2746 of 2007 ROTHREWEL JAMES DONALD STEIN -v- TORELLA HOLDINGS PTY LIMITED and ORS
JUDGMENT
1 HIS HONOUR: These proceedings were instituted by summons filed by Rothrewel James Donald Stein on 16 May 2007. By that summons the Plaintiff claimed relief in respect to a joint venture known as the SMS Joint Venture. The Defendants named in the summons were Torella Holdings Pty Limited, Kevin Norman Smith, Roma Vera Velic and Marion Mitchell. The fourth Defendant Marion Mitchell was the wife of late Grant Lee Mitchell ("Mr Mitchell") who died before the institution of the present proceedings.
2 The joint venture was between the Plaintiff, the first three Defendants and Mr Mitchell.
3 By the summons the Plaintiff claimed, substantively, relief by way of a declaration that the joint venture be dissolved, an order for an account, and an enquiry as to the assets of the joint venture and as to the respective interests of the parties in those assets.
4 On 25 June 2008 the Court made orders by consent (which were entered on 14 July 2008). Those orders included a declaration that the joint venture was dissolved on 25 June 2008, and orders in respect to the taking of an account of the joint venture.
5 An account was prepared on behalf of the Plaintiff and was annexed (as Annexure "A") to the affidavit of Bradley Ross, sworn 13 August 2008.
6 Although, strictly, that document does not comply with the order of the Court made on 25 June 2008 (since the items are not numbered, either consecutively, or at all), nevertheless, the Defendants have not raised any objection in that regard, and have been content, for the purposes of the present hearing, to treat that document as the account of the joint venture contemplated by the foregoing order.
7 A notice of falsifications was filed on behalf of the Defendants on 19 December 2008.
8 Essentially, the only falsification asserted on behalf of the Defendants is in respect to the calculation of interest made on behalf of the Plaintiff. In the account the Plaintiff has calculated interest on a compounding basis, whilst the Defendants by their notice of falsifications assert that any interest to which the Plaintiff is entitled should be calculated on a simple interest basis. The Defendants by their notice of falsifications assert as follows:
1. The Defendants set out hereunder their objections to the non-itemised statement of account, being annexure "A" to the affidavit of Bradley Ross made 13 August 2008, namely: as to every interest calculation in the account on the basis that the interest has been calculated:
(a) on a compounding basis, whereas it should be on a simple interest basis; and
(b) with the principal compounding on the occurrence of each transaction.
2. The Defendants to do not object to the statement of account annexed to the affidavit of Rothrewel James Donald Stein made 13 August 2008 and marked "A", being items 1 to 54 of the Receipts and items 1 to 23 of the Disbursements.
3. The Defendants object to the claim for interest on a compounding basis in the sum of $598,228.15 as sought in paragraph 4 of the affidavit of Rothrewel James Donald Stein made on 13 August 2008.
9 The matter has come before me for hearing of the objections of the Defendant asserted in paragraph 1 of the notice of falsifications, and of their objection contained in paragraph 3 in that notice.
10 The essential matter for determination by the Court in the present hearing is whether interest to which the Plaintiff is entitled should be calculated upon a compound basis, or should be calculated as simple interest. The Plaintiff asserts an entitlement to interest upon a compound basis. The Defendants assert that the entitlement of the Plaintiff is to only simple interest.
11 I have had the benefit of receiving a written outline of submissions from Counsel for the respective parties. Those documents will be retained in the Court file. (It should here be recorded that after the filing of the notice of falsifications, the Fourth Defendant, who had previously been represented by the same solicitors who represent the first three Defendants, retained separate representation. At the hearing and in the written outline provided by her Counsel the Fourth Defendant adopted the submissions of the First, Second and Third Defendants, but also made additional submissions.)
12 In considering the basis upon which interest to which the Plaintiff is entitled should be calculated - compound interest or simple interest - it is appropriate that I should set forth, at least in summary, the essential factual matters and circumstances regarding the joint venture and the indebtedness of the joint venture to the Plaintiff.
13 On 24 December 1997 the Plaintiff entered into a deed of joint venture and partition with the Second, Third and Fourth Defendants and Mr Mitchell. That joint venture was known as the SMS Joint Venture, and was established for the purposes of purchasing, developing, and selling certain land at 151-153 Showground Road, Castle Hill ("the property"). It was intended that an industrial building would be constructed on the property.
14 That deed of joint venture contemplated that the Plaintiff was to make available or cause to be made available a loan ("the Stein Loan") to enable the joint venturers to purchase the property (clause 3.2). Provision was made for the payment of interest on the Stein Loan, calculated at the rate of 10 per centum per annum "on the balance of such loan as varies from time to time" (clause 3.3). The deed also contemplated the obtaining of another loan from an external lender (the "external loan"). That external loan was subsequently arranged with ING.
15 The property was purchased by the joint venture on 6 February 1998. Subsequently, on 17 September 1998, the joint venture purchased adjoining land, at 155 Showground Road, Castle Hill.
16 On 1 October 1998, the joint venturers entered into a deed of variation of joint venture and partition ("the First Variation"). On 18 June 1999 the joint venturers entered into a deed of further variation of joint venture and partition ("the Second Variation"). This second variation reflected agreement concerning, inter alia, the substitution of various entities as joint venturers, and certain guarantees by other persons of the performance of various of the joint venturers.
17 Neither the First Variation nor the Second Variation affected the Stein Loan, or the obligation of the joint venturers to pay interest upon that loan pursuant to clause 3.3 in the deed of 24 December 1997.
