QUANTUM ASSET MANAGEMENT PTY LTD -v- LOVE PROPERTIES (WA) PTY LTD [2017] WASC 167 (20 June 2017)

4 The defendants also claim there is insufficient evidence as to certain claimed legal fees and costs.

5 For the reasons that follow, I have determined that the appeal should be dismissed.

6 Quantum is a private financial institution that primarily lends to highrisk borrowers. It provides highrisk borrowers with shortterm loans, generally not exceeding six months. The loans are typically secured by secondary or subsequent securities in exchange for a relatively high return. It has a limited pool of funds available to it for loan transactions and in order to remain profitable it has determined that the rate of return across its portfolio needs to be around 36% per annum. It says that rate of return is high compared with other lenders such as major banks, but it is exposed to higher risk of nonrecovery, taking into account the nature of its borrowers and security.[1]

7 The first defendant (Love Properties) is a special project vehicle for property development controlled by the second defendant (Mr Love). According to Quantum's internal records, Mr Love is an experienced businessman and qualified as a certified practising accountant. Love Properties has held a reasonable size property portfolio over the years.[2] Mr Love is no stranger to litigation.[3]

8 By a Credit Facility Deed dated 30 October 2014 (Facility Deed), Quantum provided a shortterm facility to Love Properties, secured by second registered mortgages over properties owned by the defendants.[4]

9 By a deed of guarantee dated 11 November 2014 (Guarantee), Mr Love guaranteed the indebtedness under the Facility Deed.[5]

10 The term of the loan and the principal were later increased by three deeds of variation.

11 Love Properties defaulted under the facility and Quantum issued these proceedings. On 2 June 2016, summary judgment was granted in favour of the plaintiff and the defendants were ordered to pay the sum of $660,471.66 plus interest at a daily rate of $952.31 and costs.

12 The defendants subsequently paid the judgment sum to Quantum (whilst reserving their rights).[6] The defendants say, in effect, that they should be entitled to defend the proceedings and that they are entitled at common law to restitution of moneys wrongly claimed and paid to Quantum, such moneys being excessive because the interest provision in the Facility Deed is unenforceable as a penalty.

13 On 11 November 2014, Quantum and Love Properties entered into the Facility Deed, which incorporated the terms set out in a schedule attached to it and the terms of mortgage set out in Memorandum of Provisions L164935 (Memorandum).[7]

14 Under the Facility Deed, Quantum agreed to advance the principal sum of $245,000 for a term of seven months.

15 The relevant terms regarding interest rates are set out in items (4), (5) and (15) of the schedule[8] and cl 249 cl 256 of the Memorandum.[9]

17 Item (15) of the schedule sets out the following special conditions (relevantly):

1. An establishment fee of $2,750.00 will be payable on the Loan Date and will be deducted from the Principal.
2. A security fee of $32,306.00 will be payable on the Loan Date and will be deducted from the Principal.
3. A documentation fee of $4,785.00 will be payable on the Loan Date and will be deducted from the Principal.
4. For the purposes of Item (4) and Item (5) above [Lower Rate/Higher Rate]:

(a) Period A shall apply for the first four calendar months of the loan; and

(b) Period B shall apply afterwards.

18 The application of the 'Lower Rate' and 'Higher Rate' of interest are explained in cl 251 of the Memorandum as follows:

Interest must be paid at the Higher Rate. However if:

1. the Lender, on every day on which interest is payable under the Agreements, is paid the interest owing; and
2. the Debtor and CoSurety duly observe and perform all the terms, covenants and conditions contained in and implied by the Agreements; and

then the Lender will accept payment of interest at the Lower Rate for the payment in question only.

19 It is also necessary to have regard to the letter of offer of 30 October 2014 (Letter of Offer) that preceded the Facility Deed. The terms set out in the schedule to the Facility Deed are also included in a schedule to the Letter of Offer but with some additional notes. For example, period A and period B are explained as follows:[10]

Our mortgage advance consists of two periods, A & B:

Period A represents the timeframe that you have given us as being required to put your loan exit strategy in place. Our pricing of the loan for period A is represented by the fees reflected in the Special Conditions. Provided that your repayments are made on the due date, you will pay interest at the Lower Rate of period A.

Period B represents an additional time frame that you may require in the event that your exit strategy has not been finalised at the expiration of period A. Period B attracts no fees but represents a monthly interest rate which is significantly higher than period A. It is in your interest to manage your affairs in a manner that allows repayment of the loan at the end of period A, we do not charge any additional fees for early loan repayment.

20 There are some differences between the terms of the schedule attached to the Letter of Offer and the schedule attached to the Facility Deed. As noted above, the schedule to the Facility deed says that period A shall apply for the first four calendar months of the loan and period B shall apply afterwards. The schedule to the Letter of Offer says that period A shall apply for the first six calendar months of the loan and period B shall apply afterwards. The schedule to the Facility Deed also refers to security by way of a first registered mortgage (over two pending titles) and five second registered mortgages, whereas the schedule to the Letter of Offer refers to six second registered mortgages.[11] Nothing seems to turn on these discrepancies or errors, and the defendants did not contend otherwise.

