Illawong Village P/L v State Bank of NSW Limited

NEW SOUTH WALES COURT OF APPEAL

CITATION: Illawong Village P/L v State Bank of NSW Limited [2005] NSWCA 382

FILE NUMBER(S):
40259/04

HEARING DATE(S): 12, 13 September 2005

JUDGMENT DATE: 04/11/2005

PARTIES:
ILLAWONG VILLAGE PTY LIMITED (Appellant)
STATE BANK OF NSW LIMITED (Respondent)

JUDGMENT OF: Giles JA Santow JA Hunt AJA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 3426/00

LOWER COURT JUDICIAL OFFICER: Campbell J

COUNSEL:
B W RAYMENT, QC/ A J McQUILLEN (Appellant)
J E MARSHALL, SC/ G LUCARELLI (Respondent)

SOLICITORS:
McCoy, Grove & Atkinson (Appellant)
Minter Ellison (Respondent)

CATCHWORDS:
BANKING – The appellant (and borrower) is a company concerned with the construction and operation of a neighbourhood shopping centre. Whether borrower was overcharged interest by its bank for a particular period when loan outstanding (limbo period) with damages claimed in consequence – whether interest charged for limbo period exceeded what bank was entitled to charge – whether there was a continuing agreement as to the relevant interest rate to be charged on the Bank’s loan – whether agreement extended to the limbo period – whether the source of that agreement remained the original mortgage documents or a subsequent security over property subsequently acquired.

LEGISLATION CITED:

DECISION:
Appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40259/04
SC 3426/00
GILES JA
SANTOW JA
HUNT AJA
4 NOVEMBER 2005

