Westpac Banking Corporation v ZH International Pty Ltd; Bronte Properties... [2015] NSWSC 607 | Case summary

Supreme Court of NSW|2015-05-14|Before: Adamson J

Proceedings 2013/184759 AP Coleman SC/TD Castle (Plaintiff) P Bolster (Defendants)

Proceedings 2013/152651 P Bolster (Cross-Claimant) No Appearance (Cross-Defendant)

Proceedings 2013/184759 Gadens Lawyers (Plaintiff) Marando Solicitors (Defendants)

Proceedings 2013/152651 Marando Solicitors (Cross-Claimant) No Appearance (Cross-Defendant) File Number(s): 2013/184759; 2013/152651 Publication restriction: ---

Introduction

By statement of claim filed in the Equity Division in proceedings 152651 of 2013 on 16 May 2013 (the Bronte Properties proceedings), Bronte Properties Pty Limited (Bronte Properties or the Developer) sought a declaration that the contract of sale of Unit 8 in a development in Wallace Street, Waverley (the Property) to ZH International Pty Ltd (ZH International or the Builder) had been validly terminated. On 31 May 2013, ZH International filed a cross-claim in the Bronte Properties proceedings, seeking an order for specific performance of the contract.
The Developer's statement of claim was dismissed by Rein J for want of prosecution on 23 May 2014. The Builder's cross-claim remained extant.
By statement of claim filed in proceedings 2013/184759 on 17 June 2013, Westpac Banking Corporation sought an order for possession of the land comprised in folio identifier 8/SP87282 being the land situated at and known as Unit 8, 26 Wallace Street Waverley, in the State of New South Wales against ZH International and its principal, Hui Zhang (the Bank Proceedings). The defendants resisted the claim for possession on the basis that Westpac Banking Corporation, as the successor in law to St George Bank Limited (both of which will be referred to as the Bank), was estopped from relying on its strict legal rights as first registered mortgagee of the Property by reason of its acquiescence in the conduct of the Builder and Mr Zhang. They also alleged that the Bank was guilty of misleading or deceptive or unconscionable conduct in asserting its rights as first registered mortgagee.
Orders were made on 19 September 2014 that the Bronte Properties Proceedings and the Bank Proceedings be heard together. The hearing was conducted on the basis that evidence in one proceeding was evidence in the other. The Developer did not appear at the hearing of the proceedings. Jim Kekatos, solicitor, of Kekatos Lawyers, confirmed by email sent to the parties on 12 May 2015 that his client, Bronte Properties, "does not wish to take an active part in the proceedings".
It was agreed at the conclusion of the hearing that if the Bank was successful, the Bronte Properties Proceedings would be dismissed and that if the Bank was unsuccessful, I would grant leave to ZH International to apply for an order for removal of a caveat lodged by Bronte Bowling Club Limited before determining whether ZH International is entitled to specific performance, as sought in its cross-claim in the Bronte Properties Proceedings.

Facts

In about February 2008, the Developer borrowed funds from the Bank to purchase and develop the Property pursuant to an agreement made by the acceptance of the Bank's letter of offer dated 27 February 2008 (the Facility Agreement). The total of all limits was $10.025m. It was envisaged that 10 units and an underground garage would be constructed and that, once the development was completed, a strata plan would be registered, the units sold and the Bank repaid. In March 2008 Bronte Properties drew down funds pursuant to the Facility Agreement and became the registered proprietor of the Property. The Facility Agreement was varied from time to time by the acceptance of further letters of offer dated 5 November 2009, 11 January 2010, 12 January 2010, 18 March 2010, 24 June 2011, 20 October 2011 and 24 January 2012. On 12 January 2010 the overall limits of the Facility reduced to $9.99m from $10.025m, in light of further information about building costs.
From November 2009 until February 2012, Dipin Saini, who was then the Relationship Manager at the Bank's Property Finance Southern Division at the Bankstown office, was responsible for the Facility. Mr Saini reported to Joseph El-Hachem, Executive Manager, and Head of Property Finance South, who also worked at the Bankstown office, and was assisted by Kapinjal Pandya, a Senior Account Executive at that office. Mr El-Hachem had been the relevant Senior Relationship Manager at the time the Facility was first approved in 2008.
The "ongoing conditions" of the Facility Agreement included the following: "3. Funds are to be released specifically for the following purposes. Funding Table Purpose Amount Land (purchase) $ 3,915,000 Land Acquisition Costs $ 243,440 Finance Costs $ 100,000 Construction (ex. GST) $ 4,329,171 Professional & Consultants Fees (ex. GST) $ 130,000 Council Contributions $ 65,000 Contingency - assessed at 5% of construction costs $ 211,959 Provision for capitalised interest - including Roll Over Fee & Acceptance Fee $ 1,120,430 Total: $10,0250 4. Funds for construction costs will only be released: upon receipt of a satisfactory Report from the Quantity Surveyor, and on a cost to complete basis (i.e. sufficient funds are to be held at all times within the facility limit to cover the cost to complete as certified by the Quantity Surveyor). . . . 9. The Bank is to receive 100% of net sales proceeds, including deposits, in permanent reduction of the facilities provided. Accepted adjustments would include rates and taxes (excluding GST), conveyancing costs and agents commissions payable on sale of the whole or any part of the specific property (Lot/Unit) being discharged."
The Facility Agreement provided, as a precondition, that the Bank would appoint an Independent Quantity Surveyor (QS) to prepare an Initial Report and subsequent Drawdown Certification Reports at the builder's cost. Hugh B. Gage Pty Ltd (Gage) was appointed by the Bank in this role. The builder's Payment Claims would be submitted to the QS, who would report monthly to the Bank and recommend payment based on an assessment of the value of work completed, referred to as a Progress Valuation. For each Payment Claim, the QS would also recommend that an amount, referred to as the retention sum, should be withheld. The retention sum was included in the project's costs to complete.
The funds borrowed pursuant to the Facility Agreement were secured, in part, by a registered mortgage granted to the Bank over the Property. The following were terms of the mortgage: "Dealings - such as selling, renting or mortgaging 8.1 Without our consent you may not, and may not agree to, do any of the following: (a) sell or dispose of the property; or (b) lease or license the property, or allow a surrender or variation of any lease or licence; or (c) create or allow to exist another security interest over the property or any property referred to in clause 19; or (d) part with possession of the property; or ` … (h) deal in any other way with the property, this mortgage or any interest in them, or allow any interest in them to arise or be varied. ... Other security interests 9.1 If we ask, then you must enter into an agreement acceptable to us regulating the priority between this mortgage and any other security interest. 9.2 You must ensure that the amount secured under any other security interest over the property is not increased without our consent. 9.3 You must comply with any obligation in connection with any other security interest in the property. Caveats, notifications or dealings 10. You must do everything necessary to remove any caveat, notification or dealing placed on the title to the property without our consent."
The term "security interest" was defined as follows: "security interest means any security interest for the payment of money or performance of obligations including a mortgage, charge, lien, pledge, trust, power or title retention arrangement. Security interest also includes a guarantee."
The Developer entered into several pre-sales contracts for units in the development and forwarded such contracts to Mr Saini, who, in turn, forwarded them to Alex Roth, the Bank's panel solicitor, for review. The Developer entered into one such contract, in respect of Unit 8, on 10 December 2009 for $1.7m with Ausind Properties Pty Ltd. A cash deposit of $170,000 was paid. The first round of pre-sales contracts was subject to a condition that the strata plan would be registered by a sunset date of 12 September 2011. If this did not occur, the purchaser had a right to rescind.
The builder originally engaged to perform building work on the Property was unable to complete it. In about March 2010, Bronte Properties engaged ZH International to complete the construction of 10 units and an underground garage on the Property (the Construction Contract) for the sum of $3.46m plus GST. The Construction Contract provided that the Builder was entitled to be paid the amounts certified by the QS following each Payment Claim.
The directors of ZH International were Mr Zhang and his wife Ngoc Hong Ly. Mark Marando had been their solicitor since about 2000 and had advised them on several transactions and developments since that time. Although Mr Zhang can speak and understand English and can read some English words, he cannot read well or write in English. His daughter, Joanna Tong, is bilingual in English and Mandarin. She was the Builder's Financial Controller and prepared its Payment Claims, as well as writing correspondence on its behalf.
Mr Zhang had been involved as builder in other developments which had been funded by banks. He was well aware that a mortgage to a bank generally takes priority over the other creditors of the mortgagor. He knew, when he caused ZH International to enter into the Construction Contract, that the Bank was funding the Developer to develop the Property.
When ZH International replaced the original builder for the development, a Tripartite Deed was entered into whereby ZH International assigned its rights to the Development Application with respect to the Property to Bronte Properties and Bronte Properties charged its interest in the Construction Contract in favour of the Bank. The Builder obtained advice from Mr Marando about the terms and effect of the deed, although Mr Marando did not witness his clients' execution of the deed on 7 April 2010 and may not have seen the executed version.
Clause 2 of the Tripartite Deed relevantly provided: "Part 2 - Assignment of Contractor's rights, Contractor's Consent and Duties 2.2 The Contractor [the Builder] consents to the Customer [the Developer] charging the Development Application and the Construction Contract to the Bank and agrees with the Bank that the Contractor shall (and where appropriate from time to time): … (d) not terminate, rescind or vary the Construction Contract by agreement with the Customer without the prior written consent of the Bank;"
In April 2010 the Builder commenced work on the Property. From time to time it made Payment Claims which were submitted to the QS for assessment. Once the Bank had received a Progress Valuation, it would pay the Developer in the expectation that the Developer would then pay the Builder.
In about mid-2010, Mr Zhang told Lim Kok Lim, a director of Gage, that the Developer was not paying him for the work. Ms Tong wrote emails to the QS and to Jerry Kekatos, the principal of the Developer, informing them that the Builder would not continue to work on the Property unless it was paid. Eventually Mr Zhang stopped working on the site. Mr Zhang requested a meeting with the Bank to voice his concerns and propose that the Bank pay him directly.
Mr Saini arranged for Mr El-Hachem to be present at the meeting, which took place at the Bank's Bankstown office, because he was conscious that he was the Relationship Manager for the Developer's account and that Mr Zhang was not the customer. He wanted Mr El-Hachem's "support" in relation to any decision that was made about payment. Following this meeting Mr Saini obtained the Developer's authority to pay the Builder directly.
At about this time the QS recommended that, as a condition of payment, statutory declarations be obtained from Mr Zhang, in which he would be required to declare that, as at particular dates, to the best of his knowledge and belief, having made all reasonable enquiries, all contractors, subcontractors and suppliers had been paid. The statutory declarations were filled in by Ms Tong. Mr Zhang's signature was witnessed by Mr Marando at the latter's office in Fairfield in respect of the six statutory declarations in evidence, dated: 29 June 2010; 27 July 2010, 9 August 2010, 16 May 2011, 6 June 2011 and 21 June 2011. Mr Marando did not recall any particular conversation with Mr Zhang that had occurred on any of these dates. He explained that it was not unusual for Mr Zhang to call in briefly to have the documents witnessed, although at other times, when they had matters of substance to discuss, they would speak at greater length.
On 23 July 2010 Mr Saini visited the Property and met with Mr Kekatos, Mr Zhang and Lee Chuah, a Senior Quantity Surveyor at Gage. Mr Chuah recorded in his report of 29 July 2010 (which valued Payment Claim 5 made on 26 July 2010): "Progress on site has slowed down since our last site inspection on 2 July 2010. Our discussion with the Building and the Borrower's Project Manager at the site inspection revealed that the slowdown was due to recent wet weather and also the builder has encountered cash flow problems. The anticipated completion date of March 2011 is still achievable provided additional resources are employed on this site immediately. . . . ISSUE OF CONCERN The recent slowdown on site progress indicated the Builder may have cash flow problems. Despite our repeated requests, the Builder has not disclosed to us the amount he has received to date. We suggest that the Bank obtain a statutory declaration signed by the Builder confirming the total amount received to date from the Borrower in order to avoid any possible complications later."
Following the request made at the site, a statutory declaration apparently made by Mr Zhang and dated 30 July 2010 was provided to the QS and forwarded to Mr Saini. According to the document Mr Zhang declared as follows: "We are the contract builder for Bronte Properties Pty Ltd, and we declare that all the payment from the first draw down to the fourth draw down has been received from Jerry Kekatos (Bronte Properties Pty Ltd) in the total of $621,681 plus GST."
In a handwritten endorsement on his copy of the report of 29 July 2010 referred to above, Mr Saini noted that the statutory declaration had been received: "Now obtained & attached. RM [Relationship Manager: Mr Saini] met builder on site on 23/7/10 and advised this document needs to be provided prior to the next drawdown. With regards to cashflow, drawdown of these funds should assist in moving the project further."
I accept Mr Zhang's evidence that he did not sign this document and that, by 30 July 2010, ZH International had only been paid $287,200. However, I also accept that neither Mr Saini, nor Gage, nor anyone from the Bank, was aware that the situation was otherwise than as appeared from the statutory declaration. I infer that this document was produced and submitted by someone associated with the Developer.
The following table sets out Ms Tong's record (which was not challenged) of the various Payment Claims, the Progress Valuations (PVs) and the amounts paid to the Builder and by whom and when they were paid. Claim No. PV Date PV Amount Payment Date Amount Received By ZH/(Source) Running Shortfall 1 --- $210,293 19/5/10 $70,000 (Developer) - $140,293 2 25/5/10 $72,200 7/6/10 $72,200 (Developer) - $140,293 3 18/6/10 $178,122 24/6/10 $120,000 (Developer) - $198,415 --- --- --- 29/6/10 $25,000 (Developer) - $173,415 4 --- $109,886 --- $0 - $283,301 5 2/8/10 $101,895 3/8/10 $101,895 (Bank) - $283,301 6 9/8/10 $121,070 12/8/10 $121,070 (Bank) - $283,301 --- --- $49,006 26/8/10 $49,006 (Bank) - $283,301 7 7/9/10 $128,440 8/9/10 $128,440 (Bank) - $283,301 8 30/9/10 $181,800 27/9/10 $181,800 (Bank) - $283,301 9 27/10/10 $176,160 19/10/10 $176,160 (Bank) - $283,301 10 12/11/10 $129,629 10/11/10 $129,629 (Bank) - $283,301 11 18/11/10 $40,079 18/11/10 $40,079 (Bank) - $283,301 12 20/12/10 $249,287 21/12/10 $249,287 (Bank) - $283,301 13 16/2/11 $217,488 21/2/11 $217,488 (Bank) - $283,301 14 28/2/11 $94,354 4/3/11 $94,354 (Bank) - $283,301 15 18/3/11 $215,176 23/3/11 $215,176 (Bank) - $283,301 16 30/3/11 $190,000 4/4/11 $190,000 (Bank) - $283,301 17 --- $173,975 28/4/11 $120,000 (Bank) - $337,276 18 --- $189,364 18/5/11 $174,364 (Bank) - $352,276 --- --- --- 30/5/11 $100,000 (Developer) - $252,276 19 --- $124,476 8/6/11 $124,476 (Bank) - $252,276 20 --- $95,000 23/6/11 $95,000 (Bank) - $252,276