21 In summary, the effect of the original Facility Deed is that Love Properties incurs the Higher Rate of interest, but provided no event of default has occurred its obligations are satisfied by application of the Lower Rate only. If Love Properties fails to repay the loan during period A, such failure does not of itself comprise a default but period B then commences (after four months) and extends until repayment of the loan (and so implicitly extends beyond the expiry of the term). During period B interest is applied at significantly increased rates.

22 The loan was secured by second registered mortgages over one property owned by Love Properties and over five properties owned by Mr Love.[12]

23 Mr Love provided the Guarantee and received legal advice as reflected in a solicitor's certificate.[13] Quantum was also entitled to notify an 'all present and after acquired property' security interest on the Personal Property Securities register with respect to each defendant.[14] There was no evidence as to the value in real terms of any such security or of prior registrations.

24 The Facility Deed was varied three times by deed of variation.

25 On 13 November 2014, the parties executed the first deed of variation.[15] The loan principal was increased to $313,515. Love Properties was charged a loan increase fee of $2,750, a documentation fee of $1,320, a security fee of $9,675, an introducer fee of $2,750, and an interest set off fee of $3,340. The documentation fee was capitalised and the remaining fees were disbursed from the principal.[16]

26 On 6 January 2015, the parties executed the second deed of variation.[17] Quantum permitted Love Properties to refinance the first mortgages over certain of the security properties and increase the priority indebtedness with another lender, in consideration for the defendants providing further second mortgages over an additional property. Love Properties was charged a documentation fee of $3,080, and a loan variation fee of $5,500, which were both capitalised.

27 On 2 June 2015, the parties executed the third deed of variation.[18] The original loan repayment date was 9 May 2015. By the third variation, Quantum increased the loan principal to $418,772 and extended the loan term to 9 August 2015. Love Properties was charged a loan extension fee of $5,500, a documentation fee of $1,320 and a security fee of $27,482. The loan extension fee and security fee were disbursed from the principal whereas the documentation fee was capitalised.

28 Period A was also extended until 9 August 2015, being the end of the loan term. Period B then commenced upon expiry of the term.

29 The Higher Rates changed slightly so that the rates were then:

30 The inclusion of a Lower Rate for period B was superfluous. If the loan was not repaid at the end of period A, then the term having expired, the facility was in default and the Higher Rate applied. The descriptions of period A and period B (contained in the Letter of Offer) do not apply neatly following the third variation as period B is not then an 'additional period' but commences upon expiry of the term. Although the defendants noted both of these matters, it was not contended they affected the principal argument as to the uplift in the interest rate.[19]

31 The defendants failed to repay the loan at the end of the term, and Quantum issued a notice of default. There is no dispute as to the notice or the default.

The penalty argument - summary of the position of the parties

32 The defendants contend that the increase from the period A interest rate of 9.75% per annum to the period B Higher Rate of 4.43% per month (being 53.16% per annum) is a penalty. They say the differential between 9.75% and 53.16% is sufficient to invoke the penalty principle. The defendants do not base their argument on the lower/higher interest rate mechanism: they accept such a mechanism is well recognised and at least where not applied retrospectively is not of itself a penalty.[20]

33 Quantum submits it is artificial to compare those rates, and properly viewed:

(a) fees and interest were imposed with respect to period A. The fees and interest together (if paid) result in a return on investment of some 53% per annum;

(b) no fees were imposed with respect to period B. Accordingly, the requisite return on investment is achieved by the interest rate of some 53% per annum;

(c) the desired return of 53% per annum reflects the risk of the shortterm lend and the particular risks of lending to Love Properties.

34 The relevance of both the fees and interest rates is addressed in more detail below.

Other relevant background The Norbury Crescent property

35 Mr Love owned 3 Norbury Crescent, City Beach. A dispute over a contract for the sale of that property arose and is the subject of Simmons v Love.[21] The following summary is taken from those reasons.

36 In June 2011, Mr Love applied jointly with his neighbours, the owners of the adjoining property, to subdivide those properties. In order to do so, Mr Love needed to acquire 223 sqm from the neighbours. The new lot created would include the original 3 Norbury Crescent land plus the additional 223 sqm. There would then be a subdivision so as to create proposed lot 1, being 3a Norbury Crescent.

37 Mr Love agreed to pay the neighbours $272,000 for the 223 sqm.

38 Before the development work was done and new titles issued, Mr Simmons expressed an interest in buying lot 1. A conditional contract was agreed whereby Mr Simmons would buy lot 1 from Mr Love for $1.03 million. There were long delays in the issue of new titles and settlement.

39 In June 2013, KWS Capital lodged a caveat over three properties owned by Mr Love, including 3 Norbury Crescent. The caveat was the subject of proceedings: KWS Capital v Love.[22]

40 By January 2014, Mr Love needed sufficient funds to satisfy the debt to the existing mortgagee, a debt to a second mortgagee, moneys due to the neighbours for the purchase of the 223 sqm and enough funds to be used as security to permit the KWS caveat to be lifted.[23]

41 In February 2014, Mr Simmons commenced proceedings for specific performance of the contract.

42 In May 2014, the original mortgagees issued proceedings seeking possession of the original 3 Norbury Crescent lot.[24]

43 Settlement finally occurred on 10 November 2014.[25]

44 While the above litigation with Mr Simmons was proceeding, the defendants were negotiating with Quantum for finance to bring about the settlement.