ILLAWONG VILLAGE PTY LIMITED v STATE BANK OF NSW LIMITED

Judgment

GILES JA: The appellant was financed by the respondent. It claimed that it had been overcharged interest. The judge rejected its claim, holding against it on sequential issues such that the appellant had to displace all the holdings on appeal. After hearing submissions on the first issue in the sequence, we indicated that the appellant failed on that issue. All issues had been addressed in outline written submissions, but we did not hear submissions on the remaining issues; it was accepted that the appeal would have to be dismissed.
These are my reasons for concluding that the appellant failed on the first issue. The issue was whether the interest rate for the period 8 April 1991 to 26 July 1993 was governed by the terms of securities given in 1988, or by the terms of mortgages given in 1990 as additional security for the finance.
The appellant’s shopping centre
The appellant was engaged in the construction and then operation of a shopping centre at Illawong, a southern suburb of Sydney. It obtained finance from Elders Lensworth Finance Ltd (“Elders”). In August 1987, when the construction was nearing completion, it approached the respondent to refinance the Elders finance of $6.5 million and obtain working capital of $1.25 million.
At this time the land on which the shopping centre was constructed was in four separate titles. The appellant was the registered proprietor of two of the parcels. A third parcel was a closed road, which on 23 December 1986 the appellant had contracted to purchase from the Council of the Shire of Sutherland (“the Council”) for $133,175 plus an interest amount. The fourth parcel was another closed road, vested in the State of New South Wales and the subject of incomplete arrangements for what was called a “land swap” or “road exchange”. A clause of the contract with the Council obliged it to use its best endeavours to arrange for the Department of Lands to transfer the fourth parcel to the appellant.
The respective areas of the appellant’s land and the closed roads, and their functions as components of the shopping centre, were not entirely clear. Part of the shopping centre itself stood on the third parcel, and the fourth parcel was part of its car parking area. The outstanding closed roads do not seem to have been an impediment to the construction of the shopping centre, or to its operation for some years until the closed roads were vested in the appellant.
The facility letter
The respondent’s formal offer of finance, which was duly accepted by the appellant, was made by a facility letter dated 11 December 1987. The offer was of a Commercial Bill/Fixed Interest Term Loan Switch Option Facility of $7,750,000. The terms included that the appellant would provide first mortgage security over “commercial property known as Illawong Village Estate, Fowler Road, Menai” (that is, the shopping centre) and a charge over its assets and undertaking, and that the appellant’s directors would give personal guarantees.
For the term loan option, the letter provided for provision of the finance through a separate account on which the operations would be confined to drawing down the amount of the loan, payments in reduction of the debt on the account and the debiting of interest and other charges. As to interest, the letter said -
“The interest shall be payable on the full amount from time to time, owing on the loan account, calculated on daily balances and shall be debited by the Bank to the loan account quarterly. The rate of interest payable on the loan account shall be the cost of funds to the Bank at the date of settlement, plus a margin of 1% pa fixed for 3 year term.
In the event that the Bank interest is not paid on the day it falls due a penalty rate will apply, consisting of a margin of 2% over Bank’s cost of funds for the whole of the period during which interest remains unpaid and will not affect the Bank’s usual rights under default in the mortgage.”
The letter stated -
“Term of the facility is 3 years, with a Review to be carried out one month prior to expiration to determine repayment or refinance conditions.”
A change as to security
At the time of the facility letter the respondent was unaware that the closed roads were outstanding. It found out in early 1988, and made what an internal memorandum called a “commercial decision” to proceed. Further internal memoranda specified as the security now to be taken mortgages over the parcels of which the appellant was the registered proprietor, a charge over the appellant’s interest in the contract with the Council, a charge over the appellant’s interest in the land swap, the charge over the appellant’s assets and undertaking and the personal guarantees. The “remarks” in a memorandum dated 8 February 1988, approved by the respondent’s credit committee, included that a sum of money would be withheld, in part the price under the contract with the Council; that the respondent’s valuation was acceptable even if the fourth parcel was excluded and “[n]aturally [the fourth parcel] will be included in our security if available but will have no affect [sic] on our valuation”; and -
“At interview 5 February 1998 directors requested that the Bank proceed to settlement and accept the following interim security pending full shopping complex site being consolidated under one title over which the Bank would obtain first mortgage security.”
The 1988 securities
A charge was executed dated 25 February 1988. Apart from the customary charge over the appellant’s assets and undertaking, it provided for a specific charge over and assignment to the respondent of the appellant’s interest as purchaser of the closed road from the Council. As well, its cl 22 was a covenant for further assurance -
“ … including notifying the Bank of the consolidation and subdivision of the land contained in Certificate of Title Volume 8021 Folio 115 and the road exchange referred to in the Contract between the Mortgagor and the Council of the Shire of Sutherland dated 23 December 1986 (“the Contract”) as set out in Clauses 26, 27, 28, 29 and 30 of the Contract. Once the Mortgagor becomes registered proprietor of the land referred to in the Contract, it will give a first registered Real Property Act mortgage over that land to the Bank.”
The charge provided as to interest -
“1. THAT the Mortgagor will pay to the Bank interest on the moneys hereby secured at the rate or rates agreed upon from time to time and in default of such agreements as decided by the Bank from time to time.”
Clauses 39 and 45 of the charge provided -
“39 THAT neither the taking of this security nor anything herein contained shall be held to merge discharge postpone or prejudice any other security now held or hereafter taken by the Bank for payment of any of the moneys hereby secured nor affect any claim or demand which the Bank now has or may hereafter have against the Mortgagor or any person or persons corporation or corporations whomsoever or whatsoever (including any surety guarantor or bondsman or otherwise) nor shall any other security now held or hereafter taken by the Bank abate or prejudice the powers and provisions herein contained.”
“45. THAT this mortgage shall not affect or be affected by any other security now or hereafter held or taken by the Bank from or on behalf of the Mortgagor or by any loss by the Bank of any collateral or other security or by the Bank failing or neglecting to recover by the realisation of any collateral or other security or otherwise any moneys due or owing from the Mortgagtor or such other person as aforesaid to the Bank or by any other laches negligence or mistakes on the part of the Bank.”
The appellant then asked for an increase in the facility, and for consent to it obtaining further finance from Elders secured by second mortgage over the shopping centre. On 11 March 1998 the respondent wrote to the appellant saying that the approval dated 11 February 1998 was “rescinded” and asking for further information for consideration of the increased finance. The reference to 11 February 1988 appears to have been incorrect, or may have been to an internal approval; it was not suggested that the facility letter of 11 December 1987 had been replaced by a later offer of finance.
On 15 March 1998 the respondent wrote advising that it had “reinstated the facility of $7.75 million”, and that it consented to a second mortgage to Elders on certain conditions. The letter said, “All other terms and conditions of approvals of 16 November 1987 and 4 December 1987 to remain”. This appears to have referred to internal approvals; it was common ground that the relevant terms and conditions were those of the facility letter of 11 December 1987. This letter was also signed by the appellant by way of acceptance.
A mortgage of the two parcels of which the appellant was registered proprietor was executed dated 8 April 1988. It provided as to interest -
“THIRDLY – The Mortgagor will pay to the Bank interest on the moneys hereby secured at the rate or rates agreed upon from time to time and in default of such agreement as decided by the Bank from time to time.”
The term loan is drawn down
The finance was taken under the term loan option. The loan was drawn down on 8 April 1988.
The cost of funds to the respondent on 8 April 1988 was 12.97 per cent. The interest rate for (at least) 3 years from 8 April 1988, absent default, was therefore 13.97 per cent.
