Edgar, J.S. v Farrow Mortgage Services P/L

Re: JONATHON SCOTT EDGAR; TALEDI PTY LIMITED; EASTSIDE INVESTMENTS PTY LIMITED
and TEKIKO PTY LIMITED
And: FARROW MORTGAGE SERVICES PTY LIMITED (IN LIQUIDATION); IAN DOUGLAS
FERRIER and STEPHEN ROBERT PATRICK
No. G337 of 1991
FED No. 614
Contracts - Restitution - Estoppel - Evidence - Negligence - Pleading - Tort -
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

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

CATCHWORDS

Contracts - identification and construction of terms - loan agreements for financing development of commercial site where developer made periodic requests for drawdowns of working capital - whether agreement containing written terms that drawdowns of capital were within lender's discretion also contained implied terms relating to the timely provision of working capital - whether drawdowns were conditional upon placement of security - whether applicants defaulted - whether waiver of right to sue under agreement - illegal contracts in contravention of Building Societies Act - unenforceability of mortgage securities attached to loan agreements

Restitution - whether action for restitution lies where illegal contract held unenforceable

Estoppel - whether lender should be estopped from arguing that provision of security was a condition of drawdowns in the face of affirmation of contract undertaken without security

Evidence - drawing of inferences where future representations by silence - whether inference can be drawn that lender had knowledge of its financial position - consideration of drawing inferences as to knowledge in context of future representations

Megligence - liability for negligent misrepresentations in contractual situation - negligent misrepresentations relating to future provision of working capital

Pleading - whether estoppel must be pleaded

Tort - negligent misrepresentations - availability of action for tort when parties in contractual relationship

Trade Practices - silence by lender with respect to its insolvency - whether misleading and deceptive conduct in relation to timely provision of working capital - consideration of misleading conduct by silence in relation to future representations - need for intent

Trade Practices Act 1974 sections 4(2)(c), 5(5), 51A, 52, 84(1),(2)(a) and (b), 114(2)(g)

Building Societies Act (Vic.) 1986 sections 1, 48 to 60, 52(1)(b) and (k), 53(1), 57(1) and (4), 58(2), 71(1),(3),(5), and (8), 74, 133(2)

Sentencing Act 1991 (Vic) section 110

Federal Court Rules Order 11 Rule 10

Building Societies Act 1962 (UK)

Major v Bretheton (1928) 41 CLR 62

Gould v Vaggelas (1958) 157 CLR 215

Jones v Dunkel (1959) 101 CLR 298

Piening v Wanless (1968) 117 CLR 498

Government Insurance Office of NSW v Fredrichberg (1968) 118 CLR 403

Mutual Life and Citizens Assurance Company Ltd v Evatt (1968) 122 CLR 556

Yango Pastoral Company Pty Limited v First Chicago Australia Limited (1978) 139 CLR 410

L Shaddock and Associates Pty Ltd v The Council of the City of Parramatta (1981) 150 CLR 225

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337

Hospital Products Ltd v United Surgical Corporation (1984) 156 CLR 41

San Sebastian Pty Limited v Minister administering the Environmental

Planning and Assessment Act 1979 (1986) 162 CLR 340

Pavey and Matthews Pty Limited v Paul (1987) 162 CLR 221

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387

Commonwealth of Australia v Verwayen (1990) 170 CLR 394

Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82

Walpan Pty Ltd v Wallace (1985) 8 FCR 27

Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477

Sutton v A J Thompson Pty Ltd (1987) 73 ALR 233

Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83

Finucane v New South Wales Egg Corporation (1988) 80 ALR 486

State of Western Australia v Bond Corporation Holdings Ltd (1990) 99 ALR 125

Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458

Hurst v Vestcorp Ltd (1988) 12 NSWLR 394

Holt v Viroka Pty Ltd (1988) 13 NSWLR 629

Norris v Sibberas (1990) VLR 161

BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20

Wheeler Grace and Pierucci Pty Ltd v Wright (1989) 11 ATPR 40-940

Famel Pty Ltd v Burswood Management Ltd (1989) 11 ATPR 40-962

National Australia Bank Ltd v Cunningham (1990) ATPR 41-047.

Nicholson v Permakraft (NZ) Ltd (1985) 3 ACLC 453

Kinsela v Russell Kinsela Pty Ltd (1986) 4 ACLC 215

Cornelius v Phillips (1918) AC 199

Lister v Romford Ice and Cold Storage Co Ltd (1957) AC 555

Kiriri Cotton Co Ltd v Dewani (1960) AC 192

Hedley Byrne v Heller (1964) AC 465

L Schuler AG v Wickman Machine Tool Sales Ltd (1974) AC 235

Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd (1986) AC 80

Gillespie Bros and Co v Cheney Eggar and Co (1896) 2 QB 59

Archbolds (Freightage) Ltd v S Spanglett Ltd (1961) 1 QB 374

Esso Petroleum Co Ltd v Mardon (1976) QB 801

Barkway v South Wales Transport Co Ltd (1950) 1 All ER 392

Bigos v Bousted (1951) 1 All ER 92

Victorian Daylesford Syndicate Ltd v Dott (1905) 2 Ch 624

Nash v Halifax Building Society (1979) Ch 584

Nicholas F Coppinger v Patrick R. Norton (1902) 2 Ir Rep 232

Cope v Rowlands (1836) 2 M and W 149

Farrow Mortgage Services Pty Limited v Daly Supreme Court of NSW (Rogers C.J. Comm D) unreported, 5 November 1991

Altram Pty Ltd and Ors v BP Australia Ltd Federal Court of Australia (Einfeld J) unreported, 13 April 1992

Birk, P: An Introduction to the Law of Restitution Clarendon Press 1989

Carter and Harland, Contract Law in Australia (2nd ed)

Cross on Evidence 4th Australian edition Davis, The Law and Practice of Building and Land Societies 4th ed. J.E. Walker, ed

Fleming, The Law of Torts (7th ed)

Goff and Jones, The Law of Restitution 3rd ed 1986

Jones, G: Restitution: Unjust Enrichment as a Unifying Concept in Australia? (1988-9) Journal of Contract Law 8-14 Mason QC, K: Contract and Tort: Looking Across the Boundary from the Side of Contract (1987) 61 ALJ 228

Thornton and McBrien: Building Society Law: Cases and Materials (2nd ed) Wade, Benefits Obtained under Illegal Transactions - "Reasons for and against allowing restitution" (1946) 25 Texas LR 31

American Restatement of the Law of Torts (2d) par 552

Halsbury's Laws of England 4th ed (1974), vol. 9 par 574

HEARING

SYDNEY

#DATE 26:8:1992

Counsel and solicitor Mr C C Waterstreet
for the applicant instructed by Gadens Ridgeway Solicitors

Counsel and solicitor R Bainton QC and G Parker
for the respondent instructed by Bruce and

Stewart Turton Solicitors

JUDGE1

This case arises from a dispute between a lender and a borrower. The lender, alleging breach of contract, sought to enforce security agreements it obtained with respect to certain loans. The borrower instituted the case, seeking a declaration that the security agreements are unenforceable.

