Castle Constructions Pty Ltd v Esanda Finance Corporation Limited

Re: CASTLE CONSTRUCTIONS PTY. LIMITED
And: ESANDA FINANCE CORPORATION LIMITED; BENJAMIN YIP SHING LO and CONNIE CHIU
YING LO
No. N G946 of 1992
FED No. 136
Number of pages - 37
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Beazley J.(1)

CATCHWORDS

Trade Practices - es turpi causa non oritur actio - equitable set off - estoppel - s.52 - whether valid exercise of power of sale - whether breach of mortgagee's duty in exercise of power of sale - injunction to restrain mortgagee's power of sale pending final hearing - Court's discretionary power - whether payment into Court to be a condition of interlocutory relief.

Trade Practices Act 1974, ss.52, 87

Fair Trading Act 1987, ss.42, 72

Real Property Act 1900, ss.57, 58, 63

Castlemaine Tooheys Limited v. The State of South Australia (1986) 161 CLR 148

Aboriginal Development Commission v. Ralkon Agricultural Co Pty Ltd (1987) 74 ALR 505

Eltran Pty. Limited v. Westpac Banking Corporation (1988) 32 FCR 195

New Zealand Shipping Company Limited v. Societe des Ateliers et Chantiers de France (1919) AC 1

Piggott v. Williams (1821) 6 MADD 95 (56 ER 1027)

Morgan and Son, Limited v. S. Martin Johnson and Company, Limited (1949) 1 KB 107

Waltons Stores (Interstate) Limited v. Maher (1987-1988) 164 CLR 387

The Commonwealth of Australia v. Verwayen (1990) 170 CLR 394

Central London Property Trust Limited v. High Trees House Limited (1947) 1KB 130

Websdale and Ors. v. S. and J.D. Investments Pty. Ltd (1991) 24 NSWLR 573

Pendlebury v. Colonial Mutual Life Assurance Society Limited (1912) 13 CLR 676

CAGA v. Nixon (1981) 152 CLR 491

Inglis v. Commonwealth Trading Bank of Australia (1972) 126 CLR 161

Cunningham and Ors. v. National Australia Bank Ltd. (1987) 15 FCR 495

Graham and Os. v. Commonwealth Bank of Australia (1988) ATPR 40-908 Harvey v. McWatters (1948) 49 SR(NSW) 173

Glandore Pty. Ltd. and Ors. v. Elders Finance and Investment Co. Ltd. 4 FCR 130

Langworth Pty. Limited and Anor. v. Metway Bank Limited, Neaves J, unreported of 14 August 1992

HEARING

SYDNEY, 22 and 23 February 1993

#DATE: 8:3:1993

Counsel for the Applicant: K. Lindgren QC with Miss R. Sofroniou

Solicitors for the Applicant: Andrew Thorpe

Counsel for the Respondent: J. W. Stevenson

Solicitors for the Respondent: Hickson Lakeman and Holcombe

ORDER

THE COURT ORDERS UNTIL FURTHER ORDER:

1. That the First Respondent be restrained from selling by auction or by private treaty the property known as unit 1/72 Cremorne Road Cremorne being Lot 1 in Strata Plan 40915.

2. That the Respondents be restrained from completing the Contract for Sale of Land dated 23 December 1992 in respect of the property ty known as 8/59 King Street Wollstonecraft, being Lot 8 in Strata Plan 34288

3. Costs of the Motion be costs in the cause.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

BEAZLEY J. This is an application for an interlocutory injunction to restrain the first respondent ("Esanda") from exercising its power of sale in respect of two properties, namely 1/72 Cremorne Road, Cremorne being Lot 1 in Strata Plan 40915 and Unit 8/59 King Street, Wollstonecraft being Lot 8 in Strata Plan 34288.

