Stein v Torella Holdings Pty Limited [2009] NSWSC 971 | Case summary

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.

34 (For an outline of the historical origins of the rule that banking practices require the payment of compound interest, see National Bank of Greece SA v Pinios Shipping Company [No 1] [1990] 1 AC 637, at 675-685 per Lord Goff of Chieveley; Saunders v Nash [1991] 2 VR 63 at 65-66 (Vincent J).) 35 It was also submitted on behalf of the Plaintiff that the obligation to pay interest on a compound basis may also be inferred from the standard practice within the finance industry, in particular, the banking industry, where compound interest is the usual method for calculating obligations to repay loans (see National Bank of Greece SA v Pinios Shipping Company [No 1], supra at 682-684; and the decision of the English Court of Appeal in Voller v Lloyds Bank Plc [2000] 2 All ER (Comm) 978. 36 In this latter regard the Plaintiff relied upon the provisions of clause 3.3 of the deed of joint venture and upon the surrounding circumstances of the contract. The Plaintiff pointed to uncontested evidence that the Plaintiff was, in effect, the banker of the joint venture for the purchase of the property, and that the calculation of the interest on a compound basis is the standard practice for loans made by banks. Further, that the joint venture for the purposes of the external loan (contemplated by the deed of joint venture) obtained a loan from ING, and that that entity charged compound interest, in accordance with a standard practice in the banking industry. 37 Further, the Plaintiff pointed to the loans made to the Second Defendant and Mr Mitchell under the Stein Loan being repaid with a calculation of interest at 10 per centum per annum compound, and the fact that the Second Defendant and Mr Mitchell had made no complaint to the Plaintiff or to the joint venture's accountant about this obligation The plaintiff submitted that, in effect, they acquiesced in a liability to repay interest calculated upon a compound basis. 38 The Plaintiff also sought to derive comfort from the statement of Mason CJ and Wilson J in Hungerfords v Walker (1989) 171 CLR 125 at 149 that "simple interest almost always undercompensates the injured party's true loss", and submitted that, in order to be properly compensated, the Plaintiff is entitled to interest payable to him being calculated payable on a compound basis. 39 To the extent that the Plaintiff has relied upon what might be described as usage and custom, in support of his claim to be entitled to interest upon a compound basis, it will be appreciated that any such usage and custom can have application only to the practice of bankers and financiers. All the judicial authorities relied upon by the Plaintiff are what might be described compendiously as banker-customer cases. The Plaintiff is not, and never was, a banker. The relationship between the Plaintiff and the joint venture was not that of a banker and a customer. The Plaintiff himself was one of the joint venturers, and his interest in the joint venture was a close and personal financial interest, not limited to that of an independent financier lending money in the ordinary course of its business to a borrower at arm's length from him. 40 In any event, there was no evidence of the existence of such a practice or custom as was asserted by the Plaintiff. In Thornleigh v Tilley (1925) 36 CLR 1, Knox CJ at 8 quoted with approval the following passage from the judgment of Jessell MR in Nelson v Dahl (1879) 12 Ch D 568 at 575, That [i.e, the existence of the alleged usage] is a question of fact, and, like all other customs, it must be strictly proved. It must be so notorious that everybody in the trade enters into a contract with that usage as an implied term. It must be uniform as well as reasonable, and it must have quite as much certainty as the written contract itself. 41 In the instant case there was no such evidence before the Court of such a usage or custom in banking or in finance, or otherwise, regarding the charging of compound interest. 42 To the extent that the Plaintiff's claim for compound interest is grounded upon the practice of bankers, I reject that claim. As I have already observed, not only is the Plaintiff not a banker, and has never been a banker, but in his dealings with the joint venture the Plaintiff's role cannot in any way be equated to that of banker. To do so would be to disregard the essential fact that the Plaintiff himself was one of the joint venturers. He was not an independent lender. He was advancing money to an enterprise in which he had a personal financial interest, beyond and above the extent of the loan and its repayment. 43 Further, irrespective of the truth or accuracy of the foregoing assertion in the judgment of the High Court of Australia in Hungerfords v Walker, the sentiment behind that statement cannot be substituted for the exercise of establishing, upon the facts of the present case, the terms of the agreement between the parties. 44 Accordingly, a determination of whether the Plaintiff is entitled to compound interest or simple interest will, in the circumstances of this case, depend solely upon the terms of the agreement of the parties, without the need for resort to inferences which may be drawn from any practices in the finance or banking industry, or to general sentiments expressing subjective perceptions of fairness. 45 To the extent that the Plaintiff relied upon the surrounding circumstances in order to establish the true meaning of the contractual relationship regarding payment of interest, and to the extent that in that regard the Plaintiff relied upon the fact that ING charged compound interest in respect to the indebtedness of the joint venture, it should be observed, first, that at the time of the original deed of 24 December 1997 no loan had been obtained from ING. I do not see how a subsequent indebtedness by the joint venture to ING and the manner in which that latter entity calculated interest payable by the joint venture upon such indebtedness can be treated as a surrounding circumstance relevant to a determination of the contractual arrangements between the joint venturers. 46 In any event, evidence that any funding by ING constituted the external loan contemplated by clause 5 of the deed of joint venture, and any evidence supporting the assertion that indebtedness to ING attracted compound interest was skimpy in the extreme. Clause 5.2 of that deed (which makes provision for interest upon the external loan to be "payable in arrears on discharge and that interest be accrued during the term of the loan") does not suggest to me that the interest referred to therein be compound interest. 