The first applicant (Edgar) is a property developer. He directs the second, third and fourth applicants, which are companies he used to acquire property in Strathfield, a Sydney suburb. Edgar intended to consolidate and develop a site which would be suitable for a significant commercial development. Before approaching the first respondent, Farrow Mortgage Services Pty Ltd (Farrow), to finance the project, he spent in excess of $1 million placing deposits on land and paying option fees. Farrow is a part of a group of over forty entities (the Farrow Group), including Pyramid, Countrywide and Geelong Building Societies. Farrow was used as a vehicle for the channelling of money between the building societies and the ultimate borrowers. The Farrow Group is in liquidation. For the purposes of his dealings with Farrow, Edgar engaged a corporate adviser, Trevor Allen, as his consultant and agent.
The first agreement (December 1989)
In December 1989, Farrow made an initial loan (the first agreement) to the second applicant (Taledi) for a term of twelve months. The loan was for $16,615,000 and the deed of loan stated that this sum was "to be advanced progressively or in one single payment in the absolute discretion of the Lender". The interest on this loan, $2,000,000, was capitalised - that is, instead of interest being paid by periodic payments by the borrower, it was added into the loan and became due at the end of the loan along with the principal. The security provided to Farrow by the applicants consisted of first mortgages over certain land, including Edgar's family home at Portsea, Victoria, and land comprising part of the intended development site in Strathfield which was owned by the third and fourth applicants. Edgar, Sally Clark, the fourth applicant (Tekiko) and J.V. Edgar and Co Pty Ltd guaranteed the loan.
The second agreement (May 1990)
In late March or early April 1990, Edgar needed to extend the loan beyond November 1990 to allow more time for consolidation and development of the site. By May 1990 the principal less $47,000 had been advanced but the funds then available were insufficient for the project. Hence a second agreement was negotiated on 8 or 9 May 1990 to provide additional finance of $3,450,000. The term of the total debt was extended to 18 December 1991 and additional interest of $4,500,000 was once again capitalised. Total borrowings then consisted of $26,565,000 including capitalised interest of $6,500,000.
The second agreement stated that for the loans moneys the sum of $1,000,000 working capital "is to be released progressively at the discretion of the Lender". To obtain this extension of the loan embodied in the first agreement, an establishment fee of $2,030,000 was required. This fee was to be debited to the loan account immediately upon acceptance of the letter of offer, thus apparently increasing the loan to just over $28.5 million. Additional security was provided by variation to existing registered first mortgages over the Portsea property and some of the land in Strathfield.
With respect to progressive requirements of working capital, the practice had been that Taledi presented invoices stating its requirements. Three invoices had been presented to Farrow during the first agreement, plus one on 16 May 1990 for $68,000 which, although just over $20,000 more than was still available under the first agreement, was apparently treated as being prior to the second agreement actually commencing to operate. Farrow paid these invoices promptly. However, Taledi's one and only request under the second agreement for a further drawdown of $114,000 in working capital in June 1990 was refused. The consequence of this, according to the applicants, was serious prejudice to the project and substantial damage to the applicants.
The third agreement (July 1990)
Mr K. Russell of Coopers and Lybrand was appointed administrator of the Farrow Group on 22 June 1990. In July 1990, a third agreement was entered after the applicants allegedly waived their rights with respect to any default by Farrow in the refusal to permit the drawdown under the second agreement. The third agreement, which effectively replaced the second agreement, provided for the same additional finance of $3,450,000 and the same interest of $4.5 million which was again capitalised. The $2,030,000 fee for the second agreement, debited to Taledi in May, became the establishment fee for the third agreement. The third agreement contained a covenant to exercise what were known as the Khoury options. These were options to buy two properties owned by Albert and Rose Khoury in Churchill Avenue, Strathfield, needed to complete the proposed development. They were taken on 16 October 1989 and were to be exercised on or before 16 October 1990.
On 30 July 1990 a progress claim of $205,000 was paid by Farrow and further drawdowns were made on 27 August ($58,026), 26 September ($73,014) and 4 October ($56,467). Taledi, however, failed to exercise the Khoury options by 16 October by reason of lack of funds. On 25 October in response to a request from Edgar, Farrow agreed to fund the purchase from the Strathfield Council of some additional land for the project for $770,000. On 30 October, after the Khoury options had expired but while Edgar was trying to have them extended, Farrow offered to fund them, but only upon the condition that its offer of 25 October to fund the purchase of the Council land was withdrawn. To have one piece of land but not the other was not acceptable to Edgar or viable to the project since the project could not go ahead without both.
Mr A. Hodgson of Ferrier Hodgson and Co was appointed liquidator of the Farrow Group on 13 December 1990 when there was said to be a substantial deficiency of capital in the Group. The possibility that the failure to exercise the Khoury options as agreed in the third agreement might have placed the applicants in default was first raised in a letter dated 28 December 1990 by Dennis Coghlan, Chief Manager of a section within Farrow. The letter stated that because the Farrow Group was in liquidation, the Group was precluded from making any new loans beyond those approved and committed prior to the appointment of the liquidator. He said that an alternative to Farrow enforcing its security was for Edgar to seek alternative finance for the project and repay Farrow in full.
This was not done and on 3 June 1991, by notices of demand to each of the applicants, Farrow sought to enforce its security agreements on the basis of the applicants' breach of the third agreement in failing to exercise the Khoury options by the agreed date. On 20 June 1991 Farrow as mortgagee appointed the second respondents as its agents in possession, who thereafter purported to exercise certain powers pursuant to the security agreements.
THE PRESENT PROCEEDINGS
On 2 July 1991 the applicants filed an application in this Court seeking orders restraining the respondents from, inter alia, taking possession of or assuming control of any of the properties of the first or second applicant. The applicants submit that the Court should infer terms in the second agreement relating to the future provision of working capital, which they claim were breached by Farrow. They also argue that they did not waive their rights to sue in respect of the second agreement and did not default under the third agreement.
Furthermore, they ask the Court to find that Farrow engaged in misleading or deceptive conduct contravening section 52 of the Trade Practices Act 1974 prior to and in connection with their entry into the second agreement. The alleged conduct was or related to the non-disclosure by Farrow of its financial position and illegalities committed in respect of numerous transactions in the form of contraventions of the Building Societies Act 1986 (Vic). This claim is also put as a breach by Farrow of a duty of care to the applicants. In addition, relying upon principles formulated by the courts concerning illegal contracts, they argue that illegalities by Farrow in its transactions with the applicants furnish a powerful ground for the unenforceability of the security agreements.
While damages were also claimed, the applicants' preferred remedy, because of the financial state of the Farrow Group, is a declaration that the security agreements are unenforceable. Because Farrow is in liquidation, the applicants sought leave at the hearing under section 471(2) of the Corporations Law to continue the proceeding. The respondents did not oppose the application and leave was granted. Execution under the security agreements is being withheld pending the determination of these proceedings.
The respondents' defence to the applicants' claims disputes the contractual terms argued for by the applicants, and denies misleading or deceptive conduct and negligent misrepresentations. They do not admit the illegalities but argue that their existence would not furnish a ground for unenforceability. They also advance a cross-claim for, inter alia, an order that Edgar give them possession of the Portsea property.
CONTRACTUAL TERMS
The identification and construction of contractual terms
The Court's initial task is to identify the terms of the relevant agreements. Where there is a document between the parties which contains relevant terms, it has been said that there is a presumption that this document is the contract: Major v Bretherton (1928) 41 CLR 62 at 67-8 per Isaacs J. To speak of a necessary presumption may be putting the matter too highly but if a presumption does exist, it is rebuttable, as the comments of Lord Russell C.J. in Gillespie Bros and Co v Cheney Eggar and Co (1896) 2 QB 59 at 62 indicate:

...although when the parties arrive at a definite written contract the implication or presumption is very strong that such contract is intended to contain all the terms of their bargain, it is a presumption only, and it is open to either of the parties to allege that there was, in addition to what appears in the written agreement, an antecedent express stipulation not intended by the parties to be excluded, but intended to continue in force with the express written agreement.

Once the terms of the agreement have been identified, the next task is to construe or interpret those terms. Evidence of the surrounding circumstances is admissible to assist in the interpretation of ambiguous terms, but is not admissible for the purpose of contradicting the language of the contract when it has a plain meaning: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352. Putting it another way, Justice Lockhart said in Finucane v New South Wales Egg Corporation (1988) 80 ALR 486 at 521:

The court will be prepared to place greater weight on the surrounding circumstances where the statements and actions of the parties have not been merged in a formal document exhaustively setting out the terms of the bargain...

Courts can imply terms into a contract where, inter alia, the term is necessary to give business efficacy to the contract, and it is so obvious that "it goes without saying": BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 at 26 approved in Codelfa at 347.
To identify the content of the parties' agreement, and determine any questions of relief if liability is established, it is helpful to exclude some preliminary or possible issues. The first is whether the applicants' situation was brought about by their own actions and not by any act, omission or conduct of the respondents.
The third agreement: did the applicants default?
The suggested default is their failure to exercise the Khoury options. One of the documents in the third agreement (Document 129 of Exhibit R19) relates to the options, which are defined in the schedule to the agreement as "options to be entered into between Albert Khoury...and the Borrower...". As the Khoury options were already in existence at the time of the agreement, the applicants submitted that the schedule could not refer to them. This is not the discrepancy it might otherwise appear to be. As there were simply no other "Khoury options" in contemplation at the time, there can be no doubt that the agreement intended to refer to the applicants' existing options to purchase the Khourys' land.
Under the first clause of the third agreement, Taledi agreed to assign to Farrow on request all its interest under the Khoury options at any time during the currency of the loan. Under clause 3, Taledi covenanted that it would duly exercise the options in accordance with their terms. Yet the applicants argue that Taledi's failure to exercise the Khoury options did not constitute a default under the loan. Edgar in fact said in evidence that there was no prior discussion or agreement between the parties about the covenant.
Earlier, on 22 June 1990, the respondents' solicitors had written to the applicants stating that "Farrow is presently considering whether it will request an assignment or a mere charge of the benefit of the contract for...the options over 7 and 9 Churchill Avenue". On 24 July 1990, Edgar foreshadowed that he may need to extend the Khoury options to perhaps December, which would cost $250,000, and he engaged in negotiations to this end. At the same time he also stated that he may need $6 million in January to exercise the options. At the other end of this enterprise, Farrow first raised the lapse of the Khoury options in Mr Coghlan's letter of 28 December 1990. Two months earlier they had offered to fund their extension.

The applicants' main argument is that Taledi agreed to exercise the options only if required and funded by Farrow. They argue that this must be the construction of the contract: otherwise it would mean that the applicants undertook to finance a $6.6 million option exercise in exchange, in effect, for $1 million working capital. Farrow was aware of the applicants' inability to obtain other finance since its representatives had been provided with all Edgar's financial information and held security over all his assets. The respondents argue that the covenant in the third agreement was clear and unambiguous and that there is no mention of the respondents agreeing to advance further funds for the project.
In their written submissions, the applicants stated: "It is submitted that the covenant, if it means anything, means that if Farrow required the option to be exercised, it would require Edgar to exercise it (only) if it funded the exercise". It is clear that the applicants could not have funded the options independently without security and their entire security was within the hands of Farrow. Farrow would either have had to fund the exercise or release sufficient security to enable Edgar to obtain alternative finance. It is common ground that there was no discussion between the parties in or about October 1990 on such a release, yet the obtaining of finance elsewhere would have been such an onerous, perhaps impossible, undertaking that it would have required some negotiation.
As it seems to me, neither of the two clauses on the Khoury options seems to have much meaning unless funds were made available to Edgar to exercise them. In fact two weeks after the last day for exercising the options, Farrow agreed to finance their extension, albeit on unacceptable conditions. They would not appear to be particularly useful clauses, since it was as much in Edgar's interests to exercise the options as it was critical to Farrow's security position. The land covered by the options was fundamental to the project. In all the circumstances and in the light of Farrow's knowledge that the applicants were unable to exercise the options without its assistance and co-operation, I accept the term suggested by the applicants as a matter of construction or implication.
One of the alternative constructions is that the covenant is meaningless. Because of the surrounding circumstances, to find that a reasonably clearly worded contract expressing a definite obligation has no meaning at all, is obviously not a conclusion to be made lightly. There is also no need to form this conclusion, because construing the clause as an obligation to exercise the options only if Farrow provided the money or released the necessary security is a perfectly plausible interpretation.
I find that the applicants did not default on the third agreement. Farrow therefore wrongly terminated the contract, and is not entitled to enforce its security agreements upon that basis. The applicants' failure to repay the loan should be interpreted as an election to terminate the contract, thus releasing the parties from further performance under the contract. Farrow may have a right of action for restitution based on total failure of consideration, but as this question was not raised at the trial, I do not need to examine it here.
Because of the comprehensive way the case was argued, however, I will continue on the basis that, contrary to my finding, there was in fact default by the applicants under the third agreement. Some other preliminary questions must be addressed in order to ascertain the content of the parties' total agreement.
Was payment under the second agreement conditional upon additional security?
Farrow argues that there was no obligation to meet the requested drawdown of June 1990, not only because payment was discretionary, but also because payment was conditional upon the provision of additional security which had not been provided. In the second agreement, a paragraph headed "Security" says:

Variation to existing registered first mortgage over the properties known as 12-30 Albert Road, STRATHFIELD N.S.W. 2135 and "Corsair" Weeroona Avenue, PORTSEA 3944. The advance is to be jointly and severally guaranteed by (the same guarantors as for the first agreement.)

Edgar stated that he had a conversation with Mr Poustie, the general manager for Farrow in New South Wales, at some time between 8 and 11 May 1990. Poustie was the principal person in Farrow with whom Edgar had contact. Edgar reported Poustie to have said that once the establishment fee had been debited to the loan account, the applicants were then permitted to continue making progress payments or drawdowns. It is of interest that in July 1990, Edgar appointed Poustie, who had left the Farrow Group, as his consultant and agent in dealing with Farrow.
On 22 June 1990, Farrow's solicitors sent a letter to Edgar's solicitors indicating that Farrow was still considering its position with respect to some of the security. However, it also said:

In the meantime, Farrow insists that the three mortgages in place be varied in accordance with the agreement for variation between the parties made 9 May 1990.

