Contract - foreign Currency Loan Agreement - failure by bank to give notice of agreement to drawdown in Swiss francs as required by contract - whether conduct of borrower constituted waiver of contractual requirement of notice.

Equity - Clause of loan agreement providing for higher rate of interest payable after default in repayment - whether substance of clause constituted a penalty - distinction between penalty and genuine pre-estimate of damage - whether agreed sum was extravagant, exorbitant or unconscionable.

Income Tax - Section 261 Income Tax Assessment Act - whether portion of loan repayment would constitute money paid under mistake of law, or of fact if clause of agreement rendered void by s.261.

Practice and Procedure - Whether judgment in foreign currency appropriate - whether loan agreement specified repayment in foreign currency.

Income Tax Assessment Act 1936 - ss. 261, 128A(4), 221YV

Counsel and Solicitors for W G Hodgekiss and S Y Reuben

Applicants (First & Second instructed by Gould & Shaw

Counsel and Solicitors for A R Emmett QC and J Marshall

First Respondent (Cross-Claimant): instructed by L C Hollis (Cross-Claimant):

The first respondent bring in short minutes of order to give effect to this judgment on 14 June 1989 at 9.30 am

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

On 11 May 1989 I gave judgment dismissing the applicants' application. I adjourned for later consideration a cross-claim brought by the respondent Bank against the applicants seeking recovery of moneys owing to the Bank under the loan agreements and mortgages entered into pursuant thereto.

2. Each of the applicants had entered into an agreement with the Bank specifically in respect of the foreign currency facility. Each too had entered into mortgages to secure amounts owing to the Bank from time to time. For practical purposes the two loan agreements and the various mortgages are in similar form and for convenience I will refer only to the agreements and mortgages entered into by David Securities Pty Limited. It was not suggested that any different result should follow in respect of the loan agreements or mortgages entered into by A & T Rahme & Sons Pty Limited.

3. The loan agreement provided in clause 2(a) that the borrower could from time to time during the currency of the facility apply to draw down advances. The procedure provided for in the agreement was the delivery by the borrower to the Bank not later than five banking days prior to the proposed drawdown a notice in writing nominating the amount in Australian dollars and the currency of the advance, the date of the advance and duration of what is referred to in the agreement as the "interest period", being in essence the period to elapse prior to a roll-over. Clause 2(d) provided as follows:

"Subject to clause 8(c) an Advance may be renewed

at the end of each Interest Period. The Borrower

by notice in writing delivered to the Bank not

later than five Banking Days prior to the

expiration of each successive Interest Period then

current may nominate the duration of the next

following Interest Period and the currency it

wishes the Advance to be denominated in during such

Interest Period. If the Borrower fails to give

such notice, but subject to clause 4(c), the

Borrower shall be deemed to have selected the same

duration for the relevant Interest Period as the

immediately preceding Interest Period and the

Advance shall be denominated in the same currency

during such Interest Period."

4. Clause 3 provided for the payment of interest on each advance at the end of each period save that if the interest period exceeded six months then the interest was to be payable each six months. The rate of interest was defined in clause 3(b) as follows:

"The rate of interest applicable to each Interest

Period shall be one and one quarter per cent per

annum (1.25% pa) above the rate at which the Bank

can obtain deposits in United States Dollars or in

the relevant Optional Currency as the case may be

for such Interest Period and for a similar amount

in the Interbank Eurocurrency Market in the city of

the Bank's Lending Office as at 11.00 am in such

city two Banking Days prior to the beginning of

such Interest Period."

5. Each advance and interest was to be repaid or paid as the case may be in the currency in which the advance was denominated.

"(i)An Advance may be denominated in an Optional

Currency specified pursuant to Clause 2(a) or

2(d) as the case may be by the Borrower during

an Interest Period only if the Bank so agrees.

The Bank shall give notice as to agreement or

otherwise to the Borrower not later than 3.00

pm in the city of the Bank's Lending Office

three Banking Days prior to the commencement

of such Interest Period.

(ii)If the Bank does not agree on the Optional

Currency specified by the Borrower as

aforesaid such Advance shall be denominated in

United States Dollars for the next Interest

Period unless the Bank agrees with the

Borrower that such Advance shall be

denominated in another Optional Currency for

such Interest Period."