Esanda had proposed to auction the property 1/72 Cremorne Road on Friday 26 February 1993. On 23 December 1992 it had entered into a contract for sale of 8/59 King Street Wollstonecraft with the second respondent. That contract was due for completion on 5 March 1993. There was no dispute for the purposes of this application that the second respondents were innocent third party purchasers.
The applicants had commenced proceedings in this Court on 22 December 1992. An amended application dated 23 February 1993 was filed in Court in which the applicants sought declarations and relief under s.87 of the Trade Practices Act 1974 and s.72 of the Fair Trading Act 1987 in respect of conduct of and representations made by Esanda in relation to a proposed lending facility for a construction project.
The applicants first filed a Notice of Motion for interlocutory relief on 20 January 1993. A further Notice of Motion was filed on 18 February 1993 wherein orders were sought to restrain Esanda from exercising its power of sale in respect of four properties, including 1/72 Cremorne Road and 8/59 King Street. The application in respect of those two properties was heard by me on 22 and 23 February 1993.
As it was desirable that Esanda knew, as soon as possible, whether the auction scheduled for Friday 26 February was or was not to proceed, with the consent of the applicants and the first respondent, I made orders on Thursday 25 February and reserved my reasons for judgment, which I now deliver.
The evidence relied on by the applicants was for the most part contained in a lengthy affidavit of the second applicant ("Lahoud") wherein he deposed to numerous conversations between him and officers of Esanda in relation to the financing of a development application the subject of the proceedings. Due to the urgency with which the application came on for hearing, Esanda was not in a position to test this evidence either by evidence in reply or by cross examination. The facts which are considered below are therefore drawn almost entirely from the second applicant's untested affidavit.
The second respondents did not appear at the hearing. The Court was informed that their solicitor had advised Esanda's solicitor that they did not wish to participate in the hearing but wanted to keep their contract. However, they would review their position in the event that there was an order restraining the completion of the contract.
The first applicant ("CC") is a construction and property development company, which commenced business in about 1979. Lahoud is the Managing Director of CC. CC has undertaken 12 development projects since commencing business. All, except for two, have been financed by Finance Corporation of Australia or Esanda Finance Corporation Limited, which acquired the business of Finance Corporation of Australia. CC's practice was that when it found a potential development site, it would prepare basic feasibility figures and discuss the development potential with the financier. If the development proceeded, the financier would finance the whole development from point of acquisition to completion of construction. The properties 1/72 Cremorne Road and 8/59 King Street were each part of development projects which had been funded by Esanda.
In early 1985, Lahoud became aware of a development site at 43-45 Bennett Street Neutral Bay ("the Bennett Street site"). Lahoud had various negotiations for the purchase of this site at different times between 1985 and 1987. These negotiations extended to discussions with Esanda in relation to financing the project. The negotiations eventually came to fruition in about March 1988 when CC agreed to enter into an option to purchase the property at a purchase price of $2.8 million. The option was for 6 months with provision for an extension of 3 months to 12 December 1988. The consideration for the option was $55,000 and there was a fee payable should the option be extended.
During his discussions with Esanda, Lahoud had advised George Hancock ("Hancock"), his contact at Esanda, that he was looking to Esanda for 100% finance, including the cost of acquisition. On about 9 March 1988, in a discussion with Hancock in relation to the need for finance for the option, Hancock advised that he would approve a progress payment of $150,000 on the project at King Street, $55,000 of which CC could use for the option. CC entered into the option agreement on 10 March 1988. It then lodged a development application with council for subdivision of the land into five allotments with the erection of a dwelling on each one. This was rejected and CC appealed to the Land and Environment Court. During this time, the initial option period expired and CC extended the option to 12 December 1988, at a further cost of $13,000.
On 21 November 1988, Lahoud met with Hancock and Michael Hitchcock, also from Esanda, to discuss the possible outcome of the Land and Environment Court appeal. Lahoud indicated that if the appeal was refused CC could build two large executive style houses without development consent. Hancock agreed with this and said "it's a site one shouldn't lose". Lahoud indicated that he was happy to proceed with the purchase of the property and would need around $200,000 in order to exchange. Hitchcock advised that that would be alright and that "we'll do the same thing we did with the option fee and you can draw that money off the King Street project". At this stage there had not been any discussion between Lahoud and Esanda as to the amount of the facility which would be required for the construction of the Bennett Street site. On 12 December 1988 CC exercised the option. Esanda provided the deposit moneys required, namely $225,000, out of the facility granted for the King Street project.
On 9 January 1989 Lahoud met with Hancock. They discussed estimates for the costs of the proposed construction of the five dwellings, which were in the range of $350,000 to $400,000 per dwelling. Hancock advised Lahoud that he would have to provide figures for alternative schemes in case the appeal to the Land and Environment Court was dismissed. Lahoud said that was difficult but thought that there would be little difference in the construction cost and the cost of finishes and the like would determine the difference.
Later on the same day Lahoud met again with Hancock, together with Richard Innes, a lending manager and Rob Ware, a manager of Esanda. Lahoud reminded them that settlement of the purchase was due by the end of the month and of the need for CC's loan application for the purchase price to be processed by then. Innes said "on the basis of what I have before me, I would say the loan is approved. Until we get the paperwork done, you can let Grimes know and I'll ring Osburg." Grimes and Osburg were the solicitors for CC and Esanda respectively. Lahoud rang Grimes and said "I've just come from a meeting with Esanda and they tell me that the loan is approved and they are in the process of forwarding an approval letter to you". This was not an accurate reflection of what was said, although as events turned out, the loan for the purchase price was approved.
On 19 January 1989, the Land and Environment Court handed down its decision dismissing CC's appeal. The loan was approved at about the same time. On 20 January 1989 certain of the loan documentation was forwarded to CC's solicitor. On 23 January 1989, a loan facility letter, dated that day, setting out the amount and terms and conditions of the loan, was delivered to Grimes' office. The principal amount of the loan was $3.2 million, $500,000 of which was in respect of capitalised interest. The provision for repayment was in the following terms:

"2. TERMS APPLICABLE TO THIS LOAN

...

(f) Repayment of principal

(i) Compulsory: 31st January 1990

(ii) Voluntary: As desired without penalty at any time after the expiration of three calendar months from the date of the making of the advance".

