Spira and 5 Ors v Commonwealth Bank of Australia

RESPONDENT Commonwealth Bank of Australia FILE NUMBER(S) : CA 41138/02 COUNSEL : R Macfarlan QC/P Durack/D Glass M Walton SC/R Hollo SOLICITORS : Middletons (Appellants) L E Taylor (Respondent)

LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT SC 50066/01 FILE NUMBER(S) : LOWER COURT Gzell J JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41138/02

HANDLEY JA BEAZLEY JA TOBIAS JA

1 SEPTEMBER 2003 JOHN SPIRA & 5 ORS v THE COMMONWEALTH BANK OF AUSTRALIA

BANKING - implied term of good faith conduct - threats of acts which if committed would breach implied term - threats anticipatory breach but not actual breach

CONTRACT - implied term of good faith conduct - threats of acts which if committed would breach implied term - threats anticipatory breach but not actual breach

TORTS - intimidation - threat of unlawful action tortious - breach of contract unlawful - threat of breach tortious

TRADE PRACTICES - unconscionable conduct - agreement by Bank to provide further accommodation on terms - customer had no alternative but to accept - conduct of Bank not unconscionable - s 51AA not contravened FACTS

In September 1998 the Bank offered to provide the Diamond Press Group of Companies with a package of financial accommodation which totalled $108M. This offer was accepted and a formal facility was executed which included a bill discount facility for $68M. At the time the parties expected that the Group would soon be floated on the Stock Exchange but it had no obligation to the Bank to take this course. In the event of a float the Group was bound to make a principal repayment of $18M under the bill discount facility. In late September that Facility was increased to $71M. In October the Group's managing director decided that the float would not proceed at that stage.

In early December the Bank refused to permit the Group to draw down the remaining $3M under the bill discount facility on the ground that this was not available to the Group as a source of working capital. This refusal was a breach of contract by the Bank.

At a meeting with the Bank on 18 December the Group's managing director requested additional accommodation of $8M (which included the outstanding $3M). At the same time he presented accounting projections to 31 December which appeared to disclose prospective breaches of the Group's interest cover and gearing covenants at that date. At a further meeting on 19 January revised figures then presented disclosed the need for additional accommodation of $13M (which included the outstanding $3M), and what were thought to be breaches of covenant.

On 24 February the Bank offered to increase the bill discount facility by $18M (including the undrawn $3M), to relax the interest cover and gearing covenants so that the Group would no longer be in breach but to require a principal repayment of $20M by 31 December 1999. The most likely source of such a repayment was a float of the Group.

By that time the Group was in urgent need of further funds. During the negotiations Bank officers said that the breaches of covenant was serious and that the Bank could appoint a receiver. The managing director of the Group took this as a threat. In fact the apparent breaches of covenant disclosed to the Bank were not breaches at that time but at worst foreshadowed breaches as at 30 June 1999. However the managing director and the Bank officers acted on the mistaken belief that the Group had breached these covenants. The existence of actual breaches would entitle the Bank to withhold further accommodation under the facility. The Group accepted the amended facility on the terms offered and secured access to the additional accommodation. The principal repayment of $20M was not made before the 31 December 1999 but the Bank extended the time for repayment by twelve months. This repayment was substantially effected during the year ended 31 December 2000 but the Group was placed under voluntary administration on 31 March 2001 and went into liquidation on 2 July that year.

When the bank sued the managing director and various companies under the facility and their guarantees the defendants brought cross-claims for breach of an alleged implied term of good faith and for unconscionable conduct contrary to s 51AA of the Trade Practices Act. The trial Judge dismissed these claims and the cross-claimants appealed.

HELD: (1) The Bank's refusal to permit the remaining $3M under the bill discount facility to be drawn down was a breach of contract, but the Group had not proved that it suffered any damage as a result of this breach; (2) The tort of intimidation covered threats of unlawful action but the requirement of good faith on the part of the Bank which the trial Judge had found was an implied term of the facility and the securities did not extend to threats to do acts which, if and when committed, would be a breach of the implied term; (3) Such conduct might be an anticipatory breach of contract or tortious, but was not an actual breach; (4) Although the Group had no alternative but to accept the Bank's revised offer on 1 March 1999 because of its need for further working capital it was not under a "special disadvantage" for the purposes of s 51AA, and the Bank's conduct leading to the amendment of its facility on that date was not unconscionable. ACCC v C G Berbatis Holdings Pty Ltd (2003) 77 ALJR 926 applied. ORDERS

