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[2011] NSWCA 149
Court of Appeal (NSW)
2011-05-18
Campbell JA, Macfarlan JA, Young JA, Pembroke J, MacFarlan JA
Original judgment source is linked above.
Judgment 1CAMPBELL JA : I agree with Macfarlan JA. 2MACFARLAN JA :
Nature of Case and Conclusions 3In the period 13 July 2006 to 26 September 2007, the respondent ("Equititrust"), as Lender, entered into five Credit Facility Deeds, each with one of the appellants as borrower ("the Borrowers"). The Deeds provided for the lending to the Borrowers for commercial purposes of amounts totalling in excess $20 million. With one limited exception, the Deeds were relevantly in the same terms. The Borrowers were companies that were each owned and controlled by Mr Charbel Demian who was an experienced businessman. 4The credit facilities for which the Deeds provided were cross-collateralised and performance of the Borrowers' obligations was supported by guarantees and securities. The amounts lent have all been repaid but, in the case of each of the facilities, that did not occur until after the date fixed for repayment. The terms of the facilities varied between six and 12 months. 5The Borrowers and various guarantors brought proceedings in the Equity Division of the Court to resolve a dispute that they had with Equititrust concerning the amount of interest that Equititrust was entitled to charge under three of the facilities. Equititrust contended that, from the due date for repayment of each of the facilities until repayment, it was entitled to charge interest at a rate described in the Deeds as the "Higher Rate". That rate was 6% per annum higher than the rate (described in the Deeds as the "Lower Rate") that was payable if the relevant Borrower was not in default. 6The Borrowers contended that Equititrust had made an election that precluded it from charging interest at the Higher Rate, or alternatively, that Equititrust was estopped from charging interest at that rate. 7The primary judge found that Equititrust was not so precluded and estopped and, for the reasons that I give below, I have concluded that the Borrowers' challenges on appeal to these conclusions fail. As a result, I consider that the appeal should be dismissed with costs.
The Terms of the Credit Facility Deeds 8The relevant terms of the Deeds are set out below. The only difference between the terms of the Deeds (other than those as to amounts lent, interest rates and the like) was that only one of the Deeds contained Clause 3.10, which is set out below.
The Judgment at First Instance 9The primary judge referred to the Borrowers' case of estoppel as being a paradigm case of promissory estoppel in which the "defendant is alleged to have made a representation to the plaintiffs, by words and conduct, justifying an assumption by the plaintiffs that the defendant would not exercise or insist upon its existing legal rights" (Judgment [41]). His Honour then said: "41. ... The well developed principles governing this type of estoppel are set out in Legione v Hateley (1983) 152 CLR 406; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; Giumelli v Giumelli (1999) 196 CLR 101. 42. On the facts of this case, these well developed principles require consideration of three primary requirements. First, the words or conduct of the defendant must be clear and unambiguous: Legione v Hateley 152 CLR 406 at 435-437. Second, the conduct of the plaintiff in relying to its detriment on those words or that conduct must be reasonable: State Rail Authority (NSW) v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170; Legione v Hateley (1983) 152 CLR 406. Third, the defendant must know or intend that the plaintiff will act or abstain from acting in reliance on those words or that conduct: Franks v Equitiloan Securities Pty Ltd [2008] NSWSC 33 at [72] per Brereton J." 10The primary judge summarised his conclusions on this aspect of the case as follows: "44. For the reasons that follow, I have concluded that all of the necessary features of an equitable promissory estoppel are absent in this case. The defendant's conduct was not clear and unambiguous; the plaintiffs' reliance was not reasonable; the defendant had no reasonable expectation that its words or conduct would induce some detrimental reliance by the plaintiffs; and the commercial reality and inherent probabilities are against the plaintiffs. Even more fundamentally, I am not satisfied that Mr Demian held and maintained the assumption that is the foundation of the plaintiffs' case. ..." 11The primary judge's conclusions as to election were as follows: "93. In my view, the circumstances of this case do not give rise to an election. The conduct relied upon was not unequivocal in the sense of being consistent only with the exercise of one of two sets of rights and inconsistent with the exercise of the other: Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646. 94. The contractual terms expressly contemplated, and absolved the defendant [that is, Equititrust] from the consequences of, any indulgence, omission, neglect, delay, waiver or failure to exercise a right. The defendant was not making a choice to charge the Lower Rate of interest and to abandon its entitlement to the Higher Rate. Further, it made its position pellucid in the loan statements which it issued to the Borrower. ... In my view, Mr Demian well understood this, despite his protestations that he did not read the reservation of the defendant's right to charge default interest that appeared on the statements. ..." 12His Honour also rejected the Borrowers' construction argument to which I refer immediately below (Judgment [81]-[91]).
