GHM Nominees Pty Ltd v Wallace Jackson Pty Ltd
[2022] VSCA 230
•26 October 2022
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2021 0080 |
| GHM NOMINEES PTY LTD (AS TRUSTEE OF GREG HERMAN SUPERANNUATION FUND) | Applicant |
| v | |
| WALLACE JACKSON PTY LTD (AS TRUSTEE OF WALLACE JACKSON UNIT TRUST) | Respondent |
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| JUDGES: | FERGUSON CJ, SIFRIS and MACAULAY JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 21 July 2022 |
| DATE OF JUDGMENT: | 26 October 2022 |
| MEDIUM NEUTRAL CITATION: | [2022] VSCA 230 |
| JUDGMENT APPEALED FROM: | [2021] VCC 733 (Judge Cosgrave) |
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CONTRACT – Loans – Terms for repayment – Applicant loaned monies to respondent (as trustee) for property purchase and maintenance – No clear term for repayment – Implication and inference of terms – Property used by parties for joint real estate business venture but use ceased before demand for repayment of loan – Applicant contended loans repayable upon demand after cessation of real estate business’s use of property – Held at trial loans became repayable upon sale of the property or termination of trust neither of which had occurred – Leave to appeal granted but appeal dismissed.
Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491, Hawkins v Clayton (1988) 164 CLR 539 considered.
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| Counsel | |||
| Applicant: | Mr G Griffith KC with Mr CR Northrop | ||
| Respondent: | Mr DP Lorbeer | ||
Solicitors | |||
| Applicant: | Goldsmiths Lawyers | ||
| Respondent: | King & Wood Mallesons | ||
FERGUSON CJ
SIFRIS JA
MACAULAY JA:
Introduction
When A lends money to B with nothing at all said as to repayment, the money is repayable immediately.[1] Where the borrower simply agrees to pay on request, again the money is repayable instantly.[2] To avoid a cause of action for recovery arising in A instantly, thereby commencing the relevant limitation of action period under statute, parties must contract out of that situation. A term that provides for the time for repayment may be inferred or implied, objectively, from relevant communications and the circumstances existing at the time of the loan. Determining when loans were repayable is the issue in this appeal.
[1]Ogilvie v Adams [1981] VR 1041, 1043 (Fullagar J) (‘Ogilvie’); In Re Brookers (Aust) Ltd (1986) 41 SASR 380, 382 (King CJ, Mohr J agreeing) (‘Re Brookers’).
[2]Ogilvie [1981] VR 1041, 1043; Re Brookers (1986) 41 SASR 380, 382
The applicant, GHM Nominees Pty Ltd, lent money to the respondent, Wallace Jackson Pty Ltd, to enable the respondent to purchase and maintain a commercial property on the corner of Wallace Avenue and Jackson Street, Toorak, Victoria (‘the property’).
In total, the applicant lent the respondent $802,769[3] (‘the loan monies’) between 7 September 2012 and 26 February 2016. The first two advances were the largest. A sum of $186,400 was advanced on the day of auction, 7 September 2012, as a contribution towards the deposit. Another $539,900 was advanced on the day of settlement, 6 March 2013, as a contribution to the difference between the amount required for settlement and some money lent by a bank for the purchase. Ten smaller amounts were advanced over a further three year period to make up shortfalls between income and outgoings on the property. Nothing was said about repayment at the time the applicant advanced any of the money to the respondent.
[3]See n 7 below.
Without going into much detail at this point, it is also necessary to mention that: the property was purchased by the respondent as trustee for a unit trust (the Wallace Jackson Unit Trust, hereafter ‘the trust’); the applicant was a 50 per cent unitholder in the trust; another entity, Smith Singer Pty Ltd (‘Smith Singer’), held the remaining 50 per cent of the units in the trust; and the applicant and Smith Singer, together, also came to be involved in a real estate business trading as Sotheby’s International Realty (‘the Sotheby’s business’) which leased space in the property after it was purchased.
In February 2020, the applicant demanded payment of the loan monies from the respondent. When the respondent claimed that the money had not yet fallen due for payment, the applicant commenced a proceeding in the County Court to recover the loan monies.
Neither party contended (and, in fact, both denied) that the loan monies were repayable immediately upon the loans being made. Between them, they presented a range of choices to the judge from which he was to decide which repayment date or occasion had, by inference, been agreed between the parties as the date or occasion on which the money was due or could be demanded. After satisfying himself that the money was not repayable immediately, and analysing each of the choices presented, the judge concluded that the loan monies were repayable on the earlier of the termination of the trust or the sale of the property. Since neither of those events had occurred by the time of trial, the judge dismissed the applicant’s claim for repayment.[4]
[4]GHM Nominees Pty Ltd v Wallace Jackson Pty Ltd [2021] VCC 733 (Judge Cosgrave) (‘Reasons’).
The applicant has sought leave to appeal from that decision. It has proposed two grounds of appeal, as follows:
Ground 1:The trial judge erred in finding that loans made by the applicant to the respondent were only repayable upon the termination of the [trust] or the sale of the [property]; and
Ground 2:Having found that loans made by the applicant to the respondent were not repayable instanter, the trial judge:
(a)erred in finding that the loans were not repayable upon the giving of notice;
(b)should have found that the loans became repayable upon the applicant making a demand for payment in February 2020.
More will be said later about the way in which these grounds were particularised in the applicant’s amended application for leave to appeal. For present purposes, it is sufficient to say that, in substance, the applicant contends that the judge was wrong to find that the debt was repayable on the earlier of when the trust was terminated or the property sold, and should have found that the debt was repayable after the Sotheby’s business ceased using the property (in 2019) and a notice for repayment was given.
For the reasons that follow, we would grant leave to appeal on ground 1 only but dismiss the appeal.