7. It should be noted that the expression "Optional Currency" is defined as a convertible currency excluding United States and Australian dollars.

8. Clause 7 when read together with clause 4 ensured that the payments to be made by a borrower in the event that the loan was denominated in an optional currency were to be made in that currency or if the loan were denominated in United States dollars would be made in United States dollars.

9. Clause 8 dealt with taxes. Relevantly it provided in para.(b):

"All interest payments hereunder shall be paid by

the Borrower to the Bank without deduction of any

tax or duty or other imposts of any kind

whatsoever. Should the Borrower at any time be

compelled by law to deduct any such taxes, duties

or imposts from any payment to be made by the

Borrower the Borrower will pay such additional

amounts as may be necessary in order that the net

amount received shall equal the full amount the

Bank would have received had a deduction not been

made or had payment not been made subject to such

tax duty or imposts together with an aggregate sum

equal to to any additional taxes payable by the

Bank in respect of any additional amounts

(including amounts equal to such taxes) under this

clause (including this obligation)."

10. A failure to comply with para.(b) was not however to constitute a breach of the agreement; it merely brought about the result that the Bank was not obliged to renew any advance or to replace any bills maturing under the facility with other bills subject to a provision relating to indemnity in para.(d) not presently relevant.

11. By virtue of clause 11 the overseas loan and other moneys owing under the loan agreement were to become immediately due and payable to the Bank without demand inter alia, in the event of default. Clause 11.02 then provided:

"If the Borrower fails to pay any amount payable by

it hereunder in respect of any Advance on the due

date therefor, the Borrower shall on demand by the

Bank from time to time pay interest on such overdue

amount from the due date up to the date of actual

payment, as well after as before judgment,

compounded quarterly at a rate determined by the

Bank to be one and one half of one per cent per

annum (1.5% pa) above the aggregate of one and one

quarter per cent per annum (1.25% pa) and the rate

at which the Bank was offered deposits by leading

banks in the Interbank Eurocurrency Market in the

city of the Bank's Lending Office in a currency and

amount comparable to the overdue amount for a

period of three months."

12. Finally, clause 16 of the agreement dealt with the giving of notices under the agreement and provided for such notices to be in writing addressed in a particular way referred to in the agreement.

13. The mortgages secured to the Bank all moneys referred to in a memorandum identified in the mortgage which memorandum had been filed in the Registrar General's Office. The memorandum contained as well undertakings which were to be incorporated by reference as covenants in the mortgages. For present purposes it is sufficient to say that the memorandum made it clear that what was secured by each mortgage was all moneys owing or payable to the Bank by the mortgagor on any account so that what was secured under each mortgage included the moneys secured under the loan agreement.

14. Clause 17 of the memorandum as incorporated in the mortgage provided as follows:

"A statement in writing made up from the books of

the Bank and signed by an authorised officer of the

Bank of the amount due or owing of the moneys

hereby secured at the date mentioned in such

statement shall be prima facie evidence that such

amount is so due or owing or secured and of all the

other matters therein set forth without it being

necessary to produce any books or vouchers to

verify the same and without retrospection beyond

the preceding half-yearly balance of account in the

books of the Bank."

15. There was tendered in evidence before me a statement pursuant to clause 17 purporting to be made up from the books of the Bank. The statement indicated that the sum of U.S. dollars $1,098,066.60 was due and payable under clauses 11.01 and 11.02 of the agreement dated 17 December 1984 between the Bank and David Securities Pty Limited and that interest accrued on that sum at the daily rate of US$365.78 based on an interest rate of 12 per cent per annum being the rate apparently current up to and including 22 June 1989. The statement also indicated that the sum of US$284,525.64 was due and payable under clauses 11.01 and 11.02 of the agreements dated 13 March 1985 and 10 October 1985 between the Bank and A & T Rahme & Sons Pty Limited with interest accruing at the daily rate of US$95.77 based on an interest rate of 12.125 per cent per annum being the rate current up to and including 22 June 1989.

