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[2011] VSC 640
Supreme Court of Victoria
2011-12-12
Pagone J
Original judgment source is linked above.
CONTRACT - Anticipatory breach - Failure to make funds available under a Facility Agreement - Obligations of Guarantors - Whether written notification given by borrower was sufficient under the terms of the Agreement - Whether Financiers' breach discharges Guarantors from liability - Appropriation of funds.
MISLEADING AND DECEPTIVE CONDUCT - Australian Securities and Investment Commission Act 2001 (Cth) - Defendants' reliance upon representation induced them to enter into agreement to act as guarantors - Relief available for misleading or deceptive conduct.
For the Third and Fourth Defendants and Plaintiffs by Counterclaim
1 The plaintiffs sue the defendants on guarantees to a loan given to companies with which the defendants were connected and in which they had economic interests. The defendants contended that they are not liable on the guarantees and seek relief by counterclaim relying upon what they contended to be false and misleading statements said to have induced them to give the guarantees.
2 The parties entered into a Facility Agreement dated 19 September 2008 ("the Facility Agreement"). The borrowers were Direct Factory Outlets Spencer Pty Limited (now known as "Austexx Spencer Street Pty Ltd"), as managing agent for the DFOS Partnership, and Austexx Spencer Pty Ltd (collectively referred to as "the Borrower"). The first plaintiff, Ausmezz Pty Limited ("Ausmezz") and the second plaintiff, Mirvac Capital Investments Pty Ltd ("Mirvac") were the financiers under the Facility Agreement ("Financiers"). The four defendants (Messrs Goldberger, Wieland, Porz and De Rango) were the natural persons giving guarantees, undertakings and indemnities. The guarantees given by them differed as between those given by Messrs Porz and De Rango on the one hand and Messrs Goldberger and Wieland on the other by the express limitation of the liability of the latter two by clause 7.12.
3 Clause 2.1 of the Facility Agreement provided that the plaintiffs, as Financiers, would make available to the Borrower a total commitment of $60m. The drafting mechanism by which that was achieved was to impose an obligation in clause 2.1 upon the Financiers to make available to the Borrower "the Total Commitment" as defined in clause 1.1. "Total Commitment" was defined to mean "the Advance and the Capitalised Interest Facility" (each of which were also defined in clause 1.1) and was expressed to be subject to clause 2.2 which gave the Borrower the right to draw down the Advance by delivering a Drawdown Notice to the Facility Agent in accordance with clause 3. "Advance" was defined to mean the Tranche A Advance of $13m, the Tranche B Advance of $23m and/or the Tranche C Advance of $10m, as the context permitted. The Capitalised Interest Facility was defined to mean the $14m referred to as Item 3D in Schedule 1 and was to be available for drawdown to secure payment of the capitalised interest incurred for the Tranche C Advance. In short, the Facility Agreement provided for the advance of funds in three tranches totalling $46m and a Capitalised Interest Facility of $14m which was expressed to be available to secure the payment of the capitalised interest for the third tranche of the advance. Each of the three advances totalling $46m were made under the Facility Agreement in accordance with its terms.
4 Clause 2.2 permitted the Borrower to drawdown an Advance by delivering a Drawdown Notice to the Facility Agent. Clause 3.3 provided that a Drawdown Notice was effective upon receipt by the Facility Agent and, once effective, was irrevocable. A Drawdown Notice for $22,734,990 was sent to Mirvac Funds Management Limited as Facility Agent requesting a drawdown on 19 September 2008. A further Drawdown Notice, for $23,265,010, was sent for the balance of the $46m and was requested for 23 September 2008. Both sums were advanced with the consequence that interest began to accrue as from the dates of the advances at the respective interest rates in relation to Tranches A, B and C.
5 Interest under the Facility Agreement was generally payable monthly in arrears pursuant to clause 4.1. Interest in respect of the Tranche C Advance was governed by clause 4.3 which provided for the capitalisation of interest and was made payable in accordance with clause 4.3. That clause gave the Borrower an election to convert the Capitalised Interest Facility into a principal sum available for drawdown. The defendants contended that the Borrower validly elected to convert the Capitalised Interest Facility as a principal sum but that the plaintiffs failed to make available any part of that facility as a principal sum as the borrower had required.
6 The total interest obligation payable for the month of September 2008 was $184,911 which was paid by the Borrower by 3 October 2008. The Borrower, however, did not continue to pay interest in arrears because of an accommodation which was reached between the borrower and the financiers arising from events in October 2008. It will be necessary to consider different aspects of those events in relation to specific issues arising in the dispute, but for the present it will suffice to note that what the Financiers did, with the knowledge of the Borrower, was to apply the whole of the Capitalised Interest Facility to all three tranches from October 2008 as an interim accommodation. The parties did not contend that what occurred in October 2008 amounted to a variation to the Facility Agreement. The plaintiffs maintained that whatever accommodation may have been reached concerning the payment of interest, the obligation to pay interest continued to accrue pursuant to clause 4 and that they are entitled to the interest as claimed. The defendants contend that for one reason or another the events of October 2008 prevent the plaintiffs from enforcing any guarantee against them.
7 The Borrower's requirement for funds had always been for a total facility of $60m. The Borrower had come to need a total of $72m for the completion of the construction of a development at South Wharf in Melbourne. The South Wharf project had been funded by a banking syndicate comprising the Bank of Scotland, National Australia Bank, St George Bank and Suncorp. That funding facility had comprised two tranches. The first tranche was to be used for the construction of the retail part of the development and the second tranche was to be used for the construction of an office tower. The availability of the second tranche of the funding, however, had been subject to a condition precedent that the tower be pre-sold. Negotiations for its sale were unsuccessful and the Austexx Group found itself needing some other means of securing the necessary funds to complete construction of the office tower. The tower's construction, however, had to commence with the construction of the retail premises due to the physical inter-connection between the two projects: the retail part of the project was spread over the entire site and the overall works included a basement over which the tower was to be built. As part of the retail sites work, therefore, footings, foundations, and the basement for the entire site (including for the office tower) were constructed. This occurred with the approval of the banking syndicate even though the funding for part of the works to the ground floor level was to have been from the second tranche. The second tranche was expected to have become available in due course but ultimately did not eventuate because the condition precedent of the pre-sale of the office tower did not occur. The result was that some part of the work attributable to the tower component of the project had been paid from funds secured from the first tranche.
8 The inability to pre-sell the tower led to some changes to the tower design to reduce its height which in turn reduced the funds needed to $72m. $12m of that amount was obtained from a company connected with the Borrower (Plenary Conventions Retail Pty Ltd) and which had a 25% share in the Austexx Group development. This left the Borrower requiring $60m of funding from an outside source to complete the tower. It was that funding which the Borrower had sought from the plaintiffs.
9 The Austexx Group appointed Rohan Davis of Ashe Morgan Winthrop to secure the funds, and he did so from the plaintiffs through a Mr Michael Vella who at the time was the Senior Credit Manager, Real Estate Debt Funds at Mirvac Funds Management. On 6 August 2008 Mirvac Funds Management sent a letter of offer ("offer letter") to Direct Factory Outlets Spencer Pty Ltd and Austexx Spencer Pty Ltd care of Mr R Davis of Ashe Morgan Winthrop. The letter was on Mirvac letterhead and signed by Mr Vella as Senior Credit Manager and by Mr Per Amundsen as Director of Real Estate Debt Funds at Mirvac. The offer described the total facility limit as $60m comprising three amounts described as mezzanine facilities. The third mezzanine facility was described as an amount of "$10,000,000 to be drawn within 4 months of financial close and to include an interest capitalisation provision of $14,000,000, which may be utilised, or converted to a principal sum, to result in the whole facility being serviced monthly in arrears".
