Gippsreal Ltd v Melbourne Linh Son Buddhist Society Inc

[2016] VSC 324

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT

S CI 2014 00069

GIPPSREAL LTD (ACN 005 443 292)	Plaintiff
v
MELBOURNE LINH SON BUDDHIST SOCIETY INC	Defendant

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JUDGE:	Daly AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	15 and 16 February 2016
DATE OF JUDGMENT:	20 July 2016
CASE MAY BE CITED AS:	Gippsreal Ltd v Melbourne Linh Son Buddhist Society Inc
MEDIUM NEUTRAL CITATION:	[2016] VSC 324

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DEEDS – Terms and conditions – Terms of deed of offer binding upon execution and delivery – 400 George Street (Qld) Pty Ltd v BG International Ltd [2012] 2 Qd R 302 and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 applied – No undue influence, unconscionable conduct or misleading and deceptive conduct found – National Consumer Credit Protection Act 2009, Schedule 1 not applicable.

AGENCY – Principal and agent – Broker agent of borrower – No unconscionable conduct, duress or breach of credit related consumer protection laws – Representations allegedly made by broker to borrower not binding on lender.

CONTRACT – Letter of demand – Not unreasonable – Pursuant to general conditions of the deed of offer.

CONTRACT – Interpretation – Agreed establishment fee – Construed objectively – Subjective intentions of parties not relevant – Surrounding circumstances assist in interpretation of ambiguous contract or term – Contract construed as a whole – Avoid capricious or inconvenient results – No ambiguity – Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, and Bytan Pty Ltd and Ors v BB Australia Pty Ltd [2012] VSCA 233 applied, Royal Botanic Gardens v South Sydney CC (2002) 240 CLR 45 considered – Extrinsic evidence inadmissible – Deed entire agreement – Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 and McMahon v National Foods Milk Ltd (2009) 25 VR 251 applied – No basis to imply a term – Irrelevant if outcome harsh – Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 applied.

CONTRACT – Liquidated damages clause – Term of deed of offer ambiguous – Reasonableness of outcome relevant to the construction of an ambiguous clause – Metier3 Pty Ltd v Enwerd Pty Ltd [2014] VSC 80 considered.

CONTRACT – Penalties – Liquidated damages clause – Whether agreed sum exceeds genuine pre‑estimate of damage likely to be caused by breach – Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 applied – Whether sum stipulated extravagant and unconscionable in amount – Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (1915) AC 79 applied – Onus of proof on party seeking to establish liquidated damages clause a penalty – Consider whether genuine pre‑estimate of damage at time it was agreed – Robophone Facilities Ltd v Blank (1996) 3 All ER 128 applied – Subjective intentions not necessarily relevant to the question of whether pre-estimate is ‘genuine’ – What is ‘genuine’ is to be viewed in context of actual outcome of the operation of its terms – Out of all proportion – O’Dea v Austates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 applied – Liquidated damages clause unenforceable penalty.

CONTRACT – Quantum meruit – Restitution – Work undertaken did not confer benefit on other party –Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 – Inadequate evidence of value of work done.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr S K Morris	Oakleys Legal
For the Defendant	Mr R Andrew	Starnet Legal

HER HONOUR:

1. The plaintiff, Gippsreal Ltd (‘Gippsreal’) is a lender based in Leongatha, Victoria.  Formerly a solicitor’s mortgage lending practice, it is a registered managed investment scheme under the Corporations Act 2001 (Cth), and sources the funds used for its lending activities from small investors in the South and West Gippsland region.

1. The Melbourne Linh Son Buddhist Society Inc (‘Society’) is an incorporated association bringing together members of Melbourne’s Vietnamese origin Buddhist community.  Its president and spiritual leader is Mr Duc Thang Nguyen, who adopted the name Thich Tinh Dao upon becoming a Buddhist monk in Vietnam in the 1970s.  He arrived in Australia in 1992, and is known in the community as Master Dao.  He, and the Society, are entirely supported by donations from the Society’s members, which number more than two thousand.  Since the Society’s establishment in 1994, and the purchase of a property in Reservoir for the establishment of a temple, monastery, and meditation centre, the Society has accumulated a substantial property portfolio.  The Society’s balance sheet shows that, as at 30 June 2014, the value of the Society’s land holdings were in the order of $14.5 million, and the Society owns a number of substantial parcels of land on the fringes of metropolitan Melbourne.  The balance sheet also shows the Society has substantial liabilities, with secured loans of approximately $8 million as at 30 June 2014 (up from $1.8 million as at 30 June 2013).  Indeed, the balance sheet shows that the Society substantially restructured its finances in the 2013-2014 financial year, which overlapped with the period in which the Society had dealings with Gippsreal. 

1. The dispute between the parties arises out of an alleged agreement between Gippsreal and the Society to the effect that Gippsreal would advance the sum of $1,775,000 to the Society, to be secured against a property owned by the Society in Plumpton, Victoria.  The loan failed to proceed, and Gippsreal claims, among other things, various costs and expenses associated with the proposed transaction, liquidated damages, interest, and the costs of this proceeding.  The Society denies any liability to Gippsreal arising out of the aborted loan transaction. 

1. The dealings between Gippsreal and the Society arose in the following context.  According to an affidavit sworn by Master Dao on 18 December 2015, the Society, because of its structure and sources of income, found it difficult to arrange long term finance through the usual channels.  In December 2012, the Society appointed a broker, Mr Stephen Gay of Riverside Capital Group, to raise a loan in the sum of $2.6 million.  On 20 February 2013, Mr Gay sent Master Dao an offer for finance from Gippsreal, which offered to advance $2.6 million for three years, secured by properties at Melton and Footscray, and with an establishment fee of 1.5 per cent of the loan amount.  At Gippsreal’s request, the Society paid Gippsreal the sum of $7,500, which Master Dao described as an ‘acceptance fee’.  The Society executed an expression of interest on 22 February 2013, but this loan did not proceed.

1. The Society appointed another finance broker, Mr Scott Roberts of IBN Direct Pty Ltd (‘IBN Direct’) to raise $2.4 million, to be secured over a property at Rockbank.  Master Dao executed an ‘Exclusive Mandate to Act and Fee Agreement’ (‘mandate’) with IBN Direct on 22 February 2013.  Gippsreal sent an expression of interest to Mr Roberts on 22 March 2013, but Gippsreal subsequently declined this application. 

1. Mr John Adicho of Eight Point Capital Pty Ltd also made enquiries with Gippsreal on behalf of the Society.  Indeed, from about February 2013, Gippsreal had dealings with both Mr Adicho and Mr Roberts concerning the Society’s various applications for finance.  On 16 May 2013, Gippsreal, through Mr Roberts, made an offer for finance of $2.25 million, with an estimated establishment fee of 1.5 per cent of the loan advance, to be secured over a property at 216-240 Tarletons Road, Plumpton (‘property’).  The Society paid a non‑refundable commitment fee of $10,000 on 23 May 2013. 

1. It appears from the correspondence that Gippsreal experienced some frustration in its dealings with the Society, in particular Mr Adicho’s frequent attempts to renegotiate the terms of any offer of finance, and Mr Adicho’s efforts over the course of June and July 2013 to recover the $10,000 fee from Gippsreal.  This was rejected by Gippsreal in two letters, the first addressed to Master Dao, and the second addressed to Mr Adicho and copied to Master Dao, on 11 July 2013 and 19 July 2013.  On a number of occasions, Gippsreal threatened to ‘close the file’.  Mr Roberts seemed to share, or at least empathise with Gippsreal’s frustrations.  Nevertheless, on 26 July 2013, Gippsreal made a further offer of finance to the Society (’26 July letter’).  Gippsreal offered to lend $1,775,000, for a term of one year, and an establishment fee of 1.5 per cent of the loan advance, to be secured over the property.

1. The 26 July letter was sent to both Mr Roberts and Mr Adicho, and the covering letter stated as follows:

Dear John,

Gippsreal have reviewed the loan application you have submitted on behalf of Melbourne Linh Son Buddhist Society Inc and we are pleased to advise that we will consider providing your client with a first mortgage loan advance totalling $1,775,000.00. 

In order that we can progress negotiations we outline below the terms on which Gippsreal would consider providing the loan advance.

Should these terms be acceptable to your client, please provide us with your full funding submissions and we shall then finalise our review of the application.

If the application obtains approval we will issue a Deed of Offer of Finance.

Please review the below terms closely and advise me if you would like Gippsreal to progress the application on this basis:-  …

1. The terms of the 26 July letter included the following statement in block letters:

THIS IS AN EXPRESSION OF INTEREST ONLY.  ANY OFFER OF FINANCE WILL BE MADE ON GIPPSREAL’S STANDARD OFFER TERMS.  AN OFFER OF FINANCE MAY NOT INCLUDE ALL OF THE ABOVE ITEMS OR MAY INCLUDE ADDITIONAL ITEMS.  THERE IS NO CONTRACTUAL RELATIONSHIP BETWEEN THE PARTIES UNTIL SUCH TIME AS GIPPSREAL ISSUES A DEED OF OFFER OF FINANCE AND IT IS ACCEPTED BY THE APPLICANT(S).

1. On 15 August 2013, Mr Adicho emailed what he described as a ‘letter of authority’ to Gippsreal, whereby Master Dao stated as follows:

To Funder:

I Master Dao the head of the Melbourne Linh Son Buddhist Congregation Inc. situated at 33 to 35 Radford Road Reservoir, vic 3073, hereby apply for funding in a way of a first Mortgage on the property situated at 216 to 240 Tarletons Road Plumptom. 

I hereby request Gippsreal to process this request and obtain funding being 50% of the valuation at your earliest convenience.

1. On 26 August 2013, Mr Roberts sent an email to Gippsreal in the following terms:

Just to confirm in regards to our brokerage we have agreed to an amount of 1.8% + GST of the total approved loan amount.  Of this we will pay 50% of the funds received (being 0.940 plus GST) to John Adicho.

1. On or about 23 August 2013, Gippsreal sent a formal offer of finance (‘Deed of Offer’). Schedule 1 to the Deed of Offer set out, among other things, the following terms:

Proposed Mortgage Sum: $1.775,000.00 (or a maximum of 50% Loan to Valuation Ratio, whichever is the lesser)

Initial Loan term: 1 year

Interest Rate: Higher Rate 19.25%.  Lower Rate 9.25%.

The interest rate is subject to there being no rise in Gippsreal’s standard rates prior to the date of settlement. 

The interest rate is variable.

Loan Type: Investment Loan

Estimate of Costs and Disbursements:

Gippsreal Limited – establishment fee	$26,625.00
Mortgage Preparation Fee	$5,000.00
Titles Office Fees	As required
Stamp Duty	As required
Rate and Planning Certificates	As required
6 months interest in advance	$82,093.75
Valuation fee (as per valuer’s actual account, estimated)	$5,000.00
Inspection fees	$500.00

All charges for costs, disbursements and the like are payable by the Borrower by deduction from the Principal Sum at settlement. 

Should your finance application have been introduced to Gippsreal by a third party (‘the Broker’) you acknowledge that the Broker was at all times acting as your agent and is in no way associated with, acting for, or authorised to act for Gippsreal Ltd.  Any fee agreed to between you and the Broker may be included in the above estimates. 

Monthly default costs	$1,275.00 per month (or part thereof)
Liquidated damages	*$31,625.00 on account of administration or professional costs incurred by Gippsreal in investigating the loan prior to completion and procuring investors funds;
*$41,046.88 being three month’s interest at the lower rate: and
*all monies due to Gippsreal pursuant to clause 34 of Schedule 3 – General Conditions;
*any other costs and disbursements incurred by the mortgagee or its agents at the actual costs or if the actual cost cannot be reasonably quantified, then pursuant to any costs agreement between the mortgagee and its agents;
(the Liquidated Damages – see clause 32 of Schedule 3 – General Conditions)
Proposed Drawdown Date:	The Borrower must be in a position to effect settlement:
(i)    within 4 weeks of the date of Acceptance of the Deed; or
(ii)   if the loan is to assist in the purchase of property, on the date as initially advised to Gippsreal as the Settlement date for the purchase; or
(iii) on any other date as reasonably advised by Gippsreal (the draw down date).