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41138/02

HANDLEY JA BEAZLEY JA TOBIAS JA

1 SEPTEMBER 2003 JOHN SPIRA & 5 ORS v THE COMMONWEALTH BANK OF AUSTRALIA Judgment 1 HANDLEY JA: On 30 March 2001 the companies of the Diamond Press Group were placed under voluntary administration by Mr Spira, their managing director. On 2 July 2001 the companies went into liquidation and the administrators became liquidators. These events marked the end of Mr Spira's connection with a printing business which he had begun with a partner in 1972. 2 The Commonwealth Bank became the Group's banker pursuant to a Facility Agreement (the Facility) on 23 September 1998 and remained its banker until the voluntary administration. Mr Spira guaranteed the Group's debt pursuant to the Facility. 3 On 4 May 2001 the Bank made a demand upon Mr Spira to pay $74,303,602.10 owing under the guarantee. The Bank held security over companies in the Group. During August 2002 the Bank made demands on the companies and Mr Spira to pay $52,100,411.46 which remained owing after enforcement of its securities. In September 2002 the Bank sued Mr Spira and the companies for $51,705,616.97. At the trial the Bank obtained judgment for this amount with interest. 4 The defendants brought cross-claims against the Bank. Mr Spira claimed declarations that the Bank had engaged in conduct that was misleading and deceptive or unconscionable. The latter allegation was made in respect of the Bank's conduct before variations of the Facility were agreed to in March and December 1999. Orders were sought setting aside those variations, Mr Spira's guarantee, and the Bank's securities. Damages were sought under the Trade Practices Act and for breach of the Facility. The companies claimed the same relief. 5 Damages were sought for the loss of the value of the Group. As at 1 April 2001 this was said to be $33,428,000 (9/2285, 2286). 6 The cross-claims were based principally on the events of August/September 1998 leading up to the execution of the Facility and those between December 1998 and March 1999 leading up to the execution of the amended Facility of 1 March. The cross-claimants have appealed from the dismissal of their cross-claims. 7 During August 1998 the Group, which then banked with Colonial State Bank, was seeking to change banks and it conducted an informal tender with other banks, including the Commonwealth Bank. The Group's relationship with the Colonial State Bank had broken down and both parties wanted to end the relationship. 8 On 28 August a meeting took place at the Commonwealth Bank, 48 Martin Place, Sydney, between Mr Spira and some of his executives and senior officers of the Bank including Mr McCoy and Mr Dennis. As a result of these discussions Mr Spira decided to place the Group's banking business with the Commonwealth Bank. A credit submission prepared by Mr McCoy and Mr Dennis was submitted to higher management on 2 September and approved immediately. It became the basis of a written offer sent to Mr Spira the same day which attached a summary of the accommodation offered (13/3317-25). 9 The accommodation of $108M was "to refinance existing facilities provided by the Colonial State Bank and other equipment financiers and to provide for future equipment finance requirements". The Bank said it was prepared to discuss additional funding for acquisitions "following completion of the partial float of the company". The accommodation included a five year bill discount facility of $68M to be repaid at the end of the term and an equipment finance facility of $38M. The summary stated: " Purpose 1. Refinance existing facilities of approximately $95M provided by Colonial State Bank and various equipment finance providers; 2. Finance capital expenditure of approximately $10M" 10 Arrangements for a partial float of the parent company (the Borrower) on the Stock Exchange were underway and the parties expected that this would occur later that year. An underwriting agreement with Bridges Financial Services Pty Ltd (Bridges) had been signed on 5 August. 11 The summary referred to the proposed float in a number of places. The Bank required guarantees from John Spira Investments Pty Ltd and Mr Spira which were to be released upon completion of the float. The bill discount facility of $68M was subject to a principal reduction of $18M from the proceeds of the float. The Bank reserved the right to increase its interest rates, fees and margins if shares in the Borrower were not listed by 31 March 1999. It required first ranking registered charges over the issued shares in the group companies which were also to be released on completion of the float. However the Borrower had no obligation to float. 12 The summary stated that it was "subject to documents satisfactory to the Bank being agreed and signed within a reasonable period after acceptance. Until documentation is signed, the Bank will have no obligation to provide accommodation under the Facility". 13 The Facility (10/2370) was a 72 page document. It did not impose any obligation on the Borrower to float and failure to do so was not an event of default. There were provisions which required the Group to comply with financial ratios relating to its gearing and interest cover (10/2408).

