Iacullo v Hillam

[2014] NSWSC 1021

Supreme Court

New South Wales

Medium Neutral Citation:

Iacullo v Hillam [2014] NSWSC 1021

Hearing dates:

21/07/2014

Decision date:

30 July 2014

Before:

Ball J

Decision:

(1)Judgment for the plaintiffs in the sum of $981,647.95.

(2)The defendant pay the plaintiffs' costs of the proceedings.

Catchwords:

CONTRACT - multiple subsequent agreements - novation - whether parties intended subsequent agreements to replace earlier agreements
CONTRACT - construction - whether obligation to pay conditional on grant of charge - whether failure to pay or grant charge in repudiation of agreement - where failure by all parties to enforce obligations abandonment of agreement

Cases Cited:

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471
Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473
Summers v The Commonwealth (1918) 25 CLR 144

Category:

Principal judgment

Parties:

Dominic Iacullo (First Plaintiff)
Lillian Iacullo (Second Plaintiff)
John Hillam (Defendant)

Representation:

Counsel:
DA Smallbone with WK Soon (Plaintiffs)
JB Whittle SC with D Neggo (Defendant)
Solicitors:
I E Duffield (Plaintiffs)
Mills Oakley Lawyers (Defendant)

File Number(s):

2014/66418

Publication restriction:

None

Judgment

Introduction

1. Pursuant to three loan agreements, the plaintiffs, Mr and Mrs Iacullo, agreed to lend to the defendant, Mr Hillam, a total amount of $455,000. Mr Hillam agreed to repay the loans by 12 January 2012 and to pay interest on the amount outstanding at the rate of 15 percent per annum. He also agreed, subject to an irrelevant qualification, to transfer to Mr and Mrs Iacullo shares in a company known as Carpentaria Exploration Ltd (Carpentaria) with a total value of twice the amount lent or, if those shares were not transferred to Mr and Mrs Iacullo by the due date for repayment of the loans, to pay an amount equal to twice the amount of the loans at that time.

1. Mr and Mrs Iacullo advanced the sum of $380,000. They refused to advance the balance of $75,000 until Mr Hillam provided security, which he did not do. Mr Hillam has now repaid the amounts lent to him together with interest (the last payment was made during the course of the hearing). However, he has not transferred to Mr and Mrs Iacullo any shares in Carpentaria or made any payments as an alternative to the transfer of those shares. Mr and Mrs Iacullo now seek to recover the sum of $910,000 (twice the total amount agreed to be lent) together with interest on that amount pursuant to that obligation. The question that remains in the case is whether they are entitled to do so.

Background facts

1. Mr and Mrs Iacullo and Mr Hillam were clients of a solicitor, Mr Allsop. Mr Hillam is a geologist by training. He has, or at least at the relevant time had, interests in a number of corporations including a company known as Wentworth Metals Group Pty Ltd (WMG), in which he and his de facto wife each own 50 percent of the shares, and a company known as Bonython Metals Group Pty Ltd (BMG), which had a significant interest in a magnetite project being developed by Carpentaria.

1. Some time in 2011, a shareholder in BMG brought an oppression suit against Mr Hillam in the Federal Court. By about May or June 2011, Mr Hillam was having difficulty raising funds to pay the continuing expenses of defending the oppression suit. Mr Allsop, who was acting for him in the proceedings, introduced him to Mr Iacullo, who agreed to advance him the sum of $200,000 for that purpose. The loan agreement was prepared by Mr Allsop. It was dated 12 July 2011 (the First Loan Agreement).

1. Clause 2.1 of the First Loan Agreement provided:

The Lender will advance to the Borrower the Loan on the date of this Agreement.

1. Clause 4 of the First Loan Agreement provided:

4. Repayment and Prepayment

4.1 The Borrower must repay the Loan and accrued interest on or before 12 January, 2012.

4.2 On or before 12 January, 2012, the Borrower is to cause ordinary shares in Carpentaria Exploration Limited to be transferred to the Lenders, or their nominee, to the value of $400,000, which value shall be determined by the price of the shares in Carpentaria Exploration Limited listed on the Australian Stock Exchange on the date of transfer, provided that if at the date of transfer the shares in Carpentaria exploration Limited exceed $1.00 per share, the Borrower shall cause 400,000 shares to be transferred to the Lenders.