As the table shows, the payment of $101,895, made on 3 August 2010, was the first payment made directly to the Builder by the Bank. At that stage the date for Practical Completion was March 2011, which accorded with the Quantity Surveyor's Anticipated Completion Date.
In about April 2011, ZH International prepared Payment Claims 17 and 18 and emailed them directly to Mr Lim and Mr Spiridonis, the Developer's then site manager. Following these claims the Bank paid monies which were $68,975 short of the Progress Valuations ($53,975 in respect of Payment Claim 17 and $15,000 in respect of Payment Claim 18). As at 18 May 2011, the drawdowns totalled $8,968,434. Although the Facility (of $9.99m) had not been exhausted, the Bank withheld monies to cover unpaid interest.
When Mr Zhang raised the matter with Mr Saini the latter explained why the Bank had not paid the full amounts. As a consequence, Mr Zhang again became concerned about the Developer's financial position. He warned Mr Kekatos that the workers would walk off the site if they were not paid. About this time and, I infer, as a result of that discussion, the Developer paid $100,000 to the Builder, as recorded in the above table.
Mr Saini and Mr El-Hachem visited the Property several times in May 2011. At about this time Mr Saini was provided with a letter, apparently from Mr Zhang, which read as follows: "To whom it may concern: I, John Zang Director, hereby confirm that I will provide Occupation Certificate for 16 Wallace Street, Waverley NSW 2024, as soon as practical. I only require a further $350,000 draw down from St. George Bank, as I have an arrangement with Bronte Properties Pty Ltd (the Developer), the balance of $160,000 will be dedicated to the project."
The precise provenance of the letter has not been established, although I infer that it was prepared and provided to the Bank by someone associated with the Developer. Although the letter has ZH International on the letterhead (presumably to add to its verisimilitude), I accept Mr Zhang's evidence that it was not his company's letterhead. I further accept Mr Zhang's evidence that he did not prepare or sign this letter, in which, incidentally, his name was misspelled (Zang, rather than Zhang). I also accept Mr Saini's evidence that he did not appreciate this fact until he was made aware of it by Mr Zhang's evidence in these proceedings.
On 1 June 2011 Mr Saini summarised the May inspections in a file note which recorded in part: "Various meeting have been held between the Bank, the developer, QS & builder to come to a resolution to ensure the project is completed and sold down. The developer and the builder, with the assistances of the QS, are in the process of coming to an agreement on the timing of the project's completion. It is now expected that the project will be completed by end of July 2011 with the builder to cash flow the project and the developer to provide interest on the facility on a progressive basis until the facility is paid out. An application is being prepared to Credit to provide an update to the situation and extend the current construction facility that expires in June."
On 3 June 2011 Mr Saini prepared what was referred to as a BLAST, an internal St George computer record which contains relevant information about decisions and approvals made by the Bank. One of the purposes of the BLAST he prepared in early June 2011 was to obtain Bank approval to extend the facility of $9.99m to 31 October 2011. Another purpose was to "Reallocate funds within the funding table". The BLAST document recorded in part (emphasis added): "HISTORY The Borrower, Bronte Properties Pty Ltd ATF The Bronte Unit Trust, is a special purpose entity that was set up solely for the purchase of the development site and the subsequent construction and development of 10 dwellings on site. The entity's sole director is Vicki Kekatos, an accountant by profession, who has been involved in property investment for the past few years. She also has an accounting business, Kekatos & Partners Pty Ltd, with her husband Jerry Kekatos, who primarily manages the practice. In the past 12 months, the Group has faced issues with cashflow and it was brought to our attention in the last application that their facility held with Westpac Bank is in default as they cannot meet their interest commitments. This is essentially where the Group's accounting practice operates from. Furthermore, there have been delays in completion of the project at Wallace Street, Bronte as noted by the QS, however it is expect that the project will be completed by end of July 2011. LOAN ACCOUNT PERFORMANCE … We highlight it is in the interest of the Bank to have the project completed as soon as possible, given that the developer has sold/about to exchange a total of 9 units in the building. Details of the sales are as follows: $7,720,000 Pre-sold prior to restructure of this facility in Apr 2010 Contracts issued for Lots 1, 5, 6 & 10 with a total Gross Sale value of $4,650,000, expected to exchange within the next 1-2 weeks The above equates to a total sale value of $12,370,000, which is sufficient to payout the construction debt along with reducing the term debt of $3m substantially. Note that Lot 7 remains on the market for sale, and once sold, is expected to reduce debt further. Again, we reiterate that completion of the project in a timely manner and settlement of the lots is paramount to the debt being repaid. … The borrower has also advised that they have reached an agreement with the builder that a Final OC will be made available once a total of $350K in construction funding is released to the borrower by completion (excluding retention) (letter attached as confirmation from builder). Note that this is lower than the current cost to complete of $510K by $160K (once retention of $173K is excluded) and can be utilised towards interest capitalisation. Hence, this amount has now been allocated to the interest. Furthermore, the retention can also be withheld by the Bank in a worse scenario that a Final OC is not provided in time and there are delays in repayment of the debt. . . . "
The letter referred to in the italicised portion was the letter set out above.
The BLAST continued: "SIGN-OFF Although we note that this is not the ideal situation, it is in the Banks interest to have the project completed and have our debt repaid. Borrower has come to an arrangement with the builder to complete the project by end of July and provide a Final OC at a cost of $350,000. QS is monitoring the project very closely along with RM team, who are making regular site visits and are in constant communication with the borrower."
Mr El-Hachem explained in his evidence that the reallocation of funds within the funding table was designed to ensure that there was a sufficient level of interest capitalisation available to the Developer until October 2011 when the Facility was due to expire. A further $160,000 was reallocated from construction funding to interest capitalisation based on the Bank's understanding of the arrangement to which the Developer and Builder had come, which derived from the specious letter set out above.
The Bank approved the extension of the Facility and the reallocation of funds. On 24 June 2011 the Bank made an Updated Facility Offer to the Developer which indicated that it still had $585,246 in undrawn credit under the Facility and was able to capitalise $191,910 in interest payments.
On 29 June 2011 Mr Zhang sent an email to Mr Kekatos in the following terms: "Currently, there's a lot of payment issues with Wallace St. We have about $450,000 still outstanding to suppliers for this project. Some of the suppliers want to dismantle their stock from the worksite as they have not been paid. You need to sort this out asap."
In about early July 2011, the Builder stopped work on the site. Mr Zhang and Mr Kekatos had a conversation to the following effect: "Zhang: Jerry you gave me $100,000 one month ago, you need to give me more. Dipin [Saini] said the Bank cannot give me any money because you are not paying the interest. Kekatos: John I have no money to give you, maybe I can sell one of the units to you and you can just pay me the purchase price less what I owe you. I am about to start listing the properties for sale. At this stage I think they will be listed for $1.3m to $1.6m. Zhang: Look, I will need to talk to my solicitor. If you sell me a unit, I need Unit 8. 8 is a lucky number in my culture. Kekatos: Unit 8. This unit has good views John. I will need to sell this one for $1.6m. Zhang: I can't buy this for $1.6m. I don't want to keep it, I want to sell it so I can pay the people I owe money to. I will give you $1.2m. Kekatos: If you are happy with this arrangement John, I will sell it to you for $1.3m. I will get the Contract ready and you come to my office and we will sign it."
On 4 July 2011 Mr Marando met with Mr Zhang in advance of the meeting with Mr Kekatos on the following day. He made a somewhat cryptic file note of the meeting. There is no reference in the file note to the amount of $750,000, which featured in the Special Condition set out below. There is a reference to $400,000, which is said to be the figure owed to tradespersons, and also a reference to $200,000, which is said to be the "cost to complete". It also appears that Mr Marando noted that Unit 8 was worth $1.45m, although the stated purchase price was said to be $1.3m.
Although the word "Bank" appears more than once in Mr Marando's file note dated 4 July 2011, he was unable, in oral evidence, to elucidate the meaning of his shorthand notes or the context of the word "Bank". Mr Marando did, however, accept that the Bank's mortgage over the Property was a "live question" in his mind at the time of exchange because he knew that it would have to be discharged before his client could obtain title to Unit 8. Mr Marando gave evidence that he was "pretty comfortable" because by that stage he and Mr Zhang had worked out what the Developer owed the Bank and that it would be able to be repaid from the proceeds of other units in the development as well as from the personal guarantee given by the directors of Bronte Properties and a further property which the Developer had provided by way of security for the borrowings. As Mr Marando put it: ". . . I couldn't see the bank causing any difficulties if there was sufficient proceeds there to discharge the debt."
Mr Marando performed this rough calculation to work out whether his client was likely to be able to enforce the Sale Contract. He appreciated that the Sale Contract did not provide any "security" as such that ZH International would obtain title to Unit 8 since this depended on whether the Bank could be paid out. As he explained in his oral evidence, when referring to the lodgement of a caveat based on the Sale Contract: "[There are] A lot more stronger ways to get security."
Following this meeting Mr Zhang called a meeting which took place on 5 July 2011 which he attended with Ms Ly, Ms Tong and Mr Marando. Mr Kekatos and his solicitor, Mr Soulos, were also present on behalf of the Developer. As a result of these discussions the Developer agreed to sell Unit 8 to the Builder for a notional price of $1.3m. Unit 8 was available as the pre-sale contract with Ausind Properties Pty Ltd had been rescinded.
As at 6 July 2011 the Bank, as part of its security check required for the extension of the Facility, had a title search conducted which revealed a caveat for land tax lodged by the Office of State Revenue and a caveat lodged by Bronte Bowling Club Limited. Mr Saini contacted Mr Kekatos about the caveat lodged by the Office of State Revenue and required that the tax be paid so that the caveat would be withdrawn. At no time during these discussions did Mr Kekatos mention to him the plan to sell Unit 8 to the Builder.
The Developer and the Builder exchanged contracts on 11 July 2011 for the transfer of what was to become Lot 8 (the Sale Contract). Mr Zhang, Mr Kekatos and their respective solicitors were present at exchange. Completion of the Sale Contract was, by cl 35, conditional upon registration of the Strata Plan by a date determined by receipt of the Final Occupation Certificate or notification of registration of the Strata Plan. Although the front page of the Sale Contract recorded that a deposit of $130,000 had been paid by the Builder as purchaser, this did not occur. Indeed it was never the intention of the parties that it be paid. In his oral evidence Mr Marando recalled that Mr Zhang had handed over a $10 note at the time of exchange and made a joke about it. In his evidence Mr Zhang asked rhetorically why he would pay the Developer anything when the Developer owed him money.
Special Condition 51 of the Sale Contract provided: "51. BALANCE PAYABLE ON THE COMPLETION DATE The parties agree that:- (a) On the Completion Date the Purchaser will pay to the Vendor the Purchase Price less that balance due by the Vendor to the Purchaser on account for building work pursuant to the Building Contract between the Vendor and Purchaser for the construction of the development on the Property signed in or about April 2010 [the "Building Contract"] as varied from time to time up to an agreed amount of Three Million Two Hundred and Fifty Thousand Dollars ($3,250,000). (b) The amount due to the Purchaser from the Vendor for building work under the Building Contract as at the Completion Date is an agreed amount of Seven Hundred and Fifty Thousand Dollars ($750,000)."
There was an issue about whether the figure of $750,000 referred to in cl 51(b) was intended to apply to work that had been undertaken at the date of the Sale Contract or which was to be undertaken by the time of completion. Mr Marando confirmed in an answer to a request for particulars dated 7 January 2014 that it was referable to work that had already been undertaken. Mr Marando was unable to explain the discrepancy between the $600,000 (referred to in the file note) and the $750,000 specified in Special Condition 51 in the Sale Contract.
After contracts had been exchanged, Mr Zhang returned to the Property to continue with the work, which he assessed as being more than 95% complete. He explained in his unchallenged affidavit evidence: "I was comfortable that the agreement reached would secure payment to [ZH International] and it was on this basis that I returned to the site and made arrangements for the remaining work to be completed." . . . As I was continuing to work on site in reliance on Bronte Properties honouring the Sale Contract and on the advice of Mr Kekatos that the Bank had no further funds to release, no further Progress Claims were submitted to Hugh B Gage by [ZH International]."
Mr Zhang explained the rationale for the Sale Contract in the following exchange in his cross-examination: "Q. When did you first discuss the possibility of buying unit 8 with Mr Kekatos? A. He owe me a lot of money, the job, the bank they no give him money, and Jerry [Kekatos] owe me ‑ at the time I think 5, $600,000 already I put, you know, I build in two week, I just try finish with this project, after I got no other chance, I no want to buy this unit but I got not chance, I just try getting my money back. . . A. At the time I can't remember but Jerry owe me like 500 something thousand dollars, I said look the jobs stopped, and Jerry said, "Look, what about if I give you one unit and I not going to pay you anything and you just finish the project".
Later in his cross-examination he said: "Q. What would you have done if you hadn't come to an arrangement to buy unit 8? A. The time he owe me this much I got no other chance to get the money back, only this money back, buy this unit, I finished this job and I think bank will be pay all the money, I get this unit, I sell this one, I get the money to pay all the people."
After exchange of the Sale Contract, Mr Zhang advertised Unit 8 for urgent sale at $1.3m. No contract was entered into.
Mr Zhang's second affidavit contained the following paragraph: "Had Bronte Properties and [ZH International] not entered into the Sale Contract, I would have exercised rights available to [ZH International] under the Building Contract."
Mr Zhang was cross-examined about this paragraph. Mr Coleman SC, who appeared with Mr Castle on behalf of the Bank, read it to him slowly more than once. It became apparent that Mr Zhang did not have any understanding of what it meant. Accordingly, I do not accept the contents of that paragraph. However, I accept Mr Zhang's evidence that he went back to work on the site because of the Sale Contract.