Security for the advance was by way of registered first mortgages over the Bennett Street property, Lahoud's residential property at 48 The Rampart Castlecrag, and 72 Cremorne Road, Cremorne.
Lahoud stated in his affidavit that, at this stage, he was confident funding would be forthcoming from Esanda to complete the purchase of Bennett Street as: Esanda knew that CC had entered into the contract using money provided by Esanda for the deposit; Esanda knew that CC was applying to it for finance and knew that the contract required completion on 27 January 1989; that he, Lahoud had never told anyone in Esanda that he was applying to anyone else for finance and after the unsuccessful result of the Court proceedings, Esanda, being aware of that unsuccessful result, did nothing to suggest that the funds would not be available to enable CC to complete the purchase.
After dismissal of the appeal by the Land and Environment Court Lahoud had a number of discussions with Esanda in relation to the Bennett Street site. On 4 April 1989, CC lodged a new development application with council for the construction of 5 townhouse type attached dwellings. This application was refused on 8 August 1989.
Between February and April 1989, Lahoud was approached on a number of occasions by parties showing interest in the purchase of the site. However, no offer exceeded $2 million. Lahoud stated that this caused him great concern as he started to believe that Esanda's valuation of the site, upon which the purchase had been based, may have been too high. Lahoud obtained two independent valuations, each of which was less than $2 million. He discussed the value with Evan Somerson from Esanda, but Somerson told him not to worry as there was no doubt "that this is a very valuable site".
CC appealed to the Land and Environment Court against the rejection of the second development application. That appeal was also dismissed by the Court on 3 November 1989. Lahoud then decided that he would apply for development approval for separate houses on each lot. However, because of changes to the local environmental plan, Lahoud abandoned this proposal.
In December 1989 and January 1990, Lahoud had discussions with Innes in relation to renewal of the Bennett Street loan which was due at the end of January 1990. At this stage, Lahoud was proposing to lodge a development application for the construction of four houses on the site. On 9 January 1990, CC wrote to Esanda seeking a new loan of $650,000 to cover the payment of capitalised interest for the rollover period. Lahoud spoke to Innes on 10 January 1990 and advised him the council would not be able to refuse the new development application as they had previously submitted to the Court that the Bennett Street site was suitable for four dwellings. Lahoud also advised him that his estimate of the selling price for the whole site with the completed construction was about $8 million.
On 16 January 1990, Lahoud had a meeting with Hancock on site at 72 Cremorne Road during which the proposed four house development on the Bennett Street site was discussed. Hancock said "I believe they will work but we need to fine tune some figures now as we may be looking at an approval in the not too distant future". Lahoud confirmed his expectation of a gross realisation figure of $8 million and a construction cost of about $2.5 million. He said to Hancock "I do however stand to be corrected by you". Hancock replied that he would work on it, that usually the Cordell estimate was not far out but that he thought that CC could do it more cheaply.
At the end of January or in early February 1990, Esanda approved an increase in the advance of $550,000, rather than the $650,000 that had been requested. Clause 2(f) of the new loan facility letter was in the same form as the earlier loan facility letter of 23 January 1989. Lahoud spoke to Innes about the shortfall in the additional funds he had sought. Innes said "I see what you mean. It is okay though because if what you say about getting approval for four houses is true, we can do the adjustments when we advance funds for construction".
Approval of the development application for the four house construction was granted in May 1990, although the plans were not officially stamped as approved until 20 August 1990. In May, but before approval was granted, Lahoud had a meeting with Innes, Somerson, Hancock and possibly Ware in which Lahoud advised that approximately $600,000 was needed to finish the Cremorne Road project. There was also discussion as to whether the construction of the Bennett Street project should proceed or whether the site should be sold with development application approval. Hancock said "If the land is sold now, you won't get you (sic) money back. If you build the project, I think it has still got money in it, notwithstanding delays to date. I think it should go to the next stage ...". Lahoud responded "Okay, on the basis that you guys support the project we will start preparing the building application".
In June 1990, CC was granted a further advance of $660,000 to enable completion of the Cremorne Road project. This had the effect of increasing the Bennett Street loan to $4,410,000. The loan facility letter of 28 June 1990, advising of the approval, contained an identical clause 2(f) as in the earlier letters, this time specifying the "compulsory date of repayment" as 31 January 1991.
By October 1990, the applicants were confident that the building application for the Bennett Street site would be approved and Lahoud was keen to start excavation work. He was concerned, however, to ensure that the loan for the construction would be approved in time for him to pay the excavator, whose costs he estimated to be in the order of $100,000. In a conversation with Innes about this, Innes said "go ahead with excavation and to make sure that the loan gets approved quickly I'll talk to George and see if we need any further information". The reference to George was a reference to Hancock.
CC commenced demolition work on 11 October 1990 and this was followed by excavation for the four houses. The excavation was substantially completed in early November at a cost of $76,800. On 12 November 1990, Lahoud had a meeting with Innes and Hancock and possibly Somerson in which he advised that he believed the building approval had been granted by council. Innes said "I suppose you will need funds to cover construction of the houses and Interest". During the course of this discussion, Innes advised that Esanda would like CC to look at a proposal of separating the land funds from the construction funds. Lahoud responded that if Esanda told him that it was better for him to do so, he would do it. There was also a discussion as to additional security which might be provided for the loan should it be asked for. Innes said he was only requesting this information in case Melbourne required it and stated "it's really not in our hands. The decision is up to Melbourne". The reference to Melbourne was a reference to Esanda's head office, which was dealing with the loan application.
At this juncture in the recounting of events, Lahoud deposed to his belief that the finance would be approved for the construction of four houses, having regard to his discussions with Esanda on 23 May and 12 November 1990 referred to earlier. He said he believed that it was simply necessary for Melbourne to formally approve the loan and to determine the terms but, leaving aside the possibility of a requirement for additional security, he believed that the granting of the loan was a foregone conclusion.
On 3 December 1990, the building application for two of the houses was approved. The architects had been working on the plans for the second part of the project, however they had suspended work as CC had no available funds to pay them as it was depending on the grant of the further loan by Esanda. Also at about this time the funding of the Cremorne Road project appeared to be running short. Lahoud discussed this with Innes in November, in response to which Innes said "Instead of applying for an increase now in the loan for Cremorne Road, we'll add it to the loan which is coming for Bennett Street. Work it out and let me or George know how much". The reference to George was again a reference to Hancock.

During the course of December, Lahoud made a number of inquiries as to when the loan approval would come through. At this time, CC was under great pressure from its creditors. At a meeting on 18 January 1991, Lahoud was advised by Innes that they had received a number of requisitions from Melbourne including a requirement that security be provided over unit 8/59 King Street Wollstonecraft. There was also discussion as to the order in which the houses would be constructed and the time it would take to build one house as opposed to building four. The question of splitting the funding package into two was again raised and Somerson advised Lahoud that Esanda could give a fixed loan at a better rate for the land cost than for the construction loan. Lahoud said that he would be guided by Esanda and advised that he had provided all necessary information to Hancock.
Shortly after that meeting Hancock asked for further information relating to the properties and Lahoud provided it immediately. However, by 29 January 1991, Lahoud still had not received any notification in relation to the construction loan. By that time, the capitalised interest on the existing Bennett Street loan had been utilised in full. Lahoud discussed this problem with Innes and an arrangement was entered into whereby money was drawn from the Cremorne Road project to cover the payment of interest. Problems arose in relation to the way that was arranged but they are not relevant for the purposes of this application.
In early February 1991, Lahoud again inquired as to the progress of the loan application and was advised that no news had yet been received from Melbourne. At about this time, CC took out a policy of insurance in respect of the development of the four residential houses. The premium payable was $10,187.58. Lahoud stated in his affidavit, "I never would have expended these funds if there was any doubt in my mind whatsoever that the provision of funds by Esanda for the construction of the four houses was a mere formality and that in fact, approval had in reality been given or alternatively was understood to have been given".
On 19 February 1991, Innes advised Lahoud that head office had approved finance for the construction of one house only. Lahoud was shocked at this development and spoke to Innes, who told him to wait until the documents had been received and if he was not happy he could speak to Somerson. Lahoud agreed and requested that the documents be faxed to CC's solicitors so they could be looked at straight away. At this time no major construction work had commenced on the Bennett Street site, although some minor work on footings for the first house had been carried out.
CC's solicitors received the loan documentation from Esanda on 22 February 1991. The loan facility letter, which was dated 19 February 1991, advised of a loan approval in the principal sum of $5,910,000 comprised as follows:

$4,410,000 already advanced ($4,400,000 to be replaced by back to back facility)