The Construction Argument 13The Borrowers conceded on appeal that unless they were successful on an argument that they put concerning the proper construction of the Deeds, their election argument could not succeed (Appellants' Amended Submissions [3.15]). I shall deal with that construction argument first, followed by the election argument. 14The Borrowers' construction argument was that references to "default interest" in the Special Covenant in Item 14 of the Deeds and in certain account statements provided by Equititrust to the Borrowers' accountants were to the interest to which Clause 3.2(3) of the Deeds referred and not to interest at "the Higher Rate" referred to in the first sentence of Clause 3.2. The primary judge rejected this argument on the basis that there was no distinction between the interest referred to in the two provisions: that referred to in the former was the same as the "interest" at the "Higher Rate" referred to in the latter (see Judgment [81]-[86]). I agree with this view for the following reasons. 15By reason of its definition in Clause 1.1(12), the expression "Money Secured" in the first sentence of Clause 3.2 included "interest payable on the Money Secured including interest which has been capitalised" (see (b)(ii) of the definition). Thus if a Borrower did not make an interest payment when it was due, the amount of the interest due (calculated at the Higher Rate because the payment was not made when due) was required to be added immediately to the Money Secured, upon which interest would accrue (again at the Higher Rate as the Borrower would not have complied with the conditions stated in Clause 3.4 entitling it to be charged interest at the Lower Rate). 16Application of Clause 3.2(3) led to the same result. If an "Event of Default" occurred, the interest not paid was to be immediately "added to the Money Secured". However the inclusion in the definition of "Money Secured" of "interest payable on the Money Secured including interest which had been capitalised" had this effect anyway. Pursuant to Clause 8(1), an "Event of Default" would occur if a Borrower failed to make an interest payment on the due date (subject to the argument to which reference is made below at [23(c)] concerning the need for the exercise of an option). 17Clause 3.2(3) then provided that "such capitalised interest" was to bear interest at the Higher Rate. Again this was also the effect of applying the earlier parts of Clause 3.2 and the definition of the Money Secured. 18The two parts of Clause 3.2 thus had the same effect and a reference in the Special Covenant in Item 14 and the account statements to "default interest" was not to a type of interest different from that for which Clause 3.2 (excluding Clause 3.2(3)) provided. The expression "default interest" was apt to describe interest charged at the Higher Rate because the Borrowers' failure to meet the conditions in Clause 3.4 disqualified them from entitlement to the Lower Rate, whether that result was attributed to Clause 3.2 excluding sub-clause (3), or to Clause 3.2(3). 19The Borrowers argued that such an interpretation of Clause 3.2 could not be correct because the Court had to give separate operation to each provision of the Deeds and ought not to treat two provisions as duplicating each other. It is true that the Court does incline towards a construction that gives each provision separate work to do. However, if two provisions are unambiguous, as I consider the subject ones to be, the Court should give them their ordinary meaning even if it results in duplication. It is not unusual for commercial agreements to contain provisions that are surplusage. That may occur for a variety of reasons. For example, as is perhaps the case here, one party may have wished to make doubly sure that a provision that was important to it was put beyond doubt. In any event, the present is not a case of surplusage but of overlap as Clause 3.2(3) is not confined in its operation to defaults in interest payments 20In oral argument on the appeal, the Borrowers submitted that the effect of Clause 3.2(3) was to render payable an amount of interest additional to that which would have been payable as a result of the application of the remainder of the Clause (together with the definition of "Money Secured"). They said that this was so because application of Clause 3.2(3) resulted in the amount of interest not paid when due being capitalised one day earlier than would have been the case if the remainder of the Clause had applied. However, I do not consider that there is any difference in the time at which capitalisation occurs. In each case it occurs immediately upon the default in the making of the interest payment. I accordingly reject the argument.