1. The Deed of Offer itself contains the following relevant terms:

3        Borrower’s Requests, Acknowledgements and Covenants

The Borrower hereby requests, authorises, agrees and acknowledges:

3.1      that they have received a copy of the Offer;

3.2they have read the Offer (including the Schedules attached thereto) in full;

3.3      that they understand all the terms and conditions of the Offer;

3.4the representations and warranties made in the Offer (including in Schedule 3 – General Conditions) are true and correct in all respects (save where otherwise set out in writing to the Mortgagee) and are made with the intention that the Mortgagee will rely on them in making this Offer and the proposed mortgage);

3.5that they are under no special disability and there are no special circumstances or conditions such as illness, illiteracy, ignorance, financial inexperience, impaired faculties, lack of understanding of the English language and financial need, which seriously affects the ability of the borrower to make a judgement as to their own best interests and the Borrower has not disclosed in any way to the Mortgagee the existence of any condition or circumstance and the potential effect on the Borrower.

3.6they have been advised to, and have had the opportunity to, seek independent legal and financial advice prior to accepting this Offer, and have received no legal and/or financial advice from the Mortgagee its agents or servants;

3.7that they are mature, sophisticated and experienced commercial business operators/investors, who have previously borrowed on similar commercial terms;

3.8they have had the opportunity to compare the terms and conditions of this Offer with like products from similar financiers and are making an informed decision in executing this Offer;

3.9the proposed mortgage involves elements of risk to the Mortgagee by reason of:

(a)the loan being for business, commercial, investment or development purposes;

(b)the nature of the securities offered;

(c)the relatively high loan to value ratio;

(d)the Borrower’s financial position;

(e)the Borrower’s ability to evidence financial capacity to service the proposed mortgage;

and the terms and conditions of the proposed mortgage reflect those additional risk.

3.10the terms and conditions of this Offer and the proposed mortgage are reasonable and commercial in the circumstances;

3.11the effect and consequences of them executing this Offer;

3.12they request and authorise the mortgagee to begin assessing the Borrower’s loan application and to undertake all necessary searches and enquiries and to incur all necessary costs in so assessing the Borrowers’ loan application;

3.13that induced by and in reliance upon the Borrower’s finance application and execution of this Offer the Mortgagee will:

(a)instruct its Solicitors to undertake all necessary searches and enquiries to investigate the proposed mortgage and to proceed with the preparation of all security documents and mortgage documents;

(b)arrange for investors to commit funds for the proposed mortgage to the Borrower which will involve the Mortgagee and its investors suffering loss or damage should the loan not proceed to completion.

(‘the Mortgagee’s undertaking’)

and in consideration of the Mortgagee’s undertaking the Borrower agrees to pay all monies due under this Offer (including the liquidated damages), within seven (7) days of demand and irrespective of whether or not the proposed mortgage proceeds to completion;

3.14that the Liquidated Damages (se clause 32 of Schedule 3 – General Conditions) are a fair and reasonable pre-estimate of the damages which would be suffered by the Mortgagee;

3.15that the Mortgagee has a caveatable interest over the security and authorises the Mortgagee to  lodge a Caveat over the security as security for:

3.15.1all costs incurred by the Mortgagee as a result (howsoever arising) of the Mortgagee assessing the Borrower’s loan application and the Proposed Mortgage;

3.15.2all monies due pursuant to this Offer (see clause 35, Schedule 3 General Conditions) and the proposed mortgage including the liquidated damages and any other loss that might arise from the Borrower’s breach of this Offer or the proposed mortgage;

3.16they execute this Deed freely, voluntarily and without pressure from the Mortgagee or from any other person;

3.17the terms of the Deed set out the entire agreement between the Borrower and the Mortgagee;

3.17the Mortgagee may immediately commence Court proceedings to recover any monies due under this Offer and the Borrower confirms that they will not defend those proceedings and hereby consent to judgment being entered against them for all monies outstanding under this Offer.

4Effect of this Deed

Once accepted this Offer will form a conditional agreement (see clause 36 of Schedule 3 of the Deed of Offer) between the parties which agreement inter alia constitutes a Charge over the Security with the amounts due under this Offer (whether by way of liquidated damages or the Amount Outstanding or howsoever arising) being the sum secured by that charge, such amounts repayable within seven days of demand.

1. Schedule 3 to the Deed of Offer set out Gippsreal’s General Conditions, which included, relevantly, the following terms:

(a)   clause 1, being a description of Gippsreal, its status as ‘a non-conforming second tier lender lending to persons who might not otherwise qualify for loans from major banking sources’, and the fact that Gippsreal itself is not the lender, but acts as trustee on behalf of individual lenders;

(b)   clause 21, which provides that interest will accrue on funds set aside on the drawdown date, being the date of settlement;

(c)    clause 32, whereby the borrower acknowledges its liability to pay liquidated damages if they failed to proceed with the proposed mortgage to completion by the drawdown date, or if Gippsreal exercised its rights to withdraw the Offer of Finance pursuant to clause 36(c) of the General Conditions;

(d)  clause 34, which contains a broad ranging indemnity in favour of Gippsreal, including any legal costs incurred by Gippsreal in enforcing, defending or otherwise establishing any rights of the mortgagee against the borrower or any third party;

(e)   in clause 35, the borrower agrees to charge the secured property in favour of Gippsreal; and

(f)     in clause 36, Gippsreal reserves the right to withdraw the offer of finance at any time up to and including the date of settlement should, among other things, the borrower fail to settle the proposed mortgage by the drawdown date for reasons outside the control of the mortgagee, and the mortgagee has given the borrower notice of its intention to withdraw the offer of finance if the proposed mortgage is not completed within any reasonably nominated time period.

1. Master Dao executed the Deed of Offer on or about 23 August 2013. Schedule 1 of the executed document returned to Gippsreal contained two handwritten amendments made in Mr Adicho’s handwriting: a change in the loan term from one year to two years, and, inserted under the heading ‘Estimate of Costs and Disbursements’ ‘Consulting Fee 1.8% $31,950.00.’

1. Master Dao’s evidence was that the amendment to the Deed of Offer to refer to a two year term was made at his request, but that he was not aware of the inclusion of the reference to a brokerage fee. 

1. The intention of each of the parties was that the proposed loan be settled as soon as possible.  On 29 August 2013, Gippsreal appointed Charter Keck Cramer (‘valuer’) to conduct a valuation of the property.  A planned inspection of the property by the valuer on 9 September 2013 was cancelled, apparently on the basis that the proposed loan had been cancelled by the Society.  The Society disputes that this was the reason for the cancellation of the inspection. 

1. On 9 September 2013, Mr Adicho sent an email to Ms Karen Williams of Gippsreal, explaining that the previous week Master Dao provided him with further information to be provided to the valuer regarding the property, but that the following day Master Dao had told him that the loan would not proceed owing to other committee members of the Society opposing the loan.  He said that he was informed by a committee member the evening prior to the scheduled inspection by the valuer that the inspection had been cancelled. 

1. On 12 September 2013, Gippsreal wrote to Mr Roberts (copying in Mr Adicho) as follows:

We refer to the above matter and confirm the above proposed mortgage will not be proceeding.

Please find enclosed correspondence and final account in the amount of $81,532.84 (‘the Amount Outstanding’), prepared in accordance with the Deed of Offer dated 16 August 2013 accepted by the Borrower.

1. The attached invoice was forwarded to Master Dao by Mr Roberts, along with an invoice for IBN Direct’s brokerage services pursuant to the mandate.

1. Notwithstanding the above, Mr Rickard, the principal of Gippsreal, deposed that on 17 September 2013 Master Dao telephoned him.  Mr Rickard’s file note of that conversation is reproduced below:

He said he will be instructing the solicitors to write to us saying they want to proceed with the loan, he wants me to write to confirm that we will be in a position to settle within 48 hours of receiving the report from the valuer.  Apparently he has spoken to the valuer and the valuer  might be able to be there as early as tomorrow and we would expect to have the report sometime next week so that we might be able to settle as late as next week.  I said I would be happy to give them that letter but it would be subject to obviously all the documents being signed and executed and any other outstanding issues being satisfied and the valuation being satisfactory of course.

He raised an issue which he is going to put in the letter about one of the fees that we claimed, he said it wasn’t in the original Deed of Offer, something about a consultants fee of $31,000.00 or something, anyway I said I would address that when he returns it to us.  He asked that direct all future queries to him, they are not happy with John Adicho.

1. Accordingly, the inspection of the property went ahead on 20 September 2013.  On 25 September 2013, the valuer spoke to Mr Rickard and told him that she expected that the valuation of the property was likely to be in the range of $900,000 to $1,000,000, far less than the sum estimated by the Society, being $3.5 million.  The difference in the valuation was explained on the basis that the Society’s valuation was based upon an expectation that the property would be rezoned from commercial/industrial uses to residential use within the near future, and the valuer was not prepared to value the property based upon that assumption. 

1. Upon receipt of this news, Mr Rickard telephoned Master Dao and told him that the valuation had come in at less than half the value that the Society told Gippsreal the property was worth, and in response, Master Dao told him that the Society wished to proceed with a loan at fifty per cent of Gippsreal’s valuation regardless.  Master Dao told Mr Rickard that the Society wanted to settle as soon as possible, and Mr Rickard said that he would prepare the documents and send them through as quickly as possible.  Gippsreal sent a letter through to the Society’s solicitors, Wantrup & Associates, advising them that Master Dao had contacted Mr Rickard and wanted to proceed with the loan, and that subject to Gippsreal receiving the final valuation figure, Gippsreal would be in a position to settle within 24 hours of receipt of the executed mortgage documents.  On the following day, Mr Ven Dao of the Society sent an email from Master Dao’s email address providing contact details for the Society’s new solicitors, Western Lawyers.  Later that day (26 September 2016), Gippsreal wrote to Western Lawyers as follows:

We refer to the above matter and in particular correspondence received today from Master Dao advising us that all correspondence is to be now directed to Mr Brian Luong of your office.

We advise that we are currently waiting on the valuers final valuation figure which they have indicated will be provided this afternoon.

Accordingly, once the valuation figure is received mortgage documentation will be emailed to your office for acceptance and execution by your client.

We understand Master Dao is anxious for settlement to occur on Monday, 30^th September 2013 and subject to receipt of the final valuation report, executed documents, your client satisfying any outstanding requirements, as previously notified, and notification of settlement arrangements, Gippsreal advise it will be in a position to settle.

We advise that settlement will take place at the office of Quayles, our Melbourne agents, located at Level 6, 131 Queens Street, Melbourne.

We confirm that we require the following documents be provided at settlement:-

1.Application to Correct Name in the Register from the Melbourne Linh on Buddhist Congregation Inc to the Melbourne Linh Son Society Inc; and

2.        Withdrawal of Caveat – AK488847E.

Accordingly we will be in contact with your office later today regarding the mortgage sum and documents.

1. On the following day, Friday 27 September 2013, Gippsreal wrote to Western Lawyers stating as follows:

We refer to the above matter and advise that Gippsreal has entered into an agreement with your client.

1. The letter enclosed the mortgage documentation for execution on behalf of the Society, and noted that:

Enclosure 1.16 is the Amended Deed of Offer of Finance dated 27 September 2013.  We note that the Deed of Offer as enclosed has been amended to reflect the amended loan amount.  Accordingly we require the amended Deed of Offer of Finance to be executed however Gippsreal reserves all of its rights pursuant to the executed Deed of Offer of Finance dated 16 August 2013.

1. The letter also noted that it was anticipated that settlement would occur on Monday, 30 September 2013. Schedule 1 of the amended Deed of Offer contained the following terms:

Proposed Mortgage Sum	$500,000 (or a maximum 50% Loan to Valuation Ratio, whichever is the lesser).
Initial Loan Term	1 year.

1. It is apparent from perusing this document that the only change made to the original, unannotated Deed of Offer was the amount advanced.  The amounts under the heading ‘Estimate of Costs and Disbursements’ in the amended deed of offer were the same as in the Deed of Offer, as were the amounts against the heading ‘Liquidated Damages’, notwithstanding that the sum specified as being three months interest was calculated on the basis of the original loan advance of $1.775 million, not the revised loan amount of $500,000, and the establishment fee was well in excess of 1.5% of the revised loan amount.  Further, the amended deed of offer did not incorporate either of the handwritten amendments to the Deed of Offer made by Mr Adicho. 

