Varangian Pty Ltd v OFM Capital Limited [2003] VSC 444

Supreme Court of Victoria|2003-11-12|Before: DODDS-STREETON J.

VALIDITY OF NOTICES TO PAY UNDER S.76 OF THE TRANSFER OF LAND ACT and notices for possession - Whether moneys secured by mortgages payable on demand - Whether an effective declaration pursuant to loan contract that moneys payable on demand - Whether declaration served prior to event of default - Calculation of period of failure to pay under loan contract - Whether mortgagee precluded from exercise of rights under loan contract by fiduciary duty owed under joint venture agreement between mortgagor and mortgagee's related company - Whether corporate veil should be lifted - Whether exercise of mortgagee's rights on default was precluded by duty of good faith implied into loan contract - Transfer of Land Act 1958, s. 76; Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (13 April 2000); ; ; ; ;

1 The first plaintiff, Varangian Pty Ltd ("Varangian"), is the registered proprietor of land situated at 455-457 Glenferrie Road, Kooyong ("the Kooyong land"). The second plaintiff, Kenneth Ross Jennings, is a director of Varangian.

2 The first defendant, OFM Capital Limited, formerly Collins Street Capital Ltd, ("Collins") and the second defendant, Over Fifties Mutual Friendly Society Limited ("OFM") are related companies within terms of s.50 of the Corporations Act 2001. They have the same directors, officers, registered office, shareholder and ultimate holding company.

3 The plaintiffs seek declarations that notices of demand, declarations, notices to pay and notices for possession sent by the defendant mortgagees are invalid. They seek to restrain the defendants from taking any steps to enforce the notices or to recover possession of the Kooyong land. Further, they seek that OFM be required to determine the dispute with the plaintiffs pursuant to a dispute resolution clause of a Joint Venture Agreement between the plaintiffs and Collins.

4 Collins and OFM are each wholly owned subsidiaries of OFM Investment Group Ltd. They are members of a group of companies ("the Over Fifties Group"). At the date of the relevant transactions, OFM was a friendly society within terms of s.16C of the Life Insurance Act 1995. OFM held members' statutory benefit funds which it was required, pursuant to statutory regulation and relevant prudential rules, to advance only on the security of registered first mortgages, to a limit of 66 2/3 of the value of the security property on completion. Collins, in contrast, was incorporated in 2000 in order to develop a "mezzanine and equity" financing operation for the Over Fifties Group, pursuant to which Collins could invest funds by way of joint venture or profit sharing arrangements. The funds to be advanced by Collins in such ventures were not members' benefit funds but management funds, which were not subject to the same restrictive prudential guidelines.

5 Mr Dennis Cartwright was a longstanding director within the Over Fifties Group, who had been its managing director and Chief Executive Officer. Mr Cartwright was a director of Collins. He was the officer principally responsible for developing Collins' investment operations.

6 Mr Jennings, the director of Varangian, was an experienced builder. Varangian owned the Kooyong land, which it sought to develop. In April 1999 Varangian obtained a permit permitting the construction of eight residential properties on the Kooyong land. The Kooyong land was subject to existing mortgages. Varangian required funds to discharge the existing mortgages and to develop the land.

7 In July 2000, Messrs Jennings and Cartwright agreed in principle upon a joint venture to develop the Kooyong land. They also contemplated including the development of additional land situated in Clara Street, South Yarra ("the Clara Street land") which was owned by a third party, Macs Associates Pty Ltd ("Macs"). The proposed joint venture was the first joint venture transaction undertaken by Collins.

8 Further discussions and negotiations took place between Mr Jennings and Mr Cartwright. The Investment Board of the Over Fifties Group approved the advance of the principal funds for the development of the Kooyong land and the Clara Street land by OFM as first mortgagee, and the advance of the balance of funds by Collins as second mortgagee.

9 On 3 November 2000 a number of agreements were executed by the parties in relation to the joint venture, its funding and the security for that funding.

(a) A Joint Venture Agreement dated 3 November 2000 executed by Varangian, Jennings and Collins.

(b) A Loan Agreement dated 3 November 2000 executed by Varangian and Collins.

(d) A mortgage dated 3 November 2000 of the Kooyong land given by Varangian in favour of OFM.

(e) A mortgage dated 3 November 2000 of the Clara Street land given by Macs in favour of OFM.

(f) A mortgage dated 3 November 2000 of the Kooyong land given by Varangian in favour of Collins.

(g) A mortgage dated 3 November 2000 of the Clara Street land given by Macs in favour of Collins.

11 The OFM loan agreement provided for a maximum loan to Varangian of $4,325,000 (comprising $1,005,000 and $150,000, and $2,845,000) in relation to the Kooyong land and a maximum loan of $325,000 in relation to the Clara Street land.

12 The Collins Street loan agreement provided for a maximum loan to Varangian of $275,000 comprising $95,000 and $5,000 in relation to the Kooyong land and a maximum loan of $175,000 in relation to the Clara Street land.

13 The first draw down of loan funds occurred on 3 November 2000. The loan agreements provided for repayment two years from the date of first drawn down. Accordingly, the repayment date for the loan funds was 3 November 2002.

14 Mr Jennings and Varangian were advised and represented by Messrs Deacons, solicitors, in relation to the negotiation and execution of the joint venture and the associated loan agreements and mortgages. Mr John Boyall, a senior associate at Deacons, by certificate dated 27 October 2000 certified that Mr Jennings, as the company officer of both Varangian and Macs, had indicated that he had read and understood the security documents.

15 The relationship and mutual dealings between Messrs Jennings and Cartwright, were harmonious. After the execution of the Joint Venture Agreement in November 2000, an amended planning permit for the Kooyong land was sought. The application for the amended planning permit delayed the commencement of construction of the Kooyong development until August 2001.

16 In August 2001, coinciding with the commencement of construction, Mr Cartwright ceased to represent the Over Fifties Group. Thereafter, Varangian dealt with Mr Michael Rehak (the new Chief Executive Officer within the Over Fifties Group) his successor, Mr Curtis, and Mr John Sampson, a credit manager retained by the Over Fifties Group.

17 According to Mr Jennings, from August 2001 the parties' relationship deteriorated. Problems and conflicts arose in Varangian's dealings with the Over Fifties Group in relation to the Kooyong development. A number of events or developments occurred. K.R. & D. Jennings Pty Ltd ("K.R. & D."), a building company associated with Mr Jennings, was retained as the builder of the development pursuant to a contract with Varangian. According to Mr Jennings, he was reluctant to execute the building contract and was pressured to do so by the defendants. A firm of quantity surveys, Napier & Blakeley, was retained by the defendants in relation to the Kooyong project. Mr Jennings asserts that from that date, the Over Fifties Group did not assist him with paperwork or project management. They insisted that documentation such as the building contract be finalised before advancing funds, which contributed to delay in construction of the project. Mr Jennings received the building contract for execution in March 2002 but apparently failed to execute it until June 2002.