4.3 In the event that the Borrower is unable to effect the transfer of shares in Carpentaria Exploration Limited as provided in Clause 4.2, on or before 12 January, 2012, the Borrower shall pay to the Lenders the sum of $400,000, together with interest as provided in Clause 3, which shall accrue on the said sum of $400,000 as and from 12 January, 2012, until payment of the said sum.

1. "Loan" is defined cl 1 of the agreement to mean "$200,000".

1. Notwithstanding cl 2.1, the sum of $116,697.79 was advanced as a result of an agreement between Mr Iacullo and Mr Allsop, by which Mr Allsop agreed to treat payments that were made by Mr and Mrs Iacullo to him on 28 and 29 June 2011 as having been made by Mr Hillam. Additional amounts totalling $83,302.21 were paid by Mr and Mrs Iacullo at Mr Allsop's direction on 19 and 28 July 2011.

1. Shortly after the First Loan Agreement was executed, Mr Hillam sought a second loan from Mr and Mrs Iacullo for $155,000 to pay a debt he owed to Leduva Pty Ltd, which was the subject of a bankruptcy notice that had been served on him. Mr Iacullo provided Mr Hillam with a cheque for $155,000 made payable to Leduva on 25 July 2011. The cheque was not acceptable to Leduva, which sought a bank cheque. Mr Iacullo provided Mr Hillam with a bank cheque made payable to Leduva the following day.

1. On the same day (26 July 2011), Mr Hillam and Mr Iacullo (but not Mrs Iacullo, although she was expressed to be a party) executed an agreement which was in similar terms to the First Loan Agreement (the Second Loan Agreement). The new agreement was prepared by Mr Allsop. Clause 2.1 provided:

The Lender has advanced to the Borrower the Loan as at the date of this Agreement.

"Loan" was defined to mean "$355,000".

1. Clause 4 of the Second Loan Agreement was in substantially the same terms as cl 4 of the First Loan Agreement except that the figure "710,000" was substituted for the figure of "400,000" both in relation to the amount that had to be paid and the number of shares that had to be issued.

1. At the time Mr Allsop sent Mr Iacullo a draft of the Second Loan Agreement, he advised Mr Iacullo that "you should agree to terminate the earlier agreement when a new agreement is entered". However, there is no evidence of an express agreement between Mr Iacullo and Mr Hillam to that effect.

1. It appears that, at about the time the Second Loan Agreement was signed, there was a discussion between Mr Iacullo and Mr Hillam concerning security. According to an email sent by Mr Iacullo to Mr Allsop at 7.41 pm on 26 July 2011, Mr Hillam "has no problems having a charge over the company Wentworth Metals Group and the tenements as security for the money which [Mr Hillam] will owe me and [Mrs Iacullo] regarding the $355,000.00 loan agreement that you prepared". Subsequently, on 11 August 2011, Mr Hillam wrote on a copy of that email the words "Provide it does not take presidence [sic] over other charges". The copy of the email was signed by Mr Hillam and Mr Iacullo under the note, presumably at the time the note was written. The note was also signed by a witness.

1. At about the same time, Mr Hillam asked Mr Iacullo for a further loan of $100,000. On this occasion, Mr Iacullo instructed Kardos Scanlan, solicitors, to prepare an appropriate loan agreement. In the meantime, on 15 August 2011, he advanced a further amount of $25,000 to Mr Hillam.

1. On 17 August 2011, Mr Iacullo provided Mr Hillam with draft agreements prepared by Kandos Scanlan. The drafts included a loan agreement between Mr Hillam, Mr and Mrs Iacullo and WMG, a fixed and floating charge granted by WMG in favour of Mr and Mrs Iacullo and an equitable mortgage of shares granted by Mr Hillam in favour of Mr and Mrs Iacullo.

1. Mr Hillam responded that he needed further time to consider and obtain advice on the agreements. In the meantime, on 18 August 2011, he proposed that the parties sign a loan agreement based on the previous two. Clause 4.4 of the agreement proposed by Mr Hillam was in the following terms:

In the event that the borrower make early repayment of the loan Clause 4.3 will be subject to a prorate [sic] reduction of the sum $910,000 based on the time of any early repayment to the term of the loan. For the avoidance of any doubt as an example if the borrower was to make early repayment after 3 months of the loan execution date clause 4.3 would be subject to a 50% reduction in the amount of "said sum of $910,000".