1. The mortgage documentation also included a tax invoice dated 27 September 2013.  The tax invoice gave a ‘credit’ to the Society for the $10,000 non‑refundable acceptance fee paid in May 2013.  The loan costs to be paid to Gippsreal upon settlement included the establishment fee of $26,625, and a brokerage fee payable to IBN Direct of $9,900, being 1.8 per cent of $500,000. 

1. On 30 September 2013, Gippsreal wrote to Western Lawyers, as follows:

We note this matter was to settle at the request of Master Dao today Monday, 30^th September 2013 and accordingly we have drawn down the settlement funds and interest will accumulate on those funds from today.

We advise that pursuant to clause 36(c) (vii) of Schedule 3 of the Deed of Offer of Finance if the proposed mortgage does not settle before 4.00pm, Thursday, 3^rd October 2013 Gippsreal will withdraw its offer of finance.

In that event all monies due under the Deed of Offer of Finance including the liquidated damages become due and payable within seven days of demand.

Take notice that pursuant to clause 3.13 of the Deed of Offer (as amplified by clause 32 of schedule 3 of the Deed of Offer of Finance) Gippsreal demands payment of all monies due under the Deed of Offer of Finance the full details of which will be provided to you on Friday 4^th October 2013 if the matter does not settle.

Gippsreal otherwise reserves all its rights under the Deed of Offer of Finance dated 16^th August 2013.

1. On 1 October 2013, the Society’s solicitors wrote to Gippsreal in the following terms:

We refer to your letter dated 30 September 2013 and advise that we now acting for the Society.  We refer to your Mortgage document on the 27 September 2013 and advise that the Society disagree with the terms and conditions of the document as follow:

1)We refer to your offer on 26 July 2013, in Estimated Costs and Deductions a 1.5% will be charge on the total loan advance which is payable to Gippsreal Limited.  On the Mortgage Document the loan advance is only for $500,000 based your offer the establishment should only be $7,500 and not $26,625.00 as on the mortgage document on 27 September 2013.  Please find attached your offer on 26 July 2013.

2)Item 8, the initial loan terms on the letter of offer from Gippsreal on 16 August 2013 was re-offer from our client for 2 years instead of one year.  Your mortgage document on 27 September 2013 stated the initial loan term is 1 year, not 2 years.  When our client signed proposal mortgage and wish the term of 2 years now mortgage only one year.

3)Our client has not accepted your Mortgage Document as it does not correspondence with your previous offer.

We are instructed by our client to request you to amend the Mortgage Documents as follow:

(1)       The establishment for the advancement loan of $500,000 is $7,500.00.

(2)       The term of the loan is for a period of two years.

Our client requests that you amend the Mortgage Document and forward to our office within the next 3 days from the date of this letter.

1. On 4 October 2013, Gippsreal wrote as follows:

We refer to our email of the 3^rd October 2013 and we note we have heard no further from you and your client and in the circumstances Gippsreal formally withdraws its subsequent offer of loan.

We enclose our account for the liquidated damages and note that interest at the higher rate is accruing on that account from 9^th September 2013 when Gippsreal first made demand for the liquidated damages after your client indicated they would be withdrawing from the loan offer.

We note that our client will be additionally liable for any further costs incurred by Gippsreal in enforcing its rights pursuant to the executed Deed of Offer of Finance dated 16^th August 2013.

Please have your client provide us with a cheque for the amount outstanding within 7 days.

Gippsreal otherwise reserves all its rights under the executed Deed of Offer of Finance.

1. Gippsreal’s letter of 4 October 2013 was accompanied by a tax invoice which claimed the sum of $101,238.34, which, among other things, included the sum of $72,671.88 by way of liquidated damages.  The tax invoice also claimed the sum of $9,000 in respect of brokerage fees.  That claim is conceded by Gippsreal to have been made in error, along with the sum of $72,671.88, which incorporated the sum of $5,000 for mortgage preparation and documentation, which had been claimed separately in the tax invoice.  The sum claimed in the tax invoice made no allowance for the $10,000 fee paid by the Society in May 2013. 

1. There appears to have been no further correspondence regarding this matter until 19 December 2013 when Oakleys Legal, the solicitors for Gippsreal, wrote as follows:

We refer to the above matter and we note that recently Gippsreal has been notified of the lodging of a dealing by the Australia and New Zealand Banking Group Limited (‘ANZ Bank’) being mortgage no AK777499Q. 

As you are aware Gippsreal has lodged a caveat on the title.

We advise that Gippsreal will if necessary take action to enforce its rights as chargee under the Deed of Offer of Finance and maintain its caveat.

If Gippsreal is obliged to issue those proceeding Gippsreal will be looking to the Melbourne Linh Son Buddhist Society for all its costs and disbursements which in view of the fact that the application must be made Supreme Court, will be extensive.

In those circumstances Gippsreal requires confirmation from the ANZ Bank that its mortgage is subject to the rights of Gippsreal as chargee which rights take priority to any rights of the ANZ Bank pursuant to its mortgage.

Unless we receive that confirmation on or before 4.00pm the 10 January 2013, Gippsreal will without further notice take appropriate action and will produce this letter to the Court on the issue of costs.

We note that in previous correspondence Gippsreal has set out clearly the basis of its right to claim a charge over the property pursuant to the Deed of Offer of Finance which is unequivocal.

1. On the same day, Gippsreal wrote to the ANZ Bank as follows:

Re:      Melbourne Linh Son Buddhist Society Incorporated

Mortgage No AK777499Q

We note that the Australia and New Zealand Banking Group Limited has recently lodged the above mortgage over Certificate of Title Volume 10377 Folio 060.

Gippsreal Limited as chargee have previously lodged Caveat No AK581354K.

Please confirm your acknowledgement that the Australia and New Zealand Banking Group Limited mortgage is subject to Gippsreal’s prior lodged interest as chargee and Gippsreal’s interest takes priority to the Bank’s mortgage.

1. On 6 January 2014, Mr Rickard sent an email to Western Lawyers, as follows:

I refer to my letter of 19^th December and note that I have not received a reply.

Please note that I have instructed Counsel to draw the appropriate application to the court seeking orders that the caveat be maintained and the registration of the ANZ Bank mortgage be delayed.  Obviously this will occur considerable additional expense and indeed we have incurred additional expense in attending to this matter to this date and briefing Counsel.  Please provide us with your immediate response.

1. On 8 January 2014, the solicitors for the Society wrote to Oakleys Lawyers asserting that the Society did not owe Gippsreal any money, and demanded that Gippsreal remove the caveat over the property. 

1. Gippsreal commenced this proceeding on 10 January 2014, naming the Society, the ANZ Bank Ltd (‘ANZ’), and the Registrar of Titles (‘Registrar’) as defendants.  The originating motion sought to restrain the Registrar from registering the mortgage lodged by ANZ, and costs from the Society on an indemnity basis.  On 14 January 2014, Elliott J made orders restraining the registration of ANZ’s mortgage, and the matter returned to the Practice Court on 12 March 2014.  On 12 March 2014, Kyrou J (as he then was) made orders by consent which vacated the restraining orders, gave Gippsreal leave to discontinue against ANZ and the Registrar, ordered that Gippsreal’s proceeding against the Registrar proceed as if by way of writ, and made certain procedural directions for the conduct of the proceeding.  Gippsreal had reached an agreement with ANZ whereby Gippsreal’s charge over the property ranked ahead of ANZ’s mortgage. 

1. In its statement of claim dated 21 March 2014, Gippsreal alleged, in summary, as follows:

(a)   in May 2013 the Society represented to Gippsreal that the property was valued in excess of $4 million;

(b)   relying upon that representation, Gippsreal entered into the Deed of Offer;

(c)    the relevant terms of the Deed of Offer;

(d)  pursuant to the terms of the Deed of Offer, Gippsreal undertook the necessary due diligence in respect of the proposed loan to the Society, and arranged for investors to contribute funds for the proposed loan so that Gippsreal was in a position to settle the loan;

(e)   on 10 September 2013, Gippsreal lodged a caveat over the property;

(f)     contrary to the representation made by the Society, and in breach of the warranties in the Deed of Offer, the preliminary valuation was in the range of $900,000 to $1,200,000;

(g)   on 25 September 2013, the Society confirmed that it wished to proceed with the loan based upon the lower amount, and wanted to settle as soon as possible;

(h)   on 30 September 2013, Gippsreal, pursuant to the terms of Schedule 3, clause 36(c) of the Deed of Offer, advised the Society that it had drawn down funds in preparation for settlement on that day, and that if the loan did not settle by 4.00pm on 3 October 2013, Gippsreal would withdraw its offer of finance;

(i)     in breach or otherwise as a repudiation of the terms of the Deed of Offer, the Society failed to settle the loan;

(j)     on 4 October 2013, Gippsreal sent a notice withdrawing from the Deed of Offer, and made a demand on the Society for the sum of $92,238.34 pursuant to the terms of the Deed of Offer;

(k)   on 5 February 2014, Gippsreal made a further demand in the sum of $111,745.54, being the total of the original claim of $92,238.34 plus the sum of $19,507.20 on account of the legal costs incurred in the proceeding to date;

(l)     the Society has refused, failed and/or neglected to pay Gippsreal the amount of $111,745.54; and

(m)alternatively, Gippsreal is entitled, on a quantum meruit basis, to an amount to recompense it for the reasonable value of the works undertaken by it in performing its due diligence with respect to the proposed loan, and has incurred legal expenses and disbursements. 

1. In its Further Amended Defence filed on 29 January 2015, the Society:

(a)   put Gippsreal to its proofs as to its status as the responsible entity of the Gippsreal Mortgage Investment Scheme;

(b)   denied the allegation that it had represented to Gippsreal that the property was valued in excess of $4 million, and alleged that the Society had provided Gippsreal’s agent, Mr Adicho, with a copy of a report by an independent valuer, which valued the property at $3,500,000 as at 8 December 2012;

(c)    relied upon the following facts and circumstances to support its contention that Mr Adicho was the agent of Gippsreal:

(i)     on 26 July 2013, Mr Adicho sent the Society a document in which Gippsreal represented that it would consider providing the Society with a loan of $1,775,000 upon certain terms, including the payment of an establishment fee of 1.5% of the total approved loan advance (‘Loan Advice’);[1] and

[1]The Loan Advice is the letter of 26 July 2013 referred to in paragraph 7 of these reasons.

(ii)  the terms of the agreement in place between Mr Adicho and Gippsreal, which, among other things, required Gippsreal to pay any commissions that may be owed to Mr Adicho directly to Mr Adicho;

(d)  ‘on around August 2013’, the Society paid the sum of $10,000 to Gippsreal in order to proceed with a loan application on the terms contained in the Loan Advice, and the Society was under no obligation to proceed with the loan application;

(e)   denied that the Deed of Offer was a deed, or an agreement, and that the document provided by the Society to Gippsreal was a counter-offer, which was not accepted by Gippsreal;

(f)     alternatively, ‘the Deed was rendered nugatory by [Gippsreal] subsequently inserting terms into the Deed that the [Society] was not aware of and did not agree to and was further nugatory as it did not comply with the terms of the Loan Advice’;

(g) denied that it was bound by the terms of the Deed of Offer, alternatively, the terms of the Deed of Offer ‘were such that they were unenforceable, unreasonable, unconscionable and breached essential conditions of the Australian Consumer Law and/or Australian credit lending codes’;

(h)   denied that it was bound or estopped by any terms of the Deed of Offer, including any alleged acknowledgements;

(i)     did not admit that Gippsreal conducted any due diligence with respect to the loan transaction, inspected the property or arranged for investors to contribute funds to the proposed loan.  At no stage did Gippsreal provide the Society an opportunity to review or challenge any valuation obtained by Gippsreal, and Gippsreal did not give proper consideration to the valuations provided by the Society to Gippsreal;

(j)     denied that Gippsreal has a caveatable interest in the property;

(k)   admitted receiving the correspondence concerning the valuation and the proposed revised loan amount, and asserted that Gippsreal was required to offer new loan and mortgage documents on the same terms and conditions as contained in the Loan Advice;

(l)     the terms of the revised Deed of Offer sent by Gippsreal to the Society’s solicitors on 27 September 2013 included:

(i)       a new loan amount of $500,000;

(ii)      an initial loan term of one year, which differed from the term offered of two years in August 2013;

(iii)     stated an acceptance period of 7 days;

(iv)     the amount of liquidated damages $31,625 on account of administrative and professional costs, and $41,046.88 on account of interest, which was excessive, unreasonable and disproportionate;

(m)the new loan was offered on terms which were materially different from the terms of the Loan Advice, and the Society was under no obligation to agree to or enter into the new loan;

(n)   denied that Gippsreal has suffered losses in the amount of $92,238.34, and, in the alternative, the liquidated damages are ‘excessive, breach Australian consumer and credit laws and codes, do not represent an accurate description of [Gippsreal’s] alleged damages and are not enforceable under law; and

(o)   in response to Gippsreal’s claim based upon quantum meruit, asserts that Gippsreal has failed to quantify the reasonable value of their works, legal expenses and disbursements allegedly incurred. 