Background
Greg Herman-Moore is the director of the applicant, which is the trustee of his self-managed superannuation fund. Geoffrey Smith and Gary Singer are the directors of Smith Singer, which is the trustee of their self-managed superannuation fund. Smith and Singer are married and were close friends of Herman-Moore. In 2010, Smith and Singer were granted an exclusive licence to operate a Sotheby’s art auction house in Victoria for ten years. The pair subsequently became interested in the idea of running a real estate business. In early 2012, Smith and Singer commenced negotiations with Sotheby’s parent company, Realogy LLC (‘Realogy’), to operate a real estate business under the Sotheby’s name.
The property
In August 2012, whilst still negotiating with Realogy, Smith and Singer became aware that the property was for sale. The pair spoke with Herman-Moore about the prospect of purchasing the property on a 50/50 basis, with Smith and Singer as one party and Herman-Moore as the other. On 6 September 2012, the parties purchased the property at auction for $3.73 million.[5] Relevantly, the purchase required a deposit equal to 10 per cent of the purchase price, being $373,000, of which Smith and Singer paid (approximately) one half and Herman-Moore the other half. Those monies, along with their later contributions, were paid by their respective superannuation funds.
[5]The purchasers were listed as Gary Singer and/or nominee, and Greg Herman-Moore and/or nominee. Later they nominated the respondent as purchaser.
On 14 February 2013, the respondent was incorporated ahead of settlement of the property. As mentioned, the respondent is the corporate trustee of the trust. The applicant and Smith Singer hold an equal number of units in the trust and there are no other unitholders.
On 6 March 2013, settlement of the purchase of the property occurred with the trust nominated as the purchaser. To make up the balance of the purchase price, the respondent borrowed $2.59 million from a bank and a further $540,000 (or thereabouts) from each of Smith Singer and the applicant.[6] At this point in time, Smith and Singer had not yet entered into any formal agreement with Realogy regarding the operation of a Sotheby’s real estate business.
The Sotheby’s real estate business
[6]Arithmetically, the sum of the deposit, bank loan and loans from the parties exceed the purchase price: presumably, the further funds were required to pay for stamp duty and settlement adjustments.
Returning to events prior to the purchase of the property, in early 2012 Smith and Singer travelled to the United States to speak with Realogy about obtaining the rights to operate a Sotheby’s real estate business. They approached a friend and real estate agent, David Colbran, to participate in the potential business. Colbran suggested that they also invite Herman-Moore to be involved, which they did. In May 2012, the parties lodged their application for a licence to operate a Sotheby’s real estate business. Negotiations to secure the licence for the real estate business took place over 2012 and 2013. Colbran withdrew from the project for a period in 2012, leaving Smith, Singer and Herman-Moore to pursue the project. During the course of the negotiations with Realogy in later 2012, Realogy advised that it would not accept Herman-Moore as a part owner of the business.
On 15 January 2013, Melbourne SR Pty Ltd was incorporated with Singer, Smith and Colbran as its directors. Shortly thereafter, this company became the corporate trustee for the Melbourne SR Unit trust. The company was incorporated to run the Sotheby’s real estate business, if Smith and Singer were successful in obtaining approval from Realogy. Melbourne SR Pty Ltd entered into a unitholders agreement with Smith Singer, Smith and Singer in their personal capacities, the applicant, and 1001 Pty Ltd (the trustee of Colbran’s superannuation fund). It was not until 16 April 2013, some six weeks after settlement of the purchase of the property, that Realogy entered into a master franchise agreement with Melbourne SR Pty Ltd allowing the company to conduct a Sotheby’s real estate business in Victoria.
From mid-2013, the Sotheby’s business occupied one of the five ground floor premises of the property before relocating in August 2015 to the property’s larger premises situated on the first floor. The real estate business did not succeed as the parties had hoped. It was eventually sold in 2019, following a breakdown in the relationship between Herman-Moore and Smith and Singer. After its sale, the Sotheby’s business no longer occupied any part of the property.
In summary, there were two unit trusts:
(a)One was the Wallace Jackson Unit Trust (already defined in these reasons as ‘the trust’) of which the respondent was the trustee: it had two equal unitholders, the applicant and Smith Singer, and it owned the property as its sole asset;
(b)The other was the Melbourne SR Unit Trust: it had three equal unitholders, namely the applicant, Smith Singer and Colbran’s company 1001 Pty Ltd. That trust held a franchise agreement with Realogy, owned and operated the Sotheby’s business and, from mid-2013 to 2019, leased space in the property.
The loan payments
The applicant and Smith Singer each made 12 payments to the respondent between the purchase of the property in September 2012 and February 2016. The property became cash-flow positive after February 2016, no longer requiring payments from the applicant or Smith Singer to cover any shortfall, with income sufficiently covering the cost of outgoings. All the loans made by the applicant are depicted in the following table:
Description
Date
Amount
Loan 1
7-Sep-12
$186,400.00
Loan 2
6-Mar-13
$539,900.00
Loan 3
2-Oct-13
$7,500.00
Loan 4
28-May-14
$5,000.00
Loan 5
3-Jul-14
$5,000.00
Loan 6
4-Jul-14
$1,250.00
Loan 7
27-Oct-14
$5,000.00
Loan 8
28 Oct-14
$5,000.00
Loan 9
29-Oct-14
$5,000.00
Loan 10
29-Oct-14
$22,000.00
Loan 11
21-Feb-15
$17,900.93
Loan 12
26-Feb-16
$10,000.00
On 7 January 2020, Herman-Moore expressed his concern about land tax payable on the property and asked Smith and Singer if they had any thoughts about selling the property. On 19 February 2020, the applicant’s solicitor sent a letter of demand to the respondent for the payment of $802,769.[7] Two weeks later the respondent’s solicitor denied any present obligation to repay the loans to the applicant. The applicant then commenced a claim for the total sum of the outstanding loans in the County Court.
[7]The total amount set out in the table is $809,951.93 whereas the amount recorded as owing in the respondent’s financial statements was only $802,769. Unable to explain the discrepancy, the applicant (at trial) claimed only the lower figure.