16. There was no dispute between the parties that the borrowers and mortgagors were in default under the loan agreements and the mortgages and that notices of the defaults had been given. For the cross-defendants it was submitted that they were not liable to pay all or alternatively some of the moneys, which as a result of the tender of the statements under clause 17 of the mortgages were prima facie due, for four reasons:

1. It was said that having regard to the construction

of the loan agreements at all relevant times, other

than the first drawdown, the loan should have been

denominated in United States dollars with the

consequence that the amount owing would presumably

be determined so far as the principal is concerned

by reference to the amount of United States dollars

being the equivalent of the number of Swiss francs

at the end of the respective first drawdown

periods.

2. It was said that the interest amount from the time

of default was not payable because the provision in

the loan agreement for interest in the event of

default was a penalty and therefore void.

3. It was said that clause 8(b) was void as offending

s.261 of the Income Tax Assessment Act 1936 with

the consequence that the cross-defendants were

entitled to a refund of amounts over-paid and that

the voidness of the clause also affected the amount

still unpaid.

4. In the circumstances of the present case it was not

appropriate that judgment should be given to the

Bank in United States dollars.

17. I shall deal with each of the submissions in turn.

THAT THE LOAN SHOULD HAVE BEEN DENOMINATED IN UNITED

18. The applicant submitted that although initially the borrower requested that there be an initial drawdown in Swiss francs and although in each drawdown notice that was in evidence (and it is conceded that not all drawdown notices were) there was a request from the borrower that the drawdown or renewal be in Swiss francs, nevertheless there was no evidence that the Bank had in accordance with clause 5(a)(i) given notice of its agreement to the borrowing in Swiss francs, being an optional currency, at least within the time stipulated for in that clause, namely three banking days prior to the commencement of the interest period. There was no doubt that the Bank had as a matter of fact agreed to the borrowing in Swiss francs and there was evidence of confirmation letters being sent to the Bank advising of the roll-overs in Swiss francs shortly after the date on which each roll-over occurred.

19. It was then argued that the provisions of clause 5(a)(ii) had no application because the Bank not having agreed on the Swiss franc optional currency specified by the borrower in accordance with clause 5(a)(i), that clause provided that thereafter the advance was to be denominated in United States dollars. The subsequent condition of the Bank agreeing to a denomination in another optional currency could have no relevance, it was said, because the reference to "another optional currency" was a reference to a currency being neither Unites States dollars nor Swiss francs.

20. Thereafter it was said that clause 2(d) of the agreement provided that if the borrower failed to "nominate" in writing the currency in which the advance was to be renewed the borrower was deemed to have selected the same currency as in the preceding interest period. It was said that the borrower did not in relation to any advance "nominate" pursuant to clause 2(a) or 2(d) any currency. The Bank had never given three or more business days prior to the commencement of any interest period notice to the borrower that it consented to an optional currency and the conclusion followed, it was submitted, that each advance had therefore been drawn down in United States dollars and had at all times remained in that currency. A consequence was said to be that the advances would be very substantially less than if the Swiss francs had been borrowed.

21. There was one evidentiary problem with the argument. While there was sufficient evidence before me to determine the amount of United States dollars that would be represented by the principal of the loan, it would not have been possible to determine the interest payable because the rate of interest, had the borrowing been originally in United States dollars, would have depended upon rates applicable in New York rather than rates applicable in Singapore. However, having regard to the view I take as to the argument, it is not necessary to pursue any factual difficulties of this kind.

22. It was conceded that the argument had little to justify it in terms of morality. At all times, so far as appeared from the evidence, the applicants had requested borrowings in Swiss francs and as the moneys became available in Swiss francs had accepted the Swiss franc moneys which were banked to their account. Nevertheless it is said that the loan agreements had to be strictly construed and the consequence was that the advance should at all times have contrary to the fact been seen to be in United States dollars.

23. It may be conceded that the Bank did not follow the strict terms of the loan agreements and in particular that it did not as required by clause 5(a)(i) give notice to the respective borrowers of an agreement that the borrowing be in Swiss francs. For the Bank it was argued that, as a matter of fact, it had been shown that the Bank did agree to borrowings in Swiss francs and that agreement and the giving of notice were two separate things. While the Bank had failed to give notice of its agreement and thereby had been in breach of its contractual obligations so to do, nevertheless no damage could be said to have flown from the breach.