The Developer did not at any time seek the Bank's consent to the Sale Contract. It is common ground that the Bank was not aware of the Sale Contract at the time it was made.
As referred to above, the Office of State Revenue had lodged a caveat on the title to the Property for outstanding land tax. The amount was paid and a withdrawal of caveat lodged on 14 July 2011. Mr Kekatos told Mr Saini on 18 July 2011 that it had been removed. This was confirmed by a title search of the Property on 18 July 2011, which revealed seven notifications on the Second Schedule. The first five were covenants and easements. The sixth was the St George Mortgage and the seventh was a caveat lodged by Bronte Bowling Club Limited. This search indicates that no caveat in respect of the Sale Contract had been lodged by that date. I am satisfied that Mr Kekatos had not by that time mentioned to Mr Saini that he had purported to sell Unit 8 to the Builder.
Mr Zhang instructed Mr Marando to lodge a caveat in respect of Unit 8 on the basis of the Sale Contract, since he was concerned that Mr Kekatos might try to sell Unit 8 to someone else. Accordingly, on 21 July 2011, Mr Marando lodged a caveat that contained a statutory declaration made by him on 19 July 2011 on the title to the Property that identified the interest claimed as: "Pursuant to terms of contract for the sale of land dated 11 July 2011".
Mr Marando appreciated when he lodged the caveat that the Bank would not be notified of its lodgement and would only become aware of it on the next occasion on which it searched the register in respect of the Property.
In his first affidavit, Mr Zhang gave evidence of a conversation with Mr Saini about two weeks after exchange in which he informed the Bank of the Sale Contract. As the conversation was disputed I propose to address it separately at the conclusion of the factual narrative.
Mr Saini conducted a site visit on the Property on 18 August 2011. External works had stalled because an approval from Sydney Water was outstanding. Mr Saini was advised that the works would take another month to complete once approval had been granted.
On 2 September 2011 Mr Saini, Mr El-Hachem and Mr Kekatos met to discuss the development. Mr Kekatos told them that three out of the five pre-sales were not expected to settle as the sunset clause was due to expire on 12 September 2011. However, Mr Kekatos also mentioned that there were two or three other sales and he would provide the Bank with copies of the contracts. Mr Kekatos said that he was considering refinancing his principal residence to reduce the debt to the Bank.
By email dated 5 September 2011 Mr Kekatos sent the front page of the Sale Contract to Mr Saini, as well as the front page of the contract with respect to Unit 8. As referred to above, the front page did not accord with the actual agreement which had been made by the parties in that it recorded that $130,000 had been paid by way of deposit and that the balance was $1,170,000. This was inconsistent with Special Condition 51 set out above. There was nothing about the terms of the email or the front page attached that distinguished it from others that Mr Kekatos had sent to Mr Saini to inform him of contracts that had been exchanged for units in the development. At that stage the Strata Plan had not yet been registered and, accordingly, separate certificates of title had not been issued for the several lots that corresponded with the individual units. I am satisfied that this was the first time at which Mr Saini became aware of the sale of Unit 8 to the Builder.
On 14 September 2011 Mr Saini sent an email to Mr Kekatos in the following terms: "Further to our conversation yesterday, I understand that the following sales have already been achieved: Lot 2 - $1.360m Lot 4 - $1.360m Lot 8 - 1.3m Lot 9 - 1.420m + following sales expected to be finalised shortly: Lot 3 - 1.150m Lot 6 - 1.7m I have attached a general list of requirements the solicitors will ask for when vetting the contracts of sale. I will let you know when to send the sales contracts across to our solicitors, but at least the list will give you an indication of what they will be looking for in the contract. Furthermore, please let me know how things progress with the building works as we need to report to credit prior to 30 Sep."
At about this time, 14 September 2011, Mr Saini began to prepare a BLAST, one of the functions of which was to extend the Facility of $9.99m to 31 January 2012. Because of the amount involved, the extension was required to be approved by one of the four Senior Credit Managers of the Bank's National Credit Group. The extension was recommended by Mr Saini on 20 September 2011 and then forwarded to Mr Pandya for his consideration and recommendation and then to David Hurley, an Executive Manager Credit, and ultimately to Mr Gannon, Senior Manager of St George National Credit, who had a credit approval limit of $50m.
As part of the process of obtaining Bank approval for the extension, Mr Saini consulted Mr Roth, who advised as to the criteria for pre-sales contracts (referred to as "Qualifying Sale Contract criteria") that should be inserted into the Facility Agreement as part of the approval. One such criterion was that a deposit of 10% of the purchase price be provided by cash or bank guarantee. Another was that the contract be "on arm's length commercial terms". The commercial purpose of the imposition of such criteria was plain: the Bank was entitled under the Facility Agreement to 100% of the net sale proceeds of all of the units. It was content to exchange its security (by way of mortgage over the portion of the Property that corresponded with particular units) only on the basis that it would receive the true cash equivalent. Mr Saini sent a list of the Qualifying Sale Contract criteria to Mr Kekatos by email on 14 September 2011.
Following further communications with Mr Kekatos, Mr Saini prepared a file note dated 20 September 2011 as follows: "RE: THE BRONTE UNIT TRUST - SALE OF LOTS 2, 4, 5 & 9 As per attached email, client has provided us details of deposits held on the above lots. Lot 5 is a Deposit Bond held with the client's solicitor for 5% (evidence attached). Lot 2, 4 & 9 are cash deposits held with the Real Estate agent at Laing & Simmons Coogee/Clovelly. We note that the agent is known to EM [Executive Manager] El-Hachem. We have spoken to the agent directly who has verbally confirmed that the settlements are legitimate and are expected to settle once the project is complete, as the sale of Lot 2 & 4 are to one of his best client's as advised. This provides strong comfort in relation to the new sales."
These documents indicate the Bank's concern that any contracts entered into be for full value. They also indicate that the Developer was made aware (if that were necessary) of the Bank's requirement and, accordingly, knew that the Bank would not, as a matter of course, consent to a contract for sale other than at full value and in respect of which a deposit had been paid in cash or its equivalent. Mr Saini compared the sale prices with valuations it had received in November 2009. Unit 8 had been valued at $1.8m at that time and had been sold for $1.7m when it had first been the subject of a contract for sale exchanged on 10 December 2009.
At some time around 20 September 2011 (but after 5 September 2011), Mr Saini learned more about the terms of the Sale Contract, probably from Mr Kekatos. It is possible that Mr Kekatos may by that time have realised that some explanation would have to be given as to why the deposit recorded on the Sale Contract as having been paid for Unit 8 had not actually been paid. I accept Mr Saini's evidence as to the following conversation: "Mr Kekatos: We sold Unit 8 to Zhang for $1.3m but he only has to pay $500K on settlement. It's to secure money outstanding to him by the Borrower [the Developer]. We owe him about $750K. As part of the deal Zhang won't claim any further drawdowns on the Facility until the final occupation certificate issues. Myself: Whatever you have done is a matter for you Jerry. The Bank has to be repaid its debt first. The development needs to be completed asap. We don't care what you do as long as the Bank is repaid. You will need to send the contract to Alex Roth to review."
Mr Saini denied that he spoke with Mr Zhang about the Sale Contract in September 2011. Indeed, I infer from the following exchange that he would have regarded speaking directly to Mr Zhang about it as untoward: "Q. When Jerry [Kekatos] told you about the deal did you not think to speak to John [Zhang] about it and confirm what you'd been told by Jerry [Kekatos]? A. That's a matter between Jerry [Kekatos] and John [Zhang]. . . . Q. You didn't think it was important to talk to John [Zhang] about the contract at any point in time? A. Because I'm dealing with my client, which is the developer. . . . Q. Is that your position? You just didn't think it was appropriate for you to raise the issue of the bank's position on the contract with Mr Zhang at any time? A. Correct."
Mr Saini told Mr Roth what he had learned about the Sale Contract. Mr Roth advised that the Bank was entitled to reject the contract since the consideration was substantially below valuation and the Bank had no obligation to honour any such agreement between the Developer and the Builder. As referred to below, Mr Saini set out what he knew about the Sale Contract and its legal effect in the BLAST document in order to inform his superiors at the Bank of the situation so that it could be taken into account in the quarterly review and in the decision whether to grant the extension.
Because of the way the BLAST documents are prepared, it is not possible to discern when particular portions were added and by whom any particular portion was written. The version in evidence, which was printed out at 2.33 pm on 29 September 2011, contains the following update of the development of the Property and the debt position. It contained the following passage, which Mr Saini accepted represented his understanding at the time although he had not necessarily written it: "Sales (against valuation) …………………………… We have been advised by client that the original 5 pre-sales (lot 2, 3, 4, 8 & 9, which formed part of valuation report) have been rescinded, however they have already re-sold 4 of these 5 lots (lots 2, 4, 8 & 9) with a fifth one under negotiation (lot 3). The borrower has also sold another lot (lot 5); with total gross sales of $7.165m to date. We have been provided with the front pages of contracts. We have questioned the borrower with regards to the circumstances of the sales and have requested the client to provide details in relation to the sales, including copies of full contracts, type of deposit, evidence of where the deposits are held, and other key items relating to the verification of sale contracts. We highlight that at present, we have not instructed our solicitor to vet any contracts given that our key target is completion of the project, however have requested the borrower to gather this information already. We however note that Lot 8 has been sold to the builder. We have been advised by the client that they have come to an agreement that the builder will buy a completed unit from the client, and in turn only have to pay $550K at settlement and not claim any further construction drawdowns until Final OC [Occupation Certificate] is provided. This is considered to be incentive for the builder to be able to complete remaining works in order to obtain Final OC, which is in interest of the Bank together with improved securities. However, panel solicitors have advised that Bank has right to refuse this offer given this is substantially below valuation and Bank is not obliged to honour agreement between builder and developer. . . . We have also provided with an additional front pages of contract of sale as well as unit sold to builder, directly negotiated by client and are attached with file. . . . Lot 8 - $550,000 (pre-sold in valuation $1,800,000) (69.4%) Although lot 8 is sold for $1.3M but at settlement, builder ZH International is only required to pay $550K and hence reduction in value by 69.4% has resulted. We reiterate that in current situation, it would be beneficial to accept sale price of $550K (very well below actual valuation, as valuation report was prepared on the basis of lot 8 pre-sold for $1.8M) given this is builder's major incentive to complete remaining works in order to obtain Final occupation certificate." …
Mr Saini also included in the BLAST his calculation of the Bank's security position without taking into account the "Builder's sale" at $550,000 (being the consideration which would be payable by ZH International on settlement). "B1: Residual Debt $4,756,000 B2: BLV $3,000,000 Total Debt $7,756,000 Residual lots (x 4) $5,920,000 Less GST (2.72%) $ 161,024 (pro-rata'd per valuation) Net Security (Waverly) $,5,759,000 41A New South Head Road, Vaucluse $6,750,000 Total Securities $12,509,000 Group LVR 62% This provides some comfort to the Bank that in order to quit residual group debt of $7,756,000 security properties can be sold at discount of 38% (we acknowledge that achieving sale for $6.75M for security property at 41A New South Head Rd, Vaucluse can be challenge in current environment, but buffer of 38% provides some comfort that bank debt can be repaid in full). As noted earlier, once project is completed, it would give us far better control (even in case of fire sale) to sell remaining units in order to clear residual group debt. As stated earlier, this would be our best way forward (or exit strategy)."
Having prepared the BLAST, Mr Saini went on leave from 23 September until 20 October 2011. On 23 September 2011, Mr Hurley sent an internal St George email to Mr El-Hachem, identifying outstanding issues concerning the development of the Property. The issue concerning Lot 8 was addressed in the following terms: first up, there has been no analysis of the sales achieved to the valuation. I have done a spreadsheet showing the current pre-sales compared to the valuation. That shows a 9% decrease in valuation. This should be reflected in our security value to show the correct position. In that regard, please give me your opinion on how we treat Lot 8 which is to be sold to the builder for $550k but exchanged contract shows at $1.3 million. Should we record the value for security purposes at $550k or at $1.30 million? We are certainly not sitting here with a $911k surplus on EV margins. In fact it could even be a shortfall depending on how we assess the position. Whichever way it goes, our records should be correct.
Mr Pandya recommended the extension requested in the BLAST on 27 September 2011 and Mr Hurley supported it. It was then forwarded to National Credit for the consideration of Mr Gannon, as one of the four senior managers at the relevant level of authority.
After having considered the BLAST, Mr Gannon, by email dated 28 September 2011 to Mr Hurley, raised the issue of the Sale Contract in the following terms: "Latest Inspection . . . I note in the previous Blast the following comment: "Borrower has come to an arrangement with the builder to complete the project by end of July and provide a Final OC [occupation certificate] at a cost of $350,000. QS [Quantity Surveyor] is monitoring the project very closely along with RM [Relationship Management] team, who are making regular site visits and are in constant communication with the borrower." Please advise the latest SGB inspection in the absence of the QS and a guide as to the actual hard CTC [cost to complete] to complete e.g. circa $300k as per drawdown sheet. Sale to Builder I note the commentary surrounding this sale which raises a number of issues and would appreciate your input with respect to the following: a) Have the directors of ZH International Pty Ltd provided a guarantee of the contract? b) Has a cash security deposit been paid and is this held by the agent? c) Provide a copy of the full contract of sale including the specific clause that states the client need only pay $550k or other executed agreement that clearly articulates the subject transaction; d) What is the financial capacity of the Builder to complete the purchase and is financed approved? I am concerned regarding the fundamentals and the rationale of the sale. The QS report states that the reason for the delays in the project were wet weather, Christmas shutdown and builder cash flow problems. If I were to assume there has been an overall decline in values of 15% the subject market value of this townhouse is $1.530m [85% of previous valuation of $1.8m]. The builder is required to pay $0.550m, therefore, the incentive to the builder is $0.980m. Yet there is only approx. $0.300m to complete (subject to confirmation) and there is a stat dec confirming all contractors have been paid. The sale is not considered equitable and until the bank satisfies itself as to the commercial terms should reserve our rights to rescind."