Judge’s reasons
With the parties having agreed that the payments from the applicant to the respondent were loans, and without any express term governing repayment of loans between the parties, the question framed for the judge’s determination, relevant to this proceeding, was whether the loans were repayable:
(a)immediately on the payment of each loan to the respondent;
(b)upon notice being given by the applicant to the respondent for repayment in February 2020;
(c)when Sotheby’s Realty ceased using the property in late 2019; or
(d)upon termination of the trust or the sale of the property, whichever occurs first.[8]
[8]Reasons, [20].
The applicant’s position was that there was an implied term of the agreement pursuant to which it made the loans, that the loans would be repayable when notice for repayment was given, or alternatively, when the Sotheby’s business ceased using the property. The respondent’s position was that any obligation to repay the applicant arose upon the termination of the trust or the sale of the property, whichever occurs earlier. In his final address, counsel for the respondent submitted that the loans may also become repayable upon the applicant selling its units in the trust. Despite permitting an amendment to the respondent’s pleading, the judge refused to allow the respondent to rely on that argument since it had not been raised in the respondent’s opening.[9]
[9]Ibid [27].
Through a process of elimination the judge determined that the loans made by the applicant to the respondent were not repayable immediately, nor were they payable upon demand or the termination of the lease of the property by the Sotheby’s business. The only remaining term, being the proposed term that fit best within the context of the transaction, was that the loans would become repayable upon the termination of the trust or the sale of the property, whichever occurred first in time. When ultimately accepting that position, the judge nevertheless noted that the respondent had acknowledged that the loan would become repayable if the applicant sold its units in the trust.[10]
[10]Ibid [124].
Before turning to the judge’s analysis of each of the options, it is important to refer to the factual findings he made. The judge found that the parties intended to purchase the property to hold it as a long-term investment[11] and that the process of inferring a repayment term must be conducted in that context.[12] The judge made some important findings about the nature and circumstances of the interaction between the applicant and respondent regarding the property, namely that:[13]
[11]Ibid [48].
[12]Ibid [49].
[13]Ibid [41]–[47].
(a)Each of Smith, Singer and Herman-Moore were interested in, and had extensive knowledge of, real estate. Smith and Singer were real estate investors and Herman-Moore spent his working life as a real estate agent;
(b)Smith, Singer and Herman-Moore were close friends;
(c)Smith, Singer and Herman-Moore agreed to borrow the maximum amount available to fund the purchase of the property and to maintain it as an investment, noting the property was negatively geared;[14]
(d)The property would have to be held for some time to obtain a positive return. The two means by which the parties could derive profit from the venture were to wait for the rental income to increase over time to a point where it exceeded outgoings, or hold the property for long enough to increase in value, delivering the parties a capital gain;
(e)Smith and Singer were hoping to obtain the right to conduct a Sotheby’s real estate business. If successful in obtaining that licence, Smith, Singer, Herman-Moore and Colbran agreed that the Sotheby’s business could operate from the property;
(f)At the time of both the auction and settlement Singer and Smith had not yet obtained any right to operate a Sotheby’s real estate business, meaning that the parties committed themselves to the purchase of the property without knowing the outcome of the application to Realogy; and
(g)When the trust was created its only asset was the property and that remained the case at trial.
Whether the loans were repayable immediately
[14]Meaning, the ratio of income to outgoings on the property would produce a loss.
No party submitted that the loans were immediately repayable. But, the judge considered the possibility because, if that was the case, it had implications for the recoverability of the earliest advances due to the operation of the Limitation of Actions Act. The respondent relied upon that statute in the alternative to its primary position.
In dismissing the possibility that the loans were immediately repayable upon payment of each loan to the trust, the judge thought that it was commercially unrealistic for such a term to operate in the context of this transaction. He noted that, where the entirety of the purchase price had been borrowed, the respondent would almost certainly have to sell the property if the applicant could demand instant repayment, unless there was another lender willing to make funds available.[15] The trust was not in a position to repay any loans advanced if the loans were immediately repayable upon demand. It followed from the clear uncommercial practicalities of the proposed term that it could not be inferred as the repayment term.
Whether the loans were repayable upon demand in February 2020
[15]Reasons, [53].
The judge extended this principle to the applicant’s submission that the loans were repayable upon giving notice to the trust for repayment — as it happened, by notice given in February 2020. His Honour stated that this submission was, in principle, no different from the loans being repayable on demand.[16] That is, had the loans been repayable upon the notice given in February 2020, they would equally have been repayable upon notice given on any earlier date reaching back to the dates the loans were first made. Where the borrower owned a single asset and had no financial capacity to service its bank loan and other financial obligations without loans from the applicant and Smith Singer, the judge considered that a major problem would arise for the borrower if a lender could seek repayment simply upon the giving of notice.
[16]Ibid [58].
The judge thought that the selection of the corporate and trust structure for purchase — with units in the trust being held by the participants’ superannuation funds — was designed to maximise the opportunity for profit by capital gain. Consistently with that design, Herman-Moore, Smith and Singer had held discussions at the time of purchase which contemplated their ongoing responsibilities for meeting projected income shortfalls into the future.[17] To infer that the parties intended the loans to be repayable upon demand ‘ignore[d] the special connection between the loans and the property’.[18]
Whether the loans were repayable when the Sotheby’s business ceased using the property
[17]Ibid [61]–[62].
[18]Ibid [58].
The applicant’s submission that the loans became repayable when the Sotheby’s business ceased leasing part of the property in 2019 was also rejected. In doing so, the judge specifically rejected evidence given by Herman-Moore that the only reason for buying the property was to accommodate the Sotheby’s business.[19] The judge rejected the applicant’s submission for the following reasons:[20]
[19]Ibid [65].
[20]Ibid [66]–[71].