1. Mr Iacullo took objection to that clause. The parties discussed the draft agreement at a lengthy meeting held in Mr Hillam's offices on 19 August 2011. It appears that during the course of the meeting, Mr Hillam produced a further draft of the loan agreement which he signed (the Third Loan Agreement). The Third Loan Agreement is dated 15 August 2011. "Loan" is defined in cl 1 in the following terms:

Loan means $200,000 on or around 12 July 2011

Loan means $155,000 on or around 26 July 2011

Loan means $25,000 on or around 15/08/2011

Loan means $75,000 on or around 18/08/2011

Total Loan subject to this agreement means $455,000

1. Clause 2.1 of the agreement provides:

The Lender will advance to the Borrower the Loan on the date of this Agreement.

1. Clause 4 of the Third Loan Agreement was in similar terms to cl 4 of the Second Loan Agreement except that the figure "910,000" was substituted for the figure "710,000". In addition, the clause included the following cl 4.4:

The Borrower hereby agrees to provide the Lender a fixed and floating charge over the company Wentworth Metal Group Pty Ltd for the amount of the loan within a reasonable time.

1. There is a dispute about what was said at the time the Third Loan Agreement was discussed. According to Mr Iacullo, he said that the agreement prepared by Mr Hillam was fine "for the time being", but that he was not prepared to advance any more money until Mr Hillam signed the documents prepared by Mr Iacullo's lawyers. On the other hand, according to Mr Hillam, Mr Iacullo said that he was not prepared to advance any further money without security and that he needed a charge over WMG's assets. Mr Hillam replied that he was prepared to agree to a charge and that he would make some amendments to the proposed agreement. Those changes became cl 4.4 of the Third Loan Agreement.

1. Mr Iacullo did not execute the Third Loan Agreement at the time of the meeting. Instead, he took it away with him, and he and his wife did not execute it until some time after 22 September 2011. It is unclear from the evidence the circumstances in which that occurred.

1. Also at the meeting on 19 August 2011, it appears that Mr Iacullo gave Mr Hillam copies of the First Loan Agreement and the Second Loan Agreement.

1. On 26 August 2011, Mr Hillam asked Mr Iacullo to pay the outstanding $75,000. Mr Iacullo responded that he was not prepared to do so until Mr Hillam signed the agreements that had been drafted by Kardos Scanlon.

1. There was further correspondence between the parties. The position taken by Mr and Mrs Iacullo was that they were not prepared to advance the $75,000 until Mr Hillam and WMG executed the agreements that had been prepared by Kardos Scanlon. The issue was apparently discussed on 22 September 2011 and, following that discussion, Mr Hillam wrote to Mr Iacullo a letter in the following terms:

I confirm that you will sign and return the Mark 3 agreement to me.

I also confirm that I will undertake to sign a Charge agreement over Wentworth Metal Group Pty Ltd securing these loan agreements within or around 4 weeks hence from now.

1. Mr and Mrs Iacullo's position was set out in a letter dated 28 September 2011 from Kardos Scanlon to Mr Hillam. In that letter, Kardos Scanlon asserted that Mr Hillam was in breach of the obligations under cl 4.4 of the Third Loan Agreement by not procuring WMG to grant a fixed and floating charge and by Mr Hillam and his wife not granting an equitable share mortgage over the shares they held in WMG. The letter concluded:

Despite a reasonable time having elapsed since the signing of the Loan Agreement, and your continuing failure to comply with the Loan Agreement, my clients are willing to continue to make the Additional Funds available to you until 3pm Thursday 29 October 2011. The Additional Funds will only be made available to you in return for executed Security Documents and may not be available after this time.

1. The issue remained unresolved, and, on 4 March 2014, Mr and Mrs Iacullo commenced these proceedings.

1. On 2 July 2014, Mr Hillam served a notice purporting to terminate the Third Loan Agreement because of the failure of Mr and Mrs Iacullo to advance the sum of $75,000 in the event that the agreement had not already been terminated or abandoned.