$ 580,000 to be adanced progressively against construction costs

$ 920,000 to be advanced by way of capitalised interest

Security for this advance comprised the Bennett Street, Castlecrag and Cremorne Road properties as well as 8/59 King Street. Although it was not stated, the figure of $580,000 was clearly for the construction of one house only. On 23 February 1991, Lahoud discussed the loan approval with Patrick Grimes. Grimes expressed his concern that the facility gave no certainty in relation to the funding for the remaining houses. He told Lahoud that he should sort "all this out with Esanda", especially as CC was required to provide, as security for the funding of the construction of one house, the same security that was originally indicated as being required for the whole project.
On 25 February 1991, Lahoud discussed the terms of the approval with Innes. He stated "You can't put me in a position of only giving me finance for a quarter of the project and requiring me to pay interest on a land content three quarters of which I am not going to be able to use". Innes said to leave it with him and he would get back to him.
Notwithstanding the terms of the loan approval, Lahoud deposed that at this time he still believed the funding for the remaining houses would be provided by Esanda. The basis of this belief was that Esanda had always funded the whole project in the past and he believed that there had been some administrative mistake or some other reason whereby it wanted to advance the funds in stages. He stated that he knew that Esanda was aware from a construction point of view that the houses had to be built in a staged manner and also that there had already been demolition work carried out and excavation of the whole or virtually the whole site by way of preparation for the construction of four houses. In addition, all discussions with Esanda were in relation to a four house project and Esanda was aware that the plans which had been approved by the council, required the construction of the four houses in a simultaneous manner. Further, even at this stage, Esanda did not indicate that further funds for the remainder of the project would not be forthcoming. He stated that Esanda did not give any indication to that effect until February 1992.
CC did make some, although not vigorous, attempts to obtain alternative finance, which were not successful, so it decided to proceed with the loan. It executed the loan documentation in late February or early March 1991. Part of that documentation comprised a deed dated 5 March 1991 which related to the sum of $580,000, being the funds for the construction. Recitals A and B of the Deed were in the following terms:

"A. The Borrower and the Lender have entered into a Deed of Loan dated 31st March 1987 ("the Deed of Loan") whereby it was envisaged that from time to time the Borrower would make application to the Lender for various loans, advances and financial accommodations and it was agreed that such loans, advances and financial accommodation made or granted by the Lender would be subject to inter alia various terms and conditions therein set out.

B. The Lender has at the request of the Guarantor (that is Lahoud) advanced to the Borrower funds pursuant to the Deed of Loan to enable the Borrower to purchase the property known as 43 and 45 Bent (sic) Street, and 22 and 24 Bertha Street, Neutral Bay ...".

The provisions of the Deed of Loan of 31 March 1987 referred to in recital A above contained the following relevant recitals and conditions:

A. It is envisaged that from time to time the Borrower will make application to the Lender for various loan advances and financial accommodation. B. The parties agree that all such applications as may be approved by the Lender shall be subject inter alia the various terms and conditions hereinafter set out. ...

3. The Borrower covenants to repay the Principal Sum or so much thereof as shall remain unpaid upon the expiration of not less than three (3) months written notice by the Lender upon the Borrower requiring the Borrower so to do. ..."

"13. Notwithstanding any other provisions of this Deed the whole of the Principal Sum then outstanding together with accrued interest thereon and any other amounts payable hereunder shall at the option of the Lender and notwithstanding any delay or previous waiver of the right to exercise such option become immediately due and payable:

(a) if the Borrower defaults in making any payment on the due date pursuant to this Deed;

...."

The "Principal Sum" was defined in clause 1 to mean and include "all loans advances and financial accommodation made created or given by the Lender from time to time to the Borrower ...".
On 5 March 1991 CC also entered into a Deed of Variation of the Deed of Loan. That Deed relevantly recited and provided:

"B. The Guarantor has requested the Lender to lend to the Borrower the sum of FOUR MILLION FOUR HUNDRED THOUSAND DOLLARS ($4,400,000) ("the advance") for a fixed term of one (1) year commencing on 5th March 1991 which the Lender has agreed to do pursuant to the terms of the Deed of Loan but varied in respect of the advance as hereinafter set out.

1. The Borrower covenants to repay the advance or so much thereof as shall remain unpaid on 4th March 1992."

During the weeks following the entry into the loan, Lahoud asked Innes on a number of occasions what was happening with the finance for the balance of the project. Innes was non-committal in his replies. Construction of the first house commenced in March or April 1991. The original plans as approved made provision for a common driveway to the four properties. As the construction of the first house only was proceeding at that time, the plans required amendment to ensure that the driveway was wholly within the boundary of that property. The only alternative, which was not considered suitable, was to commence some construction of the adjoining houses. Lahoud stated that he considered he had no alternative but to commence the construction of the first house as it was difficult to sell an excavated site.
On 29 April 1991, Lahoud had a discussion with Hancock wherein he asked whether Esanda was going to finance the balance of the project, and drew attention to the interdependence of the construction of the houses. Hancock stated that he didn't understand the logic of the way the approval had been given.
By September 1991 the project had got to the stage where it could go no further because of the interdependence of the construction. In early October 1991, Lahoud had a site meeting with Somerson, Innes and Feeney, another Esanda officer and possibly Hancock. Lahoud took them over the site and explained why the other houses required completion before further work could continue on the first. The alternative was that if the first house was finished it might potentially be damaged when construction of the adjoining house was undertaken. During the discussion on site, Somerson agreed that the rock hammering for the whole project would have to be finished. He suggested to Lahoud that he would have a look at his budget. He also said "I am sure we can get some money approved separately if we have to at least complete the excavation for (the adjoining house)".
Notwithstanding these various discussions the funding for the balance of the construction was not forthcoming.
On 4 March 1992, the first applicant defaulted in the payment of the advance of $4.4 million referred to in the Deed of Variation. In addition, it has not repaid the other moneys referred to in the loan facility letter of 19 February 1991.
On 29 June 1992, Esanda issued a notice pursuant to s.57(2)(b) of the Real Property Act 1900. Further notices were issued on 10 August 1992. The notices were in respect of each of the properties over which Esanda had taken security. Except for the calculation of interest owing and the respective reference to the various mortgages, the notices were identical in form. Because there is a challenge to the validity of the notices, I shall set out the terms of the notice dated 10 August in respect of 8/59 King Street.

TO: CASTLE CONSTRUCTIONS PTY LIMITED C/0 Suite 1, 4th Floor,

3 Carlingford Road,

EPPING NSW 2121.

