34 The principal issue in the case now relates to how repayments made should be allocated. There were three alternatives advanced by the parties:
(a) The repayments were to be applied in reduction of interest on the Stein Loan, first, and then in reduction of the Stein Loan;
(b) The repayments were to be applied equally between the Stein Loan and interest thereon;
(c) The repayments were to be applied proportionately (pro rata) between the Stein Loan and interest thereon.
35 The Plaintiff submitted that the court should determine the matter in accordance with (a); if not so satisfied, then, in accordance with (b); and then, as a last resort, in accordance with (c).
36 It was also submitted by the Plaintiff that interest should be paid, after 25 June 2008, calculated on the part of the Stein Loan that remained outstanding, as well as on the interest thereon, that had not been paid at that date, until the date of payment.
37 The first to third Defendants submitted that the court should determine the matter in accordance with (c); if not so satisfied, then, in accordance with (b); and then, as a last resort, in accordance with (a).
38 It was also submitted on their behalf, that interest should be paid, after 25 June 2008, calculated only on the part of the Stein Loan that remained outstanding, and not on any interest thereon that was unpaid at that date, until the date of payment.
39 The evidence revealed that the real difference was between calculations based on (a) and (c). The difference, in each case, between calculations based on (a) and (b) was small (less than $10,000). Whether interest should be payable on interest resulted in some, but not a substantial, difference.
40 There was a further issue raised as to the quantum of judgments that should be entered against the first to third Defendants regarding each of the loans, the share of loss under the joint venture and interest. It seemed to me that the determination of this issue would depend, almost entirely, upon the first issue.
41 The final issue was which party, or parties, should bear the burden of costs of the hearing before McLaughlin As J and the one before me. It was accepted that would be determined depending upon the view to which I came on the other issues. I have earlier referred to the issue of the costs of the hearing before McLaughlin AsJ.
42 The parties were not in dispute as to the arithmetic or calculation of figures in the Plaintiff's evidence. The dispute was as to the principles on which the arithmetic and calculation had been done. The parties agree that calculations may have to be redone once the court determines the principles.
Determination
Appropriation of Repayments
43 As is clear, there is nothing specific in the Deed, in the Deed of Partition, or in the Deeds of Variation, which provides the manner in which repayments made, were to be applied between the Stein Loan and the interest thereon.
44 Nor is there any specific reference as to how any strata lots transferred to one, or other, of the joint venturers, should be treated. Presumably, this was because the transmission of the strata lots was to follow the repayment of all amounts referred to in Clause 10.1 of the Deed. In this regard, Clause 11 of the Deed specifically referred to the costs of the project and the payments in Clause 10.1(e), and "any units remaining unsold". The allocation of strata lots to the joint venturers was, in effect, in substitution for a cash share of profits.
45 However, the parties agree that the first task of the court is to construe the written documents that the parties entered into, including the Deed and the Deed of Partition.
46 In so doing, the primary duty of a Court is to endeavour to discover the intention of the parties from the words of the instrument in which the agreement between them is embodied and that the meaning of a clause may be revealed by other parts of the document: Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99, per Gibbs J (as his Honour then was) at 109.
47 In this case, the documents should be read as a whole and given a commercial and businesslike interpretation: see Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15 at 25-27 ([19]-[23]) per Allsop P and at 29 ([361]-[362]) per Campbell JA, Giles JA agreeing with Campbell JA at 29 ([42]-[43]) and with Allsop P at 33 ([63]).
48 I also remember that the process of interpreting terms of an agreement is a pragmatic process, and "no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements": Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, per Barwick CJ at [35]-[36], [40]-[42]. Commercial contracts should be construed "fairly and broadly, without being too astute or subtle in finding defects" per Lord Wright in Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2, cited with approval by Gibbs J in Australian Broadcasting Commission at 109-110.
49 In considering the terms of the Deed, there is available an alternative construction, not adverted to by the parties, but raised during submissions, which, in my view, has considerable attraction, primarily because it relies upon the ordinary and natural meaning of the provisions of Clause 10 and because it seems to be in accordance with what the parties appear to have objectively intended.
50 By Clauses 10.3 and 11 of the Deed, the parties had in mind that the proceeds of sale of the strata lots, were to be applied, first, to "the costs of the project" (which, it was accepted, incorporated Clause 10.1(a) to (d)) and then to the payments referred to in Clause 10.1(e). In the event that there were insufficient funds to pay all of the costs set out in Clause 10.1(a) to (d), then the loss would be contributed, and payments would be made, to any balance not so paid, by the joint venturers in proportions equivalent to the Equity Ratio.
51 As stated, there is nothing in the Deed that states how the strata lots transferred to the Plaintiff, should be treated. However, it is clear, from the evidence to which I have referred, that the parties treated the value of the strata lots as a notional repayment towards "the Stein loan and interest payable thereon".