A month later, on 26 June 1990, Farrow's solicitors sent another letter enclosing deeds for variation. After mentioning the enclosed documents, it said:

If the documents are in order, kindly return them to us duly executed.

The incidental security such as the assignments and mortgages of the contracts for purchase shall follow shortly.

Please let us have details of the Churchill Avenue purchasers, including title particulars, in due course.

On 26 July 1990, Edgar's solicitors sent the variation documents to Farrow's solicitors.
Paragraph 1.2(b) of the deed in the first agreement dated 13 December 1989 had stated:

1.2 Notwithstanding any other provision of this Deed to the contrary, the Lender shall not be under any obligation to make the Loan, or advance any part thereof, to the Borrower:

(a) ...

(b) until the Borrower shall have procured the execution, stamping and delivery to the Lender's solicitors of the Deed of Guarantee by the Guarantor and Securities, Mortgagee (sic - probably Mortgage) shall require to be in place together with all documents relating thereto as may be required by the Lender and/or its solicitors, and the latter have certified to the Lender that all same are in order and that the Loan may be wholly or partially drawn down.

The second agreement was not made with the same degree of formality. It simply involved the signing of a copy of a letter which contained the terms of the agreement. It did not state that drawdowns were conditional upon the provision of security, although this intention must presumably be implied. Edgar actually admitted in evidence that it was standard practice of financiers for the drawing of loans to be conditional upon security being in place, although he sought to limit this proposition, I felt somewhat unconvincingly, to the first agreement. As a matter of construction or implication of the written document, I find that payment under the second agreement was conditional upon security. There seems no point to a requirement of security if drawdown can occur without the security being actually provided.
However, it is quite clear that neither party had this condition in mind in their subsequent conduct. Firstly, Farrow made substantial payments without fresh security being in place. There was a progress payment on 25 May 1990, and a $100,000 extension with respect to some land owned by the Hooker Corporation which was part of the site involved, both before security was in place. There was no mention of these payments being conditional upon security. Discussions on security were never tied to the issue of payments.
This conduct, especially the payments made without security being in place, amounted in my view to a clear representation that Farrow was not making particular payments conditional upon the provision of security. Perhaps it did not finally waive its right to the security, and it was at any stage free to notify Edgar that it would decline further payments until the security was in place, but it did not do so. When security was provided in July 1990, there was no response by Farrow that it would now release the working capital requested a month earlier, although in fact it contracted again to supply the same total moneys. This conduct of Farrow explains Edgar's impression that payment was not conditional.
It appears to me that Farrow should not be heard to argue that it was justified in refusing finance on the basis of the non-provision of security, since it represented by its conduct that it was not relying upon this term. There would appear to have been reliance upon this representation - all the applicants had to do to complete their obligation was to execute some documents, which no doubt could have been done quickly if urgency was required or a time limit set. To allow the respondents to argue that payment was being held up because security was not in place would cause substantial detriment to the applicants who operated on the assumption that security was not a problem. Of course it would be fatal to the applicants' success in this case if the respondents were permitted this indulgence.
Finally, considering the role that Farrow played in creating the assumption, the possibility of permitting it to depart from this assumption raises significant issues of conscionability. The applicants did not argue estoppel: see Commonwealth of Australia v Verwayen (1990) 170 CLR 394 for the requirements of estoppel. Instead, it was submitted that the true agreement with respect to this loan did not contain a term that the lending of money was conditional upon the provision of security. This was a little surprising in the light of authority that subsequent conduct is generally of little assistance in construing a contract: see, for example, L. Schuler AG v Wickman Machine Tool Sales Ltd (1974) AC 235 at 260.
Estoppel must generally be pleaded: see Federal Court Rules Order 11 Rule 10 and Nicholas F Coppinger v Patrick R Norton (1902) 2 Ir Rep 232. Here it was not pleaded and was not argued at the trial or in written submissions. Accordingly, although it is difficult to foresee an argument against an estoppel, it might be unjust to decide the case on this basis. The respondents did have an opportunity to adduce evidence on the matter such as, for example, that there was no detrimental reliance upon the relevant representation. In fact, conduct subsequent to the contract was fully in evidence, since the applicants were relying upon it to prove contractual terms, and the respondents did not adduce any contrary evidence. The respondents certainly accepted variations of the written contract. In these circumstances, although it seems to me that they should not be allowed to set up the written term linking drawdowns to security as a basis for defeating the applicants' reliance on the variations, I am hesitant to base any major conclusion on the existence of an estoppel.
Do the applicants retain or have a right to sue in respect of Farrow's failure to meet the June drawdown?
The respondents argued that the applicants waived their right to sue on the second agreement. Waiver must be an unambiguous representation intentionally made by the party concerned with knowledge of all the material circumstances: Halsbury's Laws of England 4th ed (1974), vol. 9 par 574. Justice Toohey said in Verwayen at 475 that it "involves the unequivocal renunciation or abandonment of a defence". Given that waiver can involve the abandonment of substantial and significant interests, the unambiguous quality of the representation must be stressed.
In a letter of 26 July 1990, Edgar's solicitors wrote to Farrow's solicitors thus:

I refer to my letter of even date returning the Variation documents to necessitate the immediately (sic) drawdowns as agreed.

You are aware that Mr Edgar and Mr Allen of Potter Warburg met in Geelong on Tuesday last with Daryl Radcliffe, Ross Scannell and Daryl Stubbings of Farrow. At that meeting our principals discussed further variations which must be implemented in order to keep the project viable. It was anticipated that following the meeting the suggested variations would be finalised within the next few working days and meanwhile the existing documents would be executed to facilitate the immediate drawdown of funds. As acknowledged by Farrow's representatives default has of course occurred by Farrow and my clients reserve their rights in respect thereof, pending the resolution of the outstanding variations necessary.

Farrow's solicitors replied to Edgar's solicitors on the same date:

Firstly we categorically deny any default on our client's part and are not prepared to proceed to completion of this matter on this basis. If our client makes any further funding available to your client it will be on the clear basis that your client withdraws any and all such allegations and waives any and all requests and claims in this regard.

On 27 July 1990, Allen wrote to Farrow on Edgar's behalf. The last paragraph of the letter stated:

We are committed to the successful completion of the amalgamation, rezoning and D.A. for this project which has taken 20 months to this stage and is now within our grasp. It is imperative therefore that these amendments we are seeking are implemented forthwith to ensure the project's continuing viability. In this regard we shall look forward to your early response. As you have requested that Taledi/Edgar waive its rights prior to the drawdown agreed to be provided on Tuesday, we would like to receive acknowledgment of your intention to negotiate variations to the loan arrangements generally in accordance with the proposals set out above prior to acceptance of the current drawdown.

There were seven proposals in all in the letter. Two of them were the release of the personal guarantees and of the Portsea property from its mortgage.
On the same day, Radcliffe, an employee of Farrow, wrote to Allen acknowledging receipt of his letter:

We acknowledge that in conjunction (sic) and under instruction from the Administrator we intend to revise our position in regard to the variations as detailed and proposed in your letter.

On 30 July, Edgar's solicitors replied:

Further to your letter dated 26 July 1990, I advise that my clients are prepared to accept the further advances on the basis discussed, that is, my clients withdraw the allegations made in my letter dated 26 July 1990 and waive any claims in respect thereof.

........ .

Please further note that on settlement (sic) is subject to negotiations proceedings (sic) to vary the loan arrangements as discussed between our respective principals last Tuesday in Geelong.

The applicants argue that the meaning of the letter of 30 July must be seen in context. Waiver was on the basis that Farrow would revise its position in line generally with Allen's proposals of 27 July. In fact there was no general acceptance of these proposals and the release of the guarantees and the Portsea home as security was in fact rejected on 27 July. The applicants pointed to an internal minute of Farrow which had been written by Radcliffe to and was approved by Coopers and Lybrand. It is undated but must have been written in the first three weeks of July 1990. Its opening paragraph was:

As you are aware Mr Trevor Allen of P P Corporate Advice Limited has written regarding the loan facility in the name of Taledi Pty Ltd to bring you up to speed with this particular development...

Although it is not entirely clear, it appears that the "writing" referred to was a letter from Allen to Farrow of 29 June 1990, where Allen mentioned that if Farrow was not in a position to provide additional funds urgently, the Portsea property should be released from the security cover, subject to Edgar arranging replacement borrowings on the property.
In the internal minute, Radcliffe recommended:

It would be more prudent to retain the Portsea property and drawdown the claims as requested so that the development approval can be achieved thereby improving the value of the property on our books. To release the Portsea property for $130,000.00 would be to release a property with a net equity position of well over $1.5 m. This is not an option.

The minute was approved by Coopers and Lybrand on 27 July 1990 but only communicated by a letter from Radcliffe to Allen on 6 August after the execution of the third agreement. The letter said:

Your proposals as detailed in your letter dated 27 July 1990 have been put before the Administrator as promised. The results are as follows:-

...

2. Extension of all maturity and trigger dates on the existing facility by 6 months has been granted.

3. Extension of the refund dates on the remainder facility fee has been granted.

4. Release of personal guarantees has been declined.

5. Release of the Portsea property has been declined.

These tactics in sum, according to the applicants, are unfair if not deceptive. I regard them as both. Radcliffe's letter of 27 July did not state that the variations would be in accordance with Allen's proposals, but rather that the revisions would be "in regard to" the variations proposed by Allen. To convey the impression of an intention to revise a position with respect to proposals, when a decision had already been made not to vary the existing position on two of the most important proposals is misleading. However, as this representation was not specifically pleaded, I am wary of using it as a basis for a definitive ruling.
Another problem with this representation is that the subsequent conduct of Edgar does not indicate to me that he actually relied upon it. If he made the assumption that Farrow was agreeing to release Portsea and that the personal guarantees would be released, it might be expected that when Farrow communicated to him that neither would be released, Edgar would have told Farrow that he no longer regarded himself as bound by the waiver. In this case that would have meant withdrawing his solicitors' letter of 30 July. Not only was this not done, Edgar actually affirmed the position again.
On 13 August, Radcliffe wrote to Edgar offering him an extension of the loan along with other conditions and stated that the letter should be read in conjunction with the letter of offer dated 8 May 1990 (this became the second agreement). It enclosed a letter of acceptance which had to be returned within 7 days, or failing that, the terms and conditions of the letter dated 8 May 1990 would continue.
Allen replied to Radcliffe on 15 August 1990. Inter alia, he again requested that the Portsea property and Edgar's personal guarantee be released to enable Edgar to seek funds from alternative sources in the absence of a preparedness of Farrow to increase the working capital element of the facility. He also enclosed a request for Taledi's working capital requirements for August and sought the earliest possible drawdown. On 22 August Edgar accepted the terms contained in the letter of 13 August, and the drawdown was made on 27 August. Thus, instead of disavowing the waiver, Edgar continued to request that the Portsea property be released as well as requesting additional finance and extensions to the terms of the loans.
I therefore leave open the issue of whether the representations made in this connection amounted to conduct in contravention of the Trade Practices Act. I also leave open alternative arguments not mounted. For example, it could perhaps be argued that waiver was conditional upon the third agreement being performed satisfactorily by Farrow, i.e. Edgar reserved his rights in the event that the third agreement was not satisfactorily performed.
Whether the second agreement contained contractual terms relating to the timely provision of working capital
The applicants argued the following two terms for the loan agreements:

1. The first respondent agreed to pay the working capital requirements as required by the developer, subject to invoicing.