The Election Argument 21The Borrowers' election argument was that Equititrust made an unequivocal election to charge interest at the Lower Rate, rather than the Higher Rate, by providing account statements to the Borrowers debiting interest only at the Lower Rate and by accepting payments of that interest. The Borrowers argued that Equititrust's rights to charge interest at the Higher and Lower Rates were inconsistent rights and that the common law principle concerning election between alternative rights or remedies (see Agricultural & Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [58]) precluded Equititrust from charging interest at the Higher Rate after it had made an unequivocal election to charge only at the Lower Rate. 22The account statements in question contained the following note at their foot: "This is a statement of transactions only and does not show a payout figure or default interest calculations". 23The Borrowers submitted that for the following reasons this note did not amount to a reservation by Equititrust of its rights that deprived Equititrust's conduct of the character of an unequivocal election: (a) The words "default interest" in the note referred to the interest for which Clause 3.2(3) of the Deeds provided and were not apt to describe interest at the Higher Rate charged in accordance with the remainder of Clause 3.2. (b) Clause 3.2(3) was conditioned upon an "Event of Default" occurring. (c) By reason of the opening words of Clause 8, an Event of Default could not have occurred unless Equititrust exercised its option conferred by that clause to hold the Borrowers in default. (d) As Equititrust did not exercise that option, it was not entitled to "default interest" under Clause 3.2(3). (e) As a result, the note on the account statements did not purport to preserve Equititrust's right to charge interest at the Higher Rate. It only applied to a different type of interest, namely "default interest" charged under Clause 3.2(3). This was not the type of interest in dispute in the proceedings because Equititrust had not exercised the option referred to in Clause 8. 24This submission cannot be accepted because I have concluded earlier that there is no difference between the interest to which Clause 3.2(3) refers and that to which the remainder of Clause 3.2 refers. Accordingly, the notes contained in the account statements were apt to refer to the interest charged at the Higher Rate that was in issue in the proceedings. 25As pointed out in [13] above, on the appeal the Borrowers accepted that if the Court reached this conclusion, it would follow that Equititrust had not unequivocally elected to charge the Lower, rather than the Higher, Rate, because Equititrust had expressly reserved the right to later claim interest at the Higher Rate. It follows that the Borrowers' election argument fails. 26That concession was appropriately made because, as I indicate at [30] below, Equititrust's rights were not inconsistent. If they had been inconsistent, a reservation of rights would likely have been ineffective because the outright exercise of one such right usually constitutes an election not to exercise the other, whatever reservation might have been made (see Haynes v Hirst (1927) 27 SR (NSW) 480 where a party unsuccessfully sought to "protect himself against the legal consequences of his acts by stating that he [did] them without prejudice" (at 489)). If the time has not arrived at which a party is confronted with the need to choose between two inconsistent rights, it may keep its position open by refraining from engaging in conduct that unequivocally indicates that it has made a choice between them (see Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26). If there has not been any outright exercise of one of the rights, reservations by a party of its rights may assist in depriving its conduct of the necessary unequivocal character. 27The submission referred to in [23] above also fails for the following further reasons. 28First, the occurrence of an "Event of Default" within the meaning of that expression in Clause 3.2(3) did not in my opinion depend upon the exercise by Equititrust of the option referred to at the commencement of Clause 8. This was so because an "Event of Default" was defined in Clause 1.1(5) to mean "the events set out in clause 8". The definition did not suggest that Equititrust needed to exercise an option for one of the events listed in Clause 8 to be characterised as an "Event of Default". The failure to make an interest payment when due was one of the events listed Clause 8 (see Clause 8(c)(i)). 