The 1990 mortgages
In due course the appellant obtained title to the closed roads. It executed mortgages dated 29 June 1990 in favour of the respondent.
Each of the 1990 mortgages incorporated Memorandum X208233. Each mortgage was expressed to secure “the payment of the moneys hereby secured as that term is defined in the Memorandum”, and provided for payment of “interest on the moneys hereby secured as that term is defined in the Memorandum … “.
The definition of “moneys hereby secured” in the Memorandum was the customary all-embracing description of all money then owing or thereafter becoming owing to the respondent.
Clause 2 of the Memorandum provided so far as presently relevant -
“2. INTEREST
2.1.         Except as otherwise provided in any Agreement -
2.1.1       (Payment) interest as herein provided shall be payable by the Mortgagor and/or the Customer on the last day of each and every period as determined by the Mortgagee and advised to the Mortgagor and/or Customer from time to time and failing such advice on the last day of each and every calendar month;
…
2.1.3       (Calculation) interest shall be calculated by applying the interest rate upon the maximum debit balance of any account of and/or advance to the Mortgagor and/or Customer for that period for calculation of the interest immediately preceding the due date for payment of interest;”
The definition of “interest rate” was -
“’interest rate’ means the rate or rates from time to time agreed upon between the Mortgagor and/or Customer and the Mortgagee and failing such agreement, the rate determined from time to time by the Mortgagee as being applicable to like accounts and in the event that the interest payable under any Agreement and/or Mortgage becomes merged in any judgment or order of any court, interest payable on the moneys hereby secured shall be at the rate which is the higher of the interest rate as agreed or provided to be paid under such judgement or order as aforesaid.”
There was a definition of “Agreement”
“’Agreement’ means and includes each and every agreement, letter, application, acknowledgement, deed, document, arrangement or understanding and without limiting the foregoing includes lease agreements, hire purchase agreements and sale and purchase agreements, made or existing from time to time whether in the past, present or the future, between, inter alia, the Mortgagor and/or Customer and the Mortgagee under which the Mortgagee has provided or agreed to provide to or for the benefit of, inter alia, the Mortgagor and/or the Customer , facilities whether financial or otherwise which the Mortgagee may lawfully provide.”
By cl 1.8 of the Memorandum -
“1.8 In the event of and only to the extent of any inconsistency between the provisions of this Mortgage and the provisions of any Agreement, the provisions of the said Agreement shall prevail and in the event of and only to the extent of any inconsistency between the provisions of any mortgage deemed to incorporate the provisions of this memorandum and the provisions of this memorandum, the provisions of such mortgage shall prevail unless the context otherwise provides.”
The limbo period
The loan was not repaid at the end of the three years, and only in July 1993 did the appellant and the respondent agree upon substituted finance, pursuant to which the term loan was repaid on 26 July 1993. The period from 8 April 1991 to 26 July 1993 came to be called the limbo period. The appellant claimed that it had been overcharged interest for the limbo period.
The issue
After various adjustments between the parties in the period after 26 July 1993, the appellant was effectively charged interest for the limbo period at 13.97 per cent.
There may be a sound argument that that was the interest rate for the limbo period because the facility letter continued to govern the changing of interest, beyond the stated three year term of the facility and until the term loan was repaid. The respondent was tempted with that argument in the course of submissions, but said that it had not so argued at the trial and did not put the argument. Its case was that the interest rate for the limbo period was 13.97 per cent because the 1988 securities governed the charging of interest and, in the absence of agreement, the rate was fixed by its decision pursuant to cl 1 of the charge and clause thirdly of the 1988 mortgage. On the appellant’s case, however, the 1990 mortgages supplanted the 1988 securities in this respect and, again in the absence of agreement, it should have been charged interest at the interest rate directed by cl 2.1.3 of the Memorandum and its definition of the interest rate in the 1990 mortgages, being a rate determined by the respondent as being applicable to like accounts.
To succeed in its claim, the appellant had to establish not only that interest for the limbo period was governed by the provisions of the 1990 mortgages. It had also to establish that there was no agreement as to interest and that the interest rate determined by the respondent as being applicable to like accounts was less than 13.97 per cent; and it had to repel arguments that a default rate of interest was chargeable. These were later issues in the sequence. They did not arise if the interest for the limbo period was to be charged in accordance with the terms of the 1988 securities.
The first issue, then, was which of the 1988 securities or the 1990 mortgages governed the rate at which interest was to be charged for the limbo period, on the basis that the facility letter was not an agreement upon the interest rate for the purposes of any of these securities. The issue as posed by the parties was perhaps artificial. The appellant did not contend that the facility letter continued to govern the charging of interest until the term loan was repaid: it was statute-barred from reliance on the facility letter, and in any event continuance of the rate of 13.97 per cent left it without a claim. The respondent chose not to argue that the facility letter continued to govern the charging of interest. The Court was asked to decide which of the 1988 securities and the 1990 mortgages dominated in this respect.
Consideration
Although the facility letter can not be regarded as governing the charging of interest until the term loan was repaid, it remains as the basis for the security documentation. The security was originally to be over the shopping centre. If the closed roads had not been outstanding, the security documentation would have comprised the charge (without the special provisions in relation to the contract with the Council and the land swap) and a mortgage of all four parcels, with interest at the rate or rates agreed upon from time to time and in default of agreement as decided by the respondent from time to time. (An argument involving the difference between “agreements” in cl 1 of the charge and “agreement” in clause thirdly of the 1988 mortgage was abandoned by the appellant.)
As the memorandum referring to the interview of 5 February 1988 shows, it was contemplated that the respondent would be given security over the whole of the shopping centre once title to the closed roads had been obtained. Clause 22 of the charge obliged the appellant to give mortgage security over the closed roads parcels when it had title to them. The 1990 mortgages were given in fulfilment of that obligation. They were supplementary to the security of the charge and the 1988 mortgage, their comparatively minor significance indicated by the withholding of only $133,175 referable to the third parcel and the respondent’s preparedness to do without the fourth parcel. The (almost) full advance was made upon the security supplied through the charge and the 1988 mortgage, and the 1990 mortgages regularised the original intention as to security.
In these circumstances, it seems to me that the objectively ascertained intention of the parties is unlikely to have been that the 1990 mortgages should supplant the 1988 securities so far as the latter provided for charging of interest beyond the stated three year term of the facility. The parties must be taken to have intended in 1988 that, if an agreement as to the rate was not to be found in the facility letter or in a separate consensus, the 1988 securities would entitle the respondent to charge interest at the rate fixed by its decision (and there was no challenge to such an entitlement on the ground of uncertainty or otherwise). The 1990 mortgages, regularising the original intention as to security, were not an occasion for changing that position.
The terms of the 1990 mortgages accommodated continuance of the 1988 intention. Clause 2.1.3 of the Memorandum was expressed to be “[e]xcept as otherwise provided in any Agreement”. That the Memorandum took a subsidiary role to an Agreement was made plain by its cl 1.8; it is not necessary to take into account cll 39 and 45 of the charge, which may not positively enhance its dominance over the 1990 mortgages but give no comfort to the appellant. The charge and the 1988 mortgage in my view fall within the definition of “Agreement” in the Memorandum, together with the facility letter being documents or (within the extraordinary generosity of the definition) part of an arrangement or understanding under which the respondent had provided the finance.