2. The first respondent would perform its financing obligations in a timely manner, so as not to jeopardise the Strathfield site project.

These contractual terms are only of direct relevance to the second agreement, which extended the loan made in the first agreement. Farrow wrote to Edgar on 8 May 1990 inviting him to accept certain conditions for the loan, which were set out in the letter, by signing and returning an enclosed copy of the letter. Edgar did so. One of these conditions was:

The sum of $1,000,000.00 working capital is to be released progressively at the discretion of the Lender.

The applicants claim that the meaning of this term must be understood in the context of the surrounding circumstances, including the nature of the project, negotiations leading to the first agreement, and its subsequent performance. This suggestion requires a brief outline of the major features of these circumstances.
The project
From the first half of 1989, Edgar was in contact with Strathfield Municipal Council with respect to the consolidation and development of the site in Albert Street and Churchill Avenue, Strathfield. A section of Albert Street is parallel to Churchill Avenue and, with other boundaries, they enclosed a substantial area. The development was divided into two stages, with land along Albert Street as the first stage and land along Churchill Avenue and also at what is known as The Square as the second stage. With respect to the first stage, Edgar bought options to purchase the properties in Albert Road, Strathfield. The adjoining properties fronting Churchill Avenue were dwellings, with 5, 11 and 13 being owned by the Council, and 7 by Albert and 9 by Albert and Rose Khoury. The property at 2 The Square was owned by the Hooker Corporation.
In November 1989, the Council resolved to proceed with the proposed two stage development, agreeing to enter a contract to sell its three sites in Churchill Avenue for an appropriate consideration. Council's agreement was subject to certain conditions, including the provision of a number of public car parking spaces, the provision of a three lane public road linking Albert Road and Churchill Avenue and the submission of a development application for the redevelopment of the site. The contract would also be conditional upon Council rezoning the land and approving the development application. After the rezoning and the approval of the development application, Edgar intended to sell the land for a major commercial office and retail development.
The first agreement - negotiations
Prior to the first agreement, there were a number of discussions between Edgar and Poustie. Moreover, Edgar says that he sought and received assurances from Mr Balaam, a director of the Farrow Group, as to the financial capacity of Farrow to fund the loan. A letter from Poustie to Edgar dated 27 November 1989 commenced:

We are pleased to confirm that your application for finance has been approved in principle.

If the terms and conditions outlined below are acceptable, kindly sign the enclosed letter of acceptance where indicated and return it to our office.

It later stated:

The purpose of the loan is to purchase/consolidate commercial/retail site at Strathfield NSW.

The applicants relied upon this as part of the conduct amounting to a warranty that working capital would be released when the applicants indicated they needed it. However, Condition 4 on page 4 of the letter stated:

The sum of $250,000.00 representing working capital will be released progressively by the mortgagee at its discretion. (Emphasis added)

In the actual deed of loan in the first agreement dated 13 December 1989, paragraph 1.1 stated:

The Lender herewith agrees to lend and advance the sum of ...($16,615,000) to the Borrower, such sum to be advanced progressively or in one single payment in the absolute discretion of the Lender.

(Emphasis added)

In evidence, Edgar said of the background to this agreement:

In approximately November 1989 when I was discussing with Mr Poustie the original facility, I said that we would need working capital over and above the base loan amount to pay architects, engineers, quantity surveyors and other consultants in relation to the preparation of the relevant plans and specifications for the project....Mr Poustie agreed and I calculated that it would have cost approximately, I think, $40 to $50,000 a month and Mr Poustie concurred with that amount and told me that he agreed at the time for the $40 to $50,000 per month for those expenses to be drawn down.

The applicants argue that this understanding is confirmed by Poustie's communications with others at Farrow. On 1 November 1989 he sent a memo to Alan Peel, who appears to have been senior to Poustie at Farrow, summarising the nature of the project and listing the initial drawdown requirements of the applicants. They included money to purchase 12-30 Albert Road, and to buy options for 5-13 Churchill Avenue. There is then a heading "Reimburse Expenses to Date" which includes items such as professional fees and interest costs. The heading contains an asterisk and the reference is: "This reimbursement will enable release of existing mortgage over an additional residential security at Portsea property". Later in the list is an item, "Additional Working Capital". This has a double asterisk and the reference says, "These funds can be held and released progressively as required by developer, subject to invoicing."
It is clear that both Edgar and Poustie had an understanding that additional working capital would be released when the developer required it. Indeed, it is difficult to see on what other footing the parties could have contracted. From Edgar's perspective, the point of obtaining the loan was to provide funding so that he could progressively establish and achieve the project. From the point of view of Farrow, its security position could only deteriorate if the various stages or sections of the plan did not occur and the proposed development fell through. As Poustie said in his memo to Peel of 1 November 1989:

We would be initially exposed on the site, as is, with additional security to the tune of $16.78m against $10.5 - $11.0m. However, the indications are that the rezoning/DA are a formality, and on this basis, we would have $16.78m and capitalised interest against security worth $21.50m plus.

The approval from Council would also cover the second stage of the proposal. The exercise price under the option agreement and contract on Hookers building is $12.80m but it's (sic) enhanced value would be approximately $17-18 million.

Given that all the loose ends are tied up, we will have a very secure position and a consolidated development site which, according to the managing agents (Colliers), would be eagerly sought. The main problem is our initial exposure if for some unseen reason the Council refuses to grant the appropriate approval. Aside from this particular transaction, they have previously approved a six (6) storey commercial development on a portion of the same site.

The first agreement - performance

In the actual performance of the contract, Farrow responded promptly to Edgar's invoices. Edgar gave evidence that in April, there were discussions to increase the working capital requirements and further to increase the term of the loan. He said:

...I said to Mr Poustie that as the Council has agreed to...fast track the rezoning and development application, we must at all times adhere to the time frame agreed to and any variation to this time frame would be disastrous to the project. Mr Poustie said he understood exactly the time frames and the constraints we were working under and that Farrow would comply with those time constraints because it was in everybody's interests to do so.

The first agreement - conclusions

It appears to me that the parties shared the expectation that Farrow would not refuse working capital requests. In the negotiations leading to the first agreement, this was clearly the understanding between the two parties. It was reinforced in the manner in which the agreement was performed (i.e. timely payments), and in communications, such as for example when Poustie told Edgar that it was in everybody's interests that the time frames stipulated by Council be adhered to. This last representation is particularly significant. When the Council agreed to "fast track" the proposal, the timing of working capital became particularly crucial. It was with this shared expectation that the second agreement was entered. This understanding between the parties that Farrow would make timely payments, and their crucial importance to both sides, provided an expectation that Farrow would not refuse requests for working capital except in extreme or unusual circumstances.
While there was this manifest understanding between the parties that there would be timely payments of the applicants' working capital requirements upon request, the written documents regularly contained the term that payment would be at Farrow's discretion. It seems clear that the letter of 27 November 1989 represented an agreement in principle, to be followed by a deed giving expression to the final agreed terms. The deed refers to the discretion being absolute and I take this to be the decisive expression of contractual intention. If the letter was itself a contract, I would hold that the deed varied it.
Edgar said in evidence that the statement that working capital would be released progressively by the mortgagee at its discretion was standard terminology. He said he agreed with the statement because he had no basis for believing that the working capital would not be released. There is every reason to accept this account - both parties believed that it was highly improbable that Farrow would refuse requests for working capital.
It is indeed difficult to contemplate a situation in which it would be in Farrow's interests to refuse drawdown, a perception shared and confirmed by Farrow. Perhaps changing circumstances could result in the project's viability being threatened, for example, if there were indications that Council might reverse its position on selling its land, or on rezoning and giving development approval. Perhaps expressions of interest in the site might evaporate. In these events, Farrow might wish to cut its losses and refuse further drawdowns of capital.
Short of such cataclysmic events, the surrounding circumstances point to an intention shared by the parties that as the proposed and well understood project progressed, the working capital would not be withheld. This in fact explains why Edgar accepted the written terms of the agreement. I am inclined to find a contractual term to this effect, but the contribution of Farrow to this expectation is much more weighty on the issue of whether Farrow engaged in misleading or deceptive conduct. Before considering this matter, it is necessary to say something about Edgar's credit, particularly because the respondents sought to impugn his evidence by alleging that he himself misled Farrow on a number of occasions and gave unsatisfactory evidence.
EDGAR'S CREDIT
The respondents alleged that Edgar was evasive under cross-examination. The major instance given of this was in relation to his understanding of whether drawdowns under the second agreement were conditional upon the provision of additional security. In my view rather than reflecting on his credibility, anything contradictory in Edgar's evidence on this matter seemed to me to reflect the tension between what was contained in the documents, and the contradictory subsequent conduct of the parties.
The respondents also pointed to what they allege are falsities in Edgar's statements to various parties. One instance given was his statement to the Town Clerk of Strathfield Council in his letter of 29 May 1989 that he had acquired the properties on 12-30 Albert Road. The respondents argued that he had not in fact acquired any of these properties. The applicants say this objection is pedantic. They pointed to a letter dated 15 June 1989 from the solicitors for Karp Investments Pty Ltd, which owned 30 Albert Street, to Edgar's solicitors (Exhibit A11) advising them that the options may be settled on 16 June. The letter referred to a facsimile of a letter from Edgar's solicitors dated 13 June, but this letter hardly assists the applicants as Edgar's letter was dated 29 May. I doubt that this discrepancy says much about Edgar's credit. It seems merely to attest to his enthusiasm for the project at the time.
The respondents also alleged that a letter from Edgar to Farrow of 10 October 1989 asserted, prematurely as to the Khoury properties and falsely as to the Council's properties, that he had secured options over the whole site fronting Churchill Avenue. The respondents also argued that he asserted falsely that option fees of $550,000 had been paid on the Churchill Avenue properties.
It seems from the evidence that the Khoury properties were secured by that time. The actual option to purchase was entered on 16 October 1989, but it was clear by 10 October that the Khourys were willing to grant the options. With respect to the Council's land, Edgar stated in evidence that when he was negotiating with the Council in 1989, he had envisaged taking an option over it. It would appear that it was only in 1990 that Council informed him that due to legal advice, they were unable to enter into an option agreement. In fact he took no option over this land. Perhaps Edgar was stretching the truth a little in this respect but there seems little doubt that if the project went ahead, the Council would not sell the land to someone else or withhold from selling it to him. For understandable commercial and political reasons, the Council itself seemed to be reasonably enthusiastic about the project.
The respondent also pointed to other inconsistencies, but I derived no subjective impression that Edgar was not a fundamentally truthful witness, stressed as he no doubt was by the loss of the project, the litigation itself and the plight in which he now finds himself. I found him to be credible. Looked at objectively, while he did make statements to Farrow which were strictly untrue, they tended to be statements which reflected his expectations or optimism rather than what had actually occurred. He was speaking to and seeking to encourage speculative financiers to lend him a large sum of money for a difficult and complex project. It cannot be said that he intended to keep Farrow in the dark about the true position: he first needed to engage its interest, then secure its agreement in principle, then obtain the actual finance to secure the realisation of his dreams. Ultimately this would require revealing the true position in regard to everything. Before final agreement, he would have expected Farrow officers to check out the whole project thoroughly for themselves. Contrary to the respondents' argument, I do not believe that there was a concerted attempt by Edgar to mislead Farrow in order to obtain some advantage. Rather, as it seems to me, any false statements were more the product of overenthusiasm, apprehension or carelessness.
MISLEADING AND DECEPTIVE CONDUCT
Representations as to future matters
The applicants alleged that there was misleading or deceptive conduct in contravention of section 52 of the Trade Practices Act which induced them to enter the second agreement. This conduct took the form of the failure by Farrow to inform Edgar, before entering the second agreement, of the Farrow Group's financial state and illegal transactions.
At common law, there may be representations which induce entry into a contract without their being found to be terms of the contract. What distinguishes terms from representations is that only with the former does the representor intend to guarantee performance: Gibbs C.J. in Hospital Products Ltd v United Surgical Corporation (1984) 156 CLR 41 at 61. A breach by one party of a term gives the other party the right to terminate the contract and sue for damages. For a representation to be actionable, there must be an intention to induce entry into the contract, and actual inducement occasioning damage. On the other hand, equity provides the additional remedy of rescission for fraudulent and non-fraudulent misrepresentations although this is subject to the possibility of restitution in integrum.
The Trade Practices Act has expanded the categories of actionable misrepresentations available at common law, and of available remedies. There is no requirement that the representor be fraudulent in making the representation, although, in the case of representations as to future matters, the state of mind of the representor is relevant. As a Full Court of this Court (Bowen C.J., Lockhart and Fitzgerald JJ.) said in Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 88:

If a corporation is alleged to have contravened s 52(1) by making a statement of past or present fact, the corporation's state of mind is immaterial unless the statement involved the state of the corporation's mind... Many statements, for example, promises, predictions and opinions, do involve the state of mind of the maker of the statement at the time when the statement is made...A statement which involves the state of mind of the maker ordinarily conveys the meaning (expressly or by implication) that the maker of the statement had a particular state of mind when the statement was made and, commonly at least, that there was basis for that state of mind. ...that a prediction proves inaccurate does not of itself establish that the maker of the prediction did not believe that it would eventuate or that the belief lacked any, or any adequate, foundation.

However, it is easier to establish the state of mind of a corporation under the Act than under the common law: Walplan Pty Ltd v Wallace (1985) 8 FCR 27. The state of mind of a director, servant or agent acting within the scope of actual or apparent authority, is attributable to the corporation: s 84(1),(2)(a). Section 84(2)(b) extends the position even further, but it is not relevant here.
Section 51A marks a significant departure from the common law. It was inserted by the Trade Practices Amendment Act No. 17 of 1986 and says:

(1) For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.

(2) For the purposes of the application of sub-section (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.

(3) Sub-section (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.

The applicants pleaded this section. Sub-section (2) has the effect that instead of the burden being placed upon the applicant to prove that the respondent did not have reasonable grounds upon which to have based its representations, it is for the corporation to prove that it had such reasonable grounds. Justice French said of section 51A in State of Western Australia v Bond Corporation Holdings Ltd (1990) 99 ALR 125 at 129:

...I repeat what I said (in Adelaide Petroleum NL v Poseidon Ltd (1988) ATPR 40-901 at 49,700):

"Prima facie the effect of that section is that every representation with respect to any future matter is misleading or deceptive unless there are reasonable grounds for making it at the time that it is made. The burden of establishing the existence of reasonable grounds is on the party making the representation..."

Silence and representations as to future matters

Of representations by failing or omitting to disclose at common law, Justice Lockhart said in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 95:

At common law, silence can give rise to an actionable misrepresentation where there is a duty upon the representor to reveal a matter if it exists, and where the other party is therefore entitled to infer that matter does not exist from the silence of the representor.

In Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477, the respondents sold a fungicide to the public without revealing that the sales were illegal. The fungicide had not been registered under State law and purchasers were thus exposed to the risk of seizure and forfeiture of the product. Bowen C.J. said at 489-91:

Dealing with the question of misrepresentation constituted by silence, there are cases which show, for example, that an omission to mention a qualification, in the absence of which some absolute statement made is rendered misleading, is conduct which should be regarded as misleading. So too is the omission to mention a subsequent change which has occurred after some statement which is correct at the time has been made where the result of the change is to render the statement incorrect so that thereafter it becomes misleading...the general position between contract parties has been expressed in the following way: "The general rule, both of law and equity, in respect to concealment, is that mere silence with regard to a material fact, which there is no legal obligation to divulge, will not avoid a contract, although it operates as an injury to the party from whom it is concealed."

(Smith v Hughes (1871) LR 6 QB 597 at 604...) Under the general law it is important to consider whether there is a legal obligation to divulge...

...(With section 52 of the Trade Practices Act) the court will not be restricted to cases where such a relationship has already been held to exist at common law or in equity. The court is likely to be faced with situations under s 52 between particular parties, where it will feel bound to hold that such an obligation to disclose arises from the circumstances.

In relation to the particular case, the Chief Justice went on:

Vendors and purchasers have not generally been regarded as being, without more, in this type of relationship...I do not discern any relationship between the respondents and their customers which would give rise to any particular obligation to make disclosure or which would lead the court to hold that a duty of disclosure should be held to arise. ...there is no conduct of the respondents which it is shown would lead a person or persons into error as to what the law of their State was or lead them into error as to whether or not the respondents had complied with that law.

Justice Lockhart agreed with the Chief Justice that there was no obligation to disclose the illegality. Jackson J delivered a cogent dissent, stating at 508:

...in the case of a product having one use, at least where, as in the present case, that use is of a nature likely to be subject to legislative regulation, I regard it as misleading to sell the product in a manner which would be appropriate if the sale were lawful. It is misleading because the sale in that manner creates the clear impression that the product does have whatever approval may be necessary and may be used by the purchaser for the purpose for which it is purchased without, in New South Wales, that use being unlawful and without, in both States, the product being liable to be seized.

I do not mean to convey, of course, that there will be a contravention of s 52(1) on every occasion on which there is a sale by a corporation of a product in contravention of a law...Each case must turn on its own facts.

Justice Lee in Wheeler Grace and Pierucci Pty Ltd v Wright (1989) 11 ATPR 40-940 at p 50,251 expressed views with respect to silence and future representations in the context of section 52, which were approved by Justice French in Famel Pty Ltd v Burswood Management Ltd (1989) 11 ATPR 40-962 at p 50,509. Justice Lee stated that even where a corporation has reasonable grounds for believing that a prediction or promise may be fulfilled, there may still be a contravention of section 52 if the representor knew, but failed to inform the representee, of circumstances which disclosed a risk of non-fulfilment.
While the Act expands the common law position principally by not limiting actions to the situations in which a common law duty to disclose is found, an important limitation is found in section 4(2) of the Act. Conduct is defined there as including the refusal to do an act. Section 4(2)(c) states that this includes a reference to:

(i) refraining (otherwise than inadvertently) from doing that act; or

(ii) making it known that that act will not be done...

Thus when the actionable representation is silence, the significant limitation is that the silence must be intentional. In other words, while the failure to disclose may in fact mislead, it will not be actionably misleading conduct unless this failure was intentional. Under the common law, this limitation exists in contract law only with fraudulent misrepresentations giving rise to damages. The limitation does not exist in tort law with negligent misrepresentations, and the scope for an action in tort when the relationship between the parties is contractual will be considered later. Of course intention may and will in many cases be inferred. The starker the unrevealed matter in terms of the subject matter in hand, and the greater its actual or potential benefits to the representor, the more readily will intention be implied.
It is appropriate to consider the interaction between sections 4(2) and 51A in the context of the present case. Assume that A argues that R represented that it will make timely payments of requested drawdowns. Assume that when the statement was made by R, it was in serious financial difficulties which threatened its ability or willingness to make those timely payments in the future. Section 4(2) indicates that when R says it will make timely payments and fails to reveal its financial difficulties, this will only be successfully actionable conduct if R, knowing or suspecting these financial difficulties, intentionally refrained from revealing them.
On the other hand, under section 51A, it is assumed that R did not have reasonable grounds for saying that it will make timely payments. R must prove that it had reasonable grounds, and this may involve proving, for example, that its financial difficulties were not reasonably discernible. By itself, section 51A might thus appear to be a powerful evidentiary aid to applicants. However, because section 4(2) requires A to prove firstly that R knew of these financial difficulties, there would appear to be little room for the operation of section 51A in the context of future representations by silence.
To put it another way, it is no help to A to cast the burden at the second stage upon R to prove that it did not have reasonable grounds for stating that it will make timely future payments, when A has to prove at the threshold that R knew that it did not have reasonable grounds. The applicants must rely, therefore, on section 52 without significant assistance from section 51A and this was reflected in the applicants' arguments: while section 51A was pleaded, it was not specifically argued. As I said in Altram Pty Ltd and Ors v BP Australia Limited unreported 13 April 1992, it was probably always available under section 52 without the onus of proof reversal.
The drawing of inferences
Justice Lee in Wheeler Grace also said at p 50,251:

...the event of non-fulfilment of a prediction or promise may be evidence that raises an inference that such a risk of non-performance existed or that qualification of the positive statement, prediction or promise was required.