45 Over the course of six months, the defendants made eight separate requests for financing relating (primarily) to the Norbury Crescent property. The eight requests are detailed in the affidavit of Mr Truter. Some of the funding applications were accepted (there were six approvals) but events intervened to prevent settlement.

46 For example, the third approval proceeded to the point that documents were prepared and executed but the terms required a second mortgage over a property in Breera owned by Love Properties. Prior to completion, a caveat was lodged by a third party against the title to the Breera property referring to a debt of $130,000, and because of the caveat the Quantum financing could not proceed.[26]

47 Further applications and approvals were considered. The later proposals involved facilities being provided by both Quantum and another lender, Platinum Mortgages Securities Limited (Platinum). Term sheets were provided but the approvals did not proceed.

48 Quantum was served with a subpoena in the proceedings instituted by Mr Simmons and was aware of the ongoing litigation. From Quantum's perspective, the legal proceedings increased the risk of any loan relating to the Norbury Crescent property.[27]

49 Finally, and after the eighth request for financing, the parties agreed terms. The defendants sought $1,400,000 from Platinum and Quantum with a planned concurrent refinancing of the first mortgage over the Norbury Crescent, acquisition of the 223 sqm from the neighbours, amalgamation and subdivision to create lot 1 and the sale of lot 1 to Mr Simmons.

50 Initially, Quantum agreed to lend the sum of $245,000 for a period of seven months (as detailed above). Platinum agreed to lend the sum of $1,125,000. The Platinum loan agreement is not the subject of this dispute. Platinum took a first registered mortgage over the (as subdivided) 3 Norbury Crescent that remained in Mr Love's name.[28]

51 The structure of fees and interest under the Facility Deed was included in prior approval letters that were signed by the defendants. The same structure is used in the second approval letter dated 2 July 2014[29] and the fourth approval letter dated 12 September 2014.[30] It is also included in the fifth approval letter (not signed by the defendants) dated 10 October 2014.[31]

52 Mr Love was therefore aware of Quantum's proposed manner of applying fees and interest for some months before executing the Facility Deed.

53 Mr Love also had knowledge at the time of the potential for contractual provisions to be struck down as penalties, having asserted a particular clause operated as a penalty in Love v Brien.[32]

54 During the course of the various applications, Quantum obtained valuations from Opteon of the Norbury Crescent property, both before and after amalgamation and subdivision. Quantum's valuation of 3 Norbury Crescent after the amalgamation and subdivision was $1,650,000.[33]

55 Mr Grobbelaar deposed to the manner in which Quantum calculates the fees and interest it proposes for any particular application. It uses a 'proprietary risk pricing calculator'. Two versions were provided to the court.[34] The first was for a 'typical loan transaction'. The second was the risk pricing calculator said to show the methodology used for calculating the risk pricing that was utilised for the Facility Deed.[35]

(a) Quantum's targeted overall return (generally 36% per annum) during period A consists of both fees and interest. Quantum internally allocates fees to borrowers during period A only. Borrowers pay upfront fees, such as establishment and security fees, which are capitalised and form part of the total loan amount;

(b) similarly, borrowers pay fees for variations to the Loan Agreement, which are capitalised or disbursed from the principal;

(c) the lower interest rate charged during period A is typically set at 9.75% per annum. The higher interest rate during period A is calculated by adding 5% to the lower rate;

(d) Quantum's targeted overall annualised return during period B consists of interest only. The lower interest rate charged during period B is calculated by adding 5% to the targeted overall annualised return of 36% per annum. The higher interest rate is calculated by adding 1% per month to the period B lower rate.

57 Quantum acknowledges that its interest rates during period B are significantly higher than in period A. It says the interest rates are charged at a higher rate to compensate for the fact that no fees are charged to the borrower during this period, and for the foregone opportunity cost to Quantum of being able to relend its funds.[37]

58 The pricing methodology for the Facility Deed followed the above practice, save that the targeted annualised return was higher than the overall target of 36% per annum and was around 53% per annum. That higher return in the case of Love Properties was calculated by Quantum taking into account three factors that represented an increased risk of not recovering its capital:[38]

(a) first, Mr Love's credit report as reviewed by Quantum indicated a very high risk of default, numerous court writs and default judgments;

(b) second, the defendants were in default with their existing lender at the time the Facility Deed was executed;[39]

(c) third, the defendants' repayment plan involved the subdivision and sale of a property that was already subject to litigation.

59 The proprietary risk pricing calculation for Love Properties indicates that the property valuation input was $1,650,000, consistent with the Opteon valuation.