1. The proceeding first came before me for management on 2 September 2014.  There were delays caused by disputes regarding pleadings and discovery, and an absence of representation of the Society for a period of time.  For some time the Society foreshadowed the filing and service of a counterclaim, which did not eventuate.  The proceeding was mediated twice, once by a judicial mediator, but did not resolve.  Finally, on 3 September 2015, I set the matter down for trial on 15 February 2016, with evidence to be by way of affidavit. 

1. On 29 September 2015, the solicitors for Gippsreal filed and served an extensive and detailed Notice to Admit.  In its Notice of Dispute dated 6 October 2015, the Society disputed each of the facts in the Notice to Admit, but admitted the authenticity of the documents referred to in the Notice to Admit.  Accordingly, Gippsreal was put to its proofs on all of the allegations made in its Statement of Claim. 

1. Gippsreal relied upon four affidavits sworn by Mr Rickard on 10 January 2014, 9 July 2015, 5 August 2015 and 16 October 2015.  By reason of the manner in which the issues in the proceeding evolved over time, there was some degree of overlap between these affidavits, and the documents exhibited to Mr Rickard’s affidavits were voluminous.  Mr Rickard’s first affidavit was sworn on 10 January 2014 in support of Gippsreal’s application to the Practice Court to restrain the registration of ANZ’s mortgage.  It largely canvassed the dealings between Gippsreal and the Society referred to in paragraphs 3 to 26 of these reasons, so there is no need to repeat this evidence here.

1. Mr Rickard’s affidavit sworn on 9 July 2015 deposed as to the following matters:

(a)   the relationship (or, more accurately, the absence of any relationship) between Gippsreal and finance brokers who submit applications of finance to Gippsreal;

(b)   details of the four loan applications received from Gippsreal from the Society between February and August of 2013;

(c)    the manner in which Gippsreal evaluates loan applications, makes offers of finance, and conducts its due diligence process, both generally and in relation to the transaction which is the subject of this proceeding;

(d)  the manner in which Gippsreal sources investor funds. At the relevant time, Gippsreal had an excess of investor funds available for investment held in ‘at call’ deposit accounts.  Over the course of September 2013, funds were transferred from these accounts to Gippsreal’s trust account in preparation for the settlement of the loan.  As at 30 September 2013, the balance of the trust account was $2,859,897.05;

(e)   Mr Rickard’s belief that the term of the Deed of Offer providing for three months’ interest on the proposed loan advance in the Deed of Offer to be payable by way of liquidated damages is a genuine pre‑estimate of the losses to be suffered by investors, based upon his thirty years of lending experience in the second tier lending market;

(f)     as at 3 October 2013, Gippsreal did not have any other loan applications approved and ready to be advanced, and Gippsreal’s records show that it was not until 16 May 2014 that the whole of the $1,775,000 that was intended to be advanced to the Society was in fact advanced to other borrowers; and

(g) based upon the above, the actual loss to Gippsreal’s investors was $47,990.34, that is, in excess of the $41,046.85 specified in Schedule 1 of the Deed of Offer.

1. In his third affidavit sworn on 5 August 2015, Mr Rickard addressed the requests by the Society’s solicitors for further discovery in relation to the matters deposed to in his second affidavit, and exhibited loan and mortgage documentation and trust account and banking records purporting to verify Gippsreal’s claim for liquidated damages.  Mr Rickard also deposed as to why, in his opinion, the amount claimed in the tax invoice dated 4 October 2013 in respect of the $26,625 establishment fee was justifiable, along with the other items claimed in that tax invoice.  At paragraph 10(d) of his affidavit, Mr Rickard deposed as follows:

The sum of $72,671.88 for ‘Liquidated Damages’ is a sum referable to clause 20 of Schedule 1 of the Deed of Offer being on account the work performed by the Plaintiff during the period 16 August 2014 and 3 October 2014 and on account of lost interest.

The $31,625 administrative and professional costs component of the liquidated damages is made up of two components being the Plaintiff’s establishment fee of $26,625 and the mortgage preparation fee of $5,000 set out in Item 14 of Schedule 1 of the Deed of Offer agreed to and executed by the borrower as a pre‑condition of the loan.

The $26,625 establishment fee is an agreed fixed fee regardless of the loan advance and was specifically inserted in this instance because of the long history of loan applications (referred to in paragraph 8 to 18 of my July 2015 Affidavit) and the significant administrative time involved in receiving the various applications, reviewing and undertaking preliminary due diligence in respect of the various loans.  It was a pre‑determined fee which was agreed to by the borrower in the Deed of Offer which was not in any way variable on the basis of the actual loan advance.  Notably, the proposed loan was to an unincorporated religious Association which had no obvious source of income (in circumstances where the Defendant had represented to the Plaintiff that the loan would be serviced by way of donations from members of the Association).  There were to be no guarantees provided and there had been a seven month history of three aborted loan applications and investigations. 

The establishment fee is not a fee for service type fee.  There are various components of that fee involving elements of establishment, application, procurement, management, regulatory compliance and reporting.  To conduct its business the Plaintiff must hold an Australian Financial Services Licence which involves significant regulatory obligations from both an investor and borrower management point of view.  The establishment fee reflects not only the individual costs of investigating the particular loan and carrying out due diligence but it also reflects the various fixed costs of the Plaintiff in being able to conduct business as an Australian Financial Services Licence Holder acting as trustee on behalf of retail investors and all the regulatory compliance obligations consequent upon that including among other things the obligation to hold professional indemnity insurance, be a member of an external dispute resolution service, hold a minimum net tangible asset cash requirement.

An integral component of Gippsreal’s business model involves being able to access investor funds as and when required.  This necessarily involves having investor funds ‘on hand’ to place into approved loans which might be advanced on short notice as was to be the case in the subject loan rather than source them individually for each loan. 

Gippsreal is obliged to document the management of those investor funds in accordance with the regulatory requirements of the Corporations Act.

Among other thing this includes advising investors of the details of the loan advance as evidenced by the Certificate of Investment, a draft of which was exhibited as ‘TJR-23’  in paragraph 35 of my July 2015 Affidavit and again meeting all the regulatory requirements for managing the investor funds, reporting to investors and satisfying all compliance obligations of managing the Australian Financial Services Licence all of which involves significant record keeping, internal and external audit and compliance and reporting to ASIC. 

A part of the Plaintiff’s business is to develop its goodwill so that investors entrust the Plaintiff to hold their investment funds in readiness for placement in loans as they are approved, offer prudent loans and diligently manage them throughout the course of the loan term.  This goodwill has been established over a period of 35 years.  The establishment fee reflects in part this goodwill aspect.  It does not reflect the actual costs of gathering any individual funds for particular loans. 

With the introduction of the Australian Financial Services Licence regulatory regime under the Corporations Act those compliance obligations have been significantly increased and as a result of the Global Financial Crisis the reporting obligations to investors and corporate governance have been made much more stringent and all of which has increased the cost of doing business.

1. In his affidavit sworn on 16 October 2015, Mr Rickard deposed in great detail to a range of matters, including:

(a)   his role, background, and experience with Gippsreal;

(b)   Gippsreal’s business model, the profile of its investors, its corporate governance requirements, and its obligations under relevant financial services legislation;

(c)    the purpose for which Gippsreal obtains valuations, and the valuation it obtained for the property;

(d)  a summary of the dealings between Gippsreal and the Society, including the various loan applications, and Gippsreal’s receipt of an email from Mr Adicho on 10 August 2013 of a letter of authority from Master Dao requesting Gippsreal to process a loan application;

(e)   the representations said to have been made by the Society with respect to the valuation of the property.  Mr Rickard referred to asset and liability statements provided by the Society in support of its four loan applications, in which the property was said to be valued at between $4,000,000 and $5,500,000.  He denied that Gippsreal had been provided with an earlier valuation prepared by Mr Robert Bath in December 2012, which valued the property at $3,500,000;

(f)     the facts, circumstances and documents relied upon by him to deny the Society’s assertion that Mr Adicho was the agent of Gippsreal, rather than the agent of the Society;

(g)   the issue of the 26 July letter, and the status of that document as a mere expression of interest;

(h) the execution of the Deed of Offer, and Gippsreal’s acceptance of the handwritten amendment to the Initial Loan Term in Schedule 1 of the Deed of Offer , which was communicated to Mr Roberts of IBN Direct;

(i)     the matters relied upon to reject any assertion by the Society that any credit lending code applied to the loan from Gippsreal to the Society;

(j)     the due diligence and other tasks undertaken by Gippsreal subsequent to the execution of the Deed of Offer;

(k)   the communications between the parties after the cancellation of the valuer’s inspection on 9 September 2013 and the formal notice of withdrawal issued by Gippsreal on 4 October 2013.  Mr Rickard deposed that the reference in the revised Deed of Offer sent on 27 September 2013 to a loan term of one year was a typographical error;

(l)     the events and correspondence post-dating the withdrawal of Gippsreal’s offer of finance, including Gippsreal’s entry into a Deed of Priority Agreement with the ANZ Bank; and

(m)further detail and contentions regarding Gippsreal’s claim for liquidated damages.  In particular, Mr Rickard deposed that as at 3 October 2013, Gippsreal did not have any alternative loan applications approved and ready to be advanced.  Gippsreal’s records show that on 24 October 2013, Gippsreal advanced the sum of $2,709,000 to another borrower, which had been committed to prior to the issue of the Deed of Offer on 16 August 2013, and funds had already been set aside for that purpose.  Gippsreal’s records show that the funds set aside for the purpose of advancing the sum of $1,775,000 to the Society were not advanced in full to other borrowers until 16 May 2014. 

1. Mr Rickard also gave additional evidence-in-chief at trial.  He gave evidence about how Gippsreal usually conducts its business.  Gippsreal is usually approached by a broker, who submits information about the proposed borrower, the amount of finance sought, and the proposed security.  If the proposed loan met Gippsreal’s lending criteria, Gippsreal would then issue an expression of interest document, which provides indicative terms as to how the loan might proceed.  If the borrower wishes to proceed, then Gippsreal issues a formal Deed of Offer, which, if accepted, becomes a binding agreement.

1. Mr Rickard was taken to the 26 July letter, which was provided to Mr Rickard and Mr Adicho.  This was not actually executed by the Society, but Gippsreal was informed that the Society wished to proceed.  While some preliminary due diligence is conducted by Gippsreal prior to the issue of an expression of interest, the valuation did not take place until after the Deed of Offer was executed.

1. Mr Rickard was taken to the tax invoice issued by Gippsreal on 4 October 2013, and through the individual items enumerated in that invoice.  He explained how the brokerage fee due to IBN Direct came to be included in the invoice, but conceded that Gippsreal was not entitled to sue the Society for those fees, as these fees were a matter between the broker and the borrower. 