The applicants rely upon inferences in the present case. Farrow did not file any affidavits or present any witnesses at the trial. One type of inference relied upon by the applicants is referred to as the rule in Jones v Dunkel (1959) 101 CLR 298. Despite its notoriety, I pause briefly to examine it again for its relevance to situations of future representations by silence. The rule is explained with supporting authority in Cross on Evidence (4th Australian edition) page 37. The main principle is that the unexplained failure by a party to give evidence, to call witnesses, or to tender documents or other evidence may, in appropriate circumstances, lead to an inference that obviously relevant evidence which is or should have been available to a party but was uncalled, would not have assisted that party's case. The rule only applies where a party is required to explain or contradict something. No inference can be drawn unless evidence is given of facts requiring an answer.
Courts are asked to draw inferences where there is an absence of direct evidence because of the recognition that plaintiffs may have difficulty obtaining direct evidence in certain types of cases. Thus the doctrine of res ipsa loquitur emerged in negligence cases. Lord Normand said in Barkway v South Wales Transport Co Ltd (1950) 1 All ER 392 said at 399:

The fact that an omnibus leaves the roadway and so causes injury to a passenger or to someone on the pavement is evidence relevant to infer that the injury was caused by the negligence of the owner, so that, if nothing more were proved, it would be a sufficient foundation for a finding of liability against him. The maxim is no more than a rule of evidence affecting onus. It is based on commonsense, and its purpose is to enable justice to be done when the facts bearing on causation and on the care exercised by the defendant are at the outset unknown to the plaintiff and are or ought to be within the knowledge of the defendant.

The doctrine has not been regarded in Australia as a rule which affects onus, though this difference does not necessarily lead to different results. Barwick C.J. said in Government Insurance Office of NSW v Fredrichberg (1968) 118 CLR 403 at 413:

...the so-called "doctrine" is no more than a process of logic by which an inference of negligence may be drawn from the circumstances of the occurrence itself where in the ordinary affairs of mankind such an occurrence is not likely to occur without lack of care towards the plaintiff on the part of a person in the position of the defendant...

There are, of course, limitations on the general experience that people have: see in this regard Barwick C.J. in Piening v Wanless (1968) 117 CLR 498.
Representations as to future events squarely raise the state of mind of the representor, and this is generally extremely difficult for the representee to prove. With section 51A of the Trade Practices Act, Parliament has gone significantly further in facilitating proof of such representations than the res ipsa loquitur doctrine did in negligence cases. However, the little operation permitted for section 51A by section 4(2) in the context of future misrepresentations by silence could in many cases defeat the consumer protection objectives of Part V of the Trade Practices Act and deny justice unless the courts take into account the practical limitations upon applicants in adducing evidence in this area. Jones v Dunkel will not be of much assistance in its literal terminology in cases of this kind.
Whether Farrow engaged in misleading or deceptive conduct
The pleaded representations
In Western Australia v Bond Corporation at 128, Justice French said:

If implied representations are part of the case, they must be clearly pleaded out along with the facts and matters relied upon to support the implications.

The rationale behind this statement, with which I respectfully agree, is to give the respondent the opportunity to refute the existence of those facts and matters or adduce other material which suggests that the alleged implied representation cannot be supported.
I have said that the surrounding circumstances showed a common expectation that Farrow would make timely payments, or put differently, that it was highly improbable that Farrow would not make timely payments. I have also found that Farrow contributed to this shared expectation and thus made an implied representation with respect to the risk that Farrow would refuse a drawdown. The difference between the representations pleaded and the implied representations is one of degree, the former involving a prediction based on certainty and the latter involving a very strong likelihood.
The respondents argued against the pleaded representations in basically two ways - they cannot stand with the contractual terms, and Edgar's credibility is questionable. As with the issue of estoppel, as a matter of natural justice, it is important to ensure that the respondents have been given the opportunity to have their say before I find an implied representation. I think it is clear that they have.
In paragraph 12 of their further amended statement of claim, the applicants pleaded:

Between 27 November 1989 and 30 July 1990 and in order to induce the First Applicant and Second Applicant to execute the 1989 Deed of Guarantee and Deed of Loan and a number of mortgages over Strathfield properties and the Portsea property, the First Applicant's personal guarantee, the 1990 Deed of Guarantee on Execution of Variation of Mortgage and Assignment Agreements the First Respondent represented in trade and commerce to the Applicants:

(a) that the First Respondent would finance the development of the Strathfield site project;

(b) that the First Respondent would perform its financing obligations in a timely manner so as not to jeopardise the Strathfield site project;

(c) that the First Respondent had adequate and sufficient funding at its disposal to finance the Strathfield site project and to do so in a timely manner;

(d) that the First Respondent would not act in contravention of any law concerning the lending of moneys more particularly the Building Societies Act 1986 (Vic).

(e) that the First Respondent would consult and confer with the Applicants concerning the orderly financing of the Strathfield site project;

(f) that the First Respondent would not withhold finance from the Strathfield site project;

(g) that the First Respondent would release the First Applicant and Ms Sally Clark from the personal guarantees and any security given in respect of the Portsea property when Development Approval was obtained in respect of the Strathfield site.

For reasons previously explained, this aspect of the case is actually only concerned with representations relevant to the second agreement, not the first and third agreements. At the highest, alleged representations (a) and (b) have been established only in the following form:

(a) that it was highly improbable that the First Respondent would not finance the development of the Strathfield site project;

(b) that it was highly improbable that the First Respondent would not perform its financing obligations in a timely manner so as not to jeopardise the Strathfield site project.

Suggested representation (c) appears to be encompassed by (a) and (b). It could not be said to be highly improbable that the first respondent would not advance the moneys if the first respondent did not in fact have the funds to finance the loan. Sub-paragraph (d) alleges illegalities which I consider later. Sub-paragraphs (e) and (f) add little to (a) and (b) and appear to be comprised within them. The respondents disagree with (g) but they agree with Edgar's assertion in his affidavit of 13 September 1991 that Poustie told him that the Portsea property will be required initially but that Farrow will consider releasing it once the development approval had been issued.
Paragraph 14 of the further amended statement of claim must also be considered. It states that the first respondent in making the representations was in contravention of section 52. The particulars given were:

(a) The First Respondent was aware that the Strathfield site was to be developed in two stages with the properties at 12-30 Albert Road, Strathfield, to be financed and purchased with the finance provided by the First Respondent and with contracts for sale and options to purchase over the property at 2 The Square and 5,7,9,11 and 13 Churchill Avenue, Strathfield.

(b) The First Respondent was aware that the Strathfield site would have to proceed in a timely manner so as to allow for the rezoning of the site and enable the lodgment of development applications, the submission of plans and the satisfaction of other administrative requirements within the period contemplated by the various options to purchase and contracts for sale.

(c) The First Respondent was aware or ought to have been aware that delay by the First Respondent in making the payments due pursuant to the agreements with the Second Applicant would jeopardise the progress of the Strathfield development.

(d) The First Respondent was aware or ought to have been aware at the time of entering the agreements that its commitments to provide working capital of $1 million was beyond its financial capacity.

(e) The First Respondent did not disclose to the Applicants or either of them its true financial position.

(f) The First Respondent knew or ought to have known that the moneys advanced and promised were moneys obtained in contravention of the Building Societies Act (Vic).

(g) The First Respondent failed to provide adequate or sufficient funding to the Applicants to finance the Strathfield project in a timely manner.

(h) The First Respondent has purported to assert the personal guarantees given by the First Applicant and Ms Sally Clark.

Sub-paragraphs (a), (b) and (c) are directed to the contention that Farrow knew how crucial timely payments were for the project, which is relevant to whether Farrow had a duty to inform, or misled by not informing, the applicants that there was a risk that Farrow would not make timely payments in the future. Sub-paragraph (d) refers to actual and imputed knowledge of the first respondent as to its financial position. Section 4(2) of the Trade Practices Act requires actual knowledge for a failure to disclose to be actionable.
There is simply insufficient evidence upon which to infer that when the second agreement was concluded, the first respondent actually knew that it would be unable to provide working capital of $1 million. A more plausible approach is that Farrow knew its financial position was such as to create a significant risk that it might not in the future make or be able to make timely payments. This may have occurred not only because of actual lack of liquid funds, but rather an unwillingness to pay out money when there were liquidity or even legal problems. Indeed the applicants included, and the respondents recognised, the question of willingness in their respective submissions.
Sub-paragraph (e) of paragraph 14 states that the first respondent did not disclose the facts of its financial position. Sub-paragraph (f) is the illegality point which I will discuss later. Sub-paragraph (g), the allegation of breach, is common ground. I do not understand sub-paragraph (h).
Silence and misleading conduct
I have already found that Farrow contributed to Edgar's understanding that the risk that it would not make timely payments was negligible. If in May there was a significant change in that degree of risk, and Farrow knew that the risk of non-payment in time was significantly greater than Edgar understood it to be, there arose the possibility that failure to disclose that risk might amount to misleading conduct. This would not be simply a case of silence on a material fact not alluded to by either side. The issue of risk was raised through the implied representations. Although they were composed of conduct going back to the first agreement, these representations appear to me to be of a continuing nature. Any significant deterioration in the financial position of Farrow by May 1990 would, in my view, have amounted to a change in circumstances creating a duty upon Farrow to disclose that change.

Justice Mason pointed out that the effect of unenforceability in Yango would not be confined to the substantial detriment resulting to the bank. The ability of the bank to meet its obligations to its investors and other creditors depends, at least in part, upon its ability to enforce the terms of repayment of its contracts of loan with customers such as Yango.
His Honour also referred to the principle ex turpi causa non oritur actio, i.e. no action can arise from an unworthy cause. But as Professor J Wade of the University of Mississippi said in his article, "Benefits Obtained under Illegal Transactions - Reasons for and against allowing restitution" (1946) 25 Texas LR 31 at 45, while there is merit in the principle that a plaintiff should have no relief upon a bad claim, its merit depends upon proper application. The proper application requires a more exacting look at the wrongdoing of the plaintiff, and whether the penalty of unenforceability is disproportionate to his guilt. The merits of the defendant must also be examined.
Murphy J also took the direct approach of looking at the statute, particularly its penalty provisions, considering the objects of the section, and determining whether enforcement would undermine or further the object of the section. Thus the majority view in the case appears to be that it is necessary to compare directly the statute and its objects against the consequences of enforcing or not enforcing the contract.
The New South Wales Court of Appeal in Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 appeared to take this view of Yango. Thus President Kirby said at 411 that Yango enunciated a number of principles including:

1. The fact that a transaction is made which results from or involves a breach of the requirement of statute may result in a conclusion that the transaction itself is illegal such that, to give effect to the statute, a court will decline to enforce the transaction or will treat it as void.