52 Clause 10.1 specifically applies to repayments made from the proceeds of sale of the strata lots (industrial units). In regard to Clause 10.1(d), the order and priority identified was "the repayment of the Stein Loan", and "interest payable thereon".
53 Thus, on this construction of the Deed, and considering the judgment of his Honour, interest would be calculated in the manner found by his Honour, namely, simple interest at the rate of 10 per centum per annum, on the unpaid balance of the Stein loan, as varied from time to time, after taking into account increases in borrowings and deductions by repayment, from the proceeds of sale of the strata lots. The interest, until repayment of the Stein Loan, would be treated separately.
54 Then, once the whole of the Stein Loan was repaid from the proceeds of sale of the strata lots, the interest that had been treated separately, would be repaid from the proceeds of sale of other strata lots, as, and when, those proceeds were received.
55 Assuming that the balance of the proceeds of sale of the strata lots was insufficient to meet the repayment of the costs of the project referred to expenses in Clause 10.1(a) to (d), in their entirety, the joint venturers would be required to contribute and pay the balance. There is no reason to suppose that the parties intended that the order and priority of repayments referred to in Clause 10.1 should be different in respect of such contributions and payments.
56 To the extent that strata lots were transferred to the Plaintiff, the value of those lots was notionally treated as a repayment of the Stein Loan and interest payable thereon in the accounts of the joint venture. The first lot transferred was on 25 June 2001, and the notional value of the transfer was $2,071,300. In the accounts, the amount was appropriated first to interest payable on the Stein Loan and then to the reduction of the Stein Loan. This seems to me to be inconsistent with the order and priority identified in Clause 10.1 of the Deed.
57 Senior Counsel for the Plaintiff submitted that even if the construction of the Deed was as set out above, Clause 10.1 had no relevance to how the notional value of the strata lots transferred should be treated, as that Clause dealt only with the proceeds of sale thereof, rather than how notional repayments made by the joint venturers to the Stein loan and interest were to be applied.
58 I do not accept this submission, because Clause 10.3 refers to the contributions and payments by each of the joint venturers in proportions equivalent to the Equity Ratio, which contributions and payments are identified by reference to Clause 10.1(a) to (d). It follows that contributions and repayments by the joint venturers to the insufficiency of funds to pay, in entirety, the costs of the project referred to, would be made to the joint venture from which repayments would be applied. There is nothing in the Deed that suggests that any such payment, or contribution, was to be applied in any other order or priority.
59 This construction of the Deed gains support from:
(a) The definition of the Stein Loan, in the Deed, which, notably, refers only to "loans made or caused to be made…plus such other funds as the parties may agree to borrow from Stein from time to time". There is no reference to "interest" on such loans, or borrowings, being included as part of the Stein Loan.
(b) Clause 3.3 specifically provides for the calculation of interest "on the balance of such loan as varies (sic) from time to time". There is no reason, in my view, to treat "as varies (sic)" as being limited to a variation increasing the Stein Loan. The phrase used is sufficiently wide to include variations by reductions in the Stein Loan.
(c) Clause 10.3, which requires contributions and payments to be made by each of the joint venturers in proportions equivalent to the Equity Ratio, in respect of any insufficiency of the proceeds of sale of strata lots, refers to Clause 10.1(a) to (d) inclusive.
60 It seems to me that there is another way to look at the transfer of the strata lots which also supports this construction. As I have stated, it is clear from Clause 11 of the Deed, that the intention of the joint venturers was to sell only so many of the strata lots as was necessary to pay the costs of the project and to make the payments in Clause 10(1)(e). Thus, to the extent that those costs had not been paid, the intention of the parties was to continue to sell strata lots. The value of the strata lots transferred could be notionally treated as proceeds of sale, without having associated costs of sale to third parties. In this way, the value of the strata lots transferred would have been applied in the same order and priority as set out in Clause 10.1 (a) to (d).
61 Then, to the extent that the proceeds of sale of the strata lots were insufficient to repay the Stein Loan and the interest payable thereon, the Plaintiff, as one of the joint venturers, was required to pay and contribute, in proportion equivalent to the Equity Ratio to the repayment. As defined, his contribution was as to fifty per cent. Accordingly, he was, himself, liable to repay half of any part of the Stein Loan that was unpaid as well as any accumulating unpaid interest payable on the Stein Loan.
62 In my view, the proceeds of sale of the strata lots and the value of the strata lots transferred should be treated in the same way and should have been applied in the same order and priority set out in Clause 10.1. It follows that those amounts should be treated as having been made as, first to "the repayment of the Stein Loan" and then to "the interest payable thereon".