In this respect, the appellant submitted that the 1988 securities were not agreements etcetera under which finance had been provided. It referred to Chan v Cresdon Pty Ltd (1989) 168 CLR 242, in which it was said at 249 that the obligation to pay rent under an implied or imputed common law tenancy was not within the guarantee in an unregistered lease of land under the Real Property Act of the obligations “under this lease”; and to Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520, in which it was said at 537-9 that in deciding which of two contracts fell within a statutory provision dealing with disposition of an asset “under a contract” it was necessary to judge which of the contracts was the source of the obligation to effect the disposal. These are different contexts, and remote from the definition of “Agreement”.
The appellant’s starting-point, in common with that of the respondent, was that the 1988 securities and their provision for interest at the rate decided by the respondent from time to time governed the charging of interest for the limbo period. The parties could vary that agreement, and “the determining factor must always be the intention of the parties as disclosed by the later agreement”: Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vict) Pty Ltd (1957) 98 CLR 93 at 144 per Taylor J, cited with approval by Wilson and Dawson JJ in Dan v Barclays Australia Ltd (19983) 57 ALJR 442 at 448-9 and Gleeson CJ and Gaudron, McHugh and Hayne JJ in Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd at 534. In my opinion, from the circumstances in which the 1990 mortgages were executed and the Memorandum’s subservience to provision in any Agreement, it should be concluded that they did not. The 1988 securities relevantly dominated.
The result
In my opinion, the appeal should be dismissed with costs.
SANTOW JA:
INTRODUCTION
This appeal is essentially about whether a borrower was overcharged interest by its bank, for a particular period when the loan was outstanding, with damages claimed in consequence. In a lucid and comprehensive judgment, the trial judge, Campbell J, concluded against the borrower on a number of grounds. These included that on the proper construction of the bank’s documentation, as well as on a number of other bases, the interest charged by the bank for the particular period did not exceed that which the bank was entitled to charge. The borrower seeks, inter alia, to overturn that construction.
The essential facts can be shortly stated. The borrower and now appellant, Illawong Village Pty Limited (“Illawong”), borrowed money from the respondent, State Bank of NSW Limited (“the Bank”), over a period from 8 April 1988 to August 1998.
The trial judge dismissed Illawong’s claim that during part of the time known as the limbo period (8 April 1991 to 26 July 1993) Illawong was overcharged interest on the loan. Essentially Illawong claimed that the Bank was only entitled to charge interest based on the cost of funds to the Bank during the limbo period, or alternatively cost of funds plus a margin of 1%. In fact, the Bank effectively charged Illawong 13.97% during the limbo period, after allowing Illawong various credits. This was a higher rate than if the Bank had employed cost of funds during the limbo period.
In the event that the trial judge’s construction of the relevant documents were upheld on appeal, there would be no necessity to deal with various secondary appeal issues. These concern estoppel, implied duty of good faith, findings said not to be based in evidence, and claimed failure to have regard to evidence. This is because a decision on construction adverse to the appellant is necessarily fatal to the appellant’s case overall.
Put broadly, the construction issue concerns whether
(i)there was a continuing agreement as to the relevant interest rate to be charged on the Bank’s loan,
(ii)that agreement extended to the limbo period itself and, if so,
(iii)the source of that agreement remained the original mortgage documents or, as the appellant contended, a subsequent security over property subsequently acquired.
The appellant contends that the trial judge was in error in concluding that, following a facility letter of 11 December 1987, the securities given thereafter (“the 1988 mortgages”) were the source of the agreement to pay interest and permitted the interest rate of 13.97% charged. The appellant contends that
(i)a later set of securities, called “the 1990 mortgages”, supplanted the 1988 mortgages so far as payment of interest was concerned,
(ii)the 1990 mortgages required interest to be charged based on cost of funds over the relevant period, so that
(iii)interest of 13.97% actually charged in the limbo period exceeded that permitted by the 1990 mortgages, there being, according to Illawong, no default entitling payment of penalty interest as the loan was not a term loan but repayable on demand and no demand had been made.
The appellant, to succeed, had to establish each of those propositions.
Both parties narrowed the issues between them. The Bank did not seek to contend that the facility letter of 11 December 1987 alone was the source of agreement as to the interest rate to be charged. It therefore did not seek to file a Notice of Contention to that effect. But that did not entail any concession that the interest rate could not be derived from the combination of the Facility Letter and the 1988 mortgages.
Illawong for its part finally abandoned its specious argument that the expression “in default of such agreements” meant the same as “in default under any agreement” in the interest payment clause of the 1988 Charge. That construction, based on the plurality of “agreements”, was never tenable and was correctly rejected by the trial judge though it was repeated in the written submissions. Nor did Illawong press Appeal Ground 32, concerning the costs order made in favour of the Bank. It was based, broadly, upon supposed “inefficiencies in litigation caused by the piecemeal presentation by the defendant of its case and the lateness of documentary material as well as its defence and affidavits”.
SALIENT FACTS
The facts set out below are essentially uncontested.
Illawong is a company concerned with the construction and operation of a neighbourhood shopping centre in Illawong, in the southern suburbs of Sydney. The shopping centre comprised in 1987-1988 four separate titles, of which Illawong was registered proprietor of two to begin with and throughout. It acquired title to the remaining two later, so giving rise to the 1990 mortgages.
In August 1987, when construction was nearing completion, Illawong approached the Bank for a term loan of $7.75 million, (re-financing earlier borrowings from another financier).
At that time, the directors of Illawong were Barry Alcock, Ross Davis and Gregory White. Mr Alcock had the most contact with the Bank.
On 17 November 1987, the Bank approved by letter the 3 year term loan of $7.75 million constituting the first version of what is referred to in the Judgment as a facility agreement. It was replaced by an essentially identical letter constituting the facility agreement dated 17 December 1987 (“the Facility Agreement”) save that the margin for non-default interest was increased from 0.75% per annum to 1% per annum. On default the margin in both versions became 2% per annum.
On 25 February 1988, while security arrangements were being finalised for the loan, Illawong executed an “all monies” equitable mortgage and a partly fixed and partly floating charge over all its assets in favour of the Bank (“the 1988 Charge”).
On 8 April 1988, the Bank advanced what the Bank contends was a three-year fixed rate term loan of $7.75 million. Illawong in return added to the 1988 Charge by giving to the Bank mortgages over the two land titles Illawong then held over Illawong Village (see Critical Docs p46). I shall refer collectively to the two sets of securities as “the 1988 mortgages” following the nomenclature of the trial judge. The interest rate the Bank charged during the three years of the term loan facility was 13.97% during times when the loan was not in default. Its cost of funds was 12.97% and hence, with the 1% margin (applicable while the interest was paid on the due date) the interest rate was 13.97%. I should interpolate that Illawong contends that by the third anniversary of that loan and commencement of the limbo period, it became payment on demand, so ceasing to be a term loan if indeed it ever was one. That is therefore a disputed issue.
In August 1988, October 1989 and December 1989, Illawong applied to the Bank for additional finance but each time its application was rejected.
On 6 June 1990, the Bank consented to a second mortgage of $1.5 million in favour of St George for purposes including the paying out of a previous mortgage to another financier.
On 29 June 1990, Illawong, having obtained title to two further adjacent land titles, mortgaged them to the Bank (“the 1990 mortgages”) (see Critical Docs p54).
Also on 29 June 1990, two Deeds of Priority were entered between the Bank, St George and Illawong, which provided that the Bank would have priority for $8 million plus interest etc, then St George would have priority for $1.5 million plus interest etc, and the Bank would have priority thereafter.
On 8 April 1991, the fixed rate term loan expired but was not then repaid. The “limbo period” then began.
On 26 September 1991, Mr White ceased being a director of Illawong and he and his company sold their shares in Illawong to Mr Alcock and Mr Davis.
On 23 July 1993, the Bank advanced finances to Illawong pursuant to a facility agreement for a loan of $8.5 million over three years so maturing 26 July 1996. At this time the term loan, which had originally been made by the Bank in April 1988, was repaid. The “limbo period” ended, so that it spanned 8 April 1991 to 26 July 1993.
At the time of repayment of the term loan (23 July 1993), the Bank allowed to Illawong what it described as an “interest concession of $90,192 for a period 7 April 1991 to 25 August 1992” with the intention of bringing the interest which was charged during the period 8 April 1991 to 26 July 1993 down to 13.97%.