10 The 6 August 2008 offer letter from Mirvac stated that guarantees were required to be given by Messrs Porz and De Rango on an unlimited basis and from Messrs Goldberger and Wieland for "interest servicing". It also required the giving of a statement of the net worth from the individual guarantors to the facility and provided that the borrower's acceptance was to be indicated by signature of a duplicate copy of the offer letter. The offer letter was signed by the Borrower on 6 August 2008 as well as by the nominated companies and each of the guarantors. The Facility Agreement to give effect to the agreement was subsequently prepared on behalf of the plaintiffs by Melanie Hunter of Holding Redlich. It was executed on 19 September 2008 by all parties including the defendants as guarantors. Messrs Porz and De Rango guaranteed the borrower's obligations generally by clause 7 but the guarantees given by Messrs Goldberger and Wieland were limited by clause 7.12 to the interest payable on the facility in accordance with clause 4 and any shortfall in the principal outstanding after the enforcement and realisation of all of the securities by the Financiers. The latter limitation was not engaged in this proceeding. All defendants, however, guaranteed and indemnified the plaintiffs for the full payment of the borrower's interest obligations under clause 4.
11 The borrower's obligation to pay interest under clause 4 arose by virtue of its terms and all parties to the litigation contended that the Facility Agreement had not been varied or modified. Clause 4.1(a) provided that, subject to clause 4.3, the Borrower was obliged to "pay interest on the Advance and on Overdue Moneys". The obligation upon the Borrower was to pay interest at the Higher Rate subject to clause 4.1(c) which provided that the Facility Agent would accept payment at a lower rate if payment was received by the Facility Agent on the due interest payment date and if on that date there was no unwaived and continuing event of default. The scheme for the payment of interest under clause 4.1 on the three tranches provided for interest to be paid by the Borrower in arrears on that interest payable on the first two tranches but that the interest payable under the third tranche was to be capitalised in accordance with clause 4.3.
12 The effect of clause 4.1 was, therefore, to impose upon the Borrower an obligation to pay interest on the $46m advanced in September 2008. The Financiers had received two drawdown notices for amounts totalling $46m which equalled the full amount of the three tranches provided for in the Facility Agreement. The Financiers allocated the money drawn down in accordance with the Facility Agreement to each of the tranches in alphabetical order. The first $13m of the $22,734,990 drawn down on 19 September 2008 was allocated as Tranche A Advance on that date. The balance advanced that day, namely, $9,734,990 was allocated as part of the Tranche B Advance. The $23,265,010 drawn down on 26 September 2008 was allocated as the remaining $13,265,010 due on the Tranche B Advance and the balance of $10,000,000 was applied to the Tranche C Advance. Interest began to accrue on the advances from and including the days on which the money was loaned to the Borrower and was calculated at the respective interest rates for the month of September. Interest in arrears for that month on all three advances was paid by the Borrower.
13 Interest was not paid by the Borrower from October onwards because of the temporary accommodation that had been reached between the Borrower and the Financiers. One question which arises is the rate at which interest was made payable by clause 4.1 of the Facility Agreement. The interest rate for the Tranche A Advance was 16.95% but the Higher Rate for that advance was 20.95%. The interest rate for the Tranche B Advance was 17.50% but the Higher Rate for that advance was 21.50%. The interest rate for the Tranche C Advance was 18% but the higher rate for that advance was 22%. Clause 4.1(c) provided the "Interest Rate" as being interest calculated at a lower rate rather than the Higher Rate, in certain circumstances. The clause provided:
(i) on the Advance, until it becomes due and owing as the Principal Outstanding, will be the Higher Rate but if:
(A) an interest payment calculated at the Interest Rate is received by the Facility Agent on the due date Interest Payment Date; and
(B) on that Interest Payment Date there is no unwaived and continuing Event of Default,
the Facility Agent will accept that payment for the period to which it relates, instead of an interest calculated at the Higher Rate, and
(ii) on Overdue Moneys will be the Higher Rate.
In this context a question which arises is whether the Facility Agent had "received" the interest payment calculated at the Interest Rate (that is, at the lower rate) on the due Interest Payment Dates notwithstanding that no funds were actually paid by the Borrower. For present purposes there is no issue about whether the other provisions in the clause had been engaged. "Overdue Moneys" was defined to mean moneys which were from time to time overdue for payment or due for payment on demand under the agreement in respect of the Advance. The accommodation which had been reached between the Borrower and the Financier meant that for a period of time between October 2008 and February or March 2010 there was no money overdue for payment and in that period there had been no demand under the agreement. "Event of Default" was defined to mean any of the events or circumstances detailed in clause 11, none of which appear to have occurred in the period between October 2008 and, at least, February or March 2010.
14 Whether the Facility Agent had received an interest payment calculated at the (lower) Interest Rate on the due Interest Payment Date is ordinarily a question of simple fact determined by demonstrating actual receipt. Usually that receipt will be from a payment actually made by the lender but its receipt can occur (and usually does occur) by payment by a third party (such as a bank) on behalf of the party with the obligation to pay. The transfer of funds from a borrower to a lender will similarly often involve payments through a third party bank from funds of or borrowed by the bank's customer. The question to determine the rate of interest payable by the borrower for the period during which the lender and the borrower had reached an interim accommodation calls for an enquiry into whether the Facility Agent received payment. That does not necessarily depend upon the source from which any payment received may have come. The accommodation reached between the Borrower and Financier towards the end of October 2008 was that the Financier was to use the undrawn balance of the capitalised interest facility in payment of interest obligations arising under all three advances until the balance of the $14m had been exhausted. On 30 October 2008 the Financiers approved an accommodation which permitted the capitalised interest facility of $14m provided for in clause 4.3(c) to be applied, until exhausted, in discharge of the interest obligations under each of the three advances. In those circumstances the Facility Agent did receive the interest payment on the interest due payment dates for those interest payments due from October 2008 until the whole of the capitalised interest facility of $10m had been applied to the interest accruing and falling due at the Interest Rate (as distinct from the Higher Rate). Indeed, that was precisely the way in which the plaintiffs treated and calculated the interest falling due for payment from October 2008 until March 2010. It was not until April 2010 that the Capitalised Interest Facility was fully utilised in payment of the interest at the (lower) Interest Rate which had become due for payment by the Borrower at the Interest Rate (as distinct from the Higher Rate).
15 By April 2010 a "Review Event" had occurred within the meaning of clause 11 of the Facility Agreement with an unwaived and continuing Event of Default which triggered the obligation to pay interest at the Higher Rate for the purpose of clause 4.1(c). Clause 11.1(b) provided that a Review Event was deemed to have occurred on 28 February 2010 if one had not occurred before that date. On 25 February 2010 the Facility Agent served a notice in accordance with clause 11.4 on the Borrower. A consequence of that was that the Borrower waived compliance with the time period stated in the notice and on 29 March 2010 unless an Amendment and Reinstatement Deed was signed by the Borrowers and the Guarantors by 30 April 2010. That did not occur. Accordingly, the plaintiffs became entitled to interest under clause 4 at the Higher Rate as from the date from which the capitalised Facility Agreement was fully applied in April 2010 in payment of the interest then due.
16 The defendants' obligations as Guarantors under clause 7 included an obligation to pay the interest made payable by the Borrower under clause 4.1. The liability of Messrs Goldberger and Wieland was limited by clause 7.12, relevantly, to "the interest payable on the Facility in accordance with clause 4". Counsel for Messrs Goldberger and Wieland contended that no interest was payable by them as a matter of construction of the guarantee because of the limitation in clause 7.12. They contended that the limitation of the guarantee in clause 7.12 to such interest as was payable "in accordance with clause 4", and the application of the funds in the capitalised interest facility meant that interest which had become payable by the Borrower from October 2008 was not interest that had become payable in accordance with clause 4. The contention depended upon the interest claimed by the Financiers in the proceeding having become payable by the Borrower in accordance with what was said to be a different regime from that which was the subject of the guarantee provided by Messrs Goldberger and Wieland. The steps in the argument began with noting that interest on the Tranche A Advance and the Tranche B Advance was required to be paid monthly in arrears and that, as was contended, the capitalised interest facility was used in fact to capitalise the interest in respect of the three tranches so that the Borrower had not in fact paid interest in arrears on the first two tranches as had been contemplated by the agreement.
