Blake v Leondiou - [2012] SASC 121

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Civil)
BLAKE v LEONDIOU & ANOR
[2012] SASC 121
Judgment of The Honourable Justice Blue
19 July 2012
INTEREST - RECOVERABILITY OF INTEREST - AWARD OF INTEREST AS DAMAGES
INTEREST - RATE OF INTEREST AND COMPOUND INTEREST - COMPOUND INTEREST
The plaintiff and first defendant agreed to purchase a house collectively to let out as a rooming house - The first defendant incorporated a company (the second defendant) to purchase and operate the property - The plaintiff and first defendant each contributed funds towards the purchase price - Both parties undertook works to improve the property and expended monies on the purchase of items for the property.
A dispute arose regarding the plaintiff and first defendant's respective interests in the property and the plaintiff commenced proceedings - The plaintiff sought a declaration that she had an 80% beneficial interest in the property (or in the company).
The parties reached agreement that consent judgment be entered in favour of the plaintiff against the defendants for $98,235 - leaving questions of interest and costs to be determined.
Held:
(1) The plaintiff is entitled to damages for loss of use of monies.
(2) In the alternative the plaintiff would have been entitled to interest as part of the restitution of the monies invested.
Supreme Court Act 1935 (SA) s 30C, referred to.
Hungerfords v Walker (1989) 171 CLR 125, applied.

BLAKE v LEONDIOU & ANOR
[2012] SASC 121
Civil:

JUSTICE BLUE: In this action the plaintiff Ms Blake sues the first defendant Mr Leondiou and the second defendant (“the Company”) in connection with the purchase and operation of a house property at Mile End.
On the first day of trial, the parties agreed on the principal relief, leaving issues involving interest and costs to be determined by me as trial Judge.
These reasons for judgment address the interest issues.
Background facts
In December 2007, Ms Blake and Mr Leondiou agreed to purchase collectively the property with a view to operating it as a residential rooming house.
In January 2008, it was agreed that the parties would use a company to be incorporated as their vehicle to purchase and operate the property. The second defendant (“the Company”) was incorporated by Mr Leondiou for this purpose.
It was in this action in dispute what proportionate interests Ms Blake and Mr Leondiou would have. Ms Blake’s case was that she was to have 80 per cent and Mr Leondiou 20 per cent. Mr Leondiou’s case was that the proportionate interest was to reflect the respective contributions of the parties.
In January 2008, Ms Blake paid, directly or indirectly, to the conveyancers acting for the purchaser a total of $94,239 towards the total purchase price of the property of $494,067.34 (including stamp duty, registration and fees). Mr Leondiou contributed $25,000 towards the purchase price. The balance was borrowed on a security of a first mortgage registered over the property and guaranteed by Mr Leondiou.
Settlement of the purchase took place on 22 February 2008. During the next two weeks, Mr Leondiou and Ms Blake in succession undertook work for the purpose of improving the property and each expended monies on the purchase of furniture and fittings for the property. Over that two week period, there was major falling out between the parties, culminating it Mr Leondiou (and the Company of which he was sole director and shareholder) assuming sole control of the property and its operation as a rooming house. In March 2008, Mr Leondiou wrote to Ms Blake characterising her contribution to the property as a loan and foreshadowing an intention to return the loan to her. Various communications transpired between the parties or their representatives.
On 4 June 2008, Ms Blake instituted this action against Mr Leondiou and the Company seeking a declaration that she had an 80 per cent beneficial interest in the property. On 4 July 2008, the Company served on Ms Blake a Notice of Payment into Court recording a payment into court of $94,239.
The trial of the action was listed to commence before me on 17 July 2012. Negotiations took place between the parties, culminating in an agreement that a consent judgment be entered in favour of Ms Blake against Mr Leondiou and the Company for $98,235 (“the principal sum”), leaving aside the questions of interest and costs.
At the trial, Ms Blake gave evidence, two affidavits by Mr Leondiou were tendered, and both parties tendered various documents.
These are three bases on which Ms Blake might be entitled to “interest” on the principal sum:
1. as damages for loss of use of monies;
2.as part of restitution to Ms Blake of which the sum of $98,251 is the principal component; or
3.as interest pursuant to section 30C of the Supreme Court Act 1925 (SA).
Loss of use of monies
The first basis which I consider is damages for loss of use of monies.[1] Ms Blake gave evidence that she borrowed $8,000 from her daughter on the footing that she would repay those monies with compensation for their use in due course. She gave evidence that she sourced the balance of the funds contributed to the property out of bank accounts. $64,000 of those monies were derived from an inheritance from her father. Her principal source of income was a disability pension paid by the Department of Social Security. She had also conducted some small businesses, but terminated them by mid 2008.
[1] Hungerfords v Walker (1989) 171 CLR 125.
Ms Blake gave evidence that, if their monies had been returned to her in early 2008, she would have invested them in a high interest bearing bank account (in accordance with advice from her daughter).
Ms Blake tendered data derived from the Reserve Bank showing interest rates since January 2008 in respect of various different bank accounts, including cash management accounts, and claims that the cash management account rates reflect the rates which she would have obtained.
If Ms Blake’s evidence is accepted concerning the hypothetical question of utilisation of the principal sum, it follows that she is entitled to damages for loss of use of those monies. The defendants recognise this, but invite me to make an adverse finding concerning Ms Blake’s credibility and to reject her evidence concerning the hypothetical use of the monies. In particular, the defendants point to what they characterised as argumentative answers by Ms Blake to questions in cross-examination.
In assessing Ms Blake’s evidence, I first consider whether it is inherently likely or unlikely that she would have acted as she said. On her evidence, and there is no reason to find otherwise, Ms Blake did not have a history of investing monies in shares or other investments apart from investing them in the bank. Her evidence was that the investment in the Mile End property put her off making a similar such investment in future. Investing monies in a bank account is a common and conservative method of investment of funds, particularly funds of the order of $100,000. Accordingly, it is not inherently unlikely that Ms Blake would have acted as she said.
Secondly, while Ms Blake’s answers in cross-examination were often argumentative, I do not consider that they were evasive. Often persons performing the triple roles of witness, advocate and party find it difficult to separate the three roles when being cross-examined. I do not consider that the argumentative nature of her answers impacts adversely on Ms Blake’s credibility.
Thirdly, there were no demonstrated internal or external inconsistencies in Ms Blake’s evidence. Overall, I have no reason or basis on which to reject her evidence. This includes her explanation for the use of different names.
Accordingly, I find on the balance of probabilities that hypothetically Ms Blake would have invested the relevant funds in a “high interest” bank account if they had not been invested in the property or if they had been returned to her in early 2008.
The defendants contend that, if Ms Blake had been earning interest on the principal sum since 2008, it may have reduced the amount of her disability pension. The defendants contend that, in these circumstances, Ms Blake has failed to prove that she suffered a loss of use of monies or alternatively there should be a reduction in the amount of such damages awarded to her.
I consider that the position in relation to pension payments is analogous to that which applies to income tax. Generally, unless it is demonstrated that income tax will operate in a manner such that a plaintiff would be over-compensated, courts ignore the incidence of income tax in assessing damages. In the present case, it is likely that Ms Blake will be obliged to pay income tax in a single year of income on any damages awarded for loss of use of monies, whereas if she had received them over the previous four years it may be that the incidence of income tax would have been less.
No evidence was adduced by either party concerning the threshold of income which can be earned before it impacts on the amount of disability pension payments or upon the rate of reduction thereafter. However, if she would have been subject to some reduction if she had earnt interest over the years since 2008, it is likely that Ms Blake will be subjected to as large, if not a larger, reduction by reason of the award of damages at a single point compared to the payments spread out over four years (if any reduction applies). I have no basis to assess the question of the incidence of tax or reduction in disability pension in the two scenarios of the receipt of interest spread over four years (with a consequential reduction in the running balance) compared to the actual scenario a receipt in a large sum of a single point
In the circumstances, the possibility of a reduction in the amount of disability payments to Ms Blake is not a reason to deny her damages for loss of use of monies or to reduce the amount of those damages.
Restitution
The second and alternative basis which Ms Blake might be entitled to interest is as part of the restitution of the principal sum which she invested in the property. Because the principal claims the subject of the action have been resolved by consent, it has not been necessary or possible for me to make findings or reach conclusions concerning Ms Blake’s causes of action. However, the return to her of her investment is likely to be characterised as an restitutionary remedy, regardless of whether the cause of action itself is regarded as being in trust or in restitution.
In assessing restitution, it is appropriate to take into account the position both from the perspective of the plaintiff and the defendant. Insofar as Ms Blake’s position is concerned, ordinarily restitution of the principal sum would be regarded as insufficient in itself to effect restitution and would be accompanied by interest. Insofar as the defendants’ position is concerned, they argue that they have incurred high interest costs on borrowings made in May 2008 to fund the payment into Court of $94,239 in July 2008, and that this is a reason why no interest should be awarded in favour of Ms Blake. However, the monies paid into Court have earnt interest over the last four years. If Mr Leondiou had borne the entire costs associated with the investment or had paid out Ms Blake at the outset, he would still have incurred interest on the principal sum.
On a consideration of the position of both the plaintiff and the defendants, I consider that it would be appropriate to award interest as part of the total restitution if I had not considered it appropriate to award damages for loss of use of monies. The defendants also argue that Ms Blake acted unreasonably in not accepting offers of repayment of $94,239. While their contention will need to be considered on the issue of costs, I do not consider it a reason to deny restitutionary interest.
Interest pursuant to section 30C
In the circumstances it is not necessary to consider the question of interest pursuant to section 30C of the Supreme Court Act 1935 (SA).
Compounding
Both interest on cash management accounts and interest on monies lodged at Court are paid on the basis that the principal sum is compounded. The defendants contend that, if interest is awarded, it ought to be calculated as simple interest. I reject that contention. It is appropriate that the interest be calculated on a monthly compounding basis either as loss of use of monies or as part of restitution.
Appropriate interest rate
The interests rates paid on cash management deposits according to the Reserve Bank data are slightly higher than the rates of interest paid on monies deposited in Court. For example, the cash management account rate rates as at February 2008 and June 2012 were 6.85 per cent and 3.6 per cent respectively, compared to interest on monies in Court of 6.81 per cent and 3.39 per cent respectively.
In the circumstances, I consider that it is appropriate to use the Court interest rates as opposed to the cash management account rates. Application of the Court interest rates on the principal sum of $98,235 from 31 January 2008 to 19 July 2012 gives total interest of $21,846.
Conclusion
Accordingly, I propose to grant judgment in favour of the plaintiff against the defendants for $120,081 and to hear the parties on the question of costs