Mr Gannon explained his concern in evidence. He said that a sale of a unit by a developer to a builder was not, in his experience, a common occurrence. He was concerned about the commerciality of the agreement for the sale of a unit apparently worth $1.8m (according to the 2009 valuation) for net proceeds of $550,000 in the following circumstances: "(a) the Bank needed to achieve a certain level of unit sales to clear the Facility, and that if the Bank agreed to the sale occurring or being completed, the Bank would be giving up a significant amount of its security over this property, bearing in mind there is always a settlement risk on sales which a developer has represented to the Bank as achievable and noting also that there is history of rescissions in relation to this project; (b) the incentive to the builder of $980,000 significantly exceeds the cost to complete the project of $300,000 where all contractors were recorded as having been paid, and these figures didn't make commercial sense."
On 29 September 2011 Mr El-Hachem responded to Mr Gannon's email and addressed the sale to the Builder as follows: "Sale to Builder - We understand that the Borrower owes the builder a sum of money. We were advised that the sale to the builder was made to give the builder and the Borrower comfort. The builder's comfort is that he has secured the money owed to him. The Borrowers comfort is that the builder is now 'tied' to the project and has a very compelling reason to complete this project asap. - We discussed this sale with a panel solicitor and they advised that we don't have to accept this sale. Our view is that we need to see how the project 'pans' out and we have made this clear to the Borrower. The most critical point at this stage is completion of the project. Upon completion of the project, we expect all other sales to settle and depending on our position, we can then consider accepting the sale (e.g. we will not agree to this settling prior to all other sales). - With regards to your queries: a) The directors have guaranteed the contract b) No deposit is held given the funds owing c) We have already requested a full copy of the contract and any side deeds that relate to the contract d) The builder has the capacity to settle, however he intends to on sell the unit"
Mr El-Hachem confirmed in evidence that his understanding of the sale to the Builder and whatever "comfort" it gave the parties came either from his staff or from Mr Kekatos. He accepted that there was a "very, very good chance" that he spoke to Mr Kekatos. I am satisfied that the word "comfort" was either Mr El-Hachem's own word or one that had been suggested to him by Mr Kekatos and that it had not been used either by Mr Saini or Mr Zhang (with whom Mr El-Hachem had not relevantly spoken). Mr El-Hachem was, in substance, putting a gloss on what he had been told by Mr Saini about the terms of the Sale Contract and recording what he had elicited, or understood, from Mr Kekatos.
Mr El-Hachem did not see the terms of the sale of Unit 8 by the Developer to the Builder as the Bank's concern since it could simply wait until it was paid out before it allowed the transfer to occur. Mr El-Hachem's attitude is revealed by the following passage in his cross-examination: "Q. You knew that if the bank's position was conveyed to him that his commitment to the project would fall away? A. No. Q. You didn't? You thought he'd finish the building work if he was told the bank's position about the contract for unit 8 did you? A. Sorry, if I can just go back and read what I wrote? [Witness read BLAST] He's got ‑ so there is security. So for me ‑ there is security, the customer has given the builder security that at the end of the day they are going to get their money back if, if it all works out. So they've come to an agreement there. So we respect that, good luck to them, it all needs to account and they'll get their money back. This is my interpretation of the situation."
Mr El-Hachem explained that, if and when the Bank was repaid in full, the sale to the Builder of Lot 8 could proceed. He did not see any need to inform the Builder of the Bank's position since the Bank was first mortgagee and the Builder was not the Bank's customer.
Mr Gannon gave evidence of his appreciation of the Bank's position at the time: "Essentially, this Facility was a problem loan for a development project that was struggling to be completed, there were significant numbers of pre-sale rescissions, and it was not the type of facility in which the Bank or its credit officers would, in my experience and with knowledge of the Bank's credit practices, agree to surrender a valuable part of the Bank's security by consenting to completion of a sale of one of the units at an undervalue prior to the Bank's being cleared."
Following these communications, Mr Gannon added the following passage to the BLAST: "It is understood that the Bank has not confirmed the contract nor is it intending to accept the contract unless to be the final sale to clear the Bank's debt and not before."
Mr Gannon approved the extension sought by the BLAST on 29 September 2011. It did not occur to him at any time to tell Mr Zhang that the Bank intended to wait until its debt had been cleared before it would confirm the Sale Contract.
When Mr Saini returned from leave on 20 October 2011 he issued the Facility amendment letter to the Developer. He also instructed Mr Roth to obtain pre-sales contracts from the Developer so that they could be reviewed.
In a diary note he prepared on 25 November 2011 Mr Saini referred to the caveat lodged by ZH International on 21 July 2011 and noted that it was: "on title recently upon the builder negotiating a purchase of a unit in the development upon completion and noted in last application."
As the table set out above indicates, no further Payment Claims were made and no further monies forthcoming from the Bank to the Builder after 23 June 2011. Arrangements were made to pay some of the tradespersons who worked on the Property by the Developer but others were paid by the Builder.
At some point when the development was close to completion, Mr Saini, Mr Lim (the QS) and Ahmed Zeitoun, the Builder's site manager, were inspecting the units. Mr Zeitoun told them that Unit 8 was going to be finished to Mr Zhang's standards as he was buying it. Accordingly, the site inspection did not include Unit 8. When Mr Saini asked Mr Zeitoun how things were going, he responded that they were going well since Mr Kekatos had agreed to sell Unit 8 to Mr Zhang. Mr Saini responded: "That's good to hear. Now we can try to get the Occupation Certificates and finish this job."
At the end of January 2012 Mr Kekatos informed Mr Zhang that the Bank wanted an Occupation Certificate issued by 23 February 2012. Ms Tong calculated that the Developer still owed the Builder $1,067,593.50 under the Construction Contract. Mr Kekatos told Mr Zhang that he would change the terms of the Sale Contract to reflect what the Builder was owed. This discussion led to the variation of the Sale Contract referred to below. Following the meeting Mr Kekatos wrote an email to Ms Tong in the following terms: "I have just finished a meeting with your father, and have explained to him that the bank has given me a deadline to the 23/2/2012 to provide an occupation certificate. John says that he requires $150,000 to be paid so he can provide that certificate. I do not have the funds at the moment, but I propose that these funds be reduced from the purchase price of the unit no 8."
The Facility Agreement expired on 29 February 2012. At about that time, the responsibility for the account was transferred to Janine Trynchy, who worked as a Relationship Manager responsible for distressed property loans for the Bank. She handled the Facility until April 2012, when it was transferred to Michael Grace of the Bank's Loan Management Unit. Ms Trynchy understood, from reading previous BLASTs, that the Bank's position was that it would accept the Sale Contract only if it was paid out in full.
On 9 March 2012 Solon Lawyers, the Developer's solicitors, wrote to the Builder and confirmed that the Sale Contract had been varied as follows: "On behalf of our client, we confirm the agreements reached at the recent meeting between the representatives of the Purchaser and our client in relation to the Contract and the balance of construction moneys. We confirm that it has been agreed in consideration of the Purchaser completing the agreed building works and either obtaining or causing to have issued an Occupation Certificate for the redevelopment of 16b Wallace Street, Waverley within seven (7) days that;- 1. Clause 51(b) shall be amended by replacing $750,000.00 with the sum of $1,032,202.50. 2. The Vendor will pay to the Purchaser the sum of $1,00,000.00 within one month of the date of issue of the Occupation Certificate in reduction of the amount due in the amended clause 51(b). 3. The Purchaser is at liberty to rescind the existing contract and proceed on a Contract for Sale reflecting the changes brought about by the agreement referred to above."
The Bank was not informed of the existence of this letter at the time and did not become aware of it prior to these proceedings.
On 16 March 2012, Ms Trynchy sent an email to Mr Kekatos in the following terms: "As discussed, your facility was extended until Friday 23 March 2012. At this time, the development funding will be fully utilised. To assist us in considering an extension of your facility, the following information is required; … 5. Notification of total amount owing to the builder on provision of the Occupation Certificate and confirmation on how these funds are being financed. We understand there is an arrangement in place for the sale of Unit 8 to the builder. Please re-confirm the arrangement. Note, as previously advised, the Bank reserves the right to reject the sale of unit 8 to the builder."
In the following week Ms Trychny tried, without success, to obtain from Mr Kekatos details of how much the Builder was owed. Her concern was not for the Builder, but rather that funds which might otherwise be available to repay the Bank would be used to pay the Builder. On 27 March 2012, Ms Trynchy prepared a BLAST document in which she set out her understanding of the Bank's position with respect to the Sale Contract: "Unit 8 - Indicates a deposit was received when advice from the borrower is that no deposit was received. This is an arrangement made between the builder and borrower. This sale has been discussed in previous applications and the Bank has made it clear that they reserve their right not to accept this sale and arrangement with the builder."
Ms Trychny confirmed that she was not aware at any time of the Bank considering, or seeking advice, whether Mr Zhang ought be informed that the Bank reserved its rights. As far as she knew there was never any suggestion that Mr Zhang ought be notified of the Bank's reservation of its rights with respect to the Sale Contract. She confirmed that she did not know whether the Sale Contract was the only means whereby the Builder would be paid by the Developer and made no assumption one way or the other.
The Final Occupation Certificate was issued on 18 June 2012.
Towards the end of November 2012, Mr Zhang, who was in need of accommodation due to matrimonial difficulties, contacted Mr Kekatos to find out when he could move into Unit 8. Mr Kekatos consented to his moving in. Mr Zhang took possession of Unit 8 in December 2012. He arranged for electricity to be connected and put the account in his wife's name.
On about 5 December 2012, Mr Marando contacted Mr Roth because he was concerned about the large amount of money which was still owed to the Builder. This was not only the first occasion on which he had sought the Bank's consent to the Sale Contract but it was also the first time he had made any contact with the Bank to inform it of the Sale Contract. Mr Marando followed up his telephone call with an email on 12 December 2012 in which he said in part: "We advise our client is owed $1,032,500.00 (excluding interest) by the Customer and has concerns as to the Ability of the customer to pay this money. We advise that the parties have entered into a Contract for Sale Of Land Where the Contractor purchases Lot 8 for $1,300,000.00 and the monies owed to our client are deducted Of the purchase price. Please confirm that the Bank will consent to this sale proceeding."
The Bank did not consent to the Sale Contract at this, or any other, time. Mr Zhang agreed to withdraw the caveat that Mr Marando had lodged on the Property in July 2011 for the sole purpose of permitting the strata plan to be registered. This occurred 7 February 2013 and a certificate of title for Lot 8 was issued on that day.
On 15 February 2013 the Builder lodged a caveat on the new title to Lot 8 in which it claimed an interest in Unit 8 "pursuant to terms of contract for the sale of land dated 11 July, 2011" by virtue of the Sale Contract between the Developer as vendor and the Builder as purchaser. The statutory declaration in the caveat was made by Mr Marando. The Bank relied in submissions on the absence of any reference to any equitable estoppel said to operate against it in the caveat, in circumstances where Mr Marando and Mr Zhang knew that the Bank relied on the mortgage to defeat the Sale Contract and intended to sell Unit 8.
By letter dated 11 February 2013 from Jim Kekatos (Jerry Kekatos' brother), an associate at Proctor & Associates, solicitors, the Developer purported to terminate the Construction Contract for breach and the Sale Contract for non-payment of the deposit.
On 16 May 2013, as referred to above, the Developer commenced the Bronte Properties proceedings in the Equity Division of this Court seeking a declaration that the Sale Contract had been validly terminated. It alleged that the Sale Contract contained the following essential terms, and alleged that each had been breached by the Builder, thereby entitling the Developer to terminate it: 1. The Builder would pay a deposit of $130,000; 2. If the Builder lodged a caveat over title to the Property, it would permit registration of the strata plan and would sign all documents required for the registration of a strata plan; and 3. The Builder would complete the building work.
The Developer sued the Builder for damages for breach of contract and claimed possession of Lot 8 against "the second defendant", which was presumably a reference to Mr Zhang, although he was not identified as such in the pleading.
By deed dated 23 May 2013, the Bank appointed receivers and managers to Bronte Properties. The receivers informed the Bank that Mr Zhang was occupying Unit 8 and that he claimed an entitlement pursuant to a licence agreement between the Developer and the Builder. By letter dated 11 June 2013 the receivers wrote to Mr Marando, relevantly in the following terms: "We refer to your client's Supreme Court application on 31 May 2013. Counsel for your client informed the court that your client was ready willing and able to settle on the contract for sale. So we may obtain further instructions could you please confirm by 5 pm on 13 June 2013, that your client is in a position to pay and proposes to pay $1,300,000 under the terms of the contract for sale without set off or deduction. Nothing in this should be read as: 1. an adoption by the receivers of the contracts for sale of the property; or 2. an adoption by the receivers of any agreement between your client and the Company."
As at 13 May 2015 the Developer owed the Bank $16,344,387.33, according to the lender's certificate which the mortgage provided was to be conclusive evidence as to the amount owing. The relevance of the certificate was to establish that the Developer was still in default and that, accordingly, the Bank was entitled to possession.