17 Messrs Goldberger and Wieland had limited the extent of their liability, relevantly, to the interest payable on the Facility in accordance with clause 4. The interest payable in accordance with clause 4 was that which clause 4 made payable by its terms. The accommodation in October 2008 between the Borrower and the Financier resulted in the interest payable under clause 4 having been received, and the obligation having been discharged, by application of the funds in the capitalised interest facility. Interest payable on the capitalised interest facility was also payable as interest in accordance with clause 4. The limitation of liability in clause 7.12 excluded some of the obligations imposed upon the Guarantors by the Facility Agreement does not exclude all of the terms of the guarantee and indemnity found in clause 7. Clause 7.3 (headed "Non-waiver") was not made subject to clause 7.12 and specifically provides that the Guarantee, undertaking and indemnity was not "abrogated, modified, prejudiced, affected or considered as wholly or partially discharged" by any of the events specified in clause 7.3 including the giving "of any time credit, indulgence or concession" by the Financiers to the Borrower. Messrs Goldberger and Wieland guaranteed and indemnified the payment of interest under each of the three tranches. The accommodation reached in October 2008 between the Borrower and the Financiers fell within the kind of circumstances provided for by clause 7.3 which the defendants, including Messrs Goldberger and Wieland, had agreed would not defeat the Guarantees they had given. Interest was received by the Financier at the lower rate in respect of the first two tranches up until part of April 2010 by application of the funds in the capitalised interest facility and from April 2010 the interest payable by the borrower under clause 4 was that payable in respect of the Tranche C Advance and the Advance of the Capitalised Interest Facility. It is that interest which the defendants, as Guarantors, are liable to pay.
18 The defendants contend that the Financiers were nonetheless in breach of the Facility Agreement by not converting the Capitalised Interest Facility as required by the Borrower. In that context an issue in dispute between the parties is whether the borrower validly elected to convert the capitalised interest facility into a principal sum within the meaning of clause 4.3(c) of the Facility Agreement. The defendants contended that the Borrower validly made such an election but that the plaintiffs breached the Facility Agreement by not making available the principal sum pursuant to the election. Clause 4.3(c) gave the Borrower an ability to convert the Capitalised Interest Facility into a principal sum available for drawdown. The Capitalised Interest Facility was to be used pursuant to clause 4.3 in payment of the interest due on the Tranche C Advance but the $14m available under the Facility could be converted into a principal sum at the election of the Borrower. That is consistent with the facts known to the parties at the time of entering into the Facility Agreement, namely, that the Borrower needed $60m to add to the $12m from its related resources to complete the construction of the tower for the $72m estimated to be needed. It is also consistent with the fact that the $14m which was made available through the Capitalised Interest Facility was more than needed to service the interest payable on the Tranche C Advance for the expected duration of the Facility Agreement. The Agreement had a termination date of 36 months from the Tranche A Drawdown Date. The Interest Rate on the Tranche C amount of $10m was 18% with, therefore, an expected interest amount payable on the $10m in the Facility of approximately $1.8m per year. Accordingly, only some of the amount of the Capitalised Interest Facility would be required over the expected term of the Facility Agreement to pay the interest accruing on the $10m Tranche C Advance, leaving a substantial amount available to be drawn upon as principal for use in the project.
19 The mechanism to convert the Capitalised Interest Facility into a principal sum was set out in clause 4.3(c). That clause was not drafted without defect. It provided:
(c) Despite clause 4.3, the Borrower may elect to convert the Capitalised Interest Facility into a principal sum available for drawdown, by prior written notification being provided to the Facility Agent.
Compliance with this clause requires consideration of the meaning of the words "prior written notification" and in particular, the role played in the clause by the word "prior". One reading would suggest that the word "prior" qualified the words "may elect" but that may readily be dismissed as producing the unlikely requirement of a borrower having to give notice of an election before making the election.
20 Commercial agreements are to be construed by reference to what a reasonable person in the position of the parties would understand by the terms used. That requires the consideration of the text of the document, the surrounding circumstances known to the parties, and the purpose and object of the transaction.[1] Agreements should be given a "business like interpretation".[2] Clause 4.3(c) was intended to confer rights upon both the Borrower and the Financiers. The Borrower was given the entitlement to convert the Capitalised Interest Facility of some amount up to $14m into a principal sum for drawdown as a principal sum and the Financiers were given the entitlement to expect written notification being given to the Facility Agent. The word "prior" in that context was used to require notification of an election to convert having been made before the sum was to be called upon for drawdown. Thus, the Borrower was to give the Financier written notification through the Facility Agent of an election to convert and that notification was to be given prior to the principal sum having to be available for drawdown. The Facility Agreement, however, made no other requirements about how the written notification was to be given or about how the election was to be communicated. That sat in contrast with the detailed prescription of the procedure for drawdown notices for the three tranches of the Advances. This included the stipulation of the form to be used in giving notice of drawdown of an advance.
21 In this case the Borrower had given notice to the Financier through the Facility Agent of having made the election to convert the Capitalised Interest Facility into a principal sum. That may not have been by a document sent by the Borrower stating in words that written notice of an election was thereby being given, but the Financier through the Facility Agent was in no doubt that the Borrower had elected to convert, and that fact appeared in writing. As early as 2 October 2008 there had been email correspondence between Mr Vella (acting on behalf of the Facility Agent and the Financiers) and Mr Chris Cowan (as Chief Financial Officer of Austexx Corporation on behalf of the Borrower) contemplating a drawdown of further funds at a time known to the parties. On 2 October 2008 Mr Cowan emailed Mr Vella asking whether "the Mandate to enable the further draw down [was] on track?". Mr Vella's response the following morning was positive and expressed an expectation that the matter would be concluded during October. He specifically acknowledged knowing that the drawdown was scheduled for late October and that the Financier's agents were "pushing to have things finalised" so as to accommodate the Borrower's requirements. The only drawdown upon funds that could possibly have been in contemplation at that time was pursuant to an election to convert the Capitalised Interest Facility into a principal sum for drawdown. All other tranches had been drawn down and there was no other money available from the Financiers pursuant to the Facility Agreement other than a conversion of the Capitalised Interest Facility.
22 On 14 October 2008 Mr Vella emailed Mr Cowan and Mr Porz, with copies sent to Mr Davis and Ms Melanie Hunter (amongst others), an update on the new mandate. On that occasion Mr Vella reported that the appropriate individuals of the Lending Committee had spoken "and agreed parameters of the next mandate". He informed the Borrowers that the next step was for the Chief Investment Officer at GIC to sign off at Board level and that once that was done the parties needed to document the agreement. He expected that by 30 October there would be a "formal" extension of the mandate and "formal" approval from the Lending Committee to convert the interest cap to the loan principal. That email went on to acknowledge an understanding that the Borrowers next drawdown was due "at the same stage" and asked whether there was "any capacity to delay the payment drawdown or for Austexx to make the payment and then have the loan funds reimburse Austexx". The email ended with an apologetic explanation that although the "situation" (which I assume to mean the need of the funds by conversion) had been contemplated "at the time", the situation was "difficult" and that he was then trying to manage expectations "with the longest lead time" that he could for all parties "so that all the alternatives" could be considered. The response from Mr Cowan was that the drawdown was actually due on 28 October and that at most they could delay drawing down by one day. That correspondence is sufficient to have communicated in writing the Borrower's election to convert the Capitalised Interest Facility if it had not already been notified in writing by the previous emails to which I referred in the previous paragraph. The email from Mr Cowan of 14 October 2008 went on to underline the importance of the funds being available by stating that if the drawdown was delayed by two days the lenders and the builders "would be in a panic which would be a disaster". At that stage Mr Cowan asserted that they "could not fund the payment on a short term basis for many reasons".
23 On 20 October 2008 a document headed "Advance Drawdown Notice" was prepared by the Borrower consistently with the Borrower having previously made an election to convert the Capitalised Interest Facility into a capital sum. The notice was sent to Mirvac Funds Management as agent for the Financiers and requested $7,241,968 by way of drawdown on 28 October 2008. That too constituted written notification of an election to convert the Capitalised Interest Facility into a principal sum which was notified to the Financiers prior to the date the principal sum was to be available. The notice was conveyed by email in writing from Mr Cowan to Mr Vella referring to the attached drawdown notice. Both documents are capable of being regarded as conveying prior written notification (on 20 October 2008) of the Borrower's election to convert the amount sought by way of principal sum (on 28 October 2008).