24. For the borrower it was however submitted that the giving of the notice was an integral part of the process of agreement and that without the giving of the notice there was no relevant agreement or proof of agreement.

25. In my view, subject to a question of waiver to which I will return, the agreements strictly construed brought about the result that unless there was notice by the Bank of its agreement not later than 3.00 pm prior to the commencement of an interest period the Bank was obliged to provide funds in United States dollars until the next interest period unless of course there was an agreement for borrowing in some other currency. On the facts of the present case it seems to me that the Bank was in breach of its obligation to provide United States dollars with the result, but for the question of waiver, that it would be liable in damages to the borrowers for failing to provide United States dollars.

26. However, although the agreement provided for notice of agreement to be given by a specific time, the borrower by its conduct in accepting the drawdown initially in Swiss francs, and for that matter each subsequent roll-over in the same currency notwithstanding that notice had not been given and confirmation was not given until a subsequent time, gave to the Bank ground to believe that precise performance on time as provided for in clause 5(a)(i) would not be insisted upon. It may well be that the waiver as constituted by such conduct went beyond the time for performance of the initial obligation and extended to the time for performance of all further obligations to give notice subsequent to the first drawdown, the extent of the waiver being a question of fact in the circumstances of each case. Cf. Mehmet v. Benson [1965] HCA 18; (1964-5) 113 CLR 295, 305 per Barwick CJ. The fact of the matter is that the borrowers by their conduct, by continued failure to insist upon the giving of the notice in writing at the stipulated time and continuing to accept the roll-overs in Swiss francs must be taken to have waived the condition in the agreement and thereby precluded themselves from now alleging that the Bank was in breach of its contractual obligations.

27. Thus in my view the first argument for the cross-defendants must fail.

28. For the borrowers it was argued that the combined effect of clauses 3(b) and 11.02 made it clear that clause 11.02 operates to impose a penalty. Clause 3(b) it was submitted, made it clear that during the currency of a loan, that is to say, in the currency of an "interest period", that rate of interest will be bank deposit rate plus 1.25 per cent. Clause 11.02 made it clear that in the event of default the rate will be 1.5 per cent above the rate that would have applied under clause 3(b). It was said that the consequence of this argument is either that no interest is payable as and from the time of the end of the interest period in which a default occurred, or alternatively, that the 1.5 per cent additional interest under clause 11.02 will not be payable.

29. It should perhaps be noted that there is a marginal difference in the wording between clauses 3(b) and 11.02 in that clause 3(b) refers to the rate at which the Bank can obtain deposits of the relevant currency whereas clause 11.02 refers to the rate at which the Bank was offered deposits of the relevant currency. However counsel for the Bank did not suggest that this made any difference and the argument proceeded on the basis that the rate of interest under clause 11.02 would always be greater than the rate of interest under clause 3.

30. Courts of equity and since the Judicature Act in the United Kingdom and its ultimate acceptance in Australia, courts of law will grant relief against provisions which impose a monetary penalty. The starting point of discussion in the United Kingdom is the judgment of Lord Dunedin in Dunlop Pneumatic Tyre Company Ltd v. New Garage & Motor Company Ltd [1914] UKHL 1; (1915) AC 79, 86-88. In that case his Lordship pointed out that "the essence of a penalty is a payment of money stipulated as in terrorem of the offending party". It was to be contrasted with liquidated damages being "a genuine covenanted pre-estimate of damage". The question, penalty or liquidated damages was "a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract". Among the tests used to resolve the question of construction was the question whether the sum stipulated for was "extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach."

31. In making the judgment penalty or no, the question is "not of words or of forms of speech, but of substance and of things": per Lord Radcliffe in Campbell Discount Co Ltd v. Bridge (1962) AC 600, 624 cited with approval by Gibbs CJ in O'Dea v. Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1982-83) 152 CLR 359. In Australia the doctrine of penalties has been considered by the High Court in a number of cases: IAC (Leasing) Ltd v. Humphrey [1972] HCA 1; (1971-72) 126 CLR 131; Allstates Leasing; AMEV-UDC Finance Ltd v. Austin [1986] HCA 63; (1986) 162 CLR 170 and Esanda Finance Corp Ltd v. Heinz Plessnig [1989] HCA 7; (1989) 63 ALJR 238, the first three being concerned with penalties in the context of leasing arrangements and the last in the context of a hire purchase agreement.