On 17 September 1993, the Bank allowed Illawong a further credit of $144,318.26. This arose from the Bank recalculating interest on the expired term loan so that, from 1 December 1992 to the date of repayment, interest was charged at the Bank’s reference rate plus 2% rather than at 13.97%. The Bank allowed Illawong a further credit of $3,156.26. This arose from the Bank having previously debited interest to Illawong’s account on the amount of interest and which, by making the credit of $144,318.26, it was refunding.
Illawong’s only claim now in dispute relates to the interest which the Bank charged on the expired term loan, during the period 8 April 1991 to 26 July 1993 (the “limbo period”).
When the three-year loan which had been made on 23 July 1993 matured, it was not repaid, and no consensual arrangement for its extension was arrived at. The Bank charged interest, from the date of expiry on 26 July 1996 until the loan was repaid in August 1998, at its reference rate plus a margin of 2% plus a debt administration fee.
Illawong’s second claim, abandoned on appeal, related to the interest charged in the period January 1997 to August 1998. Illawong contended that an agreement was entered into in January 1997 to fix the interest payable at $70,000 per month. The judge found in favour of the Bank in respect of this claim, and the appellant does not appeal this finding.
The appellant’s pleaded case
The steps in the Bank’s pleaded case concerning the first claim were summarised by the trial judge as follows (Judgment, [35]-[36]):
(i)The rate of interest payable was governed by the clause incorporated into the 1990 mortgages requiring interest to be paid at “the rate or rates from time to time agreed upon between the Mortgagor … and the Mortgagee and failing such agreement the rate determined from time to time by the Mortgagee as being applicable to like accounts”.
(ii)In the limbo period there was no agreement as to the rate or rates of interest to be applied.
(iii)The rate of interest which the bank determined as being applicable to like accounts in the limbo period was the cost of funds to the bank from time to time during the period (or, alternatively cost of funds plus a margin of 1% pa), yet the bank charged more than its cost of funds (or more than the cost of funds plus 1%).
(iv)Alternatively, there was an implied obligation on the bank to determine a rate of interest applicable to like accounts, yet it failed to make that determination. When it failed to make that determination, and there having been no agreement as to rates, the only rate the bank was entitled to apply was its cost of funds from time to time. During the limbo period the defendant charged interest at much more than its cost of funds from time to time.
The Bank argued that the 1988 mortgages governed the charging of interest in the limbo period and this entitled it to charge (at least) the interest rate of 13.97%.
On appeal, Illawong refined its submissions, posing four questions for resolution. However, at the conclusion of argument this Court reached a conclusion unfavourable to the appellant on the second question concerning construction of the relevant documentation, so rendering it unnecessary to consider the other questions. That second question was put in these terms: Did the interest regime in the 1990 mortgages supersede the 1988 mortgages and, to the extent relevant, the Facility Agreement, insofar as these separately or in combination dealt with the interest rate applicable in relation to the limbo period? In what follows, I set out my reasons for answering that question in the negative. A negative answer must be fatal to the appellant’s case. It is clear that the 1988 mortgages, if not superseded, did entitle the Bank to charge interest at 13.97%, including in the limbo period, for reasons elaborated below.
DISPOSITION
Illawong commenced with argument directed to whether the default rate of interest, as applicable to overdue payments under clause 3.3 of the memorandum to the 1990 mortgages, was applicable during the limbo period. If it was, the appellant recognised that that would mean it would fail at the threshold. That argument depended upon whether the Facility Agreement had the effect, in the context of the other documentation, that failure to repay the principal on the three year anniversary of the date of its advance (8 April 1991) had the necessary consequence that, without demand being required, Illawong was in default.
Illawong argued that the effect of the Facility Agreement and later documentation was that there was no fixed three year date for repayment. Therefore, there being absent any notice demanding repayment, there was no default on 8 April 1991; see Pennington “Bank Finance for Companies” (Sweet and Maxwell, 1987) at 12 citing Buckingham & Co v London & Midland Bank Ltd (1895) 12 TLR 70. Illawong argued that in the absence of “Review” (see below) there was no provision for the interest to continue as provided in the Facility Agreement. I quote below the two relevant provisions of the Facility Agreement:
“The interest shall be payable on the full amount from time to time, owing on the loan account, calculated on daily balances and shall be debited by the Bank to the loan account quarterly. The rate of interest payable on the loan account shall be the cost of funds to the Bank at the date of settlement, plus a margin of 1% pa fixed for 3 year term.
In the event that Bank interest is not paid on the day it falls due a penalty rate will apply, consisting of a margin of 2% over Bank’s cost of funds for the whole of the period during which interest remains unpaid and will not affect the Bank’s usual rights under default in the mortgage.”
and
“Term of the facility is 3 years, with a Review to be carried out one month prior to expiration to determine repayment or refinance conditions.”
It is not necessary to resolve that issue, in view of my conclusion concerning the construction of the Bank’s documentation explained below. It suffices to say that the appellant’s contention appears impossible to reconcile with the terms of the Facility Agreement. First, the Facility Agreement at page 4 thereof (Critical Docs, 17) contains the clear statement that “the term of the facility is three years, with a Review to be carried out one month prior to expiration to determine repayment or refinance conditions”. Earlier, the Facility Agreement precludes pre-payment without paying additional interest. Prepayment and the additional interest are expressly made referable “to the date of maturity” and “the unexpired term of this loan”. Unless there were a three year definite maturity date, here 8 April 1991, these provisions would simply be unworkable. The notion that the “Review” somehow overrode and rendered nugatory the opening words “the term of the facility is three years” in circumstances where no actual review occurred within the one month prior to expiration, is unconvincing. I should add that the trial judge did not accept Illawong’s submission that the facility continued beyond three years (Judgment, [252]-[253]). He considered, correctly in my view, that the correct construction of the Facility Agreement was that the loan itself would be for a term of three years (Judgment, [254]).
I should explain why this mattered to the appellant’s argument. The appellant was making a pre-emptive strike directed at averting clause 3.3 of the 1990 mortgages applicable to overdue interest. If applicable, it would have entitled the Bank to charge even more than 13.97%. Illawong’s argument was that the loan was repayable on demand, absent any “Review”. As there had been no demand it necessarily followed there were no overdue payments upon which penalty interest was payable. That proposition was not accepted by the trial judge and remained strongly contested by the Bank on appeal. This was both in terms of the applicability of clause 3.3 of the 1990 mortgages, and as to there being no interest overdue by reason of later defaults in payment of interest.
The critical document from the 1988 mortgages is the Deed of Charge dated 23 February 1988. The charge is expressed as securing under “the monies hereby secured” inter alia, “interest upon all such monies as aforesaid at the rate or rates agreed from time to time and in support of such agreement as decided by the Bank from time to time …”. The reference to “all such monies” compendiously refers to the variety of means whereby the Bank chose to provide funds and was, as is not disputed, apposite to include the loan of $7.75 million referred to in the Facility Agreement.
Clause 1 of the Deed of Charge then contained the following covenant,
“That the Mortgagor will pay to the Bank interest on the monies hereby secured at the rate or rates agreed upon from time to time and in default of such agreements as decided by the Bank from time to time.”
I have already mentioned that the appellant finally abandoned its untenable argument about the meaning of the words “in default of such agreements” as somehow depending on the plurality of the word “agreements” to connote that default meant not “absence of” but “breach of”.
If there were nothing more than that, Illawong would have no tenable basis for arguing that the Bank was not free to “decide from time to time” what the interest rate should be in the absence of agreement, pursuant to clause 1 of the 1988 Charge. In particular the Bank could so decide upon an interest rate of 13.97% after the interest rate payable under the Facility Agreement over its first three years ceased to be so payable. However, the appellant sought to argue that the 1990 mortgages supplanted that provision in such a way as to oblige the Bank to charge no more than its cost of funds, or costs of funds plus a margin of 1%. To understand this argument one needs to begin with the Facility Agreement. This is so, though the appellant made clear that it did not rely on the Facility Agreement to establish breach by the Bank of its terms. Indeed any claim based on the Facility Agreement would have been statute barred, as distinct from a claim based on a deed.