18 The plaintiffs asserted that a two year period was estimated for the completion of the Kooyong development. Mr Jennings stated at trial that in August 2001 he gave an estimate of ten months, which was an "unrealistic forecast".

19 An incident occurred in August 2001, during which Mr Sampson requested Mr Jennings to amend a document, in circumstances which Mr Jennings construed as indicating that Collins was henceforth acting merely as a lender, contrary to its obligations as a joint venturer.

20 Mr Jennings deposed that from late August 2001, the defendants refused to make payments to Varangian or K.R. & D. until after the defendant's solicitor had prepared and finalised documentation giving effect to the building contract, builders margin and related matters. Notwithstanding that the building works had commenced in August 2001, the plaintiffs did not receive any moneys due to them or K.R. & D., (save for a small part of the project management fee in April 2002) until after 3 June 2002. He further deposed that the only moneys received by Varangian were by way of reimbursement for third party expenses incurred in the development and that from September 2002, constraints were placed upon Varangian, K.R. & D. and himself.

21 On the other hand, the Over Fifties Group representatives noted that Mr Jennings was "struggling" and appeared to find the completion of paperwork difficult. The lenders' internal memoranda and file notes expressed concerns that the Kooyong project would not be completed, nor the loans repaid, by November 2002. Further, concerns were expressed that the costs of the project would exceed the original estimate, reflected by the maximum loan amounts.

22 In June 2002 approximately $700,000 was advanced to Varangian without a formal application.

23 By letter to Varangian dated 3 September 2002 Mr Curtis offered to extend repayment of the total loan amounts to 3 April 2003 and to increase the total loan amount by about $695,000. The offer was stated to be open for seven days. It was withdrawn after Mr Jennings stated that a 3 April 2003 completion date was not sufficient and that a completion date of 30 June 2003 would be more realistic.

24 By letter to Varangian dated 30 September 2002 Mr Curtis made an offer of finance before the loans expired on 3 November 2002, but delay occurred when Varangian failed to provide information on the fixed completion dates and costings.

25 The letter of Mr Sampson to Varangian dated 9 October 2002 indicated that the loan accounts would not be extended beyond the expiry date of 3 November 2002 until Varangian provided a fixed date for practical completion.

26 The two year term contemplated by clause 5.1 of the loan agreements expired on 3 November 2002. As at 3 November 2002 OFM had advanced $5,390,646 to Varangian. At trial, Mr Jennings did not dispute that he realised that the loans were in default after that date.

27 Mr Jennings also stated at trial that he was aware, after 3 November 2002, that the lenders were dissatisfied with Varangian's failure to provide the information they required in order to advance further moneys and that they were threatening to serve default notices. A facsimile of 8 November 2002 from Mr Sampson to Varangian confirmed that the term for the loans had expired and that the defendants' legal advisers had been requested to issue default notices.

28 The lenders did not make any payments from 4 November 2002 to about 6 December 2002, although Varangian pressed for reimbursement of the amounts it had paid to trade creditors. However, between 1 November 2002 and 30 December 2002, a total sum of $383,000 was advanced by the lenders.

29 By letter to Varangian dated 16 December 2002 Mr Curtis offered to extend both loans to 30 June 2003, and to increase the total amount of the loan by $885,000.

30 There were further negotiations, resulting in a further letter of offer by Mr Curtis dated 31 December 2002 which, although it still offered to extend the term of the Kooyong loan to 30 June 2003, reduced the extension of the term for the Clara Street loan to 28 February 2003. The letter specified a practical completion date of 1 March 2003 (or up to 31 March 2003 in the event of factors beyond the builder's control). The offer of additional loan funds was reduced to $830,000.

31 The expiry term included in the letter of 31 December 2002 was based upon Mr Jennings' indication in his letter to Mr Curtis dated 27 November 2002 that practical completion would occur on 1 March 2003, or 31 March 2003 if there were delays beyond the reasonable control of the builder. At trial, Mr Jennings asserted that he believed that completion would have been achieved by 1 March 2003 had there been co-operation and certainty of payment.

32 On 10 January 2003, Varangian executed the letter of offer dated 31 December 2002. Mr Jennings stated at trial that he was aware that the terms and conditions of the loan and joint venture documents otherwise remained unchanged. He stated that although he did not feel comfortable with the extended date, at the time of acceptance, he believed that it was `probably' achievable.

33 By letter to Mr Curtis, dated 9 October 2002, Kalus Kenny, solicitors for Varangian, had indicated that Varangian was seeking to refinance the Clara Street loan. Kalus Kenny sought the payout figure and the preparation of discharges of mortgage. Those requests were repeated in the e-mail of Mr Cartwright dated 19 November 2002, sent on behalf of Mr Jennings.

34 Despite the indications that Varangian had arranged to re-finance Clara Street, Mr Jennings testified that he had experienced difficulty in re-financing, which took longer than originally anticipated.

35 The letter of Victorian Securities (a subsidiary of Bendigo Bank) to Varangian dated 15 November 2002, required acceptance of its offer to re-finance the Clara Street loan within seven days. The offer for finance was conditional upon the receipt of additional information about the proposed development.

36 Mr Jennings stated that the offer by Victorian Securities was not accepted within the seven day period stipulated, as there was some "fine tuning to be done".

37 By the letter of Mr Jennings to Mr Curtis dated 23 December 2002 (the seven day period given by Victorian Securities having lapsed) Mr Jennings stated that the re-financing of the Clara Street loan was `in hand'.

38 In my opinion, the evidence establishes that Varangian represented to the lenders that the re-financing of the Clara Street loan by Victorian Securities was imminent in October 2002. It gave no indication that the loan monies would not be re-paid by the renegotiated expiry date of 28 February 2003.

39 By letter to Mr Anthony Ongarello of the Over Fifties Group dated 28 February 2003 Varangian advised that various rostered days off and holidays had occurred, which had delayed the completion of the Kooyong project. The letter acknowledged that a considerable number of tasks were not yet completed. It gave estimates (typically seven to ten days) of the further time necessary for completion of the outstanding tasks.

40 The letter acknowledged that the completion date of 1 March 2003 would not be achieved. It stated:

"we note that at all times you had been advised that a completion date of the 1st March 2003 would be unattainable due to the circumstances that arose some months ago and the Christmas break/union days off involved in the time frame required by yourselves."