14 The letter of offer was not expressly incorporated and the Facility did not restrict the purposes for which the Borrower could use the bill accommodation (2380, 2428). The Borrower had to give an accommodation notice to the Bank in accordance with cl 3.3 (2395) to obtain a draw down but there was no requirement either there or in the bill discount facility for the notice to state the purpose for which the funds were required (2430). 15 On 28 September Mr Skettos, the finance director of the Borrower, spoke to Mr McCoy and asked for the equipment finance facility to be reduced by $3M and for the bill discount facility to be increased by the same amount to $71M. Nothing was said to restrict the purpose for which the additional funds could be drawn down under the bill discount facility. This and other changes were documented on 30 September (13/3382). On the same day the Borrower drew down $61M under the bill discount facility. 16 Mr Spira discussed the proposed float with the Bank at meetings on 6 and 7 October. The share market had become volatile as a result of Russia defaulting on its obligations to bond holders and Mr Spira believed he would not obtain a proper price for his shares. He had also been approached by an overseas company for a possible takeover at an indicated price which was substantially higher than the value on which a partial float would be based. 17 On 16 October Mr Spira told Mr McCoy and Mr Dennis, during a visit to the Group's plant in Melbourne, that he had cancelled the float (14/3415). In fact on 13 October he had written to the underwriter confirming cancellation with effect from 7 October (14/3414). 18 During this period the Bank officers, who had negotiated the Facility, voiced no objection to the cancellation of the float. They did not suggest that this was a breach of the Facility or that the Borrower would be disadvantaged in its future dealings with the Bank. 19 The Borrower drew down further funds from the bill discount facility on 26 October ($5M: black 4/786), and on 30 November ($2M: black 4/786) without objection from the Bank although the funds were used for working capital. The last draw down exhausted the $68M allowed by the original bill discount facility, but the additional $3M authorised by the amended Facility of 30 September was still available. 20 On 26 November Mr Randall from the Borrower spoke to Mr McCoy and said that Mr Spira wanted the unused facility limit in the equipment finance facility transferred to the bill discount facility (14/3432). The next day Mr McCoy raised the matter in an internal e-mail (14/3439) which stated: "John Spira is seeing his receivables blow out … due to higher than expected sales and major accounts not paying on time … and wants to have facilities in place to cover this. Existing approval was limited to refinancing so I'm not expecting there to be $3M available anyway … [the Borrower] would not be able to draw down for the working capital purpose … do you wish to say no further funds are available (as the approved purpose has been exhausted) or apply for additional limit …" 21 The Borrower attempted to draw down the remaining $3M during the week ending 4 December but its request was refused on the ground that the Facility had only been granted to refinance an existing facility. However Mr Dennis noted that the Bank's approval letter was not sufficiently clear and that it was reasonable for Mr Spira to conclude that the $3M was available (14/3446). It was Mr McCoy who took the view that the balance was not available for working capital (14/3448 H-I). 22 On 14 December Mr Morris of the Bank sent an e-mail (3448) to Mr Ellem which reviewed the position concerning the undrawn $3M. He referred to Mr McCoy's view that the funds were not available for working capital. He referred to the executive summary and background paper (13/3299) which accompanied the credit submission of 2 September which stated that the Bank was being asked to provide additional facilities for increased working capital. For this and other reasons he concluded "clearly … there was the intention for some flexibility in usage". He continued "we are meeting with the company this Friday and it is hoped that we can confirm the availability of remaining limits for working capital purposes. Could you please consider or advise who can look at this for us prior to Friday's meeting". In an e-mail on 22 February, copied to Mr McCoy, Mr Morris referred to "the bank's incorrect withdrawal of some of the offered facilities leading to cash flow difficulties" (15/3646). 23 On 15 December Mr Ellem sent an e-mail to Mr Williams (3460) which said: "Please look into the request closely as the facilities were only recently approved/funded and the possibility of requiring this increase was not foreshadowed in the submission or when the proposal was tabled at the Review Panel. We need to make sure that this request is not the thin end of the wedge related to over trading." 24 His references to the thin end of the wedge were prescient because at a meeting on 18 December (3462) Mr Spira sought an "additional" $8M (this included the outstanding $3M) to meet working capital requirements. He produced balance sheet projections for the 6 months ending 31 December 1998 and the 12 months ending 30 June 1999 and drew attention to the fact that the interest cover and gearing covenants might be breached marginally. Mr Dennis in his call report noted that this needed to be flagged to Risk Management for appropriate action. 25 Early in January Mr Spira asked Mr Dennis about the covenants because he had not heard from the Bank. Mr Dennis told him not to worry as the changes were in the pipeline (5/1001-2). A meeting with Mr McCoy and Mr Dennis took place at the Borrower's premises in Alexandria on 19 January when Mr Spira presented a written request (14/3518-39) for an additional $8M (this included the outstanding $3M) (14/3519). After looking at this request which included cash flow projections Mr McCoy said that the Borrower really needed a total of $13M up to October 1999 (3536, 3539). 26 Mr Dennis' call report (14/3516) said that the Borrower had convinced the Bank's representatives that it was not over trading, but it needed additional finance on its bill discount facility of $13M, and the Bank needed to address or mitigate the covenant breaches. 27 On 25 January Mr McCoy became aware that the Borrower was one payment in arrears under its Master Hire Agreement with the Bank on six accounts for a total of $547,463.85. He drew this to the attention of Mr Skettos and followed up with a fax to Mr Spira on 27 January (14/3548). This referred to breaches of the interest cover and gearing covenants as at 31 December and stated that the Bank reserved its rights in respect of these breaches and the arrears. According to Mr Spira he rang Mr Dennis to protest. Mr Dennis told him not to take any notice as this was standard procedure. The Bank would get a new approval in place and the situation would be sorted out. 28 The Judge rejected this evidence because Mr Dennis had not recorded this conversation in a call report (para 82). The Judge was mistaken because Mr Dennis made a note of this conversation on his copy of the fax (14/3548) and referred to it in his call report of the meeting with Mr Spira later that day (14/3552). 