2. Such a result will not, however, always follow. Because statutes rarely provide, in terms, for the effect of the breach of their provisions upon such transactions, it is for the court, in applying the potentially crude instrument of the doctrine of illegality, to determine the imputed legislative intention.

3. In reaching its conclusion, the court will consider the extent to which the statute itself already provides adequately for securing the attainment of its apparent objects and for punishing breaches of and non-compliance with its terms. It will also have regard to the possible consequences upon innocent third parties of a rigorous application of the principles as to illegality.

4. Because of the sometimes drastic consequences of the application of the doctrine of illegality upon transactions, the proscription may not be extended beyond those transactions which are clearly in breach of the statute, lest, by casting the net more widely, serious injustice may be done to third parties beyond that necessary to give effect to the presumed legislative intention.

Inherent in these principles, and in their application to particular cases, is an inescapable element of imprecision and judgment. As in other cases, so in this, there are considerations which point in different directions.

The applicants in written submissions accepted the learned President's statement of the principles. Justice Mahoney said at 427-8, referring to Yango:

...emphasis was placed upon the necessity, when an issue of illegality is raised, to determine precisely what is the subject of the statutory proscription. The reason for this is at least twofold: to enable the court more clearly to consider the question whether that which is proscribed by the statute was intended to be, for the purposes of the law of transactions, illegal, as distinct from merely penalised; and, secondly, to enable the courts to apply with a greater degree of precision and flexibility the consequences of the decision that, in the particular case, the law of illegality was intended to apply.

In an apparently different approach to Justices Mason and Aickin in Yango, Justice McHugh, then a member of the Court of Appeal, said at 442-3:

Unfortunately, the text of the statute rarely provides direct assistance to the solution of the problem. As a result the courts have invariably found the consequences of invalidating a contract to be the decisive consideration. If the purpose of the statutory prohibition is the protection of a section of the public and the invalidation of a contract made in consequence of a breach of the prohibition will directly assist that purpose, the courts are more ready to conclude that the legislature intended that the contract should be unenforceable. But if the consequences of invalidity will lead to injustice or absurdity or will penalise the innocent, the less likely it is that the courts will hold that the purpose of the legislation was to invalidate a contract made as a consequence of the breach of the legislation. When one set of consequences points to the protection of the public or a section of the public and another set of consequences points to injustice or anomaly, the court must weigh the competing considerations and make a judgement as to what was the most likely purpose of the legislature.

To draw an authoritative thesis from this panoply of judicial and jurisprudential genius would take a wiser man than me. Doing the best I can, however, the central question seems to be whether the Act indicates an intention that the contract in question should not be enforced by the party wishing to enforce it. Where the terms of the contract are clear, as here, the issue is simply one of statutory interpretation. It is thus unnecessary to make distinctions between forbidden and otherwise illegal contracts, and between statutory interpretation and common law principles of public policy. The common law contained distinctions which complicated the task of statutory interpretation. One such distinction is between statutes intended only to protect the revenue and statutes intended to protect the public. The latter involved an implied prohibition and were thus unenforceable.
The following questions are relevant to the issue of interpretation:

1. Does the Act forbid the contract?

2. Does the Act provide a penalty for entering the contract?

3. What are the consequences of the court enforcing the contract?

4. What are the consequences for the parties and others if the court does not enforce the contract?

5. Which of these alternative sets of consequences is most consistent with the Act? One set of consequences may lead to one party being unjustly penalised, or another being unjustly enriched. In addition, the issue of whether the consequences impose an incentive or a detriment to engaging in illegal conduct must be considered.

Restitution

The applicants claim that although the security agreements should be held unenforceable, it was open to the respondents to have brought an action for restitution. The point of this argument was presumably to illustrate that the unfortunate consequences for innocent third parties of holding that this type of contract is unenforceable would be significantly mitigated by restitution.
Restitution has provided relief to plaintiffs who are unable to obtain a remedy in reliance upon the contract because it is unenforceable. Pavey and Matthews established that restitution depended upon unjust enrichment. (A convenient exposition of this case is given by Gareth Jones in "Restitution: Unjust Enrichment as a Unifying Concept in Australia?" (1988-9) 1 Journal of Contract Law 8-14.) In that case, the statute explicitly made building contracts unenforceable unless they were in writing and sufficiently described the building work the subject of the contract. The contract in question was oral, the builder did the work and the defendant resisted payment on the ground of unenforceability of the contract.
The New South Wales Court of Appeal had refused restitution, saying that Parliament intended to deny the plaintiff any recovery. If the statute allowed restitution, it would have little effect on the litigation of building contracts where the builder completed the work. The Court of Appeal was concerned that restitution would indirectly lead to the enforcement of a contract which the Act stipulated should not be enforced.
Dismissive of this approach, the High Court said that the consequences of the Court of Appeal's interpretation "are so draconian that it is difficult to suppose that they were intended" - per Mason and Wilson JJ. at 229. These justices held that the statutory purpose could be said to be:

...the protection of the building owner against a claim by a builder on a written contract that fails to describe the building work sufficiently, even in a case where the builder has fully executed the contract on his part. But it would be going a very long way indeed to assert that the statutory protection extends to a case where the building owner requests and accepts the building work and declines to pay for it on the ground that the contract fails to comply with the statutory requirements.

The Court held that there was unjust enrichment and denying this enrichment was not contrary to the policy of the Act.
The general maxim of English courts on whether restitution applies to allow recovery where an illegal contract is involved is in pari delicto potior est conditio defendentis, i.e., where both parties are alike guilty of wrongdoing, the position of the defendant is stronger. (See P Birks, An Introduction to the Law of Restitution (Clarendon Press, 1989) p 424.) One example of parties not being in pari delicto is where the statute intends to protect a particular class of persons and a member of that class sues. Thus in Kiriri Cotton Co Ltd v Dewani (1960) AC 192, the landlord could not resist recovery of a premium paid by the tenants because of his failure to conform with regulations prohibiting the receiving of premiums, since the prohibition in the regulations was for the purpose of protecting tenants.
The question of whether restitution should be allowed involves, as that example shows, the issue of whether restitution would be consistent with the purposes of the statute. In cases such as Pavey and Matthews, the statute directly prohibited the enforcement of the contract, so the plaintiff had to rely on restitution. However, in cases such as the present, where the statute is silent on the issue of enforceability, courts must determine whether enforcement is consistent with the Act. Where restitution leads to indirect enforcement of the contract, the relevant factors in deciding whether to allow this form of enforcement must be substantially the same as those relevant to direct enforcement. It seems an artificial and unnecessary exercise to treat the two questions separately. However, in Hurst, while the New South Wales Court of Appeal decided that the contract in question should be unenforceable, Justice McHugh noted at 445-6:

Although the contract of loan is unenforceable, the appellants have received and have had the benefits associated with the loans...If appellants are not required to refund the moneys which they borrowed, they will reap an unmerited benefit. That, of course, is often the result of the illegality doctrine. But the modern doctrine of restitution enables the court in appropriate cases to overcome these injustices...once the Court declares the loan agreements are unenforceable, Filmco should be given the opportunity to raise the matter...

At 417-8, President Kirby agreed with Justice McHugh's approach.
However, restitution would have acted in Hurst to enforce the contract substantially and indirectly. Surely the same considerations relevant to unenforceability must be considered on the question of restitution. To regard certain factors as indicating that the contract should not be enforceable, and then to enforce the contract indirectly without regard to those factors would seem a strange almost convoluted approach of taking away with one hand and giving with the other.
Furthermore, the concerns of unjust enrichment should be addressed in deciding whether or not to enforce the contract. Thus in Yango, Justice Mason said at 428 that:

...(to) hold the contract unenforceable at the suit of the plaintiff would be to provide a windfall gain to the defendants and other borrowers in a similar position, and, although indirectly, to impose substantial hardship on those who originally made funds available to the plaintiff.

Justice Mason held that it was not rational to suppose that Parliament intended the injustice of holding the agreement unenforceable and, in this context, the purpose of the Act was adequately served by the penalty provided by the Act. The language of "windfall gains" and hardship being consequently imposed upon the innocent addresses the same concerns as those of unjust enrichment at another's expense. Of course as Justice McHugh pointed out, this will often be the consequence of not enforcing a contract.
While the doctrine of unjust enrichment involves considerations which should be considered along with other factors when deciding whether or not a contract should be enforced, this is not to minimise the importance of the doctrine itself. Indeed Pavey and Matthews suggests that the High Court will be more favourable towards plaintiffs than some English courts have been. English courts have, it seems, tended to rely heavily upon doctrines such as ex turpi causa non oritur to deny assistance to plaintiffs without having a sufficiently close look at the relative merits of the parties and the proportionality of the penalty of unenforceability. The unjust results obtained in some cases, such as Bigos v Bousted (1951) 1 All ER 92, will hopefully be avoided in Australia. The doctrine of unjust enrichment can only serve as a useful reminder that it is not the role of courts to adopt either high-handed moralistic attitudes towards lending its assistance to plaintiffs, or "fastidious aloofness" (Goff and Jones, The Law of Restitution 3rd ed, 1986 p 406). It is for courts to dispense justice between parties in a way which is consistent with the intentions of Parliament.
To treat unjust enrichment separately from the enforceability of the contract can lead to arbitrariness not only because of the defect in reasoning involved, but also in another way. In the present case, the respondents said that restitution would have been an exercise in futility - Taledi has nothing except its claim against other Edgar companies which took title to properties, and Farrow has a mortgage over those properties. If the contract is declared unenforceable but restitution allowed, quite different results obtain depending upon the arbitrary factor of whether Taledi has sufficient assets other than those over which Farrow has first mortgages.
Thus restitution should not be dealt with separately but should be considered together with all factors relevant to the issue of enforceability.
The transaction in question
I have the very considerable benefit of the decision of Justice Rogers, Chief Judge of the Commercial Division of the Supreme Court of New South Wales, in Farrow Mortgage Services Pty Limited v Daly (unreported, 5 November 1991), a case directly in point. The Chief Judge after referring to Yango and Hurst, said:

Applying those principles, it appears to me that there are two principal guides in arriving at the conclusion that the contract of loan is not struck down by illegality. First, is the fact that the legislature has indicated with some care and clarity that, where it is intended that a transaction should be void, it has said so in terms. In other words, this is a case where the draftsman not only knew the form of words, but was ready to apply them where necessary. It is no great leap to conclude that where he did not brand the transaction with the consequences of illegality he intended that the contrary intention be manifested. The second pointer is in the identification of the class of persons intended to be protected by the provisions of the Act. The Act was not really concerned with borrowers beyond their membership of the community as a whole and beyond a general concern to ensure that a sound financial market was maintained. The primary concern of the legislation was with depositors and the stability of the building societies themselves. Neither stability nor the welfare of the building societies would be advanced by making monies lent in contravention of the provisions of the Act irrecoverable.