32. In distinguishing a penalty from a genuine pre-estimate of damage Mason and Wilson JJ in AMEV-UDC framed the test as :

"one of degree and will depend on a number of

circumstances, including (1) the degree of

disproportion between the stipulated sum and the

loss likely to be suffered by the plaintiff, a

factor relevant to the oppressiveness of the term

to the defendant, and (2) the nature of the

relationship between the contracting parties, a

factor relevant to the unconscionability of the

plaintiff's conduct in seeking to enforce the

term." (at p 193)

33. As their Honours observed, an observation repeated by Wilson and Toohey JJ in Esanda (at pp 240-241) the historical antecedents of the doctrine point to the requirement that an agreed sum be a penalty only if "extravagant, exorbitant or unconscionable" whereas later cases have struck down stipulations for the payment of an agreed sum merely because it was greater than the highest amount which could possibly be awarded for the relevant breach of contract. (cf. Cooden Engineering Co Ltd v. Stanford (1953) 1 QB 86 at p 98) In their Honours' view:

"there is much to be said for the view that the

courts should return to the Clydebank & Dunlop

concept, thereby allowing parties to a contract

greater latitude in determining what their rights

and liabilities will be, so that an agreed sum is

only characterised as a penalty if it is out of all

proportion to damage likely to be suffered as a

result of breach."

34. It seems clear from Esanda (at p 242) that the mere possibility of unfairness lurking in the calculation of the payment alleged to be a penalty will not be sufficient to characterise the payment as a penalty. There is room for some latitude. The matter is to be looked at from the point of view of the parties at the time of entering the transaction and will be a matter of degree.

35. It should be noted that Brennan J in Esanda at p 242 pointed out that where a stipulated sum is payable on the occurrence of a breach of contract, "whether serious or trifling in its consequences, there is a presumption that the sum is a penalty". However as Deane J in the same case pointed out the question is to be determined as a matter of substance. Thus a provision which operated to withdraw an incentive for observance by a defaulting party will not be penal in operation unless its operation is "as a matter of substance, to impose some additional or different financial obligation or burden upon the defaulting party in the nature of a disincentive or punishment for breach (cf. Acron Pacific Ltd v. Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514, at p 520)".

36. It has long been accepted that a provision in a mortgage that in the event of default in payment of instalments of principal, interest would be payable at a higher rate than would otherwise have been payable will be void as a penalty: Burton v. Slattery [1725] EngR 90; (1725) 5 Bro. Parl. Cas 233, 2 ER 648. See too Lady Holles v. Wyse [1693] EngR 18; (1693) 2 Vern 289. By way of comparison a stipulation in a mortgage for payment of a higher rate of interest but in the event of payment of the instalment on time, a lower rate is accepted, has equally long been regarded as good, the abatement of interest being said to be a condition which is not performed. The distinction may perhaps be thought to be one rather of form than of substance but is now so entrenched in the law that it would not be lightly set aside.

37. Where the parties to a contract have stipulated that a sum shall become payable on a certain event and that event has happened no question of penalty is said to arise. Thus a stipulation for a payment of a sum by the hirer under a hire purchase agreement if the owner should take possession of the goods: in re Apex Supply Co (1942) 1 Ch 108 or an agreement to pay a sum of money if the contracting party should resume playing professional football: Alder v. Moore (1961) 2 QB 57 are not cases of penalties. The explanation for such cases would seem to be that the event upon which the money is stated to become payable is not expressed as being a breach of contract but if that be so then again, the result owes more to form that to substance.

38. In General Credit & Discount Company v. Glegg (1883) 22 Ch D 549 a stipulation in a mortgage that if default were made in payment of an instalment on the due date a "commission" of (1 per cent for every month was also to be paid was held not to be a penalty. It was said that the stipulation was "in essence and in substance" not a contract for paying additional interest but rather a "contract to protect the lenders against a state of things which might possibly arise" and was "separate from the contract to pay interest". It was a "distinct, separate, substantive contract to pay something in case the borrower makes default. That is not an agreement in the nature of penalty" (at p 553).