47 Regarding the reliance by the Plaintiff on what were said to be surrounding circumstances, and the alleged acquiescence on the part of one or more of the joint venturers to the payment of compound interest to the Plaintiff, it should be observed that there is nothing in any of the demands made to, for example, the Second Defendant, or in any of the calculations of interest charged against that Defendant, to suggest that the interest claimed from him was referred to as being compound interest. In the absence of precise and informed knowledge on the part of the Second Defendant that he was being charged compound interest by the Plaintiff, the Plaintiff cannot rely upon the payment of such interest claimed against him, as being some form of admission on the part of the Second Defendant that he was liable to pay interest upon a compound basis. 48 It is quite apparent that if the Second Defendant was informed by Mr Ross, who was the accountant for the joint venture, that he owed a specified amount, then the Second Defendant would have accepted the figure provided by Mr Ross. 49 I am not satisfied that the terms of the original deed of joint venture construed in the light of the surrounding circumstances existing at the time of that agreement, establish that the interest referred to therein was to be calculated upon a compound basis. Neither of the subsequent deeds of variation addressed the question of interest. Thus I do not see how any of the circumstances which existed at the time of either of those two subsequent deeds of variation can have any effect upon the proper construction of the original deed regarding the basis for calculating interest payable by the joint venture to the Plaintiff. 50 Where the arguments of the Plaintiff require the implication of a term making provision for the payment of compound interest, it is quite apparent that, in order to give business efficacy to the contractual arrangements set forth in the original deed and in the two deeds of variation, there is no necessity to imply such a term. Accordingly, no such term will be implied. (See Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337, and authorities cited by Mason J at 346-347.) 51 I am not satisfied that the Plaintiff has established that the interest to which he is entitled should be calculated upon a compound basis. 52 However, even if (contrary to the conclusion which I have just expressed) the Plaintiff did have an entitlement to compound interest, the question arises how frequently that interest should be compounded. In his calculation Mr Ross compounded interest upon the occurrence of each payment and also compounded that interest each month. It will be appreciated that an increase in the frequency of the compounding of interest increases the amount of the debt. I am in agreement with the submission on behalf of the First, Second and Third Defendants that the size of the debt should not depend upon the whim of the accountant in deciding the nature and frequency of the occurrence upon which the calculation of interest should be compounded. 53 To leave to the accountant the decision of the occurrence upon which the calculation of interest should be made and compounded imports a degree of uncertainty and vagueness into any contractual arrangement on the part of the joint venture as to the amount of its indebtedness by way of interest. 54 Thus, even if (contrary to the conclusion which I have already expressed) I were to be persuaded that the terms of the agreement required payment of interest upon a compound basis, the deed is silent as to the frequency with which and the events upon the occurrence whereof such interest should be calculated and compounded. Thus, I would not be satisfied that the calculation relied upon by the Plaintiff in support the indebtedness to him of the joint venture is an accurate calculation. 55 However, in the light of the conclusion which I have expressed, that the Plaintiff has not established that the terms of the agreement require payment of interest upon a compound basis, it is unnecessary for me to express any concluded view as to the frequency and nature of the occurrences upon which the compounding of that interest should be calculated. 56 Since the Plaintiff has not established an entitlement to interest upon a compound basis, the only interest to which the Plaintiff is entitled from the joint venture is simple interest in accordance with the provisions of clause 3.3 of the deed of joint venture of 24 December 1997. 57 I propose to stand the matter over to a date to be fixed by arrangement with my Associate for the bringing in of short minutes to reflect my conclusions herein, and to enable the parties to perform a calculation of the indebtedness, if any, of the joint venture to the Plaintiff, based upon the liability of the joint venture to pay to the Plaintiff simple interest in accordance with the calculation set forth in clause 3.3 of the original deed. 58 I observe that by order 4 of the orders of 25 June 2008 the costs of the proceedings are reserved for determination by me. 59 The Plaintiff has been unsuccessful in his assertion that the interest payable to him should be calculated upon a compound basis, rather than as simple interest. The Defendants have been successful in resisting that claim of the Plaintiff, and in their assertion that the only interest payable by them is simple interest. 60 Accordingly, I consider that the Plaintiff should pay the costs of the Defendants of the proceedings, or at least the costs of the proceedings after the date of the consent orders made on 25 June 2008. 61 However, I have not heard any submissions as to costs. If any of the parties is desirous of some costs order other than that which I have just indicated, an opportunity will be given to that party to make application in that regard. 62 I make the following order: 1. I stand the matter over to a date to be fixed by arrangement with my Associate, for the bringing in of short minutes, and, if desired, for argument as to costs. **********

Stein v Torella Holdings Pty Limited

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Judgment (13 paragraphs)

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Cases Cited (5)

Cited By (3)