41 Mr Jennings conceded that the original completion date for the Kooyong project was June/July 2002. In a letter to Varangian dated 30 September 2002 Mr Curtis noted that the revised practical completion date was 24 November 2002. By letter dated 9 October 2002, Kalus Kenny advised Mr Curtis that "practical completion is now anticipated to be achieved by about early to mid December 2002". In a letter to Kalus Kenny dated 16 October 2002, Mr Sampson wrote that "the date by early to mid December 2002 is not specific enough". By letter to Mr Sampson dated 29 October 2002, Mr Jennings stated that the "anticipated completion will occur in late December 2002". By letter of Mr Sampson dated 8 November 2002 to Mr Jennings, Mr Sampson requested that a firm date for practical completion be provided. Subsequent negotiations throughout November and December 2002 extended the date of practical completion further to 1 March 2003 (with a further extension to 31 March 2003 in the event of delays beyond the reasonable control of the builder.)

42 Mr Curtis stated at trial that upon receipt of Varangian's letter of 28 February 2003, he was no longer able to believe Varangian's assurances that completion would be achieved within the time estimated. He had lost confidence in Varangian's ability to complete the project in the light of the frequent revisions of completion date. Mr Curtis stated that "at that stage we no longer had confidence in Mr Jennings and the information he was providing ... We sought to verify it through an independent project manager and he denied access to the site". Mr Curtis further stated that although up to February 2003, the Over Fifties Group were "actively trying to work with Mr Jennings and assist him by bringing other personnel as well as ourselves", from 28 February 2003 he thought "in terms of protecting the interests of the benefit funds, they're not a party to the joint venture".

43 By letter to Varangian dated 3 March 2003, on the letterhead of the Over Fifties parent company, John Benporath (General Manager, Mortgage Funds) referred to the letter of 31 December 2002. He noted that pursuant to the terms of that letter, the loan facilities for Clara Street had expired on 28 February 2002.

44 By notices of demand dated 3 March 2003 to Varangian, Collins sought repayment of $214,768.16 and OFM sought repayment of $390,102.37 being the amounts outstanding on the Clara Street loans.

45 The notices of demand were received by Varangian at a time after 4.00 p.m. on 3 March 2003.

46 By notices of declaration dated 18 March 2003 to Varangian, OFM and Collins declared that pursuant to clause 8(2)(b) of the Loan Agreements, with effect from the date of the notices, the full amounts of the loans outstanding under the Loan Agreements were immediately due and payable on demand being made by the lenders.

47 By notices of demand dated 18 March 2003 to Varangian, OFM demanded repayment of $5,013,855.88 and Collins demanded repayment of $1,905,442.94.

48 The notices of declaration and notices of demand were received by Varangian at a time after 4.00 p.m. on 18 March 2003.

49 On 19 March 2003 Mr Curtis unsuccessfully attempted to contact Mr Jennings by telephone, seeking to discuss matters. Despite Mr Curtis' message requesting Mr Jennings to contact him or Mr Sampson to discuss the status of the loan, Mr Jennings did not do so.

50 On 1 April 2003 Varangian repaid the Clara Street loan in full.

51 The letter of Anderson Rice (solicitors for the defendants) to Varangian, dated 1 April 2003 noted that the mortgages over Clara Street would be discharged and the Clara Street land released. The letter noted that such discharge did not constitute a release from any ongoing obligations which Varangian had under the personal covenants in clause 1.5 of the Common Provisions of Mortgage "to make payment of balance remaining unpaid under the Loan Agreements due to the existence of an event of default".

52 Certain additional land had been added to the Kooyong land as a result of an adverse possession claim. The lenders had sought the urgent completion of the mortgage documentation of the Kooyong adverse possession land. Varangian did not return it until 19 March 2003.

53 By letter dated 19 March 2003 to Varangian, Mr Curtis set out his concerns. The letter stated that the documents extending the loan facilities after 3 November 2002 had not been executed and returned by the 7 March 2003 deadline. No meeting had been sought and the refinance of Clara Street had not taken place. The Clara Street and Kooyong loan facilities were in default. The Kooyong construction was not complete and no completion date had been given, despite requests.

54 The letter further complained that no reports on the project had been supplied by Varangian. Baracon, an organisation retained by the lenders to assist completion, had been refused entry to the site. The costs of the Kooyong construction continued to increase. The additional $800,000 advance approved in January 2003 was almost fully drawn, but no further sums had been requested. The mortgage documentation for the adverse possession land had not been returned, despite Varangian's assurances. The plan of subdivision for the Kooyong land consequently could not be lodged. No budgeted and target selling prices had been submitted to Mr Curtis by Varangian, despite repeated requests since January 2003. No selling agent for the Kooyong land development had been appointed.

55 The letter concluded, "We cannot allow the above matters to continue to be not properly attended to. Therefore unless we receive a satisfactory proposal from you by 27 March 2003 in respect of each of the above, then we will take steps to place Varangian Pty Ltd under external administration". Varangian did not respond to Mr Curtis' letter of 19 March 2003.

56 Mr Jennings stated that in March 2003, he had refused entry to the Baracon Group, which the lenders had arranged to assist with the completion of the project, because he believed that the project was virtually complete and another contractor was not necessary at that point in time.

57 At trial, Mr Jennings stated that by March 2003 he believed the Over Fifties Group was treating him unfairly, and not "wishing for a decent resolution of the whole project". Mr Curtis' letter of 19 March 2003 invited "a satisfactory proposal" by 27 March 2003. Mr Jennings responded, by a letter dated 27 March 2003, that "the project is close to completion and final costs will be known and advised shortly". He stated at trial that he could give no further or more precise information, and the lenders themselves could see what state the project was in at the time.

58 The letter of Mr Ongarello of the Over Fifties Group to Varangian dated 31 March 2003 stated that the defendants did not accept the proposal in Mr Jennings' letter of 27 March 2003 and reserved their rights.

59 Mr Jennings contended at trial that by 19 March 2003, he considered that the Over Fifties Group had decided to take action to obtain possession of the Kooyong land and that any further discussion would be futile.

60 By Notices to Pay pursuant to s.76 of the Transfer of Land Act 1958, dated, and sent to Varangian by facsimile on, 2 April 2003, OFM required payment of the principal, interest and other moneys secured by the mortgages.

61 By Demands for Possession dated, and sent to Varangian by facsimile on, 2 April 2003, pursuant to the Kooyong mortgage and the adverse possession land mortgage, OFM gave notice of its intention to enter upon and take possession of the mortgaged land and to exercise its rights and powers as mortgagee under the Transfer of Land Act 1958 and all other relevant rights and remedies.

62 On 4 April 2003 and 11 April 2003 the plaintiff obtained injunctions preventing the defendants from relying upon the notices. The Kooyong development was completed following some weeks of further work. The first apartment was sold in September 2003, with the cooperation of the parties. The remaining units are not yet sold.