The disputed conversation between Mr Saini and Mr Zhang about the acquisition of Unit 8

In paragraph 18 of Mr Zhang's first affidavit affirmed on 6 September 2013 he said: "About one to two weeks after Bronte and the First Defendant entered into the Contract discussed above at paragraph 16, I met with Mr Saini of St George at the Property and told Mr Saini about the existence of the Contract and we had the following conversation: Mr Saini: Things are coming together here John. Is everything okay? Me: Yes Dipin, but we need money to finish. I can't pay subcontractors and they won't come back to finish the job. I spoke to Jerry and we worked something out. Mr Saini: We have no more funds to give you John. What have you worked out? Me: Jerry will sell me Unit 8. We have signed a Contract already and we won't settle until we have the final occupation certificates. When we settle, I will pay Jerry the purchase price, less what he owes me for finishing the job. Then I can sell Unit 8 and pay everyone the money I owe them for this job. Mr Saini: Okay John. Yes Jerry told me about this agreement. Does this now mean that you can keep working and get the Occupation Certificates for the Property? Me: Yes. It should be okay. Mr Saini: If you get the Occupation Certificates, then everything should be alright. Let me know if anything changes."
Mr Saini denied this conversation and maintained that he did not learn of the Builder's contract with the Developer for the purchase of Unit 8 until September 2011. Although the defendants' case, as refined in final address, did not depend on the conversation, it was nonetheless an issue of fact to be determined whether, when and on what terms any such conversation occurred.
When Mr Zhang was asked in cross-examination to recall the conversation he said that the extent of it was as follows: "I said [to Mr Saini] look, now everything is okay. I come back to work. I get this unit. I've got to finish and as soon as I look you will get an occupation certificate, everything is all right. You'll get a unit, that's it. Just hurry up, finish."
Mr Coleman put to Mr Zhang that he was making up the conversation in the following exchange: "Q. I want you to understand clearly that I am saying to you that you made that conversation up? A. No, if I made this up my whole family die. My whole family die if I making up this one."
Mr Zhang accepted that he did not inform Mr Marando of any conversation about Unit 8 at the time it occurred. He said that he did not tell Mr Marando until "later" when he had "problems" with the Developer. Mr Marando did not say that he was aware of the conversation. Moreover, Mr Marando agreed that the first time he had any contact with the Bank about the Sale Contract was on 5 December 2012 "out of concern for the large amount of money owing to [ZH International]."
Before I turn to issues of credibility I shall address the objective circumstances, including uncontroverted facts, which I consider to be inconsistent with the conversation's having occurred as deposed in Mr Zhang's affidavit.
First, Mr Saini had shown himself, when he arranged to meet with Mr Zhang and Mr El-Hachem at the Bankstown office in July 2010, to be conscious of the limits of his authority and the delicacy of speaking directly with someone who was not the Bank's customer. I do not consider that he would have said what Mr Zhang attributed to him at [18] of his affidavit without consulting those with greater authority within the Bank.
Secondly, I do not accept that Mr Saini said, as Mr Zhang asserted, that the Bank had no more funds to pay the Builder, as that was not the case. So much is evident from the Updated Facility Offer made on 24 June 2011, referred to above.
There are further considerations that affect my assessment whether the conversation occurred as Mr Zhang deposed in [18] of his first affidavit.
As referred to above, Mr Zhang was unable to read in English. In these circumstances, Mr Marando, as the solicitor on the record, and Ms Milazzo, who prepared his affidavits, were obliged to ensure that Mr Zhang's instructions and version corresponded with what was contained in the affidavit because Mr Zhang was not able to perform the comparison himself. I found Mr Zhang to be a generally honest witness, who was ready to concede lack of recollection and yet was adamant about those matters which he did recall. However, I was concerned at times by his inability to understand when certain matters in his affidavit were read out to him by Mr Coleman in cross-examination in order to elicit his response. I did not find Mr Zhang to be a reliable witness when it came to the timing of particular events, about which he was generally vague. The evidence does not enable me to make a finding about why [18] of Mr Zhang's first affidavit read as it did but I am not satisfied either that it reflected Mr Zhang's instructions to Mr Marando or that it accorded with his true recollection. As Mr Marando was not a party to these proceedings, and accordingly was not represented, I do not propose to say anything further.
I found Mr Saini to be a careful witness who relied heavily on file notes and records he had made but who nonetheless had a reasonably good recollection of the transaction and what had occurred. He did not become defensive when cross-examined forcefully about the Bank's conduct. He was ready to concede that it had not occurred to him to consider Mr Zhang's position and that the interests he considered were those of the Bank and also, to some extent, those of the Developer as it was the Bank's customer. He regarded it as axiomatic that the Bank, as first registered mortgagee, would have to be paid out ahead of all other creditors and found it difficult to accept that anyone would truly have believed otherwise.
I accept Mr Saini's evidence that the version of the conversation given by Mr Zhang in his affidavit did not occur at any time. I do, however, accept, on the basis of Mr Zhang's oral evidence, that there was some reference to Unit 8 in discussions between them at a later date (after the Bank became aware of the Sale Contract and its nature and effect) since I do not consider that Mr Zhang's oral evidence of the conversation was fabricated. However, I do not accept that any such discussion in fact conveyed to Mr Saini that Mr Zhang assumed that whatever interest his company had in Lot 8 would prevail over the Bank's interest; that Mr Zhang ever made such assumption; or that Mr Saini did anything to give rise to any such assumption.