"WHEREAS:

You are in default under Mortgage dated 5th March 1991 registered number Z546692 to Esanda Finance Corporation Limited in that you have failed to pay principal and interest amounting to $6,574,060.00 made up as follows: Principal Sum due for repayment $6,086,047.00 on 31st March 1992

Arrears of interest as at 31st July 1992 488,013.00 $6,574,060.00 NOW TAKE NOTICE THAT you are required to pay to Esanda Finance Corporation Limited the said sum of $6,574,060.00 and that unless such amount is paid within one (1) month after service upon you of this Notice Esanda Finance Corporation Limited proposes to exercise its power of sale in respect of property subject to the said mortgage such property being known as 8/59 King Street, Wollstonecraft being the whole of the land comprised in Certificate of Title Folio Identifier 8/SP34288.

DATED the 10th day of August 1992"

Subsequent to the issue of the notices, Esanda attempted to sell 1/72 Cremorne Road by private treaty. However, as no sale was achieved it was decided to auction the property. As I have stated earlier, a contract for sale of 8/59 King Street was entered into on 23 December 1992. It is that auction and that sale which the applicants now seek to restrain.
The principles governing the grant of interlocutory relief are well known: the applicant for interlocutory relief must establish that there is a serious question to be tried and that the balance of convenience lies in favour of the grant of relief. (Castlemaine Tooheys Limited v. The State of South Australia (1986) 161 CLR 148; Aboriginal Development Commission v. Ralkon Agricultural Co Pty Ltd (1987) 74 ALR 505 at 509-510; Eltran Pty. Limited v. Westpac Banking Corporation (1988) 32 FCR 195).
Dealing first with the question whether there is a serious issue to be tried, the applicants formulated their claim against Esanda on a number of bases: first it was submitted that the principle of "ex turpi causa non oritur actio" applied; secondly, that the exercise of the power of sale was in breach of a mortgagee's duty not to act in reckless disregard of the mortgagor's interest; thirdly, that the applicants were entitled to an equitable set-off; and fourthly that no occasion for the exercise of the power of sale had arisen in the case of either 1/72 Cremorne Road or 8/59 King Street.
Counsel for the applicants submitted that the principle of ex turpi causa non oritur actio applied in the present case so as to prevent Esanda from taking advantage of its wrongful conduct in resiling from certain representations it made to the applicants. (See New Zealand Shipping Company Limited v. Societe des Ateliers et Chantiers de France (1919) AC 1 at pp 6-7). The wrongful conduct alleged was that Esanda had resiled from representations it made in relation to the funding for the complete construction project in circumstances which give rise to an estoppel against Esanda. Alternatively such matters constituted breaches by Esanda of the provisions of s.52 of the Trade Practices Act 1974.
Counsel for the applicants also put its claim on a related basis, namely that CC is entitled to an equitable set-off against Esanda. The same wrongful conduct as referred to above was relied upon as giving rise to the equitable set-off. Counsel for the applicants recognised that to be entitled to relief on this basis it was necessary to impeach Esanda's legal right to exercise its power of sale under the mortgages. (Piggott v. Williams (1821) 6 MADD 95 (56 ER 1027; Morgan and Son, Limited v. S. Martin Johnson and Company, Limited (1949) 1 KB 107). It was submitted that Esanda's right to exercise its power of sale was impeached as its wrong doing caused the very default which gave rise to its exercise.
It is thus necessary to consider the wrongful conduct alleged. Counsel for the applicants submitted that the initial advance to purchase the property and the subsequent roll-overs and further borrowings for capitalised interest were entered into, both by CC and Esanda, upon the assumption that Esanda would provide full funding for the project, including the construction phase. It was further submitted that it was well known to Esanda that CC at all times expected that Esanda would fund the whole project and it did nothing to disabuse it of that fact.
Various acts were identified as evidence both of the assumption upon which CC was proceeding for the purposes of the claim in estoppel and of reliance for the purposes of the claim under s.52. Those acts were:

1. the entry into the option agreement for a consideration of $55,000;

2. the extension of the option at a further cost of $13,000;

3. the payment of the deposit for and purchase of the land for $2.8 million;

4. the rollover of the original loan in early January 1990, together with an increase in the amount to provide for capitalised interest;

5. (a) the discussion in May 1990 between Lahoud and Hancock in relation to the future of the project and in particular whether the Bennett Street site should be sold with DA approval or whether it should proceed to the next stage, Hancock's statement that CC should go to the next stage and Lahoud's reliance upon this statement;

(b) the discussion in October 1990 between Lahoud and Innes in which Innes told Lahoud to go ahead with the excavation of the entire site and Innes' statement that he would make sure that the loan was approved quickly;

6. CC undertaking the demolition work of the existing house on the property and the excavation work of almost the entire site, the excavation work being performed in respect of CC's specific four house project;

7. the requirement for the provision of security over 8/59 King Street, which requirement was made during the course of Esanda's consideration of the loan application for the funding of the four house project, without any advice or indication being given to the applicants that the funding might be restricted to one house;

8. Lahoud's continuing assumption that there would be funding for the whole project even though in February 1991, Esanda advised that approval had only been given in respect of the construction of one house. On the basis of this assumption, CC undertook the construction of the first house. Support for the reasonableness of this reliance was sought to be drawn from Innes' advice that the approval for finance was for "the construction of one house now" (emphasis added).

It is also relevant in relation to the claims based on estoppel and s.52 of the Trade Practices Act to refer to the discussions between Lahoud and the officers of Esanda at the time that the deposit for the land was advanced in relation to the cost of construction of the project, the request that Lahoud at that stage provide figures for alternative schemes should the original appeal to the Land and Environment Court be dismissed and Innes's statement that whilst the structure of the last loan could not be changed at that stage, he would see what he could do.
It was submitted by the applicants that some or all of these matters were such as to give rise to a reasonable assumption that there would be funding for the four houses and that it would be unconscionable to permit a departure from that basic assumption. It was submitted that this case fell within the principles propounded in (Waltons Stores (Interstate) Limited v. Maher (1987-1988) 164 CLR 387 and in The Commonwealth of Australia v. Verwayen (1990) 170 CLR 394 at 444 where Deane J said:

"The central principle of the doctrine is that the law will not permit an unconscionable - or, more accurately, unconscientious - departure by one party from the subject matter of an assumption which has been adopted by the other party as the basis of some relationship, course of conduct, act or omission which would operate to that other party's detriment if the assumption be not adhered to for the purposes of the litigation.