63 The Joint Venture Agreement dated 3 November 2000 was executed by Varangian, Collins and Mr Jennings. The definition of "Joint Venturers" in clause 1.9 states: "...the Owner and Collins and "Joint Venturer" means either of them". Clause 1.8 defines the joint venture as "the establishment of [the] Agreement and the relationships between the Owner, Collins and Jennings".

64 Although OFM was the principal lender, it was not a party to the Joint Venture Agreement.

65 Clause 2.2 of the Joint Venture Agreement states that the object of the joint venture is to achieve development by Varangian "making available the land and arranging for the completion of building plans by obtaining approval ... to construct the buildings" and to "subsequently sell the individual residential apartments comprising the Development in a timely and cost effective manner for a profit to the joint venturers".

66 Clause 4.1 of the Joint Venture Agreement provides that "the Owner and Collins hereby associate themselves as Joint Venturers ..."

67 Clause 10.1 of the Joint Venture Agreement provides:

"The Joint Venturers will finance the construction of the Buildings and all other expenses of the Development ... through loan funds advanced by such financier or combination of financiers as recommended by Collins. All such finance is to be arranged by Collins..."

68 On 3 November 2000 Varangian entered (a) a loan agreement with Collins ("the Collins Loan Agreement"); and (b) a loan agreement with OFM ("the OFM Loan Agreement"). Collins and OFM advanced funds to carry out the development of the Kooyong land ("the Kooyong land") and the Clara Street land ("the Clara Street land"). The first draw down of funds occurred on 3 November 2000.

69 The Collins Loan Agreement and the OFM Loan Agreement each provided for advances to fund the development of a property situated at 34 Clara Street, South Yarra ("the Clara Street loan") owned by Macs, a related party of the plaintiffs.

70 The principal funding of the Kooyong development and the Clara Street development was advanced by OFM as a first mortgagee. Collins also advanced funds as second mortgagee.

71 The loan agreements are in identical terms save for the identity of the parties and the amounts of the loans.

72 The OFM Loan Agreement between OFM and Varangian dated 3 November 2002 recites that:

"The Lender has at the request of the Borrower agreed to provide the Loan to the Borrower. The Borrower has agreed to secure repayment to the Lender of the Loan by procuring the execution and delivery of the securities."

73 Clause 1.1 defines "securities" as the securities specified in item 1 of the Schedule. Item 1 of the Schedule identifies as first ranking freehold mortgages over the Kooyong land by Varangian and over the Clara Street land by Macs, and guarantees and indemnities given by Jennings.

"The Joint Venture Agreement" means the agreement between the Borrower and Collins Street Capital Ltd for the development of the Glenferrie Road properties by the construction of residential apartments. "Maturity Date" means the date being 2 years from and including the Effective Date. "Effective Date" means the day on which the first amount of the Loan is drawn down by the Borrower. "Loan" means the Principal Sum and all other money that the Borrower is liable to pay to the Lender under the terms of this Agreement and under any Securities."

75 By clause 1.1 "Event of Default" means any of the events or circumstances described in clause 8.1

"Each of the following, unless waived by the Lender, is an Event of Default. (a) (other obligations) If the Borrower fails to perform any provision of any Transaction Document requiring performance by it (other than a failure referred to elsewhere in this clause) and that failure is incapable of remedy or if capable of remedy continues for 14 days after the Borrower receives a notice from the Lender requiring that the failure be remedied ... "

"If an Event of Default has occurred and has not been remedied, the Lender may at any time by notice to the Borrower, declare any or all of the following: (a) that the amount of the Loan outstanding, and any other amounts outstanding under this Agreement are due and payable, in which case those amounts will be immediately due and payable; (b) that the full amount of the Loan outstanding, and any other amounts outstanding under the Agreement are due and payable on demand, in which case those amounts will be due and payable immediately on demand made at any time by notice from the Lender to the Borrower."

78 By clause 1 of the Loan Agreement "Transaction Document" means each of -

"the Agreement; any other document which the Lender and Borrower so designate in writing; each other document contemplated by or required in connection with any of the above or the transactions which they contemplate; each document entered into for the purpose of amending, novating, restating or replacing any of the above."

"A Notice given to a person in accordance with this clause is treated as having been given and received: (a) if delivered - on the day of the delivery if delivered before 4.00 pm on a Business Day, otherwise on the next Business Day; (b) if sent by pre-paid mail - on the day of actual delivery if delivered before 4.00 pm on the Business Day, otherwise on the next Business Day; (c) if transmitted by facsimile and the transmission report states that it was sent in full and without error - on the day of transmission if that report states that the transmission was completed before 4.00 pm on a Business Day, otherwise on the next Business Day."

80 Clause 5.1 of the Loan Agreement relevantly provides:

"The Borrower and the Lender acknowledge that by entering into this Agreement it is their intent that the outstanding amount of the Loan, advanced in part to the Borrower on the Effective Date and then on each draw down date ... is to be repaid in full on the Maturity Date ... "

81 Clause 5.5 provides that in the event that the borrower is not in default under the Loan Agreement, the Clara Street securities will be released on repayment of the Clara Street loan.

82 The combined effect of clause 5.1 and the definitions of "Maturity Date" and "Effective Date" in clause 1.1 indicates a two year term for the Loan, which expired on 3 November 2002 because, as a matter of fact, the first draw down of loan funds by the borrower occurred on 3 November 2000.

83 The Loan Agreement is a Transaction Document within the terms of clause 1. Repayment of the loan by the due date is thus a provision of a Transaction Document requiring performance by the Borrower.

84 A failure to repay is capable of remedy[1]. If it continues for 14 days after the Borrower receives a notice from the Lender requiring that the failure be remedied, that constitutes an Event of Default pursuant to clause 8.1(a) of the Loan Agreement.

85 Varangian, by mortgages dated 3 November 2000, mortgaged the Kooyong land to Collins and OFM, to secure the liability under the loan agreements and the Joint Venture Agreement.

86 By Mortgage X269494T dated 3 November 2000, Varangian, as mortgagor, mortgaged the land described in Certificates of Title volume 4266, folio 091, volume 8122, folio 228, volume 2977, folio 235 and volume 3028, folio 495 to OFM as mortgagee.

87 By Mortgage X269495Q dated 3 November 2000 Varangian, as mortgagor, mortgaged the land described in Certificates of Title, volume 4266, folio 091, volume 8122, folio 228, volume 2977, folio 235 and volume 3028, folio 495 to Collins as mortgagee.

88 By Mortgage AB978040B dated 28 March 2003 Varangian, as mortgagor, mortgaged the land described in Certificate of Title volume 10700, folio 690 (the adverse possession land) to Collins as mortgagee.

89 By Mortgage AB978039K dated 28 March 2003, Varangian, as mortgagor, mortgaged the land described in Certificate of Title volume 10700, folio 690 (the adverse possession land) to OFM as mortgagee.