60 Mr Grobbelaar summarised the rates calculated to apply under the Facility Deed as follows:[40]

(a) the overall return to [Quantum] applying the lower rate for period A is 52.68% per annum consisting of:

(i) interest at period A Lower rate of 9.75% per annum; and

(ii) establishment and security fees of $2,750 and $32,306 respectively (representing an annualised rate of 42.93%);

(b) the overall return to [Quantum] applying the higher rate for period A is 57.68% per annum consisting of:

(i) interest at period A Higher rate of 14.75% per annum; and

(ii) establishment and security fees of $2,750 and $32,306 respectively (representing an annualised rate of 42.93%)

(c) the overall return to [Quantum] applying the lower rate for period B is 41.16% per annum (3.43% per month); and

(d) the overall return to [Quantum] applying the higher rate for period B is 53.16% per annum (4.43% per month).

61 In summary, Quantum's model seeks a relatively consistent return over time. It seeks the return during period A through a combination of fees and interest. As set out in the Letter of Offer, the fees are set taking into account the anticipated length of period A. Consistent with this, an additional fee was imposed when period A was extended under the third variation. Quantum seeks its targeted return during period B through interest.

62 Quantum submits that once that model is properly understood, the 'uplift' between period A and period B is not real: in fact, the change in the agreed return to Quantum between period A (Lower Rate) and period B (Higher Rate) was from 52.68% per annum to 53.16% per annum.

63 In both Andrews v Australia and New Zealand Banking Group Ltd[41] and Paciocco v Australia and New Zealand Banking Group Ltd,[42] the complaint was that fees charged by the bank were penalties. The High Court endorsed the continued relevance of Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd.[43] The High Court had previously said in Ringrow Pty Ltd v BP Australia Pty Ltd[44] that Dunlop continued to express the law to be applied to penalties in Australia.

64 The following can be drawn from the authorities:

(a) the question whether a sum stipulated is a penalty or liquidated damages (that is, a genuine preestimate) is to be judged as at the time of the making of the contract;[45]

(b) the party seeking to be absolved of the liability imposed by the stipulation bears the onus of proving that the stipulation constitutes an unenforceable penalty;[46]

(c) the critical issue is whether the sum agreed was commensurate with the interest protected by the bargain;[47]

(d) the nature of the interest sought to be protected is relevant. The sum agreed may be intended to protect an interest that is different from, and greater than, an interest in compensation for loss caused directly by the breach.[48] It may be intangible and unquantifiable. This is consistent with Lord Dunedin's statement in Dunlop that, 'the essence of liquidated damages is a genuine preestimate of damage'. The reference to 'damage' as distinct from 'damages' is significant;[49]

(e) an interest may be of a business or financial nature;[50]

(f) a sum that is merely disproportionate to the loss suffered does not qualify as a penalty.[51] The penalty must be 'extravagant, exorbitant or unconscionable' and 'out of all proportion' to the interest of the party which it is the purpose of the provision to protect;[52]

(g) the distinction between liquidated damages and a penalty, whilst useful, is not a limiting rule and does not mean that if no preestimate is made at the time the contract was entered into, the sum agreed will be a penalty;[53]

(h) nor does it mean that a sum that reflects or attempts to reflect other types of loss or damage beyond those caused directly will be a penalty;[54]

(i) it may be that a reliable preestimate is not possible or that damage caused by default is of such an uncertain nature that it cannot accurately be estimated or proved. In such a case a stipulated payment agreed by the parties may well be the true bargain and not a penalty;[55]

(j) where preestimation of loss is difficult, precision may not be called for, bearing in mind the question is whether the stipulation is 'out of all proportion' to the interest said to be damaged by default;[56]

(k) the court will not lightly interfere with the bargain struck between the parties. The court requires good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is expressed as an exceptional rule and descriptors such as 'extravagant' and 'out of all proportion' are used in its application;[57]

(l) the ultimate question in determining whether a stipulation is a penalty, is whether it is intended only to punish the defaulting party. Framed another way - does the innocent party's interest in the observance of the principal contractual obligation explain the agreed stipulation as having a purpose other than punishment;[58]

(m) the conventional application of the doctrine of penalties arises when a stipulated sum is made payable by upon breach. However, the rule as to penalties is not limited to cases arising out of breach of contract;[59] and

(n) whether a clause is a penalty invites attention to the proper construction of that clause, and the contract as a whole, but it is not solely a matter of contractual construction. The court is not limited to considering the terms of the contract and any background factual matrix evidence that would be admissible for the purposes of contractual construction.[60]

65 In Paciocco, the High Court stated that ANZ had an interest in receiving timeous repayment of the credit it extends.[61] That interest is affected by operational costs, provisioning and the need to maintain regulatory capital. That late payments to ANZ caused such injury to its financial position was a matter it was entitled to take into account and it could not be concluded that the fee charges properly had no purpose other than to punish the account holder for late payment.[62] The question was not what the ANZ could recover in an action for breach of contract.[63]

66 Keane J also stated that a bank's legitimate interests are not confined to the reimbursement of expenses directly occasioned by the customer's default. Maintenance of a revenue stream is a legitimate interest, and although interest is a primary source of the reward to a bank for the risk involved in providing financial services, there is no reason that fees cannot serve that same purpose.[64]

67 Keane J said that the rate of interest demanded of customers might be expected to be lower if fees are also taken from defaulting customers: fees serve to reduce overall risk. If fees were successfully challenged as penalties, then it could be expected that interest rates would rise to maintain revenue streams.[65]

68 Another legitimate interest which is part of a bank's business is the opportunity to reinvest funds and exploit opportunities.[66]

69 Finally, there is an acknowledgment that the common law has accepted that 'risky credit is more expensive credit'.[67] For example, Keane J cites Colman J in Lordsvale Finance Plc v Bank of Zambia:[68]

[T]he borrower in default is not the same credit risk as the prospective borrower with whom the loan agreement was first negotiated ... [M]oney is more expensive for a less good credit risk than for a good credit risk.