The factual basis of the defendants' claims for relief

Before considering the legal basis for the relief claimed I propose to address the matters which Mr Bolster, who appeared on behalf of the Builder and Mr Zhang, identified as the critical bases for relief in the present case: 1. The Bank knew that the Developer owed the Builder money. 2. The Bank knew, at least from September 2011, that the Sale Contract had been entered into to give the Developer comfort because it tied the Builder to the Property as builder; and to give the Builder comfort because it secured the money owed to him. 3. The Bank appreciated that the Builder was completing the development on the basis that he would definitely obtain his remuneration through completion of the Sale Contract. 4. The Bank appreciated throughout that it could reserve its position as to whether to allow the Sale Contract to be completed according to its terms until it had been paid out; in which event, the Sale Contract would no longer be of concern to the Bank. 5. It did not particularly matter whether Mr Zhang had spoken with Mr Saini a couple of weeks after the Sale Contract was entered into or whether they had not spoken about it at all since the unconscionability arose from the fact that the Bank knew that Mr Zhang was making a false assumption about his legal position and the Bank failed to disabuse him of that misapprehension. 6. The Bank took advantage of Mr Zhang's misapprehension by allowing him to complete the building work when there was a risk that the Bank would not be paid in full, in which event the Builder would not receive any outstanding remuneration for its work through the Sale Contract.
As to (1), so much may be accepted. However, the Bank's attempts to find out how much the Developer owed the Builder at any given time were unsuccessful. Moreover, the Bank was not privy to the arrangements between the Developer and the Builder, except insofar as they were recorded in the Construction Contract. I accept the evidence of the Bank's witnesses that they did not know by what means the Developer would pay the Builder, other than by the payments made by the Bank to the Builder following assessment by the QS, and did not consider there to be any basis to assume that the Sale Contract constituted the sole means of remuneration.
The circumstances in (2) and (3) above were those on which Mr Bolster placed greatest reliance. The circumstance in (2) derived largely from Mr El-Hachem's email to Mr Gannon of 29 September 2011, which probably followed a conversation between Mr El-Hachem and Mr Kekatos after Mr Saini had gone on leave. For the reasons I have given above when addressing this email in the narrative sequence, I do not consider the word "comfort" to bear the weight accorded to it by Mr Bolster's submissions.
At the time of any such conversation between Mr Kekatos and Mr El-Hachem, it was in Mr Kekatos' interests that the Bank not disturb the Sale Contract since the Sale Contract absolved him of responsibility to pay Mr Zhang for any more building work on the Property, which meant that any further funds available to him could be used for other purposes. The Sale Contract also had the effect that Mr Kekatos no longer had to worry about Mr Zhang downing tools and walking off the site when he was not paid. Mr Kekatos knew that the Sale Contract did not meet the Qualifying Sale Contract Criteria: it was neither for full value nor at arm's length and would, if completed, mean that the Bank would receive $550,000 rather than $1.53m, which is what it assessed Lot 8 to be worth. Accordingly, it was in Mr Kekatos' interests that the Bank believe the Sale Contract to be in its interests, or at least not adverse to its interests. Had the Bank not accepted the prudence of deferring a decision whether to allow the Sale Contract to proceed to completion, it could have required Mr Kekatos to endeavour to sell Unit 8 to an arm's length purchaser for its true market value. This would not have been in Mr Kekatos' interests at the time.
When Mr Kekatos intimated to Mr El-Hachem that the Sale Contract gave the Builder "comfort", Mr El-Hachem was entitled to accept this assessment. The Sale Contract elevated the Builder's ranking to that of a secured creditor over Lot 8. Although the Builder ranked behind the Bank, its interest took priority over all unsecured creditors. Moreover, it was to the Builder's advantage if the value of Lot 8 was greater than $1.3m, or if its worth increased over time. Further, if the figure of $750,000 attributed to the value of the works was inflated, the Sale Contract was also to the Builder's advantage. There was, accordingly, "comfort" to be derived by the Builder from the Sale Contract even though its interest did not prevail over the Bank's.
Although Mr Bolster contended that the word "comfort" in Mr El-Hachem's email meant, in the circumstances, "a cast-iron guarantee" or "complete satisfaction" with "no element of risk" that the Builder would be paid (which relates to (3)), I am not satisfied that this is the way Mr Zhang saw it. In September 2011, as in July 2011 when the Sale Contract was entered into, it was a matter of speculation whether the Facility would be fully repaid from the proceeds of the development or from any security available to the Bank from the Developer or its principals. It was still reasonably possible that the Facility of $9.99m would be repaid in full since there were 10 units and the Bank was entitled to 100% of the net proceeds of sale. When the Sale Contract was entered into, both Mr Zhang and Mr Marando reckoned that there would be a surplus to the Bank. In that event, questions of priority between the Bank and the Builder would not arise, since the Bank, as first mortgagee, would, on that scenario, have been repaid and Mr Zhang could reasonably expect that his interest under the Sale Contract would prevail over anyone apart from the Bank. Moreover, Mr Zhang assessed the work on the Property to be 95% complete and, accordingly, only 5% remained to be performed.
Had either Mr Zhang or Mr Marando truly believed that the Sale Contract would prevail over the Bank's interest, come what may, they would have had no need to carry out such calculations. That they did perform the assessment is a powerful indication that they appreciated that the Sale Contract advanced the Builder's priority, but would not prevail over the Bank's mortgage. Whether the Sale Contract would provide actual, or merely cold, comfort, remained to be seen.
As to (4), that was common ground. The basis on which the Bank proceeded was that it did not need to decide whether to reject the Sale Contract or not since its consent to the Sale Contract had not been sought. Further, it had no interest in the commerciality (or otherwise) of the Sale Contract as long as it was repaid in full.
The circumstance in (5) has the effect of diminishing, if not obliterating, the importance of the alleged conversation between Mr Saini and Mr Zhang about the Sale Contract, which I have found, for reasons given above, did not take place in the terms set out in Mr Zhang's affidavit. I am not satisfied, for reasons already given, that Mr Zhang misapprehended his legal position at all or that the Bank had any reason to suppose that he did. There was enough potential benefit (or "comfort") to the Builder in the Sale Contract even if it did not prevail over the Bank's interest. Further, it can hardly have been reasonable for Mr Zhang to imagine, much less assume, that the Bank would give up its priority, and the associated benefit of obtaining the full market value (in the form of 100% of the net proceeds of an arm's length sale) for Lot 8, without an expressly negotiated agreement.
Mr Zhang's evidence as to reliance in [23] of his first affidavit was: "Had it been indicated to me that St George would seek to act on its mortgage in such a way that ZH would not be able to obtain the benefit of its contract with Bronte, I would not have completed the construction of the development."
Neither the Bank, nor Mr Kekatos, nor Mr Zhang himself was in a position to know, until after the building work had been completed and all the units sold, what the ultimate financial position of the Developer was and whether the Bank would be paid out. In these circumstances, I do not accept that Mr Zhang would not have continued with the development had he been told that the Bank continued to rely on its legal rights as first mortgagee. It is not to the point that if Mr Zhang had known that he would definitely not obtain Unit 8 because the Bank would not be paid out, he would not have completed the construction of the development. The matter is not to be judged by hindsight.
Mr Bolster contended that the fact that Mr Zhang had advertised Unit 8 as being for sale after he had exchanged contracts showed that he believed that he had an unassailable right to do so. I do not accept this submission. Mr Zhang's conduct is also consistent with his having appreciated that his interest in Unit 8 was subject to the Bank's.
As to (6), I do not accept, for reasons already given, that Mr Zhang was under any misapprehension. In any event, the Builder was contractually obliged to complete the building work under the Construction Contract, which remained on foot at least until the Developer purported to terminate it by letter dated 11 February 2013. Moreover, as far as the Bank knew, the Builder and the Developer had also made an arrangement in June 2011 that the Builder would complete the development to Final Occupation Certificate at a cost of $350,000. The Bank was not to know that no such agreement had actually been made, or that the letter that purported to record it was spurious. It was, accordingly, not a question of the Bank's "allowing" the Builder to complete the project; the Builder was not only obliged to, but also had his own financial interest in completion: to obtain Unit 8, which was to be the means whereby he was to be paid.