29 During that meeting Mr McCoy apologised and accepted responsibility for the fact that the Bank's approval had been drafted too tightly and did not cover working capital requirements. He added that the Bank would have conducted the current investigations anyway because of the covenant breaches. Mr Spira said that he saw the move to a public company as inevitable but it was a matter of picking the best time. He knew that he might approach the point where the Borrower had no flexibility for growth because of balance sheet constraints (3552-3). 30 On 4 February Mr Spira telephoned Mr Dennis to ask when the company could expect to hear from the Bank. Mr Dennis said that this was unlikely until the middle of the following week but he saw no difficulties with the request. He warned Mr Spira about a pending increase in pricing. Mr Spira recognised that the Borrower was not as strong as the Bank thought it would be when it "was pretty convinced the float would proceed". He said he was having discussions with Bridges and was hopeful that a detailed proposal could be produced to the Bank within three months. He wanted his current application processed quickly because of cash flow difficulties and said that the Borrower would not be in this predicament if the Bank had handled the original application properly (3585-6). 31 On 8 February there was another meeting between Mr Spira and others with Mr McCoy and Mr Dennis (3590-1). Mr Spira agreed that the Borrower needed to obtain additional equity "probably within the next two years" and said he was hopeful of arranging a partial float within six months. The bank officers said that sooner or later the Bank would refuse to increase its level of debt finance if the equity base could not be improved to match likely business levels. 32 Mr McCoy said the Bank regarded the covenant breaches "seriously". Mr Spira said that the breaches were relatively minor and he hoped the Bank would react on this basis. The bank officers said that consideration would be given to amendments as discussed but the Borrower was sailing too close to the wind. Mr Spira said he was becoming increasingly concerned about the delays because additional working capital was needed urgently. Mr McCoy said that the delays were caused by difficulties in getting financial information from the Borrower. The call report concluded with a statement that the Bank officers were satisfied that Mr Spira was "serious in his intention to float … and provided market conditions hold up … intends to do so within 6 months … he clearly understands the company cannot continue to expand via the use of debt financing". 33 In an e-mail (3592) to Mr Morris after this meeting Mr McCoy said that the Base Case cash flows showed that the Borrower had no capacity to amortise any of the debt during the facility term of five years and noted that it was committed to capital expenditure of $17M a year in the current financial year and the next. Mr Skettos provided additional financial information to Mr McCoy on 9 and 11 February (14/3594, 3597, 3601). 34 The credit submission was dated 22 February (15/3619). It recommended waiver of the breaches of covenant and their amendment, approval for the increased funding, increased pricing, a reduction in the term of the bill discount facility to four years and additional conditions. These included a requirement for the Borrower to float by 31 December 1999 to raise at least $20M for permanent debt reduction. In his comments Mr Ellem said that the covenant breaches were "fairly nominal" and the trading results acceptable but it was not certain that the float would proceed (3621). 35 Mr Pike in his comments (3621) said it was disappointing to see breaches so soon but they were "modest" and the explanation for the gearing (inter group loans for the transfer of tax losses) reasonable. The business appeared robust but "management needs to be more disciplined in pursuit of growth which cannot be internally funded" and this was the maximum exposure he was prepared to entertain pre-float. The recommendations of Mr McCoy and Mr Dennis were accepted with slight changes and a written offer of increased accommodation on revised terms was made to Mr Spira by fax on 24 February (15/3656). 36 There was a meeting later that day attended by Mr Spira and Mr Skettos, Mr McCoy and Mr Dennis, but no call report was made. According to Mr Spira (first affidavit 5/1007-8 as amended by his third affidavit 9/2339) Mr McCoy said that Mr Spira had no credibility because he had not floated. This provoked a protest from Mr Spira based on assurances he had been given at the meeting of 28 August and his discussions with the Bank in October. Some parts of his version were denied by Mr McCoy (blue 1/32-33), but he did not deny saying that Mr Spira had lost credibility, or "you don't realise how serious things are - we could call in the whole facility or appoint a receiver". Nor did he deny that when Mr Spira said "how am I ever going to get a float underwritten if it's a term of my financial facility that I have to float", he replied "that's a good point. We certainly want the facility reduced though". There is no reason for rejecting Mr Spira's evidence about this meeting which was not denied by Mr McCoy. 37 The Bank accepted Mr Spira's point and substituted a requirement for a principal reduction of $20M by 31 December. On 1 March Mr McCoy sent the revised offer by fax to Mr Spira (15/3708). This required Mr Spira's formal acceptance which was given immediately (3712). The Borrower drew down $3M the same day (black 4/786), and a further $1M on 11 March (787). 38 Later events leading to the appointment of administrators on 30 March 2001 are only of marginal relevance except on causation and damages. 39 The appellants' first claim was that the Bank's refusal to permit the Borrower to draw down the final $3M under the Facility was a breach of contract. Their other claims were that the Bank's conduct during the negotiations between December 1998 and March 1999 was a breach of an implied term that it would act toward the Borrower in good faith, and was unconscionable in contravention of s 51AA of the Trade Practices Act. This section is relevant because it seems that the financial accommodation provided to the Borrower did not involve the provision of financial services within the meaning of s 51AAB. The contrary was not suggested. 40 The implied term in the amended cross-claims (red 22, 66) was: "It was an implied term of the Contracts and in particular the Facility Agreement and Securities that the Bank would exercise its powers and discretions under the Contracts in good faith, fairly, and reasonably and for the purpose for which they were given." 