1. Mr Rickard was taken to the item ‘Liquidated Damages’, against which the sum of $72,671.88 was claimed.  He conceded that this sum included a fee of $5,000 for mortgage preparation and documentation, which had already been separately claimed in the invoice.  He gave the following evidence about the fee of $26,625:[2]

And as I have gone to some length in explaining in the supporting – in the final witness affidavit, it covers a multitude of matters.  It is not a fee for service type thing.  It is not on an item by item basis.  It is not necessarily related to a percentage of the loan advance.  It is a fee that is determined and it varies from loan to loan depending on the loan to value ratio, the quality of the loan, the quality of the borrowers, the issues, the risks involved.  But it covers – indeed it covers, as I say, administration.  It covers the costs of doing business, I suppose, in that we have, as I say, for sale licence holders we have strict obligations and all our audit requirements and it addresses all those and I have gone in some detail in explaining that in my affidavit in paragraphs – yes, in paragraphs 198.  So the separate component of that, if you took out the $5,000 mortgage preparation, it amounts to $26,625.  And that was specifically considered by me at the time that this deed of offer issued.  And that rationale for that is spelled out in paragraph 70 – 198(c)(i)B.

[2]T31, 2-21.

1. The other component under the heading ‘Liquidated Damages’ was the amount calculated on the basis of three months’ interest on the sum of $1,775,000.  Mr Rickard gave the following evidence:[3]

It is also referrable to clause 20 of schedule 1 at p.28 of the court book?‑‑‑Yes, it is specifically determined in advance and representing three months interest at the lower rate. With 30 years' experience in this industry, this is determined to be a genuine estimate of how long it might reasonably take to alternatively lend these funds out. And the reason for that is we have to start afresh with a new loan, investigate the loan, document it, and get it to settlement. And, indeed, if you use this case as an example, we were first approached in February and the loan wasn't to be advanced until October. So it was some six months in this instance from A to B. And, indeed, again in my affidavit I went on to spell out how long it actually took to advance these funds out in full from October when this loan was terminated to when those funds were placed out. And I have set out in detail the loans when they were advanced and if the actual loss of interest to the investors exceeded the $41,000 three months' interest at the lower rate, even when you give credits for it they were progressively lent out. So it is - on the basis of experience, we – I determined that three months' interest at the lower rate is a genuine pre-estimate of the likely loss to the borrowers suffered as a result in that it takes some time to get new loans up documented and actually advanced. And, indeed, the particular of this particular matter showed that to be the case.

[3]T31, 26-31, T32, 1-21.

1. Under cross‑examination, Mr Rickard was questioned extensively regarding how he came to arrive at the figure of $26,625 for the establishment fee at the time the Deed of Offer was prepared in August 2013.  He gave evidence that the establishment fee was not the sum of a series of individual items, but rather ‘a fee that is arrived at depending upon the circumstances’.[4]  He agreed that the establishment fee was 1.5 per cent of $1,775,000, and it had been expressed as a percentage in the 26 July letter, and gave evidence that the establishment fee might vary between one per cent of the loan amount or even up to 2.5 per cent.  He gave the following evidence:[5]

… Specifically, the deed of offer, when we come to address that point of the establishment fee, rather than put the 1.5 per cent, which we would normally do, because of the long history and because they had pulled out yet again and because of the problems they had caused us, all the enquiries they had made of us, I specifically determined that we were going to have a fixed fee regardless of what the mortgage advance was, keeping in mind that even at that stage we still didn't have the valuation. We hadn’t even sought the valuation, so we were agreeing - I had specifically determined that the fee, regardless of the mortgage advance, was going to be $26,000-and whatever. 

That was, you suggested to her Honour earlier today, based on your 30 years’ experience as a mortgage solicitor?---Based on my 30 years’ experience of what the issues were in this particular loan, the risks that were involved and the history of these loan applications.

You say that was a genuine predetermination of the loss and damage?---No, that's not the loss and damage. That is our fee for providing the service.

[4]T49, 10-14.

[5]T50, 22-31; T51, 1-12.

1. Mr Rickard acknowledged there was no express reference in the Deed of Offer to the establishment fee being based upon the additional work required for this loan rather than as a percentage of the loan amount.  He accepted that all of the previous loan offers made by Gippsreal to the Society referred to an establishment fee of 1.5 per cent, and that loan documents discovered by Gippsreal relating to other borrowers referred to an establishment fee of 1.5 per cent of the loan amount, except for one instance where the rate was one per cent.  He agreed that the sum of $26,625 was 5.3 per cent of the amount of $500,000. 

1. Mr Rickard was questioned about the due diligence undertaken by Gippsreal both before and after the execution of the Deed of Offer, and Gippsreal’s purpose in instructing independent valuers.  He confirmed that Gippsreal did not rely upon the opinions of borrowers and their brokers about the value of a proposed security property. 

1. Mr Rickard was questioned about the ‘draw down’ of the sum of $1,775,000 on or about 29 September 2013.  Mr Rickard’s evidence is somewhat confusing on this point, but it appears that the ‘draw down’ (which actually occurred on 30 September 2013) is a mere book entry, and the real significance of the draw down date is that it is the date that interest begins to accumulate on the loan.  He gave evidence that at the time of the draw down, Gippsreal had $4 million to $5 million of lender’s funds on call.  He confirmed that the claim for liquidated damages in this proceeding was based upon a loan amount of $1,775,000, notwithstanding that, after Gippsreal had been informed of the lower valuation, that it was only going to advance fifty per cent of the lower sum.

1. Mr Rickard was taken to the loan documents issued by Gippsreal on 27 September 2013, and repeated his affidavit evidence that the reference to the loan term of being only one year was a typographical error.  He agreed that preparation of the loan documents was rushed, but disagreed with the suggestion that the reference to an establishment fee of $26,625 was also a typographical error, because he discussed the issue specifically with Karen Williams, an employee of Gippsreal, before the documents were issued, and the sum of $26,625 was also referred to in the disbursement authority included in the loan documents. 

1. Mr Rickard agreed that the Society had paid Gippsreal the sum of $7,500 in February/March 2013, and a later sum of $10,000 in May 2013.  He stated that the first payment related to an entirely different loan to the loan contemplated by the Deed of Offer, as was the loan proposed in May 2013.  He rejected the suggestion that the issue of a further Deed of Offer on 27 September 2013 meant that the loan of $500,000 was a different loan than that contemplated by the Deed of Offer. 

1. Mr Rickard again gave evidence that the reference to a one year term in the documents issued on 27 September 2013 was a typographical error, and that it was always intended and agreed that it would be a two year loan.  He gave evidence that he had communicated this acceptance to Scott Roberts, the broker Gippsreal dealt with. 

1. Mr Rickard was questioned about Gippsreal’s letter of 30 September 2013, where Gippsreal demanded that the Society settle the loan by 4.00pm on 3 October 2013.  He stated:[6]

Yes, we were getting cold feet because they wanted to settle on 30 September.  This was the fifth change of mind.  They’d withdrawn from four previous applications …

[6]T125, 4-7.

1. Mr Rickard rejected the contention that Gippsreal was not able to settle on 30 September 2013 because it only received the valuation on that day.  He said that the loan documents were issued on 27 September 2013 in anticipation of settlement on 30 September 2013, being the following Monday.  He rejected the contention that the reference to a brokerage fee in the tax invoice issued on 4 October 2013 was a reference to the fee for Gippsreal’s broker, not the Society’s broker. 

1. In his re‑examination, Mr Rickard gave the following evidence:

(a)   after the execution of the Deed of Offer, over the course of the following month, Gippsreal gathered together the sum of $1,775,000 from various accounts and placed it in Gippsreal’s trust account;

(b)   he confirmed that the real significance of the draw down date was as the date from which interest upon the loan will begin to run, even if the loan had not settled, rather than being a ‘physical’ transfer of funds;

(c)    the reason for issuing the revised Deed of Offer on 27 September 2013 to reflect the change in the loan amount was that the mortgage which was to be registered on the title of the property incorporated by reference the terms of the Deed of Offer, thus a revised Deed of Offer was needed to protect the indefeasibility of Gippsreal’s mortgage;

(d)  he explained that the establishment fee remained the same as in the Deed of Offer, because as things unfolded, the transaction became more complex, in part because the exit strategy specified in Schedule 2 of the Deed of Offer referred to the Society refinancing and redeveloping the property when development approvals were in place, and the valuer cast doubt upon whether that would occur;

(e)   his purpose in discussing the valuation with Master Dao was to find out whether the Society wished to proceed with the loan in circumstances where he believed that the purpose of the loan was to refinance an existing loan for in excess of $1 million, which was secured by a caveat; and

(f)     he enumerated the previous loan applications made by the Society to Gippsreal, and his view that the loan for which documentation was issued on 27 September 2013 was not a separate loan to the loan which was the subject of the Deed of Offer, unlike the earlier loan applications. 

1. The Society relied upon an affidavit sworn by Master Dao on 18 December 2015.  Master  Dao deposed, in summary, as follows:

(a)   his personal background and the establishment and growth of the Society;

(b)   the property holdings and financial position of the Society;.

(c)    his meeting with Mr Stephen Gay, a finance broker, and his execution of a brokerage agreement with GFS Finance Pty Ltd on 17 December 2012;

(d)  the offer of finance made by Gippsreal to the Society dated 20 February 2013, and the explanation Mr Gay provided to him of the calculation of the establishment fee;

(e)   the payment by the Society to Gippsreal at Mr Gay’s request of $7,500;

(f)     the enquiries he made of Mr Adicho with respect to the Society obtaining finance;

(g)   Mr Adicho told him that he had found a lender that could lend the Society the sum of $2.4 million, with an establishment fee of 1.5% of the approved loan amount, and a loan term of at least two years.  Further, the Society would not pay any fee to Mr Adicho, who would receive a commission from the lender.  He did not know at that time the proposed lender was Gippsreal;

(h)   he asserted that Mr Adicho was not the agent of the Society, but rather the agent of Gippsreal;

(i)     he explained how Mr Adicho, rather than Mr Gay, came to take over negotiations with Gippsreal, details of further proposed loans, and he referred to a payment made to Gippsreal of $10,000 on about 23 May 2013;

(j)     on or about 26 July 2013, Gippsreal had emailed Mr Adicho the Loan Advice, which referred to the establishment fee being 1.5% of the total approved loan advance;

(k)   on about 23 August 2013, Mr Adicho handed him the Deed of Offer.  Mr Adicho ‘pressured him’ to sign it.  At the time he did not understand all of the terms and conditions of the Deed of Offer.  When he looked at it in further detail, he asked Mr Adicho about the establishment fee of $26,625.00.  Mr Adicho told him that if the property valuation came in at less than $3,500,000, Gippsreal would offer a reduced amount, with an establishment fee of 1.5% of the approved loan in accordance with the Loan Advice;

(l)     he also told Mr Adicho that he did not agree with the initial loan term of one year.  Mr Adicho told him he could make a counter offer by amending the term to two years, which was done by hand by Mr Adicho, and initialled by him and another Society member, Mr Henry Nguyen;

(m)after the Society executed the Deed of Offer, either Gippsreal or Mr Adicho amended the Deed of Offer, without the agreement of the Society, to include a consultancy fee of 1.8% of the approved loan;

(n)   before he signed the Deed of Offer, Mr Adicho told him that the Society would only lose the $17,500 already paid if it did not proceed with the loan and that the Society would not be required to pay any other costs.  Because of his limited understanding of English, and Mr Nguyen’s complete lack of English, the Society relied heavily on Mr Adicho’s advice;

(o)   on or about 9 September 2013, he spoke with the valuer about an inspection of the Temple.  He told her that he could not do the inspection that week because he was conducting a funeral and would need to pray and chant for a week.  He never told the valuer he was cancelling the loan;

(p)  he deposed a slightly different version of the telephone call between him and Mr Rickard on 17 September 2015 than that deposed to by Mr Rickard, and made no mention of the subsequent telephone conversation between him and Mr Rickard on 25 September 2015.  Master Dao deposed as follows:

On or about 17^th September 2013 I telephoned Mr Trevor John Rickard of Gippsreal Limited and asked him about the counter-offer for the Proposed Mortgage Advanced (sic) dated 23 August 2013 and I advised him that I will proceed with the loan with the counter offer for the Proposed Mortgage Advanced (sic) which [the Society] executed on 23 August 2013 that the initial loan term is two (2) years and the approved loan $1,775,000 and the establishment fee is 1.5% of the approved loan and there is no consultancy fee.