The legal bases for the defendants' claims for relief

It was common ground that the Bank was entitled to the orders it sought in the statement of claim unless the defendants were entitled to relief. The defendants based their claims for relief on the following grounds, each of which will be considered in turn: 1. The Bank acquiesced in the defendants' taking possession of Unit 8 ([5(c)] of the Amended Defence); 2. The Bank consented, by its conduct, to the Sale Contract ([9] of the Amended Defence); 3. An estoppel in pais or an estoppel by conduct arose which would prevent the Bank from taking possession of Unit 8 or prevent its taking priority over the Sale Contract ([10] of the Amended Defence); 4. The Bank was guilty of misleading or deceptive conduct in breach of s 18 of the Australian Consumer Law ([10D] - [10F] of the Amended Defence); 5. The Bank was guilty of unconscionable conduct in breach of s 20 of the Australian Consumer Law ([11] of the Amended Defence).
If any one of (1), (2) or (3) is made out, the defendants sought dismissal of the Bank's proceedings for possession and removal of the caveat and a declaration that the Bank is estopped from relying on its mortgage for the purpose of preventing any transfer of Lot 8 pursuant to the Sale Contract. If either of the claims for relief in (4) or (5) is made out, the defendants sought orders pursuant to s 237(1)(a) and s 242(c) of the Australian Consumer Law refusing to enforce the Bank's mortgage in so far as it would prevent the Builder from enjoying the benefit of an order for specific performance of the Sale Contract. They also sought an order pursuant to s 237(1)(a) and s 243(h) of the Australian Consumer Law requiring the Bank to execute and deliver up to the Builder a discharge of the mortgage in registrable form in so far as it relates to Lot 8.

Consent and acquiescence: (1) and (2) above

The defendants contended, in (1) and (2) above, that the Bank's conduct amounted both to consent and acquiescence to the Sale Contract, although it was accepted that consent to the Sale Contract had not been sought at any time prior to the issue of the Final Occupation Certificate and was first sought in December 2012. It was also accepted that it had not at any time been given. It is not clear from the evidence why consent to the Sale Contract was not sought. Had Mr Zhang wanted to know whether the Bank was prepared to countenance the Sale Contract, he could have sought the Bank's consent to it before he entered into it, or, indeed, at any time thereafter. Although it is possible that he failed to obtain consent because he was not advised that it was necessary, there is no evidence that would permit such a finding to be made. I would not, in any event, infer that consent was not sought for any reason other than that both Mr Zhang and Mr Marando appreciated that it would not be forthcoming until the Bank had been paid out.
The defendants relied on Empirnall Holdings Pty Ltd v McMahon Paull Partners Pty Ltd (1988) 14 NSWLR 523 (Empirnall). In Empirnall, the question arose whether the property developer's (Empirnall's) silence could amount to acceptance of the terms of a written, but unexecuted, contract, which gave the architects (McMahon Paull) a charge for their outstanding fees; or whether the work had been performed pursuant to an oral contract which did not create a charge for the benefit of the architects. The case was not run by reference to estoppel at trial. An application for leave to amend the pleading on appeal to add an allegation of estoppel was refused. Accordingly, the question was whether Empirnall had assented to, and was bound by, the terms of the written contract although it had not executed it. The Court of Appeal found that McMahon Paull had made it clear that the terms on which the work was offered were those contained in the document and that Empirnall had taken the benefit of the work performed by McMahon Paull on those terms. McHugh JA (Samuels JA agreeing) said at 536: "The case is not so much one of acceptance by silence as one of taking the benefit of an offer with knowledge of its terms and knowledge of the offeror's reliance on payment being made in return for his work. … Since Empirnall has taken the benefit of the work with knowledge of the terms on which it was offered, an objective bystander would conclude that Empirnall had accepted the offer on those terms and conditions."
I consider Empirnall to be far removed from the present case. The question in Empirnall was the basis for McMahon Paull's remuneration for work it performed for the benefit, and at the request, of Empirnall and with which it was in a contractual relationship (whether oral, as Empirnall contended, or written, as McMahon Paull contended) to perform the work. In the present case, the Builder was performing work pursuant to a contract, the Construction Contract, with the Developer. Although the work was also for the Bank's benefit and there was privity of contract between the Builder and the Bank by reason of the Tri-partite Deed, the Builder was not performing the building work because it had an obligation to the Bank to do so.
In the circumstances of the present case the Bank had no obligation to inform the defendants of its legal rights, or that it was intending to rely on them. Its "silence" was not of the same character as the appellant's in Empirnall and cannot be taken either as consent or acquiescence to the Builder's performing work on the basis that it would thereby gain priority over the Bank.
There was no evidence that Mr Zhang was at any relevant disadvantage or could be assumed not to be aware of the fundamental matrix that underpinned this development, and many others: the Bank funded the development and, in return, had priority as first registered mortgagee. Indeed Mr Zhang admitted as much in cross-examination. Furthermore, for reasons already given, Mr Zhang had plausible commercial reasons both for entering into the Sale Contract, notwithstanding that the Builder's interest had no priority over the Bank's interest, and for continuing with the building work: it was only when it was completed that final accounts could be taken.
I reject the Builder's claim for relief in so far as it is based on consent and acquiescence.

Equitable estoppel: (3) above

The defendants also claim relief on the basis of estoppel by conduct. Mr Bolster relied on the following passage, and in particular the italicised portion from Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 (Grundt) at 674 - 675 per Dixon J: "The principle upon which estoppel in pais is founded is that the law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations. This is, of course, a very general statement. But it is the basis of the rules governing estoppel. Those rules work out the more precise grounds upon which the law holds a party disentitled to depart from an assumption in the assertion of rights against another. One condition appears always to be indispensable. That other must have so acted or abstained from acting upon the footing of the state of affairs assumed that he would suffer a detriment if the opposite party were afterwards allowed to set up rights against him inconsistent with the assumption. In stating this essential condition, particularly where the estoppel flows from representation, it is often said simply that the party asserting the estoppel must have been induced to act to his detriment. Although substantially such a statement is correct and leads to no misunderstanding, it does not bring out clearly the basal purpose of the doctrine. That purpose is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting. This means that the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain. His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment. His action or inaction must be such that, if the assumption upon which he proceeded were shown to be wrong and an inconsistent state of affairs were accepted as the foundation of the rights and duties of himself and the opposite party, the consequence would be to make his original act or failure to act a source of prejudice."
Mr Bolster contended that the defendants continued, after the Sale Contract was entered into until June 2012 when the Final Occupation Certificate was issued, to carry out the building work and pay and incur liabilities to sub-contractors and suppliers on the assumption that the Bank, having become aware of the Sale Contract, would not stand in the way of its completion. The estoppel was said to arise, in part, from the Bank's acquiescence in sitting back, once it became aware of the Sale Contract, and not intervening to inform the defendants that all the building work they did on the Property from the time of the Sale Contract might be for nought, since no transfer would take place unless the Bank were paid out in full first.
Mr Bolster placed substantial reliance on the following passage from the BLAST of September 2011 in which it was noted: "We reiterate that in current situation, it would be beneficial to accept sale price of $550K (very well below actual valuation, as valuation report was prepared on the basis of lot 8 pre-sold for $1.8M) given this is builder's major incentive to complete remaining works in order to obtain Final occupation certificate."
Mr Bolster contended that, since the Bank appreciated that the Sale Contract was the Builder's "major incentive" to complete the works, the Bank had an obligation to tell Mr Zhang that it had not decided whether to consent to the Sale Contract and, indeed, would only do so if it was paid out in full. Mr Bolster submitted that an equitable estoppel by conduct arose to protect the defendants from the detriment which would flow from the Bank's alleged change of position if it were to be permitted to resile from the assumption and that such equitable estoppel would entitle the defendants to such relief as would fulfil their expectations in accordance with the assumption.
The principles on which the defendants rely have been further enunciated since Grundt, including in Sidhu v Van Dyke [2014] HCA 19; 251 CLR 505 (Sidhu) in which the plurality (French CJ, Kiefel, Bell and Keane JJ) referred to Mason CJ's statement in Commonwealth v Verwayen (1990) 170 CLR 394 at 407 that the various categories of estoppel are intended to serve the same purpose: to protect against the detriment that would flow from a party's change of position if the assumption or expectation that led to it were departed from. As Bathurst CJ said in Ashton v Pratt [2015] NSWCA 12 at [108] of estoppel by acquiescence: ". . . the essence of these types of proprietary estoppel is that the person seeking to assert it has been led to alter his or her position detrimentally in the belief that he or she would have an interest in the property of the defendant: Dillwyn v Llewelyn (1862) 4 De Gex, Fisher & Jones 517; 45 ER 1285 and Sir J W Ramsden v Lee Dyson and Joseph Thornton (1866) LR 1 HL 129."
Although there are aspects of proprietary estoppel in the present case, since the defendants claim that they conducted themselves on the basis that they would have a proprietary interest in Lot 8 that was superior to that of the Bank's, there are also aspects of promissory estoppel, in that they also appear to assert that the Bank gave them to understand, by its silence, that it would not rely on its strict legal rights to priority. I do not consider the classification by reference to category of estoppel to be significant in the present case because of the factual findings I have made, which, in my view, exclude an estoppel of whatever kind.
It is possible that whatever comfort Mr Zhang and, through him, ZH International, derived from the Sale Contract, was fortified by advice he was given by Mr Marando, or statements made to him by Mr Kekatos. However, the former category was protected by privilege and there was no evidence of the latter category, although Mr Kekatos had been informed expressly by the Bank that it reserved its position with respect to the Sale Contract in September 2011, as soon as it became aware of its nature and effect. In these circumstances, it is not appropriate to speculate on this matter. It is sufficient to say that the evidence does not disclose that the Bank gave Mr Zhang any assurance or prediction as to whether it would be paid out and, accordingly, whether the Sale Contract would ever be completed. Nor did the Bank convey to Mr Zhang, by its conduct or its silence, that it would be prepared to defer its priority. If Mr Zhang did, indeed, assume that the Sale Contract would be completed irrespective of whether the Bank was paid in full, or because there were sufficient funds to pay it out in full, the assumption was not made or caused by anything the Bank has been shown to have said or done, or failed to say or do. Moreover even if Mr Zhang (contrary to my findings) interpreted the Bank's conduct in the way for which Mr Bolster contended, such an interpretation was unreasonable and could not reasonably have been relied on. In those circumstances, no estoppel can arise: see the authorities referred to by Meagher JA in Hammond v JP Morgan Trust Australia Ltd [2012] NSWCA 295 at [52], Basten JA and Bergin CJ in Eq agreeing.
It is also of significance that Mr Zhang did not inform the Bank of the Sale Contract before it was exchanged. Indeed, he did not tell the Bank about it at all and referred to it only in passing to Mr Saini when the latter was inspecting the site. Nor did he at any time tell the Bank of the variation, which would have, had it been given effect to, further reduced the monies available to the Bank on settlement of the Sale Contract.
The onus is on the party alleging estoppel: see Sidhu at [90] - [93] per Gageler J. Accordingly, apart from the other matters to be established, the defendants were required to establish that they would have adopted a different course of action had they known that the Bank reserved its position with respect to the Sale Contract. They have not discharged this onus. I am not satisfied that Mr Zhang would have done anything differently if the Bank had informed him in September 2011, when it informed Mr Kekatos, that it would not make a decision about the Sale Contract until all the other Lots had been sold. First, the Bank would not have been telling him anything he did not already know; and secondly, I am not satisfied that there was a better alternative available to him since, as he explained in his oral evidence set out above, "I got no other chance to get the money back".
In summary, for the reasons given above, I accept the Bank's submission that the defendants have failed to establish any of the following elements of estoppel: that they assumed that the Sale Contract would take priority over the Bank's interest in Lot 8; that the Bank caused them to adopt that assumption; that they acted differently as a result of the assumption; or that they have suffered any detriment as a result of that assumption.