(a)Smith, Singer and Herman-Moore purchased and settled on the property before knowing the outcome of negotiations with Realogy;
(b)Herman-Moore acknowledged at trial that, at the time of the auction, not only did he not know if the Sotheby’s business would eventuate, nor did he know any specifics concerning its ownership structure, estimated workforce size, or the size of office space it would require;
(c)There was no need to purchase a property to accommodate the Sotheby’s business — it would have been sufficient to simply lease a space from which to operate the business — and it was commercially ‘odd’ to commit to purchasing a building for $3.73 million to house a business without knowing the business would exist;
(d)Immediately prior to the auction, Herman-Moore disposed of a commercial property asset on Toorak Road which had, by Herman-Moore’s admission, yielded a good return. It would not have made commercial sense to dispose of this asset for one that was negatively geared unless Herman-Moore hoped to make a substantial capital gain on the property by way of a longer term investment;
(e)Herman-Moore’s behaviour after the sale of the Sotheby’s business in 2019 was inconsistent with having acquired the property solely for the purpose of operating that business. Specifically,
•a month after selling the Sotheby’s business, Herman-Moore, together with Smith and Singer, entered into a further three-year loan facility with a bank, with each of the men providing a personal guarantee;
•in none of the communications in early 2020 did Herman-Moore or the applicant’s solicitors suggest that the property should be sold despite the Sotheby’s business having ceased using the property in 2019; and
•when seeking the original purchase loan, Herman-Moore had presented to the bank manager conceptual sketches for the commercial re-development of the property without any provision for accommodating the Sotheby’s business: and the judge said he did not find Herman-Moore’s explanation for his sketches to be ‘persuasive or credible’; and
(f)Herman-Moore raised the question of selling the property only twice during the lengthy process of selling the Sotheby’s business and, when he did, Singer responded that the property and the conduct of the business were not tied together, a proposition which (at the time) Herman-Moore did not dispute.
Whether the loans are repayable upon the first to occur of the termination of the trust or the sale of the property
The judge held that, of those terms stipulated by the parties for the court to choose between, the best ‘option’ to be inferred from the circumstances and the interactions between the parties was that the loans were repayable upon the earlier of the termination of the trust or the sale of the property.[21]
[21]Ibid [86].
The judge considered that the actions of the parties between the first and second loan payments were supportive of this term. The respondent and the trust had been established after the auction and before settlement of the property. The incorporation of the respondent and the establishment of the trust at this time indicated that the parties intended the investment to be governed by the company’s constitution and the trust deed. From an analysis of the provisions of the constitution and the trust deed, the judge concluded that ‘the directors of [the respondent] make all the decisions about the operation of the [trust] and its investments’. By implication, the agreed governance structure and the directors’ power over the trust’s sole asset supported the view that the destiny of the property would remain in the hands of the directors and not be controlled indirectly by the withdrawal of funds by one of the participants.[22]
[22]Ibid [80]–[82].
Further, because the parties had to hold the property long term to see any positive return on investment, a term linking repayment of the loans to the sale of the property or termination of the trust made the most commercial sense.[23] The judge dismissed the applicant’s submission that this term would effectively allow the trust to hold the property until the trust’s vesting date in 2093. In rejecting that assertion, the judge stated that given each of the three men were advancing in age and had purchased the property through superannuation vehicles, it was ‘virtually inconceivable’ the property would not be sold until the vesting date.[24]
[23]Ibid [86].
[24]Ibid [84]–[85].
Principles for inferring or implying terms
Before coming to the specific proposed grounds of appeal, it is necessary to say something about the principles for determining the terms of an agreement when the parties have not expressed them.
In Hawkins v Clayton,[25] Deane J explained the process and test for determining the terms of a contract made orally, partly orally, partly orally and partly by conduct, or entirely by conduct: that is to say, an informal contract where the parties had not sought to lay down all or even any of its terms either in writing or by some spoken agreement.[26] His Honour described two possible stages which often overlap and, commonly, do not need to be distinguished. The first is to infer, objectively, the terms that the parties actually intended to incorporate in their agreement; the second is to imply terms into the contract as a matter of presumed or imputed intention. The second step would usually concern matters which, at the time, the parties did not direct their minds to and, so, said nothing between them on which any actual intention could be inferred.
[25](1988) 164 CLR 539; [1988] HCA 15 (‘Hawkins’).
[26]Hawkins (1988) 164 CLR 529, 570–571. See also, Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190, [176]–[180]; Uren v Uren (2018) 359 ALR 518, [61]–[63] (Santamaria, Kyrou, Ashley JJA); [2018] VSCA 141 (‘Uren’).
The dividing line between the steps of inference and implication is not necessarily a clean one. The present case provides a good illustration of how the two steps might overlap. It is apparent that the parties had discussions about sharing the cost of making up the shortfall on the deposit, settlement figure and ongoing costs of maintaining the property. From those discussions it may be inferred, objectively, that the parties actually intended that their agreement (ultimately made with the respondent as owner of the property) include a term that they should each contribute 50 per cent of whatever amounts were required to meet the respondent’s obligations. Further, because the parties discussed some written projections prepared by Singer of the amounts that each participant would be expected to contribute over a period of years, it might be possible to infer that the agreement contained a term that the parties would continue to make contributions for some identified number of years or some other measure of duration.
But, the parties did not discuss at all whether the amounts so contributed would be advanced as equity or as loans or, if advanced as loans, when those loans might be repaid. Accordingly, the formulation of any terms of their agreement relating to those aspects may, arguably, be a matter of presumed or imputed intention, only to be ascertained by a process of implication. Alternatively, assuming the contributions to be loans, from the same discussions between the parties from which it might be inferred they agreed about the period over which they would contribute to the property, it might be possible to further infer a term concerning repayment of loans.
The process of inferring a term is informed by the parties’ communications, course of dealing and relationship to one another.[27] As Deane J explained in Hawkins — subsequently approved by the High Court in Byrne v Australian Airlines Ltd[28] — the process of implication in relation to informal contracts does not require the application of the same cumulative criteria applicable to more formal contracts as laid down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.[29] Instead, the test for implying terms in contracts where the parties have not attempted to spell out the full terms of their agreement is to do so by reference to the imputed intention of the parties
if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case.[30]
[27]Uren (2018) 359 ALR 518 [62]; Re Brookers (1986) 41 SASR 380, 382.
[28](1995) 185 CLR 410, 422 (Brennan CJ, Dawson and Toohey JJ); [1995] HCA 24.
[29](1977) 180 CLR 266, 283.
[30]Hawkins (1988) 164 CLR 529, 573.