24 At some time on either 20 or 21 October 2008 it became apparent to the Borrower that the Financiers would not be able to comply with the request for conversion of the Capitalised Interest Facility by the required date. On 21 October 2008 the Borrower was plainly concerned by this inability on the part of the Financiers. Late in the afternoon of 21 October 2008 Mr Cowan emailed Mr Davis asking that he find out the steps (and the timing) Mirvac needed to go through to provide the balance of the funds. Mr Cowan pointed out that the following Friday was a full three working days after the draw down was due and that the Borrower could not go past the draw down date not knowing what would happen. Mr Cowan specifically asked that Mr Davis request Mr Vella to confirm the outcome of the meeting with Mr Gary Rothwell as soon as possible. Approximately half an hour later Mr Davis replied that Mirvac expected to have approval from Singapore on or before the following Friday to extend the mandate. The process as explained by Mr Davis required "Singapore" to agree to the new mandate before Mirvac agreeing to participate in providing the additional funds. He reported that, unfortunately, Mr Vella was not sure when a meeting would be convened by Mirvac and that he was awaiting an update from Mr Rothwell. Mr Cowan was told that the funds would become immediately available once approval was obtained from Singapore and Mirvac, with documentation of the process able to follow subsequently. Mr Cowan responded about half an hour later thanking Mr Davis and noting that now that the Borrower knew that Mirvac could not deliver by the draw down date they would have no option but to disclose that to the banking syndicate for the project.
25 What the Borrower then put in place was an alternative interim measure for the funding of the project because of the Financiers' inability to meet their obligation. There was no withdrawal by the Borrower of its request for the drawdown or any attempt to alter its election. That, it seems to me, is made out by the evidence of the correspondence between the parties and, if it be needed, by the terms of clause 3.3 of the Facility Agreement which provided that a "Drawdown Notice [was] effective upon receipt by the Facility Agent" and "once effective, [was] irrevocable". It is arguable that clause 3.3 might not strictly apply to a drawdown sought pursuant to clause 4.3(c) because the "Drawdown Notice" in clause 3.3 is that expressly defined by the Facility Agreement whereas clause 4.3(c), arguably, does not come within a "Drawdown Notice" as expressly defined. I would, however, infer (if necessary for me to do so) that the parties intended that any drawdown under clause 4.3(c) would follow the same process as the other drawdown notices and, hence, that such a drawdown as contemplated by clause 4.3(c) was intended to be by the same process as other drawdown notices and therefore to be within the meaning of clause 3.3. Such a construction accords with what the parties had intended in respect of those drawdown notices in respect of which they had specifically turned their mind. The bargain between the parties makes it both reasonable and probable that they intended the drawdown contemplated by clause 4.3(c) to be dealt with in the same way as the other drawdown notices.
26 The evidence clearly establishes that the Borrower required the funds in the Capitalised Interest Facility and that it was the Financiers' inability to provide the funds that occasioned the accommodation that was reached. Indeed, on 4 November 2008 Mr Vella, still unable to provide the funds, wrote to Mr Cowan stating, amongst other things:
When we get the third mandate position sorted we will come back to you with the option of continuing the capitalisation or giving you the capital (less the interest cap that has been used) in a lump sum and you could chose [sic] to service monthly if that suits.
That note had been preceded by correspondence between the parties making it clear that what the Borrower found itself needing to do was to find another avenue of funding because the Financiers were not in a position to meet their obligations to make the funds available on the date required. On 28 October 2008 Mr Davis emailed Mr Vella, forwarding an email form Mr Porz of the previous day, stating that they would not draw any further funds on the Mirvac facility and would capitalise interest on the three tranches previously advanced. Those words were not intended, or understood, as a withdrawal of the request to convert the Capitalised Interest Facility into a capital sum. Rather, they were intended, and understood, as the Borrower's accommodation of the need to deal with the situation created by the Financiers' inability to convert the Facility to make the funds available for drawdown. Within a few minutes of Mr Vella receiving that email from Mr Davis, he responded in apologetic tones asking whether he was to build into the arrangements the capacity to convert any undrawn cap "if and when we have capacity (at no extra charge)". Mr Vella acknowledged that the Borrower did not have to use the facility but that in the circumstances he felt it was really "the least" he could do and that the "whole thing" sat "really poorly" with him but that "to do other than [that] would be to swim against the tide at present". Mr Davis' response further emphasised the fact that the situation was caused by the Financier rather than any change of position by the Borrower by the simple statement that it looked as though Mr Porz had saved Mr Vella "from being the spit on Thursday night!".
27 Neither Mr Vella, nor any of the Financiers or any other person acting on behalf of the Financiers, understood from any of the communications anything other than that the Borrower was accommodating the Financiers' inability to provide the funds which were required and had been requested. At the same time that Mr Vella received the email from Mr Davis confirming the interim arrangements, Mr Vella wrote to Mr Per Amundsen and Mr Garry Rothwell to confirm that he had spoken with the Borrowers and with Mr Davis that morning and that "as an interim measure they would accept an interest cap on the full $46M exposure as a means of progressing on the basis that if and when we have capacity we make an adjustment with a capital drawdown for the difference in funds". There was no understanding by the Financiers of any withdrawal of an election to convert the Capitalised Interest Facility into a principal sum; rather, the Financiers knew, understood, and (in the person of Mr Vella) appeared grateful, that the Borrower was able to accommodate the Financiers' inability to provide the capital which had been sought.
28 That email went on to ask Mr Amundsen how to progress the matter with the Lending Committee. What next occurred on that day was a meeting of the Lending Committee of Mirvac to approve the request of the Borrower as formulated by Mr Vella. The process of the Lending Committee was such that an approval request was prepared within Mirvac some two days later (30 October) but was dated 28 October 2008 (the date of the meeting), not as the minutes of the meeting, but as a record of what was thought to have been sought through Mr Vella for approval at the meeting. It was an internal document of the plaintiffs and its terms were not known to the Borrower. Relevantly, however, it recorded:
As contemplated at the time of [the] approval and contingent upon the granting of a third mandate for the Mirvac Mezzanine Capital Fund, the directors of the borrowing entity have sought the conversion of the $14M interest capitalisation provision to a further loan component, upon which they will make interest payments monthly in arrears as they have on the drawn tranches to date. This was noted in the original request from July 2008, extracted as below,
"At a later stage the borrower may seek to convert the interest cap reserve and then have a $60M facility in total, which they would service monthly in arrears. As this capitalisation component (if converted to principal) sits outside of the current Ausmezz (mandate 2), the borrowers are happy to contribute the funds and then seek reimbursement when and if the next Ausmezz mandate is agreed."
The note may reveal something of the internal difficulties which the Financiers may have had in providing the funds sought by the Borrower in October 2008. The Financiers may always have needed internal formal approval and confirmation for conversion of the Capitalised Interest Facility as a principal sum before it could be made available. It is possible that the Borrower knew something of those difficulties but that is not what the parties had agreed to in the Facility Agreement and, whatever may subjectively have been known to the parties, by October 2008 the Borrower was seeking the additional funds and the approval request to the Lending Committee on 28 October 2008 recorded a request for approval of conversion of the Capitalised Interest Facility without any suggestion of the conversion having been withdrawn. And, indeed, the approval which was recorded as made upon the recommendation of, amongst others, Mr Vella, was on the terms and conditions as requested.
29 On 13 November 2008 Mirvac sent a letter to the Borrowers purporting to vary the Facility Agreement by permitting use of the Capitalised Interest Facility for payment of the interest due on the first three tranches of the funds advanced rather than only the interest payable on the third tranche. The letter required signature by the Borrower acknowledging acceptance. There was no evidence of the letter having been signed by the Borrower and it was accepted by the plaintiffs that the letter had not been received at least by Messrs Goldberger and Wieland. In any event, any variation sought to be effected by the 13 November letter was not inconsistent with the continued effect of any part of the balance of the funds being available as a principal sum. Indeed, in March 2009 the correspondence between the parties revealed a marked difference of understanding of the respective rights between the parties which was at odds with the understanding as at October 2008. In March 2009 the Financiers asserted that they were not required to make available the funds which in October 2008 they had said they were unable to make available, rather than that they were not required to make available.