(q)   he deposed as to the communications between Gippsreal and the Society’s solicitors between 27 September 2013 and 4 October 2013; and

(r)    in the final paragraph of his affidavit, Master Dao deposed as follows:

[The Society] did not pay the sum of $101,238.34 because I did not consider this was a valid claim for payment.  I do not consider that [the Society] has done anything to justify this.  It was Gippsreal which caused the loan not to proceed.

1. Master Dao was cross‑examined by counsel for Gippsreal.  Some of the evidence given by Master Dao under cross‑examination was a little confused, and confusing, at least in part because of his limited command of English.  Master Dao agreed that Mr Adicho was a financial consultant to the Society, but no longer was.  He was a broker, and helped find finance for the Society.  He was not on the committee of the Society, but he and Mr Gay provided advice to the Society.  He was unable to say whether Mr Adicho was the agent for the Society, or whether his oral evidence contradicted the statements he made in his affidavit.  He accepted that he signed the mandate appointing IBN Direct as the Society’s broker. 

1. Master Dao gave evidence that he believed the establishment fee was always going to be 1.5 per cent of the amount advanced, which was consistent with the advice given to him by Mr Adicho.

1. Master Dao gave the following evidence regarding the amendment of the Deed of Offer to make reference to a two year term:[7]

MR MORRIS:  I will take you to paragraph 43 of your affidavit.  You say, "Mr Adicho crossed out the one year on item 8 of the initial loan and inserted two years"?---Yes.

Did you see him do that?---I request him, I say one year very soft term, I cannot.  So, please, we need two year.

And you knew that that was negotiated by the time that deed was sent back to Gippsreal and you knew that Gippsreal was content with the two years by that time?---I talk with John Adicho, and John Adicho state he contact with Gippsreal - I don't know, he contact with what her name or his name, and he say, "Okay, two year".

[7]T155, 19-29.

1. However, he gave evidence that when he executed the Deed of Offer, there was no reference to a consultant’s fee of 1.8 per cent, and this amendment must have been made after he executed the Deed of Offer. 

1. Master Dao denied that he told Mr Adicho that the Society was not going ahead with the loan because of opposition from other committee members, but rather, he was asking Mr Adicho when the funds would be available, because the Society needed money urgently.  He confirmed his affidavit evidence that the reason the valuation inspection was cancelled was that he was conducting a funeral.  He denied the suggestion made by Mr Adicho in his email of 11 September 2013 that the Society was seeking funding from an alternative lender.  The Society only made an application to ANZ for finance to be secured by the property a few weeks before ANZ’s mortgage was registered in December 2013. 

1. Master Dao confirmed that the version of his conversation with Mr Rickard on 17 September 2013, referred to in paragraph 47 of his affidavit sworn on 18 December 2015, was correct.  His answer to a question as to whether Mr Rickard’s version of the conversation they had on 25 September 2013 was correct was non-responsive. 

1. Finally, Master Dao gave evidence that there were three matters he was upset with Gippsreal about: Gippsreal withdrawing its offer of finance, its refusal to charge an establishment fee based upon the sum advanced, and the valuation.

1. In re‑examination, Master Dao gave evidence that after Gippsreal cancelled the contract, the Society approached ANZ, which lent the Society $1 million in December 2013, based upon a valuation of the property of $3.4 million. 

1. Gippsreal also called Mr Adicho to give evidence, despite no affidavit being sworn by him.  Mr Adicho’s attendance at the trial was somewhat of a surprise, as Gippsreal had issued a subpoena to compel his attendance at trial but had been unable to serve him.  However, Mr Adicho told the Court that he had located the subpoena in the ‘Trash’ folder of his email account and was willing to give evidence without being formally served.  He gave evidence, in summary, as follows:

(a)   he was taken to a lengthy email written by him to Mr Roberts on 3 June 2013 (copied to staff at Gippsreal), where he said, among other things:

I got involved with the Society over 8 months ago in the capacity of a financial consultant a part of the their external management committee (sic).  I am not on a salary, I only get paid on success of a project or transaction,

and agreed that this was an accurate reflection of the relationship between him and the Society at that time;

(b)   he agreed that the handwritten amendments to the Deed of Offer were in his handwriting.  He had approval from Gippsreal to amend the Deed of Offer, including the change in the loan term from one year to two years.  He could not recall whether he spoke to Karen (Williams) or ‘the other gentleman’;

(c)    he was taken to a copy of an email he wrote to Gippsreal on 9 September 2013 regarding the Society’s intentions with respect to the loan, and agreed that what he wrote accurately reflected the position at the time, and that Master Dao changed his mind in relation to obtaining finance from Gippsreal many times;

(d)  he held the view that the Society were experienced borrowers.  He explained the terms of the Deed of Offer to Master Dao, and another Society member, and he believed that a copy was sent to the Society’s solicitors;

(e)   he had never been retained by Gippsreal as a broker;

(f)     when questioned about the establishment fee, he agreed that the sum of $26,625 is 1.5% of $1,775,000.  He believed that was reasonable, and that with Mr Roberts he had negotiated the fee down from 1.7 or 1.8 per cent to 1.5 per cent.  In his experience as a broker, an establishment fee of up to 2.5% could be charged, and a fixed fee could be charged;

(g)   he agreed that he advised Master Dao about the Deed of Offer, and that he explained to him that the establishment fee was 1.5 per cent of the amount to be advanced.  He did not contemplate a lower amount being advanced;

(h)   he was not involved with the Society at the time that Gippsreal informed the Society of the lower valuation or afterwards so he was not aware of how events unfolded until he arrived at Court that day; and

(i)     upon re‑examination by counsel for Gippsreal, he agreed that an establishment fee might be set which reflected the complexity of the deal.

1. On 18 December 2015, Gippsreal filed a document headed ‘List of Factual and Legal Issues’ as follows:

The defined terms used in the pleadings have been adopted in this List of Factual and Legal Issues.

A.       Key Issues

The proceeding relates to the liability (if any) of the defendant in respect of its obligations to pay the plaintiff damages arising from the defendant’s obligations to the plaintiff pursuant to a Deed of Offer of Finance signed by the defendant on 23 August 2013.

In addition to liability, the issue of quantum of damage is also in dispute.

A.       List of Factual Issues

1.Whether the defendant made representations to the defendant that the Property had a value in excess of $4M.

2.Whether the Deed of Offer of Finance was executed by the defendant.

3.Whether the addition of the words ‘Consultancy Fee 1.80% $31,950’ were words added to the Deed of Offer of Finance by the defendant or by an agent or person acting for and on behalf of the defendant alternatively, by the plaintiff or an agent of the plaintiff.

4.Whether John Adicho is or was an agent of the defendant, or alternatively, an agent of the plaintiff.

5.Whether Scott Roberts is or was an agent of the defendant, or alternatively an agent of the plaintiff.

6.Whether the plaintiff conducted due diligence and enquiries consistent with and for the purpose of evaluating the defendant’s financial position for the purpose of advancing a loan.

7.Whether the plaintiff obtained a preliminary valuation of the Property which valued the Property between $900,000 and $1,200,000.

8.Whether, on or about 25 September 2013, the defendant made a request on the plaintiff to proceed with a loan at 50% of the value of the Property.

9.Whether the plaintiff provided mortgage documents to the defendant and otherwise provided the defendant with an opportunity to receive a loan from the plaintiff (being a loan consistent with the terms of the Deed of Offer of Finance).

10.Whether the defendant did not take up the opportunity to receive the loan from the plaintiff and acted in breach of or otherwise repudiated the Deed of Offer of Finance.

11.Whether the plaintiff has suffered loss and damage as a result of the defendant’s failure to settle a mortgage in the sum of $1,775,000 as referred to in the Deed of Offer of Finance.

12.If the defendant is not liable to pay the Liquidated Damages, the value of the plaintiff’s loss and damage.

B.List of Legal Issues

1.If the Deed of Offer of Finance was executed by the defendant, whether the Deed of Offer of Finance had the effect of binding the defendant to its terms (including the terms of the Schedules to the Deed of Offer of Finance).

2.Whether the addition of the words ‘Consultancy Fee 1.80% $31,950’ is a matter that affects the enforceability of the plaintiff’s rights against the defendant in respect of the plaintiff’s right to recover damages from the defendant.

1. Given that finding, the question of whether any representations by Mr Adicho regarding the terms of the Deed of Offer or as to how Gippsreal might act in the future were made or acted upon do not arise.  However, for completeness, given the terms of the Society’s defence, I do not accept that the Deed of Offer is vitiated by any unconscionable conduct or duress, or that the terms of any credit related consumer protection laws are engaged in this transaction.  The proposed loan was clearly for commercial purposes, and while Master Dao’s English is imperfect, he is clearly experienced in commercial matters. 

1. However, counsel on behalf of the Society contended that Gippsreal was itself in breach of the Deed of Offer, in that it demanded, by its letter of 30 September 2013, that the Society settle the loan within three business days, in circumstances where the mortgage documentation had been sent to the Society’s lawyers with the wrong loan term and an exorbitant establishment fee.  In those circumstances, Gippsreal was not entitled to rely upon clause 36(c)(vii) of the Deed of Offer, which required Gippsreal to stipulate ‘a reasonable nominated time period’ in order to be able to withdraw its offer of finance.  As such, Gippsreal, not the Society, is in breach of the Deed of Offer, and as such, not entitled to claim damages from the Society.

1. Clause 36(c) of the Deed of Offer provides as follows:

The Mortgagee reserves the right to withdraw the Offer of Finance at any time up to and including the date of settlement should:-

i)any change in a statute, regulation, rule, policy, or other like thing prevent, in the Mortgagee’s reasonable opinion, the Mortgagee from providing the Proposed Mortgage or render the provisions of the Proposed Mortgage uncommercial;

ii)the Borrower’s (sic) fail to comply with any condition or requirement imposed by the Mortgagee (either as set out in this Deed or subsequently imposed as reasonable by the Mortgagee as a result of its enquiries); or

iii)the Mortgagee during its loan enquiries discover any matter or thing contrary to the disclosed circumstances and which has a material adverse affect (sic) on:-

i)the ability capacity or willingness of the Borrower to perform its obligations under this Deed;

ii)the financial status of the Borrower;

iii)the financial history of the Borrower;

iv)the security, including its history, status or suitability.

iv)any information comes to the attention of the Mortgagee or any event occurs which would, in the reasonable opinion of the Mortgagee, render the making of the Proposed Mortgage or the granting of the loan to the Borrower, prejudicial to the interests of the Mortgagee;

v)any representations made or warranties given by the Borrower (either in this Deed, the Application or otherwise) be determined to be untrue, false or misleading;

vi)the Borrower committing an act of default pursuant to clause 24 of this Deed;

vii)the Borrower fails to settle the Proposed Mortgage by the drawdown date for reasons outside of the control of the Mortgagee, and the Mortgagee has given the Borrower notice of it’s (sic) intention to withdraw the Offer of Finance if the Proposed Mortgage is not completed within any reasonable nominated time period; …

1. While the time frame stipulated by Gippsreal was short, I consider that, in all of the circumstances, it was not unreasonable for Gippsreal to nominate a tight time frame for the settlement of the loan.  Indeed, the Society had communicated to Gippsreal, directly and indirectly, that it wanted to proceed quickly.  Gippsreal had gathered the funds to settle the loan.  The Society’s conduct in its dealings with Gippsreal over the course of 2013 was, to say the least, erratic, as spelt out in the letters from Gippsreal dated 11 July 2013 and 19 July 2013.  While no particular blame can be attributed to the Society for this, the disparity between the value of the security property as represented to Gippsreal and the actual valuation must have caused Gippsreal concern.  I have found that Gippsreal was entitled, by reason of the terms of the Deed of Offer, to charge an establishment fee by way of a fixed sum rather than a percentage of the actual loan amount.  There is no reason not to accept Mr Rickard’s evidence that the reference in the loan documentation to a term of one year was a typographical error, and that Gippsreal was always prepared to agree to a two year loan period.  Accordingly, I reject the contention that it was Gippsreal, not the Society, that breached the terms of the Deed of Offer.