Since an estoppel will not arise unless the party claiming the benefit of it has adopted the assumption as the basis of action or inaction and thereby placed himself in a position of significant disadvantage if departure from the assumption be permitted, the resolution of an issue of estoppel by conduct will involve an examination of the relevant belief, actions and position of that party.

The question whether such a departure would be unconscionable relates to the conduct of the allegedly estopped party in all the circumstances. The party must have played such a part in the adoption of, or persistence in, the assumption that he would be guilty of unjust and oppressive conduct if he were now to depart from it."

It was submitted on behalf of Esanda that the manner in which the lending had proceeded, namely by way of a loan for the purchase of the property, the subsequent roll-overs, and the various advances for capitalised interest, must have made it clear to CC and Lahoud that Esanda only committed funds as and when needed on the basis of a 12 month facility. Accordingly, Lahoud must have been aware that Esanda would only commit itself to this project one step at a time so that there was no basis, from the course of conduct between the parties, upon which Lahoud could have reasonably assumed that there would be funding for a four house project. I am satisfied however, that on the facts alleged by Lahoud, he and thereby CC could reasonably have made such an assumption.
Counsel for Esanda further argued that even if there had been a reasonable basis for the assumption made by the applicants, Esanda's position had become patently clear on 19 February 1991 when Innes advised that the advance was in respect of one house only, and the loan facility letter of that date was clearly to that effect. That being so, the factors which might otherwise have given rise to a claim in estoppel ceased to have effect, so that no claim on this basis could be made out as and from that date.
This latter argument directly raises the issue of the circumstances in which a party, who would otherwise have been estopped from departing from the assumptions upon which the other party to the transaction was proceeding, may find itself relieved from any continuing obligation imposed which might be imposed by virtue of the estoppel. This question has not been addressed in the most recent decisions of the High Court to which counsel referred. However, in Central London Property Trust Limited v. High Trees House Limited (1947) 1KB 130 Denning J stated at p 136 that assuming, a case of estoppel:

"... it might be said that in any event the estoppel would cease when the conditions to which the representation applied came to an end, or it also might be said that it would only come to an end on notice. In either case it is only a way of ascertaining what is the scope of the representation. I prefer to apply the principle that a promise intended to be binding, intended to be acted on and in fact acted on, is binding so far as its terms properly apply".

Leaving aside for the moment the terms of the loan facility letter of 19 February 1991, and Innes' statements at that time, I am satisfied that the matters alleged by the applicants raise a serious issue as to whether Esanda should be estopped from denying an obligation to provide funding for the entirety of the construction project. The question which arises therefore, is whether the terms of that letter and Innes' comments were such that any such obligation which it might otherwise have had, came to an end. In my opinion, it cannot be said that that is necessarily the case. In the first place, there are the statements of Innes that the approval was for the construction of one house "now" and that whilst the structure of the loan could not be changed at that stage, he would see what he could do. Secondly, there is the further difficulty that it may have been too late at that stage for Esanda to depart from the assumption which it had engendered because of the inter-relationship of the construction of the four houses which could not be interfered with and thirdly the extent of the work, particularly the excavation which had been undertaken at that time.
I am therefore satisfied that notwithstanding the clear terms of the loan facility letter and the terms of the Deed of Variation, there remains a serious issue to be tried. I am also satisfied that if the applicants are successful in their claim, they will thereby impeach Esanda's title such as to give rise to an equitable set-off.
It is not necessary to separately consider the claim based on s.52 of the Trade Practices Act and indeed it was not separately argued. It is sufficent to say that for the purposes of this application I am satisfied that the conduct of Esanda which has been alleged may constitute a breach or breaches of s.52 of the Act and there is thus also a serious issue to be tried on this basis.
The applicant's further argue that the right to exercise the power of sale had not arisen at the time Esanda issued the s.57(2)(b) notices. As originally framed this argument was based on the provisions of clause 3 of the Deed of Loan which required three months notice that repayment was required. However, after the conclusion of the hearing, counsel for Esanda sought, and was granted leave to re-open its case and tender the Deed of Variation to which I have referred.
Prior to the tender of that document, it had been submitted on behalf of Esanda that clause 3 should not operate in the face of the "compulsory repayment" date in the loan facility letter. It was further submitted that Esanda was entitled to rely on clause 13 of the Deed of Loan as at least the amount of the capitalised interest fell due for repayment on the date specified in the loan facility letter, as was admitted by the applicant in paragraph 29 of his affidavit and could therefore call up the whole of CC's indebtedness without the need to give notice.
I do not agree that the statement in paragraph 29 constitutes such an admission and I consider that the definition of Principal Sum is clearly arguably wide enough to cover the advance of capitalised interest. Having tendered the Deed of Variation Esanda continued to rely on those submissions, but submitted further that the provisions of clause 1 of the Deed of Variation clearly overrode the provisions of clause 3 of the Deed of Loan. I agree with this submission. However, it is to be remembered that the Deed of Variation applied only to the amount of $4.4 million. Esanda's submission then continued that there having been default under the Deed of Variation, Esanda could invoke the provisions of clause 13 of the Deed of Loan and it should be inferred that it did exercise its option thereunder to make the whole of CC's indebtedness immediately due and payable.
Counsel for the applicants submitted that even accepting clause 3 of the Deed of Loan had no operation in respect of the sum of $4.4 million, Esanda's right to exercise its power of sale had not arisen, as that right was governed by s.58 of the Real Property Act 1900 which depended upon compliance with s.57 thereof and there had been no such compliance.
Essentially three arguments were advanced in support of this submission. First, the default referred to in the s.57(2) notices was not the default which had occurred, that default relevantly being non-payment of the $4.4 million on 4 March 1992. Secondly, s.57(5) of the Real Property Act was a complete answer to the claim. Thirdly, there was no evidence, and it could not be inferred that on 31 March 1992, Esanda exercised its option under clause 13 of the Deed of Loan.
It is convenient to deal in the first place with the argument under s.57(5). That section provides:

"Without prejudice to any other manner in which it may be deprived of force or effect, a covenant, agreement or condition whereby upon a default referred to in subsection

(2)(a) -

(a) the whole of the principal or other money of which the payment is secured by a mortgage or charge becomes payable; or

(b) a part of that principal or other money (not being a part to which that default relates) becomes payable, has no force or effect until the powers conferred by section 58 become exercisable by reason of that default".