Equally, the respondent in argument abandoned any possible reliance on the Facility Agreement as by itself constituting an agreement as to the rate of interest satisfying either the 1988 mortgages or the 1990 mortgages. In particular, the appellant chose not to raise that argument by a Notice of Contention. That said, neither party sought to exclude the Facility Agreement as irrelevant to the proper construction of the 1988 mortgages and the 1990 mortgages, remembering that the 1988 mortgages included a real property mortgage over the two land titles Illawong then held in respect of Illawong Village. That latter real property mortgage in its schedule contained a clause 3 in identical terms to clause 1 of the 1988 Charge:
“THIRDLY the Mortgagor will pay to the Bank interest on the monies hereby secured at the rate or rates agreed upon from time to time and in default of such agreement as decided by the Bank from time to time”.
Both the 1988 Charge and the 1988 real property mortgage referred to above contained conventional events of default and covenants. The 1988 Charge in addition provided for additional security in clause 22, being expressly the security subsequently obtained by the 1990 mortgages. Clearly enough, though the appellant contended otherwise, the 1988 Charge was the primary security both in point of time and in terms of subsequent mortgages. In particular, the 1990 mortgages were clearly collateral to the 1988 Charge. That this was so is underlined by the following provision of the Facility Agreement as to the security required by the Bank:
“The security required by the Bank is to be to the Bank Solicitor’s satisfaction and will comprise:-
i)Registered first mortgage over commercial property known as Illawong Village Estate, Fowler Road, Menai.
ii)Registered first equitable mortgage and floating charge over assets and undertakings of Illawong Village Pty Limited.
iii)Unlimited joint and several guarantees from three directors.
Note: No part of the facilities will be made available until all security and other documents have been executed and the Bank’s requirements in respect of the security and the facilities satisfied. The above security will extend to cover not only the principal and interest in respect of these facilities but also any other liabilities the company may have to the Bank, either past, present or future, actual or contingent, or whether alone or jointly with other persons.”
This provides necessary background to the appellant’s contention that the 1990 mortgages supplanted the 1988 mortgages, so far as interest in the limbo period was concerned. I turn now to the 1990 mortgages.
What are referred to as the 1990 mortgages comprise two real property mortgages in conventional form over the remaining two titles in relation to Illawong Village and the roadway. The trial judge found (Judgment, [43]) that “when Illawong granted the June 1990 mortgages, it did so in performance of the obligation contained in clause 22 of the [1988] Charge”. The explanation for this is that, at the time of the initial advance on 8 April 1988, Illawong was the registered proprietor of most but not all of the land the subject of a shopping centre. Two small parcels were outstanding. One was part of a roadway. The other was some council land. Contracts and arrangements had been entered into by Illawong with respect to those parcels of land. Illawong promised to provide Real Property Act mortgages over those parcels of land once Illawong became the registered proprietor, as documented in clause 22 of the Charge. Mr Alcock, the principal witness called on behalf of Illawong, regarded the Charge as already a mortgage over the land and agreed that Illawong had promised the Bank that in due course it would provide registered Real Property Act mortgages once it had obtained title to the two parcels: Black, 1 pp96-7.
So much is common ground.
Illawong then relies upon the provisions contained in a printed form memorandum inserted in the 1990 mortgages as the basis for its contention that the interest rate that then became applicable was that expressed as “being applicable to like accounts”. This expression in turn was interpreted as meaning an interest rate based upon cost of funds from time to time. I shall assume solely for purposes of the argument that that last proposition is correct, though it was very much in dispute and the trial judge decided otherwise.
The essential steps in the appellant’s argument are as follows:
(a)the memorandum defines the interest rate payable in the following terms and incorporates the definitions below:
“2.INTEREST
2.1Except as otherwise provided in any Agreement:
………
2.1.3(Calculation) interest shall be calculated by applying the interest rate upon the maximum debit balance of any account of and/or advance to the Mortgagor and/or Customer for that period for calculation of the interest immediately preceding the due date for payment of interest;
………”
1.DEFINITIONS AND INTERPRETATION
1.1When used herein or in any mortgage deemed to incorporate this memorandum, the following terms shall, unless excluded by or be repugnant to the context, have the following meanings:-
………
“Agreement” means and includes each and every agreement, letter, application, acknowledgement, deed, document, arrangement or understanding and without limiting the foregoing includes lease agreement, hire purchase agreements and sale and purchase agreements, made or existing from time to time whether in the past, present or the future, between, inter alia, the Mortgagor and/or Customer and the Mortgagee under which the Mortgagee has provided or agreed to provide to or for the benefit of, inter alia, the Mortgagor and/or the Customer, facilities whether financial or otherwise which the Mortgagee may lawfully provide.
………
“interest” means where the context so requires that amount calculable and payable in the manner set out in Part 2.
“interest rate” means the rate or rates from time to time agreed upon between the Mortgagor and/or Customer and the Mortgagee and failing such agreement, the rate determined from time to time by the Mortgagee as being applicable to like accounts and in the event that the interest payable under any Agreement and/or Mortgage becomes merged in any judgment or order of any court, interest payable on the moneys hereby secured shall be at the rate which is the higher of the interest rate as agreed or provided to be paid under such judgment or order as aforesaid.”
(b) clause 1.8 of the memorandum provides as follows:
“1.8In the event of and only to the extent of any inconsistency between the provisions of this Mortgage and the provisions of any Agreement, the provisions of the said Agreement shall prevail and in the event of and only to the extent of any inconsistency between the provisions of any mortgage deemed to incorporate the provisions of this memorandum and the provisions of this memorandum, the provisions of such mortgage shall prevail unless the context otherwise provides.”