18 During the existence of the joint venture loans were made to the Second Defendant and to Mr Mitchell pursuant to the Stein Loan.
19 At the hearing the Plaintiff foreshadowed the filing of an amended summons (an unsealed copy whereof was annexed to the written outline of submissions prepared on behalf of Counsel for the Plaintiff), by which the Plaintiff claims the sum of $598,228.15 plus 10 per centum per annum compounding from the First Defendant as the surviving entity obliged to repay the Stein loan (given that Starconia Pty Limited, which by the Second Variation was substituted for Mr Mitchell and the Fourth Defendant as a joint venturer, was deregistered on 7 September 2005). The Plaintiff also claims payment of $598,228.15 plus 10 per centum per annum compounding from the Second and Third Defendants as the guarantors of the obligations of the First Defendant and from the Fourth Defendant as the guarantor of the obligations of Starconia Pty Limited in respect to the repayment of the Stein Loan.
20 The Plaintiff has made payments or has caused payments to be made pursuant to the Stein loan, from time to time in the period 1 December 1997 to 21 January 2005. As at 26 March 2007 (that being the most recent date in calculations of receipts and expenditure detailed in the affidavit of the Plaintiff) and pursuant to the Stein Loan, the Plaintiff had lent to the joint venture a total sum of $4,638,040.10.
21 It has been calculated on behalf of the Plaintiff that interest at 10 per centum compound on the moneys loaned under the Stein Loan totals $1,204,997.86. The Plaintiff has received repayments of the Stein Loan totalling $5,244,809.81 (part of those repayments being represented by the transfer to him of units at 151-153 Showground Road, Castle Hill). Thus the Plaintiff has upon the principal sums received the amount of $606,769.70 by way of repayments in excess of the amounts of loans made by him.
22 However, when that figure is deducted from the Plaintiff's foregoing calculation of interest at 10 per centum compound, totalling $1,204,997.86, there remains the foregoing figure of $598,228.15. That is the amount presently claimed by the Plaintiff from the Defendants.
23 As I have already observed, the essential issue which must be determined in the present hearing is whether the entitlement of the Plaintiff to interest is an entitlement to interest on a compounding basis (as asserted by the Plaintiff) or is merely an entitlement to simple interest (as asserted by the Defendants).
24 There is no dispute between the parties that the various loans made by the Plaintiff to the joint venture carried an obligation on the part of the joint venture to repay those loans to the Plaintiff. Neither is there any dispute that the Plaintiff is entitled to interest at the rate of 10 per centum per annum upon the unpaid balance of those loans owing to him. But the parties are in dispute as to whether that interest should be calculated upon a compound basis or upon a simple interest basis.
25 It is settled law that compound interest is payable either by agreement or by custom, but not otherwise (Chitty on Contracts, 30th ed, 2008, Vol 2, p 922, [38.269]).
26 It has been submitted on behalf of the Plaintiff that there was an express agreement to the effect that the outstanding debt would carry compound interest. The Plaintiff submits that such an agreement may be inferred from a course of dealings between the parties; from the intention of the parties; and from the surrounding circumstances of the contract.
27 The Plaintiff relied upon the evidence of Bradley Ross, a chartered accountant since 1992, who was the accountant for the joint venture. It was Mr Ross who prepared the statement of account, and who personally performed the calculation of compound interest in respect to the outstanding indebtedness of the joint venture to the Plaintiff.
28 Mr Ross was cross-examined upon his various affidavits. He agreed under cross-examination that, whilst he believed that ING charges compound interest, he had before him no documentation from ING to confirm that belief. Mr Ross also said that he had not previously acted for joint ventures, and that he had no basis for knowing the manner in which interest is customarily charged in the case of joint ventures.
29 The original deed of joint venture and partition of 24 December 1997 makes provision in clause 3.3 for the payment of "interest", calculated at a certain rate. That clause does not specify whether such interest shall be calculated on a compound basis or should be simple interest. However, clause 5.2 requires that the Plaintiff should bear the burden of interest upon the external loan and that such payments of interest by the Plaintiff shall form part of the Stein Loan.
30 In considering the submissions of the Plaintiff in support of his claim to be entitled to interest calculated upon a compound basis, it should be emphasised, and constantly borne in mind that, as I have already observed, any such entitlement can arise only by agreement between the parties or by custom.
31 In support of the Plaintiff's claim I have been taken to a number of reported cases. The judicial observations in those cases, some of the highest authority, cannot, however, be substituted for a factual determination of the contractual agreement between the parties to the present proceedings.
32 The Plaintiff relied upon the decision of the English Court of Appeal in Re Marquis of Anglesey; Willmott v Gardner [1901] 2 Ch 548 and the decision of the Court of Appeal of the Supreme Court of Victoria in Morton v Elgin-Stuczynski [2008] VSCA 25 (22 February 2008). In that latter case Neave JA (with whom Kellam JA and Cavanough AJA agreed) said, at [27] - [28],
In my opinion the words of this contract are capable of bearing the meaning that either simple or compound interest is payable. Although both counsel relied on case law in support of their submissions, a comparison of the meaning which courts have given to the words used in other contracts of loan provides little assistance in interpreting the words used in this particular contract. Whether interest is to be calculated on a simple or compound basis depends on the true construction of the contract, read in the light of surrounding circumstances.
Whatever may have been the case historically, today there is no presumption that interest payable on a loan made by a private lender is to be calculated as either simple or compound interest.