39. With respect, while the result may have been correct in the General Credit & Discount Company case, that case seems to me to give undue emphasis to the label used by the parties. The inference, at least, from the case, is that if the amount had been called interest the result might well have been different.

40. In C J Belmore Pty Ltd v. AGC (General Finance) Ltd (1976) 1 NSWLR 507, a case with some similarity to the present, Wootten J of the Supreme Court of New South Wales held that a stipulation in a mortgage that on default in payment on the due date the mortgagee should be entitled to charge interest at 12 per cent simple interest, that being a higher rate than otherwise payable, was not void as a penalty. In so holding his Honour referred with approval to a passage from Meagher on Equity, p 379: "for to be a penalty a sum must be conditional for payment on breach, and if it is payable in performance of the contract then its payment is a principal obligation not a collateral disadvantage." It was said that on the facts before his Honour no payment was conditional on breach nor was the amount which accrued before breach in any way increased:

"The contract merely selects the time of default as

a time from which a new interest rate is applicable

for the future, and the interest becomes due, not

because of the breach, but because of continued

non-payment, subsequent to the breach, of the

amount of owing (sic). The interest rate nominated

is the only interest rate applicable under the

mortgage for the period after the due date of

instalments, and is not a higher interest rate

which becomes applicable only by reason of

default."

41. In support of his judgment Wootten J cited Burton v. Slattery supra, Herbert v. Salisbury & Yeovil Railway Co (1866) LR 2 Eq 221 and General Credit & Discount Co. v. Glegg (supra).

42. In the first it was actually held that where a mortgage secured debts to creditors and the sum nominally lent was to be paid by instalments, an agreement that the interest on those sums should rise on non-payment at the time appointed, or within three months thereafter from 5 to 8 per cent was good. However judgment was given for interest at 5 per cent until three months after the payments were due and thereafter at 8 per cent. No explanation is given for the result.

43. In the second a contract of sale provided for interest at 4 per cent from possession to completion or a nominated date and after that date at 5 per cent if the purchase money should not then be paid and at 8 per cent if not paid after a nominated date six months thereafter. It was held that the stipulation for payment of a higher rate of interest was not void as a penalty. Lord Romelly MR said of the law on the question that it was "somewhat refined, and leads to very nice distinctions". The ratio of the case which supports the view of Wootten J is to be found at p 225:

"Here the parties thought fit to enter into this

contract, that the rate of interest was to be 4 per

cent up to a certain date, 5 per cent for the next

half year and 8 per cent for every subsequent year.

I know of nothing to prevent persons from entering

into a contract of that description."

44. The third case to which I have referred above seems more to depend upon the label used than principles involving the doctrine of penalty and I do not find it helpful.

45. I have considerable difficulty in seeing how the C.J. Belmore Pty Ltd case can stand as a matter of principle with the general statement of principle expressed in the High Court, namely that regard is to be had to substance rather than form and that where the parties stipulate for the payment in the event of default of an agreed sum which is extravagant, exorbitant or unconscionable that agreed sum will be a penalty. I would prefer to rest my view of the present case on the basis that it does not seem to me that the additional 1.25 per cent interest in the event of default is extravagant, exorbitant or unconscionable. The mere fact that the interest rate is higher in the event of default does not result in the finding that there is a penalty. Rather, it seems to me that the additional rate of interest can be seen as being within the limits of a genuine pre-estimate by the parties at the time they made their bargain of the loss to the Bank in the event of default by the borrower. Cf. Citicorp Australia Ltd v. Hendry (1985) 4 NSWLR 1, at p 12E, 34F-35 F.

46. However if I were wrong as to this I would, as a matter of comity follow Wootten J, particularly as the present issue arises under the law of New South Wales being the applicable law to be applied by me: s.79 of the Judiciary Act 1901 (Cth) and the decision of Wootten J, in the light of the authority cited by him, could not be said to be clearly wrong.

47. Accordingly, it is not necessary to consider the arguments advanced by the Bank that if clause 11.02 was void as a penalty all that was void was the additional 1.25 per cent interest.

