridge and a couple of other things that had to be built." "They actually funded 1.07 million. They actually funded part of the subdivision costs which was part of the certificate provided by Mr Stokes. So they part funded the subdivision works and to me that was part of the initial funding, was to complete the subdivision works so the title could be produced to them." 41In the course of submissions to this Court, the first appellant said that he knew before the drawdown of 26 September 2008 was provided that the Westpac debt had risen to some $990,000. He said that he had also discovered that the sum ultimately needed to clear that debt was $1,019,416.19; and that $50,600 had been needed to clear a debt owed to another financier, RAB Finance, in connection with subdivision costs. Those two sums would account for the total of $1,070,016.19. The first appellant referred, in this respect, to certain of the documents the subject of the motion for leave to adduce further evidence. 42It is quite possible that the $1,070,016.19 advanced included the sum of $180,000 for subdivision costs, or at least a substantial portion of that sum. It is also possible that it did not and that the whole went to clear pre-existing indebtedness. With the evidence as it is (and, in particular, with the further documents sought to be tendered on appeal not in evidence), there can be no more than speculation on that subject.

The construction of clause 7 and "initial funding" 43It does not matter how the $1,070,016.19 was made up if, as the judge concluded, the advance of that sum constituted the provision of the "initial funding" referred to in clause 7. This is because it is accepted that subdivision confirmation had not occurred within three months after the provision of that advance. In terms of clause 7, subdivision confirmation had to be given not later than three months after "initial funding". The judge found that subdivision confirmation occurred in October 2010. 44The primary judge dealt with three initial points of construction of clause 7 as follows (at [94] - [96]):

The word "a", appearing between "funding" and "prior", must be read as "and".
The clause not only stated a condition that was to be satisfied before the respondent was required to provide funding beyond the "initial funding" but also imposed on HVE an obligation to ensure that subdivision confirmation occurred within the stated period.
The obligation defined by the word "confirmed" in clause 7 was an obligation to demonstrate by objective evidence that the specified events (completion of subdivision and issue of separate titles) had occurred within the stated period. 45There is no challenge on appeal to these aspects of the decision. 46There was then a question as to the meaning of "initial funding" in clause 7. The primary judge held that the "initial funding" consisted of the $1,070,016.19 advanced on 26 September 2008. He noted that the only reference in the agreement to "initial funding" (or anything similar) was in the form of Request Notice annexed to and forming part of the schedule to the loan agreement which referred to "initial draw". Then, referring to the request notice given by HVE, the judge said (at [112] - [114]): "[112] It will be recalled that the Request Notice requested that there be an initial draw of $880,000 to refinance the Westpac loan to be made as soon as possible. [113] In those circumstances, in my opinion and on the proper construction of the Commercial Rate Loan Agreement, the reference to 'initial funding' in clause 7 is a reference to no more than such part of the facility limit that the Bank agreed to make the subject of an 'initial draw' under the Request Notice. [114] There is no other evidence of how the $1,070,016.19 drawn down on 26 September 2008 was calculated." 47The judge was thus of the opinion that the $1,070,016.19 provided as a consequence of the Request Notice of 10 June 2008, although greater than the sum of $880,000 referred to in the Request Notice, was the "initial draw" and constituted the "initial funding". 48His Honour rejected a construction that the appellants pressed again in this Court, that is, that, bearing in mind the nature of the event of subdivision confirmation contemplated by clause 7, the "initial funding" could not be regarded as having been provided unless and until HVE had been able to use for subdivision advances of the amount specified for "Subdivision Costs" in the clause 9 table ($180,000). Furthermore, the argument runs, this was so whatever other sums had been advanced; and the "initial funding" was the whole of the contracted principal of the facility other than the amount identified as for construction of the houses. The appellants say that there could be no subdivision confirmation unless the costs of subdivision had been met and those costs could not be met except out of funds made available by the respondent. 49In my opinion, the primary judge was correct to conclude that the sum of $1,070,016.19 constituted the "initial funding" for the purposes of clause 7. The conclusion is supported when regard is had to the contractual terms as a whole. 50The agreement made it clear in clause 7 that "initial funding" was to be provided before "construction funding" and that the total funding was to consist of those two elements. The second element was to be available only if subdivision confirmation occurred within three months after the advance of the first element. Two things were thus identified as following the provision of "initial funding": first, subdivision confirmation; and, second, provision of "construction funding". 51Clause 9 said, in the part preceding the table: "Funding is to be advanced to meet the following costs". The table assigned a sum to each category of costs. Necessarily implied was the proposition that funds were not to be advanced for costs in any particular category beyond the sum stated in the table. Limits on advances to meet the costs in the several categories were thus imposed. The first two limits were $880,000 for the "Land/Refinance" category and $180,000 for the "Subdivision Costs" category. 52Completion of refinancing (required by the clause 3 condition precedent) and defraying of the cost of subdivision were the first two activities referred to in the clause 9 table. They were necessary to attainment of subdivision confirmation as contemplated by clause 7. Advances for those two purposes were likewise necessary to attainment of that result. But the extent of those advances was limited in accordance with the clause 9 table. It follows that, according to the division of the total funding into the two parts referred to in clause 7 ("initial funding" and "construction funding") and recognising that provision of the "initial funding" was to occur before subdivision confirmation, the agreement contemplated that the "initial funding" would consist of advances not exceeding the aggregate allowed for the first two purposes in the clause 9 table, that is, $1,060,000. That would be so even if the whole sum was applied to the reduction or discharge of the Westpac debt as contemplated by clause 3. 53The construction for which the appellants contend - that the respondent was obliged to advance as "initial funding" whatever was required to cover "Land/Refinance" and "Subdivision Costs", regardless of amount (so that, for example, if $1,070,016.19 had in truth been applied to the retirement of pre-existing debt, there was still a requirement that the respondent advance an additional $180,000 for subdivision costs) - overlooks the effect of clause 9 in limiting the extent to which funding was to be provided for each of the stated purposes. 54The advance of $1,070.016.19 (slightly more than the $1,060,000 indicated by the first two items in the clause 9 table) necessarily represented the provision of the "initial funding" and, since the condition concerning subdivision confirmation was not satisfied within three months after the making of that advance on 26 September 2008, the respondent was not obliged to provide further funds and HVE was in breach of the clause 7 requirement. 55For these additional reasons, the "initial funding" was, as the primary judge found, the advance of $1,070,016.19 made on 26 September 2008.

Conclusion 56The appellants have not demonstrated error on the part of the primary judge. The following orders should be made:

The appellants' notice of motion seeking an order that further evidence be received on appeal is dismissed.
The appeal is dismissed.
The appellants are to pay the respondent's costs. 57GLEESON JA: I agree with Barrett JA. 58SACKVILLE AJA: I agree with Barrett JA.

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: 14 May 2013

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