30 On 31 March 2009 Mr Cowan sent an email to Messrs Amundsen and Vella referring to a discussion they had had the previous day in relation to the ability of the Borrower to drawdown the remaining facility. Mr Cowan said that he had searched his correspondence and could find nothing which varied the agreement contained in the facility letter. He explained that his reading of the agreements were that the Borrower was entitled to drawdown the funds in accordance with the Facility Agreement. He expressed concern to know as soon as possible the basis for any lack of entitlement on the part of the Borrowers to drawdown the funds and to be told if the Financiers could not meet the drawdown. He went on to say that it had suited the Borrower to fund the $14m less capitalised interest up until then but that the Borrower would "certainly need the additional funds prior to the completion of South Wharf".
31 Mr Amundsen responded to that letter referring to an earlier document signed by himself and Mr Garry Rothwell (a Director of Mirvac Real Estate Debt). The letter was in the form of a form of "side letter" sent on 13 August 2008 to Mr Porz which, if entered into, would have had the effect of reserving to the Financiers a discretion about whether to advance the Capitalised Interest Facility then contemplated as that subsequently agreed to in clause 4.3(c) of the Facility Agreement. A clause to similar effect to the terms of the side letter had been provided in a draft of the Facility Agreement and expressly removed by Mr Porz on behalf of the Borrower. Mr Porz had agreed to the "form" of side letter in August 2008 but the document itself was neither executed nor reflected in the terms upon which the parties entered into the Facility Agreement the following month. There was no evidence of the side letter ever forming part of the bargain between the parties until it was referred to by Mr Amundsen in response to Mr Cowan seeking to understand how the parties might have seen their respective rights differently. It is curious that it was produced only then rather than in October 2008. At that time the Financiers had not been saying that they were not obliged to advance the $14m but, rather, that they were not able to do so as requested. For present purposes, however, it shows that as late as the start of April 2009 the parties were still proceeding upon the assumption that the Borrower had elected to convert the Capitalised Interest Facility into a principal sum and had not withdrawn the notification of that election or of any request for the funds to be advanced. It is also significant that the Financier, through Mr Amundsen, was not saying that an election had been withdrawn or that a drawdown had been withdrawn, but, rather, that a document signed by the Financiers meant that the Financiers were not obliged to make the funds available.
32 My conclusion that the Borrower had elected to convert the Capitalised Interest Facility pursuant to clause 4.3(c) and had given notification of a drawdown which had not been withdrawn makes it unnecessary for me to consider whether there had been a waiver by the Financiers of the requirement for prior written notice or whether the Financiers are estopped from alleging that there had not been notification or from alleging that it had been withdrawn. It may be in this context that the word "waiver" is synonymous with or indistinguishable from election or estoppel.[3] A waiver requires that there be a "deliberate, intentional and unequivocal release or abandonment of the right that is later sought to be enforced"[4] and the right is waived "only when the time comes for its exercise and the party for whose sole benefit it was introduced knowingly abstains from exercising it".[5] A mere intention not to exercise a right is not immediately effective to divest or sterilise it[6] but in this case the whole of the dealings between the parties which I have set out above showed that the Financiers unequivocally did not require any further written notification of the election which the Borrower had made or of the drawdown which it had sought.
33 Similarly, the Financiers' conduct makes good any claim of estoppel against the financier seeking to enforce a right of prior written notification or withdrawal of a drawdown request. The issue is not to be decided by broad questions of fairness.[7] It is, rather, for the defendants to show a clear and unambiguous representation on the part of the plaintiffs that led to an assumption by the defendants for the purpose of their legal relations, that as a result of adopting the assumption as the basis of action the defendants have placed themselves in a position of material disadvantage if departure from the assumption be permitted, and that the plaintiffs played such a part in the adoption of the assumption that it would be unfair or unjust if they were left free to ignore it.[8] Each of these conditions is made out on the material which I have set out above. The Borrower plainly represented by their conduct that the correspondence between them between 2 October 2008 and 28 October 2008 was accepted as prior written notification of the Borrower's election to convert the Capitalised Interest Facility into a principal sum and of the drawdown of the principal sum by the notice dated 20 October 2008. The Borrower could easily have made good any technical defect of any failure to comply with clause 4.3(a) if any other formal or stricter requirement needed to have been complied with. The Borrower, and the defendants, adopted the assumption caused by the Financiers' representations and it is the Financiers' conduct which would make it unfair or unjust for them to depart from the assumption which they enabled the Borrower and the defendants to make.
34 The defendants contended that the plaintiffs breached their obligations under clause 4.3(c) by not making available the funds as sought. Anticipatory breach occurs where one party renounces contractual liabilities by evincing an intention no longer to be bound by the contract or to fulfil the contract only in a manner substantially inconsistent with the obligations.[9] At that point the innocent party must elect whether to bring the contract to an end and sue for damages or, alternatively, to keep the contract on foot.[10] The contract remains on foot[11] unless the promisee accepts the refusal to perform and terminates the agreement. The promisee does not have to accept the anticipatory breach but may, for whatever reason, decide to continue with the contract.
35 In this case the Financiers were obliged in October 2008 to capitalise the interest facility pursuant to the terms of the drawdown notice dated 20 October 2008. That required performance by 28 October 2008. From 21 October 2008 it was clear to the Borrower that the Financiers would not comply with the requirement of the drawdown notice on 28 October. The Borrower did not accept the repudiation and did not elect to sue for damages but, rather, on 28 October 2008, confirmed that they would source the funds needed in October and in November from other sources as an interim measure. There was, however, a breach by the Financiers of their obligations. They were required to make funds available and they did not do so. The Borrower elected to maintain the agreement and as an interim measure not insist upon the drawdown.
36 It was not until April 2009 that the Financiers failed and refused to perform their obligation to make available so much of the Capitalised Interest Facility as remained for conversion into a principal sum. On 30 March 2009 Mr Amundsen informed Mr Cowan of the view that the Financiers were not obliged to make the funds available. On 1 April Mr Amundsen informed Mr Cowan of the basis of that belief. By then it was clear that the Financiers were asserting that the funds would not be available and indeed the funds were not made available pursuant to the obligation in clause 4.3(c). That amounted to a total refusal to perform the contractual obligation when the time came for performance.[12] By that time the obligation to perform had been in existence since October 2008. The election had been made and the Financiers were required to make available the funds for drawdown. The notice had been served and the correspondence between the parties made it clear that the borrowers required the funds at their request. The obligation to perform actually being due[13] the plaintiffs were in breach when they failed to make available the funds and the breach remained unremedied. The funds were called upon again in March 2009 and they were not then provided.
37 The defendants contended that the Financiers' breach resulted in the discharge of the guarantee. In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd[14] it was held that the breach of certain conditions discharged a surety from liability at the surety's election. The joint judgment posed the question raised by the appeal as being the determination of the circumstances in which a creditor's breach of contract of guarantee discharges the surety from liability under the contract.[15] Their Honours explained:
A condition precedent may be unfulfilled without any breach of contract, but when performance by the creditor of a contractual promise is a condition precedent to the liability of the surety under a contract of suretyship which otherwise involves no more than a guarantee of payment of the debt owing to that creditor, the creditor's promise is necessarily an essential term of the contract. The terms of the contract itself demonstrate that the surety would not have entered into the contract of suretyship unless he had been assured of a strict performance of the promise.[16]
Their Honours also explained that a creditor's promise in suretyship contracts had tended to be seen as a condition which required performance for the surety to become liable because many guarantees were unilateral instruments containing no promises on the part of the creditor except to the extent that the recitals might refer to a promise.[17] In Ankar, their Honours held that the departure by the creditor from the surety contract by agreement with the borrower materially altered the surety's obligations such as to discharge the surety saying:
One of the problems with this special principle is that it has been expressed in a variety of ways. Thus, it has been said that the surety is discharged by "any departure ... from the terms as agreed upon in the guarantee" (Barber v. Mackrell (1892) 67 LT 108 at p 109) and see Rose v. Aftenberger (1969) 9 DLR(3d) 42, at p 49. And in Bacon v. Chesney [1814] EngR 11 (1816) 1 Stark 192, at p 193; [1814] EngR 11, 171 ER 443, at p 443, Lord Ellenborough said that a claim against a surety is strictissimi juris and that "it is incumbent on the plaintiff to shew that the terms of the guarantee have been strictly complied with".