The issues

1. Mr and Mrs Iacullo put their case in two ways. First, they submit that they are entitled to enforce their rights under the Third Loan Agreement, in particular the right to be paid the sum of $910,000, notwithstanding that they never advanced the sum of $75,000. They say that that is because the obligation to advance the $75,000 was dependent on Mr Hillam granting a charge. Mr and Mrs Iacullo say that they remained ready, willing and able to lend the sum of $75,000, but that, from an early stage, Mr Hillam made it clear that he was either unwilling or unable to grant a charge, and, in doing so, he repudiated the contract. Mr and Mrs Iacullo did not accept that repudiation, but instead have sought to enforce their rights under the contract by claiming the amount due to them.

1. Second, and in the alternative, Mr and Mrs Iacullo submit that the Third Loan Agreement did not discharge the earlier two. Consequently, if they are not entitled to enforce their rights under the Third Loan Agreement, they are entitled to enforce their rights under the other two. They have performed their obligations under those loan agreements, and, consequently, they are entitled to be paid the sum of $710,000 together with interest on that amount from 12 January 2012 at the contractual rate.

1. For the reasons that follow, I do not accept Mr and Mrs Iacullo's first contention. However, I accept their second.

The claim under the Third Loan Agreement

1. Mr and Mrs Iacullo submit that the Court ought to have regard to the conversations that occurred leading up to execution of the Third Loan Agreement and to the correspondence between the parties - in particular, the terms of the email dated 26 July 2011 and the note on that email signed by Mr Iacullo and Mr Hillam on or about 11 August 2011 - in determining the rights and obligations of the parties. I do not accept that submission. The agreement on which Mr and Mrs Iacullo sue is the Third Loan Agreement. That sets out Mr Hillam's obligations in relation to security. In my opinion, that agreement supersedes any agreement recorded on the email dated 26 July 2011; and the parole evidence rule prevents the Court from taking into account that email or the conversations between the parties in interpreting the terms of the Third Loan Agreement: see Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at [33] per Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ.

1. The essential obligation of Mr and Mrs Iacullo under the Third Loan Agreement was to lend Mr Hillam the amounts set out in the agreement (all of which had been lent except for the $75,000). In return, Mr Hillam agreed to repay those amounts with interest by 12 January 2012 and to pay the sum of $910,000 in the event that he failed to cause ordinary shares in Carpentaria to that value to be transferred to Mr and Mrs Iacullo at the time the loans had to be repaid. Mr Hillam also agreed to provide security for the loans within a reasonable time. However, I do not think that Mr and Mrs Iacullo's obligation to make the loans was dependent on the provision of security. It is clear that most of the loans had already been made at the time the agreement was executed, and the last loan was due to be made shortly after the date of the agreement, whereas the security simply had to be provided within a "reasonable time". It is true that Mr and Mrs Iacullo did not execute the agreement until some time later. However, I do not think that that altered the nature of the obligation placed on them once they executed the agreement. At the time they executed the agreement, they came under an obligation to advance the $75,000 immediately.

1. In my opinion, it was open to Mr and Mrs Iacullo to lend the sum of $75,000 and, having done so, to insist on repayment of that amount on 12 January 2012 together with the payment of interest and the amount due under cl 4.2. If Mr Hillam failed to provide security within a reasonable time, it was open to Mr and Mrs Iacullo to terminate the agreement and to seek to recover the amount that they had lent together with the consequential losses they suffered because they lost the opportunity to receive shares in Carpentaria or the payment in lieu of those shares. However, it is not open to Mr and Mrs Iacullo to insist on the payment of $910,000 without having advanced the total sum by reference to which that amount was calculated, including the sum of $75,000. The payment of the $910,000 was dependent on the loans being made.

1. Mr and Mrs Iacullo did not lend the further amount contemplated by the Third Loan Agreement, and none of the parties sought to enforce or perform the obligation to lend the remaining $75,000 or to provide security. The result, in my view, is that the parties must be taken to have abandoned the contract: see DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 434 per Stephen, Mason and Jacobs JJ.

The claim for $710,000

1. Mr Hillam claims that the Third Loan Agreement involved a novation of the Second Loan Agreement and that, as a result, the rights and liabilities of the parties were governed by the Third Loan Agreement. Consequently, the only rights Mr and Mrs Iacullo had were under that agreement, and they have lost any right to claim the $910,000 under that agreement because they did not lend all the amounts due under that agreement, which was a precondition to that right.