(c)There was no “Agreement” within clause 1.1 of the 1990 mortgages for the purposes of the definition of “interest rate”. Nor was any rate or rates “agreed upon between the Mortgagor and/or Customer and the Mortgagee”. While the Facility Agreement could arguably be said to be within the definition of “Agreement” as an “agreement … under which the Mortgagee has provided or agreed to provide to … the Mortgagor … facilities whether financial or otherwise …” that could not be said of the 1988 mortgages being either the charge or the later mortgage of 8 April 1988.
(d)Dealing with the Facility Agreement first, while it was an agreement satisfying the definition of “Agreement” in the memorandum, the agreement concerning interest rates in the Facility Agreement ceased to operate at the end of the first three years and was therefore to be read as fixing interest only for a three year term.
(e)So far as the 1988 mortgages are concerned, they do not come within the definition of “Agreement” as neither constitutes an agreement “under which” the mortgagee “has provided or agreed to provide” facilities. Each is security for facilities provided. But the obligation to provide those facilities is not to be found in the 1988 mortgages. Thus, similarly, in Chan v Cresdon Proprietary Limited (1989) 168 CLR 242 the High Court concluded that rent could not be said to be payable “under” an unregistered lease when, as a matter of law, any obligation to pay rent derived from an implied tenancy at common law from the facts of occupation and payment of rent. Similarly, in Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Limited (2000) 201 CLR 520 the words “under a contract” in the capital gains tax provisions of the Income Tax Assessment Act directed attention to the source of the relevant obligation, there to transfer assets.
(f)As therefore the 1988 mortgages gave rise to no obligation to provide facilities to Illawong, neither the 1988 charge nor the subsequent mortgage of 8 April 1988 could constitute an “agreement” for purposes of the definition of “interest rate”.
(g)Clause 1.8 of the memorandum only applied if there were a prior “Agreement” (with provisions inconsistent with the 1990 mortgages) and here there was none. It followed that the 1990 mortgages prevailed over the earlier 1988 mortgages to the extent of any inconsistency, in accordance with the ordinary rule.
(h)Interest was therefore payable for the limbo period in accordance with clause 2.1.3 at “the rate determined from time to time by the Mortgagee as being applicable to like accounts”.
The trial judge rightly rejected a less refined version of this argument (Judgment, [42]-[52]). There are a number of answers to the appellant’s new version.
The respondent disavowed reliance upon the Facility Agreement alone as constituting an agreement as to the rate or rates to be charged during the limbo period and, to the extent necessary, as satisfying the definition of “Agreement” in the memorandum to the 1990 mortgages. But that in no way precludes the 1988 mortgages being read in conjunction with the Facility Agreement which gave rise to them, when the latter set out the “security required by the Bank”. Notwithstanding the concession made by the respondent, there is much to be said for the view that the Facility Agreement alone would have constituted an “Agreement”; that is to say, satisfying the definition of “Agreement” in the 1990 mortgages, and thereby constituting an Agreement in terms of the definition of “interest rate”. This is because the Facility Agreement when it states the rate of interest does so in these terms:
“The interest shall be payable on the full amount from time to time, owing on the loan account, calculated on daily balances and shall be debited by the Bank to the loan account quarterly. The rate of interest payable on the loan account shall be the cost of funds to the Bank at the date of settlement, plus a margin of 1% pa fixed for 3 year term.
In the event that Bank interest is not paid on the day it falls due a penalty rate will apply, consisting of a margin of 2% over Bank’s cost of funds for the whole of the period during which interest remains unpaid and will not affect the Bank’s usual rights under default in the mortgage.”
The clear meaning of the first quoted paragraph is that the margin of 1% is fixed for a “3 year term”. But it does not follow that the interest rate based upon “the cost of funds to the Bank at the date of settlement” ceases to operate after three years, in the absence of Review adopting a different interest rate. The appellant sought to read the first quoted paragraph as if there was a comma after the expression “1% pa” rather than the comma being solely after the word “settlement” immediately preceding.
The effect of so doing would mean that there was no interest rate stipulated in the Facility Agreement after expiry of the three years, were there to be no Review producing a different interest rate for an extended term. That would be a surprising conclusion indeed. Moreover, when it comes to the second quoted paragraph of the interest clause in the Facility Agreement dealing with the 2% margin by way of penalty for default in payment of interest, there is no limitation by reference to the three year term.
If it be the case that interest has thereby been agreed under the Facility Agreement beyond the three year term, there being no Review to the contrary, then it should follow that “the rate or rates agreed upon” in clause 1 of the 1988 Charge correspond to the Facility Agreement rate of interest based on cost of funds at the date of settlement plus the 1% margin. In that case the rate actually charged by the Bank of 13.97% (taking credits into account) conforms to the rate stated in the 1988 mortgages. But in any event, if one takes the Facility Agreement and the 1988 mortgages in combination, they clearly constitute an “Agreement” “under which” the mortgages “had provided or agreed to provide” facilities. Thus the Facility Agreement imposes the obligation to provide facilities while the Facility Agreement and 1988 mortgages together agree the rate or rates of interest.
All of this presupposes in favour of the appellant that one must identify an agreement whereunder the Bank is obliged to provide facilities to the Mortgagor in order to have an “Agreement” in terms of clause 1.1 of the 1990 mortgages. But for reasons elaborated below I do not consider that the definition of “Agreement” in the memorandum is limited to documentation whereunder the Bank is obliged to provide facilities. It suffices if one can identify an agreement under which the Bank has in fact provided facilities, whether obliged to or not.