Then it has been said that any departure by the creditor from the suretyship contract "which is not obviously and without inquiry quite unsubstantial, will discharge the surety from liability, whether it injures him or not, for it constitutes an alteration in the surety's obligations" (Halsbury's Laws of England, 4th ed., vol. 20 par.259). The final clause in the passage quoted from Halsbury indicates that this proposition is founded not so much on cases dealing with a breach of a term in the suretyship contract, as on cases in which conduct on the part of the creditor materially altered the surety's obligations. Such an alteration takes place when the creditor agrees to a variation of the principal contract or to an extension of time within which the debtor may comply with that contract. The creditor's agreement with the debtor thereby alters the nature of the surety's obligations without the surety's consent.
Two of the authorities cited in support of the proposition stated in Halsbury make the point. In Holme v. Brunskill (1877) 3 QBD 495, the surety's defence to an action on the guarantee was that he was discharged by a material variation of the contract between creditor and debtor. At first instance Denman J. said (at p.498):
There must, I think, be many cases in which the judge would have to take the opinion of the jury upon the question, whether the alteration was of such a character as to affect the surety in any way by substantially or materially altering the risk.
On appeal, Cotton L.J. expressed a similar view in different terms, saying (at pp.505-506):
The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged. This is in accordance with what is stated to be the law by Amphlett, L.J., in the Croydon Gas Company v. Dickinson ((1876) 2 C.P.D.46, at p.51).
Brett L.J. related the principle to the terms of the suretyship contract, observing (at p.508):
The proposition of law as to suretyship to which I assent is this, if there is a material alteration of the relation in a contract, the observance of which is necessary, and if a man makes himself surety by an instrument reciting the principal relation or contract, in such specific terms as to make the observance of specific terms the condition of his liability, then any alteration which happens is material; but where the surety makes himself responsible in general terms for the observance of certain relations between parties in a certain contract between two parties, he is not released by an immaterial alteration in that relation or contract.
Croydon Gas Co. v. Dickinson was also a case in which the creditor had by arrangement with the debtor altered this relationship by extending the time within which the debtor was bound to make payments, the arrangement being made without the surety's assent.
These statements of the principle, like that of Blackburn J. in Polak v Everett (1876) 1 QBD 669 at p 674, indicate that the principle is the by-product, not so much of the general law of contract, as of the special relationship between creditor and surety arising out of the suretyship contract upon which equity fastened to protect the surety when the creditor's conduct affected the surety's liability: Holme v. Brunskill, at p 505. According to the English cases, the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety's risk, e.g., a reduction in the debtor's debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety.
The foundation of the rule is that the creditor, by varying the principal contract or extending time, has altered the surety's rights without consulting it though the surety has an interest in the principal contract, and that the creditor cannot be permitted to do: see Rees v Berrington [1795] EngR 4082; (1795) 2 Ves Jun 540; 30 ER 765. Thus the liability of the surety was seen to be strictissimi juris and the suretyship contract was construed strictly in his favour.[18]
Deane J reached the same conclusion by a different analysis. His Honour reasoned that a departure from a contract may be such that the circumstances then existing do not permit the surety liability to come within the terms of the guarantee. His Honour said:
If the breach by the creditor is of an essential or fundamental term or constitutes repudiation of the contract between the surety and himself, the surety will, of course, be entitled to rescind the contract in accordance with general principle. That is not, however, the special rule which is here under discussion. That special rule is that, in the ordinary case where a surety agrees to be liable for the default of another upon the terms of the contract of suretyship, a significant departure by the creditor from the terms of that contract will, in the absence of agreement to the contrary, operate to preclude the existence or continued existence of the circumstances in which the surety has agreed to be bound. That being so, there is no need for the surety to rescind the contract for repudiation or breach of an essential or fundamental term. In the absence of any question of waiver or estoppel, the situation is simply that the circumstances of his liability as surety do not exist [...].[19]
It is these principles which the defendants contend to be applicable to their circumstances such as to discharge them, or alternatively, not engage, their obligations as guarantors.
38 The application of these principles to the facts requires consideration of the specific terms upon which the parties contracted. It has long been established that clauses in guarantees may successfully be designed to overcome the decision in Ankar.[20] In Brighton v Australia and New Zealand Banking Group Ltd[21] Campbell JA said:
It is well established that an adequately drafted clause in a guarantee that provides that the guarantee will not be discharged by identified particular matters that would otherwise discharge the guarantor, can be effective to prevent a discharge that would otherwise arise under the general law: eg O'Day v Commercial Bank of Australia Ltd [1933] HCA 37, (1933) 50 CLR 200 at 219-220 per Dixon J (Rich J agreeing), 222 per Evatt J, 223 per McTiernan J; Bank of Adelaide v Lorden [1970] HCA 59, (1970) 127 CLR 185 at 191-193 per Barwick CJ (with whom Windeyer and Gibbs JJ agreed, and with whom Walsh J agreed on this point), 201 per Menzies J; Buckeridge v Mercantile Credits Limited [1981] HCA 62, (1981) 147 CLR 654; at 666-667 and 671 per Aickin J (with whom Gibbs CJ and Wilson J agreed), 675-676 per Brennan J (with whom Gibbs CJ, Murphy and Wilson JJ agreed). Similarly, a clause providing in general terms that the guarantor's liability shall survive anything that would otherwise discharge it has been held to be effective, if drafted with sufficient clarity: Schoenhoff v Commonwealth Bank of Australia [2004] NSWCA 161 at [19]-[22] per Stein AJA (Ipp and McColl JJA agreeing).[22]
Clause 7.12 of the Facility Agreement was plainly drawn with a view to preserving the effect of the guarantee notwithstanding variations of a kind which might result in the discharge of the guarantee at common law in the events which occurred.
39 Clause 7.3(a) provided that the Guarantee, undertaking and indemnity would not be abrogated, modified, prejudiced, affected or considered as wholly or partially discharged by any one or more of a number of circumstances including "any time credit, indulgence or concession extended by the Financiers to the Borrower, any Guarantor or any other person". Other circumstances excluded from the effect of discharge included:
(b) any compounding compromise, release, abandonment, waiver, variation relinquishment or renewal of any rights of the Financiers against the Borrower or any other person;
(c) any variation of the Facility or of any term convenant or condition contained in or implied by any of the Transaction Documents and the Guarantor [in that instance was to] be deemed to have consented to any such variation and in particular without limitation [the] Guarantee, undertaking and indemnity [extended to]:
(i) any extension of the period for repayment of the Principal Outstanding;
(ii) any increase or decrease in the Facility;
(iii) any increase or decrease in the interest rate payable in respect of the Facility;
(iv) any partial or total release or discharge of the security conferred by the Transaction Documents or otherwise irrespective of the amount, if any, paid in reduction of the Principal Outstanding; and/or
(v) any other variation in the obligations set out in the Transaction Documents, whether or not such variations are formalised in writing and whether or not the Guarantor is aware of those variations;
(d) the neglect or omission of the Financiers to enforce any such rights;
The defendants complained that the Financiers' conduct in using the Capitalised Interest Facility to pay interest accruing on the three tranches rather than making it available for a principal loan altered the risk profile of the obligations guaranteed by the defendants. However, alteration of the risk profile of the Guarantors was contemplated by clause 7.3 as amongst the circumstances that would not discharge or defeat the guarantees. And, in case of Messrs Goldberger and Wieland, clause 7.3 was not made subject to clause 7.12 which otherwise limited their liability. Their liability was limited but it always included the "interest payable on the Facility in accordance with clause 4". The interest claimed in this proceeding is that which clause 4 made payable. It was that interest which was received by the Facility Agent until April 2010 but which clause 4 continued to make payable thereafter. The fact that the time for payment of money guaranteed has been verbally extended without the consent, or even the knowledge, of the surety does not necessarily cancel the contract of guarantee or necessarily vary it.[23] Clause 7.3 constitutes part of the contractual bargain between the Financiers and the Guarantors by which the latter were not to be discharged by such conduct as that which has occurred.[24] Here the express contractual provision stipulating that the liability of the Guarantors would not be discharged or impaired by reason of conduct which might otherwise have permitted discharge of the guarantee, is effective to continue to make the Guarantors liable upon their guarantees.[25]
40 Interest having become payable pursuant to clause 4.1 and amounts having been received, an issue which arises is whether there has been an appropriation and, if not, to which debt or debts amounts paid are now to be appropriated. Five repayments have been made by the Borrower to the Financiers in addition to the use of the Capitalised Interest Facility in discharging interest obligations. $32,600,000 was paid on 29 October 2010, $533,355.93 was paid on 19 November 2010, $400,000 was paid on 24 November 2010, $6,033,008 was repaid on 16 September 2010 and $160,000 was paid on 17 December 2010. In addition the whole of the $14m made available pursuant to the Capitalised Interest Facility was used as against interest accruing on the first three tranches until April 2010.