90 The mortgages were expressed to incorporate Memorandum of Common Provisions No. AA562.

91 Clause 24 of the Memorandum of Common Provisions provides:

"What can happen if you are in default? 24 When are you in default 24.1 You are in default if: 24.1.1 You do not pay the amount owing on time; or 24.1.2 You do something you agree not to do, or you don't do something you agree to do, under this mortgage or in an agreement covered by this mortgage;

....

24.1.6 You do not, or another person does not, carry out in full an undertaking given in connection with this mortgage or an agreement covered by this mortgage, within the period specified, or within seven days if no period is specified; 24.1.7 You are in default under any other contract you have entered into with us or any other member of the Group."

92 Clause 25 of the Memorandum of Common Provisions provides:

"What can happen then? 25.1 If you are in default then subject to any law (including requirements as to notice) the amount owing becomes immediately due for payment and we can enforce this mortgage. In addition, we may then do one or more of the following as well as anything else the law allows us to do as mortgagee. 25.1.1 sue you for the amount owing; and 25.1.2 take possession of the property."

93 Clause 30 of the Memorandum of Common Provisions provides:

"Notices, other communications and service of documents. 30.5 A communication is taken to be given: 30.5.1 in the case of a communication given personally - on the date it is received by the person to whom it is addressed; or 30.5.2 in the case of a communication sent by post - on the date it would have been delivered in the ordinary course of post; or 30.5.3 in the case of a communication sent by fax or some other form of electronic transmission - on the date on which the machine from which it was sent produces a report indicating the communication was sent to the fax or other number of the person to whom it is addressed."

93A Section 76 of the Transfer of Land Act 1958 (Vic) provides:

"Procedure in case of default in payment of moneys secured

(1) If default is made in payment of the principal sum interest or annuity secured or any part thereof or in the performance or observance of any covenant express or implied in any such mortgage or charge and continues for one month or such other period as is therein expressly fixed, the mortgagee or annuitant may serve on the mortgagor or grantor of the annuity and such other persons as appear by the Register to be affected notice in writing to pay the money owing or to perform and observe the covenants (as the case may be).

(2) Where money secured by any such mortgage is made payable on demand a demand in writing pursuant to the mortgage shall for the purposes of this Act be equivalent to serving the notice aforesaid."

94 The plaintiffs contend that OFM, although not nominated as a party to the Joint Venture Agreement was equally subject to the fiduciary duties and obligations set out in clause 3, including the duty of good faith.

95 The plaintiffs submit that OFM, although a separate legal entity from Collins, is subject to obligations and fiduciary duties under the Joint Venture Agreement either pursuant to clause 17 of the Joint Venture Agreement or because, in the circumstances, the corporate veil should be lifted.

96 The plaintiffs contend that the fiduciary duties under the Joint Venture Agreement were inconsistent with, and precluded, the exercise of the rights expressly conferred on the lenders under the loan agreements in the event of the borrower's default. Alternatively, the plaintiffs appeared to contend that breaches of the fiduciary obligations were the foundation of the borrower's default under the loan agreements. In particular, the plaintiffs assert that the lenders' delays in, and restrictions on, payment of funds, caused Varangian's incapacity to meet the completion date and hence (it would seem) the plaintiffs argue that the defendants breached the fiduciary duty of good faith by contributing to the Clara Street default on which they then based the notices. Further, the plaintiffs argue that basing the notices to pay the Kooyong loan and the notices for possession of the Kooyong land on the Clara Street default (after the Clara Street loan had in fact been repaid) was also a breach of good faith. It amounted to a collateral or ulterior purpose, in that the lenders improperly planned to use the relatively minor Clara Street default in order to obtain possession of the Kooyong land, at a time when the Kooyong loans (by reason of the extension to 30 June 2003) were not otherwise in default. The OFM default notices dated 3 March 2003, notices of declaration and notices of demand dated 18 March 2003 and notices under s.76 of the Transfer of Land Act 1958 dated 2 April 2002 are thus submitted to be invalid or ineffective on the basis of breach of the fiduciary obligations under the Joint Venture Agreement.

97 The plaintiffs also contend that OFM (if it is not subject to the obligations under the Joint Venture Agreement) is subject to a duty of good faith implied into the OFM Loan Agreement which precluded it from exercising its powers on default in the circumstances of the case.

98 Alternatively, the plaintiffs contend that the notices, even if otherwise valid, did not satisfy certain conditions stipulated in the relevant loan agreement and were ineffective on that basis.

99 The defendants contend that OFM, the first mortgagee, was a "stand-alone" lender. Although related to Collins as the subsidiary of a common parent, it was neither formally a party to the Joint Venture Agreement nor subject to its fiduciary obligations on any other basis. Although OFM and Collins had common officers who communicated with Varangian on behalf of both companies, they were clearly separate legal entities. There is no recognised legal basis for lifting the corporate veil, so as to subject OFM to the fiduciary duties undertaken by Collins in the Joint Venture Agreement.

100 Similarly, the defendants submitted that clause 17 of the Joint Venture Agreement did not operate to render OFM a party to the Joint Venture Agreement or otherwise subject to any of its fiduciary obligations. As such, OFM was not precluded by any fiduciary duty from exercising its rights under the OFM Loan Agreement upon default.

101 Similarly, the defendants contend that there was no basis on which to imply an obligation of good faith prohibiting the exercise of the lender's contractual rights on default into the loan agreements. Alternatively, they contend that there was no breach of such an obligation.

102 The defendants contend that there were no deficiencies in the notices or the service thereof, or alternatively, that there was merely a technical deficiency, within terms of Pan Foods Company Importers and Distributors Pty Ltd v Australia New Zealand Banking Group Ltd[2] discussed below. Therefore, the notices complied with all applicable conditions, and were valid and effective.

103 The term of the loans originally expired on 3 November 2002. The plaintiffs conceded that (despite the failure to complete the further documentation to which the offer of 31 December 2002 was stated to be subject) the offer of 31 December 2002 was, upon Varangian's acceptance dated 10 January 2003, a binding agreement. Under the letter of 31 December 2002, the extended date for repayment of the Clara Street loan was 28 February 2003.

104 The Clara Street loan was not repaid on 28 February 2003. The term of the Clara Street loan was not further extended.

105 Because the defendants rely only upon the OFM notice to pay and notice for possession, it is necessary to consider only the OFM notices.

106 The notice of demand in relation to the Clara Street loan was dated 3 March 2003. It demanded that Varangian perform its obligations under clauses 5.1 and 5.5 of the loan agreement (as amended) and immediately repay all moneys outstanding in respect of the Clara Street advance, which was stated to be $390,102.37. It is not contended that there was any deficiency in the OFM notice of demand.