The default referred to in sub-section (2)(a) is default

"... in the observance of any covenant, agreement or condition expressed or implied to the mortgage or charge or in the payment, in accordance with the terms of the mortgage or charge, of the principal, interest, annuity, rent-charge or other money the payment of which is secured by the mortgage or charge or of any part of that principal, interest, annuity, rent-charge or other money;"

The position as at 31 March 1992, being the date of default identified in the s.57(2) notices was as follows:

(i) The amount of $4.4 million had become due and payable on 4 March 1992 and there was default in respect of that payment.

(ii) The "normal rate" loan, which comprised the amounts of $580,000 for the construction costs, $920,000 for capitalised interest, and possibly the amount of $10,000 being the balance of the amount of $4,410,000 referred to in the loan facility letter, had a "compulsory repayment" dated of 31 March 1992.

The moneys referred to in (ii) were not included in the Deed of Variation. The applicants submitted first that clause 3 of the Deed of Loan continued to operate in respect of them, and no notice thereunder had ever been given. Next, clause 13 did not operate to override the provisions of clause 3. Clause 13 referred to default in "making any payment on the due date pursuant to this Deed". The "due date" under the Deed was the date specified in the notice which was required to be given under clause 3.
Esanda accepted that the necessity for three months notice still applied to the amounts referred to in (ii) above. However, the default in payment of the amount of $4.4 million was a default "in making any payment on the due date pursuant to this Deed" within the meaning of clause 13(a) as the Deed had been expressly varied by the Deed of Variation. It was next submitted that at the option of Esanda, the Principal Sum became "immediately due and payable" and that it should be inferred from the form of the notice that Esanda had exercised that option. Further, there was nothing in clause 13 which required Esanda to communicate that option to CC.
Counsel for the applicants submitted that s.57(5) gave protection against the provisions of an acceleration clause such as clause 13. The provisions of clause 13, it was submitted, could have no force and effect until the power of sale under s.58 had arisen. That power may only be exercised where the mortgagee has been authorised by s.57(2) to exercise the power. S.57(2) authorises the exercise of the power where a default has occurred and a written notice which complies with sub-section (3) has been served on the mortgagor. Relevantly sub-section (3) requires that a notice under s.57(2) must specify that it is a notice given under s.57(2)(b) and must require the mortgagor to pay the principal and/or interest in respect of which default has been made. However, sub-section (5) has the effect of denying an acceleration clause such as clause 13, of any force or effect "until the powers conferred by s.58 become exercisable by reason of that default". By virtue of s.57(2)(c) the power of sale under s.58 does not arise until the expiry of the time specified in the notice for compliance.
Thus, it was argued in the present case, that the only default which existed as at 31 March 1992 was in respect of the payment of the $4.4 million. There was no default in respect of the other amounts as no notice under clause 3 of the Deed of Loan had been given. Therefore, the acceleration provisions of clause 13 of the Deed of Loan could have no operation until a notice had been given specifying default in the payment of the $4.4 million and that notice had not been complied with. (See generally Websdale and Ors. v. S. and J.D. Investments Pty. Ltd (1991) 24 NSWLR 573 especially at 576-577 per Clarke J).
In my opinion, the operation of s.57(5) raises a serious issue to the validity of the s.57(2)(b) notices.
It was further argued on behalf of the applicants that the Court could not infer that Esanda had exercised its option under clause 13 on 31 March 1992, even if it was otherwise available for it to do so, in respect of all amounts referred to in the loan facility letter of 19 February 1991. Counsel for the respondent had argued that it should be inferred from the s.57(2)(b) notices that Esanda had made its election under clause 13 of the Deed of Loan. In my opinion, it is arguable that clause 13 required that the applicants be given notice of an election to treat the whole of the Principal Sum as due and owing. If that argument is correct, then the s.57(2)(b) notices included a default which had not occurred. It was further argued that no such inference should be drawn and that the s.57(2)(b) notices were as consistent with Esanda having made a calculation of the amount due as they were with Esanda having exercised such option. I agree that they are arguable. For these reasons also the notices may be invalid.
Finally it is submitted that Esanda, in proceeding with the auction of the Cremorne Street property on Friday, 26th February would be sacrificing CC's interests and would be acting in reckless disregard of them. This submission is based upon certain errors which occurred in the advertising of the date, time and place of the auction. The evidence as to the advertising revealed:

In the advertisement in the Mosman Daily on 28 January 1993 the auction was advertised as being on Friday, which was the correct day, February 27, which was the wrong date. The place and time of the auction was correctly specified. In an advertisement in the Sydney Morning Herald on 30 January 1993, the correct date of the auction was advertised but there was no place or time specified. On 4 February 1993 the advertisement in the Mosman Daily advertised the correct date, and the place of the auction but did not specify a time.

In the Sydney Morning Herald on 6 February 1993, the correct date of the auction was specified but no place or time. On 17 February 1993 the advertisement in the North Shore Times advertised the auction on both 26 and 27 February

1993. No day, place or time of auction was specified. In an undated advertising brochure, the distribution of which was unknown, the correct date, place and time was specified.

There was a further advertisement, the source of which is not known which correctly advised the date and place of auction but did not specify a time.