41 The breaches of contract pleaded (red 38, 82) included the Bank's assertions during the negotiations between December 1998 and March 1999 that the Borrower was in breach of financial covenants, that it had no credibility with the Bank because it had not floated and that the Bank might declare monies immediately due and payable and appoint a receiver (31, 75). 42 These assertions did not involve the exercise by the Bank of powers and discretions under the Facility or the securities and could not be breaches of the implied term. During argument the Court drew attention to this and Mr Macfarlan QC, for the appellants, subsequently sought leave to amend to add "and the Bank would not threaten to exercise them in any different manner". 43 The recognition of an implied term involves a question of law whether it is sought to be implied ad hoc, as a matter of construction, (Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 345) or as a legal incident of a particular type of contract. The breaches pleaded raised the necessary issues of fact and these had been litigated. 44 The implied term as proposed to be amended raised a new question of law which had not been litigated but Mr Walton SC for the Bank did not claim that it could have been met with evidence if it had been raised at the trial. The amendment should therefore be allowed. See Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 438. 45 As already mentioned the Facility did not expressly limit the purposes for which the Borrower could use the accommodation provided by the bill discount facility. Mr Walton submitted that the offer of 2 September and its acceptance constituted a preliminary contract which was not superseded by the Facility and we were referred to Ticehurst v Moore (1907) 7 SR (NSW) 202. However the offer of 2 September was expressed to be "subject to documents … being agreed and signed" [para 12] and the principles in Masters v Cameron (1954) 91 CLR 353 apply. 46 Thus the statement in the offer of 2 September of the purposes for which the accommodation would be available to the Borrower was not binding and the Facility contained no relevant restrictions [para 14]. Subject to compliance with procedural formalities the Borrower, if not in breach, was entitled to draw down accommodation for use as it saw fit. The Bank therefore committed a breach of contract when it refused to permit the Borrower to draw down the remaining $3M and is liable in damages for the delay in providing this financial accommodation. There was no evidence that the Borrower suffered any quantifiable loss from the breach. 47 The Judge found that the Facility contained the implied good faith term pleaded. However that term was not breached prior to the amendment of the Facility in March 1999 because the Bank neither exercised nor purported to exercise any power or discretion under the Facility or securities [para 42]. 48 The threshold question for this Court is whether the wider implied term, now pleaded, should be recognised. There is no support in the existing case law for the recognition of an implied term in this form. Threats of breach of contract are not new but hitherto they have been treated by the law of contract either as an anticipatory breach or a repudiation. The doctrines of repudiation and anticipatory breach do not depend on implied terms. 49 Threats to commit a breach of contract are wrongful and where they involve a repudiation the innocent party has an immediate right to rescind for breach and sue for damages. An innocent party who elects to affirm the contract has no right to damages for breach of contract at that stage. If the repudiation continues he will have a continuing right to rescind and when the time for performance arrives a right to damages for the actual breach. Where a party threatens to commit a breach of contract to coerce the other party into taking or refraining from taking some action the innocent party has a cause of action for the tort of intimidation. See Rookes v Barnard [1964] AC 1129; Latham v Singleton [1981] 2 NSWLR 843. 50 Since a threat to commit a breach of contract can be a tort there is no reason for implying a contractual term to achieve an equivalent result. Moreover any such implied term could not be limited to contracts which contain an express or implied term requiring good faith. The law of tort provides remedies for deceit and duress which do not depend on implied terms and there is no reason to recognise an implied term which would overlap the tort of intimidation. The appellants' case based on breach of an implied term of good faith fails. 51 The appellants did not plead causes of action in intimidation or economic duress. 52 The appellants' claim that the Bank engaged in unconscionable conduct depends on the cumulative effect of its conduct during this period. This included its breach of contract in refusing to allow the Borrower to access the remaining $3M, and its claims that the Borrower was in breach of its financial covenants. It also included Mr McCoy's statements that it had lost all credibility, that its breaches of covenants were serious, and that the Bank was entitled to call up the debt and appoint a receiver. 53 Mr Spira drew attention to breaches of the financial covenants at the meeting on 18 December [para 24] based on projected accounts for the six months to 31 December 1998 and for the twelve months to 30 June 1999. 54 The documents presented at the meeting of 19 January [para 25] included an unaudited balance sheet and profit and loss account to 31 December and a projected balance sheet to 30 June 1999 (14/3534-5). These appeared to show non-compliance at both dates with the covenants relating to gearing and interest cover. The Bank referred to breaches of these covenants during the later negotiations [paras 27, 32] and in its internal consideration of the credit submission [paras 34, 35]. 55 The Facility contained the Borrower's covenants as to its interest cover and gearing ratio (10/2408). Although these were expressed in broad terms in cl 10.2 ("at any time while there is any Accommodation outstanding") their effective operation was limited. The interest cover was the ratio that Earnings before Interest and Tax (EBIT) as defined (2379) bore to Interest Expense as defined (2384). This depended on consolidated accounts for twelve month periods ending 31 December and 30 June. 56 Clause 10.1 required the Borrower to furnish to the Bank copies of its audited accounts and audited consolidated accounts for the Group within 90 days of the end of each financial year and copies of unaudited accounts for the first six months of each financial year within 60 days of the end of that period. (2403). Within 90 days of the end of each financial year it had to furnish auditors' certificates confirming compliance by the Borrower and the Group with the financial covenants (2404). The Borrower was also required to immediately advise the Bank of any event of default or potential event of default (cl 10.1(d)(i): 2405). The former included any breach of the Borrower's covenants (cl 11.1(b)(i): 2410). 