41 The general rule concerning appropriation was stated in Falk v Haugh[26] as follows:
It has long been a rule that when payments are received generally on account of a debt, which is in part interest and in part principal, they are treated as applicable to interest in priority to principal. In Crisp v. Bluck a bond creditor received some payments, and afterwards recovered judgment. It was decreed that the payments ought to go in discharge of the interest first. The rule was again enunciated by Lord Keeper Wright in Chase v. Box. It has, however, been little discussed. The most recent statement of the rule is contained in Venkatadri Appa Row v. Parthasarthi Appa Row. There Lord Buckmaster said: - "There is a debt due that carries interest. There are moneys that are received without a definite appropriation on the one side or the other, and the rule which is well established in ordinary cases is that in those circumstances the money is first applied in payment of interest and then when that is satisfied in payment of capital. That rule is referred to by Rigby L.J. in the case of Parr's Banking Co. v. Yates5(1898) 2QB 460, at p. 466. in these words: - The defendant's counsel relied on the old rule that does, no doubt, apply to many cases, namely, that, where both principal and interest are due, the sums paid on account must be applied first to interest. That rule, where it is applicable, is only common justice. To apply the sums paid to principal where interest has accrued upon the debt, and is not paid, would be depriving the creditor of the benefit to which he is entitled under his contract." (See too Bamundoss Mookerjea v. Omeish Chunder Raee.) The rule affords only a presumption in the absence of any actual or express appropriation by the debtor or the creditor.[27]
It was contended that there has not been an effective appropriation by the plaintiffs or by the Borrower to displace the general rule. However, it seems clear that appropriation has been made in large measure. The whole of the $14m in the Capitalised Interest Facility was used to discharge the interest payable under the three Advances until some day in April 2010. The plaintiffs tendered business records of the current Facility Agent recording appropriations as at 31 October 2010 and 30 September 2011. As at 31 October 2010 the amounts outstanding on the different amounts advanced under the Facility Agreement stood at $66,572,533.44 plus interest of $1,154,994.67 for the month of October. The $32,600,000 paid by the Borrower on 29 October 2010 was appropriated by the Financier in repayment of $3,149,905.77 on principal advanced under the Capitalised Interest Facility, $10m as principal advanced under the Tranche C Advance, and $19,450,094.23 as principal advanced under the Tranche B advance. This was conferred in an email from Mr Amundsen to Mr Cowan on 1 November 2010. The $533,355.93 repaid on 19 November 2010 was recorded as having been appropriated against principal due under the Tranche B Advance. The $400,000 repaid on 24 November 2010 was recorded as having been appropriated against principal due under the Tranche B Advance. The $6,033,008 repaid on 16 September 2010 was appropriated against principal due under the Tranche B Advance. The $160,000 repaid on 17 December 2010 was appropriated in reduction of principal at the request of the borrower through Mr Cowan and confirmed by Mr Amundsen by email and was appropriated against principal due under the Trance B Advance.
42 Counsel for Messrs Goldberger and Wieland submitted that any appropriation was not proved to have been made by the Financiers because, as was contended, there was no evidence of that fact. The basis for that submission was that the evidence of appropriation was found in the records of Quadrant Real Estate Advisors ("Quadrant") being the Facility Agent at the time of trial whilst the Facility Agent under the agreement was Mirvac. Counsel for Messrs Goldberger and Wieland contended that no explanation had been given about how Mirvac "disappeared from the picture". I am unable to accept the submission. Mr Amundsen gave evidence that Quadrant was the Facility Agent under the Facility Agreement at present. He, of course, had also been a director at Mirvac at the time when it had been the Facility Agent under the Facility Agreement. He was asked no questions in cross-examination to cause any doubt that Quadrant was the Facility Agent and had accurately recorded and dealt with the loan facility and any payments in accordance with instructions. These business records are sufficient to reveal the appropriations made by the Financiers. That conclusion is strengthened by the oral testimony of Mr Amundsen who was a representative of the Facility Agent when it was Mirvac and also when it was Quadrant. The continuity of the natural person dealing with the account lends support to the force of the facts recorded in the documents. The submission to the contrary made by Messrs Goldberger and Wieland was also in stark contrast with the facts as known to the Borrower. On 29 October 2010 the Borrower executed a Deed of Release which evidenced an appropriation. That deed also referred to Quadrant as a party. It had been preceded by correspondence from the Borrower, signed by Mr Porz, to Quadrant notifying the Facility Agent of an intention to prepay some of the principal outstanding under the Facility Agreement. The letter was dated 8 October 2010 and was marked to the attention of Mr Amundsen. On 29 October 2010 Mr Porz wrote to Mirvac Capital Investments Pty Ltd and Ausmezz referring to the $32.6m as being applied in reduction of the Advances. In email correspondence with the Borrower in respect of the other payments the appropriations to principal were notified and on 1 November 2010 Mr Cowan acknowledged the appropriations notified on behalf of the Financiers that day in reduction of principal of the $32.6m to which I have previously referred as making "sense".
43 My conclusion that the plaintiffs were in breach of their obligations under clause 4.3(c) in April 2009, and that they had failed to make available the promised funds from October 2008, might make it strictly unnecessary for me to consider the defendants' claim of false and misleading conduct on the part of the plaintiffs beyond the claims in contract. The defendants, however, maintained claims of false and misleading conduct both as a substantive defence and as a counterclaim. As a defence the conduct was relied upon to contend that the guarantees were discharged and as a counterclaim they were relied upon for various orders under the different statutory provisions making such causes of action potentially available.
44 The defendants' contentions in this regard were based upon s 52 of the Trade Practices Act 1974 (Cth), s 9 of the Fair Trading Act 1999 (Vic), s 12DA of the Australian Securities and Investment Commission Act 2001 (Cth) ("ASIC Act") and s 1041H of the Corporations Act 2001 (Cth). Each provides relief in respect of conduct which may be said to be false or deceptive or liable to mislead or deceive in circumstances of potential application to the facts of this case. The defendants accepted that it was sufficient for the proceeding to rely upon the relevant provisions in the ASIC Act rather than to require separate submissions and consideration of each of the other provisions as well because each of the provisions ultimately required a finding of overlapping actionable conduct. Section 12DA(1) of the ASIC Act provides:
A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
Section 12BB was relied upon in respect of a representation relating to a future matter. Section 12BAB identifies the meaning of "financial service" which includes the provision, dealing, and other matters in relation to a "financial product" which, in turn, is defined in section 12BAA. Section 12GN confers upon a party a right to compensation for offences under the division containing s 12DA.
45 The defendants' pleaded case in answer to the obligations in the guarantee and in support of relief in their counterclaim is that the plaintiffs represented to the defendants "that $60m was, or alternatively would be, available to be drawdown by the Borrower under and in accordance with the Facility Agreement" ("the representation"). The representation was said to be false in so far as $60m was not available to be drawn down. The representation is the same in substance as the obligation in the Facility Agreement but the defendants sought to rely upon statements outside of the Facility Agreement to that effect. They began with the evidence establishing that a facility of $60m was fundamental for drawdown. The submission moved next to the course of negotiations by which natural persons on behalf of the plaintiffs who knew that $60m was needed for the Borrower and who made it clear that the plaintiffs' capacity to lend that amount was not in issue. A draft on 30 July 2008 of the offer letter subsequently sent on 6 August 2008 had contained a restriction, expressly crossed out by Mr Porz personally, on the ability of the Borrower to convert the Capitalised Interest Facility by making the conversion contingent upon the extension by the Financier of the investment mandate.[28] The defendants, of course, also rely upon the representation in the Facility Agreement itself to the extent that it represents the availability of $60m for drawdown.