29Secondly, if (contrary to my view) the characterisation of a failure to make an interest payment when due as an "Event of Default" was dependent on the exercise by Equititrust of an option to hold the Borrowers in default, Equititrust exercised that option. It did so at least by means of charging the Borrowers Loan Expiry Fees pursuant to the Special Covenant contained in Item 14. That Covenant provided that that fee was only chargeable if "[a]t the expiration of the term, ... the Borrower has not repaid on the due date". Failures to repay on the due dates were clearly defaults by the Borrowers. Equititrust's decision to charge Loan Expiry Fees to the Borrowers necessarily indicated that Equititrust was treating the Borrowers as in default because it was only if the Borrowers were in default that Equititrust was entitled to charge the Loan Expiry Fees. 30A further reason that the Borrowers' election argument fails is that, by charging interest at the Lower Rate, Equititrust did not exercise a right that was inconsistent with its rights to charge interest at the Higher Rate. Equititrust's conduct amounted to the charging (and acceptance of payment of) a part, rather than the whole, of the interest debt. That conduct did not of itself preclude Equititrust from subsequently claiming the balance as it has long been established that acceptance of part payment of a debt does not, without more, satisfy the whole of the debt ( Pinnel's Case (1602) 5 Co Rep 117a; 77 ER 237). The common law doctrine of election did not therefore apply here because Equititrust's claim for, and acceptance of payment of, the lesser amount of interest was not inconsistent with its later claim for a greater amount. This is not to say that some other principle of law such as estoppel might not in some circumstances preclude a creditor's later claim but that depends on other considerations to which, in relation to estoppel, I will turn later. 31For these reasons the common law doctrine of election did not protect the Borrowers from Equititrust's claim for interest at the Higher Rate.
The Estoppel Argument 32At first instance the Borrowers contended that Equititrust's conduct led them to make the following assumption: "That [Equititrust] would accept payment of interest calculated at the Lower Rate notwithstanding the expiry of the initial term of a loan facility, provided such interest was paid in a timely manner and [the Borrowers] paid a Loan Expiry/Extension Fee". 33Whilst Equititrust argued that on appeal the Borrowers sought to rely upon a materially different assumption, it seems to me that in substance the Borrowers adhered to this contention on appeal. However, as the primary judge pointed out (Judgment [45]) Mr Demian, who gave evidence on behalf of the Borrowers, did not give clear evidence that he, and therefore the Borrowers, made this assumption. What Mr Demian said was that Equititrust led him to believe that Equititrust "continued to offer the various facilities to the [Borrowers] until at least July 2010 without any charge for default interest because of the expiry of [the] facilities" (Affidavit of 27 April 2010 at [7]). This evidence did not, at least in terms, suggest that Equititrust at any stage promised not to charge interest at the Higher Rate. Rather, it was framed as an explanation for what Equititrust did in fact do. 34Mr Demian listed a number of matters that he indicated that he "took ... into account" in forming the belief to which he deposed. 35One of these was a conversation in which Mr Demian asserted that an officer of Equititrust told him that after the facility expiry dates Equititrust would only charge the Loan Expiry Fee (referred to in the Special Covenant in Item 14) and would not charge "default interest". The primary judge rejected Mr Demian's evidence of this conversation and also that of a conversation to similar effect that Mr Demian included in his list and said occurred in June 2009 (Judgment [51]-[54]). 36On the appeal the Borrowers did not challenge these rejections. As Mr Demian had not given evidence that the other matters that he listed independently gave rise to his asserted belief, the Borrowers were left without any evidence that the conduct of Equititrust led them to form a relevant belief. This result is fatal to the Borrowers' estoppel argument as an essential element of a promissory estoppel is that the party claiming the benefit of the estoppel must have been induced by the other party to adopt a particular assumption or expectation on which the former acted to its detriment (see for example, Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387 at 428-9). 37A further reason that the Borrowers' estoppel argument fails is that if the Borrowers did make the relevant assumption as a result of Equititrust's conduct, that conduct was, for the reasons given below, not clear and unambiguous. The consequence is that it was not reasonable for the Borrowers to rely upon it and Equititrust cannot be expected to have anticipated that the Borrowers would rely on it in that way. 38Being unable to rely upon Mr Demian's rejected evidence of conversations with an officer of Equititrust, on the appeal the Borrowers relied only upon the following alleged conduct of Equititrust: "(i) When the [Guildford] facility ($2,315,000) expired on 13 April 2007 the Respondent charged a loan expiry fee but kept charging and accepting interest at the lower rate. Further the Respondent proceeded