70 The value of an increase in credit risk may well be difficult to assess, particularly as other customers may default at the same time.[69]

Some cases on interest rates in the shortterm money market

71 The market in which Quantum operates is materially different to that of a bank or similar institution. Therefore, whilst Paciocco and Andrews provide guidance as to the penalty rule generally and as to framing the appropriate questions, there is value in reviewing some of the cases that have considered interest rates as a penalty in the short-term money market.

72 In Yarra Capital Group Pty Ltd v Sklash,[70] the borrower argued that default interest comprised a penalty. The Master granted summary judgment in favour of the creditor. An appeal to a single judge was unsuccessful. An appeal to the Court of Appeal was unsuccessful.

73 The borrower entered into a series of shortterm loans with the creditor. For example, one loan was for $100,000 for a period of two months. There was a oneoff fee of $20,000. After expiry of the term, a daily default fee (or interest) of $328.50 for each day that the loan, or any part of it, remained outstanding. That annualised default fee was the equivalent of approximately 120% of the principal. The oneoff fee, if annualised, was also approximately 120% of the principal.[71]

74 A second loan was for $115,000 for a period of two months with a oneoff fee of $10,000, so annualised at $60,000, or 52% of the principal. The daily default charge was $450.00, so annualised at 143%.[72]

75 The Court of Appeal did not consider it reasonably arguable that the default provisions were so out of proportion with loss as to be characterised as oppressive. Chernov J held as follows:[73]

(a) the loans were intended to be for short terms. The parties must have contemplated that they would be repaid within a relatively short period of time. The annualisation of the default rate expressed as a percentage of the principal unfairly exaggerates what was contemplated and the true burden of the default provision;

(b) the loans were essentially unsecured and one would expect high rates of interest;

(c) the amount of the fee gives some indication of the expected earnings during the period of the term and so in general terms reflects the minimum loss the creditor was likely to suffer;

(d) there would be great difficulty and expense in establishing the quantum of damage that might arise by reason of breach given the market in which the parties operated, and the rate agreed by the parties obviated the need for a complex examination that might otherwise be required. The courts are more reluctant to grant relief on the basis that an agreed amount is a penalty in such cases; and

(e) even if the task of annualising the fee were to be criticised, it was still a useful exercise in that it gave an indication of the earnings on the loan for the purpose of assessing the extravagance or otherwise of the default amount (both the Master and the primary judge had regard to both the fee and the default interest rate as part of their reasoning[74]).

76 In Bay Bon Investments Pty Ltd v Selvarajah,[75] the court considered the terms of two shortterm loans (one month). For one, the interest rate during the term was 60%, increasing on default to in effect 240%. For the second loan, the interest rate during the term was 100%, increasing on default to in effect 360%. White J accepted that there is a market for loans of last resort at very high interest rates, citing Accom Finance Pty Ltd v Mars Pty Ltd.[76] White J took into account the lender's loss of use of money, and accepted that there was a market in which the lender may have been able to deploy its money at very high rates such as 60% and even 100%, but in the absence of evidence could not conclude there was a market at rates of 240% or 360%. The disparity was so great that the interest was not a genuine preestimate of damage. It was out of all proportion to the damage it could be inferred might be suffered and was to be characterised as punishment.[77]

77 In Titles Strata Management Pty Ltd v Nirta,[78] a shortterm loan was made to a party already facing court action over an unpaid loan. The lender did not use the drafting technique of a higher rate with a lower rate absent default. Rather, the rate during the term was 3% per month and upon default was 8% per month for two months. Importantly, the lender had ample security and in those circumstances the court considered the default rate a penalty.[79]

78 There are numerous other examples (not necessarily involving the shortterm market) where interest rates are considered, but a comparison of rates alone is not useful.[80]

79 The principles to be applied on an application for summary judgment are well established. Summary judgment will be granted only when there is no real question to be tried. The power to order summary judgment is one that should be exercised with great care.[81] It is only in the clearest of cases, when there is a high degree of certainty about the ultimate outcome of the proceedings if it went to trial, that summary judgment ought properly be granted.[82]

80 The defendants' claim involves the application of some relatively difficult questions of law. However, that is no bar to a grant of summary judgment.[83]

81 Adopting the questions as framed by Gageler J in Paciocco: did the inclusion of the period B interest rate have a purpose other than to punish Love Properties in the event of late payment? Does Quantum have an interest that explains the period B interest rate?