Alleged misleading or deceptive conduct by the Bank: s 18 of the Australian Consumer Law: (4) above

Section 18 of the Australian Consumer Law relevantly provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
Mr Bolster contended that the Bank's failure to inform Mr Zhang that it reserved its rights to object to the Sale Contract until after all other units had been sold was misleading or deceptive in that it amounted to a continuing representation by silence that it would not interfere with the Builder's taking the benefit of the Sale Contract or being remunerated for its building work by the benefits it afforded. The defendants submitted that the circumstances gave rise to a reasonable expectation that if some relevant fact existed (the Bank's reservation of its rights), it would be disclosed. Mr Bolster relied on Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 (Demagogue) and Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 (Winterton).
In Demagogue, the Full Federal Court was required to consider the significance of silence and the circumstances in which it could amount to misleading or deceptive conduct within the meaning of s 52 of the Trade Practices Act 1974 (Cth), the statutory predecessor to s 18 of the Australian Consumer Law. The primary judge found that the vendors of developed land at Noosa Heads did not inform purchasers of land that access to the site was subject to a Road Licence in the vendor's name; that the need for such a licence for vehicular access to the development was "an unusual and unexpected circumstance"; and that if the purchasers had been aware of the true position regarding access to the site they would never have entered into the contract. The purchasers were relieved from the contract on that basis pursuant to orders made under s 87 of the Trade Practices Act. The appellant vendor challenged the finding of misleading or deceptive conduct and the relief granted.
The Full Court confirmed that silence was not to be regarded as relevant only where there was a "duty to speak" and found that silence was capable of forming part of the relevant circumstances that made conduct misleading or deceptive or likely to mislead or deceive. It upheld the primary judge's finding and considered that, in all the circumstances, the vendor's failure to disclose the restrictions on vehicular access constituted a breach of s 52. Justice Gummow said, at 40-41 (citations omitted): "It is true . . . that the large number of cases brought under the Act in respect of conduct analogous to passing-off has encouraged the notion that some representation must be demonstrated as an element of conduct in contravention of s 52. But, consistently with regard to the natural meaning of the terms of s 52, the question is whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive. Conduct answering that description may not always involve misrepresentation..."
The important distinction between Demagogue and the present case is that, in Demagogue, the nature of the vehicular access to the site was an "unusual and unexpected circumstance", whereas the Bank's reservation of its rights to defer a decision whether to allow the Sale Contract to be completed was precisely what one would expect (and indeed what the Builder and his solicitor did expect in the present case) the funder of a development, who was secured by a first registered mortgage, to do. It was likely to be misleading or deceptive for the vendor of the Noosa site not to inform the purchasers of the restriction. By contrast, it could hardly be expected that a Bank would tell anyone involved, much less a builder, that it intended to get its money back before it allowed any special deal between the builder and developer (which delivered to the Bank, on the face of the agreement, at least $750,000 less than it would have received on an arm's length sale) to go ahead, unless it had specifically consented to it for its own commercial reasons.
In Winterton, which was delivered a week after Demagogue, a builder (Winterton) sought relief against a financier (Hambros). Hambros financed the development. In the finance agreement with the developer, Hambros reserved the right not to advance monies if there was a material change that affected the developer's capacity to perform its obligations under the finance agreement. From October 1990 Hambros did not release any further monies as there had been a material change. The builder completed the work on the development between August and October 1990 but was not paid because of Hambros' refusal to release further funds. Justice Hill found that if the circumstances would lead a person to believe that a relevant matter would, if it affected him adversely, be communicated, the failure to do so might constitute misleading or deceptive conduct. However, his Honour found that not only did the financier have no duty to disclose to the builder information concerning the developer's financial affairs, but it also owed a duty of confidence to the developer which would prevent its disclosure of such matters. Accordingly, Winterton's claim for relief was dismissed.
Mr Bolster submitted that, in the present case, the circumstances would lead the Builder to believe that, if the Bank proposed to reserve its rights to withhold consent to the Sale Contract, the Bank would tell him because it would obviously affect the Builder adversely. Accordingly, he submitted that the Bank's failure to tell Mr Zhang constituted conduct that was likely to mislead or deceive.
Mr Coleman relied on Winterton for the proposition that the Bank owed a duty of confidence to the Developer as its customer, and therefore it could not be expected that it would disclose matters germane to its customer's financial affairs because of that duty.
I did not understand Mr Bolster to suggest that it was incumbent on the Bank to inform the Builder that, because of the Developer's financial position, there was a real prospect that it would not be paid in full, in which event it would not allow the Sale Contract to be completed. Accordingly, the duty of confidence is, in my view, a neutral factor in the present case.
Given that the Bank could not, consistently with its obligation to the Developer, disclose its financial position to the Builder, the question arises: what was the Bank obliged to tell the Builder? The defendants' answer to the question is that the Bank was obliged to tell the Builder that it would only permit the Sale Contract to be completed if it was repaid in full. The difficulty with this answer is that it requires the Bank to tell a third party with whom it is not relevantly in a contractual relationship (aside from the Tripartite Deed, which I regard as irrelevant to the present question) that it proposes to rely on its legal rights, when it has given no indication that it will not do so (Cf. Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387) and, indeed, the third party has positively assumed that it will rely on them. As French CJ and Kiefel J said in Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; 241 CLR 357 at [22]: "However, as a general proposition, s 52 does not require a party to commercial negotiations to volunteer information which will be of assistance to the decision-making of the other party. A fortiori it does not impose on a party an obligation to volunteer information in order to avoid the consequences of the careless disregard, for its own interests, of another party of equal bargaining power and competence."
I am not persuaded that the Bank's conduct was misleading or deceptive.

Alleged unconscionable conduct by the Bank: (5) above

Mr Bolster relied on the submissions advanced in favour of equitable estoppel in support of the contention that the Bank had contravened s 20 of the Australian Consumer Law, which provides that a person must not, in trade or commerce, engage in conduct that it unconscionable, within the meaning of the unwritten law from time to time. As unconscionability would need to be established for the estoppel to be made out, and, as I have found that it has not been, this further allegation can be dealt with briefly.
The term "unconscionable" when applied to conduct connotes conduct that is "irreconcilable with what is right and reasonable": Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 at [291] per Allsop P (Bathurst CJ and Campbell JA agreeing). More than unfairness or injustice is required: Paciocco v ANZ Banking Group Ltd [2015] FCAFC 50 at [259]-[306].
I am not persuaded that the Bank's conduct involves any moral obloquy or could reasonably be described as being irreconcilable with what is right and reasonable. All the Bank did was act in its own interests in the context of the priority of its interest in the Property. It was entitled, under the Facility Agreement and by reason of the registration of its mortgage, to 100% of the net proceeds of sale of all of the Lots that had comprised the Property before the lodgement of the Strata Plan. It had the legal right to reject any sale that was not at arm's length and for full value. The Sale Contract was neither of those things. The Bank had no interest in preventing the Sale Contract from being completed if it was paid in full. Accordingly, it deferred determination of that question until all other Lots had been sold and the proceeds applied in reduction of the debt created by the Facility.
Although it had an interest in the development being completed as soon as possible, the Bank's interests coincided in that respect with those of the Developer and the Builder. Because of the Sale Contract, the Builder was not entitled to be paid any more for the work until all the work had been completed. The Developer was not in a position to know if it had made a profit or a loss until all the Lots had been sold. The Builder may well have been in as good a position as the Bank to know whether the net position of the Developer would be a profit or a loss. Moreover, Mr Zhang knew that his best chance of being paid was to enter into the Sale Contract, which at least gave him priority over the Developer's other creditors. Although, as it turned out, the Bank was not paid in full (and indeed was still owed, as at 13 May 2015, $16,344,387.33), the matter cannot be judged by hindsight.
I reject the claim for relief based on s 20 of the Australian Consumer Law.

Summary

For the reasons given above, the Bank is entitled to the orders it seeks in the Bank proceedings. The defendants have failed to establish an entitlement to relief in the Bronte Properties Proceedings. Accordingly, there is no utility in granting the defendants the opportunity to have the caveat lodged by Bronte Bowling Club Ltd removed.

Orders

I make the following orders: In proceedings 152651 of 2013 1. Judgment for the cross-defendant on the amended cross-claim. In proceedings 184759 of 2013 (1) As against both defendants, an order for possession of land comprised in folio identifier 8/SP87282 being the land situated at and known as Unit 8, 26 Wallace Street Waverley, in the State of New South Wales. 1. As against both defendants, leave to issue a writ of possession. 2. As against the first defendant, an order pursuant to s 74MA(2) of the Real Property Act 1900 (NSW) that it withdraw caveat number AH554634. 3. Reserve the question of costs pending determination of the Bank's application for an order for indemnity costs.

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: 25 May 2015

Australian Consumer Law (Sch 2 to the Competition and Consumer Act 2010 (Cth)) Trade Practices Act 1974(Cth)

Trade Practices Act 1974(Cth)

Westpac Banking Corporation v ZH International Pty Ltd; Bronte Properties Pty Ltd v ZH International Pty Ltd

At a glance

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Judgment (17 paragraphs)

Legislation Cited (4)

Cases Cited (12)

Cited By (2)