1. As for the establishment fee issue, a major bone of contention between the parties is whether Gippsreal is entitled to claim the sum of $26,625, being the establishment fee referred to in the Deed of Offer.  It did not seem to be submitted on behalf of the Society that the establishment fee was a penalty, despite being included by Gippsreal in its letter of 4 October 2013 as a component of liquidated damages, but rather that, given its inclusion under the heading ‘Estimated Costs and Disbursements’, and the reference to the establishment fee in the 16 July letter as being 1.5% of the loan amount, the terms of the Deed of Offer should be construed, in a commercially sensible way, to in effect read ‘$26,625, or 1.5 percent of the loan ultimately approved to be advanced, whichever is the lesser’, which was consistent with the Society’s understanding of the transaction.  Counsel for the Society was critical of Mr Rickard’s evidence to the effect that there was some ‘science’ in the calculation of the specific sum of $26,625.

1. The difficulty with the above proposition is that it offends well established principles of contractual construction.  It is correct that the 16 July letter referred to an establishment fee of 1.5 percent, and, according to Mr Adicho, this was a rate and method of calculation which is consistent with industry practice.  I also accept that Gippsreal’s selection of a fixed sum, and deciding to stick with that sum notwithstanding the reduced loan amount, was somewhat arbitrary.  However, the parties’ subjective intentions and understandings are irrelevant to the construction of the terms of the Deed of Offer.[13]

   [13]Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (‘Codelfa’).

1. The applicable principles of contractual interpretation were concisely summarised in the Court of Appeal’s decision in Bytan Pty Ltd & Ors v BB Australia Pty Ltd (‘Bytan’),[14] as follows (omitting citations):

   [14][2012] VSCA 233 [10]-[12] (Warren CJ).

The applicable principles of contractual interpretation are not in dispute.  First, the contract should be construed objectively:

The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean.  That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

Secondly, surrounding circumstances can be used to resolve ambiguities:

[E]vidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.  But it is not admissible to contradict the language of the contract when it has a plain meaning.  Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although … if the facts are notorious knowledge of them will be presumed.

Thirdly, the contract must be construed as a whole and in the case of ambiguity the court should prefer a construction that does not lead to capricious or inconvenient results:

[T]he whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another.  If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different.  The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust.  On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, ‘even though the construction adopted is not the most obvious, or the most grammatically accurate’ …  Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. 

1. Accordingly, the question of whether extrinsic evidence (in this case, for example, the terms of the 16 July letter, and Mr Adicho’s evidence regarding industry practice) is even admissible for the purpose of construing the terms of a contract can only arise where a term of a contract is ambiguous, or susceptible to more than one meaning.  While there has been some subsequent intermediate appellate authority to suggest otherwise, the statement of Mason J in Codelfa reproduced below remains good law:[15]

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.  But it is not admissible to contradict the language of the contract when it has a plain meaning.  Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

[15]Codelfa, 352. In Royal Botanic Gardens v South Sydney CC (2002) 240 CLR 45 [39], the High Court stated that until that Court determined otherwise, Australian Courts should follow Mason J’s ‘true rule’. This was restated by three members of the Court in refusing special leave to appeal in Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604 [3]-[5].

1. In Interpretation and Use of Legal Sources,[16] the authors have helpfully identified various definitions for the meaning of ‘ambiguity’ (citations omitted):

   [16]P Hertzfeld, T Prince and S Tully, Interpretation and Use of Legal Sources (Thomson Reuters, 2013) [25.3.440].

(a)   ambiguity refers to a situation where a word or phrase or sentence has more than one meaning because of verbal, grammatical or syntactical ambiguity;

(b)   words, phrases or clauses are ambiguous where they have ‘two or more plausible meanings when the context of the words in the document is taken into account in light of the knowledge any ordinarily intelligent reader of the document would bring to the reading of it’;

(c)    ambiguity arises whenever the intention of the parties concerning the scope or application of a provision, is, for whatever reason, doubtful; or

(d)  ambiguity arises where ‘after ascertaining the meaning of the words used, and after applying the usual canons of construction, the instrument still conveys a double or multiple meaning.

1. The critical question is, therefore, whether there is any ambiguity by the inclusion of a reference to $26,625 under the heading ‘Estimated Costs and Disbursements’.  In my view, there is not.  Indeed, it could be said that there is nothing plainer than a reference to a fixed sum of money, notwithstanding any debate regarding the basis for its calculation.  Master Dao gave evidence that Mr Adicho explained to him that the valuation of the property valuation came in at less than $3,500,000, Gippsreal would offer a reduced amount, with the establishment fee being 1.5 percent of the approved amount, consistent with the loan advice.  Mr Adicho agreed that he explained to Master Dao the basis for the calculation of the establishment fee, but that at the time, he did not even contemplate a lower amount being advanced.  For the reasons explained above, where there is any conflict between the evidence of Master Dao and Mr Adicho, I prefer that of Mr Adicho.  Even if I accepted Master Dao’s version of events as being correct, given my findings about Mr Adicho’s status as being the agent of the Society, what Mr Adicho believed or told Master Dao is largely irrelevant.  If Master Dao’s evidence is correct, and Mr Adicho did represent that Gippsreal would charge an establishment fee equivalent to 1.5% of the amount ultimately advanced, it was always open to the Society to instruct Mr Adicho to amend the Deed of Offer with words to that effect, as he did with the clause setting the loan term. 

1. Counsel for the Society in his submissions placed great weight upon the inclusion of the inference to the establishment fee under the heading ‘Estimate of Costs and Disbursements” in Schedule 1 of the Deed of Offer, contending that, in the context of the negotiations concluded by Mr Roberts and Mr Adicho, culminating in the 26 July letter, the sum of $26,625 must have been an estimate, with any alternative construction resulting in an unfair windfall to Gippsreal.

1. I do not accept that the reference to the establishment fee under the heading ‘Estimate of Costs and Disbursements’ could be considered to be ambiguous in the absence of any qualifying language.  The absence of qualifying language might not be fatal in respect of all items: for example, the sum nominated as ‘6 months interest in advance’ must be an estimate, because Gippsreal was only entitled to charge interest on the amount actually advanced.  Further, the handwritten reference to ‘Consultancy Fee 1.80% $31,950’ would also be an estimate, because the fee payable would ultimately depend upon the terms of the mandate.  The valuation fee is specified to be an estimate.  However, in the absence of any express reference to ‘1.5 per cent’ in the Deed of Offer, I do not accept that the term ‘Estimate of Costs and Disbursements’ creates the necessary ambiguity in the terms of the Deed of Offer. 

1. Counsel for the Society placed great weight on the reference in the 16 July letter to an establishment fee of 1.5 percent of the amount advanced.  However, the terms of the 16 July letter make it clear that this was an indicative offer only.  In any event, the reference to an establishment fee of 1.5% in the 16 July letter is largely irrelevant, not simply because I have found that there is no ambiguity in the reference to the sum of $26,625, but the terms of the Deed of Offer provide that the Deed of Offer constitutes the entire agreement between the parties.[17]  As such, extrinsic evidence, including the evidence of previous negotiations, cannot be admitted for the purpose of contradicting, varying, adding to or subtracting from the express terms of the Deed of Offer.[18]  For completeness, I agree with the submissions of counsel for Gippsreal that there is no basis for implying a term that the establishment fee would be 1.5 per cent of the amount ultimately approved to be advanced. 

   [17]see clause 3.17 of the Deed of Offer, and clause 52 of Schedule 3. 

   [18]see Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348; McMahon v National Foods Milk Ltd (2009) 25 VR 251.

1. While my finding regarding the establishment fee might be considered to lead to a harsh outcome, it is to be noted that in the extract from Australian Broadcasting Commission v Australasian Performing Right Association Ltd,[19] reproduced in Bytan, the High Court stated that if the words issued in a contract are unambiguous, it is beside the point if the outcome is harsh. 

   [19](1973) 129 CLR 99, 109 (Gibbs J).

1. As for the penalty issue, I accept Mr Rickard’s evidence as to the basis upon which the liquidated damages clause was framed, based upon, he deposed, to his long experience as the principal of Gippsreal and its predecessor.  I also accept his evidence that if the calculation is based upon a loan amount of $1,775,000, the actual damages suffered by Gippsreal (or, more accurately, its investors) was in fact higher than the amount claimed by Gippsreal, if the calculation is based upon a loan advance of $1,775,000.  However, that evidence, to the extent that it seeks to establish that the liquidated damages clause represents a genuine pre-estimate of Gippsreal’s damages, somewhat misses the point.  The liquidated damages clause only represents a genuine pre-estimate of Gippsreal’s damages if the amount ultimately advanced is an equal or substantially similar amount to the amount originally proposed to be advanced.

1. However, it is strictly not necessary to address the question of whether the liquidated damages clause is an unenforceable penalty, on the basis that, in my view, the proper construction of the liquidated damages clause limits the obligation of a party in the position of the Society to pay three months’ interest on the sum ultimately approved to be advanced, not the figure referred to in the Deed of Offer, given that Gippsreal reserves to itself the right to advance only fifty per cent of the value of the security property.

1. In order to make good this proposition it is necessary to step through some of the terms of the Deed of Offer in some detail.  Clause 1 of the Deed of Offer provides as follows:

1        Offer of Loan

The Mortgagee offers to lend to the Borrower the proposed mortgage sum on the terms and conditions set out in this Deed of Offer of Finance.  This Deed incorporates the attached:-

Schedule 1 – Offer Schedule; and

Schedule 2 – Special Conditions (if any); and

Schedule 3 – General Conditions (v.11 dated 7 February 2012) (‘the Offer’).

1. The Deed of Offer, including the Deed itself, and the Schedules referred to above, contain a number of defined terms.  The definitions section is contained in clause 75 of Schedule 3, and, contains, among other things, the following definitions:

75       Definitions

In this Deed, unless something else is clearly intended:

‘Amount outstanding’

Means the aggregate of:-

i)     the monies hereby secured as defined in the Proposed Mortgage (including interest on interest); and

ii)    all other money due and payable and/or outstanding to the Mortgagee, howsoever incurred and on any account of the Borrower whatsoever (either past, present, future or contingent and specifically including any monies owing to the Mortgagee in their capacity as assignee of any debts (including any debts incurred by the Borrower prior to them entering into this Deed)) and including the Mortgage Sum and all other monies due (either presently or contingently) under this Deed (and specifically including the Liquidated Damages and the Contingent Fee) and the Proposed Mortgage (including any personal covenants of the Proposed Mortgage).

‘Deed of Offer of Finance’ (also referred to as ‘this Deed’

means this Deed of Offer of Finance incorporating Schedule 1 – Offer Schedule; Schedule 2 – General Conditions (this Document); and Schedule 3 – Special Condition.

‘Liquidated Damages’

means all monies defined in this Deed as Liquidated Damages and additionally any/all other monies due and payable to the Mortgagee pursuant to this Deed and the Proposed Mortgage including interest, interest on interest, costs (including legal costs), damages suffered by the Mortgagee, the Early Repayment Liquidated Damages, any monies claimed by the Mortgagee pursuant to any indemnity, contingent fee and any other losses, costs and damages howsoever incurred by the Mortgagee (whether directly or indirectly, or at present or any time in the future) as a result of the Borrower’s breach of this Deed or the Proposed Mortgage.

‘Mortgage Sum’

means and includes (without limitation);

i)the monies hereby secured as defined in the Proposed Mortgage; and

ii)the Performance Fee, the Default Discharge fee, the Liquidated Damages, the Early Repayment Liquidated Damages the Contingent Fees and all other monies, fees and charges due and payable under this Deed and the Proposed Mortgage.

‘Offer’

means this Deed of Offer of Finance incorporating Schedule 1 – Schedule 2 – General Conditions (this document) and Schedule 3 – Special Conditions, including any subsequent authorised variations.

‘Proposed Mortgage’

means any and all mortgage and loan advances made or agreed to be made by the Mortgagee to the Borrower (or at the Borrower’s request or direction) and all Security Documents related thereto.