With that introduction, we propose to first address the second proposed ground of appeal.
Ground 2: Did the judge err not to find that the debt was repayable after notice was given in February 2020?
Because an issue emerged at the hearing of the application for leave to appeal as to precisely what the applicant’s argument was concerning when the loans were due for repayment, it is helpful to trace the applicant’s argument from its pleadings through to its oral argument on this application.
The parties agreed that the 12 payments should be characterised as loans made to the respondent. After the respondent pleaded, by its amended defence, that the loans were repayable upon the termination of the trust or the sale of the property, the applicant contended, in its reply, that the agreement by which the loans were made contained a term that:
liability to repay amounts advanced […] would not arise until (a) the property was no longer required for the conduct of the Sotheby’s business; and/or (b) notice was given for repayment.
Particulars given of that allegation included that the term was to be implied or inferred from discussions between the parties to the effect that they would commence and operate a Sotheby’s real estate agency business at the property. A further particular was that:
The property would not have been purchased but for the intention to commence the Sotheby’s business from the property.
Consistently with the alleged term, the applicant also pleaded that liability to repay the debt arose:
(a)when the property ceased to be used to conduct the Sotheby’s business in 2019; and/or
(b)upon the demand for repayment in February 2020.
It is apparent that, by the use of ‘and/or’ in the formulation of its contended term of the agreement, the applicant preserved the possibility that liability for repayment of the loans arose either when both conditions were satisfied, or only one of them was satisfied. In other words, the alternatives were that the loans were repayable upon the Sotheby’s business ceasing to use the property and a demand was made for repayment, or simply upon a demand being made for repayment. The judge dealt with each of those scenarios as the second and third propositions described above in [20].
Proposed ground 2 of the appeal (above [7]) contends that the judge erred by finding that the loans were not repayable upon the giving of a notice, and the judge should have found that the loans became repayable upon the demand for repayment made in February 2020. Confined to that language, there is a degree of ambiguity latent in the expression of alleged error. The contention that the judge should have found the loans were repayable upon the demand made in February 2020 may imply that the loans were repayable upon a demand made at any time, regardless of any use of the property by the Sotheby’s business. On the other hand, the contention might mean that the demand made in February 2020 gave rise to a liability to repay only because, by that date, the Sotheby’s business had already ceased to use the property.
In light of that ambiguity, the particulars given for proposed ground 2 assume much significance. They included the following:
1.The trial judge should have found that the property was purchased for purposes that included the provision of premises for the conduct of an estate agency business under the name Sotheby’s International Realty.
2.The trial judge should have found that the loans became repayable after the property ceased being used for the Sotheby’s International Realty business and a demand for payment was made.
3.[…]
Paragraphs 1 and 2 of those particulars resolve the ambiguity latent in the formulated ground by clarifying that the demand for payment in February 2020 was only claimed to be effective because the condition that the Sotheby’s business ceased using the property had by then been satisfied. That clarification was made even plainer in the applicant’s written case which included submissions that:
(a)the term the applicant proposed was ‘consistent with the parties’ common intention to use part of the property for the Sotheby’s business and to borrow as much as possible against the value of the property’;
(b)the applicant ‘did not say notice could be given immediately; the applicant always maintained there was a connection between the Sotheby’s business and time for repayment’; and
(c)the ‘critical error was to treat the decision to purchase the property as if it were separate from the Sotheby’s venture. In fact, the Sotheby’s proposal was the central motivation for the parties’ conduct’.
In its written case, the applicant explained the difference between a loan repayable immediately on demand and the term of a loan agreement requiring a demand before the loan was repayable: the practical difference being that the limitation period commenced immediately in the first instance but was deferred until the demand in the second. The term for which the applicant contended was an example of the second kind. After giving the demand in February 2020 once Sotheby’s ceased using the property, the applicant accepted that the law required that the respondent be afforded a reasonable opportunity to make the payment and that what was reasonable depended upon the situation at the time of the demand.[31]
[31]Citing Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491, 502–3; [1984] HCA 10 (‘Bunbury Foods’).
Pausing here, we note that neither in pleadings, or at trial, or in its proposed grounds of appeal or written case, did the applicant ever suggest that the condition precedent to liability to repay the loans was — rather than the Sotheby’s business ceasing to use the property — that the respondent had the financial capacity to repay the loans. However, that was the argument put by the applicant at the hearing of the application for leave to appeal.
In oral argument, the applicant argued that although neither lender could make a demand for repayment at any time, the date on which a demand for repayment could be made was fixed by reference to the capacity of the respondent to meet the debt and make the payment without selling the property. The applicant expressly abandoned reliance upon a condition for repayment that the Sotheby’s business cease using the property.
In contending that the notice for repayment given in February 2020 was ‘a good demand’, the applicant noted that, by that date, the Sotheby’s business had ceased to use the property such that it was ‘a spent issue’. Whether or not the applicant made ‘a good demand’ was to be determined by the facts and circumstances existing at the date of the notice. One of the factors to take into account was the capacity of the respondent to borrow money to repay the loans, noting that by 2020 the value of the property had significantly increased thereby enlarging the respondent’s equity with which it could finance borrowings to meet the loan demanded.
Yet, even so, the applicant also appeared to accept that the fact that the Sotheby’s business had ceased occupying the property by February 2020 was relevant to whether the demand was ‘good’ or valid although, it submitted, the effect of the sale of the business in 2019 was to ‘remove’ its occupation of the property as a factor. After further questioning, the applicant refined its argument by accepting that notice could not have been given before Sotheby’s cessation of business but, once the business did cease and the notice was given, the applicant submitted it was a ‘good notice’.
Still further variations of the applicant’s position were given in reply. One was that the mere fact that the Sotheby’s business ceased to use the property did not, of itself, make the loans repayable, but a notice for repayment ‘could be given after that date which would be a good notice’. Another was that the relevant term was that the loan was repayable on demand, with the qualification that if there be a reason to say that the demand was premature or defective — for example, because the respondent lacked the financial capacity to pay — the onus would rest on the respondent to establish the basis of that deficiency.