48. After argument had virtually completed, counsel for the Bank sought leave to amend the Bank's statement of cross claim so as to claim damages, in case I were to find that clause 11.02 constituted a penalty, or in the alternative interest under s.51A of the Federal Court Act. In the view I take of the matter the amendment was unnecessary. Had I been of the view that clause 11.02 was a penalty I would have granted the amendment so far as it related to interest and exercised the discretion under s.51A to award interest, no good cause having been shown to the contrary, accepting as the appropriate rate that rate which the parties had themselves agreed upon as appropriate under clause 3(b) of the loan agreement.

49. Section 261 of the Income Tax Assessment Act 1936 (Cth) provides relevantly as follows:

"(1) A covenant or stipulation in a mortgage,

which has or purports to have the purpose or effect

of imposing on the mortgagor the obligation of

paying income tax on the interest to be paid under

the mortgage -

(a) if the mortgage was entered into on or before

13 September 1915 - shall not be valid to

impose on the mortgagor the obligation of

paying income tax to any greater amount than

the amount (if any) which would have been

payable by the mortgagor if his taxable income

consisted solely of a sum equivalent to the

amount of interest to be paid under the

mortgage without taking into account any

income tax payable on that interest; and

(b) if the mortgage was entered into after that

date - shall be absolutely void.

(5) For the purposes of this section, "mortgage"

includes any charge, lien or encumbrance to secure

the repayment of money, and any collateral or

supplementary agreement, whether in writing or

otherwise, and whether or not it be one whereby the

terms of any mortgage are varied or supplemented,

or the due date for the payment of money secured by

mortgage is altered, or an extension of time for

payment is granted."

50. It is clear from the express provisions of s.128A(4) that withholding tax payable under Division 11A of Part III of the Act is, unless anything to the contrary appears in s.261 included within the words "income tax". Nor does it seem that s.261 evinces a contrary intention.

51. Section 261 has been in the income tax law since it was inserted as s.54 by Act No. 34 of 1915. In its initial form the section comprised only what is now s.261(1). In that form the section was considered by the High Court in Brett v. Barr Smith [1919] HCA 4; (1919) 26 CLR 87 where a covenant in a mortgage to pay interest at )5.75 per cent with a proviso that if the mortgagors should duly pay interest at such rate as would, after deducting certain taxes including Commonwealth income tax leave a clear remainder of (4.10 per cent then the mortgagees would accept that, in lieu of interest at )5.75 per cent, was held not to impinge the then section. In so holding the Court expressed the view that the words "covenant", "stipulation", imposing the "obligation" and "interest" to be paid under the mortgage were all technical expressions which should be given their normal legal meaning. Amendments were accordingly made in 1930, 1931 and 1932 to prevent avoidance of the section particularly having regard to the imposition of a special tax on property incomes. These amendments brought the section to its present form.

52. Although the history of the section, as demonstrated by the Parliamentary debates to which I was referred, illustrates that the section was introduced to protect mortgagors and contemplated relief against the mortgagee passing on income tax as normally understood rather than withholding tax, I doubt that the section can in the light of s.128A(4) be read as confined to income tax properly so called rather than withholding tax. It is however unnecessary for me to decide this issue because in my view s.261 does not really arise for decision in these proceedings.

53. For some time prior to default the borrowers paid interest and pursuant to clause 8(b) paid to the Bank an amount equal to the 10 per cent withholding tax which I assume was also paid. These payments, if clause 8(b) was, as result of s.261, void, were paid by the borrowers under a mistake of law, the mistake being that clause 8(b) required the payment to be made. So far as appears the payments were not made under protest; certainly there is no evidence of any such protest and indeed, it is highly doubtful whether the borrowers' case, as pleaded, claimed at all a recovery of amounts wrongfully paid under the clause. However I am content to assume that such a case was pleaded.