107 The notice of demand was served after 4.00 p.m. on 3 March 2003. Its deemed date of receipt was 4 March 2003.

108 Pursuant to clause 8.1(a) of the Loan Agreement, the failure to pay the outstanding amount of the Clara Street loan demanded in OFM's notice of demand was a failure to perform a provision of a Transaction Document requiring performance by Varangian. The failure was "capable of remedy".

109 By clause 8.1(a) of the Loan Agreement, if the failure continued for 14 days after the Borrower received a notice from the Lender requiring that the failure be remedied, there would be an Event of Default, unless waived by OFM.

111 By clause 10.2(c) of the Loan Agreement, the notice of demand was deemed to be received on 4 March 2003 (that is, on the next business day, as the facsimile was received after 4.00 p.m.).

"(1) Any period of time fixed by these Rules by any judgment or order or by any document in any proceeding shall be calculated in accordance with this Rule.

(2) Where a time of one day or longer is to begin on, or to be calculated from, a day or event, the day or the day of the event shall be excluded.

(3) Where a time of one day or longer is to end on, or to be calculated to, a day or event, the day or the day of the event shall be included."

"Where in an Act or subordinate instrument a period of time is expressed to begin on, or to be reckoned from, a particular day, that day shall not be included in the period. Where in an Act or subordinate instrument a period of time is expressed to end on, or to be reckoned to, a particular day, that day shall be included in the period."

114 The plaintiffs contend that the principles of calculation of time set out in the Supreme Court Rules and the Interpretation of Legislation Act 1984 should apply in the construction of clause 8(1)(a). Further, clause 10 (2) deems receipt after 4.00 pm to be receipt on the next business day. Clause 8(1)(a) refers to "after the Borrower receives a notice".

(b) the measuring of the 14 days begins only on the day after the deemed receipt (that is, 5 March 2003);

the plaintiffs submit that the 14 days would expire on 19 March 2003 and the earliest date of entitlement to send a notice under clause 8.2 would be 20 March 2003. They submit that the declaration under clause 8.1(a) was premature and hence ineffective.

116 In my opinion, the plaintiffs' construction of clause 8.1 is unduly artificial. Under the Loan Agreement, the deemed date of receipt of the notice was 4 March 2003. As a matter of fact, the notice was already received from prior to the commencement of that day; and if 4 March 2003 itself is included in calculating the 14 days, the 14 days would elapse at the expiry of 17 March 2003. If it be accepted that the deeming provision in clause 10.2 necessitates adding an entire day to satisfy the term "after the borrower's receipt" (so that the calculation of the 14 continuous days begins on 5 March 2003) no statutory provision or principle of construction requires 5 March 2003 to be excluded from the calculation.

117 The application of the Supreme Court Rules is limited to the specified subject-matter set out in Rule 3.01(1).[3] Similarly, s.44 of the Interpretation of Legislation Act 1984 applies, in terms, only to Acts and subordinate instruments. The Loan Agreement is a commercial contract and its terms should be interpreted in accordance with the usual principles of construction.

118 The general principle is that the parties do not intend their agreement to achieve unreasonable results. A commercially sensible interpretation is to be preferred, especially in commercial contracts. Where a word or clause is capable of more than one construction, the construction which will achieve a reasonable result is to be preferred.[4] The observations of Kirby J in Pan Foods Company Importers & Distributors Pty Ltd v Australia New Zealand Banking Group Ltd,[5] discussed below, are relevant in this context. The exclusion of the first day after deemed receipt from the calculation is not required by the plain words of clause 8.1 and does not accord with commercial common sense.

119 In my opinion, the 14 continuous days began at the latest, on 5 March 2003, which day should be included in the calculation.

120 If the 14 continuous days are calculated from, and including, 5 March 2003, at the expiration of 18 March 2003, the 14 days' continued failure was complete. The event of default thus occurred at the expiration of 18 March 2003, prior to the deemed date of receipt of the notices on 19 March 2003. If 4 March 2003 is counted, in accordance with the defendants' submissions, the 14 days' continuance of failure would expire on 17 March 2003.

121 While it is unnecessary for me to determine whether the 14 day period expired on 17 March 2003, or 18 March 2003, in my opinion, the better view is that the 14 days' continuous default elapsed on 18 March 2003. The event of default had thus occurred by the deemed date of receipt of the notice on 19 March 2003.

122 By clause 8.2(b) of the Loan Agreement, upon the occurrence of an event of default, the lender is entitled "at any time by notice to the Borrower to declare that the full amount of the Loan outstanding, and any other amounts outstanding under this Agreement are due and payable on demand, in which case those amounts will be due and payable immediately on demand made by it at any time by notice from the Lender to the Borrower."

123 By notice of declaration dated 18 March 2003, OFM declared, pursuant to provisions of clause 8.2(b) of the Loan Agreement, that "with effect from the date of this notice the full amount of the loan outstanding under the Loan Agreement and any other amounts outstanding under the Agreement are immediately due and payable on demand being made by the lender."

124 A notice of demand by OFM dated 18 March 2003 demanded the amounts of the full amount outstanding.

125 The notices of declaration and demand were received by Varangian after 4.00 p.m. on 18 March 2003. Their deemed date of receipt was 19 March 2003.

126 The notice of declaration was received by the borrower after the event of default had occurred. It had not been remedied. The conditions of clause 8.2(b) were thereby satisfied. Upon receipt of the notice of demand, the full amount of the loan outstanding became "immediately due and payable".

127 The defendants, in relation to the notices, referred to the observations of Kirby J in Pan Foods Company Importers & Distributors Pty Ltd v Australia New Zealand Banking Group Ltd [6] in which his Honour warned against the importation of suretyship principles of strict compliance with conditions precedent, particularly in relation to notices, into "ordinary loan agreements between financiers and business enterprises operating for profit."[7] Kirby J considered that in the case of commercial loan agreements:

"Such documents should be construed practically, so as to give effect to their presumed commercial purposes and so as not to defeat the achievement of such purposes by an excessively narrow and artificially restricted construction. ... [A]s between a commercial enterprise and a finance provider, such as a bank, the law should be the upholder of agreements. It should eschew artificialities and excessive technicalities for these will not be imputed to the ordinary business person. Business is entitled to look to the law to keep people to their commercial promises."[8]

128 Given the view that I have formed about the date of expiration of the 14 days, it is unnecessary to consider whether the premature service of a notice of declaration under clause 8.2, before the occurrence of an event of default, could nevertheless be effective on the basis of the reasoning of Kirby J in Pan Foods.

129 I conclude that the event of default occurred on 18 March 2003. Further, the notice of declaration deemed to be received on 19 March 2003, together with the notice of demand deemed to be received on the same day, were effective to render the moneys immediately due and payable.