63 The construction of the Deed advanced is one that also appears to be a commercial and businesslike one. The joint venturers required what were, in effect, costs of the project payable to third parties to be paid in priority (Clause 10.1(a) to (c)) to the Stein Loan and interest payable thereon (Clause 10(1)(d)). Whilst the Stein Loan was not repaid, it would (as found by McLaughlin AsJ) attract simple interest at the rate of 10 per cent per annum. By repaying the Stein Loan in priority to interest payable thereon, the interest (to which the Plaintiff, himself, might have to contribute) would be reduced, whilst the part of the Stein Loan that was being repaid to the Plaintiff itself would occur. (In other words, the Plaintiff would be able to reinvest monies paid to him to reduce the Stein Loan and obtain interest thereon.)
64 The evidence reveals that there were other amounts shown as repayments to the Stein Loan. These were amounts such as refunds (from D A Patterson), reallocations (from BAS refunds from the ATO), and other repayments. These were moneys to which the joint venture would have been entitled to be paid towards the costs of the project. For the same reasons set out above, these amounts should also be treated as being made toward "the repayment of the Stein Loan" and then toward "interest thereon". Again, there is simply no basis to ignore the order and priority of application of monies repaid.
65 In the circumstances, I have found that the principal matter for determination can be decided upon the construction of the deeds entered into between the parties. The parties agreed that if the matter were decided in that way, it was unnecessary to rely upon common law principles to which reference was made.
66 In case I am wrong on the question of construction, I should deal with the alternative argument. That argument proceeds upon the basis that Clause 10 of the Deed only referred to the proceeds of sale of the strata lots and that whilst the application of the proceeds of sale in the order and priority set out therein dealt with the four different costs of the project that were to be repaid, the word "and" in Clause 10.1(d) was simply connective. It followed, so it was submitted, that Clause 10.1(d) did not provide any order and priority in respect of the repayment of the Stein Loan and interest thereon.
67 It was then submitted that nowhere else in the deeds, was there any reference to the way how repayments made should be applied between the Stein Loan and the interest thereon, which meant that one turned to common law principles. There was no dispute as to these principles.
68 In Falk v Haugh (1935) 53 CLR 163, Rich, Dixon, Evatt and McTiernan JJ, at 173, said:
"It has long been a rule that when payments are received generally on account of a debt, which is in part interest and in part principal, they are treated as applicable to interest in priority to principal. In Crisp v Bluck, a bond creditor received some payments, and afterwards recovered judgment. It was decreed that the payments ought to go in discharge of the interest first. The rule was again enunciated by Lord Keeper Wright in Chase v Box . It has, however, been little discussed. The most recent statement of the rule is contained in Venkatadri Appa Row v Parthasarthi Appa Row . There Lord Buckmaster said:- "There is a debt due that carries interest. There are moneys that are received without a definite appropriation on the one side or the other, and the rule which is well established in ordinary cases is that in those circumstances the money is first applied in payment of interest and then when that is satisfied in payment of capital. That rule is referred to by Rigby L.J. in the case of Parr's Banking Co.v Yates (1898) 2 Q.B. 460, at p. 466. in these words: - The defendant's counsel relied on the old rule that does, no doubt, apply to many cases, namely, that, where both principal and interest are due, the sums paid on account must be applied first to interest. That rule, where it is applicable, is only common justice. To apply the sums paid to principal where interest has accrued upon the debt, and is not paid, would be depriving the creditor of the benefit to which he is entitled under his contract." (See too Bamundoss Mookerjea v Omeish Chunder Raee .) The rule affords only a presumption in the absence of any actual or express appropriation by the debtor or the creditor." (Omitting citations).
69 More recently, in French v Smith [2005] VSCA 114, at [35], that rule was followed:
"the amounts paid should be applied in accordance with the well-recognised principle that a sum paid in partial reduction of a debt is appropriated first against interest accrued on that debt and any balance is treated as reducing the capital amount."
70 Whilst these cases spring from facts surrounding mortgages, the principle was said to apply in the circumstances of this case. I was also referred to Morlines Maritime Agency Ltd v Skulptor Vuchetich (Tamberlin J., 29 August 1997, unreported), in which his Honour said, at 6-7:
"In order to justify the allocation of funds away from the in rem debts and in payment of the agency commission, Morlines relies on general law principles concerning the entitlement of a creditor to allocate general payments, which are not allocated by the debtor, to pay whichever indebtedness is considered appropriate by the creditor. Neither party submits that the rule in Devaynes v Noble ("Clayton's case") (1816) 1 Mer 572 applies in the present circumstances.
The general principle relied on by Morlines is that according to the general law:
".... it is open to the creditor, if the debtor himself in making the payment has not directed an appropriation, to appropriate the payment made by his debtor to any part of the debt he likes, or to whichever of two debts, if there are two debts, he prefers."