1. Clause 3 of the Deed of Offer includes the ‘Borrower’s Requests, Acknowledgements and Covenants’, including, at clauses 3.13 and 3.14:

3.13that induced by and in reliance upon the Borrower’s finance application and execution of this Offer the Mortgagee will:-

(a)instruct its Solicitors to undertake all necessary searches and enquiries to investigate the proposed mortgage and to proceed with the preparation of all security documents and mortgage documents;

(b)arrange for investors to commit funds for the proposed mortgage to the Borrower which will involve the Mortgagee and its investors suffering loss or damage should the loan not proceed to completion.

(‘the Mortgagee’s undertaking)

and in consideration of the Mortgagee’s undertaking the Borrower agrees to pay all monies due under this Offer (including the liquidated damages), within seven (7) days of demand and irrespective of whether or not the proposed mortgage proceeds to completion;

3.14that the Liquidated Damages (see clause 32 of Schedule 3 – General Conditions) are a fair and reasonable pre-estimate of the damages which would be suffered by the Mortgagee; …

1. Schedule 1 of the Deed of Offer in effect provides the particulars of the proposed loan: Clause 7 provides that the ‘Proposed Mortgage Sum’ (which is not a defined term but must be sensibly read as being referable to the ‘Proposed Mortgage’) is:

$1,775,000 (or a maximum 50% Loan to Value Ratio, whichever is the lesser).

1. Clause 20 of Schedule 1, against the heading ‘Liquidated Damages’, provides as follows:

§$31,625.00 on account of administrative and professional costs incurred by Gippsreal in investigating the loan prior to completion and procuring investors funds;

§$41,046.88, being (three) month’s interest at the lower rate; and

§all monies due to Gippsreal pursuant to clause 34 of Schedule 3 – General Conditions; and

§any other costs and disbursements incurred by the Mortgagee or its agents at the actual costs or if the actual cost cannot be reasonably quantified, then pursuant to any costs agreement entered into between the Mortgagee and its agents;

(the Liquidated Damages – see clause 32 of Schedule 3 – General Conditions)

1. This clause is ambiguous, having regard to the definition of Proposed Mortgage Sum above, in that it refers to a dollar sum, calculated in a particular way, in circumstances where the ‘Proposed Mortgage’ means ‘all mortgages and loan advances made or agreed to be made by [Gippsreal].’  In the Deed of Offer, Gippsreal only agreed to advance $1,775,000 or some lesser amount.  Accordingly, the ‘Proposed Mortgage Sum’ is not $1,775,000, but rather, the amount that Gippsreal ultimately agreed to advance. 

1. The sum of $1,775,000 represents a maximum amount Gippsreal would be prepared to lend, not the amount it agreed to lend. Accordingly, the terms of clause 20 of Schedule 1 are ambiguous, especially when considered with clause 32 of Schedule 3, which triggers the obligation of the borrower to pay liquidated damages in the event that the Proposed Mortgage not proceed.

1. In Metier3,[20] Vickery J stated, with reference to the principles of construction with respect to commercial contracts:

In the application of these principles, the Court will also consider the reasonableness of the result of the particular constructions that are advanced.  The more unreasonable a result, the less likely that the parties intended it.  The Court will also have regard to all of the words used in the agreement so as to, as far as possible, render them harmonious.

[20][2014] VSC 80 [42].

1. In the current case, a less unreasonable, and more harmonious, construction of clause 20 of Schedule 1 is for it to read as follows:

§$41,046, or (three) month’s interest on the proposed mortgage at the lower rate, whichever is the lesser.

1. Of course, the evidence is that Gippsreal did in fact have set aside sufficient funds to make an advance to the Society prior to 27 September 2013.  However, given that it reserved to itself the right to advance a sum less than the indicative amount of $1,775,000, it took on the risk that those funds, or part of those funds could not be committed to the loan if the property didn’t ‘value up’.  It seems to me to be an absurd result if Gippsreal was only entitled to be compensated for the consequences of the failure of the property to ‘value up’ if the loan failed to proceed, or the Society later defaulted on the loan.  After all, if the loan had proceeded, there was no provision in the Deed of Offer which would entitle Gippsreal to compensation for lost interest in respect of the funds set aside, but not advanced to the Society (being the difference between $1,775,000 and $500,000).

1. However, if I am wrong in my finding that the Deed of Offer ought to be construed in the manner set out above, it is necessary to consider the argument actually advanced on behalf of the Society, being that the liquidated damages clause, insofar as it entitles Gippsreal to claim the sum of $41,046.88 as a component of liquidated damages, is an unenforceable penalty. 

1. The relevant legal principles concerning whether an agreed liquidated damages clause is a penalty was not the subject of any dispute between the parties.  In Ringrow Pty Ltd v BP Australia Pty Ltd (‘Ringrow’), the High Court stated:[21]

The law of penalties, in its standard application, is attracted where a contract stipulates on breach the contract breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre‑estimate of the damage likely to be caused by the breach.

[21](2005) 224 CLR 656, 662.

1. The High Court adopted (not without reservation), the statement of principle by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd,[22] including the following test:

It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that conceivably proved to have followed from the breach.

[22][1915] AC 79, 86-87.

1. In Ringrow, the Court emphasised that:[23] 

The propounded penalty must be judged ‘extravagant and unconscionable in amount’.  It is not enough that it should be lacking in all proportion.  It must be out of all proportion.

[23](2005) 224 CLR 656 [32].

1. In Yarra Capital Group Pty Ltd v Sklash Pty Ltd,[24] the Court of Appeal stated:

In providing this remedy the courts seek to strike a balance between the freedom of the parties to contract as they wish and the public interest that calls for the protection by the courts of the weaker party from oppressive burdens or the unconscionable use of power by the stronger party.  Nevertheless, in determining whether to provide such relief, the courts treat the parties’ freedom to contract as an important consideration.

[24][2006] VSCA 109 [11]. See also AMEV v UDC Finance Ltd v Austin (1986) 162 CLR 170.

1. In Robophone Facilities Ltd v Blank,[25] Diplock CJ held that the onus of proof lies upon the Society to establish that clause the liquidated damages clause is a penalty.  However, he also stated:[26]

The terms of the clause may themselves be sufficient to give rise to the inference that it is not a genuine estimate of damage likely to be suffered but a penalty.

[25][1996] 3 All ER 128.

[26]Ibid 142.

1. Of course, an agreed damages clause will generally, if not always, be enforceable if it represents a genuine pre‑estimate of damage on the occasion of breach, and much of Mr Rickard’s evidence was directed at first, establishing the basis for the selection of three months as a date by which it could be anticipated that the gathered funds could be advanced to other borrowers, and the fact that the actual damages suffered by Gippsreal (at least based upon an advance of $1,775,000) exceeded the sum claimed.  However, in O’Dea v Allstates Leasing System (WA) Pty Ltd,[27] Deane J stated as follows:

In what is written above, I have omitted the statement to be found in many cases, including Lord Dunedin’s judgment in the Dunlop Pneumatic Tyre Case, to the effect that ‘the question whether a sum stipulated is penalty or liquidated damages is a question of construction’.  Properly understood, that statement is unobjectionable: whether or not a provision of  contract imposes a penalty must be determined by reference to the true operation of that provision.  That question must however be determined as a question of substance which cannot be foreclosed by statements of the parties in their agreement, no matter how genuine they may be, as to their intention in stipulating the sum.  The parties to an agreement may have subjectively intended to make a pre‑estimate of damages in the event of breach.  If, however, that pre‑estimate is either extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach or, judged as at the time of making the contract, is unreasonable in the burden which it imposes in the circumstances which have arisen, it is a penalty regardless of the intention of the parties in making it.

[27](1983) 152 CLR 359, 400.

1. Accordingly, the principles relevant to the current case are as follows:

(a)   the onus of establishing that the liquidated damages clause is a penalty rests upon the Society;

(b)   however, the terms of the clause may give rise to an inference that an agreed damages clause is a penalty;

(c)    an agreed damages clause will generally be enforceable if it can be shown that it is a genuine pre-estimate of damage at the time it was agreed;

(d)  however, the term ‘genuine’ is not necessarily referable to the subjective intentions of the parties: rather, what is ‘genuine’ must be viewed in the context of the actual outcome of the operation of its terms; and

(e)   given the desirability of holding parties to their bargains and the commercial convenience and efficacy of agreed damages terms, the difference between the amount stipulated in an agreed damages clause and the actual loss suffered must be more than simply disproportionate, it must be ‘all out of proportion’. 

1. Applying these principles to the current case, having regard to the terms of the Deed of Offer as a whole, and the actual outcome of the operation of the liquidated damages clause, the liquidated damages clause is an unenforceable penalty.

1. In the Deed of Offer, Gippsreal reserved to itself the right to advance a lower amount than the indicative loan amount in the Deed of Offer if the security property failed to ‘value up’.  This is precisely what occurred in the current case.  As at 30 September 2013, when it ‘drew down’ the loan, it only intended to advance the sum of $500,000, but there is no mechanism in the Deed of Offer to adjust the liquidated damages sum claimable in the event that the loan failed to proceed to reflect the reduced loan amount.  Given that, on my calculations, if such a mechanism was in place, the adjusted amount would be $11,562.50, the claimed sum of $41,046.88 is sufficiently disproportionate to the actual losses suffered by Gippsreal as a result of the Society’s failure to proceed so as to amount to a penalty.

1. Of course, the fact that the liquidated damages clause is unenforceable as a penalty does not deprive Gippsreal of its right to claim unliquidated damages for breach of contract. 

1. Accordingly, on the basis of my findings with respect to the construction of the liquidated damages clause, the amount Gippsreal is entitled to be paid is $11,562.50, although I am content for the parties to confirm this calculation.  If I am wrong on the question of construction, then, based upon the evidence of Mr Rickard, the unliquidated damages claimable by Gippsreal will be an amount equivalent to the difference between the interest Gippsreal would have received on the sum of $500,000, and the amount actually received in interest upon those funds between 30 September 2013 and 14 January 2014, when the sum of $800,000 was lent out to another borrower.

1. Before turning to the question of costs, while strictly speaking it is not necessary for me to deal with this aspect of Gippsreal’s claim, for completeness I agree with the submissions of counsel for the Society that, insofar as the sum of $26,625 is claimed on a quantum meruit basis, Gippsreal has failed to establish that:

(a)   the work done by Gippsreal in undertaking due diligence conferred any benefit upon the Society; and

(b)   the work done by Gippsreal could be valued at the sum claimed by Gippsreal.

1. This is not to say that Gippsreal did not commit time and effort to undertaking due diligence and otherwise dealing with the Society, or to deny that it has significant overhead costs in running its business and complying with the regulatory requirements imposed upon it.  However, the evidence does not descend to the level of detail which would be necessary to support a claim in quantum meruit. 

1. Further, I agree with the submissions advanced by counsel for the Society that any work done by Gippsreal in carrying out due diligence must have conferred some material benefit upon the Society.  As stated by the High Court in Pavey & Matthews Pty Ltd v Paul:[28]

The obligation to make restitution [based upon principles of unjust enrichment] does not arise from agreement at all.  It is an obligation or debt imposed by law which ‘arises from the defendant having taken the benefit of the work done, goods supplied, or services rendered’.

[28](1987) 162 CLR 221, 225.

1. However, to the extent that it is contended by the Society that there should be some accounting for the fees already paid by the Society to Gippsreal (totalling $17,500), I reject any such contention.  The payment  of $7,500 in February 2013 related to an entirely different transaction.  In any event, the fees were paid on the basis that Gippsreal had made it abundantly clear that they were non‑refundable, although Gippsreal retained the discretion to credit these fees against any sum ultimately advanced. 

1. Turning now to the question of costs, in addition to being entitled to rely upon clause 34 of Schedule 3 of the Deed of Offer, which provides a very broad ranging indemnity to Gippsreal in respect of any costs incurred by Gippsreal in connection with the transaction which is the subject of the Deed of Offer, Gippsreal has been substantially successful in this proceeding.  However, it has not been entirely successful.  Also, I suspect that the quantum of the parties’ costs in this proceeding may well dwarf the sums of the amounts in dispute, and that there may have been offers made by either or both parties which may be relevant to the question of costs.  Accordingly, I propose to hear further from the parties on the appropriate form of order and the question of costs.

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