46 I accept that the plaintiffs represented that the plaintiffs would have available $60m for drawdown. I accept that the defendants entered into the guarantee in reliance upon the representation and that the representation was false. It follows that without the representation the Borrower would not have entered into the Facility Agreement on 19 September 2008 and that the Guarantors would not have given the guarantees which they gave.
47 Section 12GM of the ASIC Act permits the Court to make such orders as thought appropriate against the parties engaged in the contravention as will compensate the innocent person in whole or in part for loss or damage. A similar breadth of power may be found in the other provisions relied upon by the defendants for the relief they seek.[29] In Vadasz v Pioneer Concrete (SA) Pty Ltd[30] the High Court upheld a judgment avoiding the liability of a guarantor only to the extent of past indebtedness where the Judge had found at trial that a guarantor had been induced to enter into an agreement by a representation that a guarantee was only for a company's future indebtedness. In that case, the Court said:
In Amadio (26), Deane J referred to what was said by Cussen J in Mueller in support of the proposition: "Where appropriate, an order will be made which only partly nullifies a transaction liable to be set aside in equity pursuant to the principles of unconscionable dealing ... (T)he order will, in an appropriate case, be made conditional upon the party obtaining relief doing equity". Thus unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other.[31]
In this case the Guarantors had guaranteed the Borrower's borrowing to $60m. On any view the Borrower borrowed $46m and had the economic benefit of not paying interest from its own funds from October 2008. From that date the Borrower was able to call upon the balance of the $14m which made up the total of the $60m facility. The defendants, as Guarantors, had agreed to make good the Borrower's obligations (limited to interest obligations made payable pursuant to clause 4 in the case of Messrs Goldberger and Wieland) in respect of a facility totalling $60m. An order rescinding the guarantees ab initio would not, in my view, "ensure the observance of the requirements of good conscience and practical justice".[32] In Vadasz the appellant had sought to be relieved completely and unconditionally from all liabilities under the guarantee leaving the respondent without either its substantially supplied goods or any payment for them. In this case the Guarantors seek to be relieved completely and unconditionally from all liabilities under their guarantees leaving the plaintiffs out of pocket for the cost of the use of funds borrowed. In my view the appropriate order to make would be such as best reflected so much of the bargain actually made as was in fact performed. No other damage or loss was alleged or relied upon.
48 The interest payable under the guarantees is essentially a mathematical calculation taking account of the appropriate rates of interest, amounts outstanding at various dates, amounts paid and appropriated as against principal or interest and the Advances against which the appropriations were made. Various tables and spreadsheets were handed to me with calculations under the various scenarios that I might decide the issues in dispute from which I adopt the following calculations. The appropriate calculations require that interest at the Higher Rate not be payable before the March 2010 interest payments which were due in April 2010. Thereafter I see no basis in conscious to apply any rate other than the Higher Rate. No case was made by the Guarantors to justify a principled basis to require payment of interest by the Borrower after April 2010 at a rate other than the Higher Rate. Accordingly I take the figures from the tables upon the assumption that the rate of interest payable on the three tranches was the (lower) Interest Rate until 1 March 2010 and the Higher Rate from the April 2010 interest due date. The interest payable on the three tranches as at 31 October 2011 (after taking account of the repayments and of their appropriation) is $13,646,431 on the Tranche A Advance, $8,973,688 on the Tranche B Advance, and $12,912,329 on the Tranche C Advance. These amounts appear to treat the amounts advanced under the Capitalised Interest Facility as added to the three tranches and, therefore, avoid claims for double interest. However, to avoid further disputes I will direct the parties to confer with a view to agreeing the amounts payable in accordance with these reasons and I will otherwise list the proceeding for mention or further orders on 14 December 2011 at 4.15pm. I will then also hear the parties on any issue concerning the cost of the proceeding.
[1] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, 461-462 [22] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, 179 [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
[2] Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, 528-529 [15] (Gleeson CJ, McHugh, Gummow and Kirby J); International Air Transport Association v Ansett Australia Holdings Limited [2008] HCA 3; (2008) 234 CLR 151, 160 [8] (Gleeson CJ).
[3] Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570, 587 [51] (Gummow, Hayne and Kiefel JJ); The Mihalios Xilas [1979] 1 WLR 1018, 1034 (Lord Scarman); Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850, 882-3 (Lord Diplock).
[4] Zhang v Shanghai Wool and Jute Textile Co Ltd [2006] VSCA 133; (2006) 201 FLR 178, 185-186 (Chernov JA); STY (Afforestation) Pty Ltd v Atkinson [2006] VSCA 283, [22] (Maxwell P).
[5] Commonwealth v Verwayen (1990) 170 CLR 394, 427 (Brennan J); STY (Afforestation) Pty Ltd v Atkinson [2006] VSCA 283, [23] (Maxwell P).
[7] Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406, 431 (Mason and Deane JJ).
[8] Thompson v Palmer [1933] HCA 61; (1933) 49 CLR 507, 547 (Dixon J).
[9] Shevill v The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, 625-6 (Gibbs CJ).
[10] Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235, 250 (Kitto J).
[11] Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd [2007] WASC 78, [36] (Murray J).
[12] Johnstone v Milling (1886) 16 QBD 460, 467 (Lord Esher MR).
[13] Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245, 276 (Gaudron J).
[15] Ibid 553 (Mason ACJ, Wilson, Brennan and Dawson JJ).
[20] Schoenhoff v Commonwealth Bank of Australia [2004] NSWCA 161, [19] (Stein AJA, Ipp and McColl JJA agreeing).
[22] Ibid [91] (Giles and Hodgson JJA agreeing).
[23] Dowling and HG Hamilton Pty Ltd and Kelly v Rae [1927] HCA 5; (1927) 39 CLR 363, 378 (Powers J).
[24] Hancock v Williams (1942) 42 SR (NSW) 252, 256-7 (Jordan CJ and Halse Rogers J; Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152, [91] (Campbell JA, Giles and Hodgson JJA agreeing).
[25] Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443, 455; Commonwealth Bank of Australia v McArthur [2003] VSC 31, [196] (Dodds-Streeton J); Farrow Mortgage Services Pty Ltd (in liq) v Slade and Nelson (1996) 38 NSWLR 636, 637 (Gleeson CJ). See also: Bank of Adelaide v Lorden [1970] HCA 59; (1970) 127 CLR 185, 191-3 (Barwick CJ), 201; Buckeridge v Mercantile Credits Ltd [1981] HCA 62; (1981) 147 CLR 654, 671 (Aickin J), 675-6 (Brennan J); Price v Kirkham [1864] EngR 735; (1864) 159 ER 601, 603; Egbert v National Crown Bank [1918] AC 903, 909-10 (Lord Dunedin).
[27] Ibid 173 (Rich, Dixon, Evatt and McTiernan JJ) (footnotes omitted).
[28] State Rail Authority of New South Wales v Codelfa Construction Pty Ltd (No 2) [1982] HCA 51; (1982) 150 CLR 29.
[29] Trade Practices Act 1974 (Cth) s 87; Fair Trading Act 1999 (Vic) s 109; ASIC Act 2001 (Cth) s 12GM; Corporations Act 2001 (Cth) s 1325.
[31] Ibid 114 (Deane, Dawson, Toohey, Gaudron and McHugh JJ).
[32] Ibid 112 (Deane, Dawson, Toohey, Gaudron and McHugh JJ).
Ausmezz Pty Ltd & Anor
Goldberger & Ors [2011] VSC 640
(1933) 50 CLR 200
(1970) 127 CLR 185
(1981) 147 CLR 654
(2004) 218 CLR 451
(2004) 219 CLR 165
(2005) 221 CLR 522
(2008) 234 CLR 151
(2008) 238 CLR 570
(2006) 201 FLR 178
(1990) 170 CLR 394
(1983) 152 CLR 406
(1933) 49 CLR 507
(1982) 149 CLR 620
(1954) 90 CLR 235
(1988) 166 CLR 245
(1987) 162 CLR 549
(1927) 39 CLR 363
(1979) 141 CLR 443
(1996) 38 NSWLR 636
(1935) 53 CLR 163
(1982) 150 CLR 29
(1995) 184 CLR 102