82 In my view, the answer is yes, for the following reasons.

83 The nature of the facility was high risk and in the shortterm money market. The period was expressed to be for the purpose of an exit strategy: the parties did not intend the facility to endure.

84 The parties are both experienced and commercially sophisticated. The proposal for high fees and interest was disclosed for some months before the Letter of Offer was executed.

85 Quantum explained its manner of assessing risk, its targeted return, the restrictions under which it operates in terms of a finite pool of funds and the need for a certain level of return to remain profitable.

86 Quantum had an interest to protect. It had an interest in receiving repayment and on time. It had an interest in maintaining its targeted return and there was no reason that could not be achieved through both fees and interest. It had an interest in pursuing opportunities to reinvest funds in the shortterm market and at high interest rates.

87 Quantum explained why this particular loan had added risk which led it to seek a higher return than usual. The evidence, particularly as to the history of mortgagee action and the ongoing litigation with Mr Simmons, is consistent with Quantum's explanation.

88 Estimating such risk and the damage that might be caused by default is not straightforward, for the reasons identified in Yarra Capital. Whilst Quantum made a genuine attempt to preestimate loss and has developed its proprietary calculator to assist it in doing so, there is a limit as to the precision with which such a task can be undertaken. In such circumstances a stipulated payment regime on default is less likely to be a penalty.

89 Further, consistent with the approach in Yarra Capital, the period A fees and interest give an indication of damage in the event of default. The annualised period B rate is only slightly more than the annualised blended (fees and interest) period A return of 52.68% per annum. The period B rate of 53.16% per annum can hardly be said to be exorbitant or extravagant in those circumstances.

90 I acknowledge that at the time of the Letter of Offer, the period B rates applied even predefault. Superficially, one could argue that such rates could hardly be a penalty where they were to apply during the term. However, in light of Andrews, the potential for the application of period B absent default does not of itself deny their characterisation as a penalty. It makes no difference to the outcome in this case.

91 Quantum has a strong case that the period B rates had a legitimate purpose of protecting Quantum's interests, were not out of proportion to that interest and cannot be said to only operate as a punishment. I consider that the defendants have no reasonable prospect of meeting their onus to establish otherwise. There is no real question to be tried.

92 In addition to relying on a copy of the statement of account (Statement of Account),[84] Quantum refers to cl 295 of the Memorandum, which provides:

A certificate issued by the Lender, signed by its Authorised Officer relating to the Agreements is, in the absence of manifest error, prima facie evidence of the matters certified.

93 The definition of 'Authorised Officer' includes a lawyer acting for the lender.[85]

94 Quantum relies on an affidavit sworn by its solicitor, Ms Guy, which it says constitutes a certificate pursuant to cl 295. Ms Guy describes the affidavit as being 'As To Account Figures,' deposes to the fact she is authorised to swear the affidavit on behalf of Quantum and sets out the debt and interest owing under the Facility Deed. She states that she she obtained the figures following advice from Mr Truter.[86]

95 It is well established that clauses of this nature are valid. Where the effect of the clause is that a certificate is prima facie rather than conclusive evidence, the onus is placed on the defendants to demonstrate by acceptable evidence that the certificate is incorrect.[87] The defendants did not adduce such evidence.

96 That Ms Guy certifies by way of an affidavit rather than a 'certificate' is not to the point. An affidavit served in proceedings by a solicitor on behalf of the lender and where such certificate can be signed by a solicitor to my mind is issued by the lender within the meaning of cl 295. The wording of cl 295 is broad. The manner of certification is not prescribed.

97 As cl 295 is engaged, Quantum is entitled to rely upon Ms Guy's affidavit as prima facie evidence of the amounts said to be due. There is no evidence of manifest error.

98 Because Quantum is entitled to rely on the cl 295 certificate, it is not necessary to deal with the defendants' contentions that certain legal fees and costs should not have been deducted from the account or have not been properly established. However, for completeness I will refer to them.

99 The relevant terms regarding costs are cl 201, cl 202 and cl 378 cl 380 of the Memorandum. Clause 201 provides, relevantly:

The Debtor will upon demand pay to the Lender or as directed by the Lender all costs & expenses ('Costs and Expenses') and other amounts payable or incurred or paid by the Enforcers in respect of the Agreements. The Costs & Expenses shall form part of the Secured Monies and shall include:

1. Legal costs on a full indemnity or on a solicitor and own client basis, whichever is the greater;
2. Costs incurred consequence on any default by the Debtor or CoSurety under any of the Agreements or consequence on any Event of Default [.]

Any monies demanded pursuant to clause 201 which are not paid or if not demanded the Lender will form part of the Secured Monies and may be capitalised (at the Lender's option).

101 Clause 378 is a detailed clause dealing with legal costs but in summary operates such that the secured debt includes, amongst other things, all costs and disbursements which Quantum incurs through its own legal representatives on an indemnity basis in relation to any documentation or in any way incurred in relation to the advance, protecting its priority or enforcement.

102 'Enforcer' where used in cl 201 is defined to include Quantum.[88] 'Agreement' means (relevantly) any agreement with Quantum.[89] The definition of 'Costs and Expenses' in cl 201 is inclusive.