130 Although the Clara Street loan moneys were repaid on 1 April 2003, the Kooyong loan moneys remained due and payable pursuant to the notices, despite the previous agreement to extend the due date of the Kooyong loan to 30 June 2003. The failure to repay the Clara Street loan had continued for 14 days from the date of receipt of a notice of default and the full amount of the Loan (widely defined in clause 1.1 to include the Kooyong loan moneys) was henceforth payable.

131 The fact that the particular ground of default relied upon as the basis for the notice of demand dated 3 March 2003 had been remedied by the time the notice to pay and notice for possession were served on 2 April 2003 does not invalidate those notices. The clear import of clause 8.2 is to permit the lender to declare all outstanding moneys due and payable upon a particular event of default. Remedy of the particular default relied upon does not reverse the consequence of a declaration under clause 8.2(b). Varangian was also in default within terms of clause 25.1 of the Memorandum of Common Provisions.

132 By notices to pay pursuant to s.76 of the Transfer of Land Act 1958 dated 2 April 2003, OFM gave notice to pay under mortgages X269494T and AB978039K and gave a notice of possession dated 2 April 2003.

133 As the outstanding loan moneys secured by the mortgages were immediately due and payable pursuant to the notice of declaration and notice of demand deemed to be given on 19 March 2003 under clause 8.2(b) of the OFM Loan Agreement, s.76(2) of the Transfer of Land Act 1958 applied when demand in writing for money secured by the mortgages had been made. A demand in writing pursuant to the mortgage was equivalent to serving a notice after the continuance of default for one month (or such other period fixed in the mortgage) pursuant to s.76(1) of the Transfer of Land Act.

134 The OFM notices were thus valid and effective, unless invalidated on the basis that the sending of them was precluded by the existence of fiduciary obligations imposed on OFM under the Joint Venture Agreement or by good faith obligations implied in the OFM Loan Agreement.

WAS OFM SUBJECT TO OBLIGATIONS UNDER THE JOINT VENTURE AGREEMENT?

135 OFM was not, in terms a party to the Joint Venture Agreement. It was a party to the OFM Loan Agreement executed on the same day. Mr Jennings and Varangian were represented by their legal advisers in relation to the negotiation and execution of the agreements. There is no basis for finding that OFM was held out as a party to the Joint Venture Agreement. Mr Jennings' evidence was that he regarded the loan funds as "coming from within the OFM Group as a total situation". However, he stated that he knew that the joint venturer was Collins. Further, he agreed that "the OFM Group isn't one entity. There are different companies which make up the group" and "it is the one organisation with various companies". Any assumption by Mr Jennings and Varangian that OFM, although related to Collins, was other than a "stand alone" lender, was contrary to the clear terms of the documents which they executed with the benefit of legal advice.

136 The plaintiffs nevertheless assert that by operation of clause 17 of the Joint Venture Agreement, OFM was rendered subject to its terms, including the fiduciary duties.

137 Clause 17 of the Joint Venture Agreement provides:

"General Each party to this Agreement shall, and shall procure that its respective servants and agents shall, execute all such deeds, documents and instruments and do all such things as are necessary to give full effect to the rights and obligations of the parties under this Agreement."

138 In my opinion, clause 17 is principally directed at the completion of documentation and formalities. The general words of the clause are qualified by the particular words. A wider reading would render the clause otiose. It goes without saying that the contracting parties must do what is necessary to fulfil their contractual obligations.

139 Clause 17 in terms requires the parties to perform the requirements specified under clause 17 themselves, or to procure servants or agents to do so. Employees or agents enter legal relations or perform acts not in their own right but on behalf of their principal, to whom their acts are attributed. Clause 17 cannot impose independent obligations on a stranger to the agreement.

140 There is, in any event, no evidence to support the contention that OFM advanced funds or failed to advance further funds in the capacity as an agent of Collins.[9] The documents and the other available evidence indicate that OFM was a stand-alone lender which deliberately entered a contractual relationship with Varangian not on behalf of a principal, but in its own right.

141 The plaintiffs further submit that in the circumstances of this case, the corporate veil should be lifted, in order to subject OFM to the fiduciary duties of Collins.

142 The recognition of the separate legal personality of a corporation from that of its members, or from related corporations, is a basic principle of Anglo-Australian company law.[10] In exercising the powers of a company within a group, the directors must do so for the benefit of the company, rather than that of the group. While groups of companies are widespread, the underlying unity of economic purpose, common personnel, common membership and control have not been held to justify lifting the corporate veil. As recognised by Rogers J in Briggs v James Hardie and Co Pty Ltd,[11] even the complete domination or control exercised by a parent over a subsidiary is not a sufficient basis for lifting the corporate veil. This is an area in which "the law pays scant regard to the commercial reality".[12]

143 Similarly, courts are reluctant to infer an agency relationship between parent and subsidiary, save in cases where the subsidiary is simply an alias, "dummy" or mere façade. That observation applies with greater force to the relationship of companies which are the subsidiaries of a common parent. It is not contended that either OFM or Collins was a mere façade or alias for the other.

144 In the present case, it is clear that, in Young J's terms "there was a good commercial purpose for having separate companies in the group performing different functions even though the ultimate controllers would naturally lapse into speaking of the whole group as `us'."[13] Collins was "brought into being to be a special purpose vehicle for entering a joint venture transaction and providing ... mezzanine or second mortgage finance".

145 In Pioneer Concrete Services Pty Ltd v Yelnah Pty Ltd[14] Young J found it impossible to infer an agency between a holding and subsidiary company in circumstances where both were party to a deed, but the holding company deliberately refrained from joining in the promises contained in the particular clause which was said to give rise to certain obligations.

146 Young J considered that "it would appear that the parties have deliberately chosen not that there should be a covenant by the holding company but rather a covenant by the subsidiary which covenant is to be guaranteed by the holding company, obviously a very different sort of obligation. When one sees a deed couched so deliberately it is difficult to apply some broad brush commercial approach to it to give it some meaning other than its literal meaning. Again one assumes that a document obviously prepared by an expert draftsperson and doubtless settled between solicitors on instructions from their clients represented the position that was negotiated as between the parties. It may well be that [the other party] had some idea that it got more protection, it may well be that the parties did not turn their minds to the state of affairs which has now eventuated. This is unfortunate but it cannot affect the construction of the document in which the parties merge their negotiations."[15]

147 Those observations apply to the present case. The parties were legally represented and advised. Although the Joint Venture Agreement and the loan agreements and mortgages were executed on the same day, Collins was the only Over Fifties Group company to execute the Joint Venture Agreement.

148 In the OFM Loan Agreement, "Joint Venture Agreement" is defined as "the agreement between the Borrower and Collins Street Capital Ltd for the development of the Glenferrie Road properties by the construction of residential apartments." (Emphasis added).