Counsel for the applicants accepted that the preponderance of authority in Australia was that a mortgagee exercising its power of sale did not owe a duty to the mortgagor to obtain the highest price but rather its duty was not to sacrifice the mortgagor's interest, not to act in reckless disregard of the mortgagor's interest and to act in good faith. A breach of that duty would at least render a mortgagee liable in damages (Pendlebury v. Colonial Mutual Life Assurance Society Limited (1912) 13 CLR 676; CAGA v. Nixon (1981) 152 CLR 491). It was further submitted that although an injunction against a mortgagee would not lie where the only complaint was as to "the manner of exercise of the power of sale" such cases were only where the sale proposed would not obtain the highest price. Here, it is alleged, that to proceed with the sale would constitute a sacrificing of CC's interest or would be in reckless disregard of its interest because, as a result of the wrong advertising, the potential market of buyers would be confused as to, or may not know, the date, place or time of auction, so as to affect attendance at the auction. It was submitted alternatively that the erroneous advertising was a factor to be taken into account in the exercise of the Court's discretion. I consider that the applicants have made out both a serious issue to be tried on this issue and that the wrong advertising is a matter which is relevant to the exercise of discretion.
This leaves then the issue of the balance of convenience and whether the applicants should be required to pay into Court the amount of the outstanding mortgage, if injunctions were granted.
The applicants submit that had moneys been advanced for the whole project, not only would CC have made a profit, Esanda would have been repaid in full and the various securities over King Street, Cremorne Road and Castlecrag would have been discharged. The respondents on the other hand submit first that the amount of the debt outstanding on 19 February 1993 was $5,556,088.70, the interest component of which is $887,366.45; that interest is running at $50,000 per month and that it is in receipt only of the rents and profits of King Street and the Cremorne Road properties in an amount of $128,960 per annum; and finally that there would clearly be a shortfall even if all the remaining security is realised.
The balance of convenience in this matter is far from easy to resolve. If the applicants are not successful in their claim against the Bank, the shortfall to the Bank may be anything from approximately a quarter of a million to approximately $1.5 million depending upon the sale price of the properties. Although an undertaking as to damages was given by the applicants, the undertaking will only be sufficient to cover the indebtedness if the properties realise their highest possible value and even then there may be a small shortfall. Those matters clearly favour the refusal of the interlocutory relief sought. However, there are a number of matters which, in my opinion, shift the balance in favour of the applicants. First, as I have said, the applicants have made out their case that there is a serious issue to be tried based on claims in estoppel and breaches of s.52 of the Trade Practices Act. I have referred above to the various factors which are relied upon in support of these claims. In so far as those matters relate to the balance of convenience, of particular significance are: the approval of and facilitating payment for the excavation work on the basis that such work was carried out for the four house project; the conversations which took place at the time of the purchase of the land and when the first Land and Environment Court decision was handed down, and in particular the conversation that it was preferable, rather than selling the land at that time with a DA approval, that CC proceed with the project. Secondly, if the applicants' arguments are correct in respect of the s.57(2) notices, Esanda was not entitled to exercise its power of sale in any event. Thirdly, as to the auction, the errors and insufficiencies in the advertisement may affect attendance at the auction. Fourthly, although the second respondents are innocent bystanders they have not indicated that there is any particular matter which would compel the completion of the contract of sale for unit 8/59 King Street on 5 March 1993, the property having been purchased by them for investment purposes. Finally, the applicants have expressed their wish to retain the properties for their own investment purposes. (See Eltran Pty. Limited v. Westpac Banking Corporation 32 FCR 195). Therefore, in my opinion, the balance of convenience favours the applicants, although only slightly so.

That leaves the question whether, as a condition of granting the interlocutory relief requested, the outstanding mortgage moneys and accrued interest thereon should be paid into Court. The general principle is that an injunction restraining the exercise by a mortgagee of its powers given under a mortgage and in particular its power of sale, will not be granted unless the amount of the mortgage debt is paid into Court (Inglis v. Commonwealth Trading Bank of Australia (1972) 126 CLR 161 at 164-5 and at 169; Cunningham and Ors. v. National Australia Bank Ltd. (1987) 15 FCR 495 at 497; Graham and Os. v. Commonwealth Bank of Australia (1988) ATPR 40-908 at 49,757). However, the rule is not inflexible and the Court maintains a discretion to depart from the rule in appropriate cases. (Harvey v. McWatters (1948) 49 SR(NSW) 173; Cunningham and Ors. v. National Australia Bank Ltd.; Glandore Pty. Ltd. and Ors. v. Elders Finance and Investment Co. Ltd. 4 FCR 130). The mere existence of a claim in damages arising out of a breach of s.52 of the Trade Practices Act is not sufficient to displace the general rule (Cunningham; Graham, (supra) and Langworth Pty. Limited and Anor. v. Metway Bank Limited, Neaves J, unreported of 14 August 1992). The Court will be more likely to depart from the general rule where there is a serious question whether the power of sale has become exercisable at all (Harvey v. McWatters; Langworth Pty. Limited v. Metway Bank Limited (supra)).
In my opinion the present case is not one where the general rule should apply. There is a direct challenge to the mortgagee's exercise of the power of sale. In addition the applicants claim an equitable set-off which they assert impeaches the mortgagee's right to exercise that power of sale. Alternatively, the principle of ex turpi causa non oritur actio is relied upon. Relief is also sought under s.87 of the Trade Practices Act. In submissions, counsel for the applicants indicated that an appropriate order under that section may involve a distribution of the security property between the applicants and Esanda.
However, the applicants should make some payment in respect of interest. The only evidence of a source of moneys for this purpose is the rental income from 8/59 King Street and 1/72 Cremorne Road. Esanda is currently in receipt of those moneys pursuant to notices issued under s.63 of the Real Property Act 1900. They should continue to have the benefit of those notices. In addition, the hearing of the matter should be expedited. To this end, counsel for the parties agreed to directions for the further conduct of the matter which had the effect of making the matter ready for hearing in early April and I have directed that the matter be placed in the long matters callover list on 6 April 1993, or such date as is otherwise appointed.
Because it is uncertain as to what date will be allocated for the hearing of the matter, I consider that it is appropriate to grant the injunctions only until further order. Should the time for the hearing not be granted within a short time after the callover, the respondents should be at liberty to approach the Court for a discharge of the injunctions. I have thus granted liberty to apply. I should state that in granting that liberty I do not intend to restrict it to the circumstances to which I have just referred, and the liberty is extended to all parties.
For these reasons I confirm that on 25 February I made the following orders:
(a) That the First Respondent be restrained from selling by

auction or by private treaty the property known as unit 1/72 Cremorne Road Cremorne being Lot 1 in Strata Plan 40915.

(b) That the Respondents be restrained from completing the

Contract for Sale of Land dated 23 December 1992 in respect of the property known as 8/59 King Street Wollstonecraft, being Lot 8 in Strata Plan 34288

(c) Costs of the Motion be costs in the cause.

[1993] FCA 136

08 MARCH 1993