With respect to the first principal guide, his Honour pointed to sections 58(2), 71 and 74 of the Building Societies Act (Vic). Section 58(2) provides in terms that any guarantee or indemnity given in contravention of sub-section (1) is void. Section 71(3) makes management contracts as defined in section 71(1) void, if entered into after the commencement of the section. Sub-section (5) provides that any assignment, transfer or renewal of a management contract is void. Section 74 deals with loans to directors. In sub-section (8) it is provided that the prohibitions there contained do not prevent the building society from recovering the amount of, or of any interest on, any loan made, or any amount for which it becomes liable under any guarantee given, or in respect of any security provided contrary to the section.
Justice Rogers also referred to the precursor of the 1986 Act which bore the same title and was enacted in 1976. It provided that if a society contravenes or fails to comply with any provision of the Act, the rights and liabilities of the society or any other person under the Act shall not, except where expressly provided by the Act, be affected or prejudiced thereby. Thus the Act ensured that the doctrine of illegal contract would not be used to find some statutory intention in favour of unenforceability.
His Honour's first guiding principle is with respect persuasive, although it is not easy to see why guarantees, often the prime securities in some loans, should be invalidated but not other securities. However, the second guiding principle is troublesome, although his Honour cited Nash v Halifax Building Society (1979) Ch 584 in its support. That case concerned an unintended breach by the respondent of restrictions imposed by the Building Societies Act 1962 (UK). Browne-Wilkinson J did not identify investors as the class of persons intended to be protected by the Act. He said at 590-1:

It seems to me that it is clear that the intention of the section was to protect the property of the society for the benefit of all those persons interested in the society whatever their class, whether as members or outside creditors. It is in those circumstances appropriate and correct, I think, to describe the protection as being intended to be for the benefit of the society. I therefore reach the conclusion that the section is designed to protect the building society as a whole and, accordingly, although the transaction was illegal, the society is entitled to recover monies advanced under such an advance and enforce the security given for its repayment.

In my opinion, it is not appropriate to consider Building Societies Acts as if they have only one purpose or one group of people to protect. Although it does not reveal much of substance to aid in interpretation, and although there will be cases where its aims cannot be achieved for all the relevant people at the same time, I agree with the principle that the Victorian Act is intended to protect the property of the society for all persons interested in the society.
However, I disagree that mortgage securities taken in the context of the Victorian Act should be likewise enforced because of this circumstance. Against Justice Rogers' formulation of the principle, I think that the Act is primarily concerned with borrowers when it fixes the limits of the societies' permission to lend within certain specifications and strict conditions. Like its corresponding legislation in other places, the overall climate of the Act is to ensure that building societies are a reliable and stable source of funds for residential housing for the widest possible number of people, properly regarded by the legislature as crucial to a fair society. The objects of the Act thus include the development of an efficient building society industry in Victoria as a major source of reasonably priced housing finance, and the prudential regulation of societies so as to ensure that deposits made by members of the public are safe.

The transaction here did not involve residential housing in Victoria but a large-scale and speculative commercial development in a Sydney suburb based on arrangements far outside the words, spirit and intent of the Act. It was designed to use investors' money, without their or statutory authority, to make "windfall" profits for the society and those associated with it. It is difficult to read the Building Societies Act (Vic) as other than intending to invalidate lending for any such project. It seems unlikely that in this respect at least, the Act was designed to advantage the society or its investors. I have found no text writer or commentator, no parliamentary speaker, and no judicial authority who has suggested that the better returns from commercial than residential premises is a purpose of building societies, as it might be of an investment house of another kind. This Act's purpose is to promote home ownership in Victoria and assist as many Victorian residents as possible to purchase their own homes in conditions of safety and affordability. It also provides these assurances for depositors. The use of moneys invested in or accumulated by societies for the type of undertaking evidenced in this case was not contemplated or intended to be permitted.
The Victorian Building Societies Association said of the role of building societies in a 1986 publication entitled "Building Societies in Victoria":

Building societies are financial institutions which provide a wide selection of savings and investment accounts at rates of interest, and which use these funds invested with them to provide housing loans to home buyers... A wide variety of housing loans for owner occupiers and investors are available from building societies, and lending policies of societies are aimed at helping people build or purchase their home, especially their first home, at the earliest possible time.

This publication was not part of the evidence in this case and its author was not cross examined. Hence at best it can be used as only one commentary on the purpose of the statute. As it seems to me, however, the summary does in fact reflect the content and intent of the Act.
Halsbury 4th Edition Vol 4 at paragraph 1501 says that English building societies are "established for the purpose of raising, by the subscriptions of the members, a stock or fund for making advances to members out of the funds of the society upon security by way of mortgage of freehold or leasehold estate." In later paragraphs Halsbury points out the many restrictions imposed on UK societies by the local legislation in relation for example to the proportion of the value of the property that may be advanced, the limitations on the guarantees that may be taken, and the fact that guarantees do not permit the statutory amount for advances to be increased on that account. The intention is made clear that society funds are primarily intended to finance the purchase of properties in England intended for the borrowers' own residential purposes.
In the Australian commentary on Halsbury (Sir Garfield Barwick, Editor in Chief), it is said that the building societies legislation of the Australian states have as "their main object...much the same as that set forth in paragraph 1501 of the (English) text namely the making of loans to members wishing to acquire a home on the security of mortgages of real estate from moneys subscribed by members on a withdrawable basis." The Australian commentary says at paragraph C1653 that there are no similar restrictions as to guarantees as exist in the UK.
See also generally Davis: The Law and Practice of Building and Land Societies (4th ed, ed: J.E. Walker); Thornton and McBrien: Building Society Law: Cases and Materials (2nd ed) both published by Sweet and Maxwell.
It is certainly true that if societies are prevented from enforcing their securities because of the voiding of illegal contracts as a matter of course, their viability may well be threatened. In this case, if Farrow had been prevented at an earlier time from enforcing its security because of the applicants' failure to keep to their obligations under the illegal loan agreement, considering the large number of illegal transactions with which it appears to have been involved, this by itself could possibly have caused the collapse of the Farrow building societies, Pyramid, Geelong and Countrywide. To allow borrowers effectively to confiscate a portion of the assets of a society, thus precipitating a collapse of the society, is certainly not consistent with maintaining the society as a source of funds for residential homebuilding. On that reasoning, the purpose of the Act would be seriously undermined if transactions such as the present one were unenforceable.
However, in my opinion, this is not the correct approach. If a society collapsed because securities were unenforceable on account of their being attached to illegal contracts of loan, it is the illegalities not the unenforceability that bring about the collapse. That is well demonstrated in this particular case. When an administrator was appointed, he, like the liquidator who followed, found that the various entities in the Farrow Group were hopelessly insolvent. This was not because securities were not enforceable - few if any had been called in - but because of the illegal transactions in which the entities had been involved and the lack of prudence and care shown in their decision-making valuations and lending policies. I have not investigated the matter, and it was not litigated in the case, but it may even be found that unconscionable if not illegal directors' fees, loans or other subventions may have made a contribution to the Group's demise.
The authorities require that the respective consequences to the parties be weighed in the scales to ascertain the parliamentary intention and find the just balance. There are in effect only two, possibly three, direct consequences where there is or has been illegality under this Act. First, there is the totally inadequate penalty of 100 units, which is now $10,000 (Building Societies Act s 133(2); Sentencing Act 1991 (Vic) s 110) for directors breaching the regulations. Second, the Registrar is empowered to remove directors and appoint an administrator. A possible third consequence would be criminal charges if fraud or appropriate corporate offences can be proved.
However, those provisions do little to balance the benefits which the society and its directors presumably gained or hoped to gain by lending to adventurous entrepreneurs from whom higher returns were expected from higher interest rates and fees charged for riskier illegal loans. At the same time they were paying investors the lower rates normally offered for moneys invested in building society funds.
In my opinion, the directors are for present purposes irrelevant. It is not a question of whether the Parliament might have intended to supplement the adverse consequences to directors from any illegalities with the collapse of the society. The issue is whether the contracts which the Parliament has predetermined to be illegal should be enforceable at the hands of the society or entity who committed the illegalities. If so, the society and presumably the directors would receive income far greater than the Act envisages; they would extinguish security of far greater value than the Act ever contemplated; they would impoverish borrowers who contracted in good faith, and may even use the proceeds to continue and carry on their illegal ways. That could not be the legislative intention.
Of course the collapse of a building society not only causes considerable hardship to its depositors but also has significant flow-on effects to the real estate industry, other financial institutions, and the public, none of whom have any right to relief or recovery at all. On the other hand, looking at the respective merits of the particular lender and borrower here, both were effectively speculators, prepared to accept risk in return for high financial rewards. Whichever way this decision goes, both face losses or gains from the activities engaged in. So do the people depositing money in the society who assumed that they were making a safe deposit in a sound financial institution governed by a specific law drafted inter alia to protect their investment. This loss is not much reduced by their protection, at least in part, by some form of government guarantee given, apparently, after the collapse.
But it was the risky and speculative loans and other conduct by the entities of the Group that caused the demise of Farrow and the losses suffered by its investors, not conduct on the part of this borrower or the unenforceability of its securities. It was each loan agreement submitted by Farrow that was tainted by illegality that has led to the present position, not any act on the part of the applicants. The depositors lost their money because of the activities of the society with whom they invested, not through a windfall gain on the part of the applicants at their expense. I am unable to find this to be a case of unjust enrichment.
I will declare the relevant security documents to be unenforceable and direct that the parties bring in a suitable form of declaration to this effect. All the other relief sought in the application seems to be unnecessary if this declaration is made but the parties may submit for consideration any other orders or declarations sought. The cross claim will be dismissed. The respondents will pay the applicants' costs.

[1992] FCA 614

26 AUGUST 1992