When pressed to identify the evidence from which it could be inferred that the parties had agreed the term for repayment (whether before or after the Sotheby’s business exited the property) for which the applicant contended, the applicant pointed to the fact that:
(a)The money advanced was a loan and therefore had to be repaid at some point;
(b)The loans were interest free, made by superannuation funds which may need the money;
(c)The parties agreed (in the litigation) that the loans were not payable instantly; but added,
(d)‘…we do say that the Sotheby’s business is a factor to take into account’.
Despite some initial confusion on the point, the applicant firmly adhered to its reliance upon the particulars in support of proposed ground 2 (see above [44]).
We propose to deal with ground 2 in two stages: first, to address what we consider to be the ground as articulated and argued in the applicant’s written material and, secondly, to the extent necessary, to address the ground as argued by the applicant orally.
The applicant’s written argument
Although the terms of the ground tend to suggest that the term for which the applicant contends is solely related to the making of a demand for payment, as already noted the particulars to the ground also suggest that the cessation of the use by the Sotheby’s business of the property was a condition for making any demand for payment.
From its written case, the applicant’s argument may be summarised as follows:
(a)a notice could not be given immediately — there was a ‘connection’ between the Sotheby’s business and the time for repayment;
(b)as Bunbury Foods demonstrates, once a demand for payment is made it is necessary to enquire whether the demand is reasonable;
(c)when the applicant gave notice to the respondent in February 2020, the Sotheby’s business had ceased to occupy the property, the value of the land had increased and there was no reason why the loan should not have been repaid — that is, viewed at that time, the demand was a reasonable one;
(d)the judge was wrong not to find that the parties’ intention to enter the Sotheby’s business was the central motivation for purchasing the business;
(e)any suggestion that, prior to the purchase, there was uncertainty whether the Sotheby’s licence would be obtained was unsupported by evidence — the parties were ‘confident’ in February 2013 of finalising arrangements for the licence;
(f)the examples given by the judge of matters supposedly inconsistent with the reason for buying the property being to house the Sotheby’s business were flawed because, contrary to the judge’s assumptions —
•the applicant did not contend that the business was the ‘only’ reason for buying the property; simply that it was Herman-Moore’s reason for being involved in the purchase of the property and the property ‘would not have been purchased but for the intention to conduct the Sotheby’s business’;
•the applicant did not contend it was a term that the property had to be sold when Sotheby’s vacated;
•renewal of the bank loan in October 2019 is not inconsistent with the applicant’s case that its loans became repayable after Sotheby’s ceased using the property in December 2019;
•seeking payment of amounts lent has no connection with the sale of the property;
and, further —
•the evidence of Herman-Moore producing plans during a meeting with the bank manager should be treated with caution because the accountant who gave evidence about it was a partisan witness who had a long association with Smith and Singer, and it was not put to Herman-Moore that he had produced re-development plans; and
•the fact that sale of the property was raised just twice had no bearing on the repayment of loans.
Analysis of the written argument
The first thing to address is the applicant’s apparent reluctance to choose clearly between a term of repayment that turned simply on the making of a demand, on the one hand, and one that turned on the cessation of the Sotheby’s business plus a demand, on the other. The applicant disavowed any argument that the loans were repayable immediately — which must mean they were not loans repayable simply upon a demand or request — and insisted that there was a ‘connection’ between the Sotheby’s business and the time for repayment.
Whatever was the term for repayment — inferred or implied — it had to be discernible by one of those processes from the time the earliest loans were made in late 2012 and early 2013. That must follow because the parties accept that all loans were subject to the same repayment term, and that repayment term was to be objectively inferred or implied from the communications between the parties and the mutually known contextual facts around the time of the first loans.
Presumably, the term for repayment, discernible objectively in late 2012 or early 2013 and which expressed the ‘connection’ between the Sotheby’s business and the repayment of the loan, was that the loan was repayable when the Sotheby’s business ceased to use the property. No other term expressing the ‘connection’ was suggested. It was that term that the parties asked the judge to consider, which he did.
In its written case, the applicant referred to the need to consider whether the demand, once made, was a reasonable one. However, on the applicant’s argument, the time for service of the demand still appeared to be premised on the satisfaction of the condition that the Sotheby’s business ceased using the property. The existence and satisfaction of that condition explains why the applicant was at pains to emphasise the ‘connection’ between the Sotheby’s business and the time for repayment. In turn, the establishment of that ‘connection’ was to be derived from the alleged ‘central motivation’ for the purchase of the property being to house the intended Sotheby’s business, and the alleged confidence the parties had in February 2013 that the licence to operate the business would be obtained.
These arguments highlight the importance of the factual findings made by the judge concerning the so-called ‘connection’ between the purchase of the property and the intention of the investor parties to enter a Sotheby’s real estate business. They are set out above and we need not repeat them.[32] Having made a number of subordinate factual findings, it is clear that the judge rejected any conclusion that entry into the two ventures were so tied together that the repayment of loans made in connection with one (the property purchase) was dependent on the operation of the other (the Sotheby’s business).
[32]Above [28].
Whenever important findings of fact are likely to have been affected by impressions about the credibility and reliability of witnesses formed by the trial judge from having seen and heard them give evidence — as was the case here —the principles of appellate restraint make it difficult for an appellant to persuade a reviewing court to come to a different finding.[33] But here we need not resort to that principle. On the oral hearing, contrary to its position in the written argument, the applicant made clear that it did not challenge the factual findings of the trial judge. The applicant sought only to persuade us that a different inference should be drawn from the (now undisputed) facts which the judge found. From undisputed facts, an appellate court is in as good a position as the trial judge to decide the proper inference to be drawn.[34]
[33]Lee v Lee [2019] HCA 28, [55] (Bell, Gageler, Nettle and Edelman JJ).
[34]Ibid [55].