103 The defendants dispute certain costs charged to Love Properties' loan account. The loan account was maintained on Quantum's behalf by Impresta and is evidenced by the Statement of Account.[90] The defendants assert that a deed of priority fee ($250), fees on failed direct debit payment charges (5 x $80) and a bank cheque fee ($10) are not recoverable costs pursuant to s 201 of the Memorandum.[91] They do not adduce any evidence. Those fees are set out in the Statement of Account. There is a separate direct debit agreement with Impresta under which Impresta is authorised to charge a fee to the loan account if direct debits are reversed.[92]

104 I consider that such costs fall within the inclusive definition of 'Costs and Expenses' in cl 201 of the Memorandum, and there is nothing in their quantum that suggests manifest error.[93] Even if there is a question as to whether the failed direct debit payment charges are properly made under an 'Agreement', then they are in any event payable under the separate direct debit agreement with Impresta and properly debited to the loan account.

105 As to the legal fees debited to the account, the defendants assert that Quantum was obliged to prove all legal costs were reasonably incurred. The defendants did not specify the charges about which they complain, but I assume they refer to the fees listed in the Statement of Account as charged by HWL Ebsworth between October 2015 and April 2016 (five invoices). Those fees total $10,711.35. The defendants say that references to indemnity costs contain an inherent limitation which excludes costs unreasonably incurred, and say Quantum was therefore obliged to prove the costs were reasonably incurred.

106 The difficulty with the defendants' submission is that the Memorandum contains terms that require the defendants, if they wish to dispute the legal costs recoverable, to first submit the dispute to a commercial costs assessor appointed by Quantum who will prepare a bill of costs in taxable form. If the defendants do not agree with the costs set out in that bill of costs, then the defendants may seek formal assessment or taxation.[94]

107 There is no suggestion the defendants initiated that course. Absent any indication that they wished to challenge the reasonableness of the fees, it is unsurprising that Quantum did not evince evidence beyond relying on the Statement of Account and Ms Guy's affidavit, particularly as in my view, on its face the figure of $10,711.35 is not such as to raise a question as to reasonableness. As counsel for Quantum submitted, there are appropriate ways in which a third party liable for legal costs can properly challenge such costs, rather than by proceedings for breach of contract. In this case, there was a contractual dispute resolution regime in place between Quantum and the defendants, in addition to rights under pt 10 of the Legal Profession Act 2008 (WA).

108 I do not consider there is any real question to be tried as to the quantum due as reflected by Ms Guy's affidavit.

109 Quantum says that in any event there has been an admission as to the quantum of the outstanding debt.

110 In September 2015, the defendants requested that Quantum and Platinum forebear from exercising their rights in order to allow the defendants time to refinance their debts.[95] A deed of forbearance was drafted. It defined 'Debt' as all amounts owing to Quantum and Platinum under the respective facility agreements and stated that as at 21 September 2015, the total debt owing to Quantum was $446,911.16.[96] By the deed, the defendants acknowledged the Debt and their default and represented that they had no defence to an action against them.

111 The defendants signed the deed and provided it to Quantum. Quantum did not execute or rely on the deed, following advice from Mr Love's finance broker that Mr Love, 'tends to sign documents and then ... rethink and decides to challenge them'.[97]

112 Despite this, Quantum seeks to rely on the signing of the deed as an admission by the defendants as to the amount due and payable to Quantum.[98] Whilst technically it may comprise an admission, there is a real question as to the weight to be accorded such an admission in circumstances where it was made in the context of a proposed compromise that was not given effect and where Quantum itself had doubts as to its reliability. Accordingly, I decline to give it any real weight in the resolution of the appeal. That does not affect the outcome of the appeal.

113 The defendants applied for an extension of time in which to appeal. The notice of appeal was filed 12 days after the last date for filing. Mr Love says that because he was unrepresented at the time, he did not know the timeframe within which he had to lodge an appeal (10 days). He also asserts the court registry gave him incorrect information. Quantum says that an extension should not be granted because Mr Love is no stranger to litigation.

114 I accept that Mr Love has some familiarity with court processes and rules. However, as the delay was relatively short and Mr Love was at that time representing himself, I would allow some latitude on this occasion and so grant the requisite extension.

115 Having granted the extension of time to appeal, I would dismiss the appeal.

[1] Affidavit of Marius Grobbelaar filed 4 October 2016 (Second Grobbelaar affidavit) [2], [5], [6]. This affidavit was filed in the appeal.

[2] Affidavit of Rhode Truter filed 16 May 2016, 16, 106 (Quantum's operations and credit executive).

[3] Quantum refers to the following: Simmons v Love [No 2] [2016] WASC 167; Love v KWS Capital Pty Ltd [2016] HCASL 160; KWS Capital Pty Ltd v Love [2015] WASCA 237; Simmons v Love [2015] WASC 79; Simmons v Love [2014] WASC 116; KWS Capital Pty Ltd v Love [2014] WADC 119; Love v KWS Capital Pty Ltd [2013] WASC 466; KWS Capital Pty Ltd v Love [2013] WASC 294; Love v Brien [2013] WASCA 280; Love v Brien [2012] WASC 457; Love v Bahemia [2010] WASC 102; Love v Griffiths [No 2] [2008] WASC 302; Love v Griffiths [2008] WASC 168; Love v Australian Securities Commission [2000] WASCA 404.