57 The accounts presented were not for the preceding twelve months as required by the definition of EBIT (2379). The required cover depended upon the Group's earnings for the whole twelve months and an apparent non-compliance during the last six months could have been covered by a margin during the first six months. Thus the projected and actual accounts for the six months to 31 December 1998 did not show an actual breach of this covenant. 58 The gearing covenant (2408) was that the ratio of Shareholders Funds to Total Tangible Assets was to be not less than 35%. Shareholders Funds were Total Tangible Assets less Total Indebtedness, and both were defined by reference to the latest Audited Consolidated Balance Sheet of the Group (2386, 2390). Since the Borrower was only bound to furnish audited accounts for a complete financial year (2403), a breach of this covenant could only occur as at 30 June. There was no actual breach as at 31 December 1998. 59 Although there were no actual breaches as at 31 December both parties acted on the contrary assumption. This was not the Bank's fault. On 18 December Mr Spira told the Bank officers there would be breaches and his projected and later his actual accounts to 31 December appeared to show this. The Bank officers accepted this information at face value and did not investigate its correctness. Mr Spira continued to accept the existence of these breaches in the face of the Bank's reliance on them and its insistence on a reduction of $20M in the bill discount facility by 31 December 1999. 60 This means that the appellants obtain no assistance from the Bank's reliance on these supposed breaches for their case on unconscionable conduct. Proof of a relevant state of mind or some fault is required to establish a cause of action for contravention of s 51AA. This is not established where both parties, in good faith, labour under the same mistake, especially when the mistake originates in the plaintiff's camp. 61 However there was no reasonable basis for Mr McCoy's statement at the meeting of 24 February [para 36] that Mr Spira had lost all credibility with the Bank because the Borrower had not floated. There was no contractual obligation to float and the Facility contemplated that this might not occur. Moreover the Bank had been fully consulted before the decision to abandon the float [paras 16-18]. Mr McCoy had been personally involved and was aware of the facts. 62 His statement reflected the attitude of Mr Pike and Mr McCoy accepted it and passed it on without attempting to set the record straight. He made this statement to Mr Spira without any qualification when he knew that the Bank's attitude was totally unjustified. This conduct is relevant. 63 The Bank's letter of 27 January [para 27], which reserved its rights arising from the overdue payment of $547,463.85 and the breaches of covenant, was a reasonable response to the situation. The arrears were substantial and the Bank did not know how quickly they would be remedied or what explanation if any the Borrower might have. The letter did not contain any threat, although it was likely to make Mr Spira uncomfortable, as it did [para 27]. 64 The other conduct relied upon was Mr McCoy's statement that the Bank regarded the covenant breaches seriously [paras 32, 36] and it could call in the whole facility or appoint a receiver [para 36]. If the statement on 8 February that the Bank regarded the covenant breaches seriously [para 32] had stood alone it might have been considered relatively harmless, especially as the Bank officers said that consideration would be given to amendments which would rectify the breaches. However the statement was repeated during the meeting on 24 February with the statement that the Bank could call in the whole facility or appoint a receiver [para 36]. 65 Mr Spira said that he complained at that meeting about the requirement for a principal repayment of $20M and demanded that the Bank withdraw it. His principal objection was that the need for such a repayment had not been agreed or discussed during the earlier negotiations (black 1/206, 209; 2/291). The Judge found that Mr Spira did complain about this requirement (para 105) but that his principal concern was the requirement that repayment be made from the proceeds of a float (paras 102, 105). 66 The appellants challenged the latter finding and asked the Court to substitute a finding that Mr Spira was just as concerned about the requirement for a repayment of principal. In his dealings with the Bank during this period Mr Spira acknowledged that the Borrower had to widen its equity base by a float. He did this on 19 January [para 29], 4 February [para 30], and 8 February [paras 31-2] without any pressure from the Bank. He had already re-opened negotiations with Bridges with a view to a float within the next six months [paras 30, 32]. 67 Mr Spira did not mention in his first or second affidavits that he voiced any objection at this time to the repayment of principal as such. In his third affidavit he mentioned this but in a conversation with Mr Dennis on 1 March (9/2340). In cross-examination (1/209) he said for the first time that at the meeting of 24 February [para 36] he objected strongly to any requirement for a principal repayment. Although the Judge accepted this evidence, he was entitled, having regard to the way in which Mr Spira's evidence on this topic emerged, to treat this objection as secondary, especially as he had seen and heard him in the witness box. Mr Spira himself said that his "immediate requirement" for additional working capital was his "major concern" (black 1/210). The Court is not entitled to disturb this finding. 68 Mr McCoy's statement that the Bank could call in the whole facility or appoint a receiver [para 36] was seen by Mr Spira as a threat (5/1009) and made without any qualification, can properly be viewed as such. He should not have said it, at least in an unqualified form, since he knew that Mr Ellem regarded the breaches as "fairly nominal" and Mr Pike thought they were "modest" [paras 34-5]. 69 Threats per se are not unlawful. In Barton v Armstrong [1976] AC 104, 121, Lord Wilberforce and Lord Simon of Glaisdale said: "… in life, including the life of commerce and finance, many acts are done under pressure, sometimes overwhelming pressure, so that one can say that the actor had no choice but to act. Absence of choice in this sense does not negate consent in law: for this the pressure must be one of a kind which the law does not regard as legitimate. Thus, out of the various means by which consent may be obtained - advice, persuasion, influence, inducement, representation, commercial pressure - the law has come to select some which it will not accept as a reason for voluntary action: fraud, abuse of relation of confidence, undue influence, duress or coercion." 70 In Rookes v Barnard [1964] AC 1129 Lord Reid said (1168): "so long as the defendant only threatens to do what he has a legal right to do he is on safe ground". At 1206-7 Lord Devlin said: "The line must be drawn according to the law. It cannot be said that to use a threat of any sort is per se unlawful; I do not see how, except in relation to the nature of the act threatened, ie, whether it is lawful or unlawful, one could satisfactorily distinguish between a lawful and an unlawful threat … It cannot be said that every form of coercion is wrong. A dividing line must be drawn and the natural line runs between what is lawful and unlawful as against the party threatened. If the defendant threatens something that that party cannot legally resist, [that party] must put up with the coercion and its results." 