For this reason, our task is made simple. We are not persuaded, however, that the judge made any error drawing the inference that he drew on the facts he found. From those facts, we would draw the same inference, namely, that there was no term agreed between the parties (whether to be found by inference or implication) that the loans were repayable upon the Sotheby’s business ceasing to use the property (with or without a demand).[35]
Analysis of the oral argument
[35]In oral argument, the applicant abandoned any contention that the loans were repayable upon cessation of use alone, so that on its case a demand was also necessary.
We then come to the second stage of our consideration of ground 2: the applicant’s oral argument.
We have already rehearsed the applicant’s oral argument and will not repeat it in any detail. In substance, in oral argument the applicant advanced a case that the loans were repayable when the respondent was in a financial position to repay them without selling the property.
The respondent objected to the applicant raising this new case on appeal. It argued that it would suffer prejudice because, in the absence of notice of the argument at trial, it had no opportunity to call evidence or make submissions to address the existence of such a term. Even though some evidence was given (for other reasons) in the cross-examination of Singer about the probable value of the property around the time of trial, no evidence was given of the specific expectations on the part of the lender-parties at the time the loans were made about the likely rate of capital growth, or growth in income, which might inferentially support a repayment term related to financial capacity.
We accept, for those reasons, that it would be unfair to allow the applicant to raise the new argument on appeal. In any event, the new argument is devoid of merit.
In oral argument, the applicant refrained from submitting that the repayment term was entirely untethered from the use of the property by the Sotheby business. We have traced the evolution of the ‘financial capacity’ term and its various iterations on the hearing of the appeal. In all of its manifestations, the term required, or at least presupposed, that the Sotheby business had ceased using the property.
As the applicant would have it, the applicant could ask the court to assume that the Sotheby’s business had already ceased using the property, and then focus solely on the question whether the notice for repayment, thereafter made, was a ‘good notice’. By this means, the applicant seemed to think that it was superfluous to consider whether the judge was correct or not to make the findings, adverse to the applicant, about the motive for buying the property or there being any connection between the Sotheby’s business and the property acquisition. According to the applicant, because the occupation of the property by the Sotheby’s business was a ‘spent issue’ by February 2020, it was only necessary to determine whether the notice then given was given when it was reasonable to require the respondent to repay.
On the applicant’s argument, it was not necessary to look backwards to the genesis of the relevant repayment term in 2012 or 2013. One does not ask if an occurrence has triggered a right to make a demand; rather, once a demand is made one merely asks whether, in the circumstances then existing, it was a ‘good demand’. Because, at that time, the Sotheby’s business was no longer in occupation of the premises and the respondent had sufficient capacity to pay the debt without selling the property, the demand was therefore good — or, at least, the respondent had not established that the demand was not good.
In this fashion, the applicant sought to relegate the judge’s adverse findings of fact about the Sotheby’s business connection to an irrelevancy.
In our view, the applicant’s argument broke down at several points, including at the point of formulating precisely what its position was. After that, the next problem was that the applicant could not point to any evidence of discussions or circumstances at the time the loans were made from which it could be inferred that the parties agreed the loans would be repaid only if the respondent could afford to repay them without selling the building.
The applicant’s argument also confused or conflated two distinctly different concepts: one, the event giving rise to the lender’s entitlement to deliver a notice of demand and, the other, the borrower’s right to a reasonable time in which to pay the debt once a valid demand for repayment was made. In Bunbury Foods — the case relied upon by the applicant — the question before the High Court was whether a bank was entitled to appoint a receiver to the lender after a demand for repayment was made and no repayment had been received. The Court considered whether the bank’s demand was ‘valid’ as a matter of form given that the notice did not set out on its face the amount of the debt to be repaid. Although it had once been thought that a valid notice required the amount to be stated, the Court observed that it was
now a well-established principle of law that a debtor required to pay a debt payable on demand must be allowed a reasonable time to meet the demand.[36]
[36]Bunbury Foods (1984) 153 CLR 491, 502–3.
That principle ‘significantly altered’ the former position. Reasonable time to pay would permit the borrower to ascertain what it must pay and take the necessary steps to do so. Allowing that time was a better way of protecting the parties’ interests than requiring the specification of the amount of the debt to make the demand valid.[37] But the case had nothing to do with determining the conditions that gave rise to the right to deliver a demand. The allowance of a reasonable time to meet a demand assumed that the time for making the demand had arisen. It is a misconception of Bunbury Foods to construe it as laying down a principle that the court examines all the circumstances at the time a demand for repayment is made — including the financial capacity of the borrower to repay the loan — to decide if the lender was entitled to serve the demand in the first place.
[37]Ibid 503–4.
Finally, assuming that the repayment obligation was not conditional upon Sotheby’s business ceasing to use the property, it would follow that the applicant could have served a demand for repayment at any time after making the loan — a right which it expressly disavowed. If, therefore, the applicant could only have served a demand after the Sotheby’s business ceased using the property, that requirement must have arisen because it was a term that the loan was repayable in that circumstance. If so, the applicant fails for the reasons we have explained in our analysis of its written argument.
Leave to appeal ground 2 must be refused.
Ground 1: Did the judge err in finding that the debt was repayable on the earlier of the termination of the trust or the sale of the property?
From the options presented, by a process of elimination the judge adopted the fourth of the alternatives as the due date for repayment: namely, upon the termination of the trust or the sale of the property, whichever occurs first.
The first argument made by the applicant was that ‘termination of the trust’ was not pleaded by the respondent as an event for repayment. Strictly speaking, that is correct. In its pleading filed nine months before trial, the respondent had alleged that liability to repay the applicant arose on the termination of the trust or the sale of the property, whichever occurred first. However, at the end of closing submissions on 11 May 2021, the judge gave leave to the respondent to amend its pleading by deleting reference to the termination of the trust and substituting in its place the sale by the applicant of its units in the trust.
When the judge came to decide the matter, he declined to consider the substituted term because it had not been opened, and he upheld the term as originally pleaded notwithstanding that it had been struck out. Of course, as is apparent from the judge’s reasons, the parties had framed one issue for decision to be whether the loan repayment was triggered by the termination of the trust. In those circumstances, there is hardly any basis for the applicant to claim a lack of notice or some prejudice because it may have conducted the trial differently had the amendment to the pleading not been made.