149 OFM deliberately refrained from entering into the Joint Venture Agreement and assuming its obligations. That course was directed by the restrictions applicable to OFM's investment of members' benefit funds. All parties, advised as they were by reputable legal representatives, must be taken to have appreciated that OFM was not a party to the Joint Venture Agreement.

150 This is not a case where either OFM or Collins was formed or used for the sole or dominant purpose of facilitating the evasion of existing legal or fiduciary obligations. There is no question of sham or fraud, or any other recognised basis for ignoring the companies' separate legal identity.

151 In so far as DHN Food Distributors Ltd v Tower Hamlets London Borough Council[16] is otherwise persuasive authority in Australia,[17] it is distinguishable from the present case. In DHN Food Distributors, the corporate structure was viewed as a technicality which deprived the corporate group of compensation in the context of a compulsory acquisition of land.

DID DUTY OF GOOD FAITH IMPLIED IN LOAN AGREEMENT PRECLUDE OFM'S EXERCISE OF RIGHTS ON DEFAULT?

152 The plaintiffs alternatively submitted that, in the circumstances, OFM was precluded by a duty of good faith implied in the Loan Agreement from exercising its contractual rights upon default.

153 The defendants relied on Tanwar Enterprises Pty Ltd v Cauchi[18], in which the High Court concluded that equity would not restrain the exercise of a vendor's right of termination.

154 In Tanwar Enterprises Pty Ltd v Cauchi[19] the relevant contracts of sale provided for notices to complete making time of the essence. The purchaser sought relief against forfeiture on the basis that it was unconscientious of the vendor to use its legal right to terminate upon the purchaser's failure to complete in accordance with an essential time stipulation.

155 Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ observed that the vendor had not lulled the purchaser into a false sense of security that it would accept late completion. The conduct of the vendor had not led to, caused or contributed to, the breach of contract by the purchasers. There was no "accident" the possibility of which was not within the contemplation of the contracting parties.[20]

156 Their Honours recognised that the vendor had withdrawn earlier notices of termination "in return for the assumption of obligations to complete in unqualified terms". The new obligations were not made subject to the availability of finance and the possibility of "a failure by a third party to provide finance was reasonably within the contemplation of [the purchaser]."[21]

157 They concluded that equity would not intervene to prevent the effective exercise of the vendor's right to terminate the contracts.[22]

158 Kirby J, in a separate judgment, observed that although equity had jurisdiction to afford relief in contracts where time was of the essence, it was reserved to cases in which "the entire circumstances must be judged as exceptional. It is not enough to prove exceptional unconscionability on the part of the party insisting on its legal rights."[23]

159 In my opinion, many of the circumstances recognised by the High Court in Tanwar[24] as militating against equitable relief[25] were present in this case.

160 The defendants also contended that, to the extent to which an obligation of good faith may properly be implied into a commercial contract, it cannot operate to prevent a party from promoting its legitimate interests, or to block the express terms of the contract.

161 The High Court has not as yet expressly endorsed the implication of a term of good faith into a commercial contract.[26] In Royal Botanic Gardens and Domain Trust v South Sydney City Council[27] the High Court, in construing a rent review clause, rejected the view that it contained an implied term limiting rental "to a fair and reasonable rent" rather than a rental determined by reference to specified outgoings.

162 Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ recognised "the debate in various Australian authorities concerning the existence and content of an implied obligation or duty of good faith and fair dealing in contractual performance and the exercise of contractual rights and powers"[28]. They noted that the parties before them had accepted that such an obligation applied to the exercise of the lessor's powers under the rent review clause. They observed: "The result is that, whilst the issues respecting the existence and scope of a `good faith' doctrine are important, this is an inappropriate occasion to consider them".[29]

163 Kirby J also noted that it was unnecessary to answer whether Burger King Corp v Hungry Jack's Pty Ltd[30] and like authorities stood for the principle that "both in performing obligations and exercising rights under a contract, all parties owe to one another a duty of good faith: and the extent to which, if such were to be the law, a duty of good faith might deny a party an opportunistic or commercial exercise of an otherwise lawful commercial right".[31]

164 The decisions in which lower courts have recognised the legitimacy of implication of a term of good faith vary in their suggested rationales[32]. The plaintiffs relied principally on Burger King Corp v Hungry Jack's Pty Ltd[33]. In Burger King, the parties had entered a franchise agreement for fast food stores for a specified period, with renewal provisions. The agreement empowered the franchisor to terminate for breach, with a 30 day notice required for any breach capable of cure. The franchisor withheld various necessary approvals from the franchisee and served notices of termination. Rolfe J at first instance held, inter alia, that there was an implied duty to act in good faith in the exercise of contractual powers[34].

165 On appeal, the Court of Appeal endorsed Sheller JA's acceptance in Alcatel Australia Ltd v Scarcella[35] that an obligation of good faith in the performance of obligations and the exercise of rights could be implied into commercial contracts. Sheller, Beazley and Stein JJA referred in that context to the doctrine preventing reliance on rescission clauses for improper or extraneous purposes[36].

166 The Court of Appeal stressed that the duty of good faith did not amount to a fiduciary duty and did not preclude a party from having regard to its legitimate interests.

167 In Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd[37] Finkelstein J also recognised that where such a term may properly be implied (although it would require a party not to act capriciously) it would not prohibit actions designed to promote the party's legitimate interest.[38]

168 It has also been recognised that such an implied term would have to be consistent with the express terms of the agreement. In Burger King Corp v Hungry Jack's Pty Ltd[39] the New South Wales Court of Appeal accepted that "an implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation which would be inconsistent with other terms of the contractual relationship."[40]

169 In Central Exchange Ltd v Anaconda Nickel Ltd[41], the Western Australian Court of Appeal accepted that the principles of good faith could not block the use of terms that actually appear in the contract.

170 Both in Central Exchange Ltd v Anaconda Nickel Ltd and Burger King the statement of Easterbrook J in Kham & Nate's Shoes[42] was approved. Easterbrook J there stated:

"Firms that have negotiated contracts are entitled to enforce them to the letter, even to the great discomfort of their trading parties without being mulcted for lack of `good faith'. Although courts often refer to the obligation of good faith that exists in every contractual relation ... this is not an invitation to the court to decide whether one party ought to have exercised privileges expressly reserved in the document ... knowledge that literal enforcement means some mismatch between the parties' expectation and the outcome does not imply a general duty of `kindness' in performance, or judicial oversight into whether a party had `good cause' to act as it did. Parties to a contract are not each other's fiduciaries, they are not bound to treat customers with the same consideration reserved for their families."[43]

171 Burger King concerned a franchise agreement which conferred wide discretion upon the franchisor. Garry Rogers Motors involved a dealership. Far Horizons Pty Ltd v McDonalds Australia Ltd[44] also involved a franchise agreement. In that case, Byrne J observed that:

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Cases Cited (9)