[4] Affidavit of Marius Grobbelaar filed 2 February 2016 (First Grobbelaar affidavit), 66 69.

[6] Affidavit of Ross Love filed 6 September 2016, 5.

[11] Cf Truter affidavit, 98, and First Grobbelaar affidavit, 68.

[12] First Grobbelaar affidavit, 16, 24, 33, 41, 49, 58.

[16] The recitals refer to the incorrect period A length of six months - nothing turns on this, particularly in light of the third variation.

[20] ts 12 (and see David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1, 30, 31).

[21] Simmons v Love [2015] WASC 79. An appeal was discontinued and a crossappeal dismissed: Simmons v Love [2016] WASCA 176.

[22] KWS Capital v Love [2013] WASC 294.

[23] Simmons v Love [58], [65] (the KWS caveat was subsequently lifted).

[32] Love v Brien [2012] WASC 457.

[33] Truter affidavit [43] [44], Opteon valuation at 58 76.

[35] Second Grobbelaar affidavit [16].

[36] Second Grobbelaar affidavit [4] [15].

[37] Second Grobbelaar affidavit [11(b)]; ts 61.

[38] Second Grobbelaar affidavit [17]; ts 42 43.

[40] Second Grobbelaar affidavit [18].

[41] Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205.

[42] Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28.

[43] Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd [1914] UKHL 1; [1915] AC 79.

[44] Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656 [12].

[45] Dunlop (87); Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd [No 2] [2012] WASCA 53 [21].

[46] Paciocco [167] (Gageler J); Spiers Earthworks [23], [86].

[48] Paciocco [26] (Kiefel J), [266] (Keane J, citing ParkingEye Ltd v Beavis (Consumers Association Intervening), reported with Cavendish Square Holdings BV v Makdessi [2015] UKSC 67; [2015] 3 WLR 1373; [2016] AC 1172).

[49] Paciocco [144] [145], [161] (Gageler J); [282] [284] (Keane J).

[51] Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656 [31] [32].

[52] Ringrow [32]; Paciocco [29], [51] [56] (Kiefel J).

[53] Paciocco [30], [62] (Kiefel J).

[55] Paciocco [39] [41] (Kiefel J).

[57] Ringrow [32]; Paciocco [54] (Kiefel J).

[58] Paciocco [158], [166] (Gageler J).

[59] Andrews [31] [32], [46] [50], [78]; Love v Brien [2012] WASC 457 [61] [62]; cf Cavendish Square Holdings and the debate as addressed in Paciocco, particularly at [6] [10] (French CJ).

[60] Spiers Earthworks [25] [26]; Paciocco [146] (Gageler J).

[62] Paciocco [68] (Kiefel J); [172] [176] (Gageler J). See also the conclusion of Allsop CJ giving the principal reasons for judgment of the Full Court: Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50; (2015) 236 FCR 199 [169], [173].

[64] Paciocco [216], [223], [278] (Keane J).

[65] Paciocco [223] [224] (Keane J).

[67] Paciocco [263] [264] (Keane J).

[68] Lordsvale Finance Plc v Bank of Zambia [1996] QB 752, 763.

[70] Yarra Capital Group Pty Ltd v Sklash [2006] VSCA 109.

[71] Yarra Capital, Schedules A and B to Reasons, 1st Deed.

[72] Yarra Capital, Schedules A and B to Reasons, 6th Deed.

[73] Yarra Capital [15] [17], [22] (Warren CJ agreeing).

[75] Bay Bon Investments Pty Ltd v Selvarajah [2008] NSWSC 1251.

[76] Bay Bon Investments [54]; Accom Finance Pty Ltd v Mars Pty Ltd [2007] NSWSC 726 [54] [55].

[77] Bay Bon Investments [53] [56].

[78] Titles Strata Management Pty Ltd v Nirta [2015] VSC 187.

[79] Titles Strata Management [141] - [142].

[80] For example, Beil v Mansell (No 2) [2006] QSC 199; [2006] 2 Qd R 499; PT Thiess Contractors Indonesia v PT Arutmin Indonesia [2015] QSC 123.

[81] Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87, 99.

[82] Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 265 [46]; Spencer v The Commonwealth of Australia [2010] HCA 28; (2010) 241 CLR 118 [24], [53] [55]; Sutton Investments Pty Ltd v Realistic Investments Pty Ltd [2017] WASCA 14 [24].

[83] Yarra Capital [10] and cases cited.

[86] Affidavit of Cassandra Guy filed 2 June 2016.

[87] George 218 Pty Ltd v Bank of Queensland Ltd [2015] WASC 434 [244] [251] (an appeal was dismissed, application for special leave refused); St George Bank Ltd v Emery [2004] WASC 35.

[96] Deed of Forbearance, definition of Debt: Truter affidavit, 143 159.