The applicant’s first point, therefore, is a pure pleading point. If that were the only basis for overturning the judge’s finding, we would not have felt constrained to do so. But, as we will explain, we would uphold the applicant’s arguments about the judge’s conclusion in respect of the termination of the trust on a more substantive basis.
Repayable on the sale of the property?
Before addressing the event of termination of the trust, we will first consider the judge’s conclusion that the loans are repayable on the sale of the property. At the hearing of the appeal the applicant conceded that if it failed on proposed ground 2 (as it has), succeeded on its argument that the termination of the trust was not an event which triggered the repayment obligation, but failed on its argument that the sale of property was not such an event, then the appeal must fail. This must be so because, with those outcomes, the judge would still have been justified in dismissing the applicant’s claim.
The judge took into account a number of contextual facts in arriving at his conclusion that it made commercial sense that the term of the loan be tied to the sale of the property. Those contextual factors were that:
•the loans were made to fund the purchase and holding of the property;
•the property was the sole asset of the respondent-borrower;
•the respondent had borrowed from a bank the maximum amount it could borrow to acquire the property;
•the financial arrangements meant that the property was negatively geared;
•each of Herman-Moore, Singer and Smith had personally guaranteed the repayment of the bank loan;
•in order to make a profit from the property, the respondent would have to hold it for some time;
•the loaned monies were contributed by the superannuation funds of the individuals; and
•each of the individuals were at or approaching retirement age.
In summary, the judge found that there was a ‘special connection between the loans and the property’.[38]
[38]Reasons, [58]
In oral argument, the respondent sought to support the judge’s conclusion about this special connection by analysing the interest which Herman-Moore and Singer first held after they each contributed half of the deposit money on 7 September 2012 as the named purchasers of the property. That interest, the respondent submitted, was an equity interest by way of purchaser’s lien. When the respondent was incorporated and nominated as purchaser of the property, that equitable interest was exchanged for a creditor-interest held by each of the applicant and Smith Singer in the respondent. Although accepting that all contributions made by those entities were to be treated as loans, the respondent submitted that the genesis of that interest supported an inference that the lending parties did not expect the repayment of their loans so long as the respondent owned the property. In other words, the very first contribution, having the nature of equity, flavoured the term which, inferentially, the parties must have agreed as governing the repayment of all loans.
There is some force in this submission, but it is probably more technical than is necessary to decide the issue.
The applicant argued that it was unrealistic to infer that it had agreed to a repayment term dependent upon the sale of the property when the control of the respondent, and thus the disposition of its assets, effectively lay in the hands of Smith and Singer. Each of Herman-Moore, Smith and Singer were directors of the respondent so that, if Smith and Singer voted as a bloc, Herman-Moore’s interests would always be subordinate to their interests.
First, however, it must be recalled that the time for inferring the relevant term for repayment is when the initial loans were made. At that time the individuals remained friends and it should not be assumed that they contemplated the disharmony that eventuated. Secondly, while there is a degree of likelihood that directors who are married may vote in unison in the management of a company, that likelihood is not so obvious that it should be taken as a given for the purpose of drawing an inference based on the predicted decision-making process of the company. In any event, if one group of shareholders/unitholders exercises power or makes decisions unfairly towards another, there are established remedies under the Corporations Act 2001 (Cth) and Trustee Act1958 available to the aggrieved camp.
In short, we do not think that the possibility, viewed from 2012 or 2013, that Smith and Singer might make decisions about the sale of the property only to suit their own commercial interests, adversely to those of Herman-Moore, should play much role, if any, in the process of inferring what the lending parties agreed about the repayment of the loans.
In our view, the facts and circumstances found by the judge well justify the inference that the lending parties did not expect the return of their loans, and the respondent did not expect to have to repay the loans, for so long as the respondent owned the property. Herman-Moore, and Smith and Singer, as controllers of their respective lending entities, were friends. Together, they entered a long-term property investment through the unit holdings of their respective superannuation entities, expecting to make a profit by capital gain and/or income return. They made their loans in equal measure to facilitate the investment, without requiring any interest return. They each personally guaranteed the bank borrowings of the respondent, creating a substantial personal exposure should the respondent not have sufficient funds to meet expenses. There was a natural limit on the duration for which superannuation funds could hold an investment which, at law, was designed to make provision for the retirement of the individuals: so, the time for realisation of the respondent’s asset was not open-ended. As the judge remarked with some degree of understatement, it was ‘virtually inconceivable’ that the property would not be sold within the life of the trust, and we would say even much sooner.
We are not persuaded that the judge made any error in finding that the parties agreed that the loans were repayable upon the sale of the property.
Given the concession referred to at the outset of our discussion on this limb of the term, this conclusion is sufficient to dispose of the appeal. Nevertheless, we will briefly discuss the other limb of the term, namely that the loan was repayable on the termination of the trust.
Repayable on the termination of the trust?
The applicant argued that, if the event for repayment were the termination of the trust, it could mean that the amounts lent will remain unpaid until the trust vests, even if the applicant ceases to have any connection with the trust by redeeming or selling its units. The trust does not vest until 2093. We agree that evidence that the investment was intended to be held ‘long-term’ would not of itself lead to an inference that the parties agreed to defer payment of the loans until 2093. Each of the individuals will be long gone by then.
Moreover, upon the termination of the trust its assets are to be sold. Assuming, as we have found, an agreed event for repayment is the sale of the property, it is superfluous to also provide for the termination of the trust as an event of repayment.
In our view, a term that the loans would not be repayable until the termination of the trust in 2093 is uncommercial, unrealistic and unnecessary for business efficacy. To the extent that the applicant challenged the judge’s finding on this limb of the repayment term, we would allow the ground. In other words, we would allow ground one as to part only.
Conclusion
For the reasons given, we will not give leave to appeal on ground 2. We give leave to appeal on ground 1 but only upholding that ground as to part. Upholding ground 1 only as to part does not lead to the result that the judge’s order dismissing the applicant’s claim should be set aside.
The appeal must therefore be dismissed.
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