The appellant argued that interest ceased to be provided for under the Facility Agreement after the three year anniversary of the date of the advance with the result absent Review that there was no interest agreed to be paid during the limbo period. But even if that were so, I consider that on its proper construction, clause 1 of the 1988 Charge would fill such a gap were it to exist. By entering into that Charge, Illawong enters into an agreement to pay such rate or rates as “decided by the Bank from time to time”. It thus agrees to pay 13.97% being the rate “decided by” the Bank for the limbo period. By entering into the 1988 Charge, Illawong agrees to pay either the rate of interest agreed from time to time to be paid, or in the absence of such agreement, agrees to pay that which is decided by the Bank from time to time. Such “agreement” encompasses either agreement under the Facility Agreement to pay interest or agreement under the 1988 Charge to pay interest being that rate which the Bank decided.
The appellant sought to argue that the definition of “Agreement” in the 1990 mortgages, taking into account the reasoning of the High Court in Chan (supra) and Sara Lee (supra), did not include any agreement which merely granted security as distinct from one which actually obliged the Bank to make facilities available.
To my mind that is far too narrow a reading of the definition of “Agreement”. This is more especially when one takes into account the disjunctive “or” in the expression “has provided or agreed to provide … facilities …”.
The expression “agreed to provide” is apt to include any agreement which gives rise to an obligation to make available facilities to the relevant customer. However, that is to be contrasted with the expression “has provided”. It in contrast looks to a factum; the fact that “under”, in the sense of “supported by”, a particular document, the Mortgagee has in fact provided particular facilities whether obliged to or not. The 1988 mortgages represent documentation under which the Mortgagee has provided facilities for another reason as well. The 1988 mortgages provide for when the facilities become immediately due and payable, as well as containing other provisions concerning the facilities. In that sense also the facilities are provided “under” the 1988 mortgages.
The absurdity of assuming a narrower meaning limited to documents under which the Bank is “obliged” to provide facilities emerges when one considers the prospect of Bank documentation for advances made at the pleasure of the Bank, such as a typical overdraft. Here, as it happens, there was such an overdraft facility covered by various other securities. On the reasoning of the appellant, such a lending arrangement must fall outside the definition of “Agreement”, since no obligation is undertaken by the Bank to lend money. The only obligations on the Bank arise if it chooses at its pleasure to lend money. Yet why would such an at pleasure arrangement not also constitute one “under which the Mortgagee has provided … to the Mortgagor … facilities”?
The facts in Chan (supra) are readily distinguishable (as indeed also Sarah Lee). In Chan the guarantee was of “due and punctual performance by the Tenant of the obligations on its part to be performed under this lease”, meaning the actual registered lease. In those circumstances, one could not identify that which was guaranteed save by reference to the lessee’s obligation under the registered lease. But because the lease was not registered, the obligation to pay rent derived instead from the common law tenancy by reason of occupation and payment of rent.
Here, in contrast, the definition of “Agreement” contains no precise delimitation of the relevant documentation under which the facilities are to be provided. Rather, words of wide import are used. All they require is that one identify documents, arrangements or even understandings under which the Bank in fact provided facilities to Illawong whether or not in writing. Clearly enough, the 1988 Charge and 1988 mortgage met that description. But so too would suffice that agreement referred to in the first recital of the 1988 Charge:
“WHEREAS at the request or on the application of the Mortgagor the Bank has granted or agreed to grant to the Mortgagor but only during the pleasure of the Bank certain advances and/or other banking facilities …”. [emphasis added]
Summing up: It is plausibly arguable that the necessary agreement derives from the Facility Agreement itself. But the respondent eschewed reliance on it alone. However, on any view the Facility Agreement in combination with the 1988 mortgages constitutes an agreement, or arrangement in an overall sense, satisfying the definition of “Agreement” in the memorandum to the 1990 mortgage. It is notable that “Agreement” is defined to include an arrangement or understanding. So the definition readily accommodates the notion of a combination of Facility Agreement and the 1988 mortgages thus consisting an “Agreement”; that is to say one “under which” the facilities are provided. There was no such equivalent wording in Chan or Sarah Lee. And clearly enough the 1988 mortgages constitute even on their own the necessary agreement on interest rate or rates. Interest is there agreed to be either as agreed upon, or “as decided by the Bank from time to time”.
It would be an incongruous result indeed if a collateral security constituted by the 1990 mortgages were then to override the agreement constituted by the 1988 Charge. The latter was clearly the principal security as distinct from a collateral one.
Even if one put aside all these reasons, it is sufficient to reach the same result by appreciating that the definition of “interest rate” in the memorandum to the 1990 mortgage does not even use the defined term “Agreement”. Rather it refers to the rate or rates “from time to time agreed upon between the Mortgagor and/or Customer and the Mortgagee”. That strongly suggests that even were the 1988 mortgages not within the definition of “Agreement”, that would not matter, as their provisions for interest represent rate or rates “from time to time agreed upon between the Mortgagor … and the Mortgagee”.
OVERALL CONCLUSION AND ORDERS

The arguments put by the appellant for concluding that the 1990 mortgages supplanted any stipulation of interest under either the Facility Agreement or the 1988 mortgages must fail.
In so concluding, I do not therefore need to deal with the other bases upon which the trial judge concluded that the appellant was not entitled to any damages.
I would therefore propose orders as follows:
(1) Appeal dismissed.
(2) Appellant to pay respondent’s costs of the appeal.
In proposing these orders, I note that the appellant acknowledged that if its appeal were unsuccessful, it necessarily followed that the costs of the appeal should be paid by the appellant. There are no grounds of appeal on costs that are otherwise pressed.
HUNT AJA: I agree with Giles JA.
**********

LAST UPDATED: 04/11/2005

[2005] NSWCA 382

4 November 2005

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