to enter into the Summer Hill ($8,200,000) and Demian Construction ($3,630,000) facilities even though the [Guildford] facility had expired notwithstanding the fact that, as a result of the deed of collateralisation any default in one facility was a default in each of the facilities; (ii) On 15 August the CTP facility expired. Again the Respondent charged a "loan expiry fee" but continued to charge and accept interest at the lower rate; (iii) On 5 November 2008 the Respondent sent the Appellants an email advising of the interest payable on the various facilities for the period November 2008 to January 2009. The interest claimed was interest at the lower rate; and (iv) The terms of the letter of offer whilst referring to the expiry fee make no reference to interest at the higher rate also being payable if the loan passes its expiry date without being repaid" (Written Submissions [5.1]). 39The Borrowers reliance on the first two matters ((i) and (ii)) involved the implicit submission that because Equititrust charged interest at the Lower Rate after the Guildford and CTP facilities expired but were not repaid, it impliedly promised the Borrowers that no claim for interest at the Higher Rate would be made in similar circumstances in respect of the other three facilities. It is only interest on these other three facilities that is in issue in the proceedings. In my view however, the matters relied upon did not give rise to that implication, certainly not one that was conveyed in a clear and unambiguous fashion. A borrower is not, without more, entitled to assume that because a lender acts in a particular manner in one transaction, it will act similarly in another. 40The relevant parts of the email referred to in sub-para (iii) were as follows: "[I] thought [I'd] drop you a note to inform you of your upcoming interest payments to assist with your cashflow. [Interest amounts for three months in respect of two of the facilities then appeared. They were calculated at the Lower Rate.] ... Payments are due on the 15 th of each month. There is currently a 'zero tolerance' on unpaid/late interest across the book at present. If interest isn't received by the due date default notices will be issued within 7 days. If you've got any question with any of the above please don't hesitate to contact me". 41This email cannot reasonably be construed as conveying that Equititrust intended to abandon its right to charge interest at the Higher Rate. As indicated by its terms, the figures given were directed to "cashflow" in the immediately following months, rather than to ultimate legal entitlement to interest. 42The assertion in sub-para (iv) quoted in [38] above involves a misstatement of the terms of the letters of offer that preceded the parties' entry into the Deeds. The letters of offer referred, albeit at different places in the letters, both to the charging of interest at the "default rate" in the event of default and to the charging of a loan expiry fee if the loans were not fully repaid at the date of expiry of the facilities. In any event, the arrangements recorded in the letters of offer were superseded by those in the Deeds (see Clause 27.2). 43For these reasons Equititrust did not engage in any clear and unambiguous conduct that was capable of inducing the Borrowers to form the assumption that they contend that they formed. As a result, any reliance by the Borrowers upon the conduct that they identified on the appeal was not reasonable and Equititrust can have had no reasonable expectation that the Borrowers would rely upon that conduct in the way that they contended that they did. In these circumstances the Borrowers' estoppel argument fails.
Orders 44For the reasons that I have given, the appeal should be dismissed with costs. 45YOUNG JA : I agree with Macfarlan JA, but wish to make some additional comments. 46It is significant that under clause 3.2 of the key document the Higher rate was the contractual rate. It is only if the preconditions in clause 3.4 apply that the Lower rate constitutes a sufficient discharge of the obligation to pay interest. 47The reason why the document takes this form is that, traditionally, making the lower rate the ordinary rate and setting a higher rate for late payment might be set aside as a penalty in equity (see Fisher & Lightwood's Law of Mortgage , 2 nd Australian Edition [39 55]). 48Whilst lawyers appreciate this, it is understandable that lay borrowers may not, especially if the lender does not strictly enforce the payment of interest at the contractual rate. 49I can thus understand the appellants' apparent feeling that they are hardly done by, but in my view, as Macfarlan JA has so clearly pointed out, they are contractually bound to pay in accordance with the primary judge's determination.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 June 2011
Summer Hill Business Estate Pty Ltd
Equititrust Ltd
(2008) 238 CLR 570
(1993) 182 CLR 26
(1988) 164 CLR 387
(1983) 152 CLR 406
(1999) 196 CLR 101
(1986) 7 NSWLR 170
(1974) 131 CLR 634