71 At 1234 Lord Pearce said: "Somewhere one must draw the line between pressure or coercion that may be permitted and that which may not. It is logical for the law to say that while a man may threaten to use all the means to which he is strictly entitled by law … yet he shall not threaten to use any means to which is not so entitled." 72 These issues were discussed by McHugh JA in Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 46: "The proper approach … is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct … will not necessarily constitute economic duress." 73 In this, as in other situations, ignorance of the law should be no excuse. There must be a deliberate threat, and the act threatened must be unlawful, but there is no requirement that the defendant should be aware that it is unlawful. 74 Any attempt by the Bank in February 1999 to call up the whole facility and appoint a receiver would have been a breach of the implied term of good faith found by the Judge. Such action would not have been justified because the Bank's higher management thought that the breaches were nominal or modest, and the breach relating to the Master Hire Agreement had been remedied. The threat to appoint a receiver was therefore unlawful. 75 The appellants have therefore established a breach of contract by the Bank with regard to the $3M, an unlawful threat by Mr McCoy on 24 February, and his true but wholly unjustified statement the same day that Mr Spira had lost all credibility with the Bank. 76 The Borrower was entitled to draw down the available accommodation subject to a condition in cl 2.2 (10/2394) "that no Event of Default or Potential Event of Default has occurred …". Potential Event of Default was defined (2385) as: "any event or circumstance which, with the giving of notice, passage of time, fulfilment of any condition or any combination thereof, would constitute an Event of Default." 77 Non-compliance with the interest cover and gearing covenants as at 31 December 1998 were not potential events of default because the Group's trading for the next six months, or in the case of the interest cover, for the previous six months, would have to be taken into account before an event of default could occur or be identified. The result of the Group's trading position, past of future, involves much more than the mere passage of time, or the fulfilment of a condition. There was no Potential Event of Default between December 1998 and March 1999. 78 However, the fact remains that after the meeting of 18 December [para 24] and especially after that on 19 January [paras 53-4] the Bank officers not unreasonably believed that the "breaches" disclosed by Mr Spira entitled the Bank to refuse a draw down. 79 After 18 December there is no reference in the Bank's internal documents to the rights or wrongs of the Bank's refusal to allow a draw down. Mr McCoy said at the meeting of 25 January [para 29] that the financial investigations then underway would have been necessary in any event "because of the covenant breaches". This can only mean that the Bank, having been informed of the breaches, would not have permitted any further draw down until it satisfied itself about the Borrower's financial position. This is confirmed by Mr Dennis' letter of 2 March (15/3713) in which he again apologised for the Bank's mistake in the Facility and continued: "The error was compounded by the fact that [the Borrower] breached some of the financial covenants … In the normal course, any such breaches result in the Bank conducting a full review of the … client's circumstances and facilities and that was what occurred in [your] case". 80 It is strictly not necessary to decide what the position would have been if the Borrower had only sought access to the remaining $3M because it sought an additional $15M (judgment paras 32, 53, 104). 81 Mr Spira did not attempt to avoid the Bank's requirement for a $20M repayment by limiting his request to the $3M to which the Borrower was entitled. He might have argued that this should be released without any change to the requirement for a principal repayment. This option was effectively foreclosed by the Borrower's need for additional accommodation. 82 The Borrower's request for that additional accommodation entitled the Bank to seek to impose whatever terms it thought appropriate as conditions of its agreement to that increase including a requirement for a substantial repayment by a fixed date. 83 The credit submission of 22 February prepared by Mr McCoy and Mr Dennis recommended an increase of $15M in the Facility ($18M if the undrawn $3M is included) subject to the requirement for a repayment of $20M by the end of the year. This requirement was approved by Mr Ellem and Mr Pike. The appellants' attack on the Bank's decision was concentrated on Mr Pike but although his was the final decision he merely endorsed the recommendations of others. 84 As McHugh JA said in Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 46 the first enquiry "is to ask whether any applied pressure induced the victim to enter into the contract". The Judge was not persuaded of this because he found that Mr Spira was principally concerned about the requirement for a float rather than the requirement of repayment as such. I have already held that this finding cannot be disturbed. 85 Mr Spira was not deterred from seeking a variation of the repayment condition and was partly successful but the Bank refused to withdraw its requirement for a repayment of $20M. Mr Spira said that he had no practical option but to agree to the Bank's terms (5/1009-10, 9/2339-40, black 1/209-10). He needed the further accommodation, including the $3M to which the Borrower had been denied access since December, and was influenced by the threat to appoint a receiver. He believed that the covenant breaches entitled the Bank to enforce its securities. 86 The Judge found that the Borrower "may well" have had no alternative but to accept the Bank's repayment term (paras 105, 193) but held that the Bank's insistence on this requirement was not unconscionable. 87 In ACCC v C G Berbatis Holdings Pty Ltd (2003) 77 ALJR 926 the High Court considered the operation of s 51AA in the context of a landlord's negotiations with a tenant whose lease was expiring. The landlord refused to grant a renewal unless the tenant abandoned proceedings against the landlord in the Commercial Tribunal of Western Australia. The ACCC alleged that the landlord's conduct was "unconscionable within the meaning of the unwritten law" and a breach of s 51AA. The unconscionable conduct was said to be the knowing exploitation by one party of the special disadvantage of another. Gleeson CJ said at 928-30:

"a person is not in a position of relevant disadvantage … simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests … Unconscientious exploitation of another's inability, or diminished ability, to conserve his or her own interests is not to be confused with taking advantage of a superior bargaining position … The critical disadvantage from which the lessees suffered was that they had no legal entitlement to a renewal or extension of their lease; and they depended upon the lessors' willingness to grant such an extension or renewal for their capacity to sell the goodwill of their business for a substantial price … They suffered from no lack of ability to judge or protect their financial interests … rather there was a lack of ability to get their own way. That is a disability that affects people in many circumstances in commerce, and in life. It is no one against which the law ordinarily provides relief." 88 Gummow and Hayne JJ, after referring at 936 to the judgment of Mason J in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 462, continued: "It will be apparent that the special disadvantage of which Mason J spoke in this passage was one seriously affecting the ability of the innocent party to make a judgment as to that parties' own best interests … A person in a greatly inferior bargaining position … may not lack capacity to make a judgment about that person's best interests." 89 Callinan J, the other judge in the majority, said at 958: "whenever parties are in a business relationship … and they fall out over an aspect of that relationship, it will generally not be unreasonable or indeed unconscionable for them to seek to insist upon their legal rights, or to require that one party give up some right in exchange for the conferral of a new right upon that party." 90 The application of these principles requires the dismissal of the appellants' claim that the Bank engaged in unconscionable conduct between December 1998 and March 1999. The Bank was legally and commercially justified in making its agreement to provide a further $15M conditional on the Borrower accepting an obligation to repay $20M by the end of the year. 91 This means that the appellants' case on unconscionable conduct fails as a whole because it was not seriously suggested that they could base a claim to relief on later events alone. The appellants' claimed that it was unconscionable for the Bank to require the Borrower to comply with contractual obligations imposed on it in March 1999 by unconscionable conduct but this derivative case must also fail. 92 The Borrower did not float prior to 31 December 1999 and made no repayment of principal that year. The Bank extended the time for repayment of the $20M to 31 December 2000 and during that year received substantial repayments of principal. It continued to support the Borrower and a $3M increase in its overdraft was granted and availed of shortly before the administrators were appointed. 93 The appeal has been decided on the documentary evidence supplemented to a modest extent by oral evidence which was not in dispute. It has only been necessary to review two of the Judge's findings on credit. One related to the rejection of Mr Spira's evidence about a phone call between himself and Mr Dennis on 25 January [paras 27-8]. The second related to the primacy of Mr Spira's concern about the Bank's requirement that the Borrower float before 31 December 1999 [paras 65-7]. 94 The Judge made a number of adverse findings as to Mr Spira's credit and said that some of his evidence had been deliberately dishonest. It is not necessary for the Court to deal with all of Mr Macfarlan's challenges to these findings. However in fairness to Mr Spira it should be said that much of his evidence in affidavit form and orally was either supported by or consistent with the contemporary documents. A great deal of the rest was not contradicted or challenged in cross-examination. During oral argument the Court formed a provisional view that some of these findings could not be supported and furthermore it had not been necessary for the Judge to make them in the form he did. It is neither necessary nor appropriate to decide these matters or go into further detail. It follows from my earlier findings that the appeal fails and should be dismissed with costs. 95 BEAZLEY JA: I agree with Handley JA. 96 TOBIAS JA: I agree with Handley JA. **********

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