1. It is not at all clear that that result follows, even assuming the Third Loan Agreement involved a novation of the Second Loan Agreement. In DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, the plurality, following the decision of Isaacs J in Summers v The Commonwealth (1918) 25 CLR 144 at 153, held that the deposit paid under an abandoned contract for the sale of real property was recoverable. By analogy, it might be said that the termination of an earlier contract that is effected by a novation that is abandoned is ineffective. However, it is not necessary to resolve that question in this case.

1. Whether one contract is intended to replace another depends on the objective intention of the parties. As the Court of Appeal explained in Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473 at [78]:

Novation is a transaction by which all parties to a contract agree that a new contract is substituted for one that has already been made (Olsson v Dyson (1969) 120 CLR 365 at 388, per Windeyer J, ...). Novation involves the extinguishment of one obligation and the creation of a substituted obligation in its place. Intention is crucial to show a novation: see, eg, Vickery v Woods (1952) 85 CLR 336 at 345, per Dixon J as his Honour then was. A novation may be express or implied from the circumstances.

1. In my opinion, it was not the intention of the parties to replace their previous agreements by subsequent ones. Leaving aside cl 4.4 of the Third Loan Agreement that deals with the question of security, cl 4 of each agreement imposes increasing obligations on Mr Hillam corresponding to the increased amounts lent to him. Before the Third Loan Agreement was executed, Mr and Mrs Iacullo had an accrued right to receive shares in Carpentaria to the value of $710,000 or cash of $710,000 if they did not receive those shares by 12 January 2012. The question is whether, when the parties entered into the Third Loan Agreement, they intended to add to that right, or whether they intended to substitute a new right, which meant that Mr and Mrs Iacullo would be entitled to shares in Carpentaria to the value of $910,000 (or the cash equivalent), but only if they made total loans of $455,000, failing which they would be entitled to nothing. In my opinion, the parties must have intended the former and not the latter. It makes no commercial sense for Mr and Mrs Iacullo to have agreed to give away their accrued rights. To put the point another way, at the time the Third Loan Agreement was entered into, Mr and Mrs Iacullo had already lent Mr Hillam all but $75,000. It is clear that the obligation to make payments under cl 4 were intended to be tied to the amounts lent. It makes no sense in that context for the parties to have agreed that Mr and Mrs Iacullo would receive shares or cash to the value of $910,000 if they advanced the additional $100,000 referred to in that agreement (of which $25,000 had already been advanced) but nothing otherwise.

1. The parties did not say or do anything to suggest that they intended that the later agreements would replace the earlier ones. It is true that the agreements were between the same parties and covered the same subject matter. In many cases, that fact may provide some evidence that the later agreements were intended to replace the earlier ones. But in this case, if that is what happened, the result would have been to alter substantially the basis on which the additional amounts were paid. If that is what the parties intended to do, it is to be expected that they would use clear words to make their position plain. They did not do so. In fact, on the very day that Mr Hillam signed and gave Mr Iacullo the Third Loan Agreement, Mr Iacullo gave Mr Hillam signed versions of the First and Second Loan Agreements. The fact that he did so is consistent with an intention that both agreements remained on foot.

1. The fact that Mrs Iacullo did not sign the Second Loan Agreement does not alter the position. In circumstances where she is expressed to be a party to the agreement and she signed the Third Loan Agreement, which repeated and added to the obligations set out in the Second Loan Agreement, the parties must have intended that she would be a party to the Second Loan Agreement.

Orders

1. It follows that Mr and Mrs Iacullo are entitled to judgment in the sum of $710,000 plus interest on that amount at the rate of 15 percent per annum calculated from 12 January 2012 to the date of this judgment, making a total of $981,647.95.

1. Mr and Mrs Iacullo have been largely successful. Every part of their claim that had not already been the subject of a successful summary judgment application was resisted by Mr Hillam, at least up until the hearing. Mr and Mrs Iacullo have been largely successful in the balance of the claim; and the issues relating to the recoverability of the $910,000 are not easily separated from the issues relating to the recoverability of the $710,000. In those circumstances, in my opinion, it is appropriate that Mr Hillam pay Mr and Mrs Iacullo's costs of the proceedings

1. The orders of the Court, therefore, are:

(1)   Judgment for the plaintiffs in the sum of $981,647.95.

(2)   The defendant pay the plaintiffs' costs of the proceedings.

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Decision last updated: 30 July 2014