54. It is clear law that money paid under a mistake of law is not recoverable where the money is paid voluntarily, that is to say without compulsion or extortion or undue influence and with a knowledge of all the facts: Werrin v. The Commonwealth [1938] HCA 3; (1937-38) 59 CLR 150; Mason v. State of NSW [1959] HCA 5; (1958) 102 CLR 108; J & S Holdings v. NRMA [1982] FCA 78; (1982) 41 ALR 539. While there are undoubted difficulties in distinguishing those situations where a mistake of law is claimed from those where a mistake of fact is claimed, the present is in my view clearly a case where the mistake was one of law. In these circumstances the borrowers are precluded now from obtaining recovery of amounts which, if s.261 renders clause 8(b) void it was unnecessary to pay.

55. While the Bank claims interest to the date of judgment it does not claim any amount under clause 8(b) of the agreement. Hence in the present proceedings s.261 does not arise at all. When the borrowers come to pay the amount of interest as merged in the judgment, at that point they will be obliged to withhold tax under the Income Tax Assessment Act 1936, and once the withholding tax is paid to the Commissioner that payment will operate as a discharge to the borrowers: s.221YV. It will be at that stage, if at all, that an issue under s.261 could arise and then only if the Bank relying upon clause 8(b) calls upon the borrowers to pay in effect the amount of the withholding tax. That is not a matter before me and in the circumstances I do not believe it appropriate that I comment further upon the matter.

56. Counsel for the borrowers sought to argue that it was inappropriate that judgment be given in favour of the Bank in U.S. dollars. It was said that I should distinguish the judgment of the House of Lords in Miliangos v. George Frank (Textiles) Ltd. (1976) AC 443 on the basis that in the present case US dollars were not clearly the currency of payment. It was not suggested that if Miliangos could not be distinguished in this way I should not follow it and indeed it was conceded that Miliangos was good law in Australia. In Maschinenfabrik Augsburg - Nurenburg Aktiengesellschaft v. Altikar Pty Ltd (1984) 3 NSWLR 152 Rogers J of the Supreme Court of New South Wales indicated that the judges of that Court sitting in the Commercial List had regularly entered judgments for plaintiffs in foreign currency. His Honour referred also to the decision of Yeldham J sitting in admiralty in Mitsui OSK Lines Ltd v. The Ship "Mineral Transporter" (1983) 2 NSWLR 564 where, albeit without reference to Miliangos his Honour gave judgment in Japanese yen being the currency that best expressed the plaintiff's loss.

57. In Miliangos Swiss francs were, under a contract the proper law of which was Switzerland, the currency of the contract and the money of payment. In these circumstances the House of Lords having regard to the instability of currencies held that judgment could be entered in Swiss francs. The rule was confined by Lord Wilberforce at p 467 to claims such as those before the house being claims where the:

" obligations of a money character to pay foreign

currency arising under a contract whose proper law

is that of a foreign country and where the money of

account and payment is that of that country, or

possibly of some other country but not of the

United Kingdom."

58. The loan agreement pursuant to which at least initially the foreign currency amount arises is governed by the law of New South Wales. If it matters, so too are the mortgages. However it is clear from clause 4(b) of the loan agreement that, the loan being denominated in United States dollars, it was required to be repaid in United States dollars. Although the agreement envisages that the Bank shall be given an opportunity to sell to the borrower United States dollars to meet the obligation it does not follow from that that the Australian dollar is the unit of payment. In my view, the proper construction of the loan agreement is that both the currency of account and the currency of payment is United States dollars so that Miliangos is not for that reason distinguishable.

59. It is true that in Miliangos, the proper law of the contract was the same jurisdiction as the country of the currency of account. However the borrowers have not suggested that Miliangos should be distinguished on this account. Indeed, with respect, once it is acknowledged that the Courts may give judgment in foreign currency in matters where the transaction between the parties is expressed in foreign currency it seems to me, in the present state of regular currency upheaval that justice can only be done if judgment is entered in the currency chosen by the parties and that the proper law of the contract is somewhat irrelevant.

60. Accordingly I would propose to enter judgment for the cross-claimant (first respondent) against the first applicant (first cross-respondent) in the sum of US$1,098,066.60 together with interest to the date of judgment at the daily rate of US$365.78 and against the second applicant (second cross-respondent) in the sum of US$284,525.64 together with interest to the date of judgment at the daily rate of US$95.77 and I direct the